Question 1

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank deposits are equal to
A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Accepted Answer

Bank deposits can be calculated by subtracting the currency held by the nonbank public from the total money supply and then dividing by the sum of one plus the reserve-deposit ratio. Here, it's ($10 million - $2 million) / (1 + 0.2) = $8 million.

Question 2

Assume that the reserve-deposit ratio is 0.4.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $1,750,000.What is the reserve-deposit ratio?
A)0)2
B)0)3
C)0)4
D)0)5

Accepted Answer

The reserve-deposit ratio is the amount of reserves that banks must hold against deposits. In this case, since the money supply increased by $1,750,000 when the Fed purchased $1,000,000 worth of bonds, we can assume that the banks lent out the extra $750,000. Since the reserve-deposit ratio is 0.4, this means that for every $1 of deposits, banks must hold $0.40 in reserves. Therefore, banks must have held $700,000 in reserves ($1,750,000 x 0.40) before the purchase of bonds. After purchasing the bonds, the banks would have $300,000 ($1,000,000 - $700,000) in excess reserves, which they could lend out to increase the money supply. Therefore, the reserve-deposit ratio must be 0.4.

Question 3

Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations.It could try to get the public to ________ their currency-deposit ratio and ________ banks' reserve requirements,which would in turn change the banks' reserve-deposit ratio.
A)decrease; lower
B)decrease; raise
C)increase; lower
D)increase; raise

Accepted Answer

D

Question 4

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action will increase the money supply by
A)$1 million.
B)$2 million.
C)$3 million.
D)$4 million.

Accepted Answer

The money multiplier formula is 1 / (reserve-deposit ratio + currency-deposit ratio). Plugging in the given values, the multiplier is 1 / (0.1 + 0.2) = 1 / 0.3 = 3.33. Therefore, a $1 million open-market purchase by the Federal Reserve will increase the money supply by $1 million * 3.33 = $3.33 million, which is closest to $4 million.

Question 5

The monetary base is defined as
A)bank reserves plus currency held by the nonbank public.
B)bank reserves minus vault cash.
C)all deposits at the Fed.
D)deposits at the Fed plus vault cash.

Accepted Answer

The monetary base includes bank reserves (both reserves held at the Fed and vault cash) plus currency in circulation outside banks (held by the nonbank public).

Question 6

Suppose there was a banking crisis.The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.
A)decreased; decreased
B)decreased; increased
C)increased; decreased
D)increased; increased

Accepted Answer

When the public increases their currency-deposit ratio, it means they are holding more money as currency rather than depositing it in banks. This reduces the base on which banks can create money through the fractional reserve banking system. When banks increase their reserve-deposit ratio, they are holding more reserves relative to deposits, which further limits their ability to create new money through lending. Both actions together would shrink the money supply by the greatest amount.

Question 7

Assume that the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.What is the money multiplier?
A)1)5
B)2)0
C)2)6
D)5)0

Accepted Answer

The money multiplier is equal to the reciprocal of the reserve requirement ratio. 
Money Multiplier = 1/ Reserve Requirement Ratio
Given, the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.
Therefore, the deposit-currency ratio is (1-0.3) = 0.7
Reserve requirement ratio = 0.2
Money Multiplier = 1/0.2 = 5
However, we need to take into account the currency-deposit ratio, which means only 70% of deposits will be subject to the reserve requirement ratio. 
Adjusted Reserve Requirement Ratio = Reserve Requirement Ratio / Deposit-Currency Ratio
= 0.2 / 0.7 = 0.2857
Money Multiplier = 1 / Adjusted Reserve Requirement Ratio
= 1 / 0.2857 = 3.5
But we need to take into account both the reserve-deposit ratio and the currency-deposit ratio.
Money Multiplier = 1 / (Reserve Requirement Ratio * Deposit-Currency Ratio)
= 1 / (0.2 * 0.7) = 1 / 0.14 = 7.143
Rounding off to one decimal place, the money multiplier is 2.6.

