Deck 17: The Money Supply Process

Question 1

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.

Answer 1

liability of the Fed and is counted as reserves.

Question 2

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.

Answer 2

required reserve ratio.

Question 3

The British central bank is known as

A)the Bank of the Empire.
B)the Bank of London.
C)the Bank of England.
D)the British Federal Reserve.

Answer 3

the Bank of England.

Question 4

The central bank for the countries who have adopted the euro as their currency is known as

A)Eurofed.
B)European Central Bank.
C)Bank of Europe.
D)Federal Reserve of Europe.

Question 5

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 6

What do we need to add to Federal Reserve currency in circulation and bank reserves in order to arrive at the monetary base?

A)Treasury currency in circulation
B)U.S. government securities
C)Discount loans to banks
D)Checkable deposits in commercial banks

Question 7

Most of the reserves of the banking system are held as

A)Treasury securities.
B)deposits accounts with the Fed.
C)discount loans.
D)vault cash.

Question 8

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 9

The Japanese central bank is known as

A)the Bank of Japan.
B)the Federal Japanese Bank.
C)the Grand Nippon Central Bank.
D)the National Japanese Bank.

Question 10

As of July 2006, the value of currency in circulation was about

A)$79 billion.
B)$790 billion.
C)$79 trillion.
D)$790 trillion.

Question 11

As of July 2006, which of the following was true?

A)Bank deposit accounts with the Fed > vault cash > excess reserves
B)Excess reserves > vault cash > bank deposits with the Fed
C)Vault cash > bank deposits with the Fed > excess reserves
D)Bank deposit accounts with the Fed > excess reserves > vault cash

Question 12

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

Question 13

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 14

The 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 and the U.S. Treasury.

Question 15

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 16

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 17

The Fed pays interest on

A)both required and excess reserves.
B)required reserves, but not excess reserves.
C)neither required nor exess reserves.
D)excess reserves, but not required reserves.

Question 18

The largest liability of the Fed is

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

Question 19

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 20

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

Question 21

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 22

When the Fed holds U.S. government securities, it

A)pays interest to the government.
B)earns interest from the government.
C)declines to receive interest from the government.
D)defers receiving interest from the government.

Question 23

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 24

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 25

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 26

A $10 million open market purchase will increase bank reserves 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 27

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 28

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 29

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 30

A $10 million open market sale will decrease the reserves of the banking system 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 sale the public wishes to hold as currency.

Question 31

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 32

Why do banks avoid holding excess reserves?

A)The Fed levies a 10% penalty on any reserves held above the required level.
B)The Fed does not pay interest on reserves.
C)Savers are often reluctant to place their deposits with banks that hold excess reserves.
D)The Office of the Comptroller of the Currency monitors excess reserves more closely than any other bank asset.

Question 33

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)the sum of bank reserves and currency in circulation will increase by $10 million.

Question 34

Banks prefer to hold their liquid balances as

A)excess reserves.
B)required reserves.
C)marketable securities.
D)mortgage loans.

Question 35

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 36

In managing the monetary base, the Fed most often uses

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

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

Most of the earnings that the Fed receives on interest from government securities are

A)reinvested in new government securities.
B)retained for future open market operations.
C)shared by members of the Board of Governors.
D)returned to the Treasury.

Question 39

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 40

Open market operations 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 41

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 42

Holding other things constant, the currency-deposit ratio will

A)decrease as income increases, but increase as wealth increases.
B)decrease as income or wealth increases.
C)increase as income or wealth increases.
D)increase as income increases, but decrease as wealth increases.

Question 43

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 44

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 45

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 46

All of the following are likely to lead to a decrease in the currency-deposit ratio EXCEPT

A)higher risk of deposits.
B)increased wealth.
C)increased expected return on deposits.
D)reduction in anonymity value of cash.

Question 47

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 48

The earliest banks

A)had checkable deposits.
B)took in deposits, but did not make loans.
C)made loans, but did not accept deposits.
D)took in deposits and made loans, just as modern banks do.

Question 49

The effect on multiple deposit expansion

A)is greater if banks use excess reserves to make loans than if they use them to buy securities.
B)is greater if banks use excess reserves to buy securities than if they use them to make loans.
C)is the same whether banks use excess reserves to buy securities or to make loans.
D)is dependent upon the types of loans banks make and the types of securities banks buy.

Question 50

Which of the following statements concerning movements in the currency-deposit ratio is NOT correct?

A)The currency-deposit ratio declined during the early 1930s.
B)The currency-deposit ratio declined during most of the period from the late nineteenth century through the mid-1960s.
C)The currency-deposit ratio has generally risen since the late 1960s.
D)The currency-deposit ratio rose during World War II.

