FIN 350 Week 3 Quiz 2 Chapter 3 and 4 – Strayer

FIN 350 Week 3 Quiz – Strayer (All Possible Questions With Answers)

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Chapter 3—Structure of Interest Rates

1. In general, securities with ____ characteristics will offer ____ yields.
a. favorable; higher
b. favorable; lower
c. unfavorable; lower
d. none of the above

2. Default risk is likely to be highest for
a. short-term Treasury securities.
b. AAA corporate securities.
c. long-term Treasury securities.
d. BBB corporate securities.

3. Some financial institutions such as commercial banks are required by law to invest only in
a. junk bonds.
b. corporate stock.
c. Treasury securities.
d. investment-grade bonds.

4. Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.
a. True
b. False

5. If a security can easily be converted to cash without a loss in value, it
a. is liquid.
b. has a high after-tax yield.
c. has high default risk.
d. is illiquid.

6. Securities that offer ____ liquidity will need to offer a ____ yield.
a. lower; higher
b. lower; lower
c. higher; higher
d. B and C

7. If all other characteristics are similar, ____ would have to offer ____.
a. taxable securities; a higher after-tax yield than tax-exempt securities
b. taxable securities; a higher before-tax yield than tax-exempt securities
c. tax-exempt securities; a higher after-tax yield than taxable securities
d. tax-exempt securities; a higher before-tax yield than taxable securities

8. Assume an investor’s tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield?
a. 16.00 percent
b. 9.25 percent
c. 9.00 percent
d. 3.00 percent
e. none of the above

9. An investor’s tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?
a. 7.7 percent
b. 15.71 percent
c. 130 percent
d. 11.00 percent
e. none of the above

10. A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of
a. 7.0 percent.
b. 10.8 percent.
c. 20.0 percent.
d. none of the above

11. Holding other factors such as risk constant, the relationship between the maturity and annualized yield of securities is called the
a. term structure of interest rates.
b. default structure of interest rates.
c. liquidity structure of interest rates.
d. tax structure of interest rates.
e. none of the above

12. The term structure of interest rates defines the relationship
a. between risk and return.
b. between risk and maturity.
c. between maturity and yield.
d. between default risk ratings and maturity.

13. Interest income from municipal bonds is exempt from state taxes but is subject to federal taxes.
a. True
b. False

14. If shorter term securities have higher annualized yields than longer term securities, the yield curve
a. is horizontal.
b. is upward sloping.
c. is downward sloping.
d. cannot be determined unless we know additional information (such as the level of market interest rates).

15. Assume that annualized yields of short-term and long-term securities are equal. If investors suddenly believe interest rates will increase, their actions may cause the yield curve to
a. become inverted.
b. become flat.
c. become upward sloping.
d. be unaffected.

16. If issuers of securities (borrowers) and investors suddenly expect interest rates to decrease, their actions to benefit from their expectations should cause
a. long-term yields to rise.
b. short-term yields to decrease.
c. prices of long-term securities to decrease.
d. A and B
e. none of the above

17. Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets.
a. highest; below that
b. lowest; above that
c. highest; above that
d. lowest; below that

18. The yield offered on a debt security is ____ related to the prevailing risk-free rate and ____ related to the security’s risk premium.
a. negatively; negatively
b. positively; positively
c. negatively; positively
d. positively; negatively

19. The theory for the term structure of interest rates that says the shape of the yield curve is determined solely by expectations of future interest rates is called the
a. segmented markets theory.
b. liquidity premium theory.
c. pure expectations theory.
d. theory of rational expectations.

20. Assume investors are indifferent among security maturities. Today, the annualized 2-year interest rate is 12 percent, and the 1-year interest rate is 9 percent. What is the forward rate according to the pure expectations theory?
a. 15.08 percent
b. 3.00 percent
c. 12.00 percent
d. 12.62 percent
e. 11.41 percent

21. Assume the yield curve is flat. If investors flood the short-term market and avoid the long-term market, they may cause the yield curve to
a. remain flat.
b. become upward sloping.
c. become downward sloping.
d. none of the above

22. According to pure expectations theory, if interest rates are expected to decrease, there will be ____ pressure on the demand for short-term funds by borrowers and ____ pressure on the demand for long-term funds issued by borrowers.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward

23. The degree to which the Treasury’s debt management policy could affect the term structure of interest rates is greatest if
a. most debt is financed by foreign investors.
b. the Treasury’s debt level is small.
c. maturity markets are segmented.
d. A and B

