Test Your Knowledge Monetary Policy Click on the letter choices to test your understanding ABC

Question 1 Monetary policy refers to: The Federal Reserve’s actions to influence the amount of money and credit in the U.S. economy A The amount of money printed by the Bureau of Engraving and Printing B The actions of Congress and the President to influence the economy through changes in tax policy and government spending C

Correct! Monetary policy refers to what the Federal Reserve, the nation’s central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the U.S. economy’s performance. Next

Try again! The Bureau of Engraving and Printing develops and produces United States currency notes, also known as Federal Reserve notes. The Federal Reserve, as our nation’s central bank, makes sure that sufficient coin and currency are in circulation to carry out the nation’s financial transactions, but monetary policy, conducted by the Federal Reserve’s Open Market Committee, does not involve the actual printing of currency. Back

Try again! The actions of Congress and the president to influence the economy through changes in tax policy and government spending are known as fiscal policy. Monetary policy is conducted by the Federal Reserve’s Open Market Committee. Back

Question 2 When the U.S. president and Congress make changes to tax and spending policy, this is known as: Monetary Policy A Fiscal Policy B Monetary and Fiscal Policy C

Try again! Monetary policy refers to what the Federal Reserve, the nation’s central bank, does to influence the amount of money and credit in the U.S. economy. What happens to money and credit affects interest rates (the cost of credit) and the performance of the U.S. economy. Back

Correct! Fiscal policy involves changes in the rules and rates for taxations and in levels of government spending. Fiscal policy is determined by the U.S. president and Congress. Next

Try again! Economic conditions may be influenced by both monetary and fiscal policy, and it is important to distinguish between the two. The Federal Reserve conducts the nation’s monetary policy. Back

Question 3 The nation’s monetary policy is conducted by: The Fed’s Board of Governors A The president and Congress B The Federal Reserve’s Open Market Committee C

Try again! The Federal Reserve’s Board of Governors are included in the group that makes the nation’s monetary policy, but five presidents from the reserve banks are also voting members. Back

Correct! Monetary policy is conducted by the Fed’s Open Market Committee, which is made up of the 7 members of the Fed’s Board of Governors, as well as five of the regional bank presidents. Next

Try again! The U.S. president and Congress are responsible for fiscal policy, or changes in the rules and rates for taxation and in levels of government spending. Back

Question 4 The reserve requirement is: The most frequently used tool of monetary policy A The ratio of deposits that banks must hold to cover demands for liquidity B Set by the U.S. Congress C

Try again! The reserve requirement is rarely used as a monetary policy tool. In fact, the reserve requirement has not been changed since the April Back

Correct! The reserve requirement, set by the Federal Reserve, is the ratio of deposits that banks must hold in vault cash (or with the Fed) to cover demands for liquidity. Effective on December 29, 2011, the required reserve ratio will be 10 percent for net transactions accounts greater than $71 million. Next

Try again! The reserve requirement is set by the Federal Reserve. Back

Question 5 The discount rate is: The interest rate charged when banks borrow from the Fed A The interest rate charged to prime business customers B Set by commercial banks C

Correct! When financial institutions borrow directly from the Fed, the discount rate is the interest rate that they are charged for these loans. Next

Try again! The prime rate is generally the rate that banks charge their best customers, and is used to set interest rates for a variety of loans. Back

Try again! The discount rate is set by the Federal Reserve. Back

Question 6 Open market operations are conducted by: The buying and selling of stock in the open market A Targeting the prime interest rate B The buying and selling of U.S. Treasuries C

Try again! Open market operations do not refer to the stock market, but rather the buying and selling of another type of asset. Back

Try again! The Federal Reserve targets the federal funds rate, the interest rate that banks charge each other for overnight loans of excess reserves, when it conducts monetary policy. Back

Correct! In open market operations, the Federal Open Market Committee establishes a target federal funds rate, and then works to achieve that target through the buying and selling of securities, usually U.S. Treasuries. Next

Question 7 If the Federal Reserve buys Treasury securities: The money supply will increase A The money supply will decrease B Nominal interest rates will rise C

Correct! When the Federal Reserve buys Treasuries, it increases the money supply. Banks will have more money to lend and the nominal interest rate will fall.

Try Again! The money supply decreases when the Federal Reserve sells U.S. Treasuries. Back

Try again! When the Federal Reserve buys U.S. Treasuries, this increases the money supply and will cause the nominal interest rate to fall. Back

Question 8 A decrease in the amount of reserves held by banks: Decreases the amount of money and credit in the economy A Will cause interest rates to rise B Both of the above C

Try again! A decrease in the amount of reserves held by banks will decrease the amount of money and credit available in the economy, but it has other effects as well. Back

Try again! A decrease in the amount of reserves held by banks will increase interest rates, but interest rates are also affected by the supply of money and credit. Back

Correct! A decrease in the amount of reserve held by banks reduces the amount of money and credit available in the economy and consequently increases short-term interest rates. Next

Question 9 Higher short-term interest rates: Cause an increase in GDP A Increase employment B May ease inflationary pressures C

Try Again! Higher short-term interest rates raise the cost of borrowing. This slows spending and investment by consumers and businesses, which will slow the growth rate of GDP. Back

Try again! Higher short-term interest rates, by increasing the cost of borrowing, will slow spending and investment and therefore slow employment growth. Back

Correct! Higher short-term interest rates, by slowing the growth rates of both GDP and employment, should ease inflationary pressures.

Question 10 Why is it important that the Federal Reserve maintain its independence? Because it is a part of the U.S. government A Because the Board of Governors are elected officials B To remove election-cycle influences from monetary policy C

Try again! The Federal Reserve, as the nation’s central bank, is “quasi-governmental.” The Federal Reserve’s Board of Governors are appointed by the nation’s president and confirmed by the U.S. Senate, but the Federal Reserve is not an agency of the U.S. government. Back

Try again! The Federal Reserve’s Board of Governors are not elected officials. They are appointed by the U.S. president and confirmed by the U.S. Senate. Back

Correct By maintaining Federal Reserve independence, nonelected officials can be removed from potential political pressures. This independence allows the Fed the freedom to make the difficult and sometimes unpopular choices that foster long-run economic growth and price stability. Next

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