Chapter 15- AK PDF

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Chapter 15 The Money Supply Process 1) Individuals that lend funds to a bank by opening a checking account are called A) policyholders. B) partners. C) depositors. D) debt holders. Answer: C 2) The three players in the money supply process include A) banks, depositors, and the U.S. Treasury. B) banks, depositors, and borrowers. C) banks, depositors, and the central bank. D) banks, borrowers, and the central bank. Answer: C 3) Of the three players in the money supply process, most observers agree that the most important player is A) the United States Treasury. B) the Federal Reserve System. C) the FDIC. D) the Office of Thrift Supervision. Answer: B 4) Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; securities C) securities; loans to financial institutions D) securities; reserves Answer: C 5) The monetary liabilities of the Federal Reserve include A) securities and loans to financial institutions. B) currency in circulation and reserves. C) securities and reserves. D) currency in circulation and loans to financial institutions. Answer: B 6) Both ________ and ________ are monetary liabilities of the Fed. A) securities; loans to financial institutions B) currency in circulation; reserves C) securities; reserves D) currency in circulation; loans to financial institutions Answer: B

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7) The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called A) the money supply. B) currency in circulation. C) bank reserves. D) the monetary base. Answer: D 8) The monetary base consists of A) currency in circulation and Federal Reserve notes. B) currency in circulation and the U.S. Treasury's monetary liabilities. C) currency in circulation and reserves. D) reserves and Federal Reserve Notes. Answer: C 9) Total reserves minus bank deposits with the Fed equals A) vault cash. B) excess reserves. C) required reserves. D) currency in circulation. Answer: A 10) Total reserves are the sum of ________ and ________. A) excess reserves; borrowed reserves B) required reserves; currency in circulation C) vault cash; excess reserves D) excess reserves; required reserves Answer: D 11) The amount of deposits that banks must hold in reserve is A) excess reserves. B) required reserves. C) total reserves. D) vault cash. Answer: B 12) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A) three B) nine C) ten D) eleven Answer: B

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13) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent. A) ten B) twenty C) eighty D) ninety Answer: A 14) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent. A) ten B) twenty C) eighty D) ninety Answer: A 15) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A) two B) eight C) nine D) ten Answer: C 16) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in required reserves. A) one B) two C) eight D) ten Answer: A 17) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve. A) one B) two C) eight D) ten Answer: C 3

18) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A) one B) two C) nine D) ten Answer: C 19) Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve. A) one B) two C) eight D) ten Answer: C 20) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in required reserves. A) one B) two C) nine D) ten Answer: A 21) Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in vault cash. A) one B) two C) nine D) ten Answer: B 22) The interest rate the Fed charges banks borrowing from the Fed is the A) federal funds rate. B) Treasury bill rate. C) discount rate. D) prime rate. Answer: C

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23) When banks borrow money from the Federal Reserve, these funds are called A) federal funds. B) discount loans. C) federal loans. D) Treasury funds. Answer: B 24) The monetary base minus currency in circulation equals A) reserves. B) the borrowed base. C) the nonborrowed base. D) discount loans. Answer: A 25) The monetary base minus reserves equals A) currency in circulation. B) the borrowed base. C) the nonborrowed base. D) discount loans. Answer: A 26) High-powered money minus reserves equals A) reserves. B) currency in circulation. C) the monetary base. D) the nonborrowed base. Answer: B 27) Purchases and sales of government securities by the Federal Reserve are called A) discount loans. B) federal fund transfers. C) open market operations. D) swap transactions. Answer: C 28) When the Federal Reserve purchases a government bond from a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Answer: A

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29) When the Federal Reserve sells a government bond to a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases Answer: D 30) When the Fed sells $100 worth of bonds to First National Bank, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100. Answer: C 31) If a person selling bonds to the Fed cashes the Fed's check, then reserves ________ and currency in circulation ________, everything else held constant. A) remain unchanged; declines B) remain unchanged; increases C) decline; remains unchanged D) increase; remains unchanged Answer: B 32) The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase. A) deposits; deposits B) deposits; currency C) currency; deposits D) currency; currency Answer: C 33) The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in currency, the open market purchase ________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves. A) has no effect on; has no effect on B) has no effect on; increases C) increases; has no effect on D) decreases; increases Answer: B

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34) When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases A) reserves increase. B) high-powered money increases. C) reserves decrease. D) high-powered money decreases. Answer: B 35) For which of the following is the change in reserves necessarily different from the change in the monetary base? A) Open market purchases from a bank B) Open market purchases from an individual who deposits the check in a bank C) Open market purchases from an individual who cashes the check D) Open market sale to a bank Answer: C 36) When a member of the nonbank public deposits currency into her bank account, A) both the monetary base and bank reserves fall. B) both the monetary base and bank reserves rise. C) the monetary base falls, but bank reserves remain unchanged. D) bank reserves rise, but the monetary base remains unchanged. Answer: D 37) When the Federal Reserve calls in a discount loan from a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) decreases; decrease D) decreases; remains unchanged Answer: C 38) There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A) sell; extend B) sell; call in C) purchase; extend D) purchase; call in Answer: C 39) A decrease in ________ leads to an equal ________ in the monetary base in the short run. A) float; increase B) float; decrease C) Treasury deposits at the Fed; decrease D) discount loans; increase Answer: B

