Question 1

Assuming a simple money multiplier, if the Fed increases bank reserves by $100 and the required reserve ratio is 25 percent, then the maximum increase in deposits within the banking system as a whole is

Accepted Answer

According to the simple money multiplier formula, the maximum amount of deposits that can be created is calculated as: 1/RR x change in reserves. In this case, RR is 25% or 0.25 and the change in reserves is $100. Therefore, the maximum increase in deposits is (1/0.25) x 100 = $400. Therefore, our answer is C, $400.

Question 2

Assuming a simple money multiplier, if the Fed increases bank reserves by $100 and the required reserve ratio is 2 percent, then the maximum increase in deposits within the banking system as a whole is

Accepted Answer

The maximum increase in deposits is calculated using the money multiplier formula, which is 1/required reserve ratio. With a 2 percent required reserve ratio, the multiplier is 1/0.02 = 50. Therefore, if the Fed increases bank reserves by $100, the maximum increase in deposits is $100 * 50 = $5,000.

Question 3

If the required reserve ratio is 15 percent and the desired excess reserve ratio is 5 percent, then the multiplier that takes both into account is which of the following?

Accepted Answer

The answer of If the required reserve ratio is 15...

Question 4

If the required reserve ratio is 25 percent and the desired excess reserve ratio is 15 percent, then the multiplier that takes both into account is which of the following?

Accepted Answer

The multiplier formula is 1/required reserve ratio plus excess reserve ratio. So in this case, the multiplier would be 1/0.25 + 0.15 = 4 + 0.15 = 4.15. However, since we are asked to round to the nearest tenth, the answer would be 4.2. Therefore, the closest choice is D, which is 2.5.

Question 5

The simple money multiplier tells the relationship between which of the following?

Accepted Answer

The simple money multiplier tells the relationship between changes in reserves and changes in deposits. Specifically, it is the amount by which the money supply expands for every $1 increase in reserves held by banks. The formula for the simple money multiplier is 1/required reserve ratio. This means that if the required reserve ratio is 10%, then the simple money multiplier is 1/0.1 = 10. So, if banks receive an additional $100 in reserves, they can lend out up to $1,000 (10 times the amount of reserves) which can then enter the wider economy and increase the money supply.

Question 6

Reserves are which of the following?

Accepted Answer

Reserves refer to vault cash (cash held by banks in their own vaults) and deposits at the Federal Reserve. Choice A correctly identifies this definition. Choice B refers to required reserves, which are a specific portion of deposits that banks are required to hold as reserves. Choice C is incorrect as currency held outside the Fed is not considered a reserve.

Question 7

Assume the following: a 20 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash. Also assume that First Bank just received a checking deposit of $500. What are the respective amounts of required reserves and excess reserves that First Bank initially holds from this transaction?

Accepted Answer

RR = $100 because with a 20 percent required reserve ratio, 20% of $500 is $100. ER = $400 because after setting aside the required reserves, the remaining $400 can be loaned out.

Question 8

Assume that First Bank makes a $400 loan to a student named Jamie. Jamie takes the loan and spends it all at the Alberts College Bookstore. The bookstore in turn deposits Jamie's check in the bookstore account at Second Bank. What are the respective amounts of required reserves and excess reserves that Second Bank initially holds against this deposit? Assume the following: a 20 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash.

Accepted Answer

The initial deposit of $400 from Jamie will increase Second Bank's reserve account by $400. Second Bank will be required to hold 20% of this deposit as required reserves, which equals $80. The remaining $320 is excess reserves. Therefore, the correct choice is B.

Question 9

If the required reserve ratio is .20, the excess reserve ratio is .05, and there is no currency drain, what is the multiplier?

Accepted Answer

The answer of If the required reserve ratio is .20,...

Question 10

The complete money multiplier shows which of the following?

Accepted Answer

The complete money multiplier shows the relationship between changes in the monetary base and changes in the money supply. Specifically, it illustrates how changes in the level of reserves held by banks can lead to a corresponding change in the amount of money created by the banking system.

Question 11

If the Fed purchases government securities,

Accepted Answer

When the Fed purchases government securities, it increases the monetary base (A), which then leads to an increase in reserves and money supply (B). This then leads to an increase in credit and deposits (C). Therefore, all of the above are correct.

Question 12

If r = .1, c = .35, and e = .1, what is the money multiplier?

Accepted Answer

The money multiplier formula is equal to 1/(reserve requirement + currency held by the public) or 1/(r + c). Plugging in the values given, we get a money multiplier equal to 1/(.1 + .35) or 2.45. Therefore, the best choice is C.

Question 13

If r = .1, c = .35, and e = .2, what is the money multiplier?

Accepted Answer

The money multiplier formula is 1/(r+c+e). Plugging in the given values, we get: 1/(.1+.35+.2) = 1/0.65 = 1.54. Therefore, the money multiplier is 1.54, which is closest to option B (2.08 is incorrect and the other choices are too far off).

Question 14

The required reserve ratio is which of the following?

Accepted Answer

The required reserve ratio is the percentage of outstanding checkable deposits that an intermediary is required to have in vault cash or deposited at the Fed. This is a tool used by the Federal Reserve to control the money supply in the economy. Option A is referring to personal finance advice, option B is not a real requirement by the UN, and option D is unrelated to the Federal Reserve's operations.

Question 15

Which of the following statements regarding the money supply process is false?

Accepted Answer

Open market sales actually decrease the supply of reserves because they involve the sale of government securities by the Fed to the banking system, which pays for these securities with reserves, thus reducing the reserves in the banking system. Conversely, open market purchases increase the supply of reserves because the Fed buys government securities from the banking system, paying with new reserves, thus increasing the reserves in the banking system.

Question 16

Which of the following decreases reserves of depository institutions?

Accepted Answer

Open market sales decrease reserves of depository institutions by reducing the amount of money available in the banking system.

Question 17

Which of the following increases reserves of depository institutions?

Accepted Answer

Increases in discount loans provide depository institutions with additional reserves, which in turn increases their ability to lend and create money. Increases in the discount rate decrease the willingness of banks to borrow from the Federal Reserve, while open market sales decrease the amount of reserves in the banking system. Decreases in discount loans and increases in open market purchases have the opposite effect.

Question 18

Which of the following does not increase reserves of depository institutions?

Accepted Answer

Open market sales decrease reserves of depository institutions, while increases in discount loans and open market purchases increase reserves. None of the above is incorrect because they all have an impact on reserves.

Question 19

Discount window borrowing by depository institutions is used to

Accepted Answer

Discount window borrowing by depository institutions is used to cover temporary shortfalls of reserves. Depoitory institutions may need to borrow from the discount window when they are unable to meet reserve requirements or have unexpected withdrawals. This borrowing helps them to continue meeting the demands of their customers without disrupting the banking system as a whole.

Question 20

The money supply is which of the following?

Accepted Answer

The money supply is equal to the monetary base times the money multiplier. The money multiplier represents the amount of money that can be created by banks using the monetary base. Therefore, the money supply is directly proportional to the monetary base and the money multiplier.

Quiz 19: The Fed, Depository Institutions, and the Money Supply Process