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1)

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If the Federal Reserve were to reduce the discount rate banks would be encouraged to
borrow money from the Federal Reserve and then make more loans to their customers. This would
increase the money supply in the nation.

1)

The Federal Reserve wants to increase the money supply in the United States.
What is the Federal Reserve likely to do to accomplish this?

reduce the discount rate

A)

B
)

sell securities on the open market

C)

increase the reserve requirement for banks

D)

require banks to hold a reserve for all types

of deposits

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2)

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A loose monetary policy is implemented to bring about decreased saving and increased
spending. This is in order to give businesses a boost in production and, potentially, employment.

2)

What consumer behavior is the Federal Reserve Board trying to encourage when it
implements a loose monetary policy?
A)

B)

increased saving and spending

decreased saving and spending

C)

increased saving and reduced spending

D)

decreased saving and increased spending

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3)

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The staggered terms for the board, along with the other factors, MOST LIKELY result in relative
independence of the Board of Governors of theFederal Reserve System. Former Federal
Reserve Chairman Alan Greenspan was considered by some economists the most important person
in the U.S. Government.

3)

Although the members of the Board of Governors of the Federal Reserve System
are appointed by the president, the Board does not receive funding from Congress.
The seven members serve a 14 year term, and report to the Speaker of the House
once a year. This MOST LIKELY results in
A)

more oversight from the executive branch.

B)

more oversight from the legislative branch.

C)

significant control by the Treasury

Department.

D
)

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4)

relative independence of the Federal

Reserve System.

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Correct
The process by which the Federal Reserve controls the supply, availability, and cost of money in
order to keep the economy stable is monetary policy. Setting discount rates and interest rates are
two ways the Federal Reserve keeps monetary policy in check. Fiscal policy refers to government
borrowing, spending, and taxation.

4)

The process by which the Federal Reserve controls the supply, availability, and
cost of money in order to keep the economy stable is
A)

B
)

fiscal policy.

monetary policy.

C)

the interest rate.

D)

the discount rate.

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5)

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If the Federal Reserve System lowered interest rates, more people would be able to borrow and
spend money. More goods would be produced and unemployment would be reduced. This
strategy would not work in the long run, however, since factors other than the monetary policyaffect
employment.

5)

What would MOST LIKELY happen if the Federal Reserve System lowered interest
rates?
A)

B
)

Trade would increase over the long run.

Unemployment would be reduced in

the short run.

C)

The demand for goods would decrease in

the short run.

D)

The price of goods would remain stable

over the long run.

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6)

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The correct answer is Federal Open Market Committee. The committee oversees
open market operations, which are the buying and selling of government securities. These
operations are the principal tool of U.S. monetary policy.

6)

The above chart represents the organization of the Federal Reserve System.
Which of these correctly completes the chart?
A)

B
)

C)

Federal Reserve Chairman

Federal Open Market Committee

President of the United States

D)

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Senate and House of Representatives

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7)

Correct
If the Federal Reserve increased the reserve requirement in banks, the amount
of money circulating in the economy would decrease. Banks would have to hold on to more of
their money rather than lend it to borrowers.

7)

What would MOST LIKELY happen if the Federal Reserve decided to increase the
reserve requirement in banks?
A)

The amount of federal taxes people owe

would decrease.

B)

The amount of federal taxes people owe

would increase.

C
)

D)

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8)

The amount of money circulating in the

economy would decrease.
The amount of money circulating in the
economy would increase.

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If the Federal Reserve increases the discount rate, which causes interest rates to rise and
people to save rather than spend, it can sloweconomic growth. When people save, they spend
less and the money supply decreases. This also could cause employment problems, for if people are
not spending money on goods and services then businesses cannot continue to employ as many
people, nor can they expand their business.

8)

Which of these actions of the Federal Reserve can slow economic growth?
A)

The Federal Reserve regulates the amount

of money that flows into and out of the
nations economy.

B)

The Federal Reserve buys securities,

which puts money back into the hands of
people who can spend it in the
marketplace.

C)

The Federal Reserve decreases the reserve

requirement and banks have more money
to loan to people who want to borrow it.
The Federal Reserve increases the
discount rate, which causes interest
rates to rise and people to save rather
than to spend.

D
)

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9)

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The Federal Reserve has kept interest rates very low. Some might argue this could lead
to inflation. Current Fed Chairman Ben Bernanke has argued that the Fed's actions deepened the
Great Depression of the '20s and '30s, and has taken drastic measures to address the financial
crisis that began in 2007.

9)

The Federal Reserve has kept interest rates very low. Some might argue that this
could lead to
A)

inflation.

B)

deflation.

C)

a strong dollar.

D
)

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higher unemployment.

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10)

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The MOST LIKELY unintended result from this monetary policy action was a period
of stagflation. In 1979, the Fed clamped down on themoney supply, raising interest rates, which in
turn caused a recession lasting until a rebound of the US economy in 1982.

10)

During the 1970s the Federal Reserve allowed rapid credit expansion in order to
combat unemployment. What was the MOST LIKELY unintended result of this
monetary policy action?
A)

B
)

A period of stagflation

C)

The Oil Crisis of 1973

D)

A period of deflation

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11)

A drop in unemployment rates

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Monetary policy influences the money supply or the money flow in the economy. When there is
a recession, economic growth has declined. Toincrease the money supply would increase the
available funds for spending and investment, which in in turn spurs new production.

11)

What would be reasonable monetary policy if the economy was in a recession?

