AP Macroeconomics
MODULE 27 REVIEW
Check Your Understanding (answer on loose leaf)
1. Assume that any money lent by a bank is deposited back in the banking system as a checkable deposit and that the reserve ratio is 10%. Trace out the effects of a $100 million open-market purchase of U.S. Treasury bills by the Fed on the value of checkable bank deposits. What is the size of the money multiplier?
Tackle the Test: Multiple-Choice Questions (answer on loose leaf)
1. Which of the following is a function of the Federal Reserve System?
I. examine commercial banks
II. print Federal Reserve notes
III. conduct monetary policy
a. I only
b. II only
c. III only
d. I and III only
e. I, II and III
2. Which of the following financial services does the Federal Reserve provide for commercial banks?
I. clearing checks
II. holding reserves
III. making loans
a. I only
b. II only
c. III only
d. I and II only
e. I, II and III
3. When the Fed makes a loan to a commercial bank, it charges
a. no interest.
b. the prime rate.
c. the federal funds rate.
d. the discount rate.
e. the market interest rate
4. If the Fed purchases U.S. Treasury bills from a commercial bank, what happens to bank reserves and the money supply?
Bank Reserves Money Supply
a. Increase Decrease
b. Increase Increase
c. Decrease Decrease
d. Decrease Increase
e. Increase No Change
5. When banks make loans to each other, they charge the
a. prime rate.
b. discount rate.
c. federal funds rate.
d. CD rate.
e. mortgage rate
Tackle the Test: Free-Response Questions (answer on loose leaf)
1. Answer each of the following.
a. What are the three major tools of the Federal Reserve System?
b. What would the Fed do with each tool to increase the money supply? Explain for each.
2. What are the four basic functions of the Federal Reserve System and what part of the system is responsible for each?