Question 1

The money multiplier is much lower today than it was twenty-five years ago because:

Accepted Answer

The money multiplier is determined by the currency-to-deposit ratio and the reserve requirement ratio. If the currency-to-deposit ratio is high, it means people are holding more cash relative to their deposits, which reduces the amount of deposits that can be used to create money through banking activities. Therefore, as the currency-to-deposit ratio has increased over the past twenty-five years, the money multiplier has decreased.

Question 2

The formula for required reserves is:

Accepted Answer

The formula for required reserves is r_D * D, where r_D is the reserve requirement ratio and D is the amount of deposits.

Question 3

Which of the following best completes the statement? If people increase their currency holdings, all else the same, the monetary base:

Accepted Answer

The answer of Which of the following best completes the...

Question 4

If the Fed were to decrease the required reserve rate from ten percent to five percent, the simple deposit expansion multiplier would:

Accepted Answer

The simple deposit expansion multiplier is 1/required reserve ratio. If the required reserve ratio decreases from 10% to 5%, the multiplier would be 1/0.05, which is double its previous value of 1/0.10.

Question 5

Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws ten percent of every deposit in cash.An open market purchase of $1 million by the Fed will see banking system deposits increase by:

Accepted Answer

When the Fed makes an open market purchase of $1 million, the banking system reserves will increase by $1 million x 0.1 (required reserve rate) = $100,000. This will allow banks to lend out additional funds of $1 million - $100,000 = $900,000. However, banks also want to hold excess reserves equal to 3% of deposits, so they will hold back 0.03 x ($1 million + $900,000) = $57,000. This means that the total increase in deposits will be $1 million - $57,000 = $943,000. Additionally, because the public withdraws 10% of every deposit in cash, the total increase in deposits will be $943,000 x 0.9 = $848,700. Therefore, the correct answer is A, as the increase in deposits will be more than $1 million (initially lent by the Fed) but less than $10 million (without the cash withdrawal).

Question 6

If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to:

Accepted Answer

An increase in bank failures would result in a decrease in the money supply as well as a decrease in the amount of reserves held by banks. This reduction in reserves would increase the demand for excess reserves, thereby raising their cost and encouraging banks to hold more of them. As a result, the amount of excess reserves in the banking system would increase.

Question 7

During the early years of the Great Depression, the monetary base and M2:

Accepted Answer

During the early years of the Great Depression, the monetary base increased as the Federal Reserve tried to inject liquidity into the banking system. However, M2, which includes savings and checking deposits among other components, decreased because people were withdrawing their money from banks in fear of bank failures, leading to a contraction in the broader money supply despite the increase in the monetary base.

Question 8

If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then RR would equal:

Accepted Answer

Required reserves equal the reserves held by banks minus the excess reserves. Thus, RR = R - ER.

Question 9

If M = the quantity of money, m, the money multiplier, MB, the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then C + R would equal:

Accepted Answer

The monetary base, MB, is defined as the sum of currency in circulation, C, and reserves, R. Therefore, C + R = MB. The other variables, M, m, D, RR, and ER, are not directly related to C and R in this way.

Question 10

During the Great Depression, the monetary base in the U.S.:

Accepted Answer

During the Great Depression, the monetary base in the U.S. actually increased, contrary to what might be expected during a period of economic downturn. This was largely due to the Federal Reserve's efforts to inject liquidity into the banking system.

Question 11

If we assume a ten percent required reserve rate, and banks not holding any excess reserves and no change in currency holdings, an open market sale of $5 million of U.S.Treasury securities by the Fed, will result in deposits:

Accepted Answer

With a required reserve rate of 10%, an open market sale of $5 million of U.S. Treasury securities by the Fed will result in a decrease in bank deposits by $50 million. This is because banks are required to hold 10% of all deposits as reserves, and when the Fed sells Treasury securities, it drains reserves from the banking system. The decrease in reserves will lead to a decrease in deposits through the money multiplier process.

Question 12

If we focus on the banking system and assume no change in the public's currency holdings, a loss of reserves by any one bank must:

Accepted Answer

The question assumes no change in the public's currency holdings, which means that there is no inflow or outflow of currency between banks and the public. Therefore, any loss of reserves by one bank can be offset by gains in reserves by other banks in the system. This means that the loss of reserves by one bank does not necessarily equal the loss of reserves by the entire system. It also does not necessarily result in a net loss of reserves for the banking system. The correct answer is C, which states that a loss of reserves by any one bank would result in no change in reserves for the banking system.

Question 13

If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would:

Accepted Answer

The simple deposit expansion multiplier is the reciprocal of the required reserve ratio. Increasing the required reserve ratio from 10% (1/10) to 20% (1/5) would halve the multiplier, making it half as large as before.

Question 14

If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in what change in loans?

Accepted Answer

With a required reserve rate of 10%, the $1 million open market purchase by the Fed will result in an increase in excess reserves for banks of $1 million x 0.1 = $100,000. Since banks do not hold any excess reserves, they will have to loan out the entire $100,000. Using the money multiplier (1/required reserve rate), we can calculate that the total increase in loans will be $100,000 x (1/0.1) = $1,000,000. Therefore, the correct answer is an increase of $10 million in loans.

Question 15

If required reserves are expressed by RR; the required reserve rate by r_D and deposits by D, the simple deposit expansion multiplier is expressed as:

Accepted Answer

The simple deposit expansion multiplier is the reciprocal of the required reserve ratio, expressed as 1/r_D.

Question 16

The use of deposit sweeping allows banks to:

Accepted Answer

Deposit sweeping allows banks to move excess funds from checking accounts into savings accounts, which are subject to a lower reserve requirement. This allows banks to hold fewer reserves overall, freeing up funds for lending and investment activities.

Question 17

The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it:

Accepted Answer

The simple deposit expansion multiplier is too simplistic because it ignores the fact that people might change their currency holdings, which can significantly affect the money supply. It assumes all money deposited will be held in banks, not accounting for the public's preference for holding cash.

Question 18

During the early years of the Great Depression, a study of the money aggregates reveals that the money multiplier:

Accepted Answer

During the Great Depression, the money multiplier decreased due to a decrease in the velocity of money and a drop in the reserve requirement. This led to a decrease in the money supply and worsened the economic downturn.

Question 19

If M = the quantity of money, m the money multiplier, MB the Monetary Base, C = Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves, then m would equal:

Accepted Answer

The money multiplier is determined by dividing the total money supply (M) by the monetary base (MB), expressed mathematically as m = M/MB.

Question 20

If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in deposit creation of:

Accepted Answer

If the required reserve rate is 10% and there are no excess reserves, each bank must hold 10% of their deposits as reserves. Therefore, an open market purchase of $1 million by the Fed will increase reserves by $1 million and increase the potential deposit creation by $10 million (1/0.1).

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