Deck 15: The Money Supply Process and the Money Multipliers

Question 1

When the Fed wants to lower interest rates, it buys bonds.

Answer 1

True

Question 2

When banks hold more excess reserves, the process of multiple deposit creation is less powerful.

Answer 2

True

Question 3

An increase in the monetary base causes more than double the increase in the money supply.

Answer 3

False

Question 4

Federal Reserve notes are liabilities of the Fed but assets of the banking system.

Question 5

The monetary base is composed of reserves and currency.

Question 6

An increase in the monetary base causes a larger increase in the money supply.

Question 7

When a bank makes a loan, the money supply increases.

Question 8

When a bank sells a bond and holds the proceeds as reserves, the money supply increases.

Question 9

Bonds are assets for the Fed and part of high-powered money.

Question 10

Reserves are a liability of the Fed.

Question 11

The simple deposit multiplier is always greater than or equal to one.

Question 12

Federal Reserve notes are an asset of the Fed.

Question 13

When the public holds more wealth as currency, the process of multiple deposit creation is more powerful.

Question 14

Gold is part of high-powered money.

Question 15

The monetary base is composed of the assets of the Fed.

Question 16

Transaction deposits are part of the money supply but not part of the monetary base.

Question 17

The monetary base is composed of gold and reserves.

Question 18

The money supply is comprised of deposits and currency.

Question 19

Reserves are assets for banks and part of high-powered money.

Question 20

When Joan withdraws $100 from a checkable account, the monetary base rises by $100.

Question 21

The money multiplier ₁.

Question 22

The money multiplier .

Question 23

The simple deposit multiplier assumes that banks hold a fixed fraction of deposits as excess reserves.

Question 24

The deposit multiplier is inversely related to the reserve requirement.

Question 25

The money multiplier ₂ could be greater than the inverse of the reserve requirement.

Question 26

When the Fed makes a loan, the monetary base increases but the money supply does not.

Question 27

The central bank's balance sheet is the same as that of other banks.

Question 28

A change in the fraction of deposits that are not checkable has an effect on ₁.

Question 29

A change in the fraction of deposits in money market mutual funds has an effect on ₂.

Question 30

The money multiplier ₂ will always be equal to the simple deposit multiplier.

Question 31

Central banks determine the money supply by controlling the monetary base.

Question 32

When the Fed wants to increase the money supply, it sells bonds.

Question 33

The effect of an open market operation on the monetary base does not depend on whether the transaction is made with the banking system of the public.

Question 34

When a borrower repays the Fed, the money supply increases.

Question 35

If the Federal Reserve began to pay interest on reserves, the deposit multiplier would fall.

Question 36

The effect of an open market operation on the money supply does not depend on whether the transaction is made with the banking system of the public.

Question 37

M1 is always greater than or equal to M2.

Question 38

During a financial panic, banks hold more reserves and the money supply falls, .

Question 39

The simple deposit multiplier assumes that all loaned funds eventually become deposits.

Question 40

The simple deposit multiplier undervalues the true deposit multiplier.

Question 41

Short-term, the currency ratio varies directly with the interest rate and the stability of the banking system.

Question 42

If the Fed wants to increase the money supply, it can lower the reserve requirement.

Question 43

M1 includes currency in circulation plus checkable deposits.

Question 44

The money multiplier ₂ will always increase over time.

Question 45

If the amount of money market funds increases, banks must hold extra reserves.

Question 46

Which of the following is part of the monetary base?

A) Federal Reserve notes
B) bonds
C) discount loans
D) none of the above

Question 47

Borrowers can have an effect on the excess reserve ratio.

Question 48

Which of the following is a liability of the Fed?

A) bonds
B) bank reserves
C) discount loans
D) all of the above

Question 49

An increase in the T/D ratio increases M1.

Question 50

An increase in the fraction of time deposits versus all deposits increases ₂.

Question 51

The currency ratio in the United States is higher after 2000 than it was in the 1950s.

Question 52

A decrease in T/D decreases ₂.

Question 53

Which of the following are NOT liabilities of the Fed?

A) Federal Reserve notes
B) bank reserves
C) discount loans
D) They are all liabilities of the Fed.

