Question 1

When the Fed wants to expand the money supply through open market operation, it
A) sells government securities to the Treasury.
B) sells government securities to member banks.
C) buys government securities from member banks.
D) buys government securities from the Treasury.

Accepted Answer

When the Fed wants to expand the money supply, it will buy government securities from member banks through open market operations. This increases the reserves of the member banks, allowing them to lend out more money and ultimately increasing the overall money supply.

Question 2

If the FOMC orders the sale of T-bills in the open market, then bank reserves are
A) decreased, but the money supply will remain unchanged.
B) decreased, and a multiple contraction of the money supply will occur.
C) increased, but the money supply will remain unchanged.
D) increased, and a multiple expansion of the money supply will occur.

Accepted Answer

When the FOMC orders the sale of T-bills in the open market, it decreases bank reserves. As banks lend out their reserves, this leads to a multiple contraction of the money supply. Thus, the best answer is B.

Question 3

Banks will hold additional excess reserves when
A) loans to customers look safe and interest rates are high.
B) they anticipate a bank audit.
C) loans to customers look risky and interest rates are low.
D) the economy is booming and there is a large demand for loans.

Accepted Answer

Banks are more likely to hold additional excess reserves when they perceive loans to customers as risky and when interest rates are low. This is because the potential return on loans is not as attractive, and the risk of default is higher, making it safer to hold onto excess reserves.

Question 4

If the Fed sells a T-bill to a commercial bank, how will this affect the money supply?
A) It will increase the money supply.
B) It will increase bank reserves.
C) It will decrease the money supply.
D) It will have no effect on the money supply.

Accepted Answer

When the Fed sells a T-bill to a commercial bank, the bank pays the Fed with reserves, which decreases the reserves of the bank. As a result, the bank has less money to lend out, which decreases the money supply. Hence, the correct option is C, which states that it will decrease the money supply.

Question 5

Table 13-1
EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars)
 $\begin{array}{cccc}
\text { BANKS }&&\text { FEDERAL RESERVE SYSTEM }\
\text { ASSETS } & \text { LIAB. } & \text { ASSETS } & \text { LIAB. } \
\text { Reserves }+\$ 10 && \text { U.S. Gov't } & \text { Bank Reserves } \
\text { U.S. Gov't } && \text { Sec. }+\$ 10 & +\$ 10\
\text { Securities - \$10 }
\end{array}$
-In Table 13-1, the Federal Reserve System has
A) sold $10 million in government securities to banks, taking payment in cash.
B) sold $10 million in government securities to banks, taking payment from the bank's reserves.
C) purchased $10 million in government securities from banks, paying for them with increases in banks' reserves.
D) purchased $10 million in government securities from banks, paying for them with new Federal Reserve notes.

Accepted Answer

This table shows the effects of an open market transaction, where the Federal Reserve System purchases $10 million in government securities from banks. The banks' reserves increase by $10 million, while the Federal Reserve System's assets increase by $10 million in securities. Therefore, the correct answer is C, as the Federal Reserve System has purchased securities from banks and paid for them with increases in banks' reserves.

Question 6

If the Federal Open Market Committee decides to expand the money supply, then it will
A) raise the discount rate to member banks.
B) issue directions to purchase government securities, thus putting more reserves in member banks.
C) issue directions to sell government securities, thus taking reserves from member banks.
D) order new Federal Reserve notes delivered to member banks.

Accepted Answer

If the Federal Open Market Committee decides to expand the money supply, it will issue directions to purchase government securities, thus putting more reserves in member banks. This is known as an open market purchase and increases the money supply because it puts more money into the banking system. The other options listed (raising the discount rate, selling government securities, and ordering new Federal Reserve notes) all have the opposite effect of reducing the money supply.

Question 7

The Fed's purchase and sale of government securities is known as
A) margin operations.
B) open market operations.
C) bank reserve operations.
D) cash management operations.

Accepted Answer

The Fed's purchase and sale of government securities is known as open market operations.

Question 8

When the Fed wants to expand the money supply, it
A) buys government securities.
B) sells government securities.
C) buys common stock.
D) sells common stock.

Accepted Answer

When the Fed wants to expand the money supply, it buys government securities from banks and other financial institutions. By doing so, it increases the amount of money that these institutions have available to lend or invest, which in turn increases the overall money supply in the economy. Selling government securities, on the other hand, reduces the money supply. The purchase or sale of common stock is not typically a tool used by the Fed to affect the money supply.

