Deck 14: The Money Supply Process

Question 1

Total Reserves minus vault cash equals

A)bank deposits with the Fed.
B)excess reserves.
C)required reserves.
D)currency in circulation.

Answer 1

bank deposits with the Fed.

Question 2

The monetary liabilities of the Federal Reserve include

A)securities and loans to financial institutions.
B)currency in circulation and reserves.
C)securities and reserves.
D)currency in circulation and loans to financial institutions.

Answer 2

currency in circulation and reserves.

Question 3

The three players in the money supply process include

A)banks,depositors,and the U.S.Treasury.
B)banks,depositors,and borrowers.
C)banks,depositors,and the central bank.
D)banks,borrowers,and the central bank.

Answer 3

banks,depositors,and the central bank.

Question 4

Of the three players in the money supply process,most observers agree that the most important player is

A)the United States Treasury.
B)the Federal Reserve System.
C)the FDIC.
D)the Office of Thrift Supervision.

Question 5

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

A)the Federal Reserve System.
B)the United States Treasury.
C)the U.S.Gold Commission.
D)the House of Representatives.

Question 6

Individuals that lend funds to a bank by opening a checking account are called

A)policyholders.
B)partners.
C)depositors.
D)debt holders.

Question 7

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,eight million dollars on deposit with the Federal Reserve,and one million dollars in required reserves.Given this information,we can say First National Bank has ________ million dollars in excess reserves.

A)three
B)nine
C)ten
D)eleven

Question 8

Total reserves are the sum of ________ and ________.

A)excess reserves; borrowed reserves
B)required reserves; currency in circulation
C)vault cash; excess reserves
D)excess reserves; required reserves

Question 9

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,eight million dollars on deposit with the Federal Reserve,and one million dollars in required reserves.Given this information,we can say First National Bank faces a required reserve ratio of ________ percent.

A)ten
B)twenty
C)eighty
D)ninety

Question 10

Total reserves minus bank deposits with the Fed equals

A)vault cash.
B)excess reserves.
C)required reserves.
D)currency in circulation.

Question 11

The percentage of deposits that banks must hold in reserve is the

A)excess reserve ratio.
B)required reserve ratio.
C)total reserve ratio.
D)currency ratio.

Question 12

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,eight million dollars on deposit with the Federal Reserve,and nine million dollars in excess reserves.Given this information,we can say First National Bank has ________ million dollars in required reserves.

A)one
B)two
C)eight
D)ten

Question 13

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,eight million dollars on deposit with the Federal Reserve,and nine million dollars in excess reserves.Given this information,we can say First National Bank faces a required reserve ratio of ________ percent.

A)ten
B)twenty
C)eighty
D)ninety

Question 14

Excess reserves are equal to

A)total reserves minus discount loans.
B)vault cash plus deposits with Federal Reserve banks minus required reserves.
C)vault cash minus required reserves.
D)deposits with the Fed minus vault cash plus required reserves.

Question 15

Both ________ and ________ are monetary liabilities of the Fed.

A)securities; loans to financial institutions
B)currency in circulation; reserves
C)securities; reserves
D)currency in circulation; loans to financial institutions

Question 16

Both ________ and ________ are Federal Reserve assets.

A)currency in circulation; reserves
B)currency in circulation; securities
C)securities; loans to financial institutions
D)securities; reserves

Question 17

The monetary base consists of

A)currency in circulation and Federal Reserve notes.
B)currency in circulation and the U.S.Treasury's monetary liabilities.
C)currency in circulation and reserves.
D)reserves and Federal Reserve Notes.

Question 18

The amount of deposits that banks must hold in reserve is

A)excess reserves.
B)required reserves.
C)total reserves.
D)vault cash.

Question 19

Reserves are equal to the sum of

A)required reserves and excess reserves.
B)required reserves and vault cash reserves.
C)excess reserves and vault cash reserves.
D)vault cash reserves and total reserves.

