Question 1

A new bank has reserves of $600,000, checkable deposits of $500,000, and government securities of $100,000. If the desired reserve ratio is 10 percent, the amount of loans this bank can make is
A)$50,000.
B)$60,000.
C)$540,000.
D)$550,000.
E)$600,000.

Accepted Answer

The required reserves for this bank with checkable deposits of $500,000 and a desired reserve ratio of 10% is $50,000. Since the bank already has reserves of $600,000, it has $550,000 in excess reserves. The maximum amount of loans the bank can make is equal to its excess reserves, which is $550,000. Therefore, the correct answer is (D) $550,000.

Question 2

If the currency drain ratio is zero, which of the following situations leads to the greatest total increase in the quantity of money?
A)an increase in the monetary base of $100,000 when the desired reserve ratio is 5 percent
B)an increase in the monetary base of $120,000 when the desired reserve ratio is 10 percent
C)an increase in the monetary base of $200,000 when the desired reserve ratio is 20 percent
D)an increase in the monetary base of $250,000 when the desired reserve ratio is 15 percent
E)an increase in the monetary base of $100,000 when the desired reserve ratio is 50 percent

Accepted Answer

The answer of If the currency drain ratio is zero,...

Question 3

The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase?
A)$300,000
B)$200,000
C)$100,000
D)$70,000
E)$33,333

Accepted Answer

The answer of The monetary multiplier is 3 and the...

Question 4

If the currency drain ratio is 0.2 and the desired reserve ratio is 0.03, the money multiplier is
A)0.76.
B)6.67.
C)3.23.
D)4.46.
E)5.22.

Accepted Answer

The answer of If the currency drain ratio is 0.2...

Question 5

If the money multiplier is 3.0, a $1,000 increase in the monetary base
A)increases quantity of money by $3,000.
B)decreases quantity of money by $3,000.
C)increases the monetary base by $300.
D)increases the money multiplier by 3 percent.
E)decreases the quantity of money by 3 percent.

Accepted Answer

The money multiplier is the amount by which the money supply changes in response to a change in the monetary base. If the money multiplier is 3.0, a $1,000 increase in the monetary base will result in an increase in the money supply by 3 times, which is $3,000. Therefore, choice A is the correct answer.

Question 6

A-1 bank initially has no excess reserves. If the desired reserve ratio is 10 percent and a new deposit of $10,000 is made in A-1, then A-1
A)is required to hold the deposit in its reserves.
B)can immediately loan a multiple of the $10,000.
C)can immediately loan $9,000.
D)can immediately loan $100,000.
E)can immediately loan $10,000.

Accepted Answer

Since the desired reserve ratio is 10%, A-1 is required to hold 10% of the deposit in its reserves, which is $1,000. Therefore, A-1 can immediately loan out the remaining $9,000.

Question 7

C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals
A) $\frac { 1 + C / D } { R / D + C / D }$
B) $\frac { 1 + R / D } { R / D + C / D }$
C) $\frac { 1 + R / D } { 1 + C / D }$
D) $\frac { R / D - C / D } { 1 + R / D }$
E) $\frac { R / D + C / D } { 1 + C / D }$

Accepted Answer

The money multiplier is equal to 1/(R/D + C/D). Substituting 1 + C/D for C/D, we get 1/(R/D + 1 + C/D) = (1 + C/D)/(R/D + C/D + 1 + C/D) = (1 + C/D)/(R/D + 2C/D + 1) = (1 + C/D)/(R/D + C/D).

Question 8

The Fed buys $50,000 of government securities. The desired reserve ratio is 10 percent and the currency drain ratio is zero. What will be the change in the quantity of money?
A)$5,000
B)$50,000
C)$500,000
D)$5,000,000
E)$0

Accepted Answer

The answer of The Fed buys $50,000 of government securities....

Question 9

The money multiplier is the
A)fraction of the monetary base that is kept in currency.
B)factor by which a change in the monetary base is multiplied to give the change in the quantity of money.
C)factor by which a change in the deposits base is multiplied to give the change in the monetary base.
D)proportion by which a change in the quantity of money changes the monetary base.
E)number of times that the Fed conducts open market operations in a month.

Accepted Answer

The money multiplier refers to the factor by which a change in the monetary base is multiplied to give the change in the quantity of money. It is derived from the required reserve ratio, which determines how much of deposited funds banks must hold in reserve, and the excess reserves, which are available for lending and, thus, increase the money supply. By adjusting the monetary base through open market operations or other monetary policy tools, the Fed can influence the money multiplier and, hence, the overall level of economic activity.