24. According to the pure expectations theory of the term structure of interest rates, the ____ the difference between the implied one-year forward rate and today’s one-year interest rate, the ____ is the expected change in the one-year interest rate.
a. greater; less
b. less; greater
c. greater; greater
d. less; less
e. C and D

25. Assume that today, the annualized two-year interest rate is 12 percent, and the one-year interest rate is 9 percent. A three-year security has an annualized interest rate of 14 percent. What is the one-year forward rate two years from now?
a. 12.67 percent
b. 113 percent
c. 195 percent
d. 15.67 percent
e. none of the above

26. Assume that a yield curve is influenced by interest rate expectations and a liquidity premium. Assume the yield curve is initially flat. If liquidity suddenly was no longer important, the yield curve would now have a ____ (assuming no other changes).
a. slight downward slope
b. slight upward slope
c. steep upward slope
d. steep downward slope

27. According to the liquidity premium theory, the expected yield on a two-year security will ____ the expected yield from consecutive investments in one-year securities.
a. equal
b. be less than
c. be greater than
d. B and C are possible, depending on the size of the liquidity premium

28. Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent. If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is
a. 8.0 percent.
b. 7.6 percent.
c. 3.0 percent.
d. 7.0 percent.

29. If liquidity influences the yield curve, but is not considered when deriving the forward interest rate, the forward interest rate ____ the market’s expectation of the future interest rate.
a. overestimates
b. accurately estimates
c. underestimates
d. is an unbiased forecast of (it has an equal chance of overestimating or underestimating)

30. If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.
a. no changes
b. a slight decrease
c. a slight increase
d. a large increase

31. The theory of the term structure of interest rates, which states that investors and borrowers choose securities with maturities that satisfy their forecasted cash needs, is the
a. pure expectations theory.
b. liquidity premium theory.
c. segmented markets theory.
d. liquidity habitat theory.

32. According to the segmented markets theory, if most investors suddenly preferred to invest in short-term securities and most borrowers suddenly preferred to issue long-term securities there would be
a. upward pressure on the price of long-term securities.
b. upward pressure on the price of short-term securities.
c. downward pressure on the yield of long-term securities.
d. A and C

33. A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the
a. liquidity premium theory.
b. efficient markets theory.
c. pure expectations theory.
d. preferred habitat theory.

34. According to segmented markets theory, if investors have mostly short-term funds available and borrowers want long-term funds, there would be ____ pressure on the supply of short-term funds provided by investors and ____ pressure on the yield of long-term securities.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward

35. If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called
a. riding the yield curve.
b. liquidating the yield curve.
c. segmenting the yield curve.
d. a forward roll.
e. none of the above

36. Other things equal, the yield required on A-rated bonds should be ____ the yield required on B-rated bonds whose other characteristics are exactly the same.
a. greater than
b. equal to
c. less than
d. All of the above are possible, depending on the size of the bond offering.

37. Assume that the Treasury bond yield today is 2% higher than it was one year ago. Also assume that the credit (default) risk premium of an A-rated bond declined by 0.4% since one year ago. A newly issued A-rated bond will likely offer a yield today that is ____ the yield that was offered on an A-rated bond issued one year ago.
a. greater than
b. equal to
c. less than
d. A or B are both common

38. In some time periods there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.
a. liquidity premium theory
b. expectations theory
c. segmented markets theory
d. A and C

39. According to expectations theory, the sudden expectation of lower interest rates in the future will cause a ____ supply of short-term funds provided by investors, and a ____ supply of long-term funds.
a. large; large
b. large; small
c. small; small
d. small; large

40. The yield curve in a foreign country is
a. always downward sloping.
b. non-existent.
c. the same as the United States at any point in time.
d. none of the above

41. If research showed that anticipation about future interest rates was the only important factor for all investors in choosing short-term or long-term securities, this would support the argument made by the
a. liquidity premium theory.
b. expectations theory.
c. segmented markets theory.
d. A and B

42. If research showed that all investors attempt to purchase securities that perfectly match their time in which they will have available funds, this would specifically support the argument made by the
a. liquidity premium theory.
b. real interest rate theory.
c. expectations theory.
d. segmented markets theory.