Question 20

The sum of the Fed's monetary liabilities and the U.S.Treasury's monetary liabilities is called

A)the money supply.
B)currency in circulation.
C)bank reserves.
D)the monetary base.

Question 21

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,nine million dollars in excess reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars on deposit with the Federal Reserve.

A)one
B)two
C)eight
D)ten

Question 22

When a bank sells a government bond to the Federal Reserve,reserves in the banking system ________ and the monetary base ________,everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 23

High-powered money minus currency in circulation equals

A)reserves.
B)the borrowed base.
C)the nonborrowed base.
D)discount loans.

Question 24

When the Federal Reserve purchases a government bond from a bank,reserves in the banking system ________ and the monetary base ________,everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 25

Suppose that from a new checkable deposit,First National Bank holds eight million dollars on deposit with the Federal Reserve,one million dollars in required reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars in excess reserves.

A)two
B)eight
C)nine
D)ten

Question 26

When a bank buys a government bond from the Federal Reserve,reserves in the banking system ________ and the monetary base ________,everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 27

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,one million dollars in required reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars on deposit with the Federal Reserve.

A)one
B)two
C)eight
D)ten

Question 28

Suppose that from a new checkable deposit,First National Bank holds eight million dollars on deposit with the Federal Reserve,nine million dollars in excess reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars in required reserves.

A)one
B)two
C)nine
D)ten

Question 29

When the Federal Reserve sells a government bond to a bank,reserves in the banking system ________ and the monetary base ________,everything else held constant.

A)increase; increases
B)increase; decreases
C)decrease; increases
D)decrease; decreases

Question 30

When banks borrow money from the Federal Reserve,these funds are called

A)federal funds.
B)discount loans.
C)federal loans.
D)Treasury funds.

Question 31

High-powered money minus reserves equals

A)reserves.
B)currency in circulation.
C)the monetary base.
D)the nonborrowed base.

Question 32

Suppose that from a new checkable deposit,First National Bank holds eight million dollars on deposit with the Federal Reserve,one million dollars in required reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars in vault cash.

A)two
B)eight
C)nine
D)ten

Question 33

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,nine million dollars in excess reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars in required reserves.

A)one
B)two
C)eight
D)ten

Question 34

Purchases and sales of government securities by the Federal Reserve are called

A)discount loans.
B)federal fund transfers.
C)open market operations.
D)swap transactions.

Question 35

Suppose that from a new checkable deposit,First National Bank holds eight million dollars on deposit with the Federal Reserve,nine million dollars in excess reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars in vault cash.

A)one
B)two
C)nine
D)ten

Question 36

Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,one million dollars in required reserves,and faces a required reserve ratio of ten percent.Given this information,we can say First National Bank has ________ million dollars in excess reserves.

A)one
B)two
C)nine
D)ten

Question 37

When the Fed buys $100 worth of bonds from First National Bank,reserves in the banking system

A)increase by $100.
B)increase by more than $100.
C)decrease by $100.
D)decrease by more than $100.

Question 38

The monetary base minus reserves equals

A)currency in circulation.
B)the borrowed base.
C)the nonborrowed base.
D)discount loans.

Question 39

The interest rate the Fed charges banks borrowing from the Fed is the

A)federal funds rate.
B)Treasury bill rate.
C)discount rate.
D)prime rate.

Question 40

The monetary base minus currency in circulation equals

A)reserves.
B)the borrowed base.
C)the nonborrowed base.
D)discount loans.

Question 41

All else the same,when the Fed calls in a $100 discount loan previously extended to the First National Bank,reserves in the banking system

A)increase by $100.
B)increase by more than $100.
C)decrease by $100.
D)decrease by more than $100.

Question 42

When the Fed extends a $100 discount loan to the First National Bank,reserves in the banking system

A)increase by $100.
B)increase by more than $100.
C)decrease by $100.
D)decrease by more than $100.

Question 43

When the Federal Reserve calls in a discount loan from a bank,the monetary base ________ and reserves ________.

