Deck 20: Understanding Movements in Bank Reserves

Question 1

Which of the following is a correct statement regarding the balance sheet of the Federal Reserve?

A) Fed assets = Fed liabilities + Federal Reserve notes
B) Bank reserves = Fed Assets - (Fed liabilities - bank reserves) + Fed capital accounts
C) Fed liabilities = Fed Capital Accounts + bank reserves
D) Fed assets = bank reserves + Federal Reserve notes outstanding

Answer 1

B

Question 2

A gold sale by the U.S. Treasury

A) reduces bank reserves.
B) increases bank reserves.
C) increases Federal Reserve assets.
D) leaves bank reserves unaffected.

Answer 2

A

Question 3

Which of the following appears as a liability on the Federal Reserves balance sheet?

A) U.S. government securities owned outright
B) Commercial bank deposits
C) Gold certificates
D) Cash items in the process of collection

Answer 3

B

Question 4

When a commercial bank borrows from the Federal Reserve,

A) Treasury liabilities rise.
B) Treasury assets rise.
C) Federal Reserve assets rise.
D) bank reserves fall.

Question 5

Federal Reserve liabilities and capital accounts are equal to

A) Federal Reserve assets.
B) gold certificates + Federal Reserve notes.
C) Federal Reserve notes outstanding.
D) bank reserves + government securities.

Question 6

If total Fed assets __________, then reserves have to __________, everything else being equal.

A) fall; rise
B) rise; fall
C) fall; fall
D) None of the above.

Question 7

Which of the following appears as a liability on the Federal Reserves balance sheet?

A) U.S. Treasury deposits
B) Special drawing rights
C) U.S. government securities held under repurchase agreements
D) Loans to commercial banks

Question 8

A severe storm that slows postal delivery will cause

A) a decrease in Federal Reserve float.
B) a decrease in Federal Reserve notes outstanding.
C) an increase in Federal Reserve float.
D) an increase in Federal Reserve notes outstanding.

Question 9

If total Fed liabilities __________, then reserves have to __________, everything else being equal.

A) fall; rise
B) rise; rise
C) fall; fall
D) None of the above.

Question 10

Federal Reserve liabilities are equal to

A) gold certificates + other Fed liabilities.
B) bank reserves - other Fed liabilities.
C) Federal Reserve notes.
D) Fed assets - Fed equity.

Question 11

Which of the following appears as an asset on the Federal Reserves balance sheet?

A) Commercial bank deposits
B) Bank reserves
C) Gold certificates
D) U.S. Treasury deposits

Question 12

Bank reserves will increase if which of the following changes occurs, assuming that there are no offsetting changes elsewhere on the Fed's balance sheet?

A) Fed loans decrease
B) Currency held by the public increases
C) Treasury deposits increase
D) The float decreases

Question 13

If a Fed __________ other than bank reserves falls and there are no offsetting entries elsewhere on the Fed's balance sheet, then bank reserves must __________.

A) asset; fall
B) asset; rise
C) liability; fall
D) liability; rise

Question 14

Which of the following appears as an asset on the Federal Reserve's balance sheet?

A) Capital accounts
B) U.S. Treasury deposits
C) U.S. government securities held under repurchase agreements
D) Federal Reserve notes outstanding

Question 15

The largest item on the asset side of the Federal Reserve balance sheet is

A) Federal Reserve notes.
B) U.S. government securities.
C) gold.
D) U.S. Treasury deposits.

Question 16

The bank reserve equation is the

A) assets and liabilities of the entire banking system.
B) tally sheet for sources and uses of reserves.
C) M1 multiplier.
D) Federal Reserve's method of determining how many government securities to purchase.

Question 17

A gold purchase by the U.S. Treasury

A) reduces bank reserves.
B) increases bank reserves.
C) increases Federal Reserve equity.
D) leaves bank reserves unaffected.

Question 18

Federal Reserve liabilities are equal to

A) gold certificates + other Fed liabilities.
B) bank reserves + other Fed liabilities.
C) Federal Reserve notes.
D) cash + loans + U.S. Treasury deposits.

Question 19

Which of the following is a correct statement regarding the balance sheet of the Federal Reserve?

