Deck 10: The Money Supply Process

Question 1

Consider the following data about the economy: currency outstanding (C)= $1 trillion, total deposits (D)= $750 billion, total reserves (R)= $76 billion, and the required reserve ratio (RR ratio)= 10%. What is the money multiplier for this economy?

A)1.00
B)1.63
C)2.06
D)3.15

Answer 1

B

Question 2

Actual bank reserves are equal to

A)deposits at the Fed + excess reserves.
B)required reserves + excess reserves.
C)vault cash + required reserves.
D)deposits at the Fed + required reserves.

Answer 2

B

Question 3

The sum of Federal Reserve notes in circulation, plus US coins, plus bank reserves is collectively referred to by which of these designations?

A)M1
B)M2
C)The money base
D)The monetary base

Answer 3

D

Question 4

Consider the following data about the economy: currency outstanding (C)= $1 trillion, total deposits (D)= $750 billion, total reserves (R)= $76 billion, and the required reserve ratio (RR ratio)= 10%. If the Federal Reserve increases the monetary base by $1 billion, the money supply will increase by

A)$1.00 billion.
B)$1.63 billion.
C)$2.06 billion.
D)$3.15 billion.

Question 5

Trevor goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base?

A)The monetary base will increase with the increase in currency in circulation.
B)The monetary base will decline as bank reserves fall.
C)The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.
D)The monetary base will increase by less than the size of the withdrawal as the increase in the currency in circulation will not be completely offset by a decrease in bank reserves.

Question 6

When the currency ratio increases, the impact of changes in the monetary base on the money supply is

A)reversed.
B)unchanged.
C)strengthened.
D)weakened.

Question 7

When the Federal Reserve makes a loan at the discount window to a bank, which of the following will happen?

A)It will increase bank reserves and immediately lower the interest rate.
B)It will increase bank reserves and decrease the monetary base.
C)It  will increase bank reserves but have no effect on the monetary base.
D)It will increase bank reserves and increase the monetary base.

Question 8

Consider the following data about the economy: currency outstanding (C)= $1 trillion, total deposits (D)= $750 billion, total reserves (R)= $76 billion, and the required reserve ratio (RR ratio)= 10%. What is the currency ratio in this economy?

A)0.10
B)0.50
C)0.75
D)1.33

Question 9

Consider the following data about the economy: currency outstanding (C)= $2 trillion, total deposits (D)= $1 trillion, total reserves (R)= $60 billion, and the required reserve ratio (RR ratio)= 5%. If the Federal Reserve increases the monetary base by $1 billion, the money supply will

A)increase by $1.00 billion.
B)decrease by $1.00 billion.
C)increase by $1.46 billion.
D)decrease by $1.46 billion.

Question 10

Suppose the US Treasury engages in a foreign exchange intervention to lower the value of the dollar relative to the euro. The Fed sells dollars and buys euros in the foreign market. How will this affect the monetary base?

A)There will be no impact on the monetary base.
B)The monetary base will increase.
C)The monetary base will decline.
D)The composition of the monetary base will change with no impact on the overall size of the monetary base.

Question 11

Claire sells a US Treasury security to the Federal Reserve on the secondary market. She receives a check as payment and then cashes the check at her bank, keeping the cash. Which of the following best describes the result?

A)The monetary base will increase but bank reserves will stay the same.
B)Both the monetary base and bank reserves will increase.
C)The monetary base will decrease, but bank reserves will stay the same.
D)The monetary base will increase, and the Fed will have a new liability.

Question 12

Consider the following data about the economy: currency outstanding (C)= $2 trillion, total deposits (D)= $1 trillion, total reserves (R)= $60 billion, and the required reserve ratio (RR ratio)= 5%. What is the money multiplier for this economy?

A)1.00
B)1.26
C)1.46
D)2.46

Question 13

Consider the following data about the economy: currency outstanding (C)= $1 trillion, total deposits (D)= $750 billion, total reserves (R)= $76 billion, and the required reserve ratio (RR ratio)= 10%. What is the level of excess reserves for this economy?

A)$1 billion
B)$10 billion
C)$75 billion
D)$76 billion

Question 14

When there is a decrease in the required reserve ratio ( r_r )what will be the change, if any, in the money supply multiplier?

A)It will be doubled.
B)It will be unchanged .
C)It will be increased or strengthened .
D)It will be decreased or weakened .

Question 15

Through which of these methods can the Fed impact the money supply?

