Question 1

As of July 2006, which of the following was true?

Accepted Answer

A) Bank deposit accounts with the Fed > vault cash > excess reserves 
B) Excess reserves > vault cash > bank deposits with the Fed 
C) Vault cash > bank deposits with the Fed > excess reserves 
D) Bank deposit accounts with the Fed > excess reserves > vault cash 
A) Bank deposit accounts with the Fed > vault cash > excess reserves 
B) Excess reserves > vault cash > bank deposits with the Fed 
C) Vault cash > bank deposits with the Fed > excess reserves 
D) Bank deposit accounts with the Fed > excess reserves > vault cash

Question 2

The percentage of deposits that banks must hold as reserves is called the

Accepted Answer

A) percentage rate. 
B) required reserve ratio. 
C) Fed rate. 
D) discount rate. 
A) percentage rate. 
B) required reserve ratio. 
C) Fed rate. 
D) discount rate.

Question 3

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?

Accepted Answer

A) $2000 
B) $8000 
C) $10,000 
D) $50,000 
A) $2000 
B) $8000 
C) $10,000 
D) $50,000

Question 4

What do we need to add to Federal Reserve currency in circulation and bank reserves in order to arrive at the monetary base?

Accepted Answer

A) Treasury currency in circulation 
B) U.S. government securities 
C) Discount loans to banks 
D) Checkable deposits in commercial banks 
A) Treasury currency in circulation 
B) U.S. government securities 
C) Discount loans to banks 
D) Checkable deposits in commercial banks

Question 5

If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals

Accepted Answer

A) 0.86. 
B) 3.14. 
C) 3.43. 
D) 4. 
A) 0.86. 
B) 3.14. 
C) 3.43. 
D) 4.

Question 6

Why do banks avoid holding excess reserves?

Accepted Answer

A) The Fed levies a 10% penalty on any reserves held above the required level. 
B) The Fed does not pay interest on reserves. 
C) Savers are often reluctant to place their deposits with banks that hold excess reserves. 
D) The Office of the Comptroller of the Currency monitors excess reserves more closely than any other bank asset. 
A) The Fed levies a 10% penalty on any reserves held above the required level. 
B) The Fed does not pay interest on reserves. 
C) Savers are often reluctant to place their deposits with banks that hold excess reserves. 
D) The Office of the Comptroller of the Currency monitors excess reserves more closely than any other bank asset.

Question 7

When deposit withdrawals exceed reserves, which of the following is NOT a way in which banks bear the cost?

Accepted Answer

A) Buying securities 
B) Calling in loans 
C) Borrowing in the federal funds market 
D) Borrowing from the Fed 
A) Buying securities 
B) Calling in loans 
C) Borrowing in the federal funds market 
D) Borrowing from the Fed

Question 8

Which of the following is a liability of the Fed?

Accepted Answer

A) U.S. government securities 
B) Currency in circulation 
C) Discount loans to banks 
D) Checkable deposits in commercial banks 
A) U.S. government securities 
B) Currency in circulation 
C) Discount loans to banks 
D) Checkable deposits in commercial banks

Question 9

A good reason for suspecting the existence of a substantial underground economy is

Accepted Answer

A) the mysterious decline in federal tax revenue in recent years. 
B) the decline in the currency-deposit ratio during the 1970s and 1980s. 
C) the sharp rise in marginal income tax rates during the 1980s. 
D) the large amount of currency outstanding per person. 
A) the mysterious decline in federal tax revenue in recent years. 
B) the decline in the currency-deposit ratio during the 1970s and 1980s. 
C) the sharp rise in marginal income tax rates during the 1980s. 
D) the large amount of currency outstanding per person.

Question 10

A $10 million open market purchase will increase the monetary base by

Accepted Answer

A) $10 million. 
B) $10 million times the money multiplier. 
C) $10 million divided by the money multiplier. 
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency. 
A) $10 million. 
B) $10 million times the money multiplier. 
C) $10 million divided by the money multiplier. 
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.

Question 11

What is the maximum amount a bank can lend?

Accepted Answer

A) Its total reserves 
B) Its excess reserves 
C) Its excess reserves divided by the required reserve ratio 
D) The value of its checkable deposits times the required reserve ratio 
A) Its total reserves 
B) Its excess reserves 
C) Its excess reserves divided by the required reserve ratio 
D) The value of its checkable deposits times the required reserve ratio

Question 12

When banks borrow on the federal funds market

Accepted Answer

A) they typically pay a lower interest rate than the discount rate. 
B) they typically pay a higher interest rate than the discount rate. 
C) they pay a rate set by the Federal Reserve, rather than one set by market forces. 
D) they borrow funds interest free. 
A) they typically pay a lower interest rate than the discount rate. 
B) they typically pay a higher interest rate than the discount rate. 
C) they pay a rate set by the Federal Reserve, rather than one set by market forces. 
D) they borrow funds interest free.

