Question 1

If the M2 multiplier is currently 8 and people decide to increase the ratio of currency they hold relative to the amount of transactions accounts they hold, the M2 multiplier will
A)not change.
B)increase substantially.
C)decrease.
D)increase slightly.

Accepted Answer

The M2 multiplier is calculated as 1/required reserve ratio. If people decide to hold more currency relative to transaction accounts, banks will have fewer reserves available, which will increase the required reserve ratio. As a result, the M2 multiplier will decrease, meaning that the money supply will decrease as well.

Question 2

M2 money multiplier equals
A)(nontransaction accounts + money market funds) ÷ monetary base
B)(M1 + nontransaction accounts ­ money market funds) × reserves
C)(M2 ­ money market funds) ÷ excess reserves
D)(M1 + nontransaction accounts + money market funds) ÷ monetary base

Accepted Answer

The M2 money multiplier measures the amount of money supply that is generated by each dollar increase in the monetary base. It is calculated by dividing M2 (which includes M1, nontransaction accounts, and money market funds) by the monetary base. Therefore, choice D is the correct formula.

Question 3

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03.If the ratio of retail money-market mutual funds to transaction accounts increases, the M1 multiplier will _____and the M2 multiplier will ______.
A)not change; increase
B)increase; also increase
C)decrease; also decrease
D)increase; not change

Accepted Answer

The M1 multiplier is primarily affected by the behavior of transaction accounts and does not directly change with variations in retail money-market mutual funds. The M2 multiplier, which includes M1 and additional components like savings accounts and retail money-market mutual funds, will increase if the ratio of retail money-market mutual funds to transaction accounts increases, as it indicates a shift towards assets that are part of M2 but not M1.

Question 4

If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will
A)increase by $1 billion.
B)decline by $1 billion.
C)decline by $9 billion.
D)increase by $9 billion.

Accepted Answer

When the Fed engages in open-market sales, it sells securities, which decreases bank reserves and thus the money supply. With a multiplier of 3, a $3 billion sale results in a $9 billion decrease in M1.

Question 5

Third Bank has reserves of $12.3 million and transaction accounts of $115 million.If required reserves are 10 percent of transactions accounts, Third Bank has excess reserves of
A)−$0.8 million.
B)$0.
C)$0.8 million
D)$0.08 million

Accepted Answer

To find excess reserves, we need to first calculate the required reserves. Given that required reserves are 10% of transaction accounts, we have:

Required Reserves = 10% of $115 million 
= 0.10 x $115 million 
= $11.5 million

Now, we can find excess reserves by subtracting required reserves from actual reserves:

Excess Reserves = Reserves - Required Reserves 
= $12.3 million - $11.5 million 
= $0.8 million

Therefore, the answer is C) $0.8 million, as Third Bank has excess reserves of $0.8 million.

Question 6

If a bank in the economy has excess reserves of $3 million, and required reserves are 10 percent of transactions accounts under the assumptions of the simple multiplier formula, then eventually the money supply will increase by
A)−$3 million.
B)$3 million.
C)$10 million.
D)$30 million.

Accepted Answer

The simple money multiplier is calculated as 1 divided by the reserve requirement ratio, which is 10% or 0.1 in this case. Thus, the multiplier is 10. With $3 million in excess reserves, the potential increase in the money supply is $3 million multiplied by 10, equaling $30 million.

Question 7

Another name for the monetary base is
A)commodity money.
B)fiat money.
C)high-powered money.
D)bank reserves.

Accepted Answer

The monetary base is also known as high-powered money because it serves as the foundation for the money supply in an economy. It refers to the total amount of currency in circulation and the reserves held by banks at the central bank, which forms the basis for the creation of credit and the expansion of the money supply. The other options (commodity money, fiat money, and bank reserves) do not accurately capture the nature or role of the monetary base.

Question 8

The money multiplier equals
A)the money supply divided by the monetary base.
B)currency held by the non-bank public plus banks' reserves.
C)currency held by the non-bank public plus transaction accounts.
D)M2 divided by M1.

Accepted Answer

The money multiplier is the ratio of the money supply to the monetary base. In other words, it represents the amount of money the banking system can create from a given amount of reserves.

Question 9

The main liability on the Federal Reserve's balance sheet is
A)discount loans.
B)securities.
C)the monetary base.
D)capital.

Accepted Answer

The main liability on the Federal Reserve's balance sheet is the monetary base, which includes currency in circulation and reserves held by banks at the Fed.

Question 10

If the excess reserves held by banks increase, the money multiplier is likely to
A)rise.
B)fall.
C)remain unchanged.
D)rise at first, then decline later.

Accepted Answer

When the excess reserves held by banks increase, they have less incentive and ability to lend out money to customers, which leads to a decrease in the money supply and a decrease in the money multiplier.

Question 11

The main asset on the Federal Reserve's balance sheet is
A)discount loans.
B)securities.
C)monetary base.
D)capital.

Accepted Answer

The main asset on the Federal Reserve's balance sheet is securities, which include U.S. Treasury securities, federal agency debt, and mortgage-backed securities. These securities are purchased by the Fed in open market operations to inject money into the economy or sold to decrease the money supply. Discount loans and capital are liabilities on the Fed's balance sheet, while the monetary base includes both assets and liabilities.

