Deck 14: The Money Supply Process

Question 1

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 1

the Federal Reserve System.

Question 2

The amount of deposits that banks must hold in reserve is

A)excess reserves.
B)required reserves.
C)total reserves.
D)vault cash.

Answer 2

required reserves.

Question 3

Total Reserves minus vault cash equals

A)bank deposits with the Fed.
B)excess reserves.
C)required reserves.
D)currency in circulation.

Answer 3

bank deposits with the Fed.

Question 4

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

Question 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.

Question 6

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

Question 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.

Question 8

Individuals that lend funds to a bank by opening a checking account are called

A)policyholders.
B)partners.
C)depositors.
D)debt holders.

Question 9

Reserves are equal to the sum of

A)required reserves and excess reserves.
B)required reserves and vault cash reserves.
C)excess reserves and vault cash reserves.
D)vault cash reserves and total reserves.

Question 10

Total reserves minus bank deposits with the Fed equals

A)vault cash.
B)excess reserves.
C)required reserves.
D)currency in circulation.

Question 11

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

Question 12

Excess reserves are equal to

A)total reserves minus discount loans.
B)vault cash plus deposits with Federal Reserve banks minus required reserves.
C)vault cash minus required reserves.
D)deposits with the Fed minus vault cash plus required reserves.

Question 13

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.

Question 14

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.

Question 15

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

A)the Federal Reserve System.
B)the United States Treasury.
C)the U.S. Gold Commission.
D)the House of Representatives.

Question 16

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

Question 17

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

Question 18

The percentage of deposits that banks must hold in reserve is the

A)excess reserve ratio.
B)required reserve ratio.
C)total reserve ratio.
D)currency ratio.

Question 19

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

Question 20

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 has ________ million dollars in required reserves.

A)one
B)two
C)eight
D)ten

Question 21

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

Question 22

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

Question 23

When a primary dealer sells a government bond to the Federal Reserve,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

Question 24

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.

Question 25

High-powered money minus reserves equals

A)reserves.
B)currency in circulation.
C)the monetary base.
D)the nonborrowed base.

Question 26

High-powered money minus currency in circulation equals

A)reserves.
B)the borrowed base.
C)the nonborrowed base.
D)discount loans.

Question 27

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

Question 28

When a primary dealer buys a government bond from the Federal Reserve,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

Question 29

When the Federal Reserve purchases a government bond from a primary dealer,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

Question 30

The monetary base minus currency in circulation equals

A)reserves.
B)the borrowed base.
C)the nonborrowed base.
D)discount loans.

Question 31

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 vault cash.

A)two
B)eight
C)nine
D)ten

Question 32

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

Question 33

When the Federal Reserve sells a government bond to a primary dealer,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

Question 34

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.

Question 35

The monetary base minus reserves equals

A)currency in circulation.
B)the borrowed base.
C)the nonborrowed base.
D)discount loans.

Question 36

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

Question 37

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

Question 38

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

Question 39

When the Fed buys $100 worth of bonds from a primary dealer,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.

Question 40

When banks borrow money from the Federal Reserve,these funds are called

A)federal funds.
B)discount loans.
C)federal loans.
D)Treasury funds.

Question 41

When the Fed supplies the banking system with an extra dollar of reserves,deposits increase by more than one dollar-a process called

A)extra deposit creation.
B)multiple deposit creation.
C)expansionary deposit creation.
D)stimulative deposit creation.

Question 42

When the Fed sells $100 worth of bonds to a primary dealer,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.

Question 43

When the Fed extends a $100 discount loan to the 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.

Question 44

When the Federal Reserve extends a discount loan to a bank,the monetary base ________ and reserves ________.

A)remains unchanged;decrease
B)remains unchanged;increase
C)increases;increase
D)increases;remain unchanged

Question 45

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

Question 46

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.

Question 47

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.

Question 48

If the Fed decides to reduce bank reserves,it can

A)purchase government bonds.
B)extend discount loans to banks.
C)sell government bonds.
D)print more currency.

Question 49

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

Question 50

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

Question 51

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.

Question 52

The relationship between borrowed reserves (BR),the nonborrowed monetary base (MBₙ),and the monetary base (MB)is

A)MB = MBₙ - BR.
B)BR = MBₙ - MB.
C)BR = MB - MBₙ.
D)MB = BR - MBₙ.

Question 53

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.

Question 54

Explain two ways by which the Federal Reserve System can increase the monetary base. Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the monetary base?

Question 55

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

Question 56

Subtracting borrowed reserves from the monetary base obtains

A)reserves.
B)high-powered money.
C)the nonborrowed monetary base.
D)the borrowed monetary base.

Question 57

All else the same,when the Fed calls in a $100 discount loan previously extended to the 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.

Question 58

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

Question 59

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

Question 60

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

Question 61

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.

Question 62

If reserves in the banking system increase by $100,then checkable deposits will increase by $500 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.

Question 63

If the required reserve ratio is 20 percent,the simple deposit multiplier is

A)5.0.
B)2.5.
C)4.0.
D)10.0.

Question 64

In the simple deposit expansion model,a decline 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.

Question 65

In the simple deposit expansion model,if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves,deposits in the banking system can potentially increase by

A)$10.
B)$100.
C)$100 times the reciprocal of the required reserve ratio.
D)$100 times the required reserve ratio.

Question 66

In the simple deposit expansion model,if the Fed extends a $100 discount loan to 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.

Question 67

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.

Question 68

If reserves in the banking system increase by $100,then checkable deposits will increase by $1,000 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.

Question 69

In the simple deposit expansion model,an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed

A)sold $1,000 in government bonds.
B)sold $100 in government bonds.
C)purchased $1,000 in government bonds.
D)purchased $100 in government bonds.

Question 70

A simple deposit multiplier equal to four implies a required reserve ratio equal to

A)100 percent.
B)50 percent.
C)25 percent.
D)0 percent.

Question 71

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.

Question 72

In the simple deposit expansion model,if the required reserve ratio is 10 percent and the Fed increases reserves by $100,checkable deposits can potentially expand by

A)$100.
B)$250.
C)$500.
D)$1,000.

Question 73

A simple deposit multiplier equal to one implies a required reserve ratio equal to

A)100 percent.
B)50 percent.
C)25 percent.
D)0 percent.

Question 74

If the required reserve ratio is 25 percent,the simple deposit multiplier is

A)5.0.
B)2.5.
C)4.0.
D)10.0.

Question 75

In the simple deposit expansion model,if the required reserve ratio is 20 percent and the Fed increases reserves by $100,checkable deposits can potentially expand by

A)$100.
B)$250.
C)$500.
D)$1,000.

Question 76

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.

Question 77

The simple deposit multiplier can be expressed as the ratio of the

A)change in reserves in the banking system divided by the change in deposits.
B)change in deposits divided by the change in reserves in the banking system.
C)required reserve ratio divided by the change in reserves in the banking system.
D)change in deposits divided by the required reserve ratio.

Question 78

A simple deposit multiplier equal to two implies a required reserve ratio equal to

A)100 percent.
B)50 percent.
C)25 percent.
D)0 percent.

Question 79

In the simple deposit expansion model,if the Fed extends a $100 discount loan to a bank that previously had no excess reserves,deposits in the banking system can potentially increase by

A)$10.
B)$100.
C)$100 times the reciprocal of the required reserve ratio.
D)$100 times the required reserve ratio.

Question 80

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.