Question 1

Which of the following is a valid statement?

Accepted Answer

A)  The required reserve ratio equals the required reserves as a percentage of total deposits. 
B)  The required reserves equal the maximum reserves required by the Fed. 
C)  Excess reserves equal total reserves plus required reserves. 
D)  The required reserve ratio equals percentage of savings account deposit, but not checkable deposits, required by the Fed. 
A)  The required reserve ratio equals the required reserves as a percentage of total deposits. 
B)  The required reserves equal the maximum reserves required by the Fed. 
C)  Excess reserves equal total reserves plus required reserves. 
D)  The required reserve ratio equals percentage of savings account deposit, but not checkable deposits, required by the Fed.

Question 2

During a period of inflation, the Fed is likely to:

Accepted Answer

A)  sell government securities to banks in order to reduce the amount of loanable funds. 
B)  buy government securities from banks in order to reduce the amount of loanable funds. 
C)  cut the discount rate to increase the affordability of loanable funds. 
D)  cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out. 
A)  sell government securities to banks in order to reduce the amount of loanable funds. 
B)  buy government securities from banks in order to reduce the amount of loanable funds. 
C)  cut the discount rate to increase the affordability of loanable funds. 
D)  cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out.

Question 3

When the required reserve ratio is lowered,

Accepted Answer

A)  increases, and the amount of excess reserves increases in the banking system. 
B)  decreases, and the amount of excess reserves increases in the banking system. 
C)  decreases, and the amount of excess reserves decreases in the banking system. 
D)  increases, and the amount of excess reserves decreases in the banking system. 
A)  increases, and the amount of excess reserves increases in the banking system. 
B)  decreases, and the amount of excess reserves increases in the banking system. 
C)  decreases, and the amount of excess reserves decreases in the banking system. 
D)  increases, and the amount of excess reserves decreases in the banking system.

Question 4

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. 
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.

Question 5

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

Accepted Answer

A)  reducing the required reserve ratio 
B)  selling government bonds in the open market 
C)  increasing the discount rate 
D)  increasing the income tax rate 
A)  reducing the required reserve ratio 
B)  selling government bonds in the open market 
C)  increasing the discount rate 
D)  increasing the income tax rate

Question 6

If a bank keeps some of its excess reserves, the money multiplier:

Accepted Answer

A)  increases. 
B)  stays the same. 
C)  goes to zero. 
D)  decreases. 
A)  increases. 
B)  stays the same. 
C)  goes to zero. 
D)  decreases.

Question 7

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 8

If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:

Accepted Answer

A)  4.00. 
B)  2.50. 
C)  0.40. 
D)  0.25. 
A)  4.00. 
B)  2.50. 
C)  0.40. 
D)  0.25.

Question 9

Exhibit 15-2 Balance Sheet of Springfield National Bank
 
In Exhibit 15-2, if Springfield National's customers write checks for $200 and the required reserve ratio is 20 percent, then its required reserves fall to:

Accepted Answer

A)  $0. 
B)  $40. 
C)  $160. 
D)  $460. 
A)  $0. 
B)  $40. 
C)  $160. 
D)  $460.

Question 10

Which of the following directs the buying and selling of U.S. government securities?

Accepted Answer

A)  Board of Governors 
B)  Federal Reserve Banks 
C)  Federal Open Market Committee 
D)  Federal Advisory Council 
A)  Board of Governors 
B)  Federal Reserve Banks 
C)  Federal Open Market Committee 
D)  Federal Advisory Council

Question 11

Discuss how a single bank creates money. What is the limit to which a single bank can add to the money supply? By how much can an entire banking system add to the money supply?

Accepted Answer

A single bank is limited in its money cr

Question 12

When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?

Accepted Answer

A)  It purchases U.S. government securities. 
B)  It increases the discount rate. 
C)  It increases the required reserve ratio. 
D)  It sells bonds on the open market. 
A)  It purchases U.S. government securities. 
B)  It increases the discount rate. 
C)  It increases the required reserve ratio. 
D)  It sells bonds on the open market.

Question 13

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

Question 14

The term "open market operations" refers to the:

Accepted Answer

A)  loan-making activities of commercial banks. 
B)  effect of expansionary monetary policy on interest rates. 
C)  operation of competitive markets in the banking industry as the result of deregulation. 
D)  buying and selling of government securities by the Federal Reserve. 
A)  loan-making activities of commercial banks. 
B)  effect of expansionary monetary policy on interest rates. 
C)  operation of competitive markets in the banking industry as the result of deregulation. 
D)  buying and selling of government securities by the Federal Reserve.

Question 15

Which of the following would cause the money supply in the United States to decrease?

Accepted Answer

A)  an increase in reserve requirements 
B)  a decrease in the discount rate 
C)  a purchase of U.S. government bonds by the Federal Reserve 
D)  an increase in the world supply of gold 
A)  an increase in reserve requirements 
B)  a decrease in the discount rate 
C)  a purchase of U.S. government bonds by the Federal Reserve 
D)  an increase in the world supply of gold

Question 16

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. 
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.

Question 17

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum change in the money supply that can be supported is:

Accepted Answer

A)  $13 million. 
B)  $30 million. 
C)  $97 million. 
D)  $333.3 million. 
A)  $13 million. 
B)  $30 million. 
C)  $97 million. 
D)  $333.3 million.

Question 18

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

Accepted Answer

A)  $10,000. 
B)  $15,000. 
C)  $75,000. 
D)  $5,000. 
A)  $10,000. 
B)  $15,000. 
C)  $75,000. 
D)  $5,000.

Question 19

Banks would be expected to:

Accepted Answer

A)  minimize holding excess reserves because the practice of holding more than the required reserves is illegal. 
B)  minimize holding excess reserves because the practice of holding more than the required reserves is not profitable. 
C)  maximize holding excess reserves because the practice of holding more than the required reserves increases the assets of the bank. 
D)  maximize holding excess reserves because the practice of holding more than the required reserves reduces the tax paid by the bank to the Federal Reserve. 
A)  minimize holding excess reserves because the practice of holding more than the required reserves is illegal. 
B)  minimize holding excess reserves because the practice of holding more than the required reserves is not profitable. 
C)  maximize holding excess reserves because the practice of holding more than the required reserves increases the assets of the bank. 
D)  maximize holding excess reserves because the practice of holding more than the required reserves reduces the tax paid by the bank to the Federal Reserve.

Question 20

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)  equal to its loans. 
A)  held as deposits with the Federal Reserve System. 
B)  equal to its checkable deposits. 
C)  equal to its transactions deposits. 
D)  equal to its loans.

Exam 25: Money Creation

Which of the following is a valid statement?

During a period of inflation, the Fed is likely to:

When the required reserve ratio is lowered,

When the required reserve ratio is changed,

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

If a bank keeps some of its excess reserves, the money multiplier:

For a bank to earn as much profit as possible, its excess reserves should be:

If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:

Exhibit 15-2 Balance Sheet of Springfield National Bank In Exhibit 15-2, if Springfield National's customers write checks for $200 and the required reserve ratio is 20 percent, then its required reserves fall to:

Which of the following directs the buying and selling of U.S. government securities?

Discuss how a single bank creates money. What is the limit to which a single bank can add to the money supply? By how much can an entire banking system add to the money supply?

When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?

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:

The term "open market operations" refers to the:

Which of the following would cause the money supply in the United States to decrease?

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:

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum change in the money supply that can be supported is:

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

Banks would be expected to:

A bank's "required reserves" are:

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