Question 12

An increase in interest rates
A)decreases the M2 money multiplier.
B)decreases the ratio of excess reserves to transaction accounts held by banks
C)increases the money supply for a given amount of monetary base.
D)increases the ratio of excess reserves to transaction accounts held by banks

Accepted Answer

Higher interest rates incentivize banks to lend more rather than hold excess reserves, thus decreasing the ratio of excess reserves to transaction accounts.

Question 13

If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M1 multiplier is about
A)1.42.
B)2.12.
C)2.81.
D)4.24.

Accepted Answer

The M1 multiplier is calculated as 1 / (currency ratio + nontransaction account ratio + retail money-market fund ratio + required reserve ratio + excess reserve ratio). In this case, the M1 multiplier is 1 / (2 + 5 + 1 + 0.08 + 0.02) = 1 / 8.1 = 0.123.

Question 14

Green bank has transaction accounts worth $200 million.If the required reserve ratio is 10%, Green bank holds_____ as required reserves.
A)$220 million
B)$180 million
C)$60 million
D)$20 million

Accepted Answer

The required reserves are calculated as the required reserve ratio (10%) multiplied by the total amount in transaction accounts ($200 million), which equals $20 million.

Question 15

Consider a bank that has $10 million as reserves, $5million as securities, and $100 million as transaction accounts.If a customer, who is a government securities dealer, sells $2 million in securities to the Fed
A)the bank's transaction accounts reduce to $98 million.
B)the bank's securities reduce by $4 million.
C)the bank's reserves increase to $12 million.
D)the bank's loans reduce by $2 million.

Accepted Answer

When the Fed buys securities from a government securities dealer, the payment for these securities increases the reserves of the dealer's bank. Therefore, if the bank's customer sells $2 million in securities to the Fed, the bank's reserves increase by $2 million, from $10 million to $12 million.

Question 16

The money supply in an economy equals
A)monetary base plus money multiplier.
B)monetary base divided by money multiplier.
C)money multiplier divided by monetary base.
D)money multiplier multiplied by monetary base.

Accepted Answer

The money supply in an economy is calculated by multiplying the monetary base by the money multiplier. This reflects how the initial amount of money (monetary base) is expanded through the banking system's lending activities, represented by the money multiplier.

Question 17

If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million?
A)$10 million
B)$100 million
C)$1 billion
D)$6.889 billion

Accepted Answer

To find the amount the Fed needs to add to the monetary base, divide the desired increase in M2 ($830 million) by the M2 multiplier (8.3). $830 million / 8.3 = $100 million.

Question 18

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals
A)the Fed's capital stock.
B)discount loans.
C)the monetary base.
D)required clearing balances.

Accepted Answer

The currency held by the nonbank public, banks' vault cash, and banks' deposits at the Fed are all components of the monetary base. The monetary base, also known as high-powered money, is the total amount of money in circulation in the economy and is used by the Fed to influence the money supply and control inflation. Therefore, the correct answer is C) the monetary base.

Question 19

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03.If people decide to decrease the ratio of nontransaction accounts they hold relative to the amount of their transactions accounts, the M1 multiplier will____ and the M2 multiplier will _____-.
A)not change; decrease
B)increase; also increase
C)decrease; also decrease
D)increase; not change

Accepted Answer

The answer of Suppose the M1 multiplier is currently 1.95...

Question 20

M1 money multiplier equals
A)(transaction accounts + currency) ÷ monetary base
B)(transaction accounts ­ currency) ÷ monetary base
C)(transaction accounts + currency) × monetary base
D)(transaction accounts ­ currency) × monetary base

Accepted Answer

The M1 money multiplier equals the total amount of money that the banking system can create through the deposit process. It can be calculated as (transaction accounts + currency) ÷ monetary base.

Quiz 16: Monetary Control

If the M2 multiplier is currently 8 and people decide to increase the ratio of currency they hold relative to the amount of transactions accounts they hold, the M2 multiplier will

M2 money multiplier equals

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03.If the ratio of retail money-market mutual funds to transaction accounts increases, the M1 multiplier will _and the M2 multiplier will __.

If the M1 multiplier is 3 and the Fed engages in open-market sales in the amount of $3 billion, then M1 will

Third Bank has reserves of $12.3 million and transaction accounts of $115 million.If required reserves are 10 percent of transactions accounts, Third Bank has excess reserves of

If a bank in the economy has excess reserves of $3 million, and required reserves are 10 percent of transactions accounts under the assumptions of the simple multiplier formula, then eventually the money supply will increase by

Another name for the monetary base is

The money multiplier equals

The main liability on the Federal Reserve's balance sheet is

If the excess reserves held by banks increase, the money multiplier is likely to

The main asset on the Federal Reserve's balance sheet is

An increase in interest rates

Green bank has transaction accounts worth $200 million.If the required reserve ratio is 10%, Green bank holds_____ as required reserves.

Consider a bank that has $10 million as reserves, $5million as securities, and $100 million as transaction accounts.If a customer, who is a government securities dealer, sells $2 million in securities to the Fed

The money supply in an economy equals

If the M2 multiplier is 8.3, how much would the Fed need to add to the monetary base in order to increase the M2 measure of the money supply by $830 million?

Currency held by the nonbank public plus banks' vault cash plus banks' deposits at the Fed equals

Suppose the M1 multiplier is currently 1.95 and the M2 multiplier is currently 8.03.If people decide to decrease the ratio of nontransaction accounts they hold relative to the amount of their transactions accounts, the M1 multiplier will and the M2 multiplier will _-.

M1 money multiplier equals