Question 1

The relationship between the stock of money and the monetary base is

Accepted Answer

A) determined solely by the reserve-deposit ratio 
B) determined solely by the currency-deposit ratio 
C) between zero and one 
D) the money multiplier 
E) the income velocity of money 
A) determined solely by the reserve-deposit ratio 
B) determined solely by the currency-deposit ratio 
C) between zero and one 
D) the money multiplier 
E) the income velocity of money D

Question 2

Banks tend to hold some excess reserves

Accepted Answer

A) for precautionary purposes to reduce the probability of illiquidity 
B) to avoid the costs of borrowing from other banks at the federal funds rate 
C) to avoid the costs of borrowing from the Fed at the discount rate 
D) all of the above 
E) none of the above 
A) for precautionary purposes to reduce the probability of illiquidity 
B) to avoid the costs of borrowing from other banks at the federal funds rate 
C) to avoid the costs of borrowing from the Fed at the discount rate 
D) all of the above 
E) none of the above D

Question 3

The federal funds rate is the rate that

Accepted Answer

A) banks are charged if they borrow funds from the Fed 
B) the Fed pays on reserves held as deposits in its account 
C) banks charge each other, usually for large overnight loans 
D) banks charge their best customers 
E) the FDIC charges to insure deposits 
A) banks are charged if they borrow funds from the Fed 
B) the Fed pays on reserves held as deposits in its account 
C) banks charge each other, usually for large overnight loans 
D) banks charge their best customers 
E) the FDIC charges to insure deposits C

Question 4

The introduction of federal deposit insurance after the Great Depression caused

Accepted Answer

A) an increase in the excess reserve ratio 
B) an increase in the currency-deposit ratio 
C) a decrease in the size of the money multiplier 
D) the money multiplier to become more stable 
E) all of the above 
A) an increase in the excess reserve ratio 
B) an increase in the currency-deposit ratio 
C) a decrease in the size of the money multiplier 
D) the money multiplier to become more stable 
E) all of the above

Question 5

If the Fed were to abolish reserve requirements,

Accepted Answer

A) it could no longer exert any influence over money supply 
B)  the size of the money multiplier would become infinite 
C) the size of the money multiplier would become 1 
D) both A and B 
E) none of the above 
A) it could no longer exert any influence over money supply 
B)  the size of the money multiplier would become infinite 
C) the size of the money multiplier would become 1 
D) both A and B 
E) none of the above

Question 6

If the monetary growth rate is far above the target range previously announced by the Fed, financial investors are likely to assume that future interest rates will increase since

Accepted Answer

A) the Fed is likely to reduce money supply soon 
B) inflation will start to increase 
C) borrowing will increase in anticipation of higher inflation 
D) all of these are possible 
E) none of these are possible 
A) the Fed is likely to reduce money supply soon 
B) inflation will start to increase 
C) borrowing will increase in anticipation of higher inflation 
D) all of these are possible 
E) none of these are possible

Question 7

If a central bank were to set an interest rate target and stick to it,

Accepted Answer

A) much of the economy's instability would be eliminated 
B) the central bank would no longer be able to control money supply 
C) the central bank would never be able to provide sufficient money for economic growth to get the economy out of a recession 
D) inflation would no longer be a problem since the central bank would have credibility 
E) velocity would become very stable even in the short run 
A) much of the economy's instability would be eliminated 
B) the central bank would no longer be able to control money supply 
C) the central bank would never be able to provide sufficient money for economic growth to get the economy out of a recession 
D) inflation would no longer be a problem since the central bank would have credibility 
E) velocity would become very stable even in the short run

Question 8

During the financial crisis that started in 2008, the Fed

Accepted Answer

A) lowered short-term interest rates until they reached almost zero percent 
B) bought some non-traditional assets to intervene in long-term markets and drive long-term interest rates down 
C) started to pay interest to banks on the reserves they held with the Fed 
D) all of the above 
E) none of the above 
A) lowered short-term interest rates until they reached almost zero percent 
B) bought some non-traditional assets to intervene in long-term markets and drive long-term interest rates down 
C) started to pay interest to banks on the reserves they held with the Fed 
D) all of the above 
E) none of the above

