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

Question 1

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

Answer 1

B

Question 2

If the Federal Reserve is to be independent, 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

Answer 2

A

Question 3

A central bank holds foreign exchange reserves primarily for:

A)Diversification purposes
B)Foreign exchange interventions
C)Safekeeping
D)Diversification and safekeeping

Answer 3

B

Question 4

Over ninety percent of the Fed's liabilities is in:

A)Government accounts
B)Treasury certificates
C)Commercial bank reserves
D)Currency

Question 5

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 6

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

A)Foreign exchange reserves
B)Currency
C)Loans
D)Securities

Question 7

Bonds denominated in the currency of the nation that issued them 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 8

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 9

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 10

For the Federal Reserve, the largest liability on its balance sheet is:

A)Commercial bank reserves
B)Currency
C)Governments' accounts
D)Treasury certificates

Question 11

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 12

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

A)Currency
B)Loans
C)Securities
D)Foreign exchange reserves

Question 13

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 14

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 15

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 16

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 17

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 18

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 19

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)Only U.S.Treasury securities

Question 20

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 21

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 22

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 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

Most responsible central banks publish their balance sheet:

A)At least once a year
B)Quarterly
C)Weekly
D)Semi-annually

Question 25

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 26

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 27

The monetary base is also known as:

A)M1
B)M2
C)High-powered money
D)Free reserves

Question 28

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)Central bank balance sheets do not always project reality
C)Transparency is critical if people are going to trust a central bank
D)All of the answers given are correct

Question 29

Considering a central bank's balance sheet, when the value of an asset increases:

A)Nothing happens to its balance sheet
B)A liability must increase
C)The value of another asset must decrease
D)Either the value of another asset decreases or a liability must increase

Question 30

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 31

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 32

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 33

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 34

Compared to the Federal Reserve, the European Central Bank (ECB) has:

A)A smaller percentage of its liabilities in currency
B)A larger percentage of its liabilities in currency
C)About the same percentage of its liabilities in currency
D)Fewer total liabilities because the ECB does not issue currency

Question 35

Considering a central bank's balance sheet, when the value of a liability decreases:

A)Nothing happens to its balance sheet
B)Either the value of another liability increases or an asset must decrease
C)The value of another liability must increase
D)An asset must decrease

Question 36

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 37

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 38

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 39

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

Question 40

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 41

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 42

Which of the following statements is most correct?

A)During the 1990s Americans held more cash than Europeans but the amount of cash Americans held per resident decreased
B)During the 1990s the amount of cash held by Americans increased and we hold more cash per resident than Europeans
C)Americans hold less cash per resident than Europeans and the amount of cash held by American increased during the 1990s
D)Americans hold less cash than Europeans and the amount of cash held by American per resident decreased during the 1990s

Question 43

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 44

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 45

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 46

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 47

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 48

Harry gets $1000 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 $1000
C)The monetary base decreased by $1000
D)The monetary base increases by more than a $1000

Question 49

Harry gets $1000 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 $1000 when he deposited the $1000 into his checking account
B)Increased when he received the $1000 in currency from his grandfather
C)And liabilities increased by $1000 when he deposited the funds into his checking account
D)Increased by $1000 and his liabilities decreased by $1000 when he deposited the funds into his checking account

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

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

A)foreign exchange reserves
B)loans
C)US Treasury securities
D)mortgage backed securities

Question 52

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 53

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 54

The term for turning reserves into bank deposits is called:

A)Discounting
B)Balance sheet adjustment
C)Multiple deposit creation
D)Spreading

Question 55

Consider a $2 billion open market purchase of U.S.Treasury securities by the Federal Reserve.The Fed's balance sheet will specifically 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 56

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 57

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 58

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 59

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 60

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 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

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 63

The formula for required reserves is:

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

Question 64

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 65

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 66

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 67

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 68

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 69

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 70

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 71

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 72

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 73

A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in his bank, Bank

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
B)Which of the following statements pertaining to this transaction is most true?
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 74

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 75

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)RDD
B)(1/rD ) D
C)RD
D)1/rD

Question 76

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 77

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 loan hold no excess reserves
C)Ignores the fact people might change their currency holdings
D)Ignores changes in vault cash

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 purchased by the Fed will result in deposit creation of:

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

Question 79

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 80

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