Question 1

The buying and selling of government securities by the Fed is known as:

Accepted Answer

A)  open market operations. 
B)  federal bond operations. 
C)  treasury bond operations. 
D)  open bonds operations. 
E)  discount rate operations. 
A)  open market operations. 
B)  federal bond operations. 
C)  treasury bond operations. 
D)  open bonds operations. 
E)  discount rate operations.

Question 2

Exhibit 19-4  Balance sheet of Tucker National Bank   The required reserve ratio in Exhibit 19-4 is:

Accepted Answer

A)  5 percent. 
B)  10 percent. 
C)  15 percent. 
D)  20 percent. 
A)  5 percent. 
B)  10 percent. 
C)  15 percent. 
D)  20 percent.

Question 3

Exhibit 19-7  Lower Walloon National Bank   In Exhibit 19-7, if the required reserve ratio is 20 percent, and Mr. Brown deposits $10,000 in Lower Walloon National Bank. The Lower Walloon National bank has excess reserves of:

Accepted Answer

A)  $2,000. 
B)  $8,000. 
C)  $0. 
D)  $10,000. 
E)  $40,000. 
A)  $2,000. 
B)  $8,000. 
C)  $0. 
D)  $10,000. 
E)  $40,000.

Question 4

Which of the following would cause the money supply in the United States to decrease?

Accepted Answer

A)  an increase in reserve requirements 
B)  a decrease in the discount rate 
C)  a purchase of U.S. government bonds by the Federal Reserve 
D)  an increase in the world supply of gold 
A)  an increase in reserve requirements 
B)  a decrease in the discount rate 
C)  a purchase of U.S. government bonds by the Federal Reserve 
D)  an increase in the world supply of gold

Question 5

Banks that wish to borrow required reserves can turn to the federal funds market.

Accepted Answer

A) True 
 B)False

Question 6

The major assets and liabilities of a bank are:

Accepted Answer

A)  checkable deposits and total reserves, respectively. 
B)  checkable deposits and gold, respectively. 
C)  total reserves and checkable deposits, respectively. 
D)  total reserves and excess reserves, respectively. 
E)  checkable deposits and excess reserves, respectively. 
A)  checkable deposits and total reserves, respectively. 
B)  checkable deposits and gold, respectively. 
C)  total reserves and checkable deposits, respectively. 
D)  total reserves and excess reserves, respectively. 
E)  checkable deposits and excess reserves, respectively.

Question 7

The required reserve ratio is the percentage of total deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed.

Accepted Answer

A) True 
 B)False

Question 8

Assume the Fed purchases a government security from a private dealer and pays with a Fed check of $100,000. If this check is deposited by the dealer in a bank with a 10 percent required reserve ratio, the bank can extend new loans in the amount of:

Accepted Answer

A)  $20,000. 
B)  $90,000. 
C)  $100,000. 
D)  $120,000. 
A)  $20,000. 
B)  $90,000. 
C)  $100,000. 
D)  $120,000.

Question 9

When the Fed buys 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 10

Suppose a securities dealer sells a $10,000 Treasury bond to the Fed and deposits the money in its bank account. If the required reserve ratio is 10 percent, and if banks loan out all of their excess reserves, then what is the maximum increases in the money supply after the multiplier effect has fully operated?

Accepted Answer

A)  $1,000. 
B)  $10,000. 
C)  $90,000. 
D)  $1,000,000. 
A)  $1,000. 
B)  $10,000. 
C)  $90,000. 
D)  $1,000,000.

Question 11

If the banking system's money multiplier is 4, then a $2,000 increase in checkable deposits when banks hold excess reserves will result in which of the following events?

Accepted Answer

A)  The money supply will decrease 
B)  The money supply will not change. 
C)  The money supply will increase by exactly $8,000. 
D)  The money supply will increase by more than $8,000. 
E)  The money supply will increase by less than $8,000. 
A)  The money supply will decrease 
B)  The money supply will not change. 
C)  The money supply will increase by exactly $8,000. 
D)  The money supply will increase by more than $8,000. 
E)  The money supply will increase by less than $8,000.

Question 12

Exhibit 19-5  Balance sheet of Tucker National Bank   The required reserve ratio in Exhibit 19-5 is:

Accepted Answer

A)  10 percent. 
B)  15 percent. 
C)  20 percent. 
D)  25 percent. 
A)  10 percent. 
B)  15 percent. 
C)  20 percent. 
D)  25 percent.

