Question 1

Assume all banks in the system started have a 10 percent required reserve ratio and the Fed made a $20,000 open market purchase. The result would be a(n):

Accepted Answer

A)  $200,000 expansion of the money supply. 
B)  $20,000 expansion of the money supply. 
C)  $20,000 contraction of the money supply. 
D)  infinite contraction of the money supply. 
A)  $200,000 expansion of the money supply. 
B)  $20,000 expansion of the money supply. 
C)  $20,000 contraction of the money supply. 
D)  infinite contraction of the money supply.

Question 2

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 3

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

Accepted Answer

A)  Loans. 
B)  Checkable deposits. 
C)  Savings deposits. 
D)  Net worth. 
A)  Loans. 
B)  Checkable deposits. 
C)  Savings deposits. 
D)  Net worth.

Question 4

If there is a recession, the Fed would most likely:

Accepted Answer

A)  encourage banks to provide loans by lowering the discount rate. 
B)  encourage banks to provide loans by raising the discount rate. 
C)  restrict bank lending by lowering the discount rate. 
D)  restrict bank lending by raising the discount rate. 
E)  restrict bank lending by lowering the federal funds rate. 
A)  encourage banks to provide loans by lowering the discount rate. 
B)  encourage banks to provide loans by raising the discount rate. 
C)  restrict bank lending by lowering the discount rate. 
D)  restrict bank lending by raising the discount rate. 
E)  restrict bank lending by lowering the federal funds rate.

Question 5

Which of the following would not appear on the asset 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 6

A lower discount rate discourages banks from borrowing reserves and making loans. Therefore, if the Fed wants to expand the money supply.

Accepted Answer

A) True 
 B)False

Question 7

Assume that the Paris First National Bank currently has deposits of $20 million. If the current required reserve ratio is raised from 20 percent to 40 percent, then:

Accepted Answer

A)  Paris First National Bank does not have to comply with the Federal Reserve mandate. 
B)  required reserves will decrease from $16 million to $12 million. 
C)  excess reserves will automatically increase by $20 million. 
D)  Paris First National Bank must close out 4 million in loans. 
E)  Paris First National Bank must increase its required reserves from $4 million to $8 million. 
A)  Paris First National Bank does not have to comply with the Federal Reserve mandate. 
B)  required reserves will decrease from $16 million to $12 million. 
C)  excess reserves will automatically increase by $20 million. 
D)  Paris First National Bank must close out 4 million in loans. 
E)  Paris First National Bank must increase its required reserves from $4 million to $8 million.

Question 8

Exhibit 19-2  Balance Sheet of Springfield National Bank   In Exhibit 19-2, 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. 
E)  $260. 
A)  $0. 
B)  $40. 
C)  $160. 
D)  $460. 
E)  $260.

Question 9

Which of the following correctly describes fractional reserve banking?

Accepted Answer

A)  The federal government only insures a fraction of the deposits at most banks. 
B)  Banks keep a fraction of their loans with other banks to maintain the quality of their loan portfolio. 
C)  Banks can loan out all but a small fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults. 
D)  Banks can loan out all but a fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults. 
A)  The federal government only insures a fraction of the deposits at most banks. 
B)  Banks keep a fraction of their loans with other banks to maintain the quality of their loan portfolio. 
C)  Banks can loan out all but a small fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults. 
D)  Banks can loan out all but a fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults.

Question 10

Excess reserves equal total reserves plus required reserves.

Accepted Answer

A) True 
 B)False

Question 11

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. 
E)  $10,000. 
A)  $25,000. 
B)  $2,500. 
C)  $4,000. 
D)  $40,000. 
E)  $10,000.

Question 12

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 13

Best National Bank is subject to a 10 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:

Accepted Answer

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

Question 14

When the Fed raises the discount rate, 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. 
E)  decreases 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. 
E)  decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

Question 15

Decisions regarding purchases and sales of government securities by the Fed are made by the:

Accepted Answer

A)  Federal Deposit Insurance Commission (FDI
C) . 
B)  Discount Committee (D
C) . 
C)  Federal Open Market Committee (FOM
C) . 
D)  Federal Funds Committee (FF
C) . 
A)  Federal Deposit Insurance Commission (FDI
C) . 
B)  Discount Committee (D
C) . 
C)  Federal Open Market Committee (FOM
C) . 
D)  Federal Funds Committee (FF
C) .

Question 16

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 17

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 18

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.

Question 19

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. 
E)  $30,000. 
A)  $360,000. 
B)  $240,000. 
C)  $120,000. 
D)  $60,000. 
E)  $30,000.

Question 20

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 19: Money Creation

Assume all banks in the system started have a 10 percent required reserve ratio and the Fed made a $20,000 open market purchase. The result would be a(n):

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

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

If there is a recession, the Fed would most likely:

Which of the following would not appear on the asset side of a commercial bank balance sheet?

A lower discount rate discourages banks from borrowing reserves and making loans. Therefore, if the Fed wants to expand the money supply.

Assume that the Paris First National Bank currently has deposits of $20 million. If the current required reserve ratio is raised from 20 percent to 40 percent, then:

Exhibit 19-2 Balance Sheet of Springfield National Bank In Exhibit 19-2, 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 correctly describes fractional reserve banking?

Excess reserves equal total reserves plus required reserves.

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 federal funds market is the market where:

Best National Bank is subject to a 10 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:

When the Fed raises the discount rate, it:

Decisions regarding purchases and sales of government securities by the Fed are made by the:

The federal funds market is the market where:

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:

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

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

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

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

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