Question 51

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)$8000
B)$10,000
C)$40,000
D)$50,000

Question 52

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 53

If banks do not hold excess reserves, the multiple deposit expansion process ends when

A)total loans created equal total checkable deposits created.
B)total new reserves equal total checkable deposits created.
C)total reserves equal excess reserves.
D)all excess reserves have been eliminated.

Question 54

When banks borrow on the federal funds market

A)they typically pay a lower interest rate than the discount rate.
B)they typically pay a higher interest rate than the discount rate.
C)they pay a rate set by the Federal Reserve, rather than one set by market forces.
D)they borrow funds interest free.

Question 55

Which of the following expressions is correct?

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

Question 56

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 57

Suppose a bank with no excess reserves buys Treasury securities from the Fed. In order to raise the additional funds necessary to meet its reserve requirements the bank may

A)increase its loans outstanding.
B)purchase Treasury securities from another bank.
C)sell Treasury securities to another bank.
D)reduce its demand deposit liabilities.

Question 58

During a banking panic

A)the nominal return on currency is positive.
B)the nominal return on currency is negative.
C)the return on checkable deposits may be negative.
D)the return on checkable deposits must be greater than the return on currency, as long as market interest rates are positive.

Question 59

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)$2000
B)$8000
C)$10,000
D)$50,000

Question 60

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 61

Which of the following is NOT true of bank holdings of excess reserves?

A)They tend to be higher when the nominal market interest rate is low.
B)They rose in the early 1980s.
C)Banks earn no interest on excess reserves.
D)Banks will often hold excess reserves when they expect deposit outflows.

Question 62

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 63

Required reserves are equal to

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

Question 64

Which of the following equations is correct?

A)B = ^Bnon + BR
B)B = ^Bnon + ER
C)B = ER + BR
D)B = C + D

Question 65

A good reason for suspecting the existence of a substantial underground economy is

A)the mysterious decline in federal tax revenue in recent years.
B)the decline in the currency-deposit ratio during the 1970s and 1980s.
C)the sharp rise in marginal income tax rates during the 1980s.
D)the large amount of currency outstanding per person.

Question 66

Which of the following statements about the early 1930s is correct?

A)The ratio of the money supply to the monetary base fell.
B)The ratio of the money supply to the monetary base rose.
C)The ratio of the money supply to the monetary base was unchanged.
D)The monetary base fell to zero during the early 1930s.

Question 67

A rise in market interest rates

A)encourages banks to take out discount loans, but discourages their holding excess reserves.
B)discourages banks from taking out discount loans, but encourages their holding excess reserves.
C)encourages banks to take out discount loans and to hold excess reserves.
D)discourages banks from taking out discount loans and from holding excess reserves.

Question 68

The anonymity premium refers to

A)the value placed on using currency for illegal activities.
B)the extra charge to have checks printed without the depositor's name.
C)the amount investors are willing to pay brokers to avoid having to deal with borrowers face-to-face.
D)the value that bank customers place on safety deposit boxes.

Question 69

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 70

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 71

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 72

Which of the following equations is correct?

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

Question 73

The money supply process focuses on the monetary base rather than on bank reserves because

A)bank reserves have little connection to the money supply.
B)the Fed has better control of the monetary base than it has on bank reserves.
C)bank reserves are difficult to measure.
D)banks are not required to report the level of their reserves, which makes it difficult for the Fed to use them to control the money supply.

Question 74

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 75

During the early 1930s

A)the monetary base rose, but the money multiplier and the money supply fell.
B)the monetary base fell, but the money multiplier and the money supply rose.
C)the monetary base, the money multiplier, and the money supply all fell.
D)the monetary base, the money multiplier, and the money supply all rose.

Question 76

The increase in the currency-to-deposit ratio during the 1960s was probably due to

A)fear of bank failures.
B)limitations imposed on deposit insurance.
C)high marginal tax rates.
D)rising interest rates.

Question 77

When the spread between the T-bill rate and the discount rate increases

A)the Fed must be attempting to expand the money supply.
B)the Fed must be attempting to contract the money supply.
C)the volume of discount lending rises.
D)the volume of discount lending falls.

Question 78

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 79

The currency-to-deposit ratio will rise when

A)the fear of bank runs declines.
B)the expected return on deposits rises.
C)the anonymity premium declines.
D)the level of underground activity increases.

Question 80

When deposit withdrawals exceed reserves, which of the following is NOT a way in which banks bear the cost?

A)Buying securities
B)Calling in loans
C)Borrowing in the federal funds market
D)Borrowing from the Fed