Question 1

When the discount rate rises, the cost:

Accepted Answer

A) of loans to bankers, best customers goes up. 
B) of loans between banks rises. 
C) of international loans rises. 
D) to savings and loans of borrowing money from the public falls. 
E) to banks of borrowing from the Fed falls. 
A) of loans to bankers, best customers goes up. 
B) of loans between banks rises. 
C) of international loans rises. 
D) to savings and loans of borrowing money from the public falls. 
E) to banks of borrowing from the Fed falls.

Question 2

Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million. If the required reserve ratio was increased from 20 percent to 40 percent, how much would the money supply shrink?

Accepted Answer

A) $5 million. 
B) $10 million. 
C) $15 million. 
D) $20 million. 
E) $24 million. 
A) $5 million. 
B) $10 million. 
C) $15 million. 
D) $20 million. 
E) $24 million.

Question 3

The interest rate on loans made by banks in the market in which they lend and borrow reserves from each other for very short periods of time is known as the:

Accepted Answer

A) discount rate. 
B) legal reserve rate. 
C) federal funds rate. 
D) open market rate. 
E) margin rate. 
A) discount rate. 
B) legal reserve rate. 
C) federal funds rate. 
D) open market rate. 
E) margin rate.

Question 4

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:

Accepted Answer

A) $100,000. 
B) $80,000. 
C) $300,000. 
D) $20,000. 
E) $200,000. 
A) $100,000. 
B) $80,000. 
C) $300,000. 
D) $20,000. 
E) $200,000.

Question 5

The Fed's countercyclical policy tools to eliminate a recession include lowering:

Accepted Answer

A) the required reserve ratio, cutting the discount rate, and selling government bonds on the open market. 
B) the required reserve ratio, raising the discount rate, and selling government bonds on the open market. 
C) the required reserve ratio, raising the discount rate, and buying government bonds on the open market. 
D) the discount rate, cutting the discount rate, and raising the margin requirement. 
E) the reserve requirement, lowering the discount rate, and buying government bonds on the open market. 
A) the required reserve ratio, cutting the discount rate, and selling government bonds on the open market. 
B) the required reserve ratio, raising the discount rate, and selling government bonds on the open market. 
C) the required reserve ratio, raising the discount rate, and buying government bonds on the open market. 
D) the discount rate, cutting the discount rate, and raising the margin requirement. 
E) the reserve requirement, lowering the discount rate, and buying government bonds on the open market.

Question 6

The quantity of reserves held by a bank in addition to the legally required amounts is known as:

Accepted Answer

A) actual reserves. 
B) excess reserves. 
C) the required reserve ratio. 
D) the money multiplier. 
E) the monetary base. 
A) actual reserves. 
B) excess reserves. 
C) the required reserve ratio. 
D) the money multiplier. 
E) the monetary base.

Question 7

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

Accepted Answer

A) An open market purchase of government securities. 
B) A decrease in required reserve ratios. 
C) A decrease in the discount rate. 
D) An open-market sale of government securities. 
A) An open market purchase of government securities. 
B) A decrease in required reserve ratios. 
C) A decrease in the discount rate. 
D) An open-market sale of government securities.

Question 8

When the required reserve ratio is lowered,

Accepted Answer

A) the money multiplier increases, and the amount of excess reserves increases in the banking system. 
B) the money multiplier decreases, and the amount of excess reserves increases in the banking system. 
C) the money multiplier decreases, and the amount of excess reserves decreases in the banking system. 
D) the money multiplier increases, and the amount of excess reserves decreases in the banking system. 
E) there is no change in either the money multiplier or the amount of excess reserves in the banking system. 
A) the money multiplier increases, and the amount of excess reserves increases in the banking system. 
B) the money multiplier decreases, and the amount of excess reserves increases in the banking system. 
C) the money multiplier decreases, and the amount of excess reserves decreases in the banking system. 
D) the money multiplier increases, and the amount of excess reserves decreases in the banking system. 
E) there is no change in either the money multiplier or the amount of excess reserves in the banking system.

Question 9

Which of the following actions by the Fed would increase the money supply?

Accepted Answer

A) Reducing the required reserve ratio. 
B) Selling bonds in the open market. 
C) Increasing the discount rate. 
D) None of these. 
A) Reducing the required reserve ratio. 
B) Selling bonds in the open market. 
C) Increasing the discount rate. 
D) None of these.

Question 10

Which of the following is a valid statement?

Accepted Answer

A) Required reserve ratio = required reserves as a percentage to total deposits. 
B) Required reserves = the maximum reserves required by the Fed. 
C) Excess reserves = total reserves plus required reserves. 
D) All of these. 
A) Required reserve ratio = required reserves as a percentage to total deposits. 
B) Required reserves = the maximum reserves required by the Fed. 
C) Excess reserves = total reserves plus required reserves. 
D) All of these.