Question 9

If the Fed is trying to peg the interest rate, it

Accepted Answer

A) needs to sell government securities whenever interest rates go up 
B) needs to tie the discount rate to the three-month Treasury-bill rate 
C) loses control over money supply 
D) needs to restrict money supply whenever interest rates increase 
E) none of the above 
A) needs to sell government securities whenever interest rates go up 
B) needs to tie the discount rate to the three-month Treasury-bill rate 
C) loses control over money supply 
D) needs to restrict money supply whenever interest rates increase 
E) none of the above

Question 10

One of the problems that the Fed has when conducting monetary policy is that

Accepted Answer

A) it can control the supply of high-powered money but cannot always accurately predict the size of the money multiplier 
B) it can control the size of the money multiplier but cannot always control the amount of high-powered money 
C) it cannot influence the federal funds rate by its open market operations 
D) it can set the discount rate but cannot influence the federal funds rate, which is determined by banks 
E) velocity is stable in the short run but not in the long run 
A) it can control the supply of high-powered money but cannot always accurately predict the size of the money multiplier 
B) it can control the size of the money multiplier but cannot always control the amount of high-powered money 
C) it cannot influence the federal funds rate by its open market operations 
D) it can set the discount rate but cannot influence the federal funds rate, which is determined by banks 
E) velocity is stable in the short run but not in the long run

Question 11

Assume that the currency-deposit ratio is 32%, the required reserve ratio is 7%, the excess reserve ratio is 1%, and total money supply is $1,320 billion.What is the amount of high-powered money?

Accepted Answer

A) $132 billion 
B) $165 billion 
C) $330 billion 
D) $400 billion 
E) $800 billion 
A) $132 billion 
B) $165 billion 
C) $330 billion 
D) $400 billion 
E) $800 billion

Question 12

If the Fed wanted to maintain a constant interest rate after an increase in government spending, it would need to

Accepted Answer

A) buy government securities in open market operations 
B) sell government securities in open market operations 
C) raise reserve requirements 
D) increase the primary credit rate (the discount rate) 
E) increase the currency-deposit ratio 
A) buy government securities in open market operations 
B) sell government securities in open market operations 
C) raise reserve requirements 
D) increase the primary credit rate (the discount rate) 
E) increase the currency-deposit ratio

Question 13

Banks have an incentive to minimize their excess reserves since

Accepted Answer

A) they earn only a very low interest rate on the reserves they hold at the Fed 
B) larger reserves mean less liquidity 
C) deposits are bank assets while reserves are not 
D) the higher the reserve-deposit ratio, the weaker the bank's financial position 
E) it makes banks less vulnerable in case there is a run on banks 
A) they earn only a very low interest rate on the reserves they hold at the Fed 
B) larger reserves mean less liquidity 
C) deposits are bank assets while reserves are not 
D) the higher the reserve-deposit ratio, the weaker the bank's financial position 
E) it makes banks less vulnerable in case there is a run on banks

Question 14

Over which of the following does the Fed have the most control?

Accepted Answer

A) the stock of money 
B) the stock of bank reserves 
C) the amount of excess reserves held by banks 
D) the size of the money multiplier 
E) the currency-deposit ratio 
A) the stock of money 
B) the stock of bank reserves 
C) the amount of excess reserves held by banks 
D) the size of the money multiplier 
E) the currency-deposit ratio

Question 15

If money supply is M = 1,200, bank deposits are D = 800, and the monetary base (high-powered money) is H = 480,

Accepted Answer

A) the reserve-deposit ratio is 40% and the money multiplier is 4 
B)  the reserve-deposit ratio is 40% and the money multiplier is 2.5 
C)  the reserve-deposit ratio is 10% and the money multiplier is 4 
D) the reserve-deposit ratio is 10% and the money-multiplier is 2.5 
E) the reserve-deposit ratio is 10% and the money multiplier is 1.5 
A) the reserve-deposit ratio is 40% and the money multiplier is 4 
B)  the reserve-deposit ratio is 40% and the money multiplier is 2.5 
C)  the reserve-deposit ratio is 10% and the money multiplier is 4 
D) the reserve-deposit ratio is 10% and the money-multiplier is 2.5 
E) the reserve-deposit ratio is 10% and the money multiplier is 1.5

Question 16

In which of the following years was the discount rate (also known as the primary credit rate) at its lowest level?

