Deck 14: The Federal Reserves Balance Sheet and the Money Supply Process

Question 1

Which of the following is a liability of the Fed?

A)U)S. government securities
B)currency in circulation
C)discount loans to banks
D)checkable deposits in commercial banks

Answer 1

currency in circulation

Question 2

Which of the following is an asset of the Fed?

A)reserves of banks
B)currency in circulation
C)discount loans to banks
D)checkable deposits in commercial banks

Answer 2

discount loans to banks

Question 3

The paper currency of the United States is issued by

A)state governments and the Fed.
B)state governments and the U.S. Treasury.
C)the U.S. Congress.
D)the Fed.

Answer 3

the Fed.

Question 4

Reserve deposits are

A)assets for financial institutions, but liabilities for the Fed.
B)liabilities for financial institutions, but assets for the Fed.
C)assets for both financial institutions and the Fed.
D)liabilities for both financial institutions and the Fed.

Question 5

Vault cash is a(an)

A)liability of the Fed and is counted as reserves.
B)asset of the Fed and is counted as reserves.
C)liability of the Fed and is not counted as reserves.
D)asset of the Fed and is not counted as reserves.

Question 6

The primary assets of the Fed are

A)discount loans and reserves.
B)discount loans and government securities.
C)government securities and reserves.
D)discount loans and open market operations.

Question 7

The Fed's portfolio of securities consists principally of

A)municipal bonds.
B)corporate bonds.
C)U)S. Treasury obligations.
D)obligations of foreign governments.

Question 8

Which of the following is a liability of the Fed?

A)reserves
B)U)S. government securities
C)discount loans to banks
D)checkable deposits in commercial banks

Question 9

The monetary base is equal to

A)all currency in circulation plus all deposits in financial institutions.
B)all currency in circulation plus checkable deposits in financial institutions.
C)all currency in circulation plus reserves held by banks.
D)checkable deposits in depository institutions plus reserves held by banks.

Question 10

As of October 2012, the value of currency in circulation was about

A)$1.1 billion.
B)$11 billion.
C)$1.1 trillion.
D)$11 trillion.

Question 11

The percentage of deposits that banks must hold as reserves is called the

A)percentage rate.
B)required reserve ratio.
C)Fed rate.
D)discount rate.

Question 12

In October 2012, the largest liability of the Fed was

A)currency in circulation.
B)reserves.
C)discount loans to banks.
D)vault cash.

Question 13

When the Fed extends loans to depository institutions

A)it increases the level of reserves.
B)it decreases the level of reserves.
C)it reduces the total value of the assets on its balance sheet.
D)it reduces the total value of the liabilities on its balance sheet.

Question 14

Open market operations generally involve

A)the Fed making discount loans to depository institutions.
B)the Fed buying and selling common stock in order to affect the liquidity of the stock market.
C)the Fed buying and selling U.S. government securities.
D)private investors buying and selling securities directly on exchanges, rather than through brokers.

Question 15

The interest rate the Fed charges on loans to depository institutions is known as

A)the federal funds rate.
B)the Fed loan rate.
C)the discount rate.
D)the interbank clearing rate.

Question 16

Reserves equal

A)deposits with the Fed plus holdings of U.S. government securities.
B)currency in circulation plus vault cash.
C)deposits with the Fed plus vault cash.
D)currency outstanding plus currency in circulation.

Question 17

What is the most direct method the Fed uses to change the monetary base?

A)open market operations
B)changing the required reserve ratio
C)changing the federal funds rate
D)changing the level of discount loans

Question 18

When the Fed lends to depository institutions, the loans are called

A)federal funds.
B)discount loans.
C)repurchase agreements.
D)reverse repurchase agreements.

Question 19

As of October 2012, which of the following was true?

A)deposits of foreign governments and international organizations > bank reserves > currency in circulation
B)currency in circulation > bank reserves > deposits of foreign governments and international organizations
C)bank reserves > currency in circulation > deposits of foreign government and international organizations
D)currency in circulation > deposits of foreign governments and international organizations > bank reserves

Question 20

The difference between currency outstanding and currency in circulation is equal to

A)vault cash.
B)bank reserves.
C)coins issued by the U.S. Treasury.
D)zero; they are the same thing.

Question 21

Most of the increase in the monetary base between 2007 and 2012 was due to increases in:

A)currency
B)bank deposits
C)excess reserves
D)Treasury bills

Question 22

As of late 2012, what was the all-time high price for an ounce of gold?

A)$1078
B)$1780
C)$7800
D)$14,163

Question 23

If the Fed purchases securities worth $10 million from a commercial bank, the banking system's balance sheet will show

A)an increase in securities held of $10 million and an increase in bank reserves of $10 million.
B)an increase in securities held of $10 million and a decrease in bank reserves of $10 million.
C)a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
D)a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

Question 24

Which of the following expressions is correct?

