Question 1

Which of the following events would reduce the size of the "real-world" money multiplier?

Accepted Answer

A) Banks hold more excess reserves. 
B) Households hold less currency. 
C) The Fed increases the discount rate. 
D) The Fed reduces the required reserve ratio. 
A) Banks hold more excess reserves. 
B) Households hold less currency. 
C) The Fed increases the discount rate. 
D) The Fed reduces the required reserve ratio.

Question 2

Which of the following would cause the money supply to increase?

Accepted Answer

A) An open market purchase by the Fed. 
B) A reduction in the discount rate. 
C) A reduction in required ratios. 
D) All of these. 
A) An open market purchase by the Fed. 
B) A reduction in the discount rate. 
C) A reduction in required ratios. 
D) All of these.

Question 3

When the Federal Reserve sells government bonds to the public, it:

Accepted Answer

A) increases the M1 money supply and increases the reserves of the commercial banking system. 
B) increases the M1 money supply, while reducing the reserves of the commercial banking system. 
C) reduces the M1 money supply, while increasing the reserves of the commercial banking system. 
D) reduces the M1 money supply and decreases the reserves of the commercial banking system. 
A) increases the M1 money supply and increases the reserves of the commercial banking system. 
B) increases the M1 money supply, while reducing the reserves of the commercial banking system. 
C) reduces the M1 money supply, while increasing the reserves of the commercial banking system. 
D) reduces the M1 money supply and decreases the reserves of the commercial banking system.

Question 4

Banks do not create money when they make loans.

Accepted Answer

A) True 
 B)False

Question 5

In a commercial bank's T-account, reserves and outstanding loans are recorded as:

Accepted Answer

A) debts. 
B) profits. 
C) assets. 
D) liabilities. 
A) debts. 
B) profits. 
C) assets. 
D) liabilities.

Question 6

Banks would be expected to minimize holding excess reserves because this practice is:

Accepted Answer

A) illegal. 
B) not profitable. 
C) technically difficult. 
D) subject to a stiff excess reserves tax. 
A) illegal. 
B) not profitable. 
C) technically difficult. 
D) subject to a stiff excess reserves tax.

Question 7

If the Fed decides to engage in an open market operation to increase the money supply, what will it do?

Accepted Answer

A) Sell Treasury bonds, bills, or notes on the bond market. 
B) Buy Treasury bonds, bills, or notes on the bond market. 
C) Increase the required reserve ratio. 
D) Increase the fed funds rate. 
A) Sell Treasury bonds, bills, or notes on the bond market. 
B) Buy Treasury bonds, bills, or notes on the bond market. 
C) Increase the required reserve ratio. 
D) Increase the fed funds rate.

Question 8

If there is a recession, the Fed would most likely encourage banks to provide loans by:

Accepted Answer

A) buying government securities. 
B) raising the discount rate. 
C) selling government securities. 
D) raising the federal funds rate. 
A) buying government securities. 
B) raising the discount rate. 
C) selling government securities. 
D) raising the federal funds rate.

Question 9

When the required reserve ratio is changed,

Accepted Answer

A) the money multiplier is changed but the amount of excess reserves in the banking system is unchanged. 
B) the money multiplier is unchanged but the amount of excess reserves in the banking system is changed. 
C) the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio. 
D) the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio. 
E) neither the money multiplier nor the amount of excess reserves change. 
A) the money multiplier is changed but the amount of excess reserves in the banking system is unchanged. 
B) the money multiplier is unchanged but the amount of excess reserves in the banking system is changed. 
C) the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio. 
D) the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio. 
E) neither the money multiplier nor the amount of excess reserves change.

Question 10

Raising the required reserve ratio causes the money multiplier to increase.

Accepted Answer

A) True 
 B)False

Question 11

When the Fed raises the required reserve ratio, then the:

Accepted Answer

A) ability of banks to make loans is restricted. 
B) ability of banks to make loans is enhanced. 
C) ability of banks to make loans is unaffected. 
D) interest rate that banks pay to the Fed to borrow money is increased. 
E) interest rate that banks pay to other banks to borrow money is increased. 
A) ability of banks to make loans is restricted. 
B) ability of banks to make loans is enhanced. 
C) ability of banks to make loans is unaffected. 
D) interest rate that banks pay to the Fed to borrow money is increased. 
E) interest rate that banks pay to other banks to borrow money is increased.