A) Fed assets = Fed liabilities + Federal Reserve notes
B) Fed assets = Fed liabilities + Fed capital accounts
C) Fed assets = Fed liabilities + bank reserves
D) Fed assets = bank reserves + Federal Reserve notes outstanding

Question 20

The largest item on the liability side of the Federal Reserve's balance sheet is

A) commercial bank deposits.
B) U.S. government securities.
C) cash items in the process of collection.
D) Federal Reserve notes outstanding.

Question 21

In open market operations, when the Fed __________ securities, bank reserves __________.

A) buys; contract
B) buys; expand
C) sells; expand
D) None of the above.

Question 22

The importance of the float is that it

A) exists at all.
B) fluctuates considerably.
C) decreases total reserves.
D) is very stable.

Question 23

When the Fed receives an inflow of Federal Reserve notes, its

A) assets rise.
B) liabilities decline.
C) liabilities increase.
D) assets decline.

Question 24

When currency outstanding decreases,

A) gold certificates rise.
B) the money supply increases.
C) Fed assets decline.
D) bank deposits at the Fed increase.

Question 25

A sound monetary policy response to a sudden temporary increase in currency held by the public would be to

A) reduce the rate of currency printing.
B) carry out defensive open market operations.
C) carry out dynamic open market operations.
D) raise reserve requirements.

Question 26

Bank reserves will decrease if

A) Fed liabilities decrease.
B) currency held by the public decreases.
C) float decreases.
D) Fed assets increase.

Question 27

When currency outstanding increases,

A) gold certificates rise.
B) the money supply increases.
C) Fed assets increase.
D) bank deposits at the Fed decrease.

Question 28

When the U.S. Treasury sells gold, the immediate effect is that __________ and __________.

A) reserves increase; currency in circulation decreases
B) reserves decrease; currency in circulation increases
C) reserves increase; Treasury deposits decrease
D) reserves decrease; Treasury deposits increase

Question 29

When the U.S. Treasury purchases gold from a member of the non-bank public, the immediate effect is that __________ and __________.

A) reserves increase; currency in circulation decreases
B) reserves decrease; currency in circulation increases
C) reserves increase; Treasury deposits decrease
D) reserves decrease; Treasury deposits increase

Question 30

Federal Reserve credit is equal to bank borrowing plus U.S. government security holdings plus

A) currency outstanding.
B) capital accounts.
C) float.
D) bank reserves.

Question 31

An increase in shipments of currency from the Federal Reserve to commercial banks will

A) increase the money supply.
B) increase bank reserves.
C) reduce bank reserves.
D) have no effect on bank reserves.

Question 32

The Federal Reserve float is

A) items in process of collection - deferred credit items.
B) items in process of collection + deferred credit items.
C) deferred credit items - items in process of collection.
D) deferred credit items + items in process of collection.

Question 33

Suppose that the Treasury decides to spend $12 billion on a given day. Because about $12 billion in new tax revenues are expected to replenish the Treasury's account at the Fed a week later, the best policy for the Fed to pursue if it wishes to stabilize reserves is to

A) do a $12 billion government security repurchase agreement.
B) do a $12 billion government security reverse repurchase agreement.
C) buy $12 billion in government securities outright and hold them to prevent bank reserves from falling.
D) sell $12 billion in government securities to prevent bank reserves from rising.

Question 34

Factors supplying and absorbing bank reserves constitute the

A) Federal Reserve credit equation.
B) bank reserve equation.
C) equation of exchange.
D) money market.

Question 35

U)S. government purchases of gold are officially carried out by the

A) New York Federal Reserve Bank.
B) Federal Open Market Committee.
C) Federal Deposit Insurance Corporation.
D) U.S. Treasury.

Question 36

Currency in circulation is currency that meets all of the following criteria except for currency

A) outside the Treasury.
B) outside the Federal Reserve.
C) held as vault cash in banks.
D) held by the non-bank public.

Question 37

When the U.S. Treasury purchases gold and then replenishes its deposit in the Fed the effect is that __________ and __________.

A) reserves increase; gold certificates increase
B) reserves decrease; gold certificates increase
C) gold certificates increase; Treasury deposits increase
D) gold owned by the Fed increases; Treasury deposits increase

Question 38

According to the bank reserve equation, the largest factor supplying reserves to the banking system is

A) Federal Reserve purchases of government securities.
B) Treasury currency outstanding.
C) float.
D) currency in circulation.

Question 39

Bank reserves are increased by

A) Treasury currency outstanding.
B) Treasury cash holdings.
C) Federal Reserve capital.
D) currency in circulation.

