Question 1

Table 29-1
Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars)  ​
-In Table 29-1, 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

According to Table 29-1, the Federal Reserve System has purchased $10 million in government securities from banks, paying for them with increases in banks' reserves. This is shown by the increase of $10 million in the "Securities held outright" category under "Assets" and the increase of $10 million in the "Reserve balances" category under "Liabilities and capital" for the Federal Reserve System. Similarly, there is a decrease of $10 million in the "Securities" category under "Assets" for the banks, but an increase of $10 million in the "Reserves" category under "Liabilities and equity."

Question 2

Table 29-1
Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars)  ​
-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 3

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 4

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. This injects money into the economy and increases the supply of money in the system.

Question 5

The Fed relies on open-market operations, which work
A)with the Treasury in creating money to finance bonds.
B)through major stock exchanges to influence bond prices.
C)directly through the nonbank public to change their assets.
D)through the banking system by affecting their reserves.

Accepted Answer

Open-market operations is a monetary policy tool used by the Federal Reserve to influence the money supply in the economy. The Fed buys or sells government securities, such as bonds, to influence the reserves of the banking system. This affects the amount of money banks can lend out, which in turn affects the money supply. Therefore, open-market operations work through the banking system by affecting their reserves.

Question 6

If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
A)It will give the bank new reserves.
B)It will write the bank a check.
C)It will transfer cash to the bank's vault.
D)It will take reserves from another bank.

Accepted Answer

When the Fed buys a T-bill from a commercial bank, it will pay for the T-bill by giving the bank new reserves. This will increase the bank's reserves and allow it to increase its lending and money creation ability. Writing a check or transferring cash would not be necessary as the payment can be made simply by creating new reserves. Taking reserves from another bank would also not be necessary as the Fed can create new reserves through open market operations.

Question 7

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 8

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 purchase and sale of government securities by the Federal Reserve is known as open-market operations. Through open-market operations, the Fed can influence the money supply and interest rates in the economy.

Question 9

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 10

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 available for lending and spending, thereby contracting the money supply. The other options would not necessarily contract the money supply.

Question 11

Table 29-1
Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars)  ​
-After the transaction in Table 29-1 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 29-1
Effects of an open-market transaction on...

Question 12

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 13

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

When the Federal Open Market Committee (FOMC) decides to expand the money supply, it issues directions to purchase government securities. This puts more reserves in member banks, allowing them to then expand their lending and increase the money supply. The FOMC does not raise the discount rate (choice A) as this would discourage borrowing and lending, thus decreasing the money supply. Option C is also incorrect as selling government securities would reduce reserves in member banks, thus decreasing the money supply. Option D is also incorrect as ordering new Federal Reserve notes has no direct impact on the money supply.

Question 14

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

The tool most frequently relied on by the Fed is open-market operations, which involves buying and selling government securities to influence the level of reserves in the banking system and ultimately affect the interest rates that banks charge one another. While the other tools listed are also used by the Fed, they are typically employed less frequently or in more specific circumstances.

Question 15

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 by the central bank, are the most frequently used tool of monetary policy. Changing the discount rate and reserve requirements are also tools used by central banks, but they are typically used less frequently than open-market operations. Interest rate changes can be a reflection of the central bank's monetary policy stance, but they are not a tool in and of themselves.

Question 16

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 gives the bank more capacity to issue loans and expand its lending activities.

Question 17

____ is the rate that applies when banks borrow and lend reserves to one another.
A)The repo rate
B)The discount rate
C)The coupon rate
D)The federal fund rate

Accepted Answer

The federal funds rate is the rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. This rate is often used as a benchmark for interest rates on other types of loans and securities. The other options, such as the repo rate, discount rate, and coupon rate, all refer to different types of interest rates that are not directly related to interbank lending.

Question 18

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 Federal Reserve wants to expand the money supply, it buys government securities from member banks. This injects money into the banking system, increasing the amount of funds banks have available to lend, thereby expanding the money supply.

Question 19

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, it is essentially taking money out of circulation and giving the bank a government security instead. This decreases the amount of money available in the system, since the bank cannot use the security as a means to pay for goods and services. Therefore, this action will decrease the money supply.

Question 20

Table 29-1
Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars)  ​
-In Table 29-1, 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

The oversimplified money multiplier formula is 1/required reserve ratio. With a 10 percent reserve ratio, the multiplier is 1/0.10 = 10. This means every dollar of reserves can support $10 of deposits. Therefore, any increase in reserves can increase the money supply by 10 times that amount.

Quiz 29: Monetary Policy: Conventional and Unconventional

Table 29-1 Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars) -In Table 29-1, the Federal Reserve System has

Which of the following is correct?

When the Fed wants to expand the money supply, it

The Fed relies on open-market operations, which work

If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?

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

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?

The money supply contracts when the Fed

Table 29-1 Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars) -After the transaction in Table 29-1 is completed, what happens to actual reserves, required reserves, and excess reserves? Assume the required reserve ratio is 25 percent.

If the Fed sells a T-bill to an individual rather than 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 tool most frequently relied on by the Fed is

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

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

____ is the rate that applies when banks borrow and lend reserves to one another.

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

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

Table 29-1 Effects of an open-market transaction on the balance sheets of banks and the fed (in millions of dollars) -In Table 29-1, if the required reserve ratio is 10 percent, what will happen to the money supply? Use the oversimplified money multiplier in your calculations.