Question 1

When the Fed wishes to reduce the economy's money supply, it:

Accepted Answer

A)  lowers the discount rate. 
B)  lowers the required reserve ratio. 
C)  reduces the margin requirement. 
D)  sells some of its government securities. 
E)  prints more money. 
A)  lowers the discount rate. 
B)  lowers the required reserve ratio. 
C)  reduces the margin requirement. 
D)  sells some of its government securities. 
E)  prints more money.

Question 2

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)  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 3

The federal funds rate is the interest rate charged by:

Accepted Answer

A)  banks for loans to other banks. 
B)  the Fed for overnight loans. 
C)  the Fed for borrowed reserves. 
D)  the federal government on loans to member banks. 
A)  banks for loans to other banks. 
B)  the Fed for overnight loans. 
C)  the Fed for borrowed reserves. 
D)  the federal government on loans to member banks.

Question 4

The money multiplier equals:

Accepted Answer

A)  1/excess reserves. 
B)  excess reserves/loans. 
C)  required reserve ratio/excess reserves. 
D)  1/actual reserves. 
E)  1/required reserve ratio. 
A)  1/excess reserves. 
B)  excess reserves/loans. 
C)  required reserve ratio/excess reserves. 
D)  1/actual reserves. 
E)  1/required reserve ratio.

Question 5

Which of the following is a valid statement?

Accepted Answer

A)  Excess reserves = total reserves minus required reserves. 
B)  Required reserves = the minimum reserves required by the Fed. 
C)  Required reserve ratio = required reserves as a percentage to total deposits. 
D)  All of the above. 
A)  Excess reserves = total reserves minus required reserves. 
B)  Required reserves = the minimum reserves required by the Fed. 
C)  Required reserve ratio = required reserves as a percentage to total deposits. 
D)  All of the above.

Question 6

When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?

Accepted Answer

A)  It purchases U.S. government securities. 
B)  It increases the discount rate. 
C)  It increases the required reserve ratio. 
D)  It sells bonds on the open market. 
A)  It purchases U.S. government securities. 
B)  It increases the discount rate. 
C)  It increases the required reserve ratio. 
D)  It sells bonds on the open market.

Question 7

Exhibit 19-3  Balance sheet of Tucker National Bank   Assume all banks in the system started with balance sheets as shown in Exhibit 19-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

Accepted Answer

A)  $500,000 expansion of the money supply. 
B)  $100,000 expansion of the money supply. 
C)  $20,000 contraction of the money supply. 
D)  infinite contraction of the money supply. 
E)  infinite expansion of the money supply. 
A)  $500,000 expansion of the money supply. 
B)  $100,000 expansion of the money supply. 
C)  $20,000 contraction of the money supply. 
D)  infinite contraction of the money supply. 
E)  infinite expansion of the money supply.

Question 8

Exhibit 19-6  Balance sheet of Tucker National Bank   Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 19-6. The result would be a:

Accepted Answer

A)  zero change in required reserves. 
B)  $10,000 increase in required reserves. 
C)  $100,000 increase in required reserves. 
D)  $20,000 increase in excess reserves. 
A)  zero change in required reserves. 
B)  $10,000 increase in required reserves. 
C)  $100,000 increase in required reserves. 
D)  $20,000 increase in excess reserves.

Question 9

Suppose the Fed bought $150 million of U.S. securities from security dealers. The reserve requirement is 20 percent, and there are no initial excess reserves. A few weeks later, if the public's holdings of currency are constant and the banks have loaned all excess reserves, the money supply will increase by:

Accepted Answer

A)  $150 million. 
B)  $300 million. 
C)  $600 million. 
D)  $750 million. 
A)  $150 million. 
B)  $300 million. 
C)  $600 million. 
D)  $750 million.

Question 10

If the Fed decides to engage in an open market operation to increase the money supply, what will it do?

Accepted Answer

A)  Sell Treasury bonds, bills, or notes on the bond market. 
B)  Buy Treasury bonds, bills, or notes on the bond market. 
C)  Increase the required reserve ratio. 
D)  Increase the fed funds rate. 
A)  Sell Treasury bonds, bills, or notes on the bond market. 
B)  Buy Treasury bonds, bills, or notes on the bond market. 
C)  Increase the required reserve ratio. 
D)  Increase the fed funds rate.

Question 11

European banks began with which of the following?