Question 10

Suppose the currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. The money multiplier equals
A)4.27.
B)3.00.
C)3.08.
D)2.50.
E)6.67.

Accepted Answer

The money multiplier equals 1/reserve ratio. 
Reserve ratio = 10%
Currency drain ratio = 33.33% = (1 − desired deposit ratio)
Thus, the desired deposit ratio = 1 − 0.3333 = 0.6667
Therefore, the money multiplier = 1/0.1 = 10 and the deposit multiplier = 1/0.6667 = 1.5
Hence, total money multiplier = 1.5*10 = 15
Therefore, the money multiplier equals 1/0.0667 = 3.08.

Question 11

A currency drain occurs when the
A)Fed increases the required reserve ratio.
B)Fed sells U.S. government securities.
C)non-bank public increases its holdings of currency outside the banking system.
D)banks reduce the number of loans they create with their excess reserves.
E)Fed buys U.S. government securities.

Accepted Answer

A currency drain occurs when the non-bank public increases its holdings of currency outside the banking system, thereby reducing the amount of deposits held within the banking system. This can lead to a decrease in the money supply and an increase in interest rates.

Question 12

Suppose the Federal Reserve buys $50 million worth of securities from a commercial bank. As a result, the monetary base ________, and the quantity of money will ________ $50 million due to the ________.
A) increases; increase by more than; money multiplier
B) decreases; decrease by more than; money multiplier
C) increases; increase by more than; expenditure multiplier
D)decreases; decrease by less than; expenditure multiplier
E)increases; decrease by; currency drain

Accepted Answer

When the Federal Reserve buys securities from a commercial bank, it pays for them by increasing the reserves of the bank. This increases the monetary base, as reserves are a component of the monetary base. The commercial bank can then use these increased reserves to create new loans, which increases the quantity of money in the economy through the money multiplier effect. The increase in the money supply will be more than the initial $50 million because of the money multiplier.

Question 13

If the currency drain ratio is 30 percent and the desired reserve ratio is 10 percent, the money multiplier is
A)0.80.
B)1.25.
C)3.25.
D)5.00.
E)10.0.

Accepted Answer

The money multiplier formula is: 1/RRR, where RRR is the desired reserve ratio. Therefore, the money multiplier is 1/0.10 = 10. 
The currency drain ratio is the percentage of deposits that are held as currency and not available for banks to lend out. Therefore, the effective reserve ratio is RRR - CDR = 10% - 30% = -20%, which means the banks don't have enough reserves to meet the desired reserve ratio. This results in a contraction of the money supply. 
To find the new money supply, we can use the equation: Change in MS = -CDR/money multiplier. 
Change in MS = -0.30/10 = -0.03. 
Therefore, the new money supply is a 3% contraction from the original money supply.

Question 14

If a single bank has $25,000 in excess reserves and the desired reserve ratio is 20 percent, what is the maximum this bank can loan?
A)$5,000
B)$20,000
C)$25,000
D)$125,000
E)$30,000

Accepted Answer

The answer of If a single bank has $25,000 in...

Question 15

A currency drain is
A)an increase in currency held outside banks.
B)when the Fed buys securities but it is not when the Fed sells securities.
C)when the Fed sells securities but it is not when the Fed buys securities.
D)when the Fed either buys or sells securities.
E)when the Fed raises the required reserve ratio.

Accepted Answer

A currency drain refers to an increase in currency held outside banks. This can happen when individuals and businesses withdraw cash from their bank accounts and hold it for various reasons, such as a lack of confidence in the banking system or a preference for using cash in certain transactions. This can lead to a reduction in the amount of money that banks have available to lend, which can in turn affect the overall level of economic activity.

Question 16

The number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money is called the
A)desired reserve ratio.
B)money multiplier.
C)currency multiplier.
D)currency drain.
E)open market operation.

Accepted Answer

The money multiplier is the number that a change in the monetary base is multiplied by to find the resulting change in the quantity of money. The other options are not correct definitions of this concept.

Question 17

The Fed purchases $1 million of U.S. government securities from First Bank. The desired reserve ratio is 10 percent, the currency drain ratio is zero, and banks loan all excess reserves. The money multiplier is equal to
A)0.10.
B)1.0.
C)10.0.
D)100.0.
E)$1 million.

