Question 1

The Federal Reserve is
A)a Kentucky bourbon.
B)a wild game preserve.
C)an express mail service.
D)the central bank of the United States.

Accepted Answer

The Federal Reserve is the central bank of the United States, responsible for implementing monetary policy, regulating banks, and promoting stability in the financial system.

Question 2

Was the money multiplier stable during the Great Recession? Why would an unstable money multiplier pose a problem for monetary policy?

Accepted Answer

The answer of Was the money multiplier stable during the...

Question 3

A bank run is
A)a large-scale,panicky withdrawal of deposits from a bank.
B)the transfer of funds from one bank to another.
C)a situation when a bank borrows from the Fed's discount window.
D)a situation in which a bank borrows at the Federal funds rate.

Accepted Answer

A bank run is a phenomenon where a large number of depositors, fearing that their bank is at risk of failure, withdraw their funds all at once. This can lead to a liquidity crisis for the bank, as they may not have enough reserves to meet the withdrawal demands. Bank runs can be contagious and lead to a domino effect, where other banks also experience runs.

Question 4

Suppose that in Mysore,the reserve-deposit ratio is
Res = 0.5 - 2 i,
Where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10i,
Where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money multiplier equals
A)2)00.
B)2)40.
C)3)00.
D)4)00.

Accepted Answer

The money multiplier is calculated as follows:

Money Multiplier = 1 / Reserve-deposit ratio
= 1 / (0.5 - 2i)

At the current interest rate of 5%, i = 0.05. Substituting this value, we get:

Money Multiplier = 1 / (0.5 - 2(0.05))
= 1 / 0.4
= 2.5

However, we need to adjust for the currency-deposit ratio of 0.2. The adjusted money multiplier is:

Adjusted Money Multiplier = Money Multiplier / (1 - Currency-deposit ratio)
= 2.5 / (1 - 0.2)
= 3.125

Since the monetary base is 100, the money supply is:

Money Supply = Monetary Base x Adjusted Money Multiplier
= 100 x 3.125
= 312.5

Therefore, the closest answer is B) 240.

Question 5

Last year,the currency-deposit ratio was 0.2 and the reserve-deposit ratio was 0.2.Over the past year,the public changed its currency-deposit ratio,to which the Fed responded by reducing the reserve-deposit ratio to 0.15,to keep the money supply from changing and keeping the same monetary base.Calculate the new currency-deposit ratio.Show your work.

Accepted Answer

The answer of Last year,the currency-deposit ratio was 0.2 and...

Question 6

Suppose that in Mysore,the reserve-deposit ratio is
Res = 0.5 - 2i,
Where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10i,
Where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The money supply equals
A)200.
B)240.
C)300.
D)400.

Accepted Answer

We can use the equation of the monetary base to find the money supply:
M = C + D
where M is the money supply, C is currency in circulation, and D is deposits in banks.
We are given that the currency-deposit ratio is 0.2, so
C = 0.2D
The reserve-deposit ratio is 0.5 - 2i, so
R = (0.5 - 2i)D
Therefore, we can write
M = C + R = 0.2D + (0.5 - 2i)D = (0.5 - 2i + 0.2)D = (0.7 - 2i)D
To find the value of D, we need to use the quantity theory of money:
M/P = kY
where M is the money supply, P is the price level, Y is real output, and k is a constant.
We can solve for P, using the fact that the real interest rate is i - 5%, or 0%, since the inflation rate is expected to be 5%:
P = M/(kY) = (0.7 - 2i)D/(kY)
i - 0 = (1/k)(0.7 - 2i)D/Y - 1
i = (0.7 - 2i)D/(kY) - 1
(1 + 2/k)i = 0.7D/(kY) - 1
i = (0.7/(1 + 2/k))D/(kY) - 1/(1 + 2/k)
We are given that the real interest rate is 5%, so
0.05 = (0.7/(1 + 2/k))D/(kY) - 1/(1 + 2/k)
Solving for D, we get
D = (0.05 + 1/(1 + 2/k))/(0.7/(1 + 2/k))kY
Plugging in k = 1 and Y = 1, we get
D = (0.05 + 1/3)/(0.7/3) = 240
Therefore, the money supply is
M = (0.7 - 2i)D = (0.7 - 2*0.05)*240 = 240
so the answer is B).

Question 7

If the money multiplier is 10,the purchase of $1 billion of securities by the Fed on the open market causes a
A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.

Accepted Answer

If the money multiplier is 10 and the Fed purchases $1 billion of securities, the total increase in the money supply will be 10 times that amount, or $10 billion. This is because the initial injection of $1 billion will be multiplied through the banking system as loans are made and deposits are created, resulting in a larger increase in the money supply.

Question 8

If the Fed decreases the monetary base by $100 million and the money multiplier is 4,M1 will
A)rise by $400 million.
B)fall by $400 million.
C)rise by $25 million.
D)fall by $25 million.

Accepted Answer

If the Fed decreases the monetary base by $100 million and the money multiplier is 4, it means that the total money supply will decrease by 4 times the monetary base. So, M1 will fall by $400 million (4 x $100 million).

Question 9

Suppose the reserve-deposit ratio is
res = 0.5 - 2 i,
where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function
L(Y,i)= 0.5Y - 10 i,
where Y is real output.Currently the real interest rate is 5% and the economy expects an inflation rate of 5%.Assume the price level P is equal to 1.
(a)Calculate the money multiplier.
(b)Calculate the reserve-deposit ratio.
(c)Calculate the money supply.
(d)Calculate the value of output Y that clears the asset market.

Accepted Answer

The answer of Suppose the reserve-deposit ratio is
res = 0.5...

Question 10

If the money multiplier is 10,the sale of $1 billion of securities by the Fed on the open market causes a
A)$10 billion decrease in the money supply.
B)$1 billion decrease in the money supply.
C)$1 billion increase in the money supply.
D)$10 billion increase in the money supply.

Accepted Answer

The sale of $1 billion of securities by the Fed on the open market would lead to a $10 billion decrease in the money supply because the money multiplier effect implies that an initial change in the monetary base (in this case, a decrease due to the sale) is magnified in the economy by a factor of the money multiplier (in this case, 10).

Question 11

Suppose that bank reserves (res)are a function of the nominal interest rate (i):
res = 0.3 - 3i.
The money multiplier is (cu + 1)/(cu + res),where cu is the currency-deposit ratio.Initially,suppose the real interest rate (r)equals 0.03,the expected inflation rate (pe)equals 0.03,and the currency-deposit ratio equals:
cu = 0.4 - (10 × pe).
The real money demand function is L(Y,i)= 0.8Y - 1500i,where Y is the level of output.The monetary base equals 100.The price level equals 1.0 initially and will not change in the short run,but will adjust in the long run.
(a)Calculate the currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output.Assume that this level of output equals full-employment output,so you are assuming that the economy is in general equilibrium with the price level equal to 1.0.Show your work.
(b)Suppose financial innovation causes the reserve-deposit ratio to decline to res = 0.2 - 3i.Calculate the new currency-deposit ratio,the reserve-deposit ratio,the money multiplier,the money supply,and the equilibrium level of output in the short run,assuming a Keynesian model with the price level fixed in the short run.Show your work.
(c)Calculate the equilibrium price level in the long run.Show your work.

Accepted Answer

The answer of Suppose that bank reserves (res)are a function...

Question 12

The money supply is $12.5 million,currency held by the nonbank public is $2.5 million,and the reserve-deposit ratio is 0.25.
(a)What is the quantity of bank deposits?
(b)What is the quantity of bank reserves?
(c)What is the quantity of the monetary base?
(d)What is the money multiplier (give a number)?

Accepted Answer

The answer of The money supply is $12.5 million,currency held...

Question 13

How many Federal Reserve Banks are there?
A)7
B)12
C)15
D)5,500 (approximately)

Accepted Answer

There are 12 Federal Reserve Banks located in different regions of the United States.

Question 14

Suppose the following statistics are available for the economy:
CU = $60 billion
RES = $100 billion
DEP = $1000 billion
(a)Calculate the size of the monetary base,the money supply,the reserve-deposit ratio,the currency-deposit ratio,and the money multiplier.
(b)Suppose the currency-deposit ratio rises to .10,while the reserve-deposit ratio and monetary base remain unchanged.Calculate the money multiplier,the money supply,and the new values of CU,RES,and DEP.