Accepted Answer

A)  Monarchs were the first bankers, lending out cash to help the poor learn a craft. 
B)  Churches were the first bankers, lending out cash to help the poor learn a craft. 
C)  Goldsmiths were the first bankers, and the paper receipts they issued for gold held on deposit became valued as money. 
D)  Fishermen were the first bankers, and the paper receipts they issued for the fish they stored in the hulls of their ships became valued as money. 
A)  Monarchs were the first bankers, lending out cash to help the poor learn a craft. 
B)  Churches were the first bankers, lending out cash to help the poor learn a craft. 
C)  Goldsmiths were the first bankers, and the paper receipts they issued for gold held on deposit became valued as money. 
D)  Fishermen were the first bankers, and the paper receipts they issued for the fish they stored in the hulls of their ships became valued as money.

Question 12

The total lag for fiscal policy tends to be shorter than the total lag for monetary policy.

Accepted Answer

A) True 
 B)False

Question 13

Assume a simplified banking system subject to a 10 percent required reserve ratio. If there is an initial increase in excess reserves of $90,000 and all possible loans are made, the money supply:

Accepted Answer

A)  increases $90,000. 
B)  increases $900,000. 
C)  increases $990,000. 
D)  decreases $90,000. 
A)  increases $90,000. 
B)  increases $900,000. 
C)  increases $990,000. 
D)  decreases $90,000.

Question 14

Economists estimate that the total lag for monetary policy is about:

Accepted Answer

A)  1-2 days. 
B)  2 weeks to 1 month. 
C)  3-12 months. 
D)  2-4 years. 
A)  1-2 days. 
B)  2 weeks to 1 month. 
C)  3-12 months. 
D)  2-4 years.

Question 15

Exhibit 19-2  Balance Sheet of Springfield National Bank   In Exhibit 19-2, if Springfield National has excess reserves equal to $300, and the required reserve ratio increases to 35 percent, it will:

Accepted Answer

A)  be able to cover its increased reserve requirements from its excess reserves. 
B)  have to call in loans worth $350. 
C)  have to call in loans worth $250. 
D)  have to call in loans worth $200. 
E)  have to call in loans worth $150. 
A)  be able to cover its increased reserve requirements from its excess reserves. 
B)  have to call in loans worth $350. 
C)  have to call in loans worth $250. 
D)  have to call in loans worth $200. 
E)  have to call in loans worth $150.

Question 16

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

Accepted Answer

A)  Reducing the required reserve ratio. 
B)  Selling government bonds in the open market. 
C)  Increasing the discount rate. 
D)  None of the above. 
A)  Reducing the required reserve ratio. 
B)  Selling government bonds in the open market. 
C)  Increasing the discount rate. 
D)  None of the above.

Question 17

As discussed in the text, a bank can extend new loans equal to the amount by which its excess reserves increase.

Accepted Answer

A) True 
 B)False

Question 18

In a simplified banking system, the money multiplier falls as the required reserve ratio decreases.

Accepted Answer

A) True 
 B)False

Question 19

Reserve of banks appears on their balance sheet as liabilities.

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 19-2  Balance Sheet of Springfield National Bank   In Exhibit 19-2, if Springfield National finds that it has excess reserves of $300, then the required reserve ratio must be:

Accepted Answer

A)  30 percent. 
B)  0.30 percent. 
C)  0.80 percent. 
D)  0.20 percent. 
E)  20 percent. 
A)  30 percent. 
B)  0.30 percent. 
C)  0.80 percent. 
D)  0.20 percent. 
E)  20 percent.

Exam 19: Money Creation

When the Fed wishes to reduce the economy's money supply, it:

When the Fed sells government securities, it:

The federal funds rate is the interest rate charged by:

The money multiplier equals:

Which of the following is a valid statement?

When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?

Exhibit 19-3 Balance sheet of Tucker National Bank Assume all banks in the system started with balance sheets as shown in Exhibit 19-3 and the Fed made a $100,000 open market purchase. The result would be a(n):

Exhibit 19-6 Balance sheet of Tucker National Bank Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 19-6. The result would be a:

If the Fed decides to engage in an open market operation to increase the money supply, what will it do?

European banks began with which of the following?

The total lag for fiscal policy tends to be shorter than the total lag for monetary policy.

Assume a simplified banking system subject to a 10 percent required reserve ratio. If there is an initial increase in excess reserves of $90,000 and all possible loans are made, the money supply:

Economists estimate that the total lag for monetary policy is about:

Exhibit 19-2 Balance Sheet of Springfield National Bank In Exhibit 19-2, if Springfield National has excess reserves equal to $300, and the required reserve ratio increases to 35 percent, it will:

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

As discussed in the text, a bank can extend new loans equal to the amount by which its excess reserves increase.

In a simplified banking system, the money multiplier falls as the required reserve ratio decreases.

Reserve of banks appears on their balance sheet as liabilities.

Exhibit 19-2 Balance Sheet of Springfield National Bank In Exhibit 19-2, if Springfield National finds that it has excess reserves of $300, then the required reserve ratio must be:

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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