Question 1

If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40 percent, then excess reserves are:

Accepted Answer

A)  $360,000. 
B)  $240,000. 
C)  $120,000. 
D)  $60,000. 
A)  $360,000. 
B)  $240,000. 
C)  $120,000. 
D)  $60,000.

Question 2

Which of the following statements is correct regarding the lags in fiscal and monetary policy?

Accepted Answer

A)  The inside lag is the time needed for monetary policy to be effective while the outside lag is the time needed for fiscal policy to be effective. 
B)  The outside lag is the time needed for monetary policy to be effective while the inside lag is the time needed for fiscal policy to be effective. 
C)  The lag for monetary policy is shorter than the lag for fiscal policy. 
D)  The lag for fiscal policy is shorter than the lag for monetary policy. 
A)  The inside lag is the time needed for monetary policy to be effective while the outside lag is the time needed for fiscal policy to be effective. 
B)  The outside lag is the time needed for monetary policy to be effective while the inside lag is the time needed for fiscal policy to be effective. 
C)  The lag for monetary policy is shorter than the lag for fiscal policy. 
D)  The lag for fiscal policy is shorter than the lag for monetary policy.

Question 3

Which of the following would appear on the liability side of a commercial bank balance sheet?

Accepted Answer

A)  reserves 
B)  checkable deposits 
C)  loans 
D)  securities 
A)  reserves 
B)  checkable deposits 
C)  loans 
D)  securities

Question 4

Best National Bank operates with a 20 percent required reserve ratio. One day a depositor withdraws $500 from his or her checking account at this bank. As a result, the bank's excess reserves:

Accepted Answer

A)  fall by $500. 
B)  fall by $400. 
C)  rise by $100. 
D)  rise by $500. 
A)  fall by $500. 
B)  fall by $400. 
C)  rise by $100. 
D)  rise by $500.

Question 5

If the Federal Reserve wants to increase the availability of money and credit, it can:

Accepted Answer

A)  lower the discount rate. 
B)  raise the reserve requirements. 
C)  sell U.S. government bonds to the public. 
D)  encourage banks to increase their prime lending rate. 
A)  lower the discount rate. 
B)  raise the reserve requirements. 
C)  sell U.S. government bonds to the public. 
D)  encourage banks to increase their prime lending rate.

Question 6

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

Question 7

If the Fed decides to use an open market operation to reduce the money supply by $1 million, and if the money multiplier is 10, then what total amount of Treasury securities must the Fed initially sell?

Accepted Answer

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

Question 8

Exhibit 15-7 Lower Walloon National Bank
 
In Exhibit 15-7, if the required reserve ratio is 20 percent for all banks, and every bank in the banking system loans out all of its excess reserves. Then a $10,000 deposit from Mr. Brown in checkable deposits could create for the entire banking system:

Accepted Answer

A)  $8,000 worth of new money. 
B)  $2,000 worth of new money. 
C)  $10,000 worth of new money. 
D)  $40,000 worth of new money. 
A)  $8,000 worth of new money. 
B)  $2,000 worth of new money. 
C)  $10,000 worth of new money. 
D)  $40,000 worth of new money.

Question 9

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 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 expansion of the money supply.

Question 10

When the Fed buys federal government securities on the open market from commercial banks, over time, the:

Accepted Answer

A)  assets of these banks fall. 
B)  liabilities of the bank fall. 
C)  assets of the banks rise. 
D)  liabilities of the bank rise. 
A)  assets of these banks fall. 
B)  liabilities of the bank fall. 
C)  assets of the banks rise. 
D)  liabilities of the bank rise.

Question 11

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 12

If the economy is inflationary, 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 lowering the discount rate. 
D)  decrease bank reserves by selling government securities. 
A)  increase bank reserves by raising the discount rate. 
B)  increase bank reserves by buying government securities 
C)  decrease bank reserves by lowering the discount rate. 
D)  decrease bank reserves by selling government securities.

Question 13

An increase in the required reserve ratio by the Federal Reserve would:

Accepted Answer

A)  cause M1 to contract. 
B)  cause M1 to expand. 
C)  have no effect on M1 or M2. 
D)  affect only M2, not M1. 
A)  cause M1 to contract. 
B)  cause M1 to expand. 
C)  have no effect on M1 or M2. 
D)  affect only M2, not M1.

Question 14

Exhibit 15-4 Balance sheet of Tucker National Bank
 
The required reserve ratio in Exhibit 15-4 is:

Accepted Answer

A)  5 percent. 
B)  10 percent. 
C)  15 percent. 
D)  20 percent. 
A)  5 percent. 
B)  10 percent. 
C)  15 percent. 
D)  20 percent.

Question 15

If banks have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:

Accepted Answer

A)  reduced and the money supply contracts. 
B)  reduced and the money supply expands. 
C)  reduced and there is no change in the money supply. 
D)  increased and the money supply expands. 
A)  reduced and the money supply contracts. 
B)  reduced and the money supply expands. 
C)  reduced and there is no change in the money supply. 
D)  increased and the money supply expands.

Question 16

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 17

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 18

Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

Accepted Answer

A)  $100 million decrease in the money supply. 
B)  $100 million increase in the money supply. 
C)  $200 million increase in the money supply. 
D)  $500 million increase in the money supply. 
A)  $100 million decrease in the money supply. 
B)  $100 million increase in the money supply. 
C)  $200 million increase in the money supply. 
D)  $500 million increase in the money supply.

Question 19

Which of the following compose the reserves of a commercial bank?

Accepted Answer

A)  checkable deposits and time deposits 
B)  vault cash and deposits of the bank with the Federal Reserve 
C)  U.S. securities and stock equity 
D)  cash and U.S. securities 
A)  checkable deposits and time deposits 
B)  vault cash and deposits of the bank with the Federal Reserve 
C)  U.S. securities and stock equity 
D)  cash and U.S. securities

Question 20

The interest rate in the federal funds market:

Accepted Answer

A)  is determined by the imposition of price controls imposed by the Fed. 
B)  rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves. 
C)  will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks. 
D)  is an interest rate that is largely unaffected by the policies of the Fed. 
A)  is determined by the imposition of price controls imposed by the Fed. 
B)  rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves. 
C)  will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks. 
D)  is an interest rate that is largely unaffected by the policies of the Fed.

Exam 25: Money Creation

If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40 percent, then excess reserves are:

Which of the following statements is correct regarding the lags in fiscal and monetary policy?

Which of the following would appear on the liability side of a commercial bank balance sheet?

Best National Bank operates with a 20 percent required reserve ratio. One day a depositor withdraws $500 from his or her checking account at this bank. As a result, the bank's excess reserves:

If the Federal Reserve wants to increase the availability of money and credit, it can:

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:

If the Fed decides to use an open market operation to reduce the money supply by $1 million, and if the money multiplier is 10, then what total amount of Treasury securities must the Fed initially sell?

Exhibit 15-7 Lower Walloon National Bank In Exhibit 15-7, if the required reserve ratio is 20 percent for all banks, and every bank in the banking system loans out all of its excess reserves. Then a $10,000 deposit from Mr. Brown in checkable deposits could create for the entire banking system:

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):

When the Fed buys federal government securities on the open market from commercial banks, over time, the:

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

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

An increase in the required reserve ratio by the Federal Reserve would:

Exhibit 15-4 Balance sheet of Tucker National Bank The required reserve ratio in Exhibit 15-4 is:

If banks have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:

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

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

Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

Which of the following compose the reserves of a commercial bank?

The interest rate in the federal funds market:

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

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