A)Bank reserves, open market operations, and interest rates
B)Interest rates, bank reserves, and bank regulations
C)Bank deposits, bank reserves, and interest rates
D)Bank regulations, open market operations, and interest rates

Question 16

Christopher buys a US Treasury security from the Federal Reserve in the secondary market. He pays cash. What is the result of this transaction?

A)The monetary base will increase, and the Federal Reserve will have a new asset.
B)Both the monetary base and bank reserves will increase.
C)The monetary base will decrease, and bank reserves will stay the same.
D)Both the monetary base and bank reserves will decrease.

Question 17

If the US Treasury engages in a foreign exchange intervention to increase the value of the dollar relative to the yuan renminbi by having the Federal Reserve buy dollars and sell yuan renminbi in the foreign market, how will this affect the monetary base?

A)There will be no impact on the monetary base.
B)The monetary base will increase.
C)The monetary base will decline.
D)The composition of the monetary base will change with no impact on the overall size of the monetary base.

Question 18

When a bank repays a loan at the discount window to the Federal Reserve, which of the following will happen?

A)It will decrease bank reserves and decrease the monetary base.
B)It will increase the monetary base by decreasing bank reserves.
C)It will decrease bank reserves but have no effect on the monetary base.
D)It will decrease bank reserves and immediately raise interest rates.

Question 19

Consider the following data about the economy: currency outstanding (C)= $1 trillion, total deposits (D)= $750 billion, total reserves (R)= $76 billion, and the required reserve ratio (RR ratio)= 10%. What is the level of required reserves for this economy?

A)$50 billion
B)$75 billion
C)$76 billion
D)$100 billion

Question 20

Federal Reserve notes are considered to be

A)assets of the US Treasury.
B)liabilities of the US Treasury.
C)liabilities of the Federal Reserve.
D)assets of the Federal Reserve.

Question 21

Which of these entities and/or groups can directly affect the monetary base?

A)The Federal Reserve, commercial banks, and the cash-holding public
B)The Federal Reserve and commercial banks
C)Commercial banks, the Fed, and members of Congress
D)Commercial banks and the cash-holding public

Question 22

In the conduct of monetary policy, the Federal Reserve has greater control over open market operations than it does over the results of quantitative easing.

Question 23

When a central bank wants to pursue an expansionary monetary policy, it can do which of these things?

A)Raise interest rates
B)Increase the required reserve ratio
C)Pump excess reserves into the banking system
D)Loan money to banks only if they promise to loan it to consumers

Question 24

As a country's financial markets become more highly developed, we can expect monetary policy to be

A)completely ineffective.
B)no more or less effective than before.
C)less effective.
D)more effective.

Question 25

When the US Treasury decides to reduce the value of the US dollar relative to the British pound, there will be a decline in the monetary base in the United States.

Question 26

Explain the logic of the inverse relationship between the currency ratio and the money supply multiplier.

Question 27

The economy is experiencing a decrease in excess reserves relative to the level of bank deposits. What effect will this have on the money supply multiplier?

A)The money supply multiplier will be twice as strong.
B)The money supply multiplier will be unchanged.
C)The money supply multiplier will increase; it will be strengthened.
D)The money supply multiplier will decrease; it will be weakened.

Question 28

The money supply multiplier is equal to (1 + k )/( k + r_r + r_e ).

Question 29

Explain how the Treasury affects the monetary base.

Question 30

How does the concept of cash leakage show the influence of the public on the banking system?

Question 31

Initially, quantitative easing was not much help in creating economic growth because

A)banks did not lend out the excess reserves that were created by quantitative easing.
B)the Federal Reserve also increased the required reserve ratio so additional reserves were not available for lending.
C)the Federal government began to cut spending, which counteracted the expansionary monetary policy.
D)the expansion of the monetary base was inflationary.

Question 32

When the Federal Reserve began its policy of quantitative easing in November 2008, there was __________ in the monetary base.

A)no change
B)a dramatic increase
C)a slight increase
D)a decline

Question 33

During the Great Recession and immediate post-recession years between 2008 and 2014, what happened to the price level in the United States?

A)The price level remained stable.
B)The price level fell and stayed very low.
C)The price level fell sharply but then rebounded somewhat.
D)The price level increased slightly.

Question 34

When there is a high degree of trust in a country's banking system, the amount of cash held out of banks relative to deposits in banks would tend to be what?

A)The amount of cash held out of banks would be close to zero.
B)The amount of cash held out of banks would be relatively low.
C)The amount of cash held out of banks would likely be unaffected.
D)The amount of cash held out of banks would be relatively high.

Question 35

Public mistrust of banks was a factor in limiting the effectiveness of the quantitative easing policies that began in 2008.