A)B = + BR
B)BR = + B
C) = B + BR
D) = -BR - B

Question 25

Individual investors who always want to hold gold are known as:

A)goldfinger
B)golden boys
C)gold bugs
D)goldilocks

Question 26

Although open market operations and discount loans both change the monetary base, the Fed has

A)greater control over open market operations than over discount loans.
B)greater control over discount loans than over open market operations.
C)very little control over either discount loans or open market operations.
D)complete control over both discount loans and open market operations.

Question 27

When economists, policymakers, or journalists refer to the Fed's balance sheet, they are typically referring to the:

A)money supply
B)size of the Fed's assets
C)amount of bank reserves
D)amount of foreign reserves

Question 28

Between late 2007 and 2012, the Fed's balance sheet:

A)remained about the same
B)more than doubled
C)more than tripled
D)rose tenfold

Question 29

If the Fed buys securities worth $10 million, then

A)bank reserves will increase by $10 million.
B)bank reserves will decrease by $10 million.
C)currency in circulation will increase by $10 million.
D)bank holdings of securities increase by $10 million.

Question 30

If the Fed makes a discount loan of $2 million to a commercial bank, the Fed's balance sheet will show

A)an increase in discount loans of $2 million and an increase in bank reserves of $2 million.
B)an increase in discount loans of $2 million and a decrease in bank reserves of $2 million.
C)a decrease in discount loans of $2 million and an increase in bank reserves of $2 million.
D)a decrease in discount loans of $2 million and a decrease in bank reserves of $2 million.

Question 31

A $10 million open market purchase will increase the monetary base by

A)$10 million.
B)$10 million times the money multiplier.
C)$10 million divided by the money multiplier.
D)an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.

Question 32

If the Fed sells securities worth $10 million to a commercial bank, the Fed's balance sheet will show

A)an increase in securities held of $10 million and an increase in bank reserves of $10 million.
B)an increase in securities held of $10 million and a decrease in bank reserves of $10 million.
C)a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
D)a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

Question 33

Which of the following statements is correct?

A)The volume of open market operations is determined jointly by the actions of the Fed, the banking system, and the nonbank public.
B)The Fed's control over discount lending is more complete than its control over open market operations.
C)The Fed completely controls the volume of open market operations.
D)The Fed has complete control over the volume of both discount loans and open market operations.

Question 34

If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million

A)if the public holds the proceeds as currency.
B)if the public deposits the proceeds as checkable deposits.
C)if the public deposits the proceeds with the Treasury in a monetary base account.
D)whether the public holds the proceeds as currency or deposits them as checkable deposits.

Question 35

On the books of the Fed the difference between borrowed reserves and discount loans is equal to

A)excess reserves.
B)required reserves.
C)currency in circulation.
D)zero; they are the same thing.

Question 36

In what year did the United States go off the gold standard?

A)1933
B)1945
C)1981
D)2001

Question 37

A $10 million open market sale will decrease the monetary base by

A)$10 million.
B)$10 million times the money multiplier.
C)$10 million divided by the money multiplier.
D)an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.

Question 38

Which of the following statements is correct?

A)The discount rate is determined by market forces.
B)The Fed's control over discount lending is more complete than its control over open market operations.
C)Decisions by both banks and the Fed determine the volume of discount loans.
D)The discount rate is typically greater than other short-term market interest rates.

Question 39

In managing the monetary base, the Fed most often uses

A)open market purchases.
B)printing money.
C)discount loans.
D)tax increases.

Question 40

In what year did sales of gold for investment exceed that for jewelry for the first time?

A)1933
B)1971
C)2001
D)2009

Question 41

Illustrate the effect of an open market sale of $20 million worth of Treasury bills on the Fed's balance sheet.

Question 42

Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out?

A)$8,000
B)$10,000
C)$40,000
D)$50,000

Question 43

Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities on the Fed's balance sheet.

Question 44

Briefly explain the process of multiple deposit creation.

Question 45

Why did banks increase their holdings of excess reserves during the Financial Crisis of 2007-2009?

Question 46

What is the maximum amount a bank can lend?

A)its total reserves
B)its excess reserves
C)its excess reserves divided by the required reserve ratio
D)the value of its checkable deposits times the required reserve ratio

Question 47

If the required reserve ratio is 10% and the Fed purchases $20 million worth of securities, what is the simple deposit multiplier and what happens to the amount of deposits in the banking system? Assume that banks do not hold excess reserves and the public does not change its currency holdings.

Question 48

Suppose the Fed sells $500,000 worth of securities to First National Bank. Illustrate the immediate effect on the bank's balance sheet.

Question 49

Suppose the required reserve ratio is 8% and that banks hold no excess reserves and the public does not change its currency holdings. If the Fed sells $5 million worth of securities, what happens to the amount of deposits in the banking system?

Question 50

If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank's excess reserves increase?

A)by $50,000
B)by $50,000 times the required reserve ratio
C)by $50,000 divided by the required reserve ratio
D)Not enough information has been provided to answer the question.

Question 51

What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009 that affected its balance sheet?