43. If the Treasury uses a relatively large proportion of ____ debt to finance the deficit, this may place upward pressure on ____ interest rates, and corporations may reduce their investment in fixed assets.
a. long-term; long-term
b. long-term; short-term
c. short-term; long-term
d. B and C

44. You are considering the purchase of a tax-exempt security that is paying a yield of 10.08 percent. You are in the 28 percent tax bracket. To match this after-tax yield, you would consider taxable securities that pay
a. 31.1 percent.
b. 19 percent.
c. 12.5 percent.
d. 14 percent.

45. The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate one-year ahead is ____ percent.
a. 2.8
b. 115
c. 103
d. 15.1

46. The annualized yield on a three-year security is 13 percent; the annualized two-year interest rate is 12 percent, while the one-year interest rate is 9 percent. The forward rate two years ahead is ____ percent.
a. 1.8
b. 9.0
c. 15.0
d. none of the above

47. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for long-term funds issued by borrowers and the yield curve will be ____ sloping.
a. upward; downward
b. downward; upward
c. upward; upward
d. downward; downward

48. An upward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
a. longer; lower
b. longer; higher
c. shorter; lower
d. shorter; higher
e. B and C

49. Assume that the Treasury experiences a large decrease in the budget deficit and purchases a large number of T-bills. This action will ____ the supply of T-bills in the market and places ____ pressure on the yield of T-bills.
a. decrease; downward
b. decrease; upward
c. increase; upward
d. increase; downward

50. Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper.
a. 8.0
b. 7.6
c. 7.5
d. 7.9
e. none of the above

51. If liquidity influences the yield curve, the forward rate underestimates the market’s expectation of the future interest rate.
a. True
b. False

52. The yield curve for corporate bonds.
a. would typically lie below the Treasury yield curve.
b. is identical to the Treasury yield curve.
c. typically has the same slope as the Treasury yield curve.
d. is irrelevant to investors.

53. Some types of debt securities always offer a higher yield than others.
a. True
b. False

54. Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.
a. True
b. False

55. The higher a bond rating, the lower the perceived default risk.
a. True
b. False

56. Treasury securities are exempt from federal and state income taxes.
a. True
b. False

57. The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.
a. True
b. False

58. The graphic comparison of maturities and annualized yields is known as the interest rate curve.
a. True
b. False

59. According to the segmented markets theory, the term structure of interest rates is determined solely by expectations of future interest rates.
a. True
b. False

60. The forward rate is commonly used to represent the market’s forecast of the future interest rate.
a. True
b. False

61. Other things being equal, an expected decrease in interest rates will increase the demand for long-term funds by borrowers.
a. True
b. False

62. The preference for more liquid short-term securities places downward pressure on the slope of the yield curve.
a. True
b. False

63. When expectations theory is combined with the liquidity theory, the yield on a security will always be equal to the yield from consecutive investments in shorter-term securities over the same investment horizon.
a. True
b. False

64. The segmented markets theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.
a. True
b. False

65. If the yield curve is upward sloping, some investors may attempt to benefit from the higher yields on longer-term securities, even when they have funds for only a short period of time. This strategy is known as riding the yield curve.
a. True
b. False

66. Yield curves are always upward sloping.
a. True
b. False

67. Which of the following statements is not true with respect to debt securities?
a. Some types of debt securities always offer a higher yield than others.
b. Debt securities offer different yields because they exhibit different characteristics that influence the offered yield.
c. In general, securities with favorable characteristics will offer higher yields to entice investors.
d. All of the above are true with respect to debt securities.

68. Which of the following is not a characteristic affecting the yields on debt securities?
a. default risk
b. liquidity
c. tax status
d. term to maturity
e. All of the above affect yields on debt securities.

69. All other characteristics being equal, securities with ____ liquidity would have to offer a ____ yield to be preferred.
a. lower; higher
b. higher; higher
c. lower; lower
d. none of the above

70. A downward-sloping yield curve indicates that Treasury securities with ____ maturities offer ____ annualized yields.
a. longer; lower
b. longer; higher
c. shorter; lower
d. shorter; higher
e. Answers A and D are correct.

71. Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.
a. decrease; downward
b. decrease; upward
c. increase; upward
d. increase; downward

72. If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be
a. flat.
b. downward sloping.
c. upward sloping.
d. none of the above.