Question 11

When a recession hits, we would expect the government to run a budget deficit by raising the level of its spending or by cutting taxes, or perhaps both. The Fed would be expected to:

Accepted Answer

A) reduce the required reserve ratio, increase the discount rate, and buy securities on the open market. 
B) reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market. 
C) reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market. 
D) increase the required reserve ratio, reduce the discount rate, and sell securities on the open market. 
E) increase the required reserve ratio, increase the discount rate, and sell securities on the open market. 
A) reduce the required reserve ratio, increase the discount rate, and buy securities on the open market. 
B) reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market. 
C) reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market. 
D) increase the required reserve ratio, reduce the discount rate, and sell securities on the open market. 
E) increase the required reserve ratio, increase the discount rate, and sell securities on the open market.

Question 12

The discount rate is the interest rate:

Accepted Answer

A) commercial banks charge their low-risk customers for a loan. 
B) savings and loan associations pay for using savings deposit funds. 
C) the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000 or more. 
D) the Federal Reserve charges banking institutions for borrowing its funds. 
A) commercial banks charge their low-risk customers for a loan. 
B) savings and loan associations pay for using savings deposit funds. 
C) the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000 or more. 
D) the Federal Reserve charges banking institutions for borrowing its funds.

Question 13

A bank's "required reserves" are:

Accepted Answer

A) held as deposits with the Federal Reserve System. 
B) equal to its checkable deposits. 
C) equal to its transactions deposits. 
D) none of these. 
A) held as deposits with the Federal Reserve System. 
B) equal to its checkable deposits. 
C) equal to its transactions deposits. 
D) none of these.

Question 14

In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-market purchase by the Fed would cause the money supply to:

Accepted Answer

A) increase by $1,000. 
B) decrease by $1,000. 
C) decrease by $4,000. 
D) increase by $4,000. 
A) increase by $1,000. 
B) decrease by $1,000. 
C) decrease by $4,000. 
D) increase by $4,000.

Question 15

Exhibit 15-3 Balance sheet of Tucker National Bank
  The required reserve ratio in Exhibit 15-3 is:

Accepted Answer

A) 10 percent. 
B) 20 percent. 
C) 80 percent. 
D) 100 percent. 
A) 10 percent. 
B) 20 percent. 
C) 80 percent. 
D) 100 percent.

Question 16

In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio, a $1,000 open market sale by the Fed to a bank would cause the money supply to:

Accepted Answer

A) increase by $1,000. 
B) increase by $100,000. 
C) decrease by $10,000. 
D) decrease by $1,000. 
E) remain unchanged. 
A) increase by $1,000. 
B) increase by $100,000. 
C) decrease by $10,000. 
D) decrease by $1,000. 
E) remain unchanged.

Question 17

If the Federal Reserve wishes to increase the money supply it should decrease the discount rate and\or decrease the required reserve ratio and\or buy government securities on the open market.

Accepted Answer

A) True 
 B)False

Question 18

If the economy is inflationary, the Fed would most likely:

Accepted Answer

A) encourage banks to provide loans by buying government securities. 
B) encourage banks to provide loans by raising the discount rate. 
C) encourage banks to provide loans by selling government securities. 
D) restrict bank lending by selling government securities. 
E) restrict bank lending by lowering the federal funds rate. 
A) encourage banks to provide loans by buying government securities. 
B) encourage banks to provide loans by raising the discount rate. 
C) encourage banks to provide loans by selling government securities. 
D) restrict bank lending by selling government securities. 
E) restrict bank lending by lowering the federal funds rate.

Question 19

Excess reserves equal total reserves plus required reserves.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 15-3 Balance sheet of Tucker National Bank   Assume all banks in the system started with balance sheets as shown in Exhibit 15-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

Accepted Answer

A) $500,000 expansion of the money supply. 
B) $100,000 expansion of the money supply. 
C) $20,000 contraction of the money supply. 
D) infinite contraction of the money supply. 
E) infinite expansion of the money supply. 
A) $500,000 expansion of the money supply. 
B) $100,000 expansion of the money supply. 
C) $20,000 contraction of the money supply. 
D) infinite contraction of the money supply. 
E) infinite expansion of the money supply.

Exam 15: Money Creation

When the discount rate rises, the cost:

Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million. If the required reserve ratio was increased from 20 percent to 40 percent, how much would the money supply shrink?

The interest rate on loans made by banks in the market in which they lend and borrow reserves from each other for very short periods of time is known as the:

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is:

The Fed's countercyclical policy tools to eliminate a recession include lowering:

The quantity of reserves held by a bank in addition to the legally required amounts is known as:

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

When the required reserve ratio is lowered,

Which of the following actions by the Fed would increase the money supply?

Which of the following is a valid statement?

When a recession hits, we would expect the government to run a budget deficit by raising the level of its spending or by cutting taxes, or perhaps both. The Fed would be expected to:

The discount rate is the interest rate:

A bank's "required reserves" are:

In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-market purchase by the Fed would cause the money supply to:

Exhibit 15-3 Balance sheet of Tucker National Bank The required reserve ratio in Exhibit 15-3 is:

In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio, a $1,000 open market sale by the Fed to a bank would cause the money supply to:

If the Federal Reserve wishes to increase the money supply it should decrease the discount rate and\or decrease the required reserve ratio and\or buy government securities on the open market.

If the economy is inflationary, the Fed would most likely:

Excess reserves equal total reserves plus required reserves.

Exhibit 15-3 Balance sheet of Tucker National Bank Assume all banks in the system started with balance sheets as shown in Exhibit 15-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

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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