Question 1

Assume a simplified banking system subject to a 20 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

Accepted Answer

A)  increases $100,000. 
B)  increases $500,000. 
C)  increases $600,000. 
D)  decreases $500,000. 
A)  increases $100,000. 
B)  increases $500,000. 
C)  increases $600,000. 
D)  decreases $500,000.

Question 2

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

Accepted Answer

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

Question 3

When the Fed buys government securities, it:

Accepted Answer

A)  lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B)  raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C)  increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public. 
D)  increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
A)  lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B)  raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C)  increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public. 
D)  increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

Question 4

When the required reserve ratio is 20 percent, the money multiplier is:

Accepted Answer

A)  0.2. 
B)  2. 
C)  2.5. 
D)  5. 
A)  0.2. 
B)  2. 
C)  2.5. 
D)  5.

Question 5

Real-world accuracy of the money multiplier can be affected by:

Accepted Answer

A)  the income tax rate set by the government. 
B)  the way the public divides its holding of M1 between currency and certificates of deposit. 
C)  an increase in government spending. 
D)  the President's decision to alter the money multiplier. 
A)  the income tax rate set by the government. 
B)  the way the public divides its holding of M1 between currency and certificates of deposit. 
C)  an increase in government spending. 
D)  the President's decision to alter the money multiplier.

Question 6

When the economy is at full employment and inflation is present, the government could create a surplus budget by cutting its own spending and raising taxes. 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, increase 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, increase the discount rate, and sell securities on the open market.

Question 7

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 8

Exhibit 15-5 Balance sheet of Tucker National Bank
 
If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the money multiplier for the system would be:

Accepted Answer

A)  4. 
B)  5. 
C)  10. 
D)  25. 
A)  4. 
B)  5. 
C)  10. 
D)  25.

Question 9

A decrease in the required reserve ratio will:

Accepted Answer

A)  decrease commercial bank loans and reduce the money supply. 
B)  increase commercial bank loans and reduce the money supply. 
C)  increase commercial bank loans and increase the money supply. 
D)  decrease commercial bank loans and increase the money supply. 
A)  decrease commercial bank loans and reduce the money supply. 
B)  increase commercial bank loans and reduce the money supply. 
C)  increase commercial bank loans and increase the money supply. 
D)  decrease commercial bank loans and increase the money supply.

Question 10

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 11

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)  an increase in the discount rate 
D)  a decrease in the discount rate 
A)  an open-market purchase of government securities 
B)  a decrease in required reserve ratios 
C)  an increase in the discount rate 
D)  a decrease in the discount rate

Question 12

When the Fed sells government securities, it:

Accepted Answer

A)  lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B)  raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C)  decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
D)  increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public. 
A)  lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. 
B)  raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. 
C)  decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public. 
D)  increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public.

Question 13

The Fed's power to set the required reserves of commercial banks:

Accepted Answer

A)  provides a certain source of interest income for commercial banks. 
B)  allows the Fed to control the lending ability of commercial banks and, thereby, control the money supply. 
C)  prevents banks from hoarding too much vault cash. 
D)  prevents commercial banks from earning excess profits. 
A)  provides a certain source of interest income for commercial banks. 
B)  allows the Fed to control the lending ability of commercial banks and, thereby, control the money supply. 
C)  prevents banks from hoarding too much vault cash. 
D)  prevents commercial banks from earning excess profits.

Question 14

If the Fed buys $10 million dollars in government securities, and the required reserve ratio is 20 percent, the banking system is able to expand the money supply by:

Accepted Answer

A)  $10 million. 
B)  $50 million. 
C)  $2 million. 
D)  $40 million. 
A)  $10 million. 
B)  $50 million. 
C)  $2 million. 
D)  $40 million.

Question 15

A bank faces a required reserve ratio of 5 percent. If the bank has $200 million of checkable deposits and $15 million of total reserves, then how large are the bank's excess reserves?

Accepted Answer

A)  $0 
B)  $5 million 
C)  $10 million 
D)  $15 million 
A)  $0 
B)  $5 million 
C)  $10 million 
D)  $15 million

Question 16

If the required reserve ratio decreases, the:

Accepted Answer

A)  money multiplier increases. 
B)  money multiplier decreases. 
C)  amount of excess reserves the bank has decreases. 
D)  money multiplier stays the same. 
A)  money multiplier increases. 
B)  money multiplier decreases. 
C)  amount of excess reserves the bank has decreases. 
D)  money multiplier stays the same.

Question 17

When the Fed lowers the discount rate, it makes it:

Accepted Answer

A)  cheaper for banks to borrow from each other. 
B)  cheaper for banks to obtain additional reserves by borrowing from the Fed. 
C)  more difficult for banks to accept deposits. 
D)  more difficult for banks to extend loans. 
A)  cheaper for banks to borrow from each other. 
B)  cheaper for banks to obtain additional reserves by borrowing from the Fed. 
C)  more difficult for banks to accept deposits. 
D)  more difficult for banks to extend loans.

Exam 25: Money Creation

Assume a simplified banking system subject to a 20 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

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

When the Fed buys government securities, it:

When the required reserve ratio is 20 percent, the money multiplier is:

Real-world accuracy of the money multiplier can be affected by:

When the economy is at full employment and inflation is present, the government could create a surplus budget by cutting its own spending and raising taxes. The Fed would be expected to:

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):

Exhibit 15-5 Balance sheet of Tucker National Bank If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the money multiplier for the system would be:

A decrease in the required reserve ratio will:

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

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

When the Fed sells government securities, it:

The Fed's power to set the required reserves of commercial banks:

If the Fed buys $10 million dollars in government securities, and the required reserve ratio is 20 percent, the banking system is able to expand the money supply by:

A bank faces a required reserve ratio of 5 percent. If the bank has $200 million of checkable deposits and $15 million of total reserves, then how large are the bank's excess reserves?

If the required reserve ratio decreases, the:

When the Fed lowers the discount rate, it makes it:

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