73. If interest rates are expected to decrease, the yield on new short-term securities may be expected to ____, and the yield curve should be ____ sloping.
a. increase; upward
b. increase; downward
c. decrease; upward
d. decrease; downward

74. According to segmented markets theory, if investors have mostly long-term funds available and borrowers want short-term funds, this will place ____ pressure on the demand for short-term funds by borrowers and the yield curve will be ____ sloping.
a. upward; downward
b. downward; upward
c. upward; upward
d. downward; downward

75. The ____ theory suggests that although investors and borrowers may normally concentrate on a particular natural maturity market, certain events may cause them to wander from it.
a. pure expectations
b. liquidity premium
c. segmented markets
d. preferred habitat

76. If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.
a. short-term; downward
b. long-term; downward
c. short-term; upward
d. long-term; upward

77. Bonds issued at different times by the same corporation may not receive the same rating from a rating agency.
a. True
b. False

78. Investment-grade bonds are bonds that are rated as Caa or better by Moody’s and as CCC or better by Standard & Poor’s.
a. True
b. False

79. In response to criticism of the ratings they assigned before the credit crisis, credit rating agencies now:
a. a. are paid through fees assessed on the purchasers of bonds.
b. a. are depending more on sensitivity analysis in which they assess how creditworthiness may change in response to abrupt changes in the economy.
c. a. are not allowing the employees who promote an agency to influence the ratings that the agency assigns.
d. a. B and C

80. The Financial Reform Act of 2010 established the __________ within the _________ to regulate credit rating agencies.
a. a. Bureau of Thrift Agency Supervision; Treasury Department
b. a. Office of Credit Ratings; Securities and Exchange Commission
c. a. Federal Ratings Assurance Corporation; Treasury Department
d. a. Ratings Oversight Commission; Federal Reserve

81. The yields of securities commonly move in the same direction over time.
a. True
b. False

82. Because interest rates may vary significantly across countries at a given point in time, investors do not monitor the term structures of interest rates in foreign countries unless they are interested in investing in a particular foreign country.
a. True
b. False

Chapter 4—Functions of the Fed

1. Which of the following is not a major component of the Federal Reserve System?
a. member banks
b. Federal Open Market Committee
c. Securities and Exchange Commission
d. Board of Governors

2. As a result of the Financial Reform Act of 2010, the ____ was assigned the role of regulating financial products and services.
a. Federal Advisory Committee
b. Federal Open Market Committee
c. Consumer Financial Protection Bureau
d. Board of Governors

3. Which of the following is not an activity of Fed district banks?
a. clearing checks
b. replacing old currency
c. providing loans to depository institutions
d. acting as an intermediary to match up lenders and borrowers in the stock market

4. All ____ are required to be members of the Federal Reserve System.
a. state banks
b. national banks
c. savings and loan associations
d. finance companies
e. A and B

5. The ____ is made up of seven individual members, and each member is appointed by the president of the U.S.
a. Board of Governors
b. Federal Reserve district bank
c. Federal Open Market Committee (FOMC)
d. Securities and Exchange Commission

6. Which of the following is currently a main role of the Federal Reserve’s Board of Governors?
a. regulating commercial banks
b. regulating foreign trade
c. controlling monetary policy
d. A and C

7. Members of the Board of Governors serve 14-year nonrenewable terms.
a. True
b. False

8. With regard to monetary policy, which of the following is under direct control of the Federal Reserve’s Board of Governors?
a. revise reserve requirements for depository institutions
b. authorize changes in the amount of borrowing by the Treasury
c. monitor the stock market for insider trading
d. monitor the derivatives market for illegal trading strategies

9. The ____ rate is the interest rate charged on Fed district bank loans to depository institutions.
a. federal funds
b. prime
c. primary credit lending
d. real

10. Which of the following is an action that the Fed uses to increase or decrease the money supply?
a. buying or selling Treasury securities in the secondary market
b. adjusting the tax rate imposed on income earned on Treasury securities
c. adjusting the coupon rate on Treasury bonds
d. selling Treasury securities in the primary market

11. The Policy Directive is provided by Board of Governors to the FOMC.
a. True
b. False

12. Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed.
a. increase; purchased
b. increase; sold
c. decrease; purchased
d. A and B

13. The purchase of government securities by someone other than the Fed results in
a. an overall increase in funds among commercial banks.
b. an overall decrease in funds among commercial banks.
c. offsetting changes in funds at commercial banks.
d. an increase in securities maintained by the Fed.

14. As the supply of funds in the banking system ____, the federal funds rate ____.
a. increases; declines
b. increases; increases
c. declines, declines
d. none of the above

15. Repurchase agreements are purchased by the Fed to
a. temporarily decrease the aggregate level of bank funds.
b. permanently increase the aggregate level of bank funds.
c. permanently decrease the aggregate level of bank funds.
d. temporarily increase the aggregate level of bank funds.

