Question 1

If the reserve requirement is 10 percent, which of the following pairs of changes would both allow a bank to lend out an additional $10,000?
A) the Fed buys a $10,000 bond from the bank or someone deposits $10,000 in the bank
B) the Fed buys a $10,000 bond from the bank or the Fed lends the bank $10,000
C) the Fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank
D) the Fed sells a $10,000 bond to the bank or the Fed lends the bank $10,000

Accepted Answer

The answer of If the reserve requirement is 10 percent,...

Question 2

The banking system currently has $100 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed lowers the reserve requirement to 5 percent and at the same time buys $10 billion worth of bonds, then by how much does the money supply change?
A) It rises by $200 billion.
B) It rises by $800 billion.
C) It rises by $1,200 billion.
D) None of the above is correct.

Accepted Answer

The answer of The banking system currently has $100 billion...

Question 3

The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?
A) sell bonds to increase reserves
B) sell bonds to decrease reserves
C) buy bonds to increase reserves
D) buy bonds to decrease reserves

Accepted Answer

The answer of The Fed increases the reserve requirement, but...

Question 4

The money supply increases when the Fed
A) lowers the discount rate. The increase will be larger the smaller the reserve ratio is.
B) lowers the discount rate. The increase will be larger the larger the reserve ratio is.
C) raises the discount rate. The increase will be larger the smaller the reserve ratio is.
D) raises the discount rate. The increase will be larger the larger the reserve ratio is.

Accepted Answer

When the Fed lowers the discount rate, it encourages banks to borrow more from the Fed, thereby increasing the amount of reserves held by banks. This increase in reserves allows banks to increase their lending, which in turn increases the money supply. The increase in the money supply will be larger the smaller the reserve ratio is, as a smaller reserve ratio means that banks have a smaller proportion of their deposits held in reserves and can therefore lend out a larger proportion of their deposits.

Question 5

In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have
A) increased both the money multiplier and the money supply.
B) decreased both the money multiplier and the money supply.
C) increased the money multiplier and decreased the money supply.
D) decreased the money multiplier and increased the money supply.

Accepted Answer

Lowering the reserve requirement would allow banks to hold less reserves and lend out more money, increasing the money multiplier and ultimately the money supply.

Question 6

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply
A) increased. The central bank could have reduced the size of this increase by buying bonds.
B) increased. The central bank could have reduced the size of this increase by selling bonds.
C) decreased. The central bank could have reduced the size of this decrease by buying bonds.
D) decreased. The central bank could have reduced the size of this decrease by selling bonds.

Accepted Answer

The answer of At one time, people in a certain...

Question 7

The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?
A) it increases by $250,000
B) it increases by $200,000
C) it decreases by $200,000
D) it decreases by $250,000

Accepted Answer

If the Fed sells $10,000 worth of bonds, it reduces the money supply by $10,000. This is because when the Fed sells bonds, it takes money out of the banking system. Given the reserve requirement of 4%, the initial money multiplier is 1/0.04 = 25. This means that each dollar of reserves can support $25 of money supply. Since the Fed has reduced reserves by $10,000, this means the money supply will decrease by $10,000 x 25 = $250,000. Therefore, the correct answer is (D) it decreases by $250,000.

Question 8

The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by
A) $25.
B) between $200 and $300.
C) $1,600.
D) $2,500.

Accepted Answer

The answer of The Fed purchases $200 worth of government...

Question 9

If the public decides to hold more currency and fewer deposits in banks, bank reserves
A) decrease and the money supply eventually decreases.
B) decrease but the money supply does not change.
C) increase and the money supply eventually increases.
D) increase but the money supply does not change.

Accepted Answer

If the public holds more currency and fewer deposits in banks, the amount of bank reserves will decrease, and this will eventually lead to a decrease in the money supply. This is because banks can only create deposits when they have sufficient reserves, and a decrease in reserves will limit the amount of deposits banks can create, leading to a contraction of the money supply.

Question 10

The money supply increases when the Fed
A) buys bonds. The increase will be larger, the smaller is the reserve ratio.
B) buys bonds. The increase will be larger, the larger is the reserve ratio.
C) sells bonds. The increase will be larger, the smaller is the reserve ratio.
D) sells bonds. The increase will be larger, the larger is the reserve ratio.

Accepted Answer

When the Fed buys bonds, it increases the reserves of banks. This enables banks to increase their lending, which leads to an increase in the money supply. The increase in the money supply will be larger, the smaller is the reserve ratio because banks will be able to lend out a larger proportion of their reserves.

