Deck 12: Money Creation and the Federal Reserve

Question 1

If Abigail withdraws $300 cash from her checking account,then her bank's assets:

A) do not change,but its liabilities fall by $300.
B) fall by $300,but its liabilities do not change.
C) fall by $300,and its liabilities fall by $300.
D) fall by $300,and its liabilities rise by $300.

Answer 1

fall by $300,and its liabilities fall by $300.

Question 2

The fractional reserve banking system refers to a system in which banks:

A) hold reserves equal to a fraction of their deposit liabilities.
B) keep 100% of their liabilities always on reserve.
C) forbid the removal of more than a fraction of demand deposits per day.
D) keep only a fraction of each person's demand deposits.

Answer 2

hold reserves equal to a fraction of their deposit liabilities.

Question 3

If the reserve requirement is 10%,a withdrawal of $500 leads to a potential decrease in the money supply of:

A) $50.
B) $2,500.
C) $5,000.
D) $4,500.

Answer 3

$5,000.

Question 4

Sumit deposits $1,500 cash into his checking account.The reserve requirement is 25%.What is the change in his bank's required reserves?

A) $1,500
B) $375
C) $1,125
D) $6,000

Question 5

Sumit deposits $1,500 cash into his checking account.The reserve requirement is 25%.What is the change in his bank's excess reserves?

A) $1,500
B) $375
C) $1,125
D) $0

Question 6

If a bank is subject to a reserve requirement of 15%,then it is required to:

A) place 15% of its deposits in the vault.
B) lend out 15% of its deposits.
C) place 15% of its deposits in the account with its regional Federal Reserve bank.
D) place 15% of its deposits in the account with its regional Federal Reserve bank or the vault.

Question 7

The idea that banks hold only a portion of deposits and lend the rest out is called the:

A) fractional reserve banking system.
B) partial banking system.
C) double-entry bookkeeping system.
D) loan-maximization system.

Question 8

Assume that the reserve requirement is 20%.A bank has $20 billion in demand deposits.How much money does the bank have to keep in reserves?

A) $20 billion
B) $10 billion
C) $4 billion
D) $2 billion

Question 9

Assume that the Federal Reserve sets the reserve requirement at 10%.If a bank has $100 million in deposits,then its required reserves must equal:

A) $1 million.
B) $10 million.
C) $90 million.
D) $110 million.

Question 10

If the reserve requirement is 25%,a new deposit of $1,000 leads to a potential increase in the money supply of:

A) $4,000.
B) $250.
C) $10,000.
D) $5,000.

Question 11

An individual bank can,at most,lend out all of its:

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

Question 12

Sumit deposits $1,500 cash into his checking account.The reserve requirement is 25%.How much money can the banking system create?

A) $1,500
B) $0
C) $1,125
D) $6,000

Question 13

Sumit deposits $1,500 cash into his checking account.The reserve requirement is 25%.How many dollars' worth of loans can the banking system create?

A) $1,500
B) $0
C) $4,500
D) $6,000

Question 14

If Zachary deposits $500 cash into his checking account,then his bank's assets:

A) rise by $500,and its liabilities rise by $500.
B) rise by $500,but its liabilities do not change.
C) do not change,but its liabilities rise by $500.
D) rise by $500,and its liabilities fall by $500.

Question 15

The formula for calculating the reserve ratio is:

A) total deposits divided by reserve requirement.
B) reserves times reserve requirement.
C) reserves divided by reserve requirement.
D) reserves divided by total deposits.

Question 16

If a bank is subject to a reserve requirement of 10% and if its reserve ratio is 33%,then all of the following are true EXCEPT that it:

A) can make additional loans.
B) has excess reserves.
C) must limit withdrawals.
D) is considered highly liquid.

Question 17

If the reserve requirement is 2.5% and a bank initially receives $30,000 in deposits from the Fed,then the maximum amount of money that the banking system can create is:

A) $750
B) $1,500
C) $30,000
D) $1.2 million

Question 18

The fractional reserve banking system:

A) makes possible the money creation process.
B) helps to prevent bank runs.
C) requires banks to hold a portion of their demand deposits in reserve.
D) All of the answers are correct.

Question 19

Consider this T-account for your bank,showing that you deposited $100 into your checking account and that your bank then made a $75 loan to Michelle. Assets
Liabilities
+$100 (cash)
+$100 (increase in your checking account)
+$75 (loan to Michelle)
+$75 (increase in Michelle's checking account)
Your bank's reserve ratio is:

A) 57.14%
B) 75%
C) 125%.
D) 42.8%.

