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

Question 1

The main asset held by a central bank in its role as the bankers' bank is:

A) foreign exchange reserves.
B) currency.
C) loans.
D) securities.

Answer 1

C

Question 2

Reserves are:

A) assets of the central bank and liabilities of the commercial bank.
B) assets of the commercial banks and liabilities of the central bank.
C) liabilities of the commercial and central banks.
D) assets and liabilities for the central bank.

Answer 2

B

Question 3

For the Federal Reserve's balance sheet, the asset listed securities would include:

A) private and public debt.
B) mainly U.S. Treasury and municipal bonds.
C) bonds issued by commercial banks.
D) U.S. Treasury securities.

Answer 3

D

Question 4

Gold is:

A) the most important asset on the Fed's balance sheet.
B) extremely important as an asset for the Fed.
C) a small portion of the Fed's assets.
D) very important for monetary policy in the U.S.

Question 5

A liability of the central bank in functioning as the bankers' bank is:

A) accounts of commercial banks.
B) securities.
C) loans.
D) currency.

Question 6

As a portion of total assets measured in billions of dollars, the most important asset on the Fed's balance sheet is:

A) gold.
B) securities.
C) foreign exchange reserves.
D) loans.

Question 7

As a portion of total assets measured in billions of dollars, the least important asset on the Fed's balance sheet is:

A) gold.
B) securities.
C) foreign exchange reserves.
D) loans.

Question 8

A central bank holds foreign exchange reserves for:

A) diversification purposes.
B) foreign exchange interventions.
C) safekeeping.
D) diversification and safekeeping.

Question 9

If the Federal Reserve is to be independent, then the quantity of securities it purchases is determined by:

A) the Federal Reserve itself.
B) Congress.
C) the amount the public does not want to purchase at the going price.
D) the Treasury.

Question 10

A central bank's balance sheet would categorize each of the following as liabilities, except:

A) currency.
B) loans.
C) the government's account.
D) accounts of the commercial banks.

Question 11

Liabilities of commercial banks show up on the Fed's balance sheet as part of its:

A) liabilities.
B) securities.
C) foreign exchange reserves.
D) loans.

Question 12

Which of the following statements is most correct?

A) Reserves are assets of the central bank and liabilities of the U.S. Treasury.
B) Reserves are assets of the central bank and liabilities of the commercial banks.
C) Reserves are liabilities of the commercial banks and assets of the U.S. Treasury.
D) Reserves are assets of the commercial banks and liabilities of the central bank.

Question 13

Each of the following items would appear as assets on the central bank's balance sheet, except:

A) loans.
B) securities.
C) currency.
D) foreign exchange reserves.

Question 14

In the U.S., loans made by Federal Reserve to banks fall in the categories of:

A) discount loans.
B) reserves.
C) discount loans and reserves.
D) discount loans and foreign exchange reserves.

Question 15

Bonds issued by a foreign government in its own currency would:

A) not be held by the Fed.
B) be held by the Fed as part of its securities.
C) be held by the Fed as part of its foreign exchange reserves.
D) be held by the Fed as part of its loans.

Question 16

The quantity of securities held by the Federal Reserve is controlled through:

A) the U.S. Treasury.
B) the Fed's annual budget.
C) open market operations.
D) the purchases made by the regional Reserve banks.

Question 17

The collapse of the Thai currency, the baht, was partially due to:

A) inaction by the Federal Reserve.
B) the European Central Bank.
C) information provided by the central bank of Thailand.
D) information not provided by the central bank of Thailand.

Question 18

Bonds issued by the U.S. Treasury would:

A) not be held by the Fed.
B) be held by the Fed as part of its securities.
C) be held by the Fed as part of its foreign exchange reserves.
D) be held by the Fed as part of its loans.

Question 19

A central bank's balance sheet will categorize the following as liabilities:

A) currency.
B) loans.
C) securities.
D) foreign exchange reserves.

Question 20

Which of the following statements is most correct?

