Tackle the Test: Free-Response Questions

1. Question

   
   

   1. What are the three major tools of the Federal Reserve System?

      
      
   
   

   2. What would the Fed do with each tool to increase the money supply? Explain for each.

      
      
   
   

   Rubric for FRQ 1 (9 points)

   1 point: The discount rate

   1 point: The reserve requirement

   1 point: Open-market operations

   1 point: Decrease the discount rate

   1 point: A lower discount rate makes it cheaper to borrow from the Fed so the money supply increases.

   1 point: Decrease the reserve requirement

   1 point: A lower reserve requirement allows banks to loan more, increasing the money supply.

   1 point: Buy U.S. Treasury bills

   1 point: When the Fed buys U.S. Treasury bills, banks’ excess reserves increase. When lent out, these excess reserves increase the money supply with the assistance of the money multiplier.

2. Question

   What are the four basic functions of the Federal Reserve System and what part of the system is responsible for each? (8 points)

   Rubric for FRQ 2 (8 points)

   1 point: Provide financial services to depository institutions.

   1 point: Regional Federal Reserve Banks are responsible.

   1 point: Supervise and regulate banking institutions.

   1 point: Regional Federal Reserve Banks and the Board of Governors are responsible.

   1 point: Maintain the stability of the financial system.

   1 point: The Board of Governors is responsible.

   1 point: Conduct monetary policy.

   1 point: The Federal Open Market Committee is responsible.