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eco ch 15

True/False
Indicate whether the sentence or statement is true or false.
 

1. 

As the cost of credit increases, the quantity demanded increases.
 

2. 

A loose money policy may lead to inflation.
 

3. 

A tight money policy encourages consumer spending.
 

4. 

Fractional reserve banking means that banking customers cannot withdraw large amounts of cash from their accounts.
 

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
 

5. 

Members of the Board of Governors
a.
are elected by the people in each district.
b.
have no authority to make decisions.
c.
are appointed by the President with approval of the Senate.
d.
serve for two years.
 

6. 

Decisions to raise or lower interest rates are made by the
a.
Board of Governors.
c.
Federal Open Market Committee.
b.
Federal Advisory Council.
d.
President.
 

7. 

The nation is divided into how many Federal Reserve districts?
a.
10
c.
25
b.
12
d.
50
 

8. 

The Fed is headquartered in
a.
San Francisco.
c.
Kansas City.
b.
Washington, D.C.
d.
Boston.
 

9. 

Which function of the Federal Reserve System involves transferring a check to the depository institution on which it was written?
a.
holding reserves
c.
regulating the money supply
b.
supplying paper currency
d.
clearing checks
 

10. 

Which of the following is a result of a loose money policy?
a.
people are willing to borrow money
b.
people are unwilling to borrow money
c.
consumers hesitate to buy new homes
d.
businesses postpone expansion
 

11. 

Which of the following is a result of a tight money policy?
a.
people are willing to borrow money
b.
businesses cut back production
c.
consumers are willing to buy new homes
d.
businesses expand
 

12. 

Why would a country want a tight money policy?
a.
to decrease the value of the dollar
c.
to control inflation
b.
to encourage economic growth
d.
to increase consumer spending
 

13. 

Fractional reserve banking makes it possible for banks to
a.
keep all deposits in reserve.
c.
use some deposits to make loans.
b.
keep no cash in their vaults.
d.
process checks.
 

14. 

The ability of banks to allow more than one individual to spend the same money is called
a.
a loose money policy.
b.
a tight money policy.
c.
the multiple expansion of the money supply.
d.
a monetary policy.
 

15. 

If the Fed lowers the reserve requirement,
a.
less money is available to loan.
c.
banks lose business.
b.
more money is available to loan.
d.
fewer people get credit.
 

16. 

To decrease the money supply, the Fed can
a.
decrease the reserve requirement.
c.
increase the reserve requirement.
b.
buy more Treasury bills.
d.
request permission from Congress.
 

17. 

Which of the following might result if the Fed increases the discount rate?
a.
increase in the total money supply
c.
banks make more loans available
b.
banks borrow more reserves
d.
increase in the prime rate
 

18. 

A high prime rate
a.
encourages borrowing.
c.
increases the money supply.
b.
discourages borrowing.
d.
helps new businesses.
 

19. 

One problem in carrying out monetary policy is the
a.
inability of the Fed to decrease the money supply.
b.
difficulty in gathering and evaluating information about M1 and M2.
c.
inability of the Fed to increase the money supply.
d.
impossibility of controlling inflation.
 

Completion
Complete each sentence or statement.
 

20. 

The ____________________ directs the operations of the Federal Reserve System.
 

 

21. 

In the Federal Reserve System, power is shared by a governing board and 12 ____________________.
 

 

22. 

The primary responsibility of the Federal Reserve System is regulating the ____________________.
 

 

23. 

The _________________________ meets to decide the course of action that the Fed should take to control the money supply.
 

 

24. 

The Federal Reserve sets standards for ____________________ laws.
 

 

25. 

If the Fed increases the reserve requirements of financial institutions, the ____________________ decreases.
 

 

26. 

The rate of interest the Fed charges its member banks is called the ____________________.
 

 

27. 

Low ____________________ encourages people to spend rather than save.
 

 

28. 

If the Fed raises the discount rate, banks pass costs on to customers by raising the ____________________.
 

 

29. 

The major tool the Fed uses to control the money supply is buying and selling government ____________________.
 

 

Matching
 
 
Match each item with the correct statement below.
a.
Fed
b.
monetary policy
c.
Federal Open Market Committee
d.
check clearing
e.
Board of Governors
 

30. 

method by which a check is transferred to the issuer's depository institution
 

31. 

policy that involves changing the rate of growth of the supply of money in circulation
 

32. 

Federal Reserve System
 

33. 

group that directs the operations of the Fed
 

34. 

group that meets eight times a year to decide how the Fed should control the money supply
 
 
Match each item with the correct statement below.
a.
loose money policy
b.
tight money policy
c.
fractional reserve banking
d.
reserve requirements
e.
monetary policy
 

35. 

monetary policy that makes credit expensive and in short supply
 

36. 

policy that involves changing the rate of growth of the money supply
 

37. 

regulations set by the Fed requiring banks to keep a certain percentage of their deposits as cash
 

38. 

monetary policy that makes credit inexpensive and abundant
 

39. 

system in which only a fraction of the deposits in a bank is kept on hand
 
 
Match each item with the correct statement below.
a.
discount rate
b.
prime rate
c.
federal funds rate
d.
open-market operations
e.
reserve requirements
 

40. 

buying and selling of U.S. securities by the Fed to affect the money supply
 

41. 

rate of interest that banks charge on loans to their best business customers
 

42. 

percentage of deposits that a bank must keep as cash
 

43. 

interest rate that the Fed charges on loans to banks
 

44. 

interest rate that banks charge each other on loans
 



 
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