Question 1

-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 2

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

The answer of The reserve ratio is 10 percent and...

Question 3

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

Accepted Answer

Transaction deposits are liabilities of a bank as they are funds that the bank owes to its depositors. Cash, loans and total reserves are all assets of a bank.

Question 4

Which of the following is a liability to a bank?

Accepted Answer

Transaction deposits are a liability to a bank because they represent money the bank owes to its depositors.

Question 5

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

Accepted Answer

The answer of 
-Based on the above table, an open...

Question 6

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

Accepted Answer

When the Fed buys U.S. bonds in the open market, it expands total reserves by paying for the bond with newly created reserves. This injection of reserves into the banking system allows banks to increase their lending, which in turn leads to an expansion of the money supply. Therefore, the Fed's action both expands total reserves and the money supply.

Question 7

When the Fed wants to undertake open market operations, it

Accepted Answer

The Federal Reserve conducts open market operations through the trading desk at the New York Federal Reserve Bank. This involves the buying or selling of securities, typically U.S. Treasury securities, in order to control the federal funds rate and adjust the money supply. The Fed does not require commercial or member banks to participate in these operations.

Question 8

Open market operations are

Accepted Answer

Open market operations refer to the buying and selling of existing government securities (such as Treasury bills, notes, and bonds) in the open market by the Federal Reserve. This is one of the primary tools used by the Fed to influence the money supply and thus impact interest rates and the overall economy. Option A is incorrect as it refers to the buying of existing corporate securities, which is not a function of open market operations. Option C is incorrect as it implies that open market operations are used to finance government deficits, which is not the case. Option D is incorrect as it refers to the selling of new government securities, which is not the primary purpose of open market operations.

Question 9

-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 10

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, it creates a new deposit for the bank, which increases the bank's reserves by $1 million. This increases the bank's assets by $1 million (the new reserves) and liabilities by $1 million (the new deposit). At the same time, the Fed's assets increase by $1 million (the Treasury securities purchased) and its liabilities increase by $1 million (the new reserves created for the bank). Therefore, both the bank's and the Fed's assets and liabilities increase by $1 million, leading to the choice of answer D.

Question 11

Open market operations are conducted by the Fed

Accepted Answer

Open market operations refer to the buying and selling of government securities (such as Treasury bonds) by the Federal Reserve in order to influence the amount of reserves in the banking system and ultimately control interest rates. These transactions are typically conducted in the private secondary market for U.S. securities, rather than on a stock exchange or through the Bureau of Engraving. The New York location of the Federal Reserve Bank (not the Bank of Governors in Washington, D.C.) is responsible for implementing open market operations.

Question 12

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 bank pays the Fed with its reserves. This decreases the cash reserves of the commercial bank.

Question 13

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

If the actual money multiplier equals the potential money multiplier, then the reserve ratio must equal the inverse of the potential money multiplier.

The formula for the potential money multiplier is:
Potential money multiplier = 1/reserve ratio

So, in this case, the reserve ratio is 10%, which means the potential money multiplier is 1/0.1 = 10.

To increase the money supply by $500, we need to use the formula for the actual money multiplier:
Actual money multiplier = 1 + (reserve ratio exempt from required reserves)

Since we don't know the exempt amount, we can assume it is zero for simplicity. Therefore, the actual money multiplier is equal to the potential money multiplier, which is 10.

To increase the money supply by $500, we need to increase the monetary base by $500/10 = $50.

To do this, the Fed should buy $50 of government bonds from the public. This increases the reserves of banks, and they will lend out the excess reserves, leading to an increase in the money supply.

Question 14

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 Bank B presents the check to Bank A for payment, Bank A's reserves will decrease by $100 (the amount of the check). When Bank B receives $100 from Bank A, their reserves will increase by $100. Therefore, Bank B's required reserves increase while Bank A's required reserves decrease.

Question 15

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 16

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 17

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 18

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 19

The Federal Open Market Committee has responsibility for

Accepted Answer

The Federal Open Market Committee (FOMC) is responsible for conducting open market operations, which entails buying and selling government securities to influence the supply of money and credit in the economy. This is the main tool used by the Federal Reserve to implement monetary policy. The FOMC is made up of members of the Board of Governors of the Federal Reserve System and Federal Reserve Bank presidents. Therefore, options A, B, and D are incorrect as they do not reflect the primary responsibility of the FOMC.

Question 20

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 (FOMC) through its control over the money supply and interest rates. The FOMC sets a target federal funds rate, which affects the level of reserves that banks hold in order to meet reserve requirements and lend to customers.

Quiz 15: Money, Banking, and Central Banking