Question 1

Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will show:

Accepted Answer

A)  only an increase in the asset of securities of $2 billion. 
B)  only show an increase in the liability of reserves of $2 billion. 
C)  no change in the size of the balance sheet, just the composition of assets will change from cash to securities. 
D)  an increase in the asset category of securities and the liability category of reserves by $2 billion.

Question 2

You receive a $1,000 gift from your grandmother when you graduate from college. Your grandmother withdrew the $1,000 from her checking account and gave you ten $100 bills. You deposit the ten bills into your checking account. Discuss the impact of these transactions on your grandmother's balance sheet, your balance sheet, and the Fed's balance sheet.

Accepted Answer

The answer of You receive a $1,000 gift from your...

Question 3

The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it:

Accepted Answer

A)  ignores how central banks could change their balance sheet. 
B)  assumes banks hold excess reserves. 
C)  ignores the fact people might change their currency holdings. 
D)  ignores changes in vault cash.

Question 4

The Treasury usually requires most businesses to regularly deposit taxes withheld from employees into accounts at designated commercial banks. On a regular basis, the funds in these accounts are transferred to the Treasury's account at the Fed. Discuss what is happening to the balance sheet of the banking system as the businesses are making deposits and these tax accounts are increasing. What happens to the banking system's balance sheet when the funds are transferred to the Fed?

Accepted Answer

The answer of The Treasury usually requires most businesses to...

Question 5

Which of the following have the same impact on the Fed's balance sheet?

Accepted Answer

A)  An open market purchase and an increase in loans by the Fed to banks 
B)  An open market sale and an increase in foreign exchange reserves 
C)  An open market purchase and a decrease in foreign exchange reserves 
D)  An increase in loans by the Fed to banks and a decrease in foreign exchange reserves

Question 6

If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in deposit creation of:

Accepted Answer

A)  $9 million. 
B)  $90 million. 
C)  $10 million. 
D)  $900,000.

Question 7

If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to:

Accepted Answer

A)  decrease. 
B)  increase. 
C)  not change. 
D)  decrease since failing banks lost theirs.

Question 8

The monetary base is the sum of:

Accepted Answer

A)  reserves and currency in the hands of the public. 
B)  reserves and M2. 
C)  currency in the hands of the public and M2. 
D)  currency in the hands of the public M1.

Exam 17: The Central Bank Balance Sheet and the Money Supply Process