The System Open Market Account (SOMA)

QUESTION 1

1. The System Open Market Account (SOMA), managed by the Federal Reserve Bank of New York, contains dollar-denominated assets acquired via open market operations. As of the end of July 2017 the SOMA account over $3 trillion of agency mortgage-backed securities.
   True
   or
   False

QUESTION 2
Banks lend their excess reserves to one another. This is called the Fed Funds market.
True
Or
False

QUESTION 3

1. When the FOMC decides to increase the target Fed Funds rate the Federal Reserve Bank of New York would take actions to drain bank reserves out of the system.
   True
   Or
   False

QUESTION 4

1. Banks acquire the funds that they use to purchase income-earning assets from such sources as
2. A. deposits at other banks.
   B. cash items in the process of collection.
   C. savings accounts.
   D. reserves.
   QUESTION 5
3. Base your answers on the March 03, 2020 Federal Reserve issues FOMC statementhttps://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htmThe risks posed by the corona virus to the price stability and full employment in the United States prompted the FOMC to lower the target Fed Funds rate by 50 basis points to a range of 1% to 1.25%.
   True
   Or
   False
   QUESTION 6
4. The FOCM has set the target Fed Funds rate at range of 0% to .25% in reaction to the economic contraction caused by the COVID-19 health/economic crisis. In order to achieve this target, the Federal Reserve Bank of New York must be actively engaged in buying financial securities on the open market.
   True
   or
   False
   QUESTION 7
5. An open market purchase by the Federal Reserve Bank of New York reduces bank reserves and creates upward pressure on the Fed Funds rate.
   True
   Or
   False
   QUESTION 8
6. The Fed Funds rate was 19.04% in July of 1981 and was .16% in December of 2012.
   True
   Or
   False
   QUESTION 9
7. Base your answers on the March 03, 2020 Federal Reserve issues FOMC statement
   https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm
   The risks posed by the corona virus to the economy of the United States prompted the FOMC to make interest free loans to all banks in the United States.
   True
   Or
   False
   QUESTION 10
8. As the reserves of the banking system increase above what is required the incentive to lend increases. When loans are made and the loan proceeds are deposited the process of money creation has begun..
   True
   Or
   False

QUESTION 11

1. Both and are Federal Reserve assets.
2. A. government securities; reserves
   B. government securities; discount loans
   C. currency in circulation; reserves
   D. currency in circulation; government securities
   QUESTION 12
3. Base your answers on the March 03, 2020 FOMC Implementation Note
   https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a1.htm
   The Board of Governors of the Federal Reserve voted unanimously to lower the primary discount rate by 50 basis points. The primary rate is a rate that is charged to banks that borrow from the Federal Reserve.
   True
   Or
   False
   QUESTION 13
4. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The Federal Reserve intends to shrink its holdings of treasury securities by $80 billion per month in order to reduce the growth in the supply of money.
   True
   Or
   False

QUESTION 14

1. An open market sale of securities by the Federal Reserve Bank of New York puts upward pressure on the Federal Funds rate.
   True
   Or
   False
   QUESTION 15
2. The System Open Market Account (SOMA), managed by the Federal Reserve Bank of New York, contains dollar-denominated assets acquired via open market operations. As of 3/4/2014 the SOMA account held $3 trillion of agency mortgage-backed securities.
   True
   Or
   False
   QUESTION 16
3. Between 1/2008 and 12/2009 the monetary base of the Federal Reserve System increased by over 200%.
   https://fred.stlouisfed.org/series/BOGMBASE
   True
   Or
   False
   QUESTION 17
4. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The Federal Reserve intends to increase its holdings of mortgage-backed securities by $40 billion a month in order to keep mortgage rates low.
   True
   Or
   False

QUESTION 18

1. When the Federal Reserve buys assets on the open market the monetary base declines because funds flow out of the Fed to the commercial banking system.
   True
   Or
   False
   QUESTION 19
2. Eight times each year the Federal Open Market Committee (FOMC) meets to set U.S. monetary policy--which, under current operating procedures, amounts to choosing a target for the federal funds rate, a short-term interest rate that the Federal Reserve influences by controlling the supply of bank reserves.
   True
   Or
   False
   QUESTION 20
3. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The FOMC does not consider COVID as an ongoing risk to the performance of the economy. True
   Or
   False

QUESTION 21

1. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The Fed has decided restrict the flow of credit to U.S. households and businesses to moderate the rate of inflation.
   True
   Or
   False

QUESTION 22

1. Use the following data about a fixed coupon corporate bond to answer the following question.
   The yield to maturity of the bond is greater than 13%
   settlement 11/14/2016
   maturity 11/14/2026
   rate 10%
   price 75
   redemption 100
   frequency 2
   basis 0
   True
   Or
   False

QUESTION 23

1. Bank loans from the Federal Reserve are called and represent a of funds.
2. A. discount loans; source
   B. fed funds; use
   C. discount loans; use
   D. fed funds; source
   QUESTION 24
3. The commercial banking system controls the quantity of high-powered money.
   True
   Or
   False

