Level 3 Test 4   Answers     United States Money and Monetary System

1. Contractual clearing balances

2. Cash balances

3. Deposit balancing

2.  The supply of Federal Reserve balances to depository institutions comes from three sources: the Federal Reserve’s portfolio of securities and re­purchase agreements, certain other items on the Federal Reserve’s balance sheet known as autonomous factors, and what other source?

1. Bonds

2. Loans from the Federal Reserve through its discount window facility

3. Cash

3.  The Federal Reserve influences the economy through the market for balances that depository institutions maintain in their accounts at Federal Reserve Banks. Depository institutions make and receive payments on behalf of their customers or themselves in these accounts. The end of day balances in these accounts are used to meet reserve and other balance requirements. If a depository institution anticipates that it will end the day with a larger balance than it needs, it can reduce that balance in several ways, depending on how long it expects the surplus to persist. For example, if it expects the surplus to be temporary, the institution can:

1. Borrow on excess balances in financing markets

2. Deposit more funds.

3.  Lend excess balances in financing markets

4.  The Federal Reserve tends to conduct far more outright purchases than outright sales or redemptions of securities primarily because it must offset the drain of balances resulting from the public’s increasing demand for Federal Reserve notes.

1. True.

2. False. 

5.  An important function of the Federal Reserve is ensuring that enough currency and coin is in circulation to meet the public’s demand. This demand increases or decreases seasonally and as the level of economic activity changes. In the weeks leading up to a holiday season, depository institutions would need to:

1. Increase their orders of currency and coin from Reserve Banks to meet their customers’ demand.

2 Decrease their orders of currency and coin from Reserve Banks to meet their customers’ demand.

6. An important function of the Federal Reserve is ensuring that enough cash is in circulation to meet the public’s demand. The Federal Reserve Board coordinates shipments of currency to the Reserve Banks around the country. The Reserve Banks, in turn, issue the notes to the public through depository institutions. Federal Reserve notes are obligations of:

1. The Federal Reserve Board.

2. The Reserve Banks.

7  The automated clearinghouse (ACH) is an electronic payment system, developed jointly by the private sector and the Federal Reserve in the early 1970s as a more efficient alternative to:

1. Coins.

2. Checks.

3. Paper currency.

8. How is the Fedwire Funds Service used?

1. The Fedwire Funds Service provides safekeeping, transfer, and settlement services for securities issued by the Treasury, federal agencies, government sponsored enterprises, and certain international organizations.

2.  The Fedwire Funds Service provides a real-time gross settlement system in which more than 9,500 participants are able to initiate electronic funds transfers that are immediate, final, and irrevocable. Depository institutions that maintain an account with a Reserve Bank are eligible to use the service.

9. During the business day, The Federal Reserve measures each depository institution’s account balance at the end of each:

          1. Minute

          2. Second

3. Hour

10. As the U.S. central bank, the Federal Reserve is immune from liquidity problems.

1. True

2. False

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