Question 20

Suppose a bank has $1 million in deposits,a reserve requirement of 10%,and bank reserves of $300,000.The bank has excess reserves of:

A) $50,000.
B) $100,000.
C) $200,000.
D) $300,000.

Question 21

If the reserve requirement is 1%,what is the money multiplier?

A) 100
B) 10
C) 1
D) 0

Question 22

New deposits of $1 billion are placed in a bank.The reserve requirement is 20%.How much does the money supply increase,assuming no leakages?

A) $1 billion
B) $5 billion
C) $10 billion
D) $20 billion

Question 23

If the reserve requirement is 10%,then a $6,000 decrease in deposits means that the money supply:

A) will decrease by $600.
B) has the potential to decrease by $600.
C) will decrease by $60,000.
D) has the potential to decrease by $60,000.

Question 24

At Christmas,people tend to draw money out of their checking accounts to pay for Christmas presents.As a result,the money multiplier will:

A) increase.
B) not change.
C) decrease.
D) become more volatile.

Question 25

Perry deposits $10,000 in his bank account.If the reserve requirement is 15%,how much of this amount can his bank make in new loans?

A) $1,500
B) $15,000
C) $8,500
D) $10,000

Question 26

If the reserve requirement is 25%,then the potential money multiplier is ____ and the actual money multiplier is ____.

A) 25;less than 25
B) 25;greater than 25
C) 4;less than 4
D) 250;greater than 250

Question 27

If the reserve requirement is 2.5%,the potential money multiplier is:

A) 0.025
B) 2.5
C) 4
D) 40

Question 28

If the reserve requirement is 25%,then a $1 increase in deposits means that the money supply:

A) will increase by $4.
B) has the potential to increase by $4.
C) will increase by $25.
D) has the potential to increase by $25.

Question 29

Assume the reserve requirement is 10% and no excess reserves are held.If an initial cash deposit of $10,000 is made,the money supply has the potential to increase by:

A) $11,000.
B) $100,000.
C) $90,000.
D) $110,000.

Question 30

The money multiplier is:

A) interest payment divided by yield.
B) yield divided by interest payment.
C) 1/1 - MPS.
D) 1 divided by reserve requirement.

Question 31

Callie withdraws $600 from her bank account.If the reserve requirement is 15%,by how many dollars must her bank reduce its lending?

A) $510
B) $600
C) $90
D) $667

Question 32

The _____ measures the maximum amount the money supply can increase when new deposits enter the system.

A) equity multiplier
B) FDIC
C) money multiplier
D) Federal Reserve System

Question 33

If the reserve requirement is 25%,then a $500 increase in deposits means that the money supply:

A) will increase by $2,000.
B) has the potential to increase by $2,000.
C) will increase by $125.
D) has the potential to increase by $125.

Question 34

Assume the reserve requirement is 10% and all banks are fully loaned up.If a new deposit of $10,000 is made into Bank X,with this deposit Bank X can make new loans of:

A) $9,000.
B) $10,000.
C) $1,000.
D) $11,000.

Question 35

If a bank's required reserve ratio is 10%,an initial injection of $2,000 would increase the overall money supply by up to:

A) $200.
B) $2,000.
C) $10,000.
D) $20,000.

Question 36

The money multiplier:

A) is equal to the reserve requirement.
B) measures the maximum amount the money supply can increase when new deposits enter the banking system.
C) works only for increases in the money supply and never for decreases.
D) demonstrates that small changes in reserves have a negligible impact on the total money supply.

Question 37

If the reserve requirement is 20%,then a $1 decrease in deposits means that the money supply:

A) will decrease by $5.
B) has the potential to increase by $20.
C) will increase by $5.
D) has the potential to decrease by $5.

Question 38

When banks hold excess reserves,they:

A) increase the amount of loans to the public.
B) reduce the actual money multiplier.
C) increase the money supply.
D) increase the reserve requirement.

Question 39

If the reserve requirement is 10%,then the potential money multiplier is ____ and the actual money multiplier is ____.

A) 10;greater than 10
B) 100;greater than 100
C) 10;less than 10
D) 100;less than 100

Question 40

If the reserve requirement is 18.5%,what is the money multiplier?

A) 1.9
B) 20
C) 18.5
D) 5.4

Question 41

During the 2007-2009 recession,the money multiplier:

A) fell but remained above 1.
B) fell to less than 1.
C) rose above 1.
D) rose above 10 for the first time.

Question 42

Which of the following is a provision of the Federal Reserve Act or subsequent legislation that weakens the independence of the Fed?

