Question 1

In the banking system of the United States, banks that wish to borrow to make up reserve deficiencies must turn to the federal funds market.

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

If your bank faces a 20 percent required reserve ratio and receives a checkable deposit of $4,000, it can make additional loans worth a maximum of:

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 4

How can the Fed increase the money supply? How can the Fed decrease the money supply? Be specific.

Accepted Answer

To increase the money supply the Fed sho

Question 5

In a simplified system where all banks have uniform reserve requirements and checkable deposits are the only form of money, the money multiplier is equal to 1 over the required reserve ratio.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following does not appear on the asset side of a bank's balance sheet?

Accepted Answer

A)  Required reserves. 
B)  Checkable deposits. 
C)  Loans. 
D)  Excess reserves. 
A)  Required reserves. 
B)  Checkable deposits. 
C)  Loans. 
D)  Excess reserves.

Question 7

If a bank that is subject to a 10 percent required reserve ratio has $20,000 in excess reserves, it can make new loans of:

Accepted Answer

A)  $2,000. 
B)  $18,000. 
C)  $20,000. 
D)  $200,000. 
A)  $2,000. 
B)  $18,000. 
C)  $20,000. 
D)  $200,000.

Question 8

The interest rate which the Fed charges banks that borrow reserves from it is the:

Accepted Answer

A)  federal funds rate. 
B)  discount rate. 
C)  reserved rate. 
D)  investment rate. 
E)  check rate 
A)  federal funds rate. 
B)  discount rate. 
C)  reserved rate. 
D)  investment rate. 
E)  check rate

Question 9

Which of the following will make the real-world money multiplier smaller than the theoretical formula?

Accepted Answer

A)  Banks actually hold fewer reserves than technically required by the Fed. 
B)  Banks actually make loans for more money than they have in excess reserves. 
C)  Banks may keep some excess reserves rather than loan it all out. 
D)  Both a. and b. above are correct. 
A)  Banks actually hold fewer reserves than technically required by the Fed. 
B)  Banks actually make loans for more money than they have in excess reserves. 
C)  Banks may keep some excess reserves rather than loan it all out. 
D)  Both a. and b. above are correct.

Question 10

A decrease in the required reserve ratio will:

Accepted Answer

A)  reduce commercial bank loans and reduce the money supply. 
B)  increase commercial bank loans and reduce the money supply. 
C)  increase commercial bank loans and increase the money supply. 
D)  decrease commercial bank loans and increase the money supply. 
A)  reduce commercial bank loans and reduce the money supply. 
B)  increase commercial bank loans and reduce the money supply. 
C)  increase commercial bank loans and increase the money supply. 
D)  decrease commercial bank loans and increase the money supply.

Question 11

In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-market purchase by the Fed would cause the money supply to:

Accepted Answer

A)  increase by $1,000. 
B)  decrease by $1,000. 
C)  decrease by $4,000. 
D)  increase by $4,000. 
A)  increase by $1,000. 
B)  decrease by $1,000. 
C)  decrease by $4,000. 
D)  increase by $4,000.

Question 12

Assume a bank has total deposits of $100,000 and $20,000 is set aside to meet reserve requirements of the Fed. Its required reserve ratio is:

Accepted Answer

A)  $20,000. 
B)  20 percent. 
C)  0.2 percent. 
D)  1 percent. 
A)  $20,000. 
B)  20 percent. 
C)  0.2 percent. 
D)  1 percent.

Question 13

A decrease in the discount rate by the Federal Reserve causes the money stock to expand.

Accepted Answer

A) True 
 B)False

Question 14

The required reserves of a bank are:

Accepted Answer

A)  held as deposits with the Federal Reserve System. 
B)  equal to its loans. 
C)  equal to its checkable deposits. 
D)  none of the above. 
A)  held as deposits with the Federal Reserve System. 
B)  equal to its loans. 
C)  equal to its checkable deposits. 
D)  none of the above.

Question 15

Which of the following directs open market operations?

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 16

Which of the following is the most frequently used tool the Fed uses to control the supply of money?

Accepted Answer

A)  The discount rate. 
B)  The reserve requirements. 
C)  Open market operations. 
D)  The 30-year home-mortgage interest rate. 
A)  The discount rate. 
B)  The reserve requirements. 
C)  Open market operations. 
D)  The 30-year home-mortgage interest rate.

Question 17

Bank reserves will increase over time when:

Accepted Answer

A)  the Fed sells government securities on the open market. 
B)  the Treasury sells government securities on the open market. 
C)  depositors take funds out of their checkable deposit accounts. 
D)  the Fed buys government securities on the open market. 
E)  the Fed lowers the discount rate. 
A)  the Fed sells government securities on the open market. 
B)  the Treasury sells government securities on the open market. 
C)  depositors take funds out of their checkable deposit accounts. 
D)  the Fed buys government securities on the open market. 
E)  the Fed lowers the discount rate.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Exhibit 19-5  Balance sheet of Tucker National Bank   If all banks in the system shown in Exhibit 19-5 were identical to Tucker National Bank, the money multiplier for the system would be:

Accepted Answer

A)  4. 
B)  5. 
C)  10. 
D)  25. 
A)  4. 
B)  5. 
C)  10. 
D)  25.

Question 20

Most of the Fed's assets are held in the form of loans to its member banks.

Accepted Answer

A) True 
 B)False

Exam 19: Money Creation

In the banking system of the United States, banks that wish to borrow to make up reserve deficiencies must turn to the federal funds market.

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

If your bank faces a 20 percent required reserve ratio and receives a checkable deposit of $4,000, it can make additional loans worth a maximum of:

How can the Fed increase the money supply? How can the Fed decrease the money supply? Be specific.

In a simplified system where all banks have uniform reserve requirements and checkable deposits are the only form of money, the money multiplier is equal to 1 over the required reserve ratio.

Which of the following does not appear on the asset side of a bank's balance sheet?

If a bank that is subject to a 10 percent required reserve ratio has $20,000 in excess reserves, it can make new loans of:

The interest rate which the Fed charges banks that borrow reserves from it is the:

Which of the following will make the real-world money multiplier smaller than the theoretical formula?

A decrease in the required reserve ratio will:

In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-market purchase by the Fed would cause the money supply to:

Assume a bank has total deposits of $100,000 and $20,000 is set aside to meet reserve requirements of the Fed. Its required reserve ratio is:

A decrease in the discount rate by the Federal Reserve causes the money stock to expand.

The required reserves of a bank are:

Which of the following directs open market operations?

Which of the following is the most frequently used tool the Fed uses to control the supply of money?

Bank reserves will increase over time when:

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

Exhibit 19-5 Balance sheet of Tucker National Bank If all banks in the system shown in Exhibit 19-5 were identical to Tucker National Bank, the money multiplier for the system would be:

Most of the Fed's assets are held in the form of loans to its member banks.

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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