Question 1

When the Fed wants to undertake open market operations, it

Accepted Answer

The Fed undertakes open market operations by buying or selling securities through the trading desk at the New York Federal Reserve Bank. It is not able to require all commercial banks or member banks to participate in these transactions, and it does not buy from or sell to the U.S. Treasury.

Question 2

Open market operations are conducted by the Fed

Accepted Answer

Open market operations involve the buying and selling of U.S. government securities in the open market, and these transactions occur primarily in the private secondary U.S. securities market. This is where the Fed can affect the money supply and short-term interest rates. The New York Stock Exchange is not directly involved in these operations, and the Bureau of Engraving is responsible for printing U.S. currency, not conducting open market operations. While the Federal Reserve's Bank of Governors is involved in policy decisions, open market operations are executed by the Federal Reserve Bank of New York, which is located in New York City.

Question 3

The level of reserves in the banking system is determined by

Accepted Answer

The level of reserves in the banking system is determined by the Federal Open Market Committee, which is responsible for setting monetary policy and managing the money supply in the US economy. The committee uses a variety of tools, such as open market operations and the discount rate, to influence the level of reserves in the banking system. The American Banking Association, bond dealers, and the Treasury Department may play a role in the banking system, but they do not determine the level of reserves.

Question 4

-Based on the above table, an open market operation in which the Fed purchased $100,000 of government securities would

Accepted Answer

When the Fed purchases government securities, it increases the reserves of the banking system, allowing banks to lend more. With a reserve requirement, the money supply can expand by a multiple of the initial purchase, potentially up to $1 million if the reserve requirement is 10%.

Question 5

When the Fed buys a U.S. bond in the open market

Accepted Answer

When the Fed buys a U.S. bond in the open market, it pays for the bond by creating electronic reserves in the bank account of the bank that sold the bond. This increases the bank's reserves, which in turn allows the bank to increase its lending and create new money in the economy, thereby expanding the money supply. Therefore, the Fed's action expands the total reserves and the money supply.

Question 6

If a $1 million open market purchase by the Fed generates a new deposit at a bank that immediately causes the bank's reserves held at the Fed to increase by $1 million, then the T-account effects are that the bank's assets and liabilities ________ by $1 million and that the Fed's assets and liabilities ________ by $1 million.

Accepted Answer

When the Fed makes an open market purchase of $1 million, they are essentially buying bonds from the market. The seller of the bonds receives $1 million from the Fed which becomes a deposit at a bank. This deposit causes the bank's reserves held at the Fed to increase by $1 million. Therefore, the bank's assets and liabilities both increase by $1 million. At the same time, the Fed's assets (the bond bought from the market) and liabilities (the increase in reserves held at the Fed) both increase by $1 million. Therefore, the correct answer is D) increase; increase.

Question 7

If a check was written on Bank A for $100 and Bank B presented the check to Bank A for payment, what will happen to the required reserves for each respective bank after payment is made?

Accepted Answer

When a check is presented for payment, the bank on which it is drawn (Bank A in this case) will decrease its required reserves by the amount of the check ($100). The bank receiving payment (Bank B) will receive the $100 as a deposit, therefore increasing its required reserves. Hence, Bank A's required reserves decrease while Bank B's required reserves increase.

Question 8

-Based on the above table, the reserve ratio for the banking system is

Accepted Answer

The reserve ratio is calculated by dividing the total reserves of the bank by the total deposits. Without specific numbers from a table, the general approach to find the reserve ratio involves dividing the bank's reserves by its total deposits. A 10 percent reserve ratio suggests that the bank holds 10% of its deposits as reserves, which is a common requirement in many banking systems to ensure that banks have enough liquidity to meet withdrawal demands.

Question 9

The reserve ratio is 10 percent and all loan proceeds are deposited in transactions accounts. A bond dealer has $100 million in deposits, $8 million in vault cash, and $7 million in deposits at the Fed. The Fed sells $1 million in securities to the bond dealer. As a result, of this transaction alone

Accepted Answer

When the Fed sells $1 million in securities to the bond dealer, the bond dealer pays with its reserves, reducing its reserves by $1 million. This decreases the money supply by $1 million as the reserves are used to purchase the securities.

Question 10

Which of the following is NOT an asset of a bank?

Accepted Answer

Transaction deposits are liabilities of a bank, not assets. They represent the funds deposited by customers into their accounts, which the bank then uses to make loans or investments. Cash, loans, and total reserves are all assets of a bank, as they represent the resources that the bank can use to make profits or satisfy customer demand.