Question 40

When the Federal Reserve float __________, bank reserves __________.

A) rises; fall
B) rises; rise
C) rise; are unchanged
D) rise; change unpredictably

Question 41

Reverse repurchase agreements are often used to

A) increase bank reserves permanently.
B) increase bank reserves temporarily.
C) reduce bank reserves permanently.
D) reduce bank reserves temporarily.

Question 42

When taxes paid by a check are deposited in tax and loan accounts,

A) bank reserves and the money supply are unaffected.
B) bank reserves fall but the money supply is unaffected.
C) bank reserves are unaffected but the money supply falls.
D) bank reserves and the money supply fall.

Question 43

The monetary base is equal to

A) Fed liabilities plus currency outstanding.
B) Fed liabilities minus loans to commercial banks.
C) bank reserves plus currency held by the non-bank public.
D) the M1 money supply minus Fed loans to commercial banks.

Question 44

The Federal Reserve uses dynamic open market operations to

A) alter the money multiplier.
B) alter the growth path of bank reserves.
C) inject reserves temporarily into the system.
D) take reserves temporarily from the system.

Question 45

The five options available to the U.S. Treasury for financing government spending are as follows: collecting taxes, printing currency, borrowing from the Federal Reserve, borrowing from the public, and

A) expanding the money supply.
B) devaluing the dollar.
C) borrowing from the banking system.
D) raising bank reserve requirements.

Question 46

If the government collects taxes to pay for expenditures of an equal amount, bank reserves

A) are unaffected.
B) rise by an equal amount.
C) rise by a multiple amount.
D) fall by an equal amount.

Question 47

Which of the following situations is likely to lead to dynamic open market operations?

A) A recession
B) An increase in Federal Reserve float
C) An increase in Treasury cash holdings
D) An increase in currency outstanding

Question 48

When federal government expenditures exceed tax receipts, the Treasury must

A) expand the money supply.
B) raise taxes.
C) reduce spending.
D) sell bonds.

Question 49

If the government collects taxes and makes expenditures of a smaller amount, bank reserves

A) are unaffected.
B) may rise or fall.
C) rise.
D) fall.

Question 50

Assume the federal government collects $20 billion in taxes and spends them on the public. If the money multiplier is 2.5, bank reserves

A) and the money supply still increase by only $20 billion.
B) increase by $20 billion and the money supply increase by $50 billion.
C) and the money supply both increase by $50 billion.
D) and the money supply are unaffected.

Question 51

If the Treasury borrows from the public and makes an expenditure of an equal amount, it will affect

A) the supply of currency.
B) the money supply.
C) the supply of government securities.
D) bank reserves.

Question 52

The monetary base will increase if

A) currency outstanding decreases.
B) loans by the Fed to commercial banks decrease.
C) bank reserves increase.
D) vault cash in banks increases.

Question 53

If the federal government collects $10 billion in taxes and then spends it on the public, the money supply

A) rises by $20 billion.
B) rises by $10 billion.
C) falls by $10 billion.
D) is unaffected.

Question 54

Repos and reverse repos are

A) permanent injections or deletions of reserves.
B) always dynamic policy tools.
C) temporary injections or deletions of reserves.
D) sometimes defense, but most often dynamic policy tools.

Question 55

If reserves are __________ because of a temporary __________ in the Treasury's balance at the Fed, open market __________ may be used to offset such influences.

A) falling; decline; sales
B) rising; increase; sales
C) rising; decline; sales
D) rising; decline; purchases

Question 56

Open market operations that represent an attempt to offset short-term fluctuations in bank reserves are known as

A) defensive open market operations.
B) dynamic open market operations.
C) temporary open market operations.
D) equilibrating open market operations.

Question 57

Repurchase agreements are often used to

A) increase bank reserves permanently.
B) increase bank reserves temporarily.
C) reduce bank reserves permanently.
D) reduce bank reserves temporarily.

Question 58

Immediately after being collected, taxes are deposited in

A) tax and loan accounts.
B) the Federal Reserve Bank of New York.
C) Federal Reserve district banks around the country.
D) the Congressional Vault.

Question 59

U.S. Treasury deposits at the Fed are

A) part of M1, M2, and M3.
B) part of M1 and M2.
C) part of M1.
D) not part of the money supply.