A) Discount loans are initiated by the Federal Reserve.
B) Discount loans are made when banks need relatively small amounts of cash for the long term.
C) Discount loans are made when banks need relatively large amounts of cash for the long term.
D) Discount loans are made when banks need relatively small amounts of cash for the short term.

Question 21

The experience of the Marcos Presidency in the Philippines in 1986 showed:

A) the importance of keeping the central bank independent from political pressure.
B) published central bank balance sheets do not always reflect reality.
C) transparency is critical if people are going to trust a central bank.
D) all of the answers given are correct.

Question 22

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

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 23

Vault cash is not included in the central bank's liability category of currency because:

A) only non-bank currency is in the liability category of currency.
B) vault cash really is only electronic funds.
C) vault cash is in the asset category of reserves.
D) it is the liability of the U.S. Treasury.

Question 24

The Fed purchases German bonds from commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

A) The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease.
B) The Fed's assets increase and its liabilities increase, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
C) The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase.
D) The Fed's assets increase and its liabilities decrease, for the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

Question 25

When a business purchases a $50,000 computer system by writing a check, the business's balance sheet will:

A) only show an increase in liabilities of $50,000.
B) show an increase in assets and liabilities for $50,000.
C) not reflect any increase in assets or liabilities, only a change in the composition of assets.
D) only show an increase in assets of $50,000.

Question 26

An open market sale of U.S. Treasury securities by the Fed will cause the Fed's balance sheet to show:

A) a decrease in the asset of securities and a decrease in the liability of reserves.
B) an increase in the liability of reserves.
C) no change in the size of the balance sheet, just the composition of assets will change from securities to cash.
D) an increase in the asset category of securities and the liability category of reserves.

Question 27

One trait a central bank has over other businesses including banks is that it:

A) receives all of its funding from the government.
B) can control the size of its balance sheet.
C) doesn't have stockholders.
D) doesn't have a board of directors.

Question 28

When a business purchases a $25,000 computer system by writing a check, the business's balance sheet will:

A) show an increase in assets and liabilities of $25,000.
B) only show an increase in assets of $25,000.
C) only show an increase in liabilities of $25,000.
D) still show the same total amount of assets as before the purchase.

Question 29

Monetary policy operations for central banks are run through changes in the liability category of:

A) government's accounts.
B) currency.
C) reserves.
D) gold.

Question 30

A central bank's purchase of securities made by writing checks on itself will:

A) decrease the size of its balance sheet.
B) have no impact at all on the balance sheet.
C) increase the size of their balance sheet.
D) only change the composition of its assets.

Question 31

When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check, when the check returns, the Fed's balance sheet will show:

A) an increase in assets and a decrease in liabilities of $1 million.
B) only an increase in assets of $1 million.
C) only an increase in liabilities of $1million.
D) an increase in assets and liabilities of $1 million.

Question 32

Most responsible central banks publish their balance sheet:

A) at least once a year.
B) quarterly.
C) at least monthly.
D) semi-annually.

Question 33

The monetary base is the sum of:

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

Question 34

The monetary base is the sum of:

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.

Question 35

An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show:

A) only an increase in liabilities.
B) only a decrease in assets.
C) no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing.
D) no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

Question 36

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

A) only an increase in liabilities of $2 billion.
B) only a decrease in assets of $2 billion.
C) no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively.
D) no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing by $2 billion respectively.

Question 37

Vault cash is:

A) equal to the total amount of reserves and is an asset of the central bank.
B) not reserves but is a liability of the central bank.
C) a part of reserves and an asset of commercial banks.
D) not reserves but is an asset of central banks.

Question 38

In dollar amounts:

A) the monetary base is larger than M2 and M1 is less than M2.
B) M1 is smaller than the monetary base and M2 is larger than both.
C) the monetary base is larger than M1 and M2.
D) the monetary base is smaller than M1 and M2 is larger than M1.

Question 39

The monetary base is also known as:

A) M1.
B) M2.
C) high-powered money.
D) free reserves.