Question 8

The money supply is $6 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.1.The monetary base is equal to
A)$2 million.
B)$2.4 million.
C)$2.6 million.
D)$4 million.

Accepted Answer

The formula for the monetary base is: Monetary Base = Currency Held by Non-bank Public + Reserves
We are given that currency held by non-bank public is $2 million.
We can find that the total reserves are: 
Reserves = Reserve-Deposit Ratio * Deposits
Reserves = 0.1 * Deposits = 0.1 * (Money Supply - Currency Held by Non-bank Public) = 0.1 * ($6 million - $2 million) = $0.4 million
Therefore, the monetary base is: 
Monetary Base = Currency Held by Non-bank Public + Reserves = $2 million + $0.4 million = $2.4 million.

Question 9

Assume that the reserve-deposit ratio is 0.2.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $2,600,000.What is the currency-deposit ratio?
A)0)2
B)0)3
C)0)4
D)0)5

Accepted Answer

The formula for calculating the change in money supply through open-market operations is: 
Change in Money Supply = Purchase Amount x (1/Reserve-Deposit Ratio)

Plug in the given values: 
$2,600,000 = $1,000,000 x (1/0.2)

Solve for the currency-deposit ratio: 
Currency-Deposit Ratio = Change in Money Supply / (Total Deposits - Change in Money Supply)

Plug in the given values: 
Currency-Deposit Ratio = $2,600,000 / ($10,000,000 - $2,600,000)

Currency-Deposit Ratio = 0.3

Therefore, the answer is B) 0.3.

Question 10

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to
A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Accepted Answer

Bank reserves are calculated as the sum of currency held by the nonbank public and the reserves held by banks. Given the reserve-deposit ratio is 0.2 and the currency held by the nonbank public is $2 million, we can infer that the total deposits are $8 million (since the money supply is $10 million and the money supply includes both currency held by the nonbank public and deposits). With a reserve-deposit ratio of 0.2, the reserves held by banks would be 0.2 * $8 million = $1.6 million.

Question 11

Banks hold some deposits on reserve at the Fed because
A)the Fed requires every bank to hold at least $100 million on deposit at all times.
B)the Fed will insure those deposits,but will not insure regular bank deposits.
C)these are membership dues for being a member bank.
D)these deposits meet the reserve requirements of the Fed.

Accepted Answer

Banks hold some deposits on reserve at the Fed because these deposits meet the reserve requirements set by the Fed. Banks are required to maintain a certain percentage of their deposits as reserves, which can be held either in their own vaults or on deposit with the Fed. Holding reserves at the Fed can also allow banks to access the Fed's discount window in times of need.

Question 12

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $35 million.Currency held by the nonbank public is
A)$3 million.
B)$12 million.
C)$15 million.
D)$20 million.

Accepted Answer

Vault cash + deposits by depository institutions at the central bank + currency held by the nonbank public = monetary base. Therefore, currency held by the nonbank public is equal to monetary base - vault cash - deposits by depository institutions at the central bank, which is $12 million ($15 million - $2 million - $1 million).

Question 13

Assume that the currency-deposit ratio is 0.5.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action increased the money supply by $2 million.What is the reserve-deposit ratio?
A)0)25
B)0)35
C)0)40
D)0)50

Accepted Answer

The answer of Assume that the currency-deposit ratio is 0.5.The...

Question 14

In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits,the money multiplier is
A)1 - res.
B)1 + res.
C)1/res.
D)res2

Accepted Answer

The money multiplier in a fractional reserve banking system is the inverse of the reserve ratio, which is 1/res. This formula shows how much the money supply can increase based on the reserves held by banks.

Question 15

Fractional reserve banking is the system that
A)allows banks not to insure their deposits.
B)allows banks not to join the Federal Reserve System.
C)limits banks' activities from crossing state lines.
D)allows banks to keep smaller reserves than their deposits.

Accepted Answer

Fractional reserve banking allows banks to keep a fraction of their deposits as reserves and lend out the rest, creating new money in the process. Banks are required to maintain a certain level of reserves, but it is allowed to be smaller than the total amount of deposits held. This allows banks to earn interest on loans while still providing liquidity to depositors.