Question 60

When the Treasury borrows from the non-bank public and makes an expenditure of an equal amount, the money supply

A) rises by a multiple of the expenditure.
B) rises by an amount equal to the expenditure.
C) rises by an amount less than the expenditure.
D) is unaffected.

Question 61

Assuming a fully loaned-up banking system and a deposit expansion multiplier of 2, a $10 million government expenditure financed by sales of securities to the banking system will cause the money supply to

A) remain unchanged.
B) rise by $5 million.
C) rise by $10 million.
D) rise by $20 million.

Question 62

A Treasury expenditure financed through borrowing from the Federal Reserve will cause the money supply

A) and bank reserves to rise by an equal amount.
B) and bank reserves to fall by an equal amount.
C) to rise but bank reserves to rise by a greater amount.
D) to rise by a greater amount than the rise in bank reserves.

Question 63

Assume a money multiplier of 2. If the Treasury finances a $10 million expenditure by selling securities to the Fed, bank reserves will

A) remain unchanged.
B) rise by $5 million.
C) rise by $10 million.
D) rise by $20 million.

Question 64

Which of these government financing methods is generally the least inflationary?

A) Printing currency
B) Borrowing from the banking system
C) Borrowing from the central bank
D) Borrowing from the non-bank public

Question 65

If the Treasury finances an expenditure by borrowing from the banking system, the money supply will not be affected if the banks

A) borrowed from the discount window to buy the government bonds.
B) had no excess reserves when they bought the bonds.
C) were not members of the Federal Reserve System.
D) had no other government securities in their portfolios.

Question 66

Assume the deposit expansion multiplier is 3.0. If the Treasury borrows $5 billion from the Non-bank public and spends it on the public, bank reserves will

A) rise by $5 billion.
B) fall by $5 billion.
C) rise by $15 billion.
D) not change.

Question 67

If the Treasury finances an expenditure by borrowing from banks with excess reserves, the money supply will

A) remain unchanged.
B) rise by an amount equal to the expenditure.
C) rise by a multiple of the expenditure.
D) fall by a multiple of the expenditure.

Question 68

Bank reserves increase when the Treasury finances an expenditure through

A) taxation.
B) borrowing from the non-bank public.
C) borrowing from the banking system.
D) borrowing from the Fed.

Question 69

The money supply is certain to increase if the Treasury finances expenditures by borrowing from the

A) Federal Reserve.
B) banking system.
C) non-bank financial system.
D) general public.

Question 70

Assume a money multiplier of 3. If the Treasury finances a $30 million expenditure by selling securities to the Fed, the money supply could ultimately

A) rise by $3 million.
B) rise by $10 million.
C) rise by $30 million.
D) rise by $90 million.

Question 71

If the Treasury prints currency to finance an expenditure, the impact on the money supply is similar to when the Treasury borrows from the

A) banking system when it is fully loaned-up.
B) banking system when it has excess reserves.
C) non-bank public.
D) Federal Reserve.

Question 72

Assume a demand deposit multiplier of 2 and a government expenditure of $10 million. If the Treasury borrows that much from the banking system, bank reserves will

A) rise by $2 million.
B) rise by $10 million.
C) rise by $20 million.
D) remain unchanged.

Question 73

Assume a money multiplier of 3. If the Treasury finances a $30 million expenditure by selling securities to the Fed, the effect of this transaction on the money supply is that it will

A) remain unchanged.
B) rise by $3 million.
C) rise by $30 million.
D) rise by $90 million.

Question 74

Assume a money multiplier of 4 and a government expenditure of $20 million. If the Treasury borrows $20 million from the banking system while the banks have excess reserves, the money supply will

A) rise by $5 million.
B) rise by $20 million.
C) rise by $80 million.
D) not be affected.

Question 75

Assume the Treasury borrows $5 billion from the non-bank public and spends it. The effect on bank reserves is that they will __________ by $5 billion when the Treasury borrows and then bank reserves will __________ by $5 billion when the Treasury spends the money.

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

Question 76

If the Treasury finances an expenditure by borrowing from the Fed, the money supply

A) and bank reserves fall.
B) and bank reserves rise.
C) rises while bank reserves remain unchanged.
D) remains unchanged as bank reserves rise.

Question 77

The Treasury runs the greatest risk of inflation when expenditures are financed by borrowing from

A) foreign nations.
B) the Federal Reserve.
C) the banking system.
D) the non-bank public.