Question 9

Which of the following is the most frequently used tool of monetary policy?
A) changing the discount rate
B) changing reserve requirements
C) open market operations
D) interest rate changes

Accepted Answer

Open market operations, which involve the buying and selling of government securities, are the most frequently used tool of monetary policy by central banks around the world. The Federal Reserve in the United States, for example, uses open market operations to influence the federal funds rate, which is a key interest rate that affects borrowing and lending throughout the economy. While changing the discount rate or reserve requirements can also affect the money supply and interest rates, they tend to be less frequently used and less effective than open market operations. Interest rate changes, while important, are not a tool of monetary policy themselves, but rather a result of the actions taken by central banks through the use of other tools.

Question 10

The Fed conducts an open market purchase of Treasury bills of $10 million.If the required reserve ratio is 0.10, what change in the money supply can be expected using the oversimplified money multiplier?
A) $100 million
B) $10 million
C) 0
D) -$10 million
E) -$100 million

Accepted Answer

The oversimplified money multiplier is 1/required reserve ratio, which in this case is 1/0.10 = 10. Therefore, an open-market purchase of $10 million can potentially increase the money supply by 10 times that amount, or $100 million.

Question 11

Table 13-1
EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars)
 $\begin{array}{cccc}
\text { BANKS }&&\text { FEDERAL RESERVE SYSTEM }\
\text { ASSETS } & \text { LIAB. } & \text { ASSETS } & \text { LIAB. } \
\text { Reserves }+\$ 10 && \text { U.S. Gov't } & \text { Bank Reserves } \
\text { U.S. Gov't } && \text { Sec. }+\$ 10 & +\$ 10\
\text { Securities - \$10 }
\end{array}$
-In Table 13-1, if the required reserve ratio is 10 percent, what will happen to the money supply? Use the oversimplified money multiplier in your calculations.
A) The money supply will decrease by $100 million.
B) The money supply will decrease by $10 million.
C) The money supply will not change.
D) The money supply will increase by $10 million.
E) The money supply will increase by $100 million.

Accepted Answer

An open market purchase by the Federal Reserve increases bank reserves, which allows banks to lend out more money. The increase in loans leads to an increase in the money supply.

Using the oversimplified money multiplier:
Money multiplier = 1/required reserve ratio = 1/0.10 = 10

The initial increase in reserves of $10 million will lead to an increase in the money supply of:
$10 million x 10 = $100 million

Therefore, the correct answer is E. The money supply will increase by $100 million.

Question 12

The tool most frequently relied on by the Fed is
A) interest rate changes.
B) changing the money multiplier.
C) changing the discount rate.
D) open market operations.
E) changing the reserve ratio.

Accepted Answer

Open market operations refer to the Fed's decision to buy or sell securities in the open market, which increases or decreases the money supply. This tool is the most frequently relied on by the Fed as it allows for more precise control over the money supply compared to other tools.

Question 13

Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities from member banks.If the oversimplified money multiplier is assumed, then the money supply will
A) increase by $500 million.
B) increase by $100 million.
C) decrease by $100 million.
D) decrease by $500 million.

Accepted Answer

The oversimplified money multiplier is 1/required reserve ratio. In this case, the oversimplified money multiplier would be 1/0.10 = 10. An open-market sale of $50 million in government securities from member banks will decrease bank reserves by $50 million, causing a contraction of the money supply by $50 million * 10 (the oversimplified money multiplier) = $500 million. Therefore, the correct answer is D.

Question 14

If the Fed sells a T-bill to an individual rather than to a commercial bank, how will this affect the money supply?
A) It will increase the money supply.
B) It will increase the checking account balance of the individual.
C) It will have no effect on the money supply.
D) It will decrease the money supply.

Accepted Answer

When the Fed sells a T-bill to an individual, the individual pays for it with money from their bank account. This reduces the amount of money in circulation because the money used to buy the T-bill is effectively removed from the economy, thus decreasing the money supply.

Question 15

When the Fed purchases government securities from a commercial bank, the bank
A) loses its ability to make loans.
B) automatically becomes poorer.
C) loses equity in the Fed.
D) receives reserves that can be loaned out.

Accepted Answer

When the Fed purchases government securities from a commercial bank, the bank receives reserves that can be loaned out. This injection of reserves into the banking system increases their ability to make loans and expands the money supply.

Question 16

Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks.If the oversimplified money multiplier is assumed, then the money supply will
A) increase by $500 million.
B) increase by $100 million.
C) decrease by $100 million.
D) decrease by $500 million.

Accepted Answer

The money multiplier is calculated as 1/required reserve ratio. With a 20 percent reserve ratio, the multiplier is 1/0.20 = 5. Therefore, an open-market purchase of $100 million in government securities can potentially increase the money supply by $100 million * 5 = $500 million, as banks can lend out more money based on the initial increase in reserves.

Question 17

The Fed conducts an open market sale of Treasury bills of $5 million.If the required reserve ratio is 0.20, what change in the money supply can be expected using the oversimplified money multiplier?
A) $25 million
B) $5 million
C) 0
D) -$5 million
E) -$25 million

Accepted Answer

With the oversimplified money multiplier method, we can calculate the potential change in the money supply as:
Change in money supply = (1/required reserve ratio) x change in reserves
In this case, the change in reserves is -$5 million (due to the open-market sale) and the required reserve ratio is 0.20. Therefore, the potential change in the money supply is:
Change in money supply = (1/0.20) x (-$5 million) = -$25 million
Note that this method assumes that all bank reserves are held as required reserves and there are no leakages (such as excess reserves or currency drains) in the banking system, which is why it is an oversimplified approach.

Question 18

Table 13-1
EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars)
 $\begin{array}{cccc}
\text { BANKS }&&\text { FEDERAL RESERVE SYSTEM }\
\text { ASSETS } & \text { LIAB. } & \text { ASSETS } & \text { LIAB. } \
\text { Reserves }+\$ 10 && \text { U.S. Gov't } & \text { Bank Reserves } \
\text { U.S. Gov't } && \text { Sec. }+\$ 10 & +\$ 10\
\text { Securities - \$10 }
\end{array}$
-After the transaction in Table 13-1 is completed, what happens to actual reserves, required reserves, and excess reserves? Assume the required reserve ratio is 25 percent.
A) Actual reserves increase by $10 million, required reserves increase $2.5 million, and excess reserves increase by $7.5 million.
B) Actual reserves decrease by $10 million, required reserves decrease $2.5 million, and excess reserves decrease by $7.5 million.
C) Actual reserves increase by $10 million, required reserves are unchanged, and excess reserves increase by $10 million.
D) Actual reserves decrease by $10 million, required reserves decrease by $10 million, and excess reserves are unchanged.

Accepted Answer

The answer of Table 13-1
EFFECTS OF AN OPEN MARKET TRANSACTION...

Question 19

Which of the following is correct?
A) The Fed has very good control over the money supply and bank reserves.
B) The Fed has very poor control over the money supply and bank reserves.
C) The Fed has very good control over bank reserves but not over the money supply.
D) The Fed has very good control over the money supply but not over bank reserves.

Accepted Answer

The Federal Reserve (the Fed) has direct control over bank reserves through its open market operations, discount rate, and reserve requirements. However, its control over the money supply is less direct because it depends on the behavior of banks in lending and the preferences of the public in holding cash versus deposits.

Question 20

The money supply contracts when the Fed
A) replaces old worn-out notes and bills.
B) borrows from the Treasury.
C) sells government securities.
D) purchases stocks from corporate businesses.

Accepted Answer

When the Fed sells government securities, it decreases the amount of money that is available in the economy. As a result, the money supply contracts.

Quiz 30: Monetary Policy: Conventional and Unconventional

When the Fed wants to expand the money supply through open market operation, it

If the FOMC orders the sale of T-bills in the open market, then bank reserves are

Banks will hold additional excess reserves when

If the Fed sells a T-bill to a commercial bank, how will this affect the money supply?

If the Federal Open Market Committee decides to expand the money supply, then it will

The Fed's purchase and sale of government securities is known as

When the Fed wants to expand the money supply, it

Which of the following is the most frequently used tool of monetary policy?

The Fed conducts an open market purchase of Treasury bills of $10 million.If the required reserve ratio is 0.10, what change in the money supply can be expected using the oversimplified money multiplier?

The tool most frequently relied on by the Fed is

Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities from member banks.If the oversimplified money multiplier is assumed, then the money supply will

If the Fed sells a T-bill to an individual rather than to a commercial bank, how will this affect the money supply?

When the Fed purchases government securities from a commercial bank, the bank

Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks.If the oversimplified money multiplier is assumed, then the money supply will

The Fed conducts an open market sale of Treasury bills of $5 million.If the required reserve ratio is 0.20, what change in the money supply can be expected using the oversimplified money multiplier?

Which of the following is correct?

The money supply contracts when the Fed