Chapter 16 Money and the Banking System

| November 9, 2018

21)
The Federal Reserve is a branch of the Treasury Department, and is therefore
subject to significant government control.

22)
List four of the Federal Reserve’s key functions.

23)
List and explain the three subgroups of the Federal Reserve System.

24)
Describe the relationship between the Federal Reserve and the legislative and
executive branches of the U.S. government.

16.4 What the Federal Reserve Does During a
Financial Crisis

Recall
the Application about how the Fed kept the U.S. financial system in operation
following the attacks of September 11, 2001, to answer the following
question(s). To help prevent financial firms from defaulting on their debts,
the Fed took several steps to provide additional funds to the financial system,
including allowing banks to borrow more, increasing the difference between the
credits and debits it extended while serving as a clearinghouse for checks,
purchasing government securities, and providing dollars to foreign central
banks. Together, these actions increased the credit extended by the Fed by over
$90 billion.

1)
Recall the application. Immediately following the attacks of September 11,
2001, the Fed provided additional funds to the financial system. On September
12, banks borrowed $45.5 billion
dollars, up from $99 million the previous week. This was an example of the Fed
acting as a
A)
medium of exchange.
B)
unit of account.
C)
store of value.
D)
lender of last resort.

2)
Recall the application. Following the attacks of September 11, 2001, the Fed
effectively put an additional $20 billion into the banking system by increasing
the difference between the credits and debits it extended while serving as a
clearinghouse for checks. The difference between the credits and debits
extended by the Federal Reserve is called the
A)
Federal Reserve balance sheet.
B)
federal funds rate.
C)
Federal Reserve float.
D)
federal deficit.

3)
Recall the application. Following the attacks of September 11, 2001, the
Federal Reserve purchased government securities, putting $30 billion in the
hands of private citizens and their banks. By extending cash to banks during
the potential financial crisis following the September 11 attacks, the Fed was
attempting to
A)
fend off a financial panic.
B)
decrease the federal deficit.
C)
reduce potential inflation.
D)
decrease net exports.

Recall
the Application about the Fed’s response to the collapse of the investment
house Bear Stearns as well as its handling of the 2008 financial crisis with
respect to other financial institutions to answer the following question(s).

4)
Recall the application. The Fed increased its lending by hundreds of billions
of dollars to financial institutions as a response to the ongoing financial
crisis. This increase in loans to financial institutions increased the supply
of money in the economy. When the supply of money increases, the money supply
curve will
A)
shift to the right, increasing the interest rate.
B)
shift to the right, decreasing the interest rate.
C)
shift to the left, increasing the interest rate.
D)
shift to the left, decreasing the interest rate.

5)
Recall the Application. In response to the financial crisis, the Fed
implemented a new policy in which it began to pay interest on deposits held at
the Fed. This move would ________ deposits held at the Fed and ________ the
Fed’s ability to make loans.
A)
decrease; decrease
B)
decrease; increase
C)
increase; decrease
D)
increase; increase

6)
Recall the application. The Fed responded to the financial crisis by continuing
to develop new programs. One example of this was its announcement that it would
now purchase commercial paper, which is the short-term debt of corporations.
This is an example of the Fed acting as a
A)
medium of exchange.
B)
lender of last resort.
C)
store of value.
D)
unit of account.

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