Question 11

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 4 percent. If the Fed raises the reserve requirement to 10 percent and at the same time buys $50 billion worth of bonds, then by how much does the money supply change?
A) It rises by $600 billion.
B) It rises by $125 billion.
C) It falls by $2,500 billion.
D) None of the above is correct.

Accepted Answer

The answer of The banking system currently has $200 billion...

Question 12

The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?
A) It falls by $12 billion.
B) It falls by $19 billion.
C) It falls by $21 billion.
D) None of the above is correct.

Accepted Answer

The answer of The banking system currently has $10 billion...

Question 13

If the public decides to hold less currency and more deposits in banks, bank reserves
A) decrease and the money supply eventually decreases.
B) decrease but the money supply does not change.
C) increase and the money supply eventually increases.
D) increase but the money supply does not change.

Accepted Answer

The answer of If the public decides to hold less...

Question 14

The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves
A) increase by $20 million and the money supply eventually increases by $20 million.
B) increase by $20 million and the money supply eventually increases by $200 million.
C) decrease by $2 million and the money supply eventually increases by $20 million.
D) decrease by $20 million and the money supply eventually decreases by $200 million.

Accepted Answer

When the Fed sells $20 million worth of bonds to the public, the reserves of banks decrease by $20 million (10% of $20 million). As banks do not hold excess reserves, their ability to lend decreases, leading to a decrease in the money supply by a multiple of the initial decrease in reserves. The money supply is given by the formula: Money supply = (1/reserve ratio) x reserves. Therefore, the money supply decreases by (1/0.1) x (-$20 million) = $200 million.

Question 15

The money supply decreases if the Fed
A) sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
B) sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
C) buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
D) buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

Accepted Answer

The answer of The money supply decreases if the Fed
A)...

Question 16

The banking system currently has $50 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time sells $10 billion worth of bonds, then by how much does the money supply change?
A) It falls by $20 billion.
B) It falls by $110 billion.
C) It falls by $180 billion.
D) None of the above is correct.

Accepted Answer

The answer of The banking system currently has $50 billion...

Question 17

If people decide to hold more currency relative to deposits, the money supply
A) falls. The larger the reserve ratio is, the more the money supply falls.
B) falls. The larger the reserve ratio is, the less the money supply falls.
C) rises. The larger the reserve ratio is, the more the money supply rises.
D) rises. The larger the reserve ratio is, the less the money supply rises.

Accepted Answer

The answer of If people decide to hold more currency...

Question 18

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank reserves
A) increase by $25.5 million and the money supply eventually increases by $382.5 million.
B) increase by $25.5 million and the money supply eventually increases by $170 million.
C) decrease by $25.5 million and the money supply eventually decreases by $382.5 million.
D) decrease by $25.5 million and the money supply eventually decreases by $170 million.

Accepted Answer

If the Fed sells $25.5 million worth of bonds to the public, bank reserves will decrease by $25.5 million. Since the reserve ratio is 15%, the money supply will eventually decrease by the maximum multiple of the initial change in reserves, which is $25.5 million ÷ 0.15 = $170 million. Therefore, the correct answer is (D).

Question 19

If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million worth of government bonds, bank reserves
A) increase by $20 million and the money supply eventually increases by $400 million.
B) decrease by $20 million and the money supply eventually decreases by $400 million.
C) increase by $20 million and the money supply eventually increases by $100 million.
D) decrease by $20 million and the money supply eventually decreases by $100 million.

Accepted Answer

With a reserve ratio of 5 percent, the initial impact of a $20 million purchase of government bonds by the Fed is an increase in bank reserves by $20 million. Banks will lend out the excess reserves, which eventually will increase the money supply by 20/0.05 = $400 million.

Question 20

In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds,
A) reserves and the money supply increase by less than $100 million.
B) reserves increase by $100 million and the money supply increases by $100 million.
C) reserves increase by $100 million and the money supply increases by more than $100 million.
D) both reserves and the money supply increase by more than $100 million.

Accepted Answer

The answer of In a fractional-reserve banking system with no...

Quiz 11: The Monetary System

If the reserve requirement is 10 percent, which of the following pairs of changes would both allow a bank to lend out an additional $10,000?

The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?

The money supply increases when the Fed

In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply

The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?

The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by

If the public decides to hold more currency and fewer deposits in banks, bank reserves

The money supply increases when the Fed

If the public decides to hold less currency and more deposits in banks, bank reserves

The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves

The money supply decreases if the Fed

If people decide to hold more currency relative to deposits, the money supply

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank reserves

If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million worth of government bonds, bank reserves

In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds,