Economics USA: 21st Century Edition

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1. In the United States today, which of the following functions as the central bank?

   	The Federal Reserve
   	The Federal Reserve Board
   	The Federal Reserve together with the Congress
   	There is no central bank in the U.S.

   The Federal Reserve

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2. Which of the following is an example of a government security?

   	government bonds
   	Federal Reserve notes
   	gold certificates
   	Treasury deposits

   government bonds

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3. George W. is president of the newly chartered national bank, the Golddust. George has been presented with several interesting investment opportunities during the past week, but a review of the balance sheets indicates that reserves are not sufficient to allow the Golddust to make the loans. The promise of profits is very tempting even though some risk is involved. Based on current interest rates, George calculates he will need collateral valued at about $2 million for the size loan he wants. The net worth of the Golddust currently stands at $1 million. George applies for a loan with the Fed, but it is denied. Which of the following is the MOST LIKELY reason?

   	The net worth of the Golddust is too small
   	The Fed only makes loans to member banks.
   	The proposed investments presented too much risk.
   	The Fed issues loans to help banks through hard times, not to encourage profits.

   The Fed issues loans to help banks through hard times, not to encourage profits. The third response is partially correct, since the Fed will obviously favor low-risk investments over high-risk ones. But the more important point by far is that the Fed does not provide assistance to banks so that they can turn around and use the money to make a profit; the purpose of the loans is to keep banks solvent when they run into difficulty.

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4. According to the balance sheet below for the Fed and the member banks, we can infer that the Fed has:

   Effect on Fed’s Balance Sheet
   Assets	Liabilities and Net Worth
   Government securities (+ $1 million)	Government bank reserves (+ $1 million)
   Effect on Banks’ Balance Sheet
   Assets	Liabilities and Net Worth
   Reserves (+ $1 million)	Demand deposits (+ $1 million)

   	increased bank reserves, thereby decreasing the total money supply.
   	sold government securities, thereby augmenting member banks’ liabilities.
   	increased the discount rate, thereby encouraging member banks to hold onto their reserves.
   	purchased government securities, thereby increasing the money supply.

   purchased government securities, thereby increasing the money supply.

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5. Based on the information in the previous question, in order to raise the reserves of banks above the $1 million mark, the Fed should probably:

   	use moral suasion to get Congress to increase taxes.
   	lower the discount rate.
   	purchase more securities.
   	raise legal reserve requirements.

   purchase more securities.

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6. The Banking Act of 1935 has been called the “single most important piece of banking legislation since the original Federal Reserve Act.” Probably the MAIN reason for this is that the Act:

   	guaranteed the solvency of member banks.
   	gave the Fed authority to take a leadership role in setting monetary policy.
   	made the Fed subservient to the Treasury, thus ensuring control of its power.
   	made the Fed a “reactive” agency, thus encouraging more sensitivity to economic pressures of the times.

   gave the Fed authority to take a leadership role in setting monetary policy.

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