Question 13

Exhibit 19-4  Balance sheet of Tucker National Bank   Suppose Connie Rich deposits $500 in the bank in Exhibit 19-4. The result would be that the bank must increase its required reserves to:

Accepted Answer

A)  $4,100. 
B)  $4,500. 
C)  $5,100. 
D)  $5,500. 
A)  $4,100. 
B)  $4,500. 
C)  $5,100. 
D)  $5,500.

Question 14

During a period of inflation, the Fed is likely to:

Accepted Answer

A)  sell government securities to banks in order to reduce the amount of loanable funds. 
B)  buy government securities from banks in order to reduce the amount of loanable funds. 
C)  raise taxes in order to reduce the money supply. 
D)  cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out. 
E)  cut the discount rate in order to increase the affordability of loanable funds. 
A)  sell government securities to banks in order to reduce the amount of loanable funds. 
B)  buy government securities from banks in order to reduce the amount of loanable funds. 
C)  raise taxes in order to reduce the money supply. 
D)  cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out. 
E)  cut the discount rate in order to increase the affordability of loanable funds.

Question 15

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its excess reserve balance will be:

Accepted Answer

A)  $0. 
B)  $90. 
C)  $100. 
D)  $900. 
E)  $910. 
A)  $0. 
B)  $90. 
C)  $100. 
D)  $900. 
E)  $910.

Question 16

When the Fed lowers the required reserve ratio, 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 17

The interest rate that banks charge other banks for short-term loans is the:

Accepted Answer

A)  discount rate. 
B)  prime rate. 
C)  treasury rate. 
D)  federal funds rate. 
E)  interbank rate. 
A)  discount rate. 
B)  prime rate. 
C)  treasury rate. 
D)  federal funds rate. 
E)  interbank rate.

Question 18

Suppose Wilma accepts a loan of $10,000 and deposits the money in her checking account. If the required reserve ratio is 20 percent, and if banks loan out all of their reserves, then what is the maximum increase in the money supply after the multiplier effect has fully operated?

Accepted Answer

A)  $2,000. 
B)  $20,000. 
C)  $50,000. 
D)  $45,000. 
E)  $255,000. 
A)  $2,000. 
B)  $20,000. 
C)  $50,000. 
D)  $45,000. 
E)  $255,000.

Question 19

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its required reserves balance will be:

Accepted Answer

A)  $0. 
B)  $90. 
C)  $100. 
D)  $900. 
E)  $910 
A)  $0. 
B)  $90. 
C)  $100. 
D)  $900. 
E)  $910

Question 20

When the Fed lowers 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.

Exam 19: Money Creation

The buying and selling of government securities by the Fed is known as:

Exhibit 19-4 Balance sheet of Tucker National Bank The required reserve ratio in Exhibit 19-4 is:

Exhibit 19-7 Lower Walloon National Bank In Exhibit 19-7, if the required reserve ratio is 20 percent, and Mr. Brown deposits $10,000 in Lower Walloon National Bank. The Lower Walloon National bank has excess reserves of:

Which of the following would cause the money supply in the United States to decrease?

Banks that wish to borrow required reserves can turn to the federal funds market.

The major assets and liabilities of a bank are:

The required reserve ratio is the percentage of total deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed.

Assume the Fed purchases a government security from a private dealer and pays with a Fed check of $100,000. If this check is deposited by the dealer in a bank with a 10 percent required reserve ratio, the bank can extend new loans in the amount of:

When the Fed buys government securities, it:

If the banking system's money multiplier is 4, then a $2,000 increase in checkable deposits when banks hold excess reserves will result in which of the following events?

Exhibit 19-5 Balance sheet of Tucker National Bank The required reserve ratio in Exhibit 19-5 is:

Exhibit 19-4 Balance sheet of Tucker National Bank Suppose Connie Rich deposits $500 in the bank in Exhibit 19-4. The result would be that the bank must increase its required reserves to:

During a period of inflation, the Fed is likely to:

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its excess reserve balance will be:

When the Fed lowers the required reserve ratio, it:

The interest rate that banks charge other banks for short-term loans is the:

Suppose Wilma accepts a loan of $10,000 and deposits the money in her checking account. If the required reserve ratio is 20 percent, and if banks loan out all of their reserves, then what is the maximum increase in the money supply after the multiplier effect has fully operated?

Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 deposit, then its required reserves balance will be:

When the Fed lowers the discount rate, 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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