Question 40

A central bank's sale of securities from its portfolio will:

A) decrease the size of its balance sheet.
B) have no impact at all on the balance sheet.
C) only change the composition of its liabilities.
D) only change the composition of its assets.

Question 41

The most a bank could lend at any time without altering its assets is an amount equal to its:

A) checkable deposits.
B) reserves.
C) excess reserves.
D) net worth.

Question 42

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will:

A) not change.
B) increase by $100,000.
C) decrease.
D) increase but by less than $100,000.

Question 43

Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact on the monetary base of Harry's deposit?

A) The monetary base did not change
B) The monetary base increased by $1,000
C) The monetary base decreased by $1,000
D) The monetary base increases by more than a $1,000

Question 44

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will:

A) increase by less than $100,000.
B) not change.
C) decrease by less than $100,000.
D) increase by $100,000.

Question 45

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's reserves will:

A) increase by $100,000.
B) increase by less than $100,000.
C) not change.
D) decrease.

Question 46

When the Fed makes a discount loan, the impact on the Banking System's balance sheet is:

A) an increase in liabilities with no change in assets.
B) an increase in assets and a decrease in liabilities.
C) a decrease in assets and an increase in liabilities.
D) the same as that of an open market purchase.

Question 47

The Fed sells German bonds to commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

A) The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease.
B) The Fed's assets increase and its liabilities both increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
C) The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase.
D) The Fed's assets and liabilities both decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

Question 48

When the Fed makes a discount loan, the impact on the Banking System's balance sheet will reflect:

A) an increase in liabilities with no change in assets.
B) an increase in assets and a decrease in liabilities.
C) a decrease in assets and an increase in liabilities.
D) an increase in assets and liabilities.

Question 49

Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be:

A) no change in total assets or total liabilities, but an increase in the liability of currency and a decrease in the liability of reserves by $300 respectively.
B) no change in total assets but the liability of currency increases by $300.
C) total assets decrease by $300 and the liability of currency increases by $300.
D) no change in either total assets or total liabilities.

Question 50

When an individual withdraws funds from a checking account the:

A) bank's balance sheet shrinks but the size of the Fed's balance sheet is not affected.
B) bank's balance sheet shrinks and so does the Fed's balance sheet.
C) bank's balance sheet shrinks but the size of the Fed's balance sheet increases.
D) size of the bank's balance sheet stays the same but the size of the Fed's balance sheet shrinks.

Question 51

A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in his bank, Bank B. Which of the following statements pertaining to this transaction is most true?

A) Banks A's reserves will decrease by the required reserve rate times $20,000 and Banks B's reserves will increase by (1- required reserve rate) times $20,000
B) Bank A's reserves decrease by $20,000 and Bank B's reserves increase by $20,000
C) Neither Bank A's nor B's reserves will change
D) Bank B's reserves will decrease and Bank A's reserves will increase by $20,000

Question 52

Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the Banking System's balance sheet will be to:

A) only reduce checkable deposits by $500.
B) increase reserves and reduce checkable deposits by $500 respectively.
C) decrease reserves and checkable deposits by $500 respectively.
D) only reduce reserves by the required reserve rate times $500.

Question 53

During the 2007-2009 financial crisis which of the following temporarily became the largest component of assets on the Fed's balance sheet:

A) foreign exchange reserves.
B) loans.
C) U.S. Treasury securities.
D) mortgage backed securities.

Question 54

Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. Considering Harry's personal balance sheet, his assets:

A) increased by $1,000 when he deposited the $1,000 into his checking account.
B) Increased when he received the $1,000 in currency from his grandfather.
C) And liabilities increased by $1,000 when he deposited the funds into his checking account.
D) Increased by $1,000 and his liabilities decreased by $1,000 when he deposited the funds into his checking account.

Question 55

Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum amount Bank A could lend?

A) $85 million
B) $15 million
C) $14 million
D) $5 million

Question 56

Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by:

A) 2.5 times.
B) 3 times.
C) 4.5 times.
D) 6 times.

Question 57

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

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 58

To obtain a discount loan from the Fed, a commercial bank must:

A) prove that it will fail if it does not obtain the loan.
B) prove that the loan will be used to make loans.
C) provide collateral.
D) agree to more frequent examinations.

