Question 1

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 reserves available to banks and thus reduces the amount of money that can be lent out, leading to a contraction of the money supply.

Question 2

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

____ 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 fund rate is the rate that applies when banks borrow and lend reserves to one another. The repo rate is the rate at which the central bank lends money to commercial banks for a short-term period, while the discount rate is the rate at which banks can borrow from the central bank overnight. The coupon rate is the interest rate on a bond.

Question 5

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, or the buying and selling of government securities in the open market, are the most frequently used tool by the Fed to influence the money supply and interest rates. This tool allows the Fed to directly affect the level of reserves in the banking system, which in turn affects the ability of banks to lend and the overall level of economic activity. While other tools such as changing the discount rate, reserve ratio, and money multiplier are also used by the Fed, they are typically used less frequently and with less immediate impact than open-market operations.

Question 6

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...

Question 7

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 pays for it by giving new reserves to the bank. This increases the bank's total reserves and allows it to lend out more money, increasing the money supply. The Fed creates these new reserves on its balance sheet, which allows it to expand or contract the money supply as necessary. Writing a check or transferring cash are not typical methods of payment in this scenario. Taking reserves from another bank is also not a usual practice.

Question 8

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 buys government securities from member banks. This increases the reserves of the banks, allowing them to lend more money and increase the money supply in the economy. Selling government securities would have the opposite effect, reducing the money supply. Buying from the Treasury is not a common method of open-market operations.

Question 9

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 FOMC decides to expand the money supply, it will issue directions to purchase government securities, thus putting more reserves in member banks. This increases the amount of money available for lending, which can stimulate economic growth. Keeping the discount rate low also encourages banks to borrow from the Federal Reserve, further increasing the money supply. Option A is incorrect as the discount rate is lowered to encourage borrowing. Option C is incorrect as selling government securities would decrease the money supply. Option D is also incorrect as simply ordering new Federal Reserve notes would not immediately increase the money supply.

Question 10

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 11

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

The table shows that the Fed purchased $10 million in government securities from banks, paying for them with increases in banks' reserves. This is evidenced by the increase in reserves on the banks' balance sheets and the corresponding decrease in securities on the Fed's balance sheet.

Question 12

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

The Fed expands the money supply by buying government securities, which injects cash into the economy and increases the reserves of commercial banks. This increases the availability of credit, which in turn stimulates economic activity. Selling government securities, on the other hand, decreases the money supply by pulling cash out of the economy and reducing bank reserves. Buying or selling common stock does not directly impact the money supply.

Question 13

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 14

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 involve the buying and selling of government securities by the Fed with banks and other financial institutions. This affects the reserves of these institutions and can influence the overall money supply in the economy. Therefore, choice D is the correct answer as it states "through the banking system by affecting their reserves." Choices A and B are incorrect as they describe processes that are not directly related to open-market operations. Choice C is also incorrect as the Fed does not directly interact with the nonbank public in open-market operations.

Question 15

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 for the T-bill by reducing its reserves with the Fed. This decreases the amount of money that the bank can lend and thus decreases the money supply in the economy.

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, which increases the bank's ability to make loans. Therefore, option D is the correct choice. Option A is incorrect because the bank's ability to make loans is not affected by the Fed's purchase of securities. Option B is incorrect because the bank does not become poorer; it simply has a different mix of assets on its balance sheet. Option C is incorrect because the bank does not lose equity in the Fed; it simply has a different mix of assets on its balance sheet.

Question 17

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 buying or selling government securities in the open market, are the most frequently used tool of monetary policy by central banks like the Federal Reserve. These operations allow the central bank to increase or decrease the money supply in the economy, which can influence interest rates and inflation. While the other tools listed (changing the discount rate, changing reserve requirements, and interest rate changes) are also used in monetary policy, they are typically used less frequently than open-market operations.

Question 18

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 answer of Table 29-1 Effects of an open-market transaction...

Question 19

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

The oversimplified money multiplier formula is:

Money multiplier = 1/Required Reserve Ratio

Therefore, in this case, the money multiplier is:

Money multiplier = 1/0.20 = 5

To determine the change in the money supply, we multiply the change in reserves by the money multiplier.

Since the Fed conducted an open-market sale of $5 million in Treasury bills, this means that $5 million in reserves will be removed from the banking system.

Therefore, the change in the money supply can be expected to be:

Change in money supply = −$5 million × 5 = −$25 million

The negative sign indicates that the money supply will decrease by this amount.

Question 20

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.

Quiz 29: Monetary Policy: Conventional and Unconventional

The money supply contracts when the Fed

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

Which of the following is correct?

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

The tool most frequently relied on by the Fed is

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

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

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

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

When the Fed wants to expand the money supply, it

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

The Fed relies on open-market operations, which work

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

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

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

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.

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 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?