The Federal Reserve Quiz

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.

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

• government bonds
• Federal Reserve notes
• gold certificates
• Treasury deposits

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.

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.

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.