Question 52

The aggregate M1 consists of

A)currency plus all deposits in financial institutions.
B)currency plus all deposits in all institutions.
C)currency plus checkable deposits in financial institutions.
D)currency plus all checkable deposits.

Question 53

Suppose the Fed makes a $5 million discount loan to a bank. Illustrate how this affects the balance sheets of the Fed and the banking system.

Question 54

Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities, make use of the simple deposit multiplier to determine how much checking deposits would change.

A)increase by $1 million
B)increase by $10 million
C)decrease by $1 million
D)decrease by $10 million

Question 55

If the required reserve ratio is 5%, what is the value of the simple deposit multiplier?

A)0)05
B)0)20
C)5
D)20

Question 56

Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans?

A)$8 million
B)$92 million
C)$100 million
D)$1.25 billion

Question 57

Suppose that a bank with no excess reserves receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the bank can lend out?

A)$2,000
B)$8,000
C)$10,000
D)$50,000

Question 58

Suppose a bank repays a $10 million discount loan that it had previously borrowed from the Fed. Illustrate how this affects the balance sheets of the Fed and the banking system.

Question 59

When conducting open market operations, at what price is it willing to buy or sell securities?

A)at the price agreed upon by the Federal Open Market Committee
B)at the price agreed upon by the Board of Governors
C)at the price set by the Fed chair
D)at whatever price is necessary to carry out its open market operations

Question 60

If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?

A)rise by $1 million
B)decline by $1 million
C)rise by $8 million
D)rise by $12.5 million

Question 61

All of the following were reasons that the Fed increase the required reserve ration in 1936 EXCEPT:

A)concerns over the possibility of future inflation
B)to eliminate the high level of excess reserves
C)fears that the economy was overheating
D)concerns over a speculative bubble

Question 62

When banks hold excess reserves, the size of the money multiplier

A)is less than the simple deposit multiplier would suggest.
B)is greater than the simple deposit multiplier would suggest.
C)is equal to the size of the simple deposit multiplier.
D)becomes infinite.

Question 63

The size of the money multiplier depends upon all of the following EXCEPT

A)the required reserve ratio.
B)the currency-deposit ratio.
C)excess reserves relative to deposits.
D)the discount rate.

Question 64

Which of the following equations is correct?

A)M = m( + ER)
B)M = m( + BR)
C)M = m(C + BR)
D)M = C + R

Question 65

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals

A)1)14.
B)3)57.
C)4)35.
D)5)

Question 66

Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic?

A)The Fed sets the required reserve ratio.
B)The Fed is able to affect the level of reserves in the banking system.
C)Banks loan out all of their excess reserves.
D)The simple deposit multiplier is equal to 1 divided by the required reserve ratio.

Question 67

If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

A)$550 million.
B)$1.54 billion.
C)$1.9 billion
D)$15 billion.

Question 68

Suppose the required reserve ratio is 8%, excess reserve-to-deposit ratio is 2%, and the currency-to-deposit ratio is 10%. What is the value of the money multiplier?

Question 69

The Fed has the greatest control over which of the following?

A)the money multiplier
B)discount loans
C)the amount of excess reserves
D)the nonborrowed monetary base

Question 70

Suppose the banking system holds no excess reserves. If the required reserve ratio is 0.10 and the money multiplier is 2.5, what is the value of the currency-deposit ratio?

Question 71

Suppose the required reserve ratio is 8% and banks do not hold excess reserves. Illustrate on a bank's balance sheet what happens if the Fed buys $250,000 worth of securities from a bank.

Question 72

Suppose the required reserve ratio is 10%, excess-to-deposit ratio is 10%, and the currency-to-deposit ratio is 20%. If the Fed buys $50 million worth of securities, what will happen to the money supply?

Question 73

If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals

A)0)86.
B)3)14.
C)3)43.
D)4)

Question 74

During the Financial Crisis of 2007-2009, banks significantly increased their holdings of excess reserves. What impact did this have on the money multiplier? How would the Fed change the monetary base if it wanted to maintain a stable money supply?

Question 75

The money multiplier

A)equals 1 over the required reserve ratio.
B)is an expression that converts the monetary base to the money supply.
C)is larger than the simple deposit multiplier.
D)is completely controlled by the Fed.

Question 76

Which of the following accurately describes the relationship between excess reserves and checkable deposits following the financial crisis of 2007-2009?

A)Excess reserves declined as the excess reserve ratio returned to near zero.
B)Excess reserves rose to nearly one-third of checkable deposits.
C)Excess reserves approached the same level as checkable deposits.
D)Excess reserves exceeded checkable deposits.

Question 77

Why didn't the surge in the monetary base between 2008-2012 lead to a similar surge in the money supply?

A)The currency-deposit ratio rose significantly, resulting in a much smaller money multiplier.
B)The excess reserve-deposit ratio rose significantly, resulting in a much smaller money multiplier.
C)The Fed increase the required reserve ratio, resulting in a much smaller money multiplier.
D)Nonborrowed reserves declined, offsetting the increase in the monetary base.