A)remains unchanged; decrease
B)remains unchanged; increase
C)decreases; decrease
D)decreases; remains unchanged

Question 44

When a member of the nonbank public deposits currency into her bank account,

A)both the monetary base and bank reserves fall.
B)both the monetary base and bank reserves rise.
C)the monetary base falls,but bank reserves remain unchanged.
D)bank reserves rise,but the monetary base remains unchanged.

Question 45

Suppose a person cashes his payroll check and holds all the funds in the form of currency.Everything else held constant,total reserves in the banking system ________ and the monetary base ________.

A)remain unchanged; increases
B)decrease; increases
C)decrease; remains unchanged
D)decrease; decreases

Question 46

There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks.

A)sell; extend
B)sell; call in
C)purchase; extend
D)purchase; call in

Question 47

If a member of the nonbank public purchases a government bond from the Federal Reserve in exchange for currency,the monetary base will ________,but reserves will ________.

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

Question 48

An increase in ________ leads to an equal ________ in the monetary base in the short run.

A)float; decrease
B)float; increase
C)discount loans; decrease
D)Treasury deposits at the Fed; increase

Question 49

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds.If the proceeds are kept in ________,the open market purchase has no effect on reserves; if the proceeds are kept as ________,reserves increase by the amount of the open market purchase.

A)deposits; deposits
B)deposits; currency
C)currency; deposits
D)currency; currency

Question 50

A decrease in ________ leads to an equal ________ in the monetary base in the short run.

A)float; increase
B)float; decrease
C)Treasury deposits at the Fed; decrease
D)discount loans; increase

Question 51

If a person selling bonds to the Fed cashes the Fed's check,then reserves ________ and currency in circulation ________,everything else held constant.

A)remain unchanged; declines
B)remain unchanged; increases
C)decline; remains unchanged
D)increase; remains unchanged

Question 52

When a member of the nonbank public withdraws currency from her bank account,

A)both the monetary base and bank reserves fall.
B)both the monetary base and bank reserves rise.
C)the monetary base falls,but bank reserves remain unchanged.
D)bank reserves fall,but the monetary base remains unchanged.

Question 53

When the Fed sells $100 worth of bonds to First National Bank,reserves in the banking system

A)increase by $100.
B)increase by more than $100.
C)decrease by $100.
D)decrease by more than $100.

Question 54

The monetary base declines when

A)the Fed extends discount loans.
B)Treasury deposits at the Fed decrease.
C)float increases.
D)the Fed sells securities.

Question 55

If the Fed decides to reduce bank reserves,it can

A)purchase government bonds.
B)extend discount loans to banks.
C)sell government bonds.
D)print more currency.

Question 56

If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency,the monetary base will ________,but ________.

A)remain unchanged; reserves will fall
B)remain unchanged; reserves will rise
C)rise; currency in circulation will remain unchanged
D)rise; reserves will remain unchanged

Question 57

When an individual sells a $100 bond to the Fed,she may either deposit the check she receives or cash it for currency.In both cases

A)reserves increase.
B)high-powered money increases.
C)reserves decrease.
D)high-powered money decreases.

Question 58

When the Federal Reserve extends a discount loan to a bank,the monetary base ________ and reserves ________.

A)remains unchanged; decrease
B)remains unchanged; increase
C)increases; increase
D)increases; remain unchanged

Question 59

The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds.If the proceeds are kept in currency,the open market purchase ________ reserves; if the proceeds are kept as deposits,the open market purchase ________ reserves.

A)has no effect on; has no effect on
B)has no effect on; increases
C)increases; has no effect on
D)decreases; increases

Question 60

For which of the following is the change in reserves necessarily different from the change in the monetary base?

A)Open market purchases from a bank
B)Open market purchases from an individual who deposits the check in a bank
C)Open market purchases from an individual who cashes the check
D)Open market sale to a bank

Question 61

If the required reserve ratio is 10 percent,the simple deposit multiplier is

A)5.0.
B)2.5.
C)100.0.
D)10.0

Question 62

When the Fed supplies the banking system with an extra dollar of reserves,deposits increase by more than one dollar-a process called

A)extra deposit creation.
B)multiple deposit creation.
C)expansionary deposit creation.
D)stimulative deposit creation.

