Question 1

When the discount rates fall, the cost:

Accepted Answer

A)  of loans to bankers' best customers goes down. 
B)  of loans between banks falls. 
C)  of international loans falls. 
D)  to banks of borrowing from the Fed falls. 
E)  to savings and loans of borrowing money from the public falls. 
A)  of loans to bankers' best customers goes down. 
B)  of loans between banks falls. 
C)  of international loans falls. 
D)  to banks of borrowing from the Fed falls. 
E)  to savings and loans of borrowing money from the public falls.

Question 2

In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio, a $1,000 open market sale by the Fed to a bank would cause the money supply to:

Accepted Answer

A)  increase by $1,000. 
B)  increase by $100,000. 
C)  decrease by $10,000. 
D)  decrease by $1,000. 
E)  remain unchanged. 
A)  increase by $1,000. 
B)  increase by $100,000. 
C)  decrease by $10,000. 
D)  decrease by $1,000. 
E)  remain unchanged.

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. 
E)  the money multiplier must be equal to zero. 
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. 
E)  the money multiplier must be equal to zero.

Question 4

If there is no one who is interested in borrowing from a bank:

Accepted Answer

A)  the bank's excess reserves will be zero. 
B)  there will be no process of money creation. 
C)  the required reserve ratio must be equal to zero. 
D)  the required reserve ratio must be equal to 100 percent. 
A)  the bank's excess reserves will be zero. 
B)  there will be no process of money creation. 
C)  the required reserve ratio must be equal to zero. 
D)  the required reserve ratio must be equal to 100 percent.

Question 5

A bank can lend out its excess reserves but not its required reserves.

Accepted Answer

A) True 
 B)False

Question 6

Assume that the Paris First National Bank is a thriving bank with deposits of $20 million. If the required reserve ratio is 20 percent and the bank is fully loaned out, the bank will have outstanding loans totaling:

Accepted Answer

A)  $2 million. 
B)  $4 million. 
C)  $10 million. 
D)  $16 million. 
E)  $20 million. 
A)  $2 million. 
B)  $4 million. 
C)  $10 million. 
D)  $16 million. 
E)  $20 million.

Question 7

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. 
E)  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, reduce the discount rate, and sell securities on the open market. 
E)  increase the required reserve ratio, increase the discount rate, and sell securities on the open market.

Question 8

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. 
E)  high and banks are not able 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. 
E)  high and banks are not able to loan out all of their excess reserves.

Question 9

The rate of interest charged by the Federal Reserve to member banks for reserves borrowed from the Fed is known as the:

Accepted Answer

A)  federal funds rate. 
B)  discount rate. 
C)  repurchase rate. 
D)  Q-ceiling rate. 
A)  federal funds rate. 
B)  discount rate. 
C)  repurchase rate. 
D)  Q-ceiling rate.

Question 10

The money supply will not increase if you deposit $100 given to you on your birthday in your bank account, and the bank holds all $100 of that money as excess reserves.

Accepted Answer

A) True 
 B)False

Question 11

When the discount rate rises, the cost:

Accepted Answer

A)  of loans to bankers, best customers goes up. 
B)  of loans between banks rises. 
C)  of international loans rises. 
D)  to savings and loans of borrowing money from the public falls. 
E)  to banks of borrowing from the Fed falls. 
A)  of loans to bankers, best customers goes up. 
B)  of loans between banks rises. 
C)  of international loans rises. 
D)  to savings and loans of borrowing money from the public falls. 
E)  to banks of borrowing from the Fed falls.

Question 12

In a system in which all banks have a uniform reserve requirement, the money multiplier is equal to 1 divided by the prime rate.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is not an interest-earning asset of commercial banks?

Accepted Answer

A)  Required reserves. 
B)  Checkable deposits. 
C)  Customer savings accounts. 
D)  All of the above are interest-earning assets of commercial banks. 
E)  None of the above are interest-earning assets of commercial banks. 
A)  Required reserves. 
B)  Checkable deposits. 
C)  Customer savings accounts. 
D)  All of the above are interest-earning assets of commercial banks. 
E)  None of the above are interest-earning assets of commercial banks.

Question 14

Exhibit 19-7  Lower Walloon National Bank   In Exhibit 19-7, 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. 
E)  no 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. 
E)  no new money.

Question 15

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

Accepted Answer

A)  Increasing the required reserve ratio. 
B)  Selling government bonds in the open market. 
C)  Increasing the discount rate. 
D)  Reducing the required reserve ratio. 
A)  Increasing the required reserve ratio. 
B)  Selling government bonds in the open market. 
C)  Increasing the discount rate. 
D)  Reducing the required reserve ratio.

Question 16

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. 
E)  $ 0. 
A)  $10,000. 
B)  $15,000. 
C)  $75,000. 
D)  $5,000. 
E)  $ 0.

Question 17

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)  $8 million. 
C)  $2 million. 
D)  $40 million. 
E)  $50 million. 
A)  $10 million. 
B)  $8 million. 
C)  $2 million. 
D)  $40 million. 
E)  $50 million.

Question 18

Exhibit 19-3  Balance sheet of Tucker National Bank   Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 19-3. The result would be a:

Accepted Answer

A)  $20,000 increase in excess reserves. 
B)  $20,000 increase in required reserves. 
C)  $100,000 increase in required reserves. 
D)  zero change in required reserves. 
A)  $20,000 increase in excess reserves. 
B)  $20,000 increase in required reserves. 
C)  $100,000 increase in required reserves. 
D)  zero change in required reserves.

Question 19

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 20

When the required reserve ratio is lowered,

Accepted Answer

A)  the money multiplier increases, and the amount of excess reserves increases in the banking system. 
B)  the money multiplier decreases, and the amount of excess reserves increases in the banking system. 
C)  the money multiplier decreases, and the amount of excess reserves decreases in the banking system. 
D)  the money multiplier increases, and the amount of excess reserves decreases in the banking system. 
E)  there is no change in either the money multiplier or the amount of excess reserves in the banking system. 
A)  the money multiplier increases, and the amount of excess reserves increases in the banking system. 
B)  the money multiplier decreases, and the amount of excess reserves increases in the banking system. 
C)  the money multiplier decreases, and the amount of excess reserves decreases in the banking system. 
D)  the money multiplier increases, and the amount of excess reserves decreases in the banking system. 
E)  there is no change in either the money multiplier or the amount of excess reserves in the banking system.

Exam 19: Money Creation

When the discount rates fall, the cost:

In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio, a $1,000 open market sale by the Fed to a bank would cause the money supply to:

Because the banking system operates using fractional reserves,

If there is no one who is interested in borrowing from a bank:

A bank can lend out its excess reserves but not its required reserves.

Assume that the Paris First National Bank is a thriving bank with deposits of $20 million. If the required reserve ratio is 20 percent and the bank is fully loaned out, the bank will have outstanding loans totaling:

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:

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

The rate of interest charged by the Federal Reserve to member banks for reserves borrowed from the Fed is known as the:

The money supply will not increase if you deposit $100 given to you on your birthday in your bank account, and the bank holds all $100 of that money as excess reserves.

When the discount rate rises, the cost:

In a system in which all banks have a uniform reserve requirement, the money multiplier is equal to 1 divided by the prime rate.

Which of the following is not an interest-earning asset of commercial banks?

Exhibit 19-7 Lower Walloon National Bank In Exhibit 19-7, 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:

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

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:

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:

Exhibit 19-3 Balance sheet of Tucker National Bank Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 19-3. The result would be a:

The term "open market operations" refers to the:

When the required reserve ratio is lowered,

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

Filters