Question 11

-The potential money multiplier for the banking system in the above table is

Accepted Answer

The answer of 
-The potential money multiplier for the banking...

Question 12

Open market operations are

Accepted Answer

Open market operations refer to the buying and selling of existing U.S. government securities in open private markets by the Federal Reserve. Through these operations, the Fed can influence the reserves held by banks and ultimately impact the money supply in the economy. The other choices in the question are not accurate descriptions of open market operations.

Question 13

The Federal Open Market Committee has responsibility for

Accepted Answer

The Federal Open Market Committee (FOMC) is responsible for issuing orders to buy or sell government securities for the Fed. This is done as part of the Fed's monetary policy to influence interest rates and control inflation. The FOMC is made up of members of the Board of Governors of the Federal Reserve System and presidents of regional Federal Reserve Banks. The FOMC does not appoint members to the Board of Governors, print money, or advise the Treasury Department on monetary policy.

Question 14

A sale of securities by the Fed causes

Accepted Answer

When the Federal Reserve sells securities, it effectively removes money from the banking system because the purchasers of these securities pay the Fed, which reduces the reserves they hold at the Fed. This decrease in reserves means banks have less money to lend out, leading to a contraction in the money supply. Due to the fractional reserve banking system, this initial reduction in reserves can lead to a multiple contraction of the money supply, as it reduces banks' ability to create money through lending.

Question 15

The initial impact of the Fed's open market sale of government securities by the Federal Reserve is

Accepted Answer

The answer of The initial impact of the Fed's open...

Question 16

If the actual money multiplier equals the potential money multiplier and if the Fed wishes to reduce the money supply by $1 million when the reserve ratio is 20 percent, then the Fed should

Accepted Answer

The reserve ratio is 20%, so the potential money multiplier is 1/0.2 = 5. If the actual money multiplier equals the potential money multiplier, then the money supply will decrease by $1 million if the Fed reduces the monetary base by $200,000 (1/5 x $200,000 = $1 million). The Fed can reduce the monetary base by selling $200,000 of government securities, which will decrease the excess reserves of banks and reduce the amount of loans they can make, leading to a decrease in the money supply.

Question 17

If the actual money multiplier equals the potential money multiplier and if the Federal Reserve wishes to increase the money supply by $500 when the reserve ratio is 10 percent, it should

Accepted Answer

The potential money multiplier is calculated as 1/RR (reserve ratio). In this case, the potential money multiplier is 1/0.1 = 10. If the actual money multiplier equals the potential money multiplier, it means that the banking system is currently using all excess reserves to create new deposits, and there is no excess reserves available to create more deposits.

To increase the money supply by $500, the Federal Reserve needs to inject more reserves into the banking system. One way to do this is by buying government bonds from the banks. When the Fed buys bonds, it pays for them with newly-created reserves. These reserves increase the banks' reserves, which in turn increase their ability to lend and create new deposits.

Since the reserve ratio is 10 percent, the Fed needs to inject $5000 into the banking system to increase the money supply by $500. Thus, the correct choice is B, which proposes the Fed to buy $50 of government bonds.

Question 18

The Fed sells a U.S. government security and a bank dealer writes a check for the amount. When the check clears

Accepted Answer

When the Fed sells a U.S. government security and a bank dealer writes a check for the amount, the reserves have fallen by the amount of the check because the Fed clears the check by reducing the bank's deposits at the Fed. This action directly reduces the reserves of the banking system.

Question 19

Suppose that the actual money multiplier equals the maximum potential money multiplier. If the reserve ratio is 10 percent, in order for the banking system to increase deposits by $2.5 million, the Fed must

Accepted Answer

Since the actual money multiplier equals the maximum potential money multiplier, we can use the formula to find the amount of money that can be created given a change in reserves:

Change in deposits = (1/rr) x Change in reserves

where rr is the reserve ratio.

If the banking system wants to increase deposits by $2.5 million and the reserve ratio is 10%, we can plug in the numbers:

2,500,000 = (1/0.10) x Change in reserves

Change in reserves = $250,000

This means that the Fed must buy $250,000 of government securities from the public to increase reserves by that amount, which will allow the banking system to create an additional $2.5 million in deposits. Therefore, the correct choice is D.

Question 20

When the Federal Reserve sells a government security to a commercial bank

Accepted Answer

When the Federal Reserve sells a government security to a commercial bank, the commercial bank pays for it with its cash reserves, thus decreasing them.

Quiz 14: Money Banking and Central Banking