Question 1

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

Accepted Answer

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

Question 2

The major assets and liabilities of a bank are:

Accepted Answer

A) checkable deposits and total reserves, respectively. 
B) checkable deposits and gold, respectively. 
C) total reserves and checkable deposits, respectively. 
D) total reserves and excess reserves, respectively. 
E) checkable deposits and excess reserves, respectively. 
A) checkable deposits and total reserves, respectively. 
B) checkable deposits and gold, respectively. 
C) total reserves and checkable deposits, respectively. 
D) total reserves and excess reserves, respectively. 
E) checkable deposits and excess reserves, respectively.

Question 3

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could expand the money supply by as much as:

Accepted Answer

A) $100,000. 
B) $400,000. 
C) $0. 
D) $20,000. 
E) $80,000. 
A) $100,000. 
B) $400,000. 
C) $0. 
D) $20,000. 
E) $80,000.

Question 4

In a system in which all banks have a uniform reserve requirement, the money multiplier is equal to 1 divided by the prime rate.

Accepted Answer

A) True 
 B)False

Question 5

Exhibit 15-4 Balance sheet of Tucker National Bank
  Assume all banks in the system started with the balance sheet shown in Exhibit 15-4 and the Fed makes a $1,000 open market purchase. The result would be a(n):

Accepted Answer

A) infinite contraction of the money supply. 
B) infinite expansion of the money supply. 
C) $1,000 expansion of the money supply. 
D) $5,000 expansion of the money supply. 
A) infinite contraction of the money supply. 
B) infinite expansion of the money supply. 
C) $1,000 expansion of the money supply. 
D) $5,000 expansion of the money supply.

Question 6

A bank has $100 million of checkable deposits, $6 million of required reserves, and $2 million of excess reserves. What is the required reserve ratio?

Accepted Answer

A) 2 percent. 
B) 3 percent. 
C) 6 percent. 
D) 12 percent. 
A) 2 percent. 
B) 3 percent. 
C) 6 percent. 
D) 12 percent.

Question 7

If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new money that can be created by the banking system, including the initial deposit, is:

Accepted Answer

A) $25,000. 
B) $2,500. 
C) $4,000. 
D) $40,000. 
E) $10,000. 
A) $25,000. 
B) $2,500. 
C) $4,000. 
D) $40,000. 
E) $10,000.

Question 8

Exhibit 15-1 Balance sheet of First Iliad State Bank
                 
       
In Exhibit 15-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:

Accepted Answer

A) have to convert loans worth $800,000 to required reserves 
B) have to convert loans worth $200,000 to required reserves. 
C) be able to make additional loans worth $800,000. 
D) be able to make additional loans worth $200,000. 
E) not have to act. 
A) have to convert loans worth $800,000 to required reserves 
B) have to convert loans worth $200,000 to required reserves. 
C) be able to make additional loans worth $800,000. 
D) be able to make additional loans worth $200,000. 
E) not have to act.

Question 9

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 its loan balance can increase by a maximum of:

Accepted Answer

A) $0. 
B) $90. 
C) $100. 
D) $900. 
E) $910. 
A) $0. 
B) $90. 
C) $100. 
D) $900. 
E) $910.

Question 10

Exhibit 15-2 Balance Sheet of Springfield National Bank    
In Exhibit 15-2, if Springfield National finds that it has excess reserves of $300, then the required reserve ratio must be:

Accepted Answer

A) 30 percent. 
B) 0.30 percent. 
C) 0.80 percent. 
D) 0.20 percent. 
E) 20 percent. 
A) 30 percent. 
B) 0.30 percent. 
C) 0.80 percent. 
D) 0.20 percent. 
E) 20 percent.

Question 11

The Fed's countercyclical policy during expansion and prosperity includes:

Accepted Answer

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

Question 12

Exhibit 15-1 Balance sheet of First Iliad State Bank
  In Exhibit 15-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to convert loans worth:

Accepted Answer

A) $9,000,000 to required reserves. 
B) $1,500,000 to required reserves. 
C) $500,000 to required reserves. 
D) $1,000,000 to required reserves. 
E) $450,000 to required reserves. 
A) $9,000,000 to required reserves. 
B) $1,500,000 to required reserves. 
C) $500,000 to required reserves. 
D) $1,000,000 to required reserves. 
E) $450,000 to required reserves.

Question 13

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:

Accepted Answer

A) $2,000. 
B) $8,000. 
C) $9,000. 
D) $10,000. 
A) $2,000. 
B) $8,000. 
C) $9,000. 
D) $10,000.