Question 59

When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect:

A) no change in liabilities but an increase in assets.
B) a decrease in assets and liabilities.
C) an increase in assets and liabilities.
D) an increase in assets and a decrease in liabilities.

Question 60

Bank A has checkable deposits of $140 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the amount of excess reserves Bank A is holding?

A) It does not have any excess reserves
B) $15 million
C) $2 million
D) $1 million

Question 61

Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws ten percent of every deposit in cash. An open market purchase of $1 million by the Fed will see banking system deposits increase by:

A) more than $1 million but less than $10 million.
B) exactly $1 million.
C) less than $1 million.
D) more than $10 million but less than $20 million.

Question 62

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:

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 63

The use of deposit sweeping allows banks to:

A) pay higher rates of interest than are allowed by law.
B) reduce the amount of required reserves they must hold.
C) pay less for FDIC insurance.
D) weed out less profitable deposits.

Question 64

If we assume a ten percent required reserve rate, and banks not holding any excess reserves and no change in currency holdings, an open market sale of $5 million of U.S. Treasury securities by the Fed, will result in deposits:

A) decreasing by $50 million.
B) increasing by $5 million.
C) increasing by $50 million.
D) not changing.

Question 65

If required reserves are expressed by RR; the required reserve rate by rD and deposits by D, the simple deposit expansion multiplier is expressed as:

A) RD × D.
B) (1/rD ) D.
C) RR × D.
D) 1/rD.

Question 66

If M = the quantity of money, m, the money multiplier, MB, the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then C + R would equal:

A) M.
B) R.
C) MB.
D) ER.

Question 67

During the Great Depression, the monetary base in the U.S.:

A) decreased significantly.
B) increased.
C) remained constant.
D) was highly erratic.

Question 68

If we focus on the banking system and assume no change in the public's currency holdings, a loss of reserves by any one bank must:

A) equal the loss of reserves by the entire system.
B) be equal to the net loss of reserves for the banking system.
C) result in no change in reserves for the banking system.
D) result in a multiple loss to the banking system.

Question 69

If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves, then m would equal:

A) R/ER.
B) M/MB.
C) C + D.
D) D - C

Question 70

If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then RR would equal:

A) MB.
B) D - C.
C) M/MB.
D) R - ER.

Question 71

The formula for required reserves is:

A) (1/rD ) D.
B) 1/rD.
C) rD.
D) D/rD.

Question 72

Which of the following best completes the statement? If people increase their currency holdings, all else the same, the monetary base:

A) does not change but the quantity of M2 will decrease.
B) increases as does the quantity of M2.
C) decreases as does the quantity of M2.
D) does not change and neither does M2.

Question 73

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

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

Question 74

If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would:

A) double.
B) increase by 10 percent.
C) decrease by a factor of ten.
D) be half as large as it was before the increase.

Question 75

During the early years of the Great Depression, a study of the money aggregates reveals that the money multiplier:

A) was at an all-time high.
B) increased from 1929 right through 1936.
C) decreased.
D) was constant from 1929 through 1936.

Question 76

If the Fed were to decrease the required reserve rate from ten percent to five percent, the simple deposit expansion multiplier would:

A) double.
B) decrease by 5 percent.
C) increase by a factor of five.
D) be half as large as it was before the reduction.

Question 77

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 what change in loans?

A) No change
B) A decrease of $1 million
C) An increase of $10 million
D) An increase of $1 million

Question 78

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:

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

Question 79

During the early years of the Great Depression, the monetary base and M2:

A) both increased significantly.
B) both decreased significantly.
C) moved in opposite directions; M2 increased while the monetary base decreased.
D) moved in opposite directions; the monetary base increased but M2 decreased.

Question 80

The money multiplier is much lower today than it was twenty-five years ago because:

A) people are holding less currency today.
B) the currency-to-deposit ratio is much higher today.
C) there is less currency available today.
D) credit cards are more widely used.