Accepted Answer

The answer of Suppose the following statistics are available for...

Question 15

The leadership of the Federal Reserve System is provided by
A)the Board of Governors.
B)the Federal Advisory Committee.
C)the Federal Open Market Committee.
D)the directors of the twelve Federal Reserve banks.

Accepted Answer

The Board of Governors is the main decision-making body of the Federal Reserve System and is responsible for setting monetary policy. The other options listed are advisory or implementing bodies within the Federal Reserve System.

Question 16

The Fed can reduce the money supply by reducing
A)the currency-deposit ratio.
B)the monetary base.
C)reserve requirements.
D)the discount rate.

Accepted Answer

The Fed can reduce the money supply by reducing the monetary base, which includes currency in circulation and reserves held by banks. By doing so, it directly decreases the amount of funds available in the banking system for lending, thus contracting the money supply.

Question 17

The current chairman of the Board of Governors of the Federal Reserve System is
[NOTE: YOU MAY NEED TO UPDATE THIS QUESTION.]
A)Milton Friedman.
B)Alan Greenspan.
C)Ben Bernanke.
D)Paul Volcker.

Accepted Answer

This question requires updating as the current Chairman of the Federal Reserve Board has changed since the original creation of this question. As of 2021, the current Chairman of the Board of Governors of the Federal Reserve System is Jerome Powell. However, among the options given, the best choice is C, Ben Bernanke, who served as Chairman from 2006 to 2014.

Question 18

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $30 million,and bank deposits are $100 million.The money multiplier is equal to
A)2)5.
B)3)0.
C)4)0.
D)5)0.

Accepted Answer

The answer of Vault cash is equal to $8 million,deposits...

Question 19

Who determines the open-market operations of the Federal Reserve System?
A)Board of Governors
B)FDIC
C)FHLBB
D)FOMC

Accepted Answer

The Federal Open Market Committee (FOMC) determines the open-market operations of the Federal Reserve System. The FOMC is composed of the seven members of the Federal Reserve Board (Board of Governors) and five of the 12 Federal Reserve Bank presidents. Together, they make decisions on monetary policy, including setting interest rates and conducting open-market operations. The other options, FDIC and FHLBB, are regulatory bodies that deal with bank supervision and federal housing issues, respectively, but they do not have a role in determining the open-market operations of the Federal Reserve System.

Question 20

Which of the following is the Federal Reserve most likely to use to change the nation's money supply?
A)Open-market operations
B)Reserve requirements
C)Discount lending
D)Credit controls

Accepted Answer

Open-market operations refer to the buying and selling of government securities by the Federal Reserve in order to influence the money supply. This is the most commonly used tool by the Fed for controlling the money supply. Reserve requirements involve setting a minimum amount of reserves that banks must hold in order to lend out money. Discount lending refers to the Fed's ability to lend money directly to banks. Credit controls involve setting limits on the amount of credit that can be extended by banks. While all of these tools can be used to influence the money supply, open-market operations are the most flexible and thus the most commonly used tool by the Federal Reserve.

Quiz 14: Monetary Policy and the Federal Reserve System

The Federal Reserve is

Was the money multiplier stable during the Great Recession? Why would an unstable money multiplier pose a problem for monetary policy?

A bank run is

If the money multiplier is 10,the purchase of $1 billion of securities by the Fed on the open market causes a

If the Fed decreases the monetary base by $100 million and the money multiplier is 4,M1 will

If the money multiplier is 10,the sale of $1 billion of securities by the Fed on the open market causes a

How many Federal Reserve Banks are there?

The leadership of the Federal Reserve System is provided by

The Fed can reduce the money supply by reducing

The current chairman of the Board of Governors of the Federal Reserve System is [NOTE: YOU MAY NEED TO UPDATE THIS QUESTION.]

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $30 million,and bank deposits are $100 million.The money multiplier is equal to

Who determines the open-market operations of the Federal Reserve System?

Which of the following is the Federal Reserve most likely to use to change the nation's money supply?