Chapter 6 Practice Questions
1. The federal funds rate refers to:
A. The rate banks have to pay when borrowing from the Federal Reserve
B. The rate broker-dealers pay when borrowing on behalf of customers
C. The rate that the most creditworthy customers pay when borrowing
D. The rate banks charge each other for overnight loans over $1 million
2. If the economy is in a recession, what can the federal government do to boost the economy?
A. Raise taxes
B. Decrease spending
C. Lower interest rates
D. Sell Treasury bonds
3. All of the following are tools that the Federal Reserve uses to implement monetary policy except:
A. Open market operations
B. Discount window lending
C. Changing bank reserve requirements
D. Changing the capital gains rate
4. What entity actually carries out open market operations for the Federal Reserve System?
A. Federal Open Market Committee
B. U.S. Treasury
C. The Open Market Trading Desk
D. Congress
5. The welfare program is considered an automatic stabilizer because:
A. Once you’re on the welfare rolls, you never get off.
B. Expenditures increase or decrease counter to the economic cycle.
C. It increases purchasing power in the economy.
D. Welfare expenditures by the government are fixed and stable.
6. The real interest rate:
A. Excludes inflation
B. Includes inflation
C. Is always positive
D. Is identical to the coupon rate
7. The real interest rate may be defined as:
A. The rate that banks lend to their largest customers
B. The nominal interest rate less inflation
C. The short-term rate used as an index in long-term contracts
D. The three-month Treasury bill rate
8. The primary function of the Federal Reserve Bank is to:
A. Issue new money into the U.S. economy
B. Insure cash and cash equivalent deposits in private U.S. banks
C. Promote a stable U.S. economy by managing the money supply