Question 1

If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would:

Accepted Answer

A)  buy bonds, reduce the discount rate, and reduce reserve requirements. 
B)  sell bonds, reduce the discount rate, and reduce reserve requirements. 
C)  sell bonds, increase the discount rate, and increase reserve requirements. 
D)  buy bonds, increase the discount rate, and increase reserve requirements. 
A)  buy bonds, reduce the discount rate, and reduce reserve requirements. 
B)  sell bonds, reduce the discount rate, and reduce reserve requirements. 
C)  sell bonds, increase the discount rate, and increase reserve requirements. 
D)  buy bonds, increase the discount rate, and increase reserve requirements. C

Question 2

The difference between an inside lag and an outside lag is best described as:

Accepted Answer

A)  an inside lag is the time needed for monetary policy to be effective while an outside lag is the time needed for fiscal policy to be effective. 
B)  an inside lag is usually much longer than an outside lag. 
C)  an inside lag is the time between when a policy change is needed and when the Fed identifies the problem and solution, while an outside lag is the time between a policy decision and its effect on the economy. 
D)  an outside lag is the time between when a policy change is needed and when the Fed identifies the problem and solution, while an inside lag is the time between a policy decision and its effect on the economy. 
A)  an inside lag is the time needed for monetary policy to be effective while an outside lag is the time needed for fiscal policy to be effective. 
B)  an inside lag is usually much longer than an outside lag. 
C)  an inside lag is the time between when a policy change is needed and when the Fed identifies the problem and solution, while an outside lag is the time between a policy decision and its effect on the economy. 
D)  an outside lag is the time between when a policy change is needed and when the Fed identifies the problem and solution, while an inside lag is the time between a policy decision and its effect on the economy. C

Question 3

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. 
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. A

Question 4

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

Question 5

If a single bank faces a required reserve ratio of 20 percent, has total reserves of $500,000, and checkable deposits of $400,000, the maximum amount of money this bankcould increase the money supply is

Accepted Answer

A)  $420,000. 
B)  $100,000. 
C)  $80,000. 
D)  $2,100,000. 
A)  $420,000. 
B)  $100,000. 
C)  $80,000. 
D)  $2,100,000.

Question 6

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 7

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 8

A lowering of the required reserve ratio might not expand the money supply if:

Accepted Answer

A)  tax rates are also lowered at the same time. 
B)  tax rates are increased at the same time. 
C)  borrowers are unwilling to borrow the new funds the banks have available for loans. 
D)  borrowers are willing to borrow the new funds the banks have available for loans.. 
A)  tax rates are also lowered at the same time. 
B)  tax rates are increased at the same time. 
C)  borrowers are unwilling to borrow the new funds the banks have available for loans. 
D)  borrowers are willing to borrow the new funds the banks have available for loans..

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 excess reserve balance will be:

Accepted Answer

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

Question 10

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. 
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.

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

If people refused to use banks to create checkable deposits, the banking system would:

Accepted Answer

A)  not be affected in the money creating process. 
B)  not have a way to loan out excess reserves. 
C)  be able to expand the money supply by more than the money multiplier indicates. 
D)  not be able to create new money. 
A)  not be affected in the money creating process. 
B)  not have a way to loan out excess reserves. 
C)  be able to expand the money supply by more than the money multiplier indicates. 
D)  not be able to create new money.

Question 13

The federal funds market is the market where:

Accepted Answer

A)  the federal government raises funds to cover its budget deficit. 
B)  the Federal Reserve System makes loans to commercial banks. 
C)  commercial banks with excess reserves make loans to commercial banks seeking reserves. 
D)  commercial banks make loans to the Federal Reserve. 
A)  the federal government raises funds to cover its budget deficit. 
B)  the Federal Reserve System makes loans to commercial banks. 
C)  commercial banks with excess reserves make loans to commercial banks seeking reserves. 
D)  commercial banks make loans to the Federal Reserve.

Question 14

The Fed can raise the discount rate when it wants to:

Accepted Answer

A)  decrease the money supply. 
B)  increase the money supply. 
C)  decrease the budget deficit. 
D)  increase the budget deficit. 
A)  decrease the money supply. 
B)  increase the money supply. 
C)  decrease the budget deficit. 
D)  increase the budget deficit.

Question 15

If your bank receives a checkable deposit that results in $20,000 in excess reserves, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

Accepted Answer

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

Question 16

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. 
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.

Question 17

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 18

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 19

Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of money. A commercial bank receiving a new checkable deposit of $100 would be able to extend new loans in the amount of:

Accepted Answer

A)  $10. 
B)  $90. 
C)  $100. 
D)  $1,000. 
A)  $10. 
B)  $90. 
C)  $100. 
D)  $1,000.

Question 20

If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can:

Accepted Answer

A)  decrease the money supply by up to $10 million. 
B)  decrease the money supply by up to $40 million. 
C)  decrease the money supply by up to $50 million. 
D)  increase the money supply by up to $2 million. 
A)  decrease the money supply by up to $10 million. 
B)  decrease the money supply by up to $40 million. 
C)  decrease the money supply by up to $50 million. 
D)  increase the money supply by up to $2 million.

Exam 25: Money Creation

If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would:

The difference between an inside lag and an outside lag is best described as:

Because the banking system operates using fractional reserves,

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?

If a single bank faces a required reserve ratio of 20 percent, has total reserves of $500,000, and checkable deposits of $400,000, the maximum amount of money this bankcould increase the money supply is

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:

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?

A lowering of the required reserve ratio might not expand the money supply if:

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 excess reserve balance will be:

Bank reserves will increase over time when:

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

If people refused to use banks to create checkable deposits, the banking system would:

The federal funds market is the market where:

The Fed can raise the discount rate when it wants to:

If your bank receives a checkable deposit that results in $20,000 in excess reserves, and the banking system makes loans totaling $60,000, the maximum possible, then the money multiplier must be:

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

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

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:

If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can:

Introducing the Economic Way of Thinking

Production Possibilities Opportunity Cost and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand and Supply

Consumer Choice Theory

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets

Income Distribution Poverty and Discrimination

Antitrust and Regulation

Environmental Economics

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

Understanding Direct and Inverse Relationships between Variables

Filters