Question 1

The federal funds rate is the interest rate that:

Accepted Answer

A)  the government charges banks to borrow money 
B)  the Fed charges banks to borrow money 
C)  the federal government pays to borrow money 
D)  federally chartered banks charge their customers for commercial loans. 
E)  banks charge other banks for short-term loans. 
A)  the government charges banks to borrow money 
B)  the Fed charges banks to borrow money 
C)  the federal government pays to borrow money 
D)  federally chartered banks charge their customers for commercial loans. 
E)  banks charge other banks for short-term loans.

Question 2

The discount rate is the interest rate charged by:

Accepted Answer

A)  major banks to their best customers. 
B)  banks for overnight loans to other banks. 
C)  the Fed on loans of reserves to banks. 
D)  banks for loans of less than 24 hours. 
A)  major banks to their best customers. 
B)  banks for overnight loans to other banks. 
C)  the Fed on loans of reserves to banks. 
D)  banks for loans of less than 24 hours.

Question 3

In a simplified banking system with a 20 percent required reserve ratio, a $1,000 open-market sale by the Fed would cause the money supply to:

Accepted Answer

A)  increase by $200. 
B)  decrease by $200. 
C)  decrease by $5,000. 
D)  increase by $5,000. 
A)  increase by $200. 
B)  decrease by $200. 
C)  decrease by $5,000. 
D)  increase by $5,000.

Question 4

If the Fed wishes to increase the money supply then it should:

Accepted Answer

A)  increase the required reserve ratio. 
B)  increase the discount rate. 
C)  buy government securities on the open market. 
D)  do any of the above. 
A)  increase the required reserve ratio. 
B)  increase the discount rate. 
C)  buy government securities on the open market. 
D)  do any of the above.

Question 5

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, 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 6

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:

Accepted Answer

A)  $1,000. 
B)  $9,000. 
C)  $10,000. 
D)  $100,000. 
A)  $1,000. 
B)  $9,000. 
C)  $10,000. 
D)  $100,000.

Question 7

When new checkable deposits are created through loans,

Accepted Answer

A)  the money supply contracts. 
B)  excess reserves are destroyed. 
C)  the money supply remains the same. 
D)  the money supply expands. 
E)  the required reserve ratio declines 
A)  the money supply contracts. 
B)  excess reserves are destroyed. 
C)  the money supply remains the same. 
D)  the money supply expands. 
E)  the required reserve ratio declines

Question 8

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

Accepted Answer

A)  An open market sale of government securities. 
B)  An increase in required reserve ratios. 
C)  A decrease in the discount rate. 
D)  All of the above. 
A)  An open market sale of government securities. 
B)  An increase in required reserve ratios. 
C)  A decrease in the discount rate. 
D)  All of the above.

Question 9

Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

Accepted Answer

A)  $100 million decrease in the money supply. 
B)  $100 million increase in the money supply. 
C)  $200 million increase in the money supply. 
D)  $500 million increase in the money supply. 
A)  $100 million decrease in the money supply. 
B)  $100 million increase in the money supply. 
C)  $200 million increase in the money supply. 
D)  $500 million increase in the money supply.

Question 10

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

Accepted Answer

A)  0.2. 
B)  1.2. 
C)  2. 
D)  2.5. 
E)  5. 
A)  0.2. 
B)  1.2. 
C)  2. 
D)  2.5. 
E)  5.

Question 11

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

Question 12

An open-market purchase by the Federal Reserve injects excess reserves into the banking system and allows the money supply to expand.

Accepted Answer

A) True 
 B)False

Question 13

The required reserve ratio for a bank is set by:

Accepted Answer

A)  Congress. 
B)  the bank itself. 
C)  the Treasury Department. 
D)  the banking system. 
E)  the Federal Reserve. 
A)  Congress. 
B)  the bank itself. 
C)  the Treasury Department. 
D)  the banking system. 
E)  the Federal Reserve.

Question 14

If there is a recession, 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 raising 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 raising the discount rate. 
D)  decrease bank reserves by selling government securities. 
E)  decrease bank reserves by lowering the legal reserve requirement.

Question 15

Banks do not create money when they make loans.

Accepted Answer

A) True 
 B)False

Question 16

An increase in the discount rate by the Federal Reserve causes the money stock to expand.

Accepted Answer

A) True 
 B)False

Question 17

The Fed's countercyclical policy tools to eliminate a recession include lowering:

Accepted Answer

A)  the required reserve ratio, cutting the discount rate, and selling government bonds on the open market. 
B)  the required reserve ratio, raising the discount rate, and selling government bonds on the open market. 
C)  the required reserve ratio, raising the discount rate, and buying government bonds on the open market. 
D)  the discount rate, cutting the discount rate, and raising the margin requirement. 
E)  the reserve requirement, lowering the discount rate, and buying government bonds on the open market. 
A)  the required reserve ratio, cutting the discount rate, and selling government bonds on the open market. 
B)  the required reserve ratio, raising the discount rate, and selling government bonds on the open market. 
C)  the required reserve ratio, raising the discount rate, and buying government bonds on the open market. 
D)  the discount rate, cutting the discount rate, and raising the margin requirement. 
E)  the reserve requirement, lowering the discount rate, and buying government bonds on the open market.

Question 18

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

Accepted Answer

A)  $800. 
B)  $3,200. 
C)  $4,000. 
D)  $16,000. 
E)  $20,000. 
A)  $800. 
B)  $3,200. 
C)  $4,000. 
D)  $16,000. 
E)  $20,000.

Question 19

__________ plus __________ plus __________ equals ___________. ​

Accepted Answer

A)  ​ Total deposits, loans, required reserves, excess reserves. 
B)  ​ Loans, required reserves, excess reserves, total deposits. 
C)  ​ Required reserves, total deposits, excess reserves, loans. 
D)  ​ Excess reserves, loans, total deposits, required reserves. 
A)  ​ Total deposits, loans, required reserves, excess reserves. 
B)  ​ Loans, required reserves, excess reserves, total deposits. 
C)  ​ Required reserves, total deposits, excess reserves, loans. 
D)  ​ Excess reserves, loans, total deposits, required reserves.

Question 20

Exhibit 19-1  Balance sheet of First Iliad State Bank   In Exhibit 19-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to convert loans worth:

Accepted Answer

A)  $9,000,000 to required reserves. 
B)  $1,500,000 to required reserves. 
C)  $500,000 to required reserves. 
D)  $1,000,000 to required reserves. 
E)  $450,000 to required reserves. 
A)  $9,000,000 to required reserves. 
B)  $1,500,000 to required reserves. 
C)  $500,000 to required reserves. 
D)  $1,000,000 to required reserves. 
E)  $450,000 to required reserves.

Exam 19: Money Creation

The federal funds rate is the interest rate that:

The discount rate is the interest rate charged by:

In a simplified banking system with a 20 percent required reserve ratio, a $1,000 open-market sale by the Fed would cause the money supply to:

If the Fed wishes to increase the money supply then it should:

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:

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:

When new checkable deposits are created through loans,

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

Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:

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

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

An open-market purchase by the Federal Reserve injects excess reserves into the banking system and allows the money supply to expand.

The required reserve ratio for a bank is set by:

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

Banks do not create money when they make loans.

An increase in the discount rate by the Federal Reserve causes the money stock to expand.

The Fed's countercyclical policy tools to eliminate a recession include lowering:

If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a checkable deposit account, the maximum total amount of money possible after the banking system makes all loans is:

__________ plus __________ plus __________ equals ___________. ​

Exhibit 19-1 Balance sheet of First Iliad State Bank In Exhibit 19-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to convert loans worth:

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

plus plus equals _.