A) The Fed's actions are subject to executive branch control.
B) Members of the Federal Reserve Board serve 14-year terms.
C) Members of the Federal Reserve Board cannot be reappointed.
D) The Federal Reserve System is subject to Congressional oversight.

Question 43

Which of the following statements is CORRECT?

A) The Fed's actions are subject to executive branch control.
B) Politically controlled banks are better at fighting inflation than are independent central banks.
C) The Federal Reserve is considered to be an independent central bank.
D) The Federal Reserve System is not subject to Congressional oversight.

Question 44

Tighter lending standards tend to ____ the money multiplier,making it ____ for the Fed to use its tools effectively.

A) increase;easier
B) increase;harder
C) decrease;easier
D) decrease;harder

Question 45

Which of the following is a provision of the Federal Reserve Act or subsequent legislation that contributes to the independence of the Fed?

A) The Fed's actions are subject to executive branch control.
B) Appointments to the Federal Reserve Board are staggered so that one expires every other year.
C) Members of the Federal Reserve Board cannot be reappointed.
D) The Federal Reserve System is subject to Congressional oversight.

Question 46

The actual money multiplier is:

A) usually equal to the potential money multiplier.
B) usually larger than the potential money multiplier.
C) usually smaller than the potential money multiplier.
D) always equal to the potential money multiplier.

Question 47

If the spread of ATMs made it more likely for people to hold their money in banks,the potential money multiplier probably ____ and the actual money multiplier probably ____,ceteris paribus.

A) did not change;rose
B) did not change;fell
C) rose;rose
D) rose;did not change

Question 48

About ____ of U.S.currency is held outside the United States.

A) one-quarter
B) one-third
C) half
D) two-thirds

Question 49

Money leakages tend to ____ during recessions,causing the actual money multiplier to ____.

A) rise;rise
B) rise;fall
C) fall;rise
D) fall;fall

Question 50

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults:

A) the potential multiplier will rise.
B) the potential multiplier will fall.
C) the actual multiplier will rise.
D) the actual multiplier will fall.

Question 51

If foreigners become less confident in the ability of the U.S.dollar to hold its value:

A) the potential multiplier will rise.
B) the potential multiplier will fall.
C) the actual multiplier will rise.
D) the actual multiplier will fall.

Question 52

Sometimes the Fed's goals conflict,and the Fed must emphasize one goal over another.Which of the following is a goal of the Fed that does NOT conflict with its goal of full employment?

A) promoting economic growth
B) promoting an equitable distribution of income
C) keeping the price level stable
D) keeping tax rates low

Question 53

There are two ways for money to be initially deposited into the banking system.They include:

A) the deposit of a check by a bank customer and a gold deposit by the government.
B) the deposit of a check by a bank customer and a cash deposit by a bank customer.
C) a cash deposit by a bank customer and a cash deposit by the government.
D) a cash deposit by a bank customer and an electronic reserve deposit by the government.

Question 54

If a bank has assets of $5 billion and liabilities of $4.8 billion:

A) its equity equals $200 million.
B) its equity equals −$800 million.
C) it faces a solvency crisis.
D) its equity equals −$800 million and it faces a solvency crisis.

Question 55

Which of the following does NOT explain why the actual money multiplier and the potential money multiplier are different?

A) Banks hold excess reserves during tough economic times.
B) The interest rate that banks pay on deposits is very low.
C) Foreign deposits in American banks aren't counted in the actual money multiplier.
D) Foreign consumers,businesses,and governments hold U.S.dollars.

Question 56

The growth of businesses such as Coinstar that convert coins into bank notes or gift cards caused money to ____ and the actual money multiplier to ____,ceteris paribus.

A) reenter the banking system;rise
B) reenter the banking system;fall
C) leave the banking system;rise
D) leave the banking system;fall

Question 57

Appointments to the Federal Reserve Board are staggered so that one expires every other year.This provision was enacted to ensure:

A) that Federal Reserve Board members would serve their entire term.
B) that the Fed would be accountable to Congress.
C) stability and continuity on the Board.
D) that regional considerations would not impact the Board's decisions.

Question 58

Sometimes the Fed's goals conflict,and the Fed must emphasize one goal over another.Which of the following is a goal of the Fed that might conflict with its goal of full employment?

A) promoting economic growth
B) promoting an equitable distribution of income
C) keeping the price level stable
D) keeping tax rates low

Question 59

The national economic objectives that the Fed attempts to achieve include all the following actions EXCEPT:

A) promoting economic growth accompanied by full employment.
B) maintaining moderate long-term interest rates.
C) keeping the price level stable.
D) keeping tax rates low.

