Question 1

Which of the following is in charge of the buying and selling of government securities by the Fed?

Accepted Answer

A)  The president. 
B)  The Federal Open Market Committee. 
C)  The Congress. 
D)  None of the above. 
A)  The president. 
B)  The Federal Open Market Committee. 
C)  The Congress. 
D)  None of the above.

Question 2

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 3

The Fed can raise the discount rate when it wants to:

Accepted Answer

A)  decrease the money supply. 
B)  increase the money supply. 
C)  decrease the budget deficit. 
D)  increase the budget deficit. 
A)  decrease the money supply. 
B)  increase the money supply. 
C)  decrease the budget deficit. 
D)  increase the budget deficit.

Question 4

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. 
E)  decrease bank reserves by lowering the legal reserve requirement. 
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. 
E)  decrease bank reserves by lowering the legal reserve requirement.

Question 5

When the Fed conducts open market operations, it buys and sells:

Accepted Answer

A)  stocks. 
B)  government securities. 
C)  foreign currency 
D)  gold. 
A)  stocks. 
B)  government securities. 
C)  foreign currency 
D)  gold.

Question 6

Assume a simplified banking system subject to a 25 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 $400,000. 
C)  increases $125,000. 
D)  decreases $500,000. 
A)  increases $100,000. 
B)  increases $400,000. 
C)  increases $125,000. 
D)  decreases $500,000.

Question 7

The percentage of checkable deposits that banks and other financial intermediaries are required to keep in cash reserves is known as:

Accepted Answer

A)  the fractional reserve requirement. 
B)  the excess reserve requirement. 
C)  the required reserve ratio. 
D)  the discount rate. 
E)  M1. 
A)  the fractional reserve requirement. 
B)  the excess reserve requirement. 
C)  the required reserve ratio. 
D)  the discount rate. 
E)  M1.

Question 8

If the required reserve ratio is 4 percent, then $100 of reserves can support up to $2,500 of checkable deposits.

Accepted Answer

A) True 
 B)False

Question 9

In a simplified system, a bank receiving a new deposit can extend new loans equal to the amount by which its excess reserves increase.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

Accepted Answer

A)  Buy U.S. government securities. 
B)  Force the Treasury to reduce the national debt. 
C)  Raise the discount rate. 
D)  Increase the reserve requirements. 
A)  Buy U.S. government securities. 
B)  Force the Treasury to reduce the national debt. 
C)  Raise the discount rate. 
D)  Increase the reserve requirements.

Question 11

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. 
E)  neither the money multiplier nor the amount of excess reserves change. 
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. 
E)  neither the money multiplier nor the amount of excess reserves change.

Question 12

A banking system that provides people immediate access to their deposits, but that allows banks to hold only a portion of those deposits on reserve, is known as:

Accepted Answer

A)  an excess reserve system. 
B)  a fractional reserve system. 
C)  the Fed. 
D)  the FDIC. 
E)  an asset-based system. 
A)  an excess reserve system. 
B)  a fractional reserve system. 
C)  the Fed. 
D)  the FDIC. 
E)  an asset-based system.

Question 13

If banks cannot lend all of their excess reserves:

Accepted Answer

A)  the money multiplier increases. 
B)  the money multiplier decreases. 
C)  the money multiplier stays the same. 
D)  the amount of loans by the bank increases. 
E)  checkable deposits decrease. 
A)  the money multiplier increases. 
B)  the money multiplier decreases. 
C)  the money multiplier stays the same. 
D)  the amount of loans by the bank increases. 
E)  checkable deposits decrease.

Question 14

In a commercial bank's T-account, reserves and outstanding loans are recorded as:

Accepted Answer

A)  debts. 
B)  profits. 
C)  assets. 
D)  liabilities. 
A)  debts. 
B)  profits. 
C)  assets. 
D)  liabilities.

Question 15

If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can:

Accepted Answer

A)  decrease the money supply by up to $10 million. 
B)  decrease the money supply by up to $40 million. 
C)  decrease the money supply by up to $50 million. 
D)  decrease the money supply by up to $ 2 million. 
E)  increase the money supply by up to $50 million. 
A)  decrease the money supply by up to $10 million. 
B)  decrease the money supply by up to $40 million. 
C)  decrease the money supply by up to $50 million. 
D)  decrease the money supply by up to $ 2 million. 
E)  increase the money supply by up to $50 million.

Question 16

If loans are $69,000, excess reserves are $1,400, and checkable deposits are $80,000, then the required reserve ratio must be:

Accepted Answer

A)  1.75 percent. 
B)  12 percent. 
C)  13.75 percent. 
D)  17.5 percent. 
E)  0.12 percent. 
A)  1.75 percent. 
B)  12 percent. 
C)  13.75 percent. 
D)  17.5 percent. 
E)  0.12 percent.

Question 17

Best National Bank is subject to a 20 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:

Accepted Answer

A)  $500. 
B)  $800. 
C)  $1,000. 
D)  $5,000. 
A)  $500. 
B)  $800. 
C)  $1,000. 
D)  $5,000.

Question 18

Exhibit 19-1  Balance sheet of First Iliad State Bank   In Exhibit 19-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:

Accepted Answer

A)  have to convert loans worth $800,000 to required reserves 
B)  have to convert loans worth $200,000 to required reserves. 
C)  be able to make additional loans worth $800,000. 
D)  be able to make additional loans worth $200,000. 
E)  not have to act. 
A)  have to convert loans worth $800,000 to required reserves 
B)  have to convert loans worth $200,000 to required reserves. 
C)  be able to make additional loans worth $800,000. 
D)  be able to make additional loans worth $200,000. 
E)  not have to act.

Question 19

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

Accepted Answer

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

Question 20

The federal funds rate is:

Accepted Answer

A)  the minimum amount of reserves the Fed requires a bank to hold. 
B)  the interest rate that the Fed charges banks who borrow from it. 
C)  the interest rate on loans made by banks to other banks 
D)  the maximum percentage of the cost of a stock that can be borrowed from a bank, with the stock offered as collateral. 
E)  an appeal by the Fed to banks, asking for voluntary compliance with the Fed's wishes. 
A)  the minimum amount of reserves the Fed requires a bank to hold. 
B)  the interest rate that the Fed charges banks who borrow from it. 
C)  the interest rate on loans made by banks to other banks 
D)  the maximum percentage of the cost of a stock that can be borrowed from a bank, with the stock offered as collateral. 
E)  an appeal by the Fed to banks, asking for voluntary compliance with the Fed's wishes.

Exam 19: Money Creation

Which of the following is in charge of the buying and selling of government securities by the Fed?

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

The Fed can raise the discount rate when it wants to:

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

When the Fed conducts open market operations, it buys and sells:

Assume a simplified banking system subject to a 25 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:

The percentage of checkable deposits that banks and other financial intermediaries are required to keep in cash reserves is known as:

If the required reserve ratio is 4 percent, then $100 of reserves can support up to $2,500 of checkable deposits.

In a simplified system, a bank receiving a new deposit can extend new loans equal to the amount by which its excess reserves increase.

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

When the required reserve ratio is changed,

A banking system that provides people immediate access to their deposits, but that allows banks to hold only a portion of those deposits on reserve, is known as:

If banks cannot lend all of their excess reserves:

In a commercial bank's T-account, reserves and outstanding loans are recorded as:

If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can:

If loans are $69,000, excess reserves are $1,400, and checkable deposits are $80,000, then the required reserve ratio must be:

Best National Bank is subject to a 20 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of:

Exhibit 19-1 Balance sheet of First Iliad State Bank In Exhibit 19-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:

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

The federal funds rate is:

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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