Question 63

If the required reserve ratio is 20 percent,the simple deposit multiplier is

A)5.0.
B)2.5.
C)4.0.
D)10.0.

Question 64

If the required reserve ratio is equal to 10 percent,a single bank can increase its loans up to a maximum amount equal to

A)its excess reserves.
B)10 times its excess reserves.
C)10 percent of its excess reserves.
D)its total reserves.

Question 65

If reserves in the banking system increase by $100,then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is

A)0.01.
B)0.10.
C)0.05.
D)0.20

Question 66

The relationship between borrowed reserves,the nonborrowed monetary base,and the monetary base is

A)MB = MB_n - BR.
B)BR = MB_n - MB.
C)BR = MB - MB_n.
D)MB = BR - MB_n.

Question 67

If the required reserve ratio is 15 percent,the simple deposit multiplier is

A)15.0.
B)1.5.
C)6.67.
D)3.33.

Question 68

In the simple deposit expansion model,if the Fed extends a $100 discount loan to a bank that previously had no excess reserves,the bank can now increase its loans by

A)$10.
B)$100.
C)$100 times the reciprocal of the required reserve ratio.
D)$100 times the required reserve ratio.

Question 69

In the simple deposit expansion model,if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves,the bank can now increase its loans by

A)$10.
B)$100.
C)$100 times the reciprocal of the required reserve ratio.
D)$100 times the required reserve ratio.

Question 70

Suppose your payroll check is directly deposited to your checking account.Everything else held constant,total reserves in the banking system ________ and the monetary base ________.

A)remain unchanged; remains unchanged
B)remain unchanged; increases
C)decrease; increases
D)decrease; decreases

Question 71

Subtracting borrowed reserves from the monetary base obtains

A)reserves.
B)high-powered money.
C)the nonborrowed monetary base.
D)the borrowed monetary base.

Question 72

In the simple model of multiple deposit creation in which banks do not hold excess reserves,the increase in checkable deposits equals the product of the change in reserves and the

A)reciprocal of the excess reserve ratio.
B)simple deposit expansion multiplier.
C)reciprocal of the simple deposit multiplier.
D)discount rate.

Question 73

If reserves in the banking system increase by $100,then checkable deposits will increase by $1000 in the simple model of deposit creation when the required reserve ratio is

A)0.01.
B)0.10.
C)0.05.
D)0.20.

Question 74

When the Fed supplies the banking system with an extra dollar of reserves,deposits ________ by ________ than one dollar-a process called multiple deposit creation.

A)increase; less
B)increase; more
C)decrease; less
D)decrease; more

Question 75

The formula for the simple deposit multiplier can be expressed as

A)△R = × △T
B)△D = × △R
C)△rr = × △T
D)△R = × △D

Question 76

Explain two ways by which the Federal Reserve System can increase the monetary base.Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the monetary base?

Question 77

The Fed does not tightly control the monetary base because it does not completely control

A)open market purchases.
B)open market sales.
C)borrowed reserves.
D)the discount rate.

Question 78

In the simple deposit expansion model,if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves,deposits in the banking system can potentially increase by

A)$10.
B)$100.
C)$100 times the reciprocal of the required reserve ratio.
D)$100 times the required reserve ratio.

Question 79

The simple deposit multiplier can be expressed as the ratio of the

A)change in reserves in the banking system divided by the change in deposits.
B)change in deposits divided by the change in reserves in the banking system.
C)required reserve ratio divided by the change in reserves in the banking system.
D)change in deposits divided by the required reserve ratio.

Question 80

In the simple deposit expansion model,if the Fed extends a $100 discount loan to a bank that previously had no excess reserves,deposits in the banking system can potentially increase by

A)$10.
B)$100.
C)$100 times the reciprocal of the required reserve ratio.
D)$100 times the required reserve ratio.