Question 60

If there is a general rise in fear of the financial system:

A) the potential multiplier will rise.
B) the potential multiplier will fall.
C) the actual multiplier will rise.
D) the actual multiplier will fall.

Question 61

The report that compiles economic conditions collected by the Federal Reserve regional banks is called the:

A) Beige Book.
B) Red Book.
C) Economic Report.
D) Reserve Report.

Question 62

Which of the following is NOT a policy tool of the Federal Reserve?

A) reserve requirements
B) the discount rate
C) open market operations
D) fiscal policy

Question 63

The Chairman of the Board of Governors is appointed for a _____ renewable term.

A) 4-year
B) 6-year
C) 8-year
D) 12-year

Question 64

The Federal Open Market Committee is responsible for:

A) setting interest rates.
B) running the check-clearing process.
C) overseeing the buying and selling of government securities in the open market.
D) reducing the Fed's reliance on open market operations.

Question 65

All of these actions are performed by the Federal Reserve regional banks EXCEPT:

A) distributing coins and currency.
B) setting reserve requirements.
C) regulating and supervising member banks.
D) providing a nationwide payments system.

Question 66

The central bank of the United States is:

A) the Treasury.
B) the Congressional Budget Office.
C) the Internal Revenue Service.
D) the Federal Reserve System.

Question 67

The Fed's Board of Governors consists of _____ members who are appointed by the _____ and confirmed by the _____.

A) five;President;Senate
B) seven;President;Senate
C) seven;Senate;President
D) 12;Congress;President

Question 68

The membership of the Board of Governors of the Federal Reserve System consists of:

A) the presidents of seven of the Federal Reserve district banks.
B) the President of the United States,three members of the Senate,and three members of the House of Representatives.
C) four government-appointed persons and three commercial bank presidents.
D) seven persons appointed by the President of the United States.

Question 69

The Federal Open Market Committee:

A) is independent of the Board of Governors.
B) is composed of all the regional bank presidents.
C) is composed of the Board of Governors and five other regional Reserve Bank presidents.
D) None of the answers is correct.

Question 70

Which of the following statements concerning the structure of the Federal Reserve System is CORRECT?

A) The Fed's Board of Governors consists of 12 members.
B) The chairman and vice-chairman of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years.
C) There are 10 regional Federal Reserve banks.
D) The Federal Open Market Committee (FOMC)has seven members.

Question 71

In which city is the Federal Reserve's Board of Governors?

A) Boston
B) New York
C) Philadelphia
D) Washington,DC

Question 72

The _______________________________ oversee(s)the main tool of monetary policy.

A) 12 regional Federal Reserve banks
B) Federal Open Market Committee
C) Council of Economic Advisers
D) Congressional Budget Office

Question 73

The 12 Federal Reserve banks and their branches do all of the following except:

A) distribute coins and currency.
B) regulate and supervise member banks.
C) serve as the banker for the United States Treasury.
D) accept deposits from U.S.citizens.

Question 74

The main policymaking arm of the Fed is the:

A) Federal Open Market Committee.
B) Council of Economic Advisers.
C) Money Committee.
D) Beige Book Committee.

Question 75

Which of the following is a basic goal of the Federal Reserve System?

A) full employment
B) a balanced federal budget
C) zero interest rates
D) export promotion

Question 76

Federal Reserve banks are located in all of these cities EXCEPT:

A) Dallas.
B) Augusta.
C) Richmond.
D) Boston.

Question 77

Which of the following is correct?

A) The Federal Reserve has 12 regional banks.The Board of Governors has 14 members,each serving a 7-year term.
B) The Federal Reserve has 14 regional banks.The Board of Governors has 12 members,each serving a 7-year term.
C) The Federal Reserve has 12 regional banks.The Board of Governors has seven members,each serving a 14-year term.
D) The Federal Reserve has 14 regional banks.The Board of Governors has seven members,each serving a 12-year term.

Question 78

The Federal Reserve System includes _____ regional banks.

A) 50
B) 25
C) 12
D) 4

Question 79

The _____ is the central bank of the United States.

A) Federal Deposit Insurance Corporation
B) Federal Reserve System
C) Securities and Exchange Commission
D) U.S.Treasury

Question 80

Federal Reserve board members serve for ______ years,but the chair serves for ______.

A) 4;14 years
B) 14;4 years
C) 4;4 years
D) 14;life