Question 1

When a member bank borrows reserves from the Fed,

Accepted Answer

A)   it pays an interest rate called the discount rate.
B)   it pays no interest rate but is required to repay the loan within the stipulated period.
C)   it pays an interest rate equivalent to the coupon rate on long-term government bonds.
D)   it pays an interest rate equal to the federal funds in the reserves market. A

Question 2

The M1 money supply includes all currency in circulation, checkable deposits, and traveler's checks.

Accepted Answer

A) True 
 B)False  True

Question 3

A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 10%, what is the amount of excess reserves?

Accepted Answer

A)   $0
B)   $10,000
C)   $20,000
D)   $30,000 C

Question 4

Use the following to answer questions.
Exhibit: Money in the Economy
 
-(Exhibit: Money in the Economy) In Year 1, if savings deposits had been $200 billion instead of $150 billion, M1 would have been

Accepted Answer

A)   unaffected.
B)   larger by $50 billion.
C)   smaller by $50 billion.
D)   $100 billion.

Question 5

The required reserve ratio is the percentage of checkable deposits that must be held as reserves.

Accepted Answer

A) True 
 B)False

Question 6

Suppose the Fed purchases $1,000 of government securities from the general public who then deposit the proceeds into their checking accounts in commercial banks. Which pair of the T-accounts below shows this transaction?

Accepted Answer

A)   
B)   
C)   
D)

Question 7

The law requires banks to maintain

Accepted Answer

A)   fractional reserves in the form of deposit liabilities against their liquid assets.
B)   fractional reserves in the form of federal securities against their outstanding loans.
C)   fractional reserves in the form of cash in their vaults or deposits with the central bank against their deposit liabilities.
D)   legal reserves in the form of gold against their outstanding loans.

Question 8

When a bank receives new deposits, it can make new loans up to the amount of

Accepted Answer

A)   the deposits received.
B)   the excess reserves generated by the deposits
C)   the reserves generated by the deposits.
D)   the required reserves generated by the deposits.

Question 9

Assume that the required reserve ratio is 10%. An increase of $1,000 in the banking system's excess reserves may result in a total expansion of new deposits for the banking system as a whole by as much as

Accepted Answer

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

Question 10

Use the following to answer questions .
Exhibit: Balance Sheet of the Alpha-Beta Bank
 
-(Exhibit: Balance Sheet of the Alpha-Beta Bank) What is the value of the bank's net worth?

Accepted Answer

A)   $200 million
B)   $2,000 million
C)   $2,800 million
D)   $3,000 million

Question 11

The Federal Reserve does all of the following except

Accepted Answer

A)   make loans to individuals
B)   influence the supply of money
C)   influence the value of money
D)   regulate the banking system

Question 12

M1 includes

Accepted Answer

A)   currency only.
B)   currency plus checkable deposits.
C)   currency in circulation plus checkable deposits.
D)   currency in circulation plus checkable deposits plus traveler's checks.

Question 13

The Federal Reserve System
I. is the central bank for the United States.
II. is a United States government owned bank.
III. is a branch of the Treasury of the United States.

Accepted Answer

A)   I only
B)   I and II only
C)   I and III only
D)   I, II, and III

Question 14

The _____ rate is the interest rates charged when a bank lends reserves to another bank.

Accepted Answer

A)   federal funds
B)   discount
C)   prime
D)   reserve rate

Question 15

Assume that the required reserve ratio is 20%. What is the maximum increase in money supply for the banking system as a whole following a $10,000 increase in excess reserves?

Accepted Answer

A)   $5,000
B)   $10,000
C)   $40,000
D)   $50,000

Question 16

Which of the following is true regarding the reserve requirements?

Accepted Answer

A)   The Fed changes them frequently because they are a power monetary policy tool.
B)   The Fed does not change them much at all because taxation is a more impactful monetary policy tool.
C)   The Fed changes them frequently because doing so simplifies banking operations.
D)   The Fed does not change them much at all because doing so would make banking operations difficult.

Question 17

When the Fed _______ governments bonds it _______ bank reserves.

Accepted Answer

A)   sells; increases
B)   buys; increases
C)   buys; decreases
D)   issues new; increases

Question 18

The value of the simple money multiplier tends to be greater when individuals hold less cash.

Accepted Answer

A) True 
 B)False

Question 19

Use the following to answer questions .
Exhibit: Deposit Expansion Stages
 
-(Exhibit: Deposit Expansion Stages) What is the value of $F (the total new checkable deposits)?

Accepted Answer

A)   $1,000
B)   $4,000
C)   $5,000
D)   $6,000

Question 20

The principle of fractional reserve banking makes it possible for a

Accepted Answer

A)   bank to make loans.
B)   bank to print currency.
C)   bank to avoid reserve requirements.
D)   bank to sell securities.

Exam 9: The Nature and Creation of Money