16. When open market operations are used to ____ bank funds, the yield on debt instruments ____.
a. reduce; decreases
b. reduce; increases
c. increase; increases
d. none of the above

17. ____ open market operations offset the impact of other conditions that affect the level of funds.
a. Active
b. Passive
c. Dynamic
d. Defensive

18. The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign currencies.
a. True
b. False

19. The primary credit lending rate changes in accordance with changes in the federal funds rate.
a. True
b. False

20. ____ credit may be used for any purpose and is available only to depository institutions that meet specific requirements for financial soundness.
a. Primary
b. Secondary
c. Tertiary
d. None of the above

21. To decrease money supply, the Fed could ____ the reserve requirement ratio.
a. increase
b. stabilize
c. reduce
d. eliminate

22. The ____ the reserve requirement ratio, the ____ the ultimate effect of any initial increase in money supply.
a. lower; less
b. lower; greater
c. greater; less
d. B and C

23. The ____ is directly responsible for controlling money supply growth.
a. Federal Advisory Council
b. FOMC
c. Board of Governors
d. President of the United States

24. Assume that the reserve requirements ratio is 15%. An initial injection of $150 million could result in a maximum change in the money supply of
a. $150 million.
b. $1 billion.
c. $1 million.
d. $22.5 million.

25. The form of money consisting of currency held by the public and checkable deposits at depository institutions is called
a. M1.
b. M2.
c. M3.
d. MMDA.

26. The Monetary Control Act of 1980 subjected
a. only member banks to the reserve requirements set by the Fed.
b. only S&Ls to the reserve requirements set by the Fed.
c. all depository institutions to the reserve requirements set by the Fed.
d. only national banks to reserve requirements set by the Fed.

27. The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial banks.
a. True
b. False

28. The voting members of the Federal Open Market Committee consist of the Board of Governors plus the
a. President of the United States.
b. Presidents of the 12 Fed district banks.
c. Presidents of 5 Fed district banks.
d. Federal Advisory Council.

29. The Board of Governors is composed of
a. seven members appointed by the President of the United States.
b. the 12 presidents of Fed district banks.
c. the Federal Open Market Committee, plus the Federal Advisory Council.
d. the Federal Open Market Committee, plus the President of the United States.

30. The ____ is directly responsible for setting reserve requirements.
a. Federal Advisory Council
b. FOMC
c. Board of Governors
d. President of the United States

31. The ____ is directly responsible for conducting monetary policy.
a. Federal Advisory Council
b. FOMC
c. Senate
d. President of the United States

32. Based on a 2003 policy, the primary credit lending rate is set
a. lower than the federal funds rate.
b. lower than the prevailing Treasury bill rate.
c. lower than the expected inflation rate.
d. above the federal funds rate.

33. A(n) ____ in Federal Reserve float causes a(n) ____ in bank funds.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. A and C

34. The ____ consists of seven members, each of whom is appointed by the President of the United States.
a. Federal Open Market Committee (FOMC)
b. Federal Advisory Council
c. Board of Governors
d. none of the above

35. Assume that the reserve requirement ratio is 12 percent and that the Fed uses open market operations by buying $200 million worth of Treasury securities. Assuming that banks use all funds except required reserves to make loans and that the public does not store any cash, the money supply should ____ by about ____.
a. increase; $200 million
b. increase; $1.67 billion
c. decrease; $200 million
d. decrease; $1.67 billion

36. The federal funds rate is the rate at which the Fed lends money directly to member banks.
a. True
b. False

37. When the Fed purchases securities, the total funds of commercial banks ____ by the market value of securities purchased by the Fed. This activity initiated by the FOMC’s policy directive is referred to as a(n) ____ of money supply growth.
a. increase; loosening
b. decrease; tightening
c. decrease; loosening
d. increase; tightening
e. none of the above

38. The Trading Desk is sometimes directed to ____ a sufficient amount of Treasury securities that will ____ the federal funds rate to a new targeted level set by the FOMC.
a. buy; decrease
b. sell; increase
c. buy; increase
d. sell; decrease
e. A and B

39. Which of the following statements is incorrect with respect to a single European monetary policy?
a. It allows for more consistent economic conditions across the countries.
b. It prevents any participating European country from solving local economic problems with its own unique monetary policy.
c. A policy used in a particular period may not affect the participating countries equally, since they all have the same currency.
d. Each participating country will still be able to apply its own fiscal policy (tax and government expenditure decisions).
e. All of the above are true with respect to a single European monetary policy.

