Question 1

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is:

Accepted Answer

Currently, the required reserve amount is 20% of $40,000 = $8,000. The actual reserve amount is $4,000, leaving excess reserves of $4,000.
If the reserve requirement is increased to 25%, the required reserve amount will be 25% of $40,000 = $10,000. The bank will then have a deficiency of $6,000 in reserves ($4,000 actual reserves - $10,000 required reserves).
The maximum amount of new loans the bank can make is equal to its excess reserves. Therefore, the maximum amount of new loans the bank can make is $4,000 (answer choice B).

Question 2

The discount rate is the interest rate:

Accepted Answer

The discount rate is the interest rate that the Fed charges depository institutions to borrow reserves from a regional Federal Reserve bank. Option A refers to the federal funds rate, option B refers to the prime rate, and option D is not accurate as members of Congress do not borrow from the Fed.

Question 3

The time policymakers must wait for the collection of economic data is known as a(n):

Accepted Answer

The information lag refers to the delay in obtaining and analyzing economic data necessary for policymakers to make informed decisions.

Question 4

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. Its current level of total reserves is _____. If the reserve requirement is increased to 25%, the new level of excess reserves would be _____.

Accepted Answer

- Current level of total reserves = excess reserves + required reserves
- Required reserves = demand deposits * reserve requirement = $40,000 * 20% = $8,000
- Excess reserves = $4,000
- Therefore, current level of total reserves = $8,000 + $4,000 = $12,000
- New required reserves = $40,000 * 25% = $10,000
- Excess reserves after the increase = current total reserves - new required reserves = $12,000 - $10,000 = $2,000

Question 5

Assume the reserve requirement is 10%. If the Federal Open Market Committee buys a $10,000 bond from Bank A, Bank A's reserves:

Accepted Answer

When the Federal Open Market Committee buys a $10,000 bond from Bank A, the money is credited to Bank A's reserve account at the Federal Reserve. Since the reserve requirement is 10%, Bank A can now use $9,000 of the $10,000 to make new loans and must hold $1,000 in reserves. Therefore, Bank A's reserves increase by $10,000 ($9,000 in excess reserves and $1,000 in required reserves).

Question 6

Which statement(s) is(are) true? I. Increasing the reserve requirement would decrease the money supply.
II) Decreasing the discount rate would decrease the money supply.
III) Buying government bonds would increase the money supply.

Accepted Answer

Increasing the reserve requirement reduces the money banks can lend, decreasing the money supply. Buying government bonds injects money into the economy, increasing the money supply.

Question 7

When the Fed buys bonds, its demand _____ the price of bonds, _____ nominal interest rates.

Accepted Answer

When the Fed buys bonds, it increases the demand for bonds, which leads to an increase in the price of bonds. As bond prices and yields are inversely related, the increase in bond prices leads to a decrease in nominal interest rates. Therefore, the correct choice is B, which states that the demand increases the price of bonds and decreases nominal interest rates.

Question 8

_____ lags are shorter for monetary policy than for fiscal policy.

Accepted Answer

Monetary policy decisions can be made more quickly than fiscal policy decisions, which often require legislative approval.

Question 9

If the Federal Reserve decides to increase the money supply:

Accepted Answer

When the Federal Reserve increases the money supply, it typically does so by buying government securities on the open market. This injection of money into the financial system increases the supply of available funds, making it easier for banks and other financial institutions to lend money. As a result, the demand for loans increases, which in turn drives down interest rates, including the federal funds rate. So, if the Federal Reserve decides to increase the money supply, the federal funds rate will fall.

Question 10

Which measure would increase the money supply?

Accepted Answer

Buying government bonds would increase the money supply as it involves the central bank purchasing bonds from banks, hence increasing the bank's reserves and allowing them to lend out more money, thereby increasing the money supply.

Question 11

If the Fed is buying bonds, then it wants bond prices to _____ and the federal funds rate to _____.

Accepted Answer

When the Fed buys bonds, the demand for bonds increases and the prices of bonds rise. This results in a decrease in bond yields, which consequently leads to a fall in the federal funds rate as well.