Question 12

Suppose the Fed bought $150 million of U.S. securities from security dealers. The reserve requirement is 20 percent, and there are no initial excess reserves. A few weeks later, if the public's holdings of currency are constant and the banks have loaned all excess reserves, the money supply will increase by:

Accepted Answer

A) $150 million. 
B) $300 million. 
C) $600 million. 
D) $750 million. 
A) $150 million. 
B) $300 million. 
C) $600 million. 
D) $750 million.

Question 13

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

Accepted Answer

A) $800. 
B) $3,200. 
C) $4,000. 
D) $16,000. 
E) $20,000. 
A) $800. 
B) $3,200. 
C) $4,000. 
D) $16,000. 
E) $20,000.

Question 14

Exhibit 15-5 Balance sheet of Tucker National Bank
  Suppose Brad Jones deposits $20,000 into his checking account in the bank shown in Exhibit 15-5. The result would be that the bank must increase its required reserves to:

Accepted Answer

A) $5,000. 
B) $20,000. 
C) $25,000. 
D) $30,000. 
A) $5,000. 
B) $20,000. 
C) $25,000. 
D) $30,000.

Question 15

If a bank has $100,000 in checkable deposits, reserves of $20,000, and no excess reserves, then the required reserve ratio is:

Accepted Answer

A) 10 percent. 
B) 20 percent. 
C) 25 percent. 
D) 30 percent. 
E) 50 percent. 
A) 10 percent. 
B) 20 percent. 
C) 25 percent. 
D) 30 percent. 
E) 50 percent.

Question 16

The federal funds market is the market where:

Accepted Answer

A) the federal government borrows money from banks to finance the national debt. 
B) the federal government lends money to commercial banks. 
C) banks borrow money from other banks for short periods of time. 
D) banks borrow money from the Fed for short periods of time. 
E) banks borrow money from the Treasury for long periods of time. 
A) the federal government borrows money from banks to finance the national debt. 
B) the federal government lends money to commercial banks. 
C) banks borrow money from other banks for short periods of time. 
D) banks borrow money from the Fed for short periods of time. 
E) banks borrow money from the Treasury for long periods of time.

Question 17

In a simplified banking system, the money multiplier falls as the required reserve ratio rises.

Accepted Answer

A) True 
 B)False

Question 18

If the required reserve ratio is 10 percent, $1,000 cash deposited into a checkable deposit account will generate, assuming willing borrowers, an increase in the money supply of:

Accepted Answer

A) $900. 
B) $1,100. 
C) $9,000. 
D) $10,000. 
E) $11,000. 
A) $900. 
B) $1,100. 
C) $9,000. 
D) $10,000. 
E) $11,000.

Question 19

Reserves of banks appear on their balance sheet as liabilities.

Accepted Answer

A) True 
 B)False

Question 20

An increase in the discount rate by the Federal Reserve causes the money stock to expand.

Accepted Answer

A) True 
 B)False

Exam 15: Money Creation

Which of the following events would reduce the size of the "real-world" money multiplier?

Which of the following would cause the money supply to increase?

When the Federal Reserve sells government bonds to the public, it:

Banks do not create money when they make loans.

In a commercial bank's T-account, reserves and outstanding loans are recorded as:

Banks would be expected to minimize holding excess reserves because this practice is:

If the Fed decides to engage in an open market operation to increase the money supply, what will it do?

If there is a recession, the Fed would most likely encourage banks to provide loans by:

When the required reserve ratio is changed,

Raising the required reserve ratio causes the money multiplier to increase.

When the Fed raises the required reserve ratio, then the:

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

Exhibit 15-5 Balance sheet of Tucker National Bank Suppose Brad Jones deposits $20,000 into his checking account in the bank shown in Exhibit 15-5. The result would be that the bank must increase its required reserves to:

If a bank has $100,000 in checkable deposits, reserves of $20,000, and no excess reserves, then the required reserve ratio is:

The federal funds market is the market where:

In a simplified banking system, the money multiplier falls as the required reserve ratio rises.

If the required reserve ratio is 10 percent, $1,000 cash deposited into a checkable deposit account will generate, assuming willing borrowers, an increase in the money supply of:

Reserves of banks appear on their balance sheet as liabilities.

An increase in the discount rate by the Federal Reserve causes the money stock to expand.

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

Filters