40. Since 2003, the Fed’s rate on short-term loans to depository institutions is referred to as the
a. discount rate.
b. primary credit lending rate.
c. Federal funds rate.
d. prime rate

41. ____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness.
a. Primary
b. Secondary
c. Tertiary
d. None of the above

42. Most of the Fed’s income is transferred to the U.S. Department of Justice.
a. True
b. False

43. All commercial banks are required to be members of the Fed.
a. True
b. False

44. Each member of the Board of Governors is appointed by the president of the United States and serves a nonrenewable 14-year term.
a. True
b. False

45. Each Federal Reserve district bank is responsible for reporting its regional conditions, and all of these reports are consolidated to compose the Beige Book.
a. True
b. False

46. When the Trading Desk sells a sufficient amount of Treasury securities, it creates a surplus of funds in the banking system. Consequently, the federal funds rate decreases along with other interest rates.
a. True
b. False

47. Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.
a. True
b. False

48. To increase the money supply, the Trading Desk would be instructed to sell government securities.
a. True
b. False

49. To increase the money supply, the Fed may increase the reserve requirement ratio.
a. True
b. False

50. Which of the following is not true with respect to the Federal Reserve Act of 1913?
a. It established reserve requirements for member commercial banks.
b. It specified fourteen districts across the United States as well as a city in each district where a Federal Reserve district bank was to be established.
c. Each district focused on its particular district, without much concern for other districts.
d. All of the above are true.

51. ____ is (are) not a component of the Fed as it exists today.
a. The Federal Advisory Council
b. The Board of Governors
c. National banks
d. The U.S. Department of Commerce
e. All of the above are components of the Fed.

52. The advisory committee making recommendations to the Fed about economic and banking related issues is the
a. Consumer Advisory Council.
b. Thrift Institutions Advisory Council.
c. Federal Advisory Council.
d. none of the above

53. The advisory committee offering views on issues related to credit unions is the
a. Consumer Advisory Council.
b. Thrift Institutions Advisory Council.
c. Federal Advisory Council.
d. none of the above

54. If the Fed desires to ____ the money supply using open market operations, it would instruct the trading desk to ____ government securities.
a. increase; purchase
b. increase; sell
c. decrease; purchase
d. Answers B and C are correct.

55. When the Fed buys Treasury bills as a means of increasing the money supply, it places ____ pressure on their prices and ____ pressure on their yields.
a. upward; upward
b. downward; downward
c. upward; downward
d. downward; upward

56. To increase the money supply growth, the Fed could
a. sell government securities in the secondary market.
b. increase the primary credit lending rate.
c. increase the reserve requirement ratio.
d. all of the above
e. none of the above

57. When the Fed sells securities, the total funds of commercial banks ____ by the market value of securities sold by the Fed. This activity initiated by the FOMC’s policy directive is referred to as a ____ of money supply growth.
a. increase; loosening
b. decrease; loosening
c. increase; tightening
d. decrease; tightening
e. none of the above

58. ____ includes only currency held by the public and checking deposits as well as savings accounts and small time deposits, money market deposit accounts, and some other items.
a. M1
b. M2
c. M3
d. None of the above

59. The ____ consists of seven members, each of whom is appointed by the president of the United States.
a. Federal Open Market Committee (FOMC)
b. Federal Advisory Council
c. Board of Governors
d. none of the above

60. The Fed’s primary goal has historically been to add liquidity to the mortgage market by continuously purchasing mortgage-backed securities.
a. True
b. False

61. When the Fed purchases _______, it is attempting to directly stimulate the housing market.
a. commercial paper
b. short-term Treasury securities
c. mortgage-backed securities
d. consumer loans

62. The Fed’s purchases of long-term Treasury securities in recent years were intended to:
a. reduce long-term interest rates.
b. reduce interest rates on credit cards and consumer loans.
c. increase the federal funds rate.
d. restore confidence in the market for these securities.

63. A criticism of the Fed’s actions during the credit crisis is that it:
a. did not attempt to increase the liquidity of the debt markets.
b. focused too much on financial institutions.
c. allowed Bear Stearns to fail and file for bankruptcy.
d. periodically raised the primary credit rate.

64. Which of the following did the Fed not do during the credit crisis?
a. purchase mortgage-backed securities
b. purchase commercial paper
c. reduce the targeted federal funds rate
d. prevent depository institutions from obtaining funding through the discount window