Question 1

Assume a simplified banking system subject to a 25 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

Accepted Answer

A) increases $100,000. 
B) increases $400,000. 
C) increases $125,000. 
D) decreases $500,000. 
A) increases $100,000. 
B) increases $400,000. 
C) increases $125,000. 
D) decreases $500,000.

Question 2

The money supply will grow faster through deposit creation when the required reserve ratio is:

Accepted Answer

A) high and banks hold excess reserves. 
B) high and banks cannot find good customers to lend to. 
C) low and banks are able to lend out all of their excess reserves. 
D) low and banks are unable to loan out all of their excess reserves. 
E) high and banks are not able to loan out all of their excess reserves. 
A) high and banks hold excess reserves. 
B) high and banks cannot find good customers to lend to. 
C) low and banks are able to lend out all of their excess reserves. 
D) low and banks are unable to loan out all of their excess reserves. 
E) high and banks are not able to loan out all of their excess reserves.

Question 3

The federal funds market is the market in which:

Accepted Answer

A) banks borrow from the Fed. 
B) bank customers borrow from their banks 
C) banks borrow from each other. 
D) the federal government borrows from the Fed. 
E) the federal government borrows from members of the general public. 
A) banks borrow from the Fed. 
B) bank customers borrow from their banks 
C) banks borrow from each other. 
D) the federal government borrows from the Fed. 
E) the federal government borrows from members of the general public.

Question 4

In the banking system of the United States, banks that wish to borrow to make up reserve deficiencies must turn to the federal funds market.

Accepted Answer

A) True 
 B)False

Question 5

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then Odyssey National can increase the money supply by:

Accepted Answer

A) $900. 
B) $910. 
C) $1,000. 
D) $9,000. 
E) $10,000. 
A) $900. 
B) $910. 
C) $1,000. 
D) $9,000. 
E) $10,000.

Question 6

Which of the following policy actions by the Fed would cause the money supply to decrease?

Accepted Answer

A) An open-market purchase. 
B) A decrease in required reserve ratios. 
C) A decrease in the discount rate. 
D) None of these. 
A) An open-market purchase. 
B) A decrease in required reserve ratios. 
C) A decrease in the discount rate. 
D) None of these.

Question 7

The federal funds rate is the interest rate that:

Accepted Answer

A) the government charges banks to borrow money 
B) the Fed charges banks to borrow money 
C) the federal government pays to borrow money 
D) federally chartered banks charge their customers for commercial loans. 
E) banks charge other banks for short-term loans. 
A) the government charges banks to borrow money 
B) the Fed charges banks to borrow money 
C) the federal government pays to borrow money 
D) federally chartered banks charge their customers for commercial loans. 
E) banks charge other banks for short-term loans.

Question 8

Assume a bank has total deposits of $100,000 and $20,000 is set aside to meet reserve requirements of the Fed. Its required reserve ratio is:

Accepted Answer

A) $20,000. 
B) 20 percent. 
C) 0.2 percent. 
D) 1 percent. 
A) $20,000. 
B) 20 percent. 
C) 0.2 percent. 
D) 1 percent.

Question 9

Exhibit 15-4 Balance sheet of Tucker National Bank   Suppose Connie Rich deposits $500 in the bank in Exhibit 15-4. The result would be that the bank must increase its required reserves to:

Accepted Answer

A) $4,100. 
B) $4,500. 
C) $5,100. 
D) $5,500. 
A) $4,100. 
B) $4,500. 
C) $5,100. 
D) $5,500.

Question 10

The term "open market operations" refers to the:

Accepted Answer

A) loan-making activities of commercial banks. 
B) effect of expansionary monetary policy on interest rates. 
C) operation of competitive markets in the banking industry as the result of deregulation. 
D) buying and selling of government securities by the Federal Reserve. 
A) loan-making activities of commercial banks. 
B) effect of expansionary monetary policy on interest rates. 
C) operation of competitive markets in the banking industry as the result of deregulation. 
D) buying and selling of government securities by the Federal Reserve.

Question 11

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

Accepted Answer

A) Buy U.S. government securities. 
B) Force the Treasury to reduce the national debt. 
C) Raise the discount rate. 
D) Increase the reserve requirements. 
A) Buy U.S. government securities. 
B) Force the Treasury to reduce the national debt. 
C) Raise the discount rate. 
D) Increase the reserve requirements.

