Deck 16: Monetary Control

Question 1

If the M2 multiplier is currently 8 and people decide to increase the ratio of currency they hold relative to the amount of transactions accounts they hold, the M2 multiplier will

A)not change.
B)increase substantially.
C)decrease.
D)increase slightly.

Answer 1

C

Question 2

M2 money multiplier equals

A)(nontransaction accounts + money market funds) ÷ monetary base
B)(M1 + nontransaction accounts ­ money market funds) × reserves
C)(M2 ­ money market funds) ÷ excess reserves
D)(M1 + nontransaction accounts + money market funds) ÷ monetary base

Answer 2

D

Question 3

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03.If the ratio of retail money-market mutual funds to transaction accounts increases, the M1 multiplier will _____and the M2 multiplier will ______.

A)not change; increase
B)increase; also increase
C)decrease; also decrease
D)increase; not change

Answer 3

not change; increase

Question 4

If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will

A)increase by $1 billion.
B)decline by $1 billion.
C)decline by $9 billion.
D)increase by $9 billion.

Question 5

Third Bank has reserves of $12.3 million and transaction accounts of $115 million.If required reserves are 10 percent of transactions accounts, Third Bank has excess reserves of

A)−$0.8 million.
B)$0.
C)$0.8 million
D)$0.08 million

Question 6

If a bank in the economy has excess reserves of $3 million, and required reserves are 10 percent of transactions accounts under the assumptions of the simple multiplier formula, then eventually the money supply will increase by

A)−$3 million.
B)$3 million.
C)$10 million.
D)$30 million.

Question 7

Another name for the monetary base is

A)commodity money.
B)fiat money.
C)high-powered money.
D)bank reserves.

Question 8

The money multiplier equals

A)the money supply divided by the monetary base.
B)currency held by the non-bank public plus banks' reserves.
C)currency held by the non-bank public plus transaction accounts.
D)M2 divided by M1.

Question 9

The main liability on the Federal Reserve's balance sheet is

A)discount loans.
B)securities.
C)the monetary base.
D)capital.

Question 10

If the excess reserves held by banks increase, the money multiplier is likely to

A)rise.
B)fall.
C)remain unchanged.
D)rise at first, then decline later.

Question 11

The main asset on the Federal Reserve's balance sheet is

A)discount loans.
B)securities.
C)monetary base.
D)capital.

Question 12

An increase in interest rates

A)decreases the M2 money multiplier.
B)decreases the ratio of excess reserves to transaction accounts held by banks
C)increases the money supply for a given amount of monetary base.
D)increases the ratio of excess reserves to transaction accounts held by banks

Question 13

If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M1 multiplier is about

A)1.42.
B)2.12.
C)2.81.
D)4.24.

Question 14

Green bank has transaction accounts worth $200 million.If the required reserve ratio is 10%, Green bank holds_____ as required reserves.

A)$220 million
B)$180 million
C)$60 million
D)$20 million

Question 15

Consider a bank that has $10 million as reserves, $5million as securities, and $100 million as transaction accounts.If a customer, who is a government securities dealer, sells $2 million in securities to the Fed

A)the bank's transaction accounts reduce to $98 million.
B)the bank's securities reduce by $4 million.
C)the bank's reserves increase to $12 million.
D)the bank's loans reduce by $2 million.

Question 16

The money supply in an economy equals

A)monetary base plus money multiplier.
B)monetary base divided by money multiplier.
C)money multiplier divided by monetary base.
D)money multiplier multiplied by monetary base.

Question 17

If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million?

A)$10 million
B)$100 million
C)$1 billion
D)$6.889 billion

Question 18

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals

A)the Fed's capital stock.
B)discount loans.
C)the monetary base.
D)required clearing balances.

Question 19

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03.If people decide to decrease the ratio of nontransaction accounts they hold relative to the amount of their transactions accounts, the M1 multiplier will____ and the M2 multiplier will _____-.

A)not change; decrease
B)increase; also increase
C)decrease; also decrease
D)increase; not change

Question 20

M1 money multiplier equals

A)(transaction accounts + currency) ÷ monetary base
B)(transaction accounts ­ currency) ÷ monetary base
C)(transaction accounts + currency) × monetary base
D)(transaction accounts ­ currency) × monetary base

Question 21

Primary credit discount loans for profit will be zero when

A)primary credit discount rate is equal to secondary credit discount rate.
B)primary credit discount rate is greater than federal funds rate.
C)primary credit discount rate is lesser than federal funds rate.
D)primary credit discount rate is equal to nominal short-term interest rate.

Question 22

Before 2008, an increase in reserve requirements by the Fed

A)would increase the money multiplier.
B)would increase money supply.
C)would decrease the money multiplier.
D)would decrese the amount of reserves held by banks.

Question 23

A secondary credit discount loan has an interest rate that is______ a primary credit discount loan.

A)1/4
B)1/2
C)1
D)2

Question 24

During the holiday season in December, people use more currency than usual.To offset this increase in demand for money, the Fed increases the money supply through

A)defensive open-market operations.
B)dynamic open-market operations.
C)discount loans for profit.
D)discount loans for business needs.

Question 25

The extra collateral the Fed requires above the value of a discount loan is known as

A)the term premium.
B)a haircut.
C)a covenant.
D)secondary credit.

Question 26

A bank in poor condition may take out a loan under close Fed scrutiny.Such a loan is known as

A)a secondary credit discount loan.
B)a haircut.
C)a covenant.
D)a primary credit discount loan.

Question 27

If the Open-Market Desk at the Fed sells securities, the most likely effect is that the

A)federal funds rate decreases.
B)primary credit discount rate decreases.
C)primary credit discount rate increases.
D)federal funds rate increases.

Question 28

The Fed undertakes defensive open-market operations

A)when it wants to change fiscal policy.
B)because of seasonal effects or to offset a temporary change in money demand.
C)to offset a permanent change in money demand.
D)when it wants to change monetary policy.

Question 29

A _____is a loan from the Fed to a small agricultural bank.

A)federal credit discount loan
B)secondary credit discount loan
C)primary credit discount loan
D)seasonal credit discount loan

Question 30

The amount of nonborrowed reserves equals

A)the monetary base plus the amount of discount loans.
B)the amount of reserves plus the amount of discount loans.
C)the amount of reserves minus the sum of the amount of discount loans and currency.
D)the monetary base minus the sum of the amount of discount loans and currency.

Question 31

The Fed undertakes dynamic open-market operations

A)when it wants to change monetary policy.
B)because of seasonal effects.
C)when it wants to change fiscal policy.
D)to offset a temporary change in money demand.

Question 32

If the Open-Market Desk at the Fed buys securities, the most likely effect is that the

A)federal funds rate decreases.
B)primary credit discount rate decreases.
C)primary credit discount rate increases.
D)federal funds rate increases.

Question 33

If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M2 multiplier is about

A)1.43.
B)2.12.
C)2.83.
D)4.25.

Question 34

A bank in good condition may take out a loan without the Fed questioning the purpose or nature of the loan.Such a loan is known as

A)a no documentation discount loan.
B)a haircut.
C)a covenant.
D)a primary credit discount loan.

Question 35

If the haricut charged by the Fed is very large

A)banks will be discouraged from borrowing.
B)transaction accounts held by banks increase.
C)the Fed loses a lot of money if banks default on their loans.
D)the Fed's discount rate rises.

Question 36

The supply curve of reserves in an economy is horizontal when

A)the federal funds rate is greater than the seasonal credit discount rate.
B)the federal funds rate is less than the secondary credit discount rate.
C)the federal funds rate equals the primary credit discount rate.
D)the federal funds rate is less than the primary credit discount rate.

Question 37

An increase in the amount of discount loans by the Fed

A)increases the money supply by an amount equal to the increase in the loans times the multiplier.
B)decreases the money supply by an amount equal to the increase in the loans times the multiplier.
C)decreases the money supply by an amount greater than the increase in the loans times the multiplier.
D)increases the money supply by an amount lower than the increase in the loans times the multiplier.

Question 38

The sum of seasonal credit discount loans, secondary credit discount loans, and primary credit discount loans that banks take out because of temporary problems are known as

A)unsubstantiated discount loans.
B)discount loans for profit.
C)discount loans that arise for business needs.
D)inelastic discount loans.

Question 39

If the Fed decides to tighten monetary policy, it uses _____to_____ the money supply.

A)defensive open-market operations; decrease
B)dynamic open-market operations; increase
C)defensive open-market operations; increase
D)dynamic open-market operations; decrease

Question 40

The supply curve of reserves in an economy is _____when the federal funds rate is less than the primary credit discount rate.

A)downward-sloping
B)upward-sloping
C)horizontal
D)vertical when the federal funds rate is less than the primary credit

Question 41

If the federal funds rate is below its target, the Fed is likely to_____ securities in the open market, which will cause the federal funds rate to_____ .

A)buy; increase
B)buy; decrease
C)sell; decrease
D)sell; increase

Question 42

The Fed makes an open-market purchase of $5 million in an economy in which no bank holds excess reserves and the assumptions of the simple multiplier hold with a reserve requirement of 8 percent.Draw up a table to show the amount of new deposits in each new bank (show the amounts in the first five of them), the additional reserves held by that bank, and the loans made by that bank, as each successive bank lends out its excess reserves.Finally, calculate the total amount of new deposits, of additional reserves, and of loans made in the economy.

Question 43

Which of the following is true of an economy in a liquity trap?

A)The money supply in the economy increases rapidly as additions are made to the monetary base.
B)The economy's nominal short-term interest rates become close to zero.
C)The banks in the economy do not hold any reserves.
D)The economy's interest rates decline when there is an increase in the monetary base.

Question 44

If the Open-Market Desk at the Fed buys securities when the federal funds rate is below the primary credit discount rate, the most likely effect is that the

A)federal funds rate decreases.
B)primary credit discount rate decreases.
C)primary credit discount rate increases.
D)federal funds rate increases.

Question 45

If the ratio of currency to transaction accounts is 1, the ratio of nontransaction accounts to transaction accounts is 6, the ratio of retail money-market funds to transaction accounts is 2, the ratio of required reserves to transaction accounts is 0.07, and the ratio of excess reserves to transaction accounts is 0.02, calculate the M1 multiplier and the M2 multiplier.

Question 46

If the federal funds rate equals the primary credit discount rate, the Fed is likely to ____securities in the open market, which will cause the federal funds rate to_____ .

A)buy; increase
B)buy; decrease
C)sell; decrease
D)sell; increase

Question 47

A bank has reserves of $34.3 million, securities of $65.2 million, and loans of $287.5 million.It has transaction accounts totaling $357.7 million and capital of $29.3 million.The reserve requirement is 0 percent on the first $7 million of transaction accounts, 3 percent on transaction accounts from $7 million to $47 million, and 10 percent on transaction accounts above $47 million.

a.Draw up the bank's balance sheet and calculate the bank's excess reserves.
b.Suppose the bank makes a loan equal to the amount of its excess reserves that you calculated in part a. Draw up the bank's balance sheet before the customer spends the proceeds of the
loan. What are the bank's excess reserves?

c.Now suppose the customer spends the proceeds of the loan.Draw up the bank's balance sheet and calculate its excess reserves.

Question 48

A _____is a situation in which additions to an economy's monetary base do not lead to an increase in the economy's
Money supply or decline in the interest rate.

A)liquidity trap
B)recession
C)financial crisis
D)credit crunch

Question 49

Suppose the Fed's Open-Market Desk thinks the downward-sloping portion of the demand for reserves is given by the equation
D = 28 ? (3 × i),
where i is the federal funds rate in percent and D is expressed in billions of dollars.Suppose the Fed is currently supplying $26.5 billion in nonborrowed reserves.There are no secondary or seasonal credit discount loans.The primary credit discount rate is currently set at 2 percent and the interest rate on reserves is 0.30 percent.The Fed's target for the federal funds rate is 1 percent.

a.Does the Desk need to change the supply of reserves in the market? How much does it need to add or withdraw from the market? After carrying out its daily actions, what will be the
equilibrium amount of reserves and discount loans?

b.Suppose the demand curve for reserves shifts to
D = 35 ? (3 × i).
The Fed does not realize that the demand curve has shifted, so it keeps the supply of nonborrowed reserves at the level you determined in part a. Calculate the equilibrium federal funds rate, reserves, and the amount of primary credit discount loans.

Question 50

​Discuss the effectiveness of a monetary policy in an economy in which banks are indifferent between holding bonds
and holding cash as reserves.

Question 51

Which of the following is true of an economy that has hit the zero lower bound?

A)The money supply in the economy increases rapidly as additions are made to the monetary base.
B)Any increase increase in its monetary base is exactly offset by a decline in its money multipliers.
C)Any short-term bond would provide a return that is much lower than the return from holding cash.
D)The economy's interest rates decline when there is an increase in the monetary base.

Question 52

Suppose the M1 multiplier is currently 2.23 and the M2 multiplier is currently 7.95.If banks decide to increase the ratio of excess reserves they hold relative to the amount of transaction accounts they hold, how will the multipliers for M1 and M2 be affected (in qualitative, not quantitative, terms)?

Question 53

​What are the nontraditional policies suggested by Ben Bernanke for a central bank caught in a liquidity trap?

Question 54

Since the 2008 financial crisis, what has happened to the M1 and M2 multipliers?