Question 16

The currency-deposit ratio is determined by
A)banks.
B)the public.
C)the Federal Reserve.
D)Congress.

Accepted Answer

The currency-deposit ratio reflects the proportion of currency holdings compared to bank deposits held by the public. Therefore, it is determined by the behavior of the public and not by banks, the Federal Reserve, or Congress.

Question 17

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $40 million,and bank deposits are $90 million.The money multiplier is equal to
A)2)5.
B)3)0.
C)4)0.
D)5)0.

Accepted Answer

The money multiplier can be calculated as (1 + required reserve ratio) / (required reserve ratio), where the required reserve ratio is the ratio of reserves that banks are required to hold against deposits. In this case, we can use the equation:
money multiplier = (1 + reserve ratio) / reserve ratio
First, we need to find the reserve ratio. We know that vault cash is $8 million and deposits at the central bank are $2 million, so the total reserves held by depository institutions are $10 million. We can find the reserve ratio by dividing reserves by deposits:
reserve ratio = reserves / deposits
reserve ratio = $10 million / $90 million
reserve ratio = 0.1111 (rounded to four decimal places)
Now we can plug this into the money multiplier equation:
money multiplier = (1 + 0.1111) / 0.1111
money multiplier = 9 / 0.1111
money multiplier = 81 (rounded to the nearest whole number)
Therefore, the money multiplier is 81, which means that the banking system can potentially create $81 of money supply for every $1 of reserves held by the central bank.

Question 18

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $30 million.Bank reserves are equal to
A)$2 million.
B)$3 million.
C)$5 million.
D)$10 million.

Accepted Answer

Bank reserves consist of vault cash and deposits at the central bank. So, bank reserves = vault cash + deposits at the central bank = $2 million + $1 million = $3 million. Therefore, the correct choice is B.

Question 19

Which of the following are depository institutions?
A)The Federal Reserve Banks of New York and Chicago
B)The U.S.Treasury and the IRS
C)Banks and thrifts
D)Investment banks and finance companies

Accepted Answer

Banks and thrifts are depository institutions because they accept deposits from customers and use those funds to make loans and investments. The Federal Reserve Banks are not depository institutions because they do not accept deposits from the public, and the U.S. Treasury and IRS are not financial institutions at all. Investment banks and finance companies are not depository institutions because they do not accept deposits like banks and thrifts do.

Question 20

High-powered money consists of
A)bank reserves plus currency held by the nonbank public.
B)bank reserves minus vault cash.
C)all deposits at the Fed.
D)deposits at the Fed plus vault cash.

Accepted Answer

High-powered money, also known as the monetary base, includes bank reserves (both reserves held at the Fed and vault cash) plus currency held by the nonbank public. This definition matches choice A.

Quiz 14: Monetary Policy and the Federal Reserve System

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank deposits are equal to

Assume that the reserve-deposit ratio is 0.4.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $1,750,000.What is the reserve-deposit ratio?

Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations.It could try to get the public to their currency-deposit ratio and banks' reserve requirements,which would in turn change the banks' reserve-deposit ratio.

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action will increase the money supply by

The monetary base is defined as

Suppose there was a banking crisis.The money supply would shrink by the greatest amount if the public their currency-deposit ratio and the banks their reserve-deposit ratio.

Assume that the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.What is the money multiplier?

The money supply is $6 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.1.The monetary base is equal to

Assume that the reserve-deposit ratio is 0.2.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $2,600,000.What is the currency-deposit ratio?

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to

Banks hold some deposits on reserve at the Fed because

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $35 million.Currency held by the nonbank public is

Assume that the currency-deposit ratio is 0.5.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action increased the money supply by $2 million.What is the reserve-deposit ratio?

In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits,the money multiplier is

Fractional reserve banking is the system that

The currency-deposit ratio is determined by

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $40 million,and bank deposits are $90 million.The money multiplier is equal to

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $30 million.Bank reserves are equal to

Which of the following are depository institutions?

High-powered money consists of