Question 12

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $10,000 bond. The impact on the banking system is a(n) _____ in new reserves.

Accepted Answer

The answer of Assume that the reserve requirement is 20%...

Question 13

If the Fed wants to raise the federal funds rate, it will _____ bonds, which _____ bond prices.

Accepted Answer

If the Fed wants to raise the federal funds rate, it will sell bonds. When the Fed sells bonds, it takes money out of circulation, which raises the federal funds rate. This decrease in money supply also lowers demand for bonds, therefore lowering bond prices.

Question 14

The U.S. economy is currently experiencing high unemployment and low inflation. To lessen the unemployment problem, the Federal Reserve could:

Accepted Answer

Buying bonds through open market operations increases the money supply and lowers interest rates, which encourages borrowing and spending. This can stimulate economic growth and lessen unemployment. Option A is incorrect because raising the reserve requirement would decrease the ability of banks to lend, which would have the opposite effect. Option B is incorrect because lowering the discount rate would increase liquidity and the money supply, which could lead to inflation rather than addressing low inflation. Option D is incorrect because selling bonds would decrease the money supply and potentially worsen unemployment.

Question 15

Which of the following measures would decrease the money supply?

Accepted Answer

Increasing the reserve requirement means banks must hold more reserves and can lend out less, reducing the money supply.

Question 16

All of these are considered monetary policy lags EXCEPT:

Accepted Answer

Speculation lag is not a recognized type of monetary policy lag. The other options (decision lag, implementation lag, and information lag) are standard types of lags in monetary policy.

Question 17

Monetary policy involves all of these EXCEPT:

Accepted Answer

Monetary policy is primarily concerned with managing the money supply and interest rates, while personal taxes are related to fiscal policy.

Question 18

If the Fed increases the supply of money in the market, bond prices will _____ and interest rates will _____.

Accepted Answer

When the Fed increases the money supply, it typically leads to lower interest rates because there is more money available for lending. As interest rates fall, bond prices rise because existing bonds with higher interest rates become more attractive.

Question 19

Suppose the Fed increases required reserves from 10% to 20% of deposits. Assuming that banks are fully loaned up, the money supply will _____ and the value of the money multiplier will _____ to _____.

Accepted Answer

The answer of Suppose the Fed increases required reserves from...

Question 20

A bank has excess reserves of $5,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is:

Accepted Answer

The answer of A bank has excess reserves of $5,000...

Quiz 12: Money Creation and the Federal Reserve

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is:

The discount rate is the interest rate:

The time policymakers must wait for the collection of economic data is known as a(n) :

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. Its current level of total reserves is _. If the reserve requirement is increased to 25%, the new level of excess reserves would be _.

Assume the reserve requirement is 10%. If the Federal Open Market Committee buys a $10,000 bond from Bank A, Bank A's reserves:

Which statement(s) is(are) true? I. Increasing the reserve requirement would decrease the money supply. II) Decreasing the discount rate would decrease the money supply. III) Buying government bonds would increase the money supply.

When the Fed buys bonds, its demand _ the price of bonds, _ nominal interest rates.

_____ lags are shorter for monetary policy than for fiscal policy.

If the Federal Reserve decides to increase the money supply:

Which measure would increase the money supply?

If the Fed is buying bonds, then it wants bond prices to _ and the federal funds rate to _.

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $10,000 bond. The impact on the banking system is a(n) _____ in new reserves.

If the Fed wants to raise the federal funds rate, it will _ bonds, which _ bond prices.

The U.S. economy is currently experiencing high unemployment and low inflation. To lessen the unemployment problem, the Federal Reserve could:

Which of the following measures would decrease the money supply?

All of these are considered monetary policy lags EXCEPT:

Monetary policy involves all of these EXCEPT:

If the Fed increases the supply of money in the market, bond prices will _ and interest rates will _.

Suppose the Fed increases required reserves from 10% to 20% of deposits. Assuming that banks are fully loaned up, the money supply will ___ and the value of the money multiplier will _ to ___.

A bank has excess reserves of $5,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is: