Question 1

The banking system currently has $100 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed lowers the reserve requirement to 5 percent and at the same time buys $10 billion worth of bonds, then by how much does the money supply change?
A)It rises by $200 billion.
B)It rises by $800 billion.
C)It rises by $1,200 billion.
D)None of the above is correct.

Accepted Answer

The answer of The banking system currently has $100 billion...

Question 2

If people decide to hold more currency relative to deposits, the money supply
A)falls. The Fed could lessen the impact of this by buying Treasury bonds.
B)falls. The Fed could lessen the impact of this by selling Treasury bonds.
C)rises. The Fed could lessen the impact of this by buying Treasury bonds.
D)rises. The Fed could lessen the impact of the by selling Treasury bonds.

Accepted Answer

If people hold more currency relative to deposits, it means that less money is in the banking system, resulting in a decrease in the money supply. The Fed can counteract this by buying Treasury bonds, which increases the money supply through the injection of new money into the system. Hence, choice A is the correct answer.

Question 3

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank reserves
A)increase by $25.5 million and the money supply eventually increases by $382.5 million.
B)increase by $25.5 million and the money supply eventually increases by $170 million.
C)decrease by $25.5 million and the money supply eventually decreases by $382.5 million.
D)decrease by $25.5 million and the money supply eventually decreases by $170 million.

Accepted Answer

If the Fed sells $25.5 million worth of bonds to the public, bank reserves decrease by the same amount, since the buyers of the bonds will pay for them with deposits that will be deducted from their banks' reserves. The money supply will eventually decrease by a multiple of the decrease in reserves determined by the money multiplier, which is the reciprocal of the reserve ratio. Therefore, the money supply will decrease by $25.5 million* (1/0.15) = $170 million.

Question 4

The banking system currently has $50 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time sells $10 billion worth of bonds, then by how much does the money supply change?
A)It falls by $20 billion.
B)It falls by $110 billion.
C)It falls by $180 billion.
D)None of the above is correct.

Accepted Answer

The answer of The banking system currently has $50 billion...

Question 5

The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by
A)$25.
B)between $200 and $300.
C)$1,600.
D)$2,500.

Accepted Answer

The answer of The Fed purchases $200 worth of government...

Question 6

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?
A)they fall $220 million
B)they fall $200 million
C)they rise $200 million
D)they rise $220 million

Accepted Answer

The banks have only enough reserves to satisfy reserve requirements, and they choose to hold an additional $10 million in reserves due to uncertainty. Therefore, they will need to decrease their loans by $200 million to maintain the required reserve ratio.

Question 7

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits. As a result, bank reserves will
A)decrease and the money supply will eventually decrease.
B)decrease and the money supply will eventually increase.
C)increase and the money supply will eventually decrease.
D)increase and the money supply will eventually increase.

Accepted Answer

The answer of Suppose that in a country people gain...

Question 8

If the public decides to hold less currency and more deposits in banks, bank reserves
A)decrease and the money supply eventually decreases.
B)decrease but the money supply does not change.
C)increase and the money supply eventually increases.
D)increase but the money supply does not change.

Accepted Answer

The answer of If the public decides to hold less...

Question 9

During wars the public tends to hold relatively more currency and relatively fewer deposits. This decision makes reserves
A)and the money supply increase.
B)and the money supply decrease.
C)increase, but leaves the money supply unchanged.
D)decrease, but leaves the money supply unchanged.

Accepted Answer

During wars, there is often uncertainty and fear which causes people to hold onto more physical currency and withdraw their deposits from banks. This leads to a decrease in deposits and reserves in banks, causing a decrease in the money supply.

Question 10

If people decide to hold less currency relative to deposits, the money supply
A)falls. The Fed could lessen the impact of this by buying Treasury bonds.
B)falls. The Fed could lessen the impact of this by selling Treasury bonds.
C)rises. The Fed could lessen the impact of this by buying Treasury bonds.
D)rises. The Fed could lessen the impact of this by selling Treasury bonds.

Accepted Answer

The answer of If people decide to hold less currency...

Question 11

The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?
A)sell bonds to increase reserves
B)sell bonds to decrease reserves
C)buy bonds to increase reserves
D)buy bonds to decrease reserves

Accepted Answer

The answer of The Fed increases the reserve requirement, but...

Question 12

If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million worth of government bonds, bank reserves
A)increase by $20 million and the money supply eventually increases by $400 million.
B)decrease by $20 million and the money supply eventually decreases by $400 million.
C)increase by $20 million and the money supply eventually increases by $100 million.
D)decrease by $20 million and the money supply eventually decreases by $100 million.

Accepted Answer

When the Fed purchases $20 million worth of government bonds, banking reserves will increase by $20 million. Since the reserve ratio is 5%, banks can multiply the new reserves into additional loans and deposits by a maximum of 20 times. So the total increase in the money supply will be 20 times the initial increase in reserves, which leads to $400 million ($20 million x 20) increase in the money supply.

Question 13

The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves
A)increase by $20 million and the money supply eventually increases by $20 million.
B)increase by $20 million and the money supply eventually increases by $200 million.
C)decrease by $2 million and the money supply eventually increases by $20 million.
D)decrease by $20 million and the money supply eventually decreases by $200 million.

Accepted Answer

When the Fed sells bonds to the public, bank reserves decrease by the same amount as the sale. In this case, bank reserves decrease by $20 million. Since the reserve ratio is 10 percent, this decrease in reserves allows for a 10 times increase in deposits, or $200 million. However, since the Fed's action is contractionary, the money supply eventually decreases by $200 million.

Question 14

During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action
A)increases the money multiplier and increases the money supply.
B)decreases the money multiplier and decreases the money supply.
C)does not change the money multiplier, but increases the money supply.
D)does not change the money multiplier, but decreases the money supply.

Accepted Answer

During recessions, banks tend to be more conservative in their lending, resulting in a decrease in the money multiplier. Holding more excess reserves relative to their deposits means that banks have less money available to lend out, which decreases the money supply. Thus, the correct choice is B - decreases the money multiplier and decreases the money supply.

Question 15

The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?
A)It falls by $12 billion.
B)It falls by $19 billion.
C)It falls by $21 billion.
D)None of the above is correct.

Accepted Answer

The answer of The banking system currently has $10 billion...

Question 16

If people decide to hold more currency relative to deposits, the money supply
A)falls. The larger the reserve ratio is, the more the money supply falls.
B)falls. The larger the reserve ratio is, the less the money supply falls.
C)rises. The larger the reserve ratio is, the more the money supply rises.
D)rises. The larger the reserve ratio is, the less the money supply rises.

Accepted Answer

The answer of If people decide to hold more currency...

Question 17

The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?
A)it increases by $250,000
B)it increases by $200,000
C)it decreases by $200,000
D)it decreases by $250,000

Accepted Answer

If the reserve requirement is 4%, then banks must hold 4% of total deposits as reserves. Initially, banks hold no excess reserves, so they must hold 4% of the initial deposits of $10,000 as required reserves, which is $400. When the Fed sells $10,000 of bonds, it takes $10,000 out of the bank's reserve account. This reduces bank reserves by $10,000 and reduces the money supply by $10,000 x (1/0.04), which is equal to $250,000. Therefore, the money supply decreases by $250,000.

Question 18

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 4 percent. If the Fed raises the reserve requirement to 10 percent and at the same time buys $50 billion worth of bonds, then by how much does the money supply change?
A)It rises by $600 billion.
B)It rises by $125 billion.
C)It falls by $2,500 billion.
D)None of the above is correct.

Accepted Answer

The answer of The banking system currently has $200 billion...

Question 19

If the public decides to hold more currency and fewer deposits in banks, bank reserves
A)decrease and the money supply eventually decreases.
B)decrease but the money supply does not change.
C)increase and the money supply eventually increases.
D)increase but the money supply does not change.

Accepted Answer

When the public decides to hold more currency and fewer deposits in banks, this leads to a decrease in bank reserves. Banks need to hold a certain percentage of their deposits as reserves, and if these reserves decrease, banks may have to reduce their lending. This decrease in lending ultimately leads to a decrease in the money supply. Therefore, A) decrease in bank reserves and the money supply eventually decreases is the correct answer.

Question 20

Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the
A)money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
B)money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
C)money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
D)money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.

Accepted Answer

Holding more excess reserves means banks are not lending out as much, which reduces the money supply. To counteract this, the Fed could buy Treasury bonds to increase the money supply. Selling Treasury bonds would only exacerbate the decrease in the money supply.

Quiz 29: The Monetary System

If people decide to hold more currency relative to deposits, the money supply

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank reserves

The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits. As a result, bank reserves will

If the public decides to hold less currency and more deposits in banks, bank reserves

During wars the public tends to hold relatively more currency and relatively fewer deposits. This decision makes reserves

If people decide to hold less currency relative to deposits, the money supply

The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?

If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million worth of government bonds, bank reserves

The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves

During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action

If people decide to hold more currency relative to deposits, the money supply

The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?

If the public decides to hold more currency and fewer deposits in banks, bank reserves

Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the