Question 1

What interest rate does a bank pay when it borrows reserves from the Fed?

Accepted Answer

A)  The discount rate. 
B)  The prime rate. 
C)  The federal funds rate. 
D)  The required reserve rate. 
A)  The discount rate. 
B)  The prime rate. 
C)  The federal funds rate. 
D)  The required reserve rate.

Question 2

Assume we have a simplified banking system in balance-sheet equilibrium.Also assume that all banks are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of money.A commercial bank receiving a new checkable deposit of $100 would be able to extend new loans in the amount of:

Accepted Answer

A)  $10. 
B)  $90. 
C)  $100. 
D)  $1,000. 
A)  $10. 
B)  $90. 
C)  $100. 
D)  $1,000.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Real-world accuracy of the money multiplier can be affected by:

Accepted Answer

A)  the amount of loans provided by nonbanks. 
B)  the way the public divides its holding of M1 between currency and certificates of deposit. 
C)  the willingness of banks to loan excess reserves. 
D)  all of the above. 
A)  the amount of loans provided by nonbanks. 
B)  the way the public divides its holding of M1 between currency and certificates of deposit. 
C)  the willingness of banks to loan excess reserves. 
D)  all of the above.

Question 5

The money supply will grow faster through deposit creation when the required reserve ratio is:

Accepted Answer

A)  high and banks hold excess reserves. 
B)  high and banks cannot find good customers to lend to. 
C)  low and banks are able to lend out all of their excess reserves. 
D)  low and banks are unable to loan out all of their excess reserves. 
E)  high and banks are not able to loan out all of their excess reserves. 
A)  high and banks hold excess reserves. 
B)  high and banks cannot find good customers to lend to. 
C)  low and banks are able to lend out all of their excess reserves. 
D)  low and banks are unable to loan out all of their excess reserves. 
E)  high and banks are not able to loan out all of their excess reserves.

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 people refused to use banks to create checkable deposits,the banking system would:

Accepted Answer

A)  not be affected in the money creating process. 
B)  not have a way to loan out excess reserves. 
C)  be able to expand the money supply by more than the money multiplier indicates. 
D)  not be able to create new money. 
E)  not be able to find new borrowers. 
A)  not be affected in the money creating process. 
B)  not have a way to loan out excess reserves. 
C)  be able to expand the money supply by more than the money multiplier indicates. 
D)  not be able to create new money. 
E)  not be able to find new borrowers.

Question 8

The term "open market operations" refers to the:

Accepted Answer

A)  loan-making activities of commercial banks. 
B)  effect of expansionary monetary policy on interest rates. 
C)  operation of competitive markets in the banking industry as the result of deregulation. 
D)  buying and selling of government securities by the Federal Reserve. 
A)  loan-making activities of commercial banks. 
B)  effect of expansionary monetary policy on interest rates. 
C)  operation of competitive markets in the banking industry as the result of deregulation. 
D)  buying and selling of government securities by the Federal Reserve.

Question 9

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

Accepted Answer

A)  Required reserve deposits. 
B)  Loans. 
C)  Excess reserves. 
D)  All of the above. 
A)  Required reserve deposits. 
B)  Loans. 
C)  Excess reserves. 
D)  All of the above.

Question 10

Exhibit 19-4 Balance sheet of Tucker National Bank
  
-Assume all banks in the system started with the balance sheet shown in Exhibit 19-4 and the Fed makes a $1,000 open market purchase.The result would be a(n):

Accepted Answer

A)  infinite contraction of the money supply. 
B)  infinite expansion of the money supply. 
C)  $1,000 expansion of the money supply. 
D)  $5,000 expansion of the money supply. 
A)  infinite contraction of the money supply. 
B)  infinite expansion of the money supply. 
C)  $1,000 expansion of the money supply. 
D)  $5,000 expansion of the money supply.

Question 11

If the Fed sells $10 million in bonds to a bank,and the required reserve ratio is 20 percent,then the banking system can:

Accepted Answer

A)  decrease the money supply by up to $10 million. 
B)  decrease the money supply by up to $40 million. 
C)  decrease the money supply by up to $50 million. 
D)  decrease the money supply by up to $ 2 million. 
E)  increase the money supply by up to $50 million. 
A)  decrease the money supply by up to $10 million. 
B)  decrease the money supply by up to $40 million. 
C)  decrease the money supply by up to $50 million. 
D)  decrease the money supply by up to $ 2 million. 
E)  increase the money supply by up to $50 million.