A)

cut taxes

B)

raise taxes

C)

reduce the money supply

D
)

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increase the money supply

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12)

Correct
During a period of high inflation, the expected monetary policy is to reduce the money supply. A
reduction of the money supply will put downward pressure on prices as investment and spending
slows.

12)

What would be reasonable monetary policy during a period of high inflation?

A)

cut taxes

B)

raise taxes

C)

D)

reduce the money supply

increase the money supply

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13)

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Raising and lowering short-term interest rates is one of the monetary policies that the Federal
Reserve can use to help stimulate the economy. Taxation and government spending are fiscal
policies that the government can use. Minimum wage is a price floor to raise the standard of living.

13)

In its role as money manager, the Federal Reserve has three primary goals: to
maintain stable prices (control inflation), ensure maximum employment, and increase
production output.
How does the Federal Reserve achieve these goals?
A)

Raising and lowering the minimum wage

B)

Helping to develop the taxation policies

C)

Increasing and decreasing government

spending

D)

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14)

Raising and lowering short-term

interest rates

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Correct
Changing reserve requirements is one way the Federal Reserve can affect the money supply of
the US Economy. They can contract or expand the money supply by changing the reserve
requirement.

14)

The Federal Reserve can affect the money supply by

A)

B
)

announcing a new prime rate.

changing reserve requirements.

C)

issuing monthly money supply charts and

graphs.

D)

charging fees through the regional Federal

Reserve banks.

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15)

Correct
That businesses will begin increasing investments, which in turn, will cause a need for more
employees. When the Federal Reserve lowersinterest rates, they do this to jump start
business investments, and in turn, the increased business will increase the need for workers.

15)

When the Federal Reserve lowers interest rates, hoping to jump-start the
employment market, what does it hope it will accomplish with that monetary policy
action?
A)

That the lower interest rates will reduce

the money supply to lower inflation.

B)

That people will begin borrowing enough

money so that they do not have to work.

C)

That enough people will stop borrowing

money and increase spending to raise the
GDP.

That businesses will begin increasing

investments, which in turn, will cause a
need for more employees.

D
)

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16)

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Rising inflation, a crash in the "housing bubble," and a recession from 2007-2010 was the
unintended outcome of the monetary policy of the Federal Reserve. The lower interest rates helped
to fuel the housing boom of the early to mid 2000s (along with other government policies).
When prices of housea began to skyrocket and the Federal Reserve raised interest rates to curb
the inflation, the housing market crashed, causing the economy to plunge into a recession.

16)

The Federal Reserve uses interest rates to help the economy maintain economic
growth and curb inflation. The Federal Reserve kept interest rates low during 20002004 to encourage economic growth after the dot-com crash. The intended result was
growth in real GDP, and a housing "boom" (also a "housing bubble")in the United
States.
What was the unintended consequence or outcome of this monetary policy?
A)

B)

The 9-11 attacks on Washington and New

York City
Rising inflation, a crash in the "housing
bubble," and a recession from 20072010

C)

Lower inflation and the largest growth in

rGDP since WWII with a healthy economy
into 2013

D)

Rising inflation and the arrest of the

Federal Reserve Chairman for causing the
Great Depression
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17)

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Do nothing is the appropriate Fed action in this situation. The economy is good: inflation is low and
the GDP is growing steady.

17)

What would be the appropriate monetary policy during a period of low inflation and
steady GDP growth?

Buy bonds to stop business investment.

A)

B)

Just monitor the situation, but do

nothing.

C)

Sell bonds to encourage even more

business investment.

D)

Continue to keep interest rates low to

encourage low inflation.

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18)

Correct
It will raise interest rates and make your truck payment higher. Raising the discount rate will, in
effect, raise all interest rates. That will make your car payment higher since it will cost more to
borrow money.

18)

You want a new truck. How can the Federal Reserve's raising of the discount rate
affect your decision to purchase the truck?
A)

It will raise interest rates and make your

truck payment lower.

B)

It will lower interest rates and make your

truck payment higher

C)

D)

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It will lower interest rates and make your

truck payment lower.
It will raise interest rates and make
your truck payment higher.

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19)

Correct
It is the jog of the Federal Reserve to ultimately control the money supply in the United States.
While it is true that banks and credit unions do contribute to the expansion of the
money supply when they lend money, they are not the arbiters of the situation.

19)

Which of these ULTIMATELY controls the money supply in the United States?
A)

private banks

B)

The U.S. Congress

C)

D)

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20)

The Federal Reserve

private credit unions

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Correct
Make new loans totaling about $10 million. Coty Colony Bank now has $10 million dollars in
excess reserve and will be able to loan out that excess money.

20)

Suppose the Fed buys $10 million worth of government bonds from Coty Colonial
Bank.
What will Coty Colony Bank most likely to do?

Borrow more reserves from other banks.

A)

B)

Make new loans totaling about $10

million.

C)

Reduce its outstanding loans by $10

million.

D)

Borrow more reserves at the discount

window.

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21)

Correct
The money supply has increased by $30 million. The reserve ration is 10% and that makes
the money multiplier 10. Multiply the bondpurchase by 10 and you get the increase in the
money supply.

21)

Suppose the Fed makes an open market purchase of $3 million. Assume that the
reserve ratio is 10% and the money multiplier equals 10. What is the change in the
money supply?
A)

The money supply has increased by $3

million.

B)

The money supply has decreased by $3

million.

C
)

D)

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The money supply has increased by

$30 million.
The money supply has decreased by $30
million.

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