Terms on the Fed's Board of Governors are staggered so that one governor's term expires every two years.
Correct Answer
True
True. The 14-year terms are staggered so one expires at the end of January in every even-numbered year, which keeps any single President from appointing the whole board at once.
Category: Federal Reserve Structure
Question 2
The Chair of the Fed's Board of Governors serves a 10-year term as chair.
Correct Answer
False
False. The Chair is a governor designated to serve a 4-year term as chair, which can be renewed. The Chair has one vote but sets the agenda and acts as the Fed's public voice.
Category: Federal Reserve Structure
Question 3
Monetary policy decisions by the Fed do not require approval from Congress.
Correct Answer
True
True. The Fed's policy decisions take effect without a congressional vote, which is part of what makes the Fed independent. Congress created the Fed and can change its legal mandate.
Category: Federal Reserve Structure
Question 4
The Federal Reserve is run entirely by private bankers, with no government appointees.
Correct Answer
False
False. The Fed mixes public and private appointees: the seven governors are appointed by the President and confirmed by the Senate, while commercial banks in each district elect directors of their regional Fed bank.
Category: Federal Reserve Structure
Question 5
The Fed provides banking services to banks, such as processing checks and transferring funds between banks.
Correct Answer
True
True. Along with conducting monetary policy and promoting financial stability, the Fed acts as a bank for banks, holding their reserve accounts, clearing checks, moving funds and making discount loans.
Category: Central Bank Functions
Question 6
The Fed supervises bank holding companies, which are firms that own banks along with other businesses.
Correct Answer
True
True. The Fed oversees bank holding companies, while other agencies such as the Office of the Comptroller of the Currency and the FDIC supervise many of the banks themselves.
Category: Bank Regulation
Question 7
A bank whose liabilities exceed its assets has positive net worth.
Correct Answer
False
False. Net worth equals assets minus liabilities, so liabilities greater than assets mean negative net worth. Such a bank is insolvent, and regulators require banks to keep net worth above a minimum share of assets.
Category: Bank Regulation
Question 8
Lowering the discount rate tends to encourage banks to borrow from the Fed, which can expand the money supply.
Correct Answer
True
True. A cheaper discount rate makes borrowing reserves from the Fed more attractive, and the added reserves support more lending. Raising the discount rate works in the opposite direction.
Category: Other Policy Tools
Question 9
The Fed normally sets the discount rate below the federal funds rate to encourage banks to borrow from it.
Correct Answer
False
False. The Fed sets the discount rate above the federal funds rate so that banks try other sources of funds first, which is why the Fed makes relatively few discount loans.
Category: Other Policy Tools
Question 10
Interest on reserve balances is the rate that banks pay the Fed to borrow reserves overnight.
Correct Answer
False
False. Interest on reserve balances is the rate the Fed pays banks on the reserves they hold at the Fed. In an ample-reserves system, the FOMC adjusts it to steer the federal funds rate.
Category: Other Policy Tools
Question 11
When the federal funds rate changes, rates such as mortgage rates usually move in the same direction, though often by a smaller amount.
Correct Answer
True
True. A change in the federal funds rate tends to pull other interest rates the same way, but long-term rates such as mortgage rates usually move less than one-for-one because each lending market has its own supply and demand.
Category: Policy and Economic Outcomes
Question 12
The zero lower bound limits how far a central bank can cut nominal interest rates using conventional tools.
Correct Answer
True
True. Open market operations cannot push nominal rates much below zero, so when rates neared zero in 2008-2009 and again in 2020, the Fed turned to unconventional tools such as large-scale asset purchases.
Category: Policy and Economic Outcomes
Question 13
In the neoclassical view, monetary policy affects real GDP but not the price level in the long run.
Correct Answer
False
False. The neoclassical view holds the reverse: in the long run monetary policy affects only the price level, not real output or unemployment. This view supports inflation targeting.
Category: Policy and Economic Outcomes
Question 14
Under inflation targeting, keeping inflation low is the central bank's primary goal.
Correct Answer
True
True. Under inflation targeting, adopted by many countries starting in the 1990s, low inflation becomes the central bank's main objective, often set in law or in an agreement with the government. The Fed is a notable exception because its legal mandate also covers employment.
Category: Policy and Economic Outcomes
Question 15
If velocity is constant, a 5 percent increase in the money supply leads to a 10 percent increase in nominal GDP.
Correct Answer
False
False. With velocity constant, MV = nominal GDP means a 5 percent rise in the money supply raises nominal GDP by 5 percent. That increase is split between inflation and growth in real output.
Category: Quantity Equation
Question 16
M1 velocity in the United States became much less predictable after about 1980.
Correct Answer
True
True. M1 velocity moved fairly steadily from 1960 to about 1980 and then became erratic, likely because of financial innovations such as electronic payments and easy transfers between savings and checking. That instability weakened the case for a fixed money growth rule.
Category: Quantity Equation
Question 17
Unexpected deflation raises the real burden of existing debts for borrowers.
Correct Answer
True
True. When prices fall unexpectedly, each dollar owed is worth more in real terms, so borrowers struggle to repay. Defaults can then hurt banks and reduce lending and aggregate demand.
Category: Monetary Policy Pitfalls
Question 18
During the 2008-2009 financial crisis, U.S. banks sharply reduced the reserves they held.
Correct Answer
False
False. Surviving banks greatly increased their reserves during and after the crisis, and reserves reached trillions of dollars by 2014. Large reserves held rather than lent can blunt expansionary policy.
Category: Monetary Policy Pitfalls
Question 19
The Fed first used quantitative easing in the late 1970s, when short-term interest rates were very high.
Correct Answer
False
False. The Fed began quantitative easing in late 2008, when short-term interest rates were already near zero and conventional tools could not lower them further. In the late 1970s and early 1980s the Fed raised rates sharply to fight inflation.
Category: Other Policy Tools
Question 20
The Federal Reserve was created in response to the stock market crash of 1929.
Correct Answer
False
False. Congress created the Federal Reserve in 1913, after the bank panic of 1907, largely so it could act as a lender of last resort and stop bank runs. The 1929 crash came 16 years later.
Category: Central Bank Functions