QUESTION 25

1. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The FOMC has indicated that the inflation rate reflects transitory factors.
   True
   Or
   False
   QUESTION 26
2. Use the following data about a fixed coupon corporate bond to answer the following question.
   The yield to maturity of the bond is greater than 8%
   settlement 11/14/2016
   maturity 11/14/2026
   rate 10%
   price 101
   redemption 100
   frequency 2
   basis 0
   True
   Or
   False
   QUESTION 27
3. When the Fed Funds rate increases the cost of credit to non-financial firms does not change since the Fed Funds rate is an inter-bank rate of interest.
   True
   Or
   False
   QUESTION 28
4. An increase in the monetary base stimulates an increase in M1.
   True
   Or
   False
   QUESTION 29
5. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The FOMC has set a target for inflation of 3% over the long run-in order to diminish the real interest rate and help borrowers.
   True
   Or
   False

QUESTION 30

1. It was on December 16th 2008 that the FOMC lowered the Target Fed Funds rate from 2% to a range of 0%-.25%.
   True
   Or
   False

QUESTION 31

1. High powered money also called the monetary base is a liability of the Federal Reserve.
   True
   Or
   False

QUESTION 32

1. Bank W borrows $10 million from the Federal Reserve and lends out $8 million to firm X and keeps $2 million in vault cash. Firm X deposits $6 million in a checking account at Bank Y and bank Y lends out $5 million to Firm Z. Firm Z buys farm equipment with the $5 million. The farm equipment company spends the $5 million money on parts, rent, labor, interest and dividends. $4 million of the money spent on farm equipment ends up in checking accounts at various banks. The initial loan to bank W by the Fed: A. Increased the money supply by more than $10,000,000. B. Loans to banks by the Fed are not open market operations so they do not increase the money supply. C. Did not change the money supply. D. Increased the money supply by less than $10,000,000.

QUESTION 33

1. Base your answers on the March 03, 2020 FOMC Implementation Note
   https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a1.htm
   The FOMC decided to drain reserves from the banking system to stabilize markets.
   True
   Or
   False

QUESTION 34

1. Base your answers on the March 03, 2020 FOMC Implementation Note
   https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a1.htm
   The FOMC directed the trading desk at the Federal Reserve Bank of New York to conduct open market purchases of U.S. Treasury bills in order to maintain “ample banking reserves at levels at or above what they were at the beginning of September 2019.
   True
   Or
   False
   QUESTION 35
2. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   Since the FOMC is targeting a 2% inflation rate over the long run and the average inflation has been persistently below 2% over the last few years we should expect inflation rates to be above 2% for a number of years.
   True
   Or
   False

QUESTION 36

1. Use the following data about a fixed coupon corporate bond to answer the following question.
   The yield to maturity of the bond is greater than 13%
   settlement 11/14/2016
   maturity 11/14/2026
   rate 10%
   price 75
   redemption 100
   frequency 2
   basis 0
   True
   Or
   False

QUESTION 37

1. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The Federal Reserve intends to increase its holdings of mortgage-backed securities by $40 billion a month in order to keep mortgage rates low.
   True
   Or
   False

QUESTION 38

1. Bank reserves include
2. A. vault cash and deposits at the Fed.
   B. vault cash and short-term Treasury securities.
   C. deposits at other banks and deposits at the Fed.
   D. deposits at the Fed and short-term treasury securities.
   QUESTION 39
3. Base your answers on the March 03, 2020 FOMC Implementation Note
   https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a1.htm
   The FOMC directed the trading desk at the Federal Reserve Bank of New York to conduct open market purchases of U.S. Treasury bills in order to maintain “ample banking reserves at levels at or above what they were at the beginning of September 2019.
   True
   Or
   False
   QUESTION 40
4. The FOCM has set the target Fed Funds rate at range of 0% to .25% in reaction to the economic contraction caused by the COVID-19 health/economic crisis. In order to achieve this target, the Federal Reserve Bank of New York must be actively engaged in buying money market securities.
   True
   Or
   False

QUESTION 41

1. Between February 5th, 2020 and January 6th, 2020, the total amount held in the SOMA account of the Federal Reserve increased by $2,905,514,181,800.

True
Or
False

QUESTION 42

1. In reaction the stress in the money markets in August of 2007 the FOMC lowered the target for the Fed Funds rate from 5.25% to 4.75% on August 10th.
   True
   Or
   False

QUESTION 43

1. Base your answer on the FOMC meeting that took place on June 15th and 16th.
   The FOMC has prioritized achieving full employment for the economy over price stability.
   True
   Or
   False

QUESTION 44

1. The nominal yield to maturity on the five-year treasury securities is greater than the real yield to maturity on the five-year treasury security.
   True
   Or
   False

QUESTION 45

1. Bank capital is equal to minus .
2. A. total assets; total reserves
   B. total liabilities; total assets
   C. total liabilities; total borrowings
   D. total assets; total liabilities

QUESTION 46

1. A bank with insufficient reserves can increase its reserves by
2. A. buying short-term Treasury securities.
   B. calling in loans.
   C. lending federal funds.
   D. buying municipal bonds.

Sample Solution