Question 1

Quantitative easing occurred when the Fed purchased bank debt, mortgage-backed securities, and long-term Treasury notes with money it created electronically.

Accepted Answer

Quantitative easing involved the Fed purchasing various types of securities with electronically created money.

Question 2

The central bank of the United States is

Accepted Answer

The Federal Reserve System is the central bank of the United States, responsible for monetary policy, regulating banks, and maintaining a stable financial system. The Treasury is a department of the federal government responsible for managing finances and collecting revenue. The Congressional Budget Office analyzes and reports on the budgetary impact of legislation. The Internal Revenue Service collects taxes.

Question 3

The fractional reserve banking system does not allow customers to withdraw all of their money from the bank at once.

Accepted Answer

The answer of The fractional reserve banking system does not...

Question 4

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

Accepted Answer

The potential money multiplier is calculated as 1 divided by the reserve requirement ratio. Therefore, with a reserve requirement of 2.5% (or 0.025 as a decimal), the potential money multiplier is 1 / 0.025 = 40.

Question 5

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

Accepted Answer

Foreign deposits in American banks are counted in the actual money supply, so they do not explain the difference between the actual and potential money multipliers.

Question 6

Because the Fed meets about every six weeks, the decision lag for monetary policy is shorter than for fiscal policy.

Accepted Answer

The Federal Reserve meets about every six weeks to make decisions about monetary policy, which means the decision lag for monetary policy is shorter than for fiscal policy, which often requires approval from multiple branches of government and may take longer to implement.

Question 7

If a bank's assets are $135 million and its liabilities are $157 million, then its equity is $22 million.

Accepted Answer

The equation for the balance sheet is Assets = Liabilities + Equity. Therefore, Equity = Assets - Liabilities. In this case, Equity would be a negative $22 million, since the bank's liabilities exceed its assets.

Question 8

In September 2013, the Fed was waiting for a pattern of economic improvement in the data before winding down its bond purchases. This wait for a signal about the economy's condition is known as decision lag.

Accepted Answer

This is known as "forward guidance," a communication strategy used by the Federal Reserve to influence expectations about future monetary policy actions, not decision lag. Decision lag refers to the time it takes for policy makers to recognize the need for action and to implement it.

Question 9

If the Federal Reserve wants to decrease the money supply, it should raise the required reserve ratio.

Accepted Answer

By raising the required reserve ratio, banks are required to hold more money in reserves and are able to lend out less money, which decreases the overall money supply in circulation.

Question 10

When liabilities exceed assets, a bank has negative equity.

Accepted Answer

When a bank's liabilities exceed its assets, it means that the bank owes more than it owns, resulting in negative equity.

Question 11

Which action is NOT a tool of monetary policy?

Accepted Answer

Changing government spending and taxes is a tool of fiscal policy, not monetary policy. Monetary policy refers to actions taken by the central bank to influence the money supply and interest rates in order to achieve macroeconomic goals such as controlling inflation and promoting economic growth. The tools of monetary policy include changing the discount rate, reserve requirements, and conducting open market operations.

Question 12

If foreign countries abandoned the use of the dollar as their only form of legal currency, the U.S. money multiplier would likely increase.

Accepted Answer

If foreign countries abandoned the use of the dollar as their only form of legal currency, the demand for dollars would decrease, which would lead to a decrease in the money multiplier.

Question 13

A bank has $50,000 in checking account deposits and loans of $49,000. Of the $49,000 loaned out, $43,000 remains in the checking accounts of the loan recipients. The bank has $50,000 cash on hand, and the reserve requirement is 25%. The amount of its required reserves equals

Accepted Answer

The required reserves equal 25% of the $49,000 in checking account deposits, which is $23,250.

Question 14

In June 2013, the Bank of Japan announced that it was continuing its easy money policy through open market operations. This bank must have decided to continue to buy securities.

Accepted Answer

The statement mentions that the Bank of Japan announced it was continuing its easy money policy through open market operations, which typically involves buying securities. Therefore, it can be concluded that the bank decided to continue buying securities.

Question 15

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

Accepted Answer

If a bank is subject to a reserve requirement of 15%, it is required to keep 15% of its deposits either in the vault or in the account with its regional Federal Reserve bank. Therefore, choice D is the best answer. Choices A and B are incorrect because the bank is not required to keep or lend out a specific portion of its deposits, but rather to keep a certain percentage in reserves. Choice C is partially correct, but it is incomplete, as the bank may choose to keep its required reserves in either the vault or the account with the regional Federal Reserve bank.

Question 16

If the reserve requirement is 25%, the potential money multiplier is

Accepted Answer

The potential money multiplier is calculated by dividing 1 by the reserve requirement ratio expressed as a decimal. So, 1/0.25 = 4. Therefore, the potential money multiplier is 4.

Question 17

If the potential money multiplier is 5, the reserve requirement is

Accepted Answer

The answer of If the potential money multiplier is 5,...

Question 18

Experience in this country and abroad suggests that independent central banks are better at fighting inflation than are politically controlled banks.

Accepted Answer

This statement is generally supported by economic research and experience in many countries. Independent central banks, less subject to political pressure to manipulate interest rates or money supply for short-term political gain, tend to have better success in controlling inflation over the long-term.

Question 19

The 12 regional Federal Reserve banks serve as the banker for the U.S. Treasury.

Accepted Answer

The 12 regional Federal Reserve banks do serve as the banker for the U.S. Treasury.

Question 20

The money multiplier is equal to one divided by checkable deposits.

Accepted Answer

The money multiplier is calculated as 1/reserve ratio, not 1/checkable deposits.

Quiz 12: Money Creation and the Federal Reserve