Question 1

The balance sheet for a commercial bank shows the bank's:

Accepted Answer

A)  required reserves as assets and excess reserves as liabilities. 
B)  loans as assets and required reserves as liabilities. 
C)  loans as assets and checkable deposits as liabilities. 
D)  checkable deposits as assets and loans as liabilities. 
E)  excess reserves as assets and required reserves as liabilities. 
A)  required reserves as assets and excess reserves as liabilities. 
B)  loans as assets and required reserves as liabilities. 
C)  loans as assets and checkable deposits as liabilities. 
D)  checkable deposits as assets and loans as liabilities. 
E)  excess reserves as assets and required reserves as liabilities.

Question 2

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 3

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.

Question 4

In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio,a $1,000 open market sale by the Fed to a bank would cause the money supply to:

Accepted Answer

A)  increase by $1,000. 
B)  increase by $100,000. 
C)  decrease by $10,000. 
D)  decrease by $1,000. 
E)  remain unchanged. 
A)  increase by $1,000. 
B)  increase by $100,000. 
C)  decrease by $10,000. 
D)  decrease by $1,000. 
E)  remain unchanged.

Question 5

The interest rate in the federal funds market:

Accepted Answer

A)  is determined by the imposition of price controls imposed by the Fed. 
B)  rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves. 
C)  will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks. 
D)  is an interest rate that is largely unaffected by the policies of the Fed. 
A)  is determined by the imposition of price controls imposed by the Fed. 
B)  rises when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves. 
C)  will fall if the Fed sells bonds and, thereby, reduces the reserves available to banks. 
D)  is an interest rate that is largely unaffected by the policies of the Fed.

Question 6

The federal funds market is the market where:

Accepted Answer

A)  the federal government raises funds to cover its budget deficit. 
B)  the Federal Reserve System makes loans to commercial banks. 
C)  commercial banks with excess reserves make loans to commercial banks seeking reserves. 
D)  commercial banks make loans to the Federal Reserve. 
A)  the federal government raises funds to cover its budget deficit. 
B)  the Federal Reserve System makes loans to commercial banks. 
C)  commercial banks with excess reserves make loans to commercial banks seeking reserves. 
D)  commercial banks make loans to the Federal Reserve.

Question 7

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 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

A bank creates money when it:

Accepted Answer

A)  gets new checkable deposits which the depositor formerly held as cash. 
B)  has a loan paid off, which creates excess reserves for the bank. 
C)  makes a loan from its excess reserves. 
D)  holds back excess reserves because of an increase in the required reserve ratio. 
E)  gets more excess reserves because of a decrease in the required reserve ratio. 
A)  gets new checkable deposits which the depositor formerly held as cash. 
B)  has a loan paid off, which creates excess reserves for the bank. 
C)  makes a loan from its excess reserves. 
D)  holds back excess reserves because of an increase in the required reserve ratio. 
E)  gets more excess reserves because of a decrease in the required reserve ratio.

Question 10

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 11

When the Fed decreases the required reserve ratio,then the:

Accepted Answer

A)  ability of banks to make loans is restricted. 
B)  ability of banks to make loans is enhanced. 
C)  ability of banks to make loans is unaffected. 
D)  interest rate that banks pay to the Fed to borrow money is reduced. 
E)  interest rate that banks pay other banks to borrow money is decreased. 
A)  ability of banks to make loans is restricted. 
B)  ability of banks to make loans is enhanced. 
C)  ability of banks to make loans is unaffected. 
D)  interest rate that banks pay to the Fed to borrow money is reduced. 
E)  interest rate that banks pay other banks to borrow money is decreased.

Question 12

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 Odyssey National can increase the money supply by:

Accepted Answer

A)  $900. 
B)  $910. 
C)  $1,000. 
D)  $9,000. 
E)  $10,000. 
A)  $900. 
B)  $910. 
C)  $1,000. 
D)  $9,000. 
E)  $10,000.

Question 13

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

Accepted Answer

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

Question 14

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 15

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 16

If the Fed decides to use an open market operation to reduce the money supply by $1 million,and if the money multiplier is 10,then what total amount of Treasury securities must the Fed initially sell?

Accepted Answer

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

Question 17

Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million.If the required reserve ratio was increased from 20 percent to 40 percent,how much would the money supply shrink?

Accepted Answer

A)  $5 million. 
B)  $10 million. 
C)  $15 million. 
D)  $20 million. 
E)  $24 million. 
A)  $5 million. 
B)  $10 million. 
C)  $15 million. 
D)  $20 million. 
E)  $24 million.

Question 18

Banks do not create money when they make loans.

Accepted Answer

A) True 
 B)False

Question 19

If the required reserve ratio is 10 percent,$1,000 cash deposited into a checkable deposit account will generate,assuming willing borrowers,an increase in the money supply of:

Accepted Answer

A)  $900. 
B)  $1,100. 
C)  $9,000. 
D)  $10,000. 
E)  $11,000. 
A)  $900. 
B)  $1,100. 
C)  $9,000. 
D)  $10,000. 
E)  $11,000.

Question 20

Which of the following appears on the asset side of a bank's balance sheet?

Accepted Answer

A)  Excess reserves. 
B)  Loans. 
C)  Required reserves. 
D)  None of the above. 
E)  All of the above. 
A)  Excess reserves. 
B)  Loans. 
C)  Required reserves. 
D)  None of the above. 
E)  All of the above.

Exam 19: Money Creation

The balance sheet for a commercial bank shows the bank's:

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:

When the Fed lowers the discount rate,it:

In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio,a $1,000 open market sale by the Fed to a bank would cause the money supply to:

The interest rate in the federal funds market:

The federal funds market is the market where:

Which of the following is a valid statement?

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

A bank creates money when it:

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 decreases the required reserve ratio,then the:

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 Odyssey National can increase the money supply by:

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

The federal funds rate is the interest rate that:

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

If the Fed decides to use an open market operation to reduce the money supply by $1 million,and if the money multiplier is 10,then what total amount of Treasury securities must the Fed initially sell?

Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million.If the required reserve ratio was increased from 20 percent to 40 percent,how much would the money supply shrink?

Banks do not create money when they make loans.

If the required reserve ratio is 10 percent,$1,000 cash deposited into a checkable deposit account will generate,assuming willing borrowers,an increase in the money supply of:

Which of the following appears on the asset side of a bank's balance sheet?

Introducing the Economic Way of Thinking

A: Appendix: Applying Graphs to Economics

Production Possibilities,Opportunity Cost,and Economic Growth

Part 1: Market Demand and Supply

Part 2: 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

A: Appendix: The Self-Correcting Aggregate Demand and Supply Model

Fiscal Policy

The Public Sector

Federal Deficits,Surpluses,and the National Debt

Money and the Federal Reserve System

Monetary Policy

A: Appendix: 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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