Accepted Answer

A) 1985 
B) 1991 
C) 1995 
D) 2000 
E) 2008 
A) 1985 
B) 1991 
C) 1995 
D) 2000 
E) 2008

Question 17

High-powered money

Accepted Answer

A) earns more interest than other forms of money 
B) consists of currency held by the public and bank reserves 
C) consists of currency held by the public and demand deposits at banks 
D) includes time and demand deposits held at banks 
E) is created whenever the Fed sells government bonds 
A) earns more interest than other forms of money 
B) consists of currency held by the public and bank reserves 
C) consists of currency held by the public and demand deposits at banks 
D) includes time and demand deposits held at banks 
E) is created whenever the Fed sells government bonds

Question 18

When conducting monetary policy, the Fed should not just look at the total amount of money but also at the total amount of credit, since

Accepted Answer

A) the link between money and nominal GDP is insignificant 
B) if not enough credit is available investment will be reduced, affecting GDP negatively 
C) banks can ration credit, affecting the impact of monetary policy 
D) all of the above 
E) only 
B) and 
C)  
A) the link between money and nominal GDP is insignificant 
B) if not enough credit is available investment will be reduced, affecting GDP negatively 
C) banks can ration credit, affecting the impact of monetary policy 
D) all of the above 
E) only 
B) and 
C)

Question 19

The reserve-deposit ratio is likely to increase whenever

Accepted Answer

A) uncertainty about the net flow of bank deposits increases 
B) the market interest rate increases 
C) the Fed lowers reserve requirements 
D) the Fed increases the discount rate 
E) the Fed undertakes open market sales 
A) uncertainty about the net flow of bank deposits increases 
B) the market interest rate increases 
C) the Fed lowers reserve requirements 
D) the Fed increases the discount rate 
E) the Fed undertakes open market sales

Question 20

If the currency-deposit ratio is 23% and the reserve-deposit ratio is 7%, the size of the money multiplier is

Accepted Answer

A) 0)3 
B) 2)0 
C) 3)0 
D) 3)3 
E) 4)1 
A) 0)3 
B) 2)0 
C) 3)0 
D) 3)3 
E) 4)1

Exam 17: The fed, money, and credit

The relationship between the stock of money and the monetary base is

Banks tend to hold some excess reserves

The federal funds rate is the rate that

The introduction of federal deposit insurance after the Great Depression caused

If the Fed were to abolish reserve requirements,

If the monetary growth rate is far above the target range previously announced by the Fed, financial investors are likely to assume that future interest rates will increase since

If a central bank were to set an interest rate target and stick to it,

During the financial crisis that started in 2008, the Fed

If the Fed is trying to peg the interest rate, it

One of the problems that the Fed has when conducting monetary policy is that

Assume that the currency-deposit ratio is 32%, the required reserve ratio is 7%, the excess reserve ratio is 1%, and total money supply is $1,320 billion.What is the amount of high-powered money?

If the Fed wanted to maintain a constant interest rate after an increase in government spending, it would need to

Banks have an incentive to minimize their excess reserves since

Over which of the following does the Fed have the most control?

If money supply is M = 1,200, bank deposits are D = 800, and the monetary base (high-powered money) is H = 480,

In which of the following years was the discount rate (also known as the primary credit rate) at its lowest level?

High-powered money

When conducting monetary policy, the Fed should not just look at the total amount of money but also at the total amount of credit, since

The reserve-deposit ratio is likely to increase whenever

If the currency-deposit ratio is 23% and the reserve-deposit ratio is 7%, the size of the money multiplier is

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