ECON 303 Chapter 14 Study Questions
1) Americans’ fear of centralized power and their distrust of moneyed interests explains why the U.S. did not have a central bank until the
(a) 17th century.
(b) 18th century.
(c) 19th century.
(d) 20th century.
2) The public’s hostility to the existence of a central bank led to the demise of the first two experiments in central banking:
(a) the First Bank of the United States and the Second Bank of the United States.
(b) the First Bank of the United States and the Central Bank of the United States.
(c) the First Central Bank of the United States and the Second Central Bank of the United States.
(d) the First Bank of North America United States and the Second Bank of North America.
3) When the charter of the Second Bank of the United States expired in 1836
(a) the incidence of banking panics declined.
(b) the lack of a lender of last resort did not affect the banking system.
(c) the lack of a lender of last resort led to increased banking panics.
(d) the Treasury assumed the role of a lender of last resort.
(e) both (a) and (d) of the above.
4) The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that
(a) the First Bank of the United States had failed to serve as a lender of last resort.
(b) the Second Bank of the United States had failed to serve as a lender of last resort.
(c) the Federal Reserve System had failed to serve as a lender of last resort.
(d) a central bank was needed to prevent future panics.
5)
Nationwide financial panics in the nineteenth and early
twentieth centuries might have been
avoided had
(a) the First Bank of the United States served its intended role of lender of last resort.
(b) the Second Bank of the United States served its intended role of lender of last resort.
(c) the Second Bank of the United States not been abolished in 1836 by president Andrew Jackson.
(d) the Federal Reserve served its intended role of lender of last resort.
6) The many regional Federal Reserve banks resulted from a compromise between parties favoring
(a) establishment of a central bank and those opposed to its establishment.
(b) a private central bank and those favoring a government institution.
(c) establishment of the Board of Governors in Washington, D.C. and those preferring its establishment in New York City.
(d) none of the above.
7) Which of the following is not an entity of the Federal Reserve System?
(a) Federal Reserve Banks
(b) The FDIC
(c) The Board of Governors
(d) The Board of Advisors
8) Of all commercial banks,
(a) about 15 percent belong to the Federal Reserve System.
(b) about 20 percent belong to the Federal Reserve System.
(c) about 33 percent belong to the Federal Reserve System.
(d) about 50 percent belong to the Federal Reserve System.
9) Prior to 1980, member banks left the Federal reserve System due to
(a) the high cost of discount loans.
(b) the high cost of required reserves.
(c) the high margin requirements.
(d) a desire to avoid interest rate regulations.
(e) a desire to avoid credit controls.
10) While the Depository Institutions Deregulation and Monetary Control Act of 1980 required that all banks comply with the Fed’s reserve requirements, it gave nonmember banks equal access to
(a) the Fed’s check clearing services.
(b) the Fed’s discount window.
(c) the Fed’s dividend payments.
(d) all of the above.
(e) both (a) and (b) of the above.
11) The special status of the Federal Reserve Bank of New York stems from
(a) the fact that power within the Federal Reserve System is centered in New York.
(b) the fact that the president of the New York Fed chairs the Federal Open Market Committee.
(c) the fact that the New York Fed holds more gold than Fort Knox.
(d) all of the above.
(e) both (a) and (b) of the above.
12) The Federal Open Market Committee consists of
(a) the five senior members of the seven-member Board of Governors.
(b) the seven members of the Board of Governors and seven presidents of the regional Fed banks.
(c) the seven members of the Board of Governors and five presidents of the regional Fed banks.
(d) the twelve regional Fed bank presidents and the chairman of the Board of Governors.
13) In the United States monetary policy is determined by
(a) the Board of Governors.
(b) the district Federal Reserve banks.
(c) the Federal Open Market Committee.
(d) the Federal Advisory Council.
(e) the Comptroller of the Currency.
14) Although neither _____ nor the _____ are officially set by the Federal Open Market Committee, decisions concerning these policy tools are effectively made by the committee.
(a) margin requirements; discount rate
(b) margin requirements; federal funds rate
(c) reserve requirements; discount rate
(d) reserve requirements; federal funds rate
15) Which of the following are true statements?
(a) The Banking Acts of 1933 and 1935 set in motion a series of changes that gave the Board of Governors more control over Fed operations.
(b) The FOMC issues a directive to the trading desk at the New York Fed.
(c) Designers of the Federal Reserve Act did not envision the use of open market operations as a monetary policy tool.
(d) All of the above are true statements.
(e) Only (a) and (b) of the above are true statements.
16) Factors that provide the Federal Reserve with a high degree of autonomy include
(a) 14-year terms for members of the Board of Governors.
(b) a source of revenue free from the appropriations process.
(c) a 4-year term for the chairman of the Board of Governors that does not coincide with the president’s 4-year term.
(d) all of the above.
(e) only (a) and (b) of the above.
17) Which of the following statements are true of the Bank of England?
(a) The Bank of England was established in 1694.
(b) Until 1997, the decision to raise or lower interest rates resided not with the Bank of England but with the chancellor of the Exchequer.
(c) The government can overrule the Bank and set rates “in extreme economic circumstances” and “for a limited period.”
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
18) While legislation enacted in 1998 granted the Bank of Japan new powers and greater autonomy, its critics
(a) contend that its independence is limited by the Ministry of Finance’s veto power over a portion of its budget.
(b) contend that its independence is too great because it need not pursue a policy of price stability even if that is the popular will of the people.
(c) contend that its independence is too great since the Ministry of Finance no longer has veto power over the bank’s budget.
(d) contend that its independence is limited since the Ministry of Finance can dismiss senior bank officials.
(e) none of the above.
19) Prior to the creation of the European Central Bank, the most independent central banks were the German Bundesbank and
(a) the Federal Reserve System.
(b) the Swiss National Bank.
(c) the Bank of England.
(d) the Bank of Japan.
(e) the Bank of Canada.
20) The European Central Bank enjoys
(a) instrument independence.
(b) goal independence.
(c) political independence from nation governments and the European Union.
(d) all of the above.
(e) both (a) and (b) of the above.
21) Which of the following statements about central bank structure and independence are not true?
(a) In recent years, with the exception of the Bank of England and the Bank of Japan, most countries have reduced the independence of their central banks, subjecting them to greater democratic control.
(b) Before the Bank of England was granted greater independence, the Federal Reserve was the most independent of the world’s central banks.
(c) Both theory and experience suggest that more independent central banks produce better monetary policy.
(d) All of the above are false statements.
(e) Only (a) and (b) of the above are false statements.
22) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
(a) resists so vigorously congressional attempts to limit the central bank’s autonomy.
(b) is so secretive about the conduct of future monetary policy.
(c) sought less control over banks in the 1980s.
(d) all of the above.
(e) only (a) and (b) of the above.
23) Politicians in a democratic society may be shortsighted because of their desire to win reelection; thus, the political process can
(a) impart an inflationary bias to monetary policy.
(b) generate a political business cycle, in which just before an election expansionary policies are pursued to lower unemployment and interest rates.
(c) place too much pressure on the Fed to finance federal budget deficits.
(d) cause all of the above.
(e) cause only (a) and (b) of the above.
24) Critics of Fed independence argue
(a) that
it is undemocratic to have monetary policy controlled by an elite group
responsible to
no one.
(b) that independence seemingly does not always guarantee good monetary policy.
(c) that its independence may encourage the Fed to pursue a course of narrow self-interest rather than the public interest.
(d) all of the above.