Question 1

The most a bank could lend at any time without altering its assets is an amount equal to its:

Accepted Answer

Excess reserves are the funds that a bank has available to lend out beyond the required reserves.

Question 2

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will:

Accepted Answer

When the Federal Reserve buys a U.S. Treasury bond from a bank, the bank's reserves increase by the amount of the sale. However, required reserves are determined by the bank's deposits, not its assets like Treasury bonds. Therefore, the sale itself does not directly change the required reserves.

Question 3

Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact on the monetary base of Harry's deposit?

Accepted Answer

The monetary base does not change when Harry deposits his $1,000 into his checking account because the physical currency is simply transferred from being held by Harry to being held by the bank. The overall amount of currency in circulation plus reserves held by the bank remains the same.

Question 4

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will:

Accepted Answer

When Bank A sells a $100,000 U.S. Treasury bond to the Fed, the Fed will pay Bank A with newly created reserves. Therefore, the excess reserves of Bank A will increase by the same amount as the payment, which is $100,000.

Question 5

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's reserves will:

Accepted Answer

When Bank A sells a U.S. Treasury bond to the Fed for $100,000, the Fed pays Bank A using its own reserves, which increases Bank A's reserves by $100,000.

Question 6

When the Fed makes a discount loan, the impact on the Banking System's balance sheet is:

Accepted Answer

When the Fed makes a discount loan to a bank, it increases the bank's reserves (an asset for the bank) without an immediate change in its liabilities, similar to the effect of an open market purchase where the Fed buys securities from banks, thereby increasing the banks' reserves.

Question 7

The Fed sells German bonds to commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

Accepted Answer

When the Fed sells German bonds to commercial banks, it is essentially exchanging one asset (the bonds) for another (cash). This reduces the Fed's assets (the bonds are removed from its balance sheet) and also reduces its liabilities (as the cash paid by the banks is removed from the banking system's reserves, which are a liability on the Fed's balance sheet). For the commercial banks, the total value of assets and liabilities does not change; they simply swap one asset (cash) for another (the bonds).

Question 8

When the Fed makes a discount loan, the impact on the Banking System's balance sheet will reflect:

Accepted Answer

When the Federal Reserve makes a discount loan to a bank, the bank's assets increase because it receives the loan amount, and its liabilities increase because it now owes the Federal Reserve the amount of the loan. This results in an increase in both assets and liabilities on the bank's balance sheet.

Question 9

Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be:

Accepted Answer

When Tom withdraws $300 from his checking account, the bank's reserves decrease by $300, which means that the Fed's liability of reserves decreases by $300. At the same time, there is an increase in the liability of currency by $300 since currency in circulation has increased. This transaction does not affect the total assets or total liabilities of the Fed, but it does change the composition of the liabilities, as explained above in choice A. Therefore, the correct answer is A.

Question 10

When an individual withdraws funds from a checking account the:

Accepted Answer

When an individual withdraws funds from a checking account, the bank's balance sheet shrinks because the bank's liability decreases (due to the decrease in the amount of deposits), while its assets (such as loans or reserves) remain the same. However, the size of the Federal Reserve's balance sheet is not affected because the reserves held by the bank are already reflected in the Fed's balance sheet.

Question 11

A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in his bank, Bank B. Which of the following statements pertaining to this transaction is most true?

Accepted Answer

When the check is processed, Bank A's reserves decrease by the amount of the check ($20,000) because it is paying out this amount. Bank B's reserves increase by the same amount ($20,000) because it is receiving this amount. Reserves are directly transferred from one bank to another in such transactions.

Question 12

Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the Banking System's balance sheet will be to:

Accepted Answer

This transaction decreases reserves because the bank must give Mary $500 in cash, reducing its reserves. It also decreases checkable deposits by $500 because Mary's account balance is reduced by that amount.

Question 13

During the 2007-2009 financial crisis which of the following temporarily became the largest component of assets on the Fed's balance sheet:

Accepted Answer

During the financial crisis, mortgage backed securities temporarily became the largest component of assets on the Fed's balance sheet as a result of the Fed's actions to purchase these securities in order to inject liquidity into the financial system and stabilize the housing market.

Question 14

Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. Considering Harry's personal balance sheet, his assets:

Accepted Answer

When Harry received the $1,000 in currency from his grandfather, his assets increased by that amount. Depositing the money into his checking account did not change his total assets; it merely changed the form of the assets from currency to bank deposits.

Question 15

Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum amount Bank A could lend?

Accepted Answer

Bank A needs to hold 10% of $100 million as reserves, which is $10 million. With $1 million in vault cash and $14 million at the Fed, Bank A has $15 million in reserves. Therefore, it can lend out $15 million - $10 million = $5 million.

Question 16

Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by:

Accepted Answer

The answer of Over the two-year period during which the...

Question 17

Which of the following have the same impact on the Fed's balance sheet?

Accepted Answer

An open market purchase and an increase in loans by the Fed to banks both expand the Fed's balance sheet by increasing assets. An open market purchase increases the Fed's holdings of securities, while an increase in loans to banks increases the Fed's loan assets.

Question 18

To obtain a discount loan from the Fed, a commercial bank must:

Accepted Answer

To obtain a discount loan from the Fed, a commercial bank must provide collateral. Proof of potential failure or intended use of loan is not required, but collateral serves as security for the loan. Additionally, while agreeing to more frequent examinations is a requirement for banks to maintain their charters, it is not directly related to obtaining a discount loan.

Question 19

When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect:

Accepted Answer

When the Fed makes a discount loan, it increases both its assets (due to the loan receivable) and its liabilities (due to the increase in reserves of the borrowing bank). Therefore, the impact on the Fed's balance sheet will reflect an increase in assets and liabilities.

Question 20

Bank A has checkable deposits of $140 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the amount of excess reserves Bank A is holding?

Accepted Answer

The answer of Bank A has checkable deposits of $140...

Quiz 17: The Central Bank Balance Sheet and the Money Supply Process