Question 13

The interest rate the Fed charges on loans to depository institutions is known as

Accepted Answer

A) the federal funds rate. 
B) the Fed loan rate. 
C) the discount rate. 
D) the interbank clearing rate. 
A) the federal funds rate. 
B) the Fed loan rate. 
C) the discount rate. 
D) the interbank clearing rate.

Question 14

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals

Accepted Answer

A) 1.14. 
B) 3.57. 
C) 4.35. 
D) 5. 
A) 1.14. 
B) 3.57. 
C) 4.35. 
D) 5.

Question 15

The Japanese central bank is known as

Accepted Answer

A) the Bank of Japan. 
B) the Federal Japanese Bank. 
C) the Grand Nippon Central Bank. 
D) the National Japanese Bank. 
A) the Bank of Japan. 
B) the Federal Japanese Bank. 
C) the Grand Nippon Central Bank. 
D) the National Japanese Bank.

Question 16

Holding other things constant, the currency-deposit ratio will

Accepted Answer

A) decrease as income increases, but increase as wealth increases. 
B) decrease as income or wealth increases. 
C) increase as income or wealth increases. 
D) increase as income increases, but decrease as wealth increases. 
A) decrease as income increases, but increase as wealth increases. 
B) decrease as income or wealth increases. 
C) increase as income or wealth increases. 
D) increase as income increases, but decrease as wealth increases.

Question 17

Which of the following statements is correct?

Accepted Answer

A) The volume of open market operations is determined jointly by the actions of the Fed, the banking system, and the nonbank public. 
B) The Fed's control over discount lending is more complete than its control over open market operations. 
C) The Fed completely controls the volume of open market operations. 
D) The Fed has complete control over the volume of both discount loans and open market operations. 
A) The volume of open market operations is determined jointly by the actions of the Fed, the banking system, and the nonbank public. 
B) The Fed's control over discount lending is more complete than its control over open market operations. 
C) The Fed completely controls the volume of open market operations. 
D) The Fed has complete control over the volume of both discount loans and open market operations.

Question 18

Most of the earnings that the Fed receives on interest from government securities are

Accepted Answer

A) reinvested in new government securities. 
B) retained for future open market operations. 
C) shared by members of the Board of Governors. 
D) returned to the Treasury. 
A) reinvested in new government securities. 
B) retained for future open market operations. 
C) shared by members of the Board of Governors. 
D) returned to the Treasury.

Question 19

The monetary base is equal to

Accepted Answer

A) all currency in circulation plus all deposits in financial institutions. 
B) all currency in circulation plus checkable deposits in financial institutions. 
C) all currency in circulation plus reserves held by banks. 
D) checkable deposits in depository institutions plus reserves held by banks. 
A) all currency in circulation plus all deposits in financial institutions. 
B) all currency in circulation plus checkable deposits in financial institutions. 
C) all currency in circulation plus reserves held by banks. 
D) checkable deposits in depository institutions plus reserves held by banks.

Question 20

If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

Accepted Answer

A) $550 million. 
B) $1.54 billion. 
C) $1.9 billion 
D) $15 billion. 
A) $550 million. 
B) $1.54 billion. 
C) $1.9 billion 
D) $15 billion.

Exam 17: The Money Supply Process

As of July 2006, which of the following was true?

The percentage of deposits that banks must hold as reserves is called the

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?

What do we need to add to Federal Reserve currency in circulation and bank reserves in order to arrive at the monetary base?

If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals

Why do banks avoid holding excess reserves?

When deposit withdrawals exceed reserves, which of the following is NOT a way in which banks bear the cost?

Which of the following is a liability of the Fed?

A good reason for suspecting the existence of a substantial underground economy is

A $10 million open market purchase will increase the monetary base by

What is the maximum amount a bank can lend?

When banks borrow on the federal funds market

The interest rate the Fed charges on loans to depository institutions is known as

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals

The Japanese central bank is known as

Holding other things constant, the currency-deposit ratio will

Which of the following statements is correct?

Most of the earnings that the Fed receives on interest from government securities are

The monetary base is equal to

If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters