Question 1

If the Fed purchases government securities on the open market,the money supply will

Accepted Answer

A) decrease 
B) increase only if the seller of those securities is a commercial bank 
C) increase only if the seller of those securities is a commercial bank belonging to the Fed 
D) increase through the system of securities dealers rather than through the commercial banking system 
E) increase through the commercial banking system regardless of who the seller is 
A) decrease 
B) increase only if the seller of those securities is a commercial bank 
C) increase only if the seller of those securities is a commercial bank belonging to the Fed 
D) increase through the system of securities dealers rather than through the commercial banking system 
E) increase through the commercial banking system regardless of who the seller is

Question 2

The ready cash kept on hand by a bank to meet the needs of those who want to withdraw funds does not earn interest for the bank.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is correct?

Accepted Answer

A) To control the money supply,the Fed relies primarily on the reserve requirement. 
B) The discount rate is the rate of interest banks charge to their best customers. 
C) The Fed changes the reserve requirement frequently. 
D) Because the Fed has no way to earn income,it is dependent upon Congress for appropriations. 
E) Banks can turn a borrower's IOU into money--i.e.,they can create money. 
A) To control the money supply,the Fed relies primarily on the reserve requirement. 
B) The discount rate is the rate of interest banks charge to their best customers. 
C) The Fed changes the reserve requirement frequently. 
D) Because the Fed has no way to earn income,it is dependent upon Congress for appropriations. 
E) Banks can turn a borrower's IOU into money--i.e.,they can create money.

Question 4

Banks differ from other types of businesses because banks

Accepted Answer

A) earn profits 
B) combine economic resources to produce services 
C) can go out of business 
D) can create money 
E) are regulated by the government 
A) earn profits 
B) combine economic resources to produce services 
C) can go out of business 
D) can create money 
E) are regulated by the government

Question 5

If the Fed buys a $1,000 U.S.government bond from a bank,it pays it by giving the bank $1,000 in reserves--reserves that it simply creates out of thin air.

Accepted Answer

A) True 
 B)False

Question 6

If people choose to hold some of a newly received loan as cash instead of keeping it in a checking account,the money supply

Accepted Answer

A) will not increase as a result of that loan 
B) decreases as a result of that loan 
C) will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal increases excess reserves 
D) will not increase as much from that point on as it would if borrowers redeposited all of the money because cash is not included in the money supply 
E) will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal decreases excess reserves 
A) will not increase as a result of that loan 
B) decreases as a result of that loan 
C) will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal increases excess reserves 
D) will not increase as much from that point on as it would if borrowers redeposited all of the money because cash is not included in the money supply 
E) will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal decreases excess reserves

Question 7

The Fed can increase the amount of excess reserves in the banking system by

Accepted Answer

A) lending at the discount window 
B) raising the required reserve ratio 
C) selling securities 
D) lowering the federal funds rate 
E) selling off member banks 
A) lending at the discount window 
B) raising the required reserve ratio 
C) selling securities 
D) lowering the federal funds rate 
E) selling off member banks

Question 8

If the Fed decreases the required reserve ratio at a time when banks are holding no excess reserves,the Fed is

Accepted Answer

A) forcing banks to increase the money supply 
B) forcing banks to decrease the money supply 
C) making it possible for banks to increase the money supply but not forcing them to do so 
D) making it possible for banks to decrease the money supply but not forcing them to do so 
E) conducting open market operations but not changing the money supply 
A) forcing banks to increase the money supply 
B) forcing banks to decrease the money supply 
C) making it possible for banks to increase the money supply but not forcing them to do so 
D) making it possible for banks to decrease the money supply but not forcing them to do so 
E) conducting open market operations but not changing the money supply

Question 9

On a bank's balance sheet,

Accepted Answer

A) assets = liabilities - net worth 
B) assets = liabilities + net worth 
C) assets = liabilities 
D) assets = net worth 
E) net worth = liabilities 
A) assets = liabilities - net worth 
B) assets = liabilities + net worth 
C) assets = liabilities 
D) assets = net worth 
E) net worth = liabilities

Question 10

Suppose a bank lends you $1,000 to purchase a car.Which of the following correctly represents the changes in the bank's balance sheet before you spend the money?

Accepted Answer

A) assets: loans,+$1,000; liabilities and net worth: checking deposits,+$1,000 
B) assets: loans,-$1,000,checking deposits,+$1,000; liabilities and net worth: no change 
C) assets: loans,+$1,000,checking deposits,-$1,000; liabilities and net worth: no change 
D) assets: checking deposits,+$1,000; liabilities and net worth: loans,+$1,000 
E) assets: checking deposits,+$1,000; liabilities and net worth: loans,-$1,000 
A) assets: loans,+$1,000; liabilities and net worth: checking deposits,+$1,000 
B) assets: loans,-$1,000,checking deposits,+$1,000; liabilities and net worth: no change 
C) assets: loans,+$1,000,checking deposits,-$1,000; liabilities and net worth: no change 
D) assets: checking deposits,+$1,000; liabilities and net worth: loans,+$1,000 
E) assets: checking deposits,+$1,000; liabilities and net worth: loans,-$1,000

Question 11

The simple money multiplier

Accepted Answer

A) equals the reciprocal of the required reserve ratio 
B) assumes banks hold excess reserves 
C) is larger as the required reserve ratio increases 
D) equals required reserves plus excess reserves 
E) equals total reserves minus required reserves 
A) equals the reciprocal of the required reserve ratio 
B) assumes banks hold excess reserves 
C) is larger as the required reserve ratio increases 
D) equals required reserves plus excess reserves 
E) equals total reserves minus required reserves

Question 12

A bank can increase the money supply by the amount of total reserves it holds.

Accepted Answer

A) True 
 B)False

Question 13

If banks choose not to lend out their excess reserves then the money supply will not expand.

Accepted Answer

A) True 
 B)False

Question 14

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1.If the bank has $5 million in excess reserves,then it would be able to lend out

Accepted Answer

A) $0 
B) $5 million 
C) $10 million 
D) $15 million 
E) $20 million 
A) $0 
B) $5 million 
C) $10 million 
D) $15 million 
E) $20 million

Question 15

When the Fed buys U.S.government securities from a bank,that bank's required reserves and total reserves increase but excess reserves decrease.

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 14-1
Exhibit 14-1
$\begin{array}{llll}
&&\text {EUBANK}\
\text {Assets }&&\text {Liabilities and Net Worth }\
\hline\text { Deposits at the Fed } & \$ 40,000 &\text {Checkable deposits }&\$500,000\
\text { Cash } & \$ 10,000 &\text {Net Worth }&\$20,000\
\text { Loans } & \$ 300,000 \
\text { Securities } & \$ 150,000 \
\text { Fed Stock } & \$ 20,000
\end{array}$
-Refer to Exhibit 14-1.If Eubank is holding no excess reserves,what must the required reserve ratio be?

Accepted Answer

A) 5 percent 
B) 4 percent 
C) 10 percent 
D) 20 percent 
E) 2 percent 
A) 5 percent 
B) 4 percent 
C) 10 percent 
D) 20 percent 
E) 2 percent

Question 17

The liquidity of an asset

Accepted Answer

A) describes the ease of conversion to cash without significant loss of value 
B) is its cash value relative to other assets 
C) indicates how much interest would flow from it if it were a financial instrument 
D) is of little concern to bank managers,since their primary goal is profit 
E) usually rises along with an asset's rate of return 
A) describes the ease of conversion to cash without significant loss of value 
B) is its cash value relative to other assets 
C) indicates how much interest would flow from it if it were a financial instrument 
D) is of little concern to bank managers,since their primary goal is profit 
E) usually rises along with an asset's rate of return

Question 18

Suppose the Fed purchases $5,000 in U.S.government securities from the Last National Bank and the Last National Bank's account at the Federal Reserve district bank increases by $5,000.Which of the following results from this transaction?

Accepted Answer

A) The Last National Bank's balance sheet shows a change in the composition of its assets. 
B) Both the Last National Bank's assets and its liabilities rise by $5,000. 
C) Both the Fed's assets and its liabilities fall by $5,000. 
D) Only the Fed's liabilities change; its assets are unchanged. 
E) This transaction decreases the money supply. 
A) The Last National Bank's balance sheet shows a change in the composition of its assets. 
B) Both the Last National Bank's assets and its liabilities rise by $5,000. 
C) Both the Fed's assets and its liabilities fall by $5,000. 
D) Only the Fed's liabilities change; its assets are unchanged. 
E) This transaction decreases the money supply.

Question 19

In the United States,paper money is redeemable for gold.

Accepted Answer

A) True 
 B)False

Question 20

The U.S.Treasury is committed to keeping the designs of U.S.currency unchanged.

Accepted Answer

A) True 
 B)False

Exam 15: Banking and the Money Supply

If the Fed purchases government securities on the open market,the money supply will

The ready cash kept on hand by a bank to meet the needs of those who want to withdraw funds does not earn interest for the bank.

Which of the following statements is correct?

Banks differ from other types of businesses because banks

If the Fed buys a $1,000 U.S.government bond from a bank,it pays it by giving the bank $1,000 in reserves--reserves that it simply creates out of thin air.

If people choose to hold some of a newly received loan as cash instead of keeping it in a checking account,the money supply

The Fed can increase the amount of excess reserves in the banking system by

If the Fed decreases the required reserve ratio at a time when banks are holding no excess reserves,the Fed is

On a bank's balance sheet,

Suppose a bank lends you $1,000 to purchase a car.Which of the following correctly represents the changes in the bank's balance sheet before you spend the money?

The simple money multiplier

A bank can increase the money supply by the amount of total reserves it holds.

If banks choose not to lend out their excess reserves then the money supply will not expand.

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1.If the bank has $5 million in excess reserves,then it would be able to lend out

When the Fed buys U.S.government securities from a bank,that bank's required reserves and total reserves increase but excess reserves decrease.

The liquidity of an asset

Suppose the Fed purchases $5,000 in U.S.government securities from the Last National Bank and the Last National Bank's account at the Federal Reserve district bank increases by $5,000.Which of the following results from this transaction?

In the United States,paper money is redeemable for gold.

The U.S.Treasury is committed to keeping the designs of U.S.currency unchanged.

The Art and Science of Economic Analysis

Economic Tools and Economics Systems

Economic Decision Makers

Demand, supply, and Markets

Introduction to Macroeconomics

Tracking the Useconomy

Unemployment and Inflation

Productivity and Growth

Aaggregate Expenditure and Aggregate Demand

Baggregate Expenditure and Aggregate Demand

Aggregate Supply

Fiscal Policy

Federal Budgets and Public Policy

Money and the Financial System

Monetary Theory and Policy

Macro Policy Debate: Active or Passive

International Trade

Externalities and the Environment

International Finance

Economic Development

understanding Graphs

National Income Accounts

The Algebra of Demand-Side Equilibrium

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