Accepted Answer

The money multiplier is calculated as 1/reserve ratio. In this case, the reserve ratio is 10%, so the money multiplier is 1/0.10 = 10. Therefore, the initial injection of $1 million will ultimately increase the money supply by $10 million ($1 million x 10).

Question 18

The currency drain reduces the amount of
A)reserves available to banks to make loans.
B)currency the Fed has outstanding in the economy.
C)currency available for banks to borrow from the Fed.
D)the monetary base.
E)open market operations the Fed can make.

Accepted Answer

Currency drain refers to a situation where individuals and businesses withdraw cash from banks, leading to a decrease in the currency held by banks. As a result, banks have fewer reserves available to make loans, which reduces the money supply and the monetary base. Therefore, the correct choice is A) reserves available to banks to make loans.

Question 19

Bank One has reserves of $100,000, government securities of $200,000, loans of $700,000, and checkable deposits of $800,000. If the desired reserve ratio is 10 percent, Bank One can make additional loans totaling
A)$0.00.
B)$10,000.
C)$20,000.
D)$80,000.
E)$100,000.

Accepted Answer

The answer of Bank One has reserves of $100,000, government...

Question 20

Suppose the currency drain ratio is 25 percent and the desired reserve ratio is 20 percent. The money multiplier equals
A)4.00.
B)3.00.
C)2.78.
D)2.00.
E)5.42.

Accepted Answer

The money multiplier is calculated by dividing the amount of money that can be created by the initial amount of reserves.

Money Multiplier = 1 / Reserve Ratio

In this case, the desired reserve ratio is 20%, which means that banks must hold onto 20% of the deposits as reserves and can lend out the rest.

Reserve Ratio = 0.20
Money Multiplier = 1 / 0.20 = 5

However, the currency drain ratio is 25%, which means that 25% of the deposits are being held as currency by the public and are not available for banks to lend out.

Effective Reserve Ratio = Reserve Ratio - Currency Drain Ratio
Effective Reserve Ratio = 0.20 - 0.25 = -0.05

This negative effective reserve ratio means that the banks do not have enough reserves to support the deposits and the money multiplier cannot be calculated.

To avoid this situation, the desired reserve ratio must be increased or the currency drain ratio must be decreased. However, as the numbers in this problem stand, the money multiplier cannot be calculated.

The only answer option that is close to the correct calculation is C) 2.78, but this is not a reasonable or accurate calculation given the negative effective reserve ratio.

Quiz 18: Money and the Monetary System

A new bank has reserves of $600,000, checkable deposits of $500,000, and government securities of $100,000. If the desired reserve ratio is 10 percent, the amount of loans this bank can make is

If the currency drain ratio is zero, which of the following situations leads to the greatest total increase in the quantity of money?

The monetary multiplier is 3 and the change in the monetary base is $100,000. How much will the quantity of money increase?

If the currency drain ratio is 0.2 and the desired reserve ratio is 0.03, the money multiplier is

If the money multiplier is 3.0, a $1,000 increase in the monetary base

A-1 bank initially has no excess reserves. If the desired reserve ratio is 10 percent and a new deposit of $10,000 is made in A-1, then A-1

C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals

The Fed buys $50,000 of government securities. The desired reserve ratio is 10 percent and the currency drain ratio is zero. What will be the change in the quantity of money?

The money multiplier is the

Suppose the currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. The money multiplier equals

A currency drain occurs when the

Suppose the Federal Reserve buys $50 million worth of securities from a commercial bank. As a result, the monetary base , and the quantity of money will $50 million due to the .

If the currency drain ratio is 30 percent and the desired reserve ratio is 10 percent, the money multiplier is

If a single bank has $25,000 in excess reserves and the desired reserve ratio is 20 percent, what is the maximum this bank can loan?

A currency drain is

The number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money is called the

The Fed purchases $1 million of U.S. government securities from First Bank. The desired reserve ratio is 10 percent, the currency drain ratio is zero, and banks loan all excess reserves. The money multiplier is equal to

The currency drain reduces the amount of

Bank One has reserves of $100,000, government securities of $200,000, loans of $700,000, and checkable deposits of $800,000. If the desired reserve ratio is 10 percent, Bank One can make additional loans totaling

Suppose the currency drain ratio is 25 percent and the desired reserve ratio is 20 percent. The money multiplier equals