Question 1

-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

The oversimplified money multiplier is calculated as 1 divided by the reserve ratio. With a 10% reserve ratio, the multiplier is 10. Therefore, an initial increase in reserves of $10 million can increase the money supply by $100 million (10 times the initial amount).

Question 2

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 work through the banking system by affecting their reserves. The Fed buys or sells government securities on the open market, which either increases or decreases the reserves that banks hold at the Fed. This, in turn, affects the amount of money that banks can lend out and ultimately the money supply in the economy.

Question 3

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 removing money from the economy. The bank pays for the T-bill with its reserves, which decreases the amount of money that the bank has available to lend out. This, in turn, decreases the money supply in the economy.

Question 4

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, where the Federal Reserve buys and sells government securities to influence the money supply in the economy, is the most frequently used tool of monetary policy. It is used by the Federal Reserve on a regular basis to adjust short-term interest rates in the economy. While the other tools (changing the discount rate, changing reserve requirements, and interest rate changes) are also used, they are less frequently used and typically used in conjunction with open market operations.

Question 5

-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

The Federal Reserve System has purchased $10 million in government securities from banks, paying for them with increases in banks' reserves. This is known as an open market purchase, where the Fed buys government securities from banks, increasing banks' reserves in return. This is a form of expansionary monetary policy, aimed at increasing the money supply and stimulating economic growth.

Question 6

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 7

Table 13-1
EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars)

-After the transaction in Table 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 8

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 buying and selling of government securities in the open market by the Fed, which enables it to influence the money supply and interest rates. This tool is the most frequently relied on by the Fed.

Question 9

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 10

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 11

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 12

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 effectively injects more money into the banking system, which can then be used to make loans to individuals and businesses. Therefore, the bank does not lose its ability to make loans but instead gains more reserves to use for lending.

Question 13

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 in the economy, which contracts the money supply. The other options do not directly impact the money supply.

Question 14

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 from member banks. This puts more reserves in member banks, allowing them to increase lending and thus expanding the money supply. Option A is incorrect because raising the discount rate would discourage member banks from borrowing from the Federal Reserve, which would reduce the money supply. Option C is incorrect because selling government securities would reduce the reserves of member banks, which would also reduce the money supply. Option D is incorrect because ordering new Federal Reserve notes would not immediately increase the money supply if there is no increase in reserves.

Question 15

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 oversimplified money multiplier formula is 1/required reserve ratio. In this case, the multiplier would be 1/0.2 = 5. Therefore, the $100 million open market purchase would lead to a $500 million increase in the money supply (5 x $100 million = $500 million).

Question 16

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. This is when the Fed buys or sells government securities to control the money supply and influence interest rates.

Question 17

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 18

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

If the Fed conducts an open market sale of Treasury bills of $5 million, banks will have $5 million less in reserves. With a required reserve ratio of 0.20, banks must hold back $1 million ($5 million × 0.20) in reserves, leaving them with only $4 million to loan out. Using the oversimplified money multiplier (1/required reserve ratio), the money supply will decrease by $20 million ($4 million × 5). Therefore, the correct answer is E, a decrease of $25 million ($20 million decrease in the money supply, plus the $5 million Treasury bill sale).

Question 19

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 purchases government securities from banks and other financial institutions. This increases the banks' reserves and allows them to lend out more money, thereby increasing the overall money supply in the economy.

Question 20

____ 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 at which banks lend and borrow reserves to/from each other. It is set by the Federal Reserve and influences other interest rates in the economy, including consumer and business loans. The other options, such as the repo rate and discount rate, are also important interest rates, but they serve different purposes and are not directly linked to interbank lending.

Quiz 30: Monetary Policy: Conventional and Unconventional

-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.

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?

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

-In Table 13-1, the Federal Reserve System has

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?

Table 13-1 EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars) -After the transaction in Table 13-1 is completed, what happens to actual reserves, required reserves, and excess reserves? Assume the required reserve ratio is 25 percent.

The tool most frequently relied on by the Fed is

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

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

Which of the following is correct?

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

The money supply contracts when the Fed

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

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's purchase and sale of government securities is known as

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 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?

When the Fed wants to expand the money supply, it

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