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40) The monetary base declines when A) the Fed extends discount loans. B) Treasury deposits at the Fed decrease. C) float increases. D) the Fed sells securities. Answer: D 41) An increase in ________ leads to an equal ________ in the monetary base in the short run. A) float; decrease B) float; increase C) discount loans; decrease D) Treasury deposits at the Fed; increase Answer: B 42) Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; increases B) decrease; increases C) decrease; remains unchanged D) decrease; decreases Answer: C 43) Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; remains unchanged B) remain unchanged; increases C) decrease; increases D) decrease; decreases Answer: A 44) The Fed does not tightly control the monetary base because it does not completely control A) open market purchases. B) open market sales. C) borrowed reserves. D) the discount rate. Answer: C 45) Subtracting borrowed reserves from the monetary base obtains A) reserves. B) high-powered money. C) the nonborrowed monetary base. D) the borrowed monetary base. Answer: C

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46) The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is A) MB = MBn - BR. B) BR = MBn - MB. C) BR = MB - MBn. D) MB = BR - MBn. Answer: C 47) When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollar—a process called multiple deposit creation. A) increase; less B) increase; more C) decrease; less D) decrease; more Answer: B 48) If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves. B) 10 times its excess reserves. C) 10 percent of its excess reserves. D) its total reserves. Answer: A 49) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: B 50) The formula for the simple deposit multiplier can be expressed as A) △R =

× △T

B) △D =

× △R

C) △rr =

× △T

D) △R =

× △D

Answer: B

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51) In the simple model of multiple deposit creation in which banks do not hold excess reserves, the increase in checkable deposits equals the product of the change in reserves and the A) reciprocal of the excess reserve ratio. B) simple deposit expansion multiplier. C) reciprocal of the simple deposit multiplier. D) discount rate. Answer: B 52) If reserves in the banking system increase by $100, then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.10. C) 0.05. D) 0.20. Answer: B 53) If the required reserve ratio is 10 percent, the simple deposit multiplier is A) 5.0. B) 2.5. C) 100.0. D) 10.0 Answer: D 54) If the required reserve ratio is 15 percent, the simple deposit multiplier is A) 15.0. B) 1.5. C) 6.67. D) 3.33. Answer: C 55) In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is A) $75. B) $750. C) $37.50. D) $375. Answer: D 56) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed A) sold $200 in government bonds. B) sold $500 in government bonds. C) purchased $200 in government bonds. D) purchased $500 in government bonds. Answer: C

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57) If reserves in the banking system increase by $100, then checkable deposits will increase by $667 in the simple model of deposit creation when the required reserve ratio is A) 0.01. B) 0.05. C) 0.15. D) 0.20. Answer: C 58) If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of A) $16,000. B) $20,000. C) $26,000. D) $36,000. Answer: C 59) If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of A) $16,000. B) $20,000. C) $26,000. D) $36,000. Answer: D 60) If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of A) $11,000. B) $20,000. C) $21,000. D) $26,000. Answer: C 61) If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of A) $17,000. B) $19,000. C) $24,000. D) $29,000. Answer: B 62) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of A) $14,000. B) $17,000. C) $22,000. D) $27,000. Answer: B 11

63) A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000. Answer: D 64) Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts. A) deposits; required reserves B) deposits; excess reserves C) currency; required reserves D) currency; excess reserves Answer: D 65) Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. A) borrowers; depositors B) banks; depositors C) depositors; borrowers D) depositors; banks Answer: D 66) An increase in the nonborrowed monetary base, everything else held constant, will cause A) the money supply to fall. B) the money supply to rise. C) no change in the money supply. D) demand deposits to fall. Answer: B 67) The amount of borrowed reserves is ________ related to the discount rate, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: B 68) A ________ in market interest rates relative to the discount rate will cause discount borrowing to ________. A) fall; increase B) rise; decrease C) rise; increase D) fall; remain unchanged Answer: C 12

69) Models describing the determination of the money supply and the Fed's role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former. A) reserves; the monetary base B) reserves; high-powered money C) the monetary base; high-powered money D) the monetary base; reserves Answer: D 70) The Fed can exert more precise control over ________ than it can over ________. A) high-powered money; reserves B) high-powered money; the monetary base C) the monetary base; high-powered money D) reserves; high-powered money Answer: A 71) The ratio that relates the change in the money supply to a given change in the monetary base is called the A) money multiplier. B) required reserve ratio. C) deposit ratio. D) discount rate. Answer: A 72) The formula linking the money supply to the monetary base is A) M = m/MB. B) M = m × MB. C) m = M × MB. D) MB = M × m. E) M = m + MB. Answer: B 73) An increase in the monetary base that goes into ________ is not multiplied, while an increase that goes into ________ is multiplied. A) deposits; currency B) excess reserves; currency C) currency; excess reserves D) currency; deposits Answer: D 74) If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change. Answer: D 13

75) The formula that links checkable deposits to the monetary base is 1 . rr  e  c 1 . B) M = rr  e  c 1 c C) M = . rr  e  c A) m =

1 . rr  e  c 1 × MB. E) D = rr  e  c D) D =

Answer: E 76) The formula that links checkable deposits to the money supply is A) M =

1c . D 1

B) M = 1  c × D. 1

C) D = 1  c × M. D) D = (1 + c) × M.

Answer: C 77) The formula for the M1 money multiplier is A) m = (1 + c)/(rr + e + c). B) M = 1/(rr + e + c). C) M = (1 + c)/(rr + e + c). D) m = [1/(rr + e + c)] × MB. Answer: A 78) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________ billion. A) $8000 B) $1200 C) $1200.8 D) $8400 Answer: B 79) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.5. B) 1.67. C) 2.0. D) 0.601. Answer: A 80) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the currency ratio is A) 0.25. 14

B) 0.50. C) 0.40. D) 0.05. Answer: B 81) If the req...