Question 54

In the early 1960s and early 2000s, ER/D was high at .003 to .004.

Question 55

When ER/D is up, the money supply decreases.

Question 56

Which of the following is an asset of the Fed?

A) Federal Reserve notes
B) bank reserves
C) gold
D) all of the above

Question 57

Banks have an influence on the currency ratio through interest rates.

Question 58

Checkable deposits are also known as transaction deposits.

Question 59

An increase in the excess reserve ratio (versus deposits) makes the multiple deposit creation process more powerful.

Question 60

A decrease in the ratio C/D increases M1.

Question 61

When the Bank of England buys euros, the supply of pounds

A) rises.
B) falls.
C) stays the same.
D) cannot be determined.

Question 62

A change in the monetary base leads to a larger change in the money supply since

A) reserves earn interest for the bank.
B) banks lend excess reserves, which become deposits.
C) a change in the monetary base changes the likelihood that households hold cash.
D) none of the above.

Question 63

Which of the following is part of high-powered money?

A) bonds
B) gold
C) discount loans
D) none of the above

Question 64

When the Fed buys securities, how much banks hold as excess reserves affects the

A) monetary base.
B) money supply.
C) money multiplier.
D) all of the above.

Question 65

Which of the following is part of the money supply but not high-powered money?

A) currency
B) bonds
C) checkable deposits
D) gold

Question 66

If the Fed were to sell gold, the money supply would

A) increase.
B) decrease.
C) stay the same.
D) cannot be determined.

Question 67

The balance sheet below shows a

A) $300 increase in the monetary base.
B) $300 decrease in the monetary base.
C) $300 increase in the money supply.
D) $300 decrease in the money supply.

Question 68

If the Fed sells $50 in securities and the reserve requirement is 25%, according to the simple formula for the money multiplier, the money supply

A) falls by $50.
B) falls by $200.
C) rises by $50.
D) rises by $200.

Question 69

If the Fed sells $50 in securities and the reserve requirement is 25%, according to the simple formula for the money multiplier, the monetary base

A) falls by $50.
B) falls by $200.
C) rises by $50.
D) rises by $200.

Question 70

The Federal Reserve makes an open market purchase and the change in reserves is the same as the change in the MB. Therefore, the Fed

A) made the purchase from the banks.
B) made the purchase from the public.
C) made the purchase from the government.
D) It is impossible for reserves to change as much as the MB.

Question 71

When the Fed sells $100 of bonds, the monetary base falls by an amount _____ $100 and the money supply falls by an amount _____ $100.

A) less than, equal to
B) equal to, equal to
C) equal to, greater than
D) greater than, greater than

Question 72

The balance sheet below shows a

A) $500 increase in the monetary base.
B) $200 increase in the monetary base.
C) $500 increase in the money supply.
D) $300 increase in the money supply.

Question 73

The balance sheet below shows a

A) $400 increase in the monetary base.
B) $400 decrease in the monetary base.
C) $300 decrease in the money supply.
D) $300 decrease in the monetary base.

Question 74

When the Fed buys securities, how much cash is held by the public affects the change in the

A) monetary base.
B) money supply.
C) money multiplier.
D) all of the above.

Question 75

Central banks make money from interest on

A) gold.
B) notes.
C) reserves.
D) none of the above.

Question 76

When the Bank of Japan buys a Japanese government bond, the supply of yen

A) rises.
B) falls.
C) stays the same.
D) cannot be determined.

Question 77

If the Fed buys $300 in securities and the reserve requirement is 5%, according to the simple formula for the money multiplier, the money supply

A) falls by $315.
B) falls by $600.
C) rises by $315.
D) rises by $600.

Question 78

Central banks make money from interest on

A) loans.
B) notes.
C) reserves.
D) all of the above.

Question 79

If the money supply rises by $1, the monetary base must have risen by

A) more than $1.
B) less than $1.
C) exactly $1.
D) cannot be determined.

Question 80

If the Fed buys $100 in securities and the reserve requirement is 10%, according to the simple formula for the money multiplier, the money supply

A) falls by $100.
B) falls by $1000.
C) rises by $100.
D) rises by $1000.