Question 12

When the Fed buys government securities, it:

Accepted Answer

A) lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B) raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C) increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public. 
D) increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
E) decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
A) lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B) raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C) increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public. 
D) increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
E) decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

Question 13

Exhibit 15-5 Balance sheet of Tucker National Bank   If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the money multiplier for the system would be:

Accepted Answer

A) 4. 
B) 5. 
C) 10. 
D) 25. 
A) 4. 
B) 5. 
C) 10. 
D) 25.

Question 14

The required reserve ratio for a bank is set by:

Accepted Answer

A) Congress. 
B) the bank itself. 
C) the Treasury Department. 
D) the banking system. 
E) the Federal Reserve. 
A) Congress. 
B) the bank itself. 
C) the Treasury Department. 
D) the banking system. 
E) the Federal Reserve.

Question 15

When the Fed purchases government securities, it:

Accepted Answer

A) increases banks' reserves and makes possible an increase in the money supply. 
B) decreases banks' reserves and makes possible a decrease in the money supply. 
C) automatically raises the discount rate. 
D) uses discounting operations to influence margin requirements. 
E) has no effect on either the money supply or the discount rate. 
A) increases banks' reserves and makes possible an increase in the money supply. 
B) decreases banks' reserves and makes possible a decrease in the money supply. 
C) automatically raises the discount rate. 
D) uses discounting operations to influence margin requirements. 
E) has no effect on either the money supply or the discount rate.

Question 16

In a simplified system where all banks have uniform reserve requirements and checkable deposits are the only form of money, the money multiplier is equal to 1 over the required reserve ratio.

Accepted Answer

A) True 
 B)False

Question 17

Bank reserves will increase over time when:

Accepted Answer

A) the Fed sells government securities on the open market. 
B) the Treasury sells government securities on the open market. 
C) depositors take funds out of their checkable deposit accounts. 
D) the Fed buys government securities on the open market. 
E) the Fed lowers the discount rate. 
A) the Fed sells government securities on the open market. 
B) the Treasury sells government securities on the open market. 
C) depositors take funds out of their checkable deposit accounts. 
D) the Fed buys government securities on the open market. 
E) the Fed lowers the discount rate.

Question 18

When new checkable deposits are created through loans,

Accepted Answer

A) the money supply contracts. 
B) excess reserves are destroyed. 
C) the money supply remains the same. 
D) the money supply expands. 
E) the required reserve ratio declines 
A) the money supply contracts. 
B) excess reserves are destroyed. 
C) the money supply remains the same. 
D) the money supply expands. 
E) the required reserve ratio declines

Question 19

If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling $180,000, the maximum possible, then the required reserve ratio must be:

Accepted Answer

A) 0.10. 
B) 0.20. 
C) 0.25. 
D) 0.40. 
E) 0.50. 
A) 0.10. 
B) 0.20. 
C) 0.25. 
D) 0.40. 
E) 0.50.

Question 20

Because the banking system operates using fractional reserves,

Accepted Answer

A) the money multiplier is greater than one. 
B) excess reserves are equal to zero. 
C) required reserves are equal to 100 percent. 
D) banks can loan out only their required reserves. 
E) the money multiplier must be equal to zero. 
A) the money multiplier is greater than one. 
B) excess reserves are equal to zero. 
C) required reserves are equal to 100 percent. 
D) banks can loan out only their required reserves. 
E) the money multiplier must be equal to zero.

Exam 15: Money Creation

Assume a simplified banking system subject to a 25 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

The money supply will grow faster through deposit creation when the required reserve ratio is:

The federal funds market is the market in which:

In the banking system of the United States, banks that wish to borrow to make up reserve deficiencies must turn to the federal funds market.

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then Odyssey National can increase the money supply by:

Which of the following policy actions by the Fed would cause the money supply to decrease?

The federal funds rate is the interest rate that:

Assume a bank has total deposits of $100,000 and $20,000 is set aside to meet reserve requirements of the Fed. Its required reserve ratio is:

Exhibit 15-4 Balance sheet of Tucker National Bank Suppose Connie Rich deposits $500 in the bank in Exhibit 15-4. The result would be that the bank must increase its required reserves to:

The term "open market operations" refers to the:

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

When the Fed buys government securities, it:

Exhibit 15-5 Balance sheet of Tucker National Bank If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the money multiplier for the system would be:

The required reserve ratio for a bank is set by:

When the Fed purchases government securities, it:

In a simplified system where all banks have uniform reserve requirements and checkable deposits are the only form of money, the money multiplier is equal to 1 over the required reserve ratio.

Bank reserves will increase over time when:

When new checkable deposits are created through loans,

If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling $180,000, the maximum possible, then the required reserve ratio must be:

Because the banking system operates using fractional reserves,

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Monetary Policy

The Phillips Curve and Expectations Theory

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

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