Question 14

Exhibit 15-3 Balance sheet of Tucker National Bank   Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 15-3. The result would be a:

Accepted Answer

A) $20,000 increase in excess reserves. 
B) $20,000 increase in required reserves. 
C) $100,000 increase in required reserves. 
D) zero change in required reserves. 
A) $20,000 increase in excess reserves. 
B) $20,000 increase in required reserves. 
C) $100,000 increase in required reserves. 
D) zero change in required reserves.

Question 15

If your bank receives a checkable deposit of $20,000 cash, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

Accepted Answer

A) 2. 
B) 2.5. 
C) 3. 
D) 3.5. 
E) 4. 
A) 2. 
B) 2.5. 
C) 3. 
D) 3.5. 
E) 4.

Question 16

A banking system that provides people immediate access to their deposits, but that allows banks to hold only a portion of those deposits on reserve, is known as:

Accepted Answer

A) an excess reserve system. 
B) a fractional reserve system. 
C) the Fed. 
D) the FDIC. 
E) an asset-based system. 
A) an excess reserve system. 
B) a fractional reserve system. 
C) the Fed. 
D) the FDIC. 
E) an asset-based system.

Question 17

If a bank receives a new checkable deposit of $10,000, and the required reserve ratio is 20 percent, then the bank can lend out:

Accepted Answer

A) $2,000. 
B) $10,000. 
C) $40,000. 
D) $8,000. 
E) $0. 
A) $2,000. 
B) $10,000. 
C) $40,000. 
D) $8,000. 
E) $0.

Question 18

An open-market purchase by the Federal Reserve injects excess reserves into the banking system and allows the money supply to expand.

Accepted Answer

A) True 
 B)False

Question 19

In order for a bank to earn as much profit as possible, its excess reserves should be:

Accepted Answer

A) equal to its required reserves. 
B) as small as possible. 
C) less than its vault cash. 
D) growing at a constant rate. 
A) equal to its required reserves. 
B) as small as possible. 
C) less than its vault cash. 
D) growing at a constant rate.

Question 20

If there is a recession, the Fed would most likely:

Accepted Answer

A) increase bank reserves by raising the discount rate. 
B) increase bank reserves by buying government securities. 
C) decrease bank reserves by raising the discount rate. 
D) decrease bank reserves by selling government securities. 
E) decrease bank reserves by lowering the legal reserve requirement. 
A) increase bank reserves by raising the discount rate. 
B) increase bank reserves by buying government securities. 
C) decrease bank reserves by raising the discount rate. 
D) decrease bank reserves by selling government securities. 
E) decrease bank reserves by lowering the legal reserve requirement.

Exam 15: Money Creation

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

The major assets and liabilities of a bank are:

Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the bank currently has $100,000 in reserves, it could expand the money supply by as much as:

In a system in which all banks have a uniform reserve requirement, the money multiplier is equal to 1 divided by the prime rate.

Exhibit 15-4 Balance sheet of Tucker National Bank Assume all banks in the system started with the balance sheet shown in Exhibit 15-4 and the Fed makes a $1,000 open market purchase. The result would be a(n):

A bank has $100 million of checkable deposits, $6 million of required reserves, and $2 million of excess reserves. What is the required reserve ratio?

If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new money that can be created by the banking system, including the initial deposit, is:

Exhibit 15-1 Balance sheet of First Iliad State Bank In Exhibit 15-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:

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 its loan balance can increase by a maximum of:

Exhibit 15-2 Balance Sheet of Springfield National Bank In Exhibit 15-2, if Springfield National finds that it has excess reserves of $300, then the required reserve ratio must be:

The Fed's countercyclical policy during expansion and prosperity includes:

Exhibit 15-1 Balance sheet of First Iliad State Bank In Exhibit 15-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to convert loans worth:

Assume a simplified banking system in which all banks are subject to a uniform reserve requirement of 20 percent and checkable deposits are the only from of money. A bank that received a new checkable deposit of $10,000 would be able to extend new loans up to a maximum of:

Exhibit 15-3 Balance sheet of Tucker National Bank Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 15-3. The result would be a:

If your bank receives a checkable deposit of $20,000 cash, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

A banking system that provides people immediate access to their deposits, but that allows banks to hold only a portion of those deposits on reserve, is known as:

If a bank receives a new checkable deposit of $10,000, and the required reserve ratio is 20 percent, then the bank can lend out:

An open-market purchase by the Federal Reserve injects excess reserves into the banking system and allows the money supply to expand.

In order for a bank to earn as much profit as possible, its excess reserves should be:

If there is a recession, the Fed would most likely:

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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