For multiple choice questions, indicate in the space provided whether the correct answer is A, B, C, or D. For True- False questions, indicate T for True and F for False.

1. Under US banking law, national- chartered banks must purchase FDIC insurance but state chartered banks do not have to.

2. In the US, state chartered banks get their operating license from the state: nationally- chartered banks get their operating license from the (a) FDIC (b) OCC (c) Federal Reserve (d) any of these federal banking regulatory agencies can charter a national bank.

3. A fundamental premise of US bank regulation is that the more capital banks are required to hold, the less risk they are likely to take in lending and investing funds.

4. Friedman National Bank has its head office in New York City. Accordingly, it is examined by (a) New York State, the FDIC and the Federal Reserve (b) New York State, the OCC, and the FDIC (c) the OCC and New York State (d) the Federal Reserve and New York State.

5. If a bank establishes a “financial holding company” it can use that company to buy an insurance company, but, under rules established by the Federal Reserve, that insurance company can only sell new policies to depositors of the bank.

6. To reduce risk-taking, US bank regulators (a) require banks to hold substantial capital (b) subject banks to annual financial examinations (c) prohibit banks from investing in corporate stock (d) all of the above

7. To ensure that all banks are operating with “safety and soundness,” the bank regulatory authorities require all banks to (a) obtain deposit insurance from the FDIC (b) hold an amount of capital equal to no less than their required reserves. (c) subject themselves to annual financial examinations (d) all of the above

8. Forming a “bank holding company” provided banks with important advantages in that (a) it allowed banks to avoid Federal Reserve-imposed reserve requirements (b) it allowed them to engage in activities prohibited to the bank itself. (c) it allowed insurance companies and other shadow banks to purchase commercial banks and put them under single corporate control (d) all of the above.

9. Federal Reserve Banks are private institutions owned by member commercial banks; they are not government institutions.

10. Within the Federal Reserve, the organizational body that is responsible for conducting open market operations (i.e., the buying and selling of government securities) is the (a) FOMC (b) Board of Governors (c) Board of Directors (d) Federal Reserve Bank of New York.

11. The main source of Federal Reserve “independence” is that it is “self funding.” This means that the Federal reserve gets money to operate from (a) interest on its portfolio of government and mortgage-backed securities (b) annual membership fees paid by member commercial banks (c) selling government securities from the open market portfolio (d) special appropriations from Congress

12. Which of the following is not a responsibility of the Federal Reserve (a) examines banks (b) issues new currency and coin (c) holds deposits of municipal governments (d) all of these are Federal reserve responsibilities

13. The Federal Open Market Committee (FOMC) is compromised of the 7 members of the Board of Governors of the Federal Reserve, who can vote to change monetary policy, and the 12 Reserve bank presidents, who can advise the Governors, but can’t vote on proposed changes to monetary policy.

14. Although the Federal Reserve is “independent” it is still subject to the influence of Congress because Congress can (a) pass legislation that can restrict the Fed’s independence (b) withhold appropriations that fund the Fed’s operating budget (c) appoint members of the Board of Governors who share the Congress’s views on monetary policy (d) all of the above

15. After covering expenses and paying dividends on outstanding stock, the annual earnings of the Federal Reserve are (a) distributed to member commercial banks (b) given to the US Treasury (c) invested in US Government securities (d) put into the FDIC’s deposit insurance fund.

16. The President of the Federal Reserve Bank of New York (a) is appointed by the President of the US with the consent of the Senate (b) serves a 14 year term as a Reserve Bank president (c) is a permanent voting member of the FOMC (d) all of the above

17. A state-chartered bank that is a member of Federal Reserve (a) gets an annual return

of 6% on its holdings of Reserve Bank stock (b) is examined by the Federal Reserve (c)

elects one of the nine directors that oversee the reserve Bank in its district (d) all of the


18. The three policy tools that the Fed relies on to control bank reserves and the money supply are (a) discount rate, federal funds rate, prime rate (b) open market operations, discount rate, reserve requirements (c) reserve requirements, margin requirements, capital requirements (d) monetary base controls, interest rate controls, credit controls

19. Any bank can borrow from the Fed if they need liquid funds, but they are charged one

percentage point more than the federal funds rate if they do so.

20. The main purpose of reserve requirements is to (a) enable the Fed to control the

amount of demand deposits (b) ensure that banks have a safe margin of cash assets

available for daily use (c) prevent banks “runs” by building public confidence in US

banking (d) enable the Fed to buy government securities with the reserves that banks

have to keep at the Fed.

21. The Federal Reserve’s reserve requirement power includes the authority to (a)

determine which bank liabilities are subject to reserve requirements (b) impose reserve

requirements on mutual funds (c) eliminate reserve requirements for small banks (i.e.,

those with deposits of $100 million or less) (d) all of the above

22. The Federal Reserve has the power to change (a) reserve requirements (b) stock

market margin requirements (c) capital requirements for large banks (d) all of the above

23. Since 2009, Congress has given the Fed new policy tools, most notably the authority to (a) pay interest on bank reserves (b) close the stock market if trading becomes “disruptive” (c) require banks to give first priority in lending to consumers and business firms that have deposits in their bank (d) all of the above

24. Open market operations work efficiently and effectively because these operations (a)

are conducted through dealer firms, not banks (b) involve highly liquid and highly

coveted US Treasury securities (c) change bank reserves and the money supply instantly

(d) all of the above

25. When the Fed buys government Securities in the open market (a) bank reserves increase (b) bank reserves decline (c) money supply increases but bank reserves remain unchanged (d) money supply declines but bank reserves remain unchanged.

26. Banks that maintain their reserves at the Fed receive interest on these funds; the rate they receive is called the “prime rate.”

27. To implement its sequential targeting strategy, the Fed relies on (a) daily open market operations (b) daily management of the amount of reserves provided to banks (c) adherence to a pre- designated federal funds rate target (d) all of these

28. Under the Fed’s sequential targeting strategy, money supply growth is one of several intermediate targets that the Fed uses to assess how close it is coming to achieving its policy goals.

29. Which of the following is not an “intermediate’ target used by the Fed in implementing monetary policy (a) gold prices (b) real long term interest rates (c) growth in consumer debt (d) federal funds rate

30. The Fed operates under a “dual mandate” with respect to its ultimate policy goals;

one part of the mandate is to achieve full employment, price stability and economic

growth; the other part of the mandate is to reduce income inequality and the national


31. Economics consider the Fed’s sequential targeting strategy to be transparent because

the Federal Reserve announces its strategy, policy intentions and operating targets after

each FOMC meeting.

32. Since 2009, the Federal Reserve has adopted a policy of “forward guidance” in an attempt to (a) stabilize US financial markets (b) give brokers and dealers a competitive edge in trading securities (c) induce banks to reduce consumer lending (d) all of the above

33. The priority the Fed gives to its policy goals (i.e., whether price stability is the top priority or full employment is the top priority) is set each year in the annual federal budget resolution adopted by Congress each October.