Question 12

Exhibit 19-7 Lower Walloon National Bank
  
-In Exhibit 19-7,if Mr.Brown pays out all of the proceeds of the loan to Mr.John White who is going to make the renovations of the restaurant,the Lower Walloon National bank will now have:

Accepted Answer

A)  $6,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
B)  $2,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
C)  $2,000 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
D)  $0 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
E)  $10,000 in reserves, $8,000 in loans, and $2,000 in checkable deposits. 
A)  $6,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
B)  $2,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits. 
C)  $2,000 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
D)  $0 in reserves, $8,000 in loans, and $10,000 in checkable deposits. 
E)  $10,000 in reserves, $8,000 in loans, and $2,000 in checkable deposits.

Question 13

The discount rate is the interest rate:

Accepted Answer

A)  commercial banks charge their low-risk customers for a loan. 
B)  savings and loan associations pay for using savings deposit funds. 
C)  the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000 or more. 
D)  the Federal Reserve charges banking institutions for borrowing its funds. 
A)  commercial banks charge their low-risk customers for a loan. 
B)  savings and loan associations pay for using savings deposit funds. 
C)  the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000 or more. 
D)  the Federal Reserve charges banking institutions for borrowing its funds.

Question 14

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 15

When the Fed buys federal government securities on the open market from commercial banks,then,over time,the:

Accepted Answer

A)  assets of these banks fall. 
B)  assets of the banks stay the same. 
C)  assets of the banks rise. 
D)  liabilities of the bank rise. 
E)  liabilities of the bank fall. 
A)  assets of these banks fall. 
B)  assets of the banks stay the same. 
C)  assets of the banks rise. 
D)  liabilities of the bank rise. 
E)  liabilities of the bank fall.

Question 16

When the Fed purchases government securities,it:

Accepted Answer

A)  increases banks' reserves and makes possible an increase in the money supply. 
B)  decreases banks' reserves and makes possible a decrease in the money supply. 
C)  automatically raises the discount rate. 
D)  uses discounting operations to influence margin requirements. 
E)  has no effect on either the money supply or the discount rate. 
A)  increases banks' reserves and makes possible an increase in the money supply. 
B)  decreases banks' reserves and makes possible a decrease in the money supply. 
C)  automatically raises the discount rate. 
D)  uses discounting operations to influence margin requirements. 
E)  has no effect on either the money supply or the discount rate.

Question 17

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

Question 18

Which of the following would cause the money supply to increase?

Accepted Answer

A)  An open market purchase by the Fed. 
B)  A reduction in the discount rate. 
C)  A reduction in required ratios. 
D)  All of the above. 
A)  An open market purchase by the Fed. 
B)  A reduction in the discount rate. 
C)  A reduction in required ratios. 
D)  All of the above.

Question 19

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 20

In order for a bank to earn as much profit as possible,its excess reserves should be:

Accepted Answer

A)  equal to its required reserves. 
B)  as small as possible. 
C)  less than its vault cash. 
D)  growing at a constant rate. 
A)  equal to its required reserves. 
B)  as small as possible. 
C)  less than its vault cash. 
D)  growing at a constant rate.

Exam 19: Money Creation

What interest rate does a bank pay when it borrows reserves from the Fed?

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

Real-world accuracy of the money multiplier can be affected by:

The money supply will grow faster through deposit creation when the required reserve ratio is:

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

If people refused to use banks to create checkable deposits,the banking system would:

The term "open market operations" refers to the:

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

Exhibit 19-4 Balance sheet of Tucker National Bank -Assume all banks in the system started with the balance sheet shown in Exhibit 19-4 and the Fed makes a $1,000 open market purchase.The result would be a(n):

If the Fed sells $10 million in bonds to a bank,and the required reserve ratio is 20 percent,then the banking system can:

Exhibit 19-7 Lower Walloon National Bank -In Exhibit 19-7,if Mr.Brown pays out all of the proceeds of the loan to Mr.John White who is going to make the renovations of the restaurant,the Lower Walloon National bank will now have:

The discount rate is the interest rate:

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

When the Fed buys federal government securities on the open market from commercial banks,then,over time,the:

When the Fed purchases government securities,it:

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

Which of the following would cause the money supply to increase?

The discount rate is the interest rate charged by:

In order for a bank to earn as much profit as possible,its excess reserves should be:

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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