Question 1

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

Accepted Answer

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

Question 2

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

Accepted Answer

Lowering the reserve requirement will increase the excess reserves that banks hold, and therefore increase the money multiplier, which is inversely related to the reserve requirement. This, in turn, will increase the money supply.

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold currency, then the money multiplier is 1/0.05 = 20. This means that the initial injection of $20 million by the Fed can lead to a potential increase in the money supply by $20 million x 20 = $400 million. Therefore, bank reserves would increase by the initial injection of $20 million and the money supply would eventually increase by $400 million.

Question 7

The money supply decreases if the Fed

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

The money supply increases when the Fed

Accepted Answer

When the Fed lowers the discount rate, it makes it cheaper for banks to borrow from the Fed. This increases the reserves of banks, allowing them to lend out more money, which in turn increases the money supply. The increase will be larger the smaller the reserve ratio is, as banks will have to hold less in reserves for every dollar they lend out.

Question 10

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

Accepted Answer

When the Fed sells bonds to the public, the reserves of banks decrease by the same amount that the public pays to buy the bonds (in this case, $20 million). Because the reserve ratio is 10 percent, the banks will lose $2 million in reserves and, as a result, will be able to lend out $18 million less in loans. This decrease in the money supply will eventually be magnified through the money multiplier, resulting in a total decrease in the money supply of $200 million.

Question 11

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

Accepted Answer

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

Question 12

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?

Accepted Answer

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

Question 13

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?

Accepted Answer

Initially, the money supply (M1) is:
M1 = 1/reserve ratio * reserves = 1/0.1 * $50 billion = $500 billion

After the Fed raises the reserve ratio to 12.5 percent, the new reserve ratio is 1/0.125 = 8. The new amount of required reserves is:
8 * (total deposits) = 8 * ($500 billion) = $4 trillion

Since the banking system only has $50 billion of reserves, it needs to reduce its deposits to a level where the new required reserves are $4 trillion. The required reduction in deposits is:
$4 trillion - $50 billion = $3.95 trillion

The money supply falls by the same amount, which is $3.95 trillion.

If the Fed sells $10 billion worth of bonds, the monetary base (MB) falls by $10 billion. The money multiplier is the reciprocal of the reserve ratio, which is 1/0.125 = 8. The total change in the money supply is:
change in M1 = -change in MB * money multiplier = -$10 billion * 8 = -$80 billion

Therefore, the final money supply is:
M1 = $500 billion - $80 billion = $420 billion

The percentage change in the money supply is:
(420 - 500) / 500 = -0.16 or -16%

So the correct answer is (C) It falls by $180 billion.

Question 14

The money supply increases when the Fed

Accepted Answer

When the Fed buys bonds, it injects money into the economy, which increases the money supply. The increase will be larger with a smaller reserve ratio because banks will have more excess reserves to lend out, multiplying the initial injection of money.

Question 15

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?

Accepted Answer

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

Question 16

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

Accepted Answer

When the public decides to hold more currency and fewer deposits in banks, the banks' reserves decrease. As a result, banks have less money to lend out, reducing the money supply. This decrease in bank reserves ultimately leads to a decrease in the money supply.

Question 17

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?

Accepted Answer

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

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

Accepted Answer

When the Fed sells $25.5 million worth of bonds to the public, the reserves of the banking system decrease by $25.5 million. This is because the public uses funds from their deposits to purchase the bonds, which results in a decrease in bank reserves. Since the reserve ratio is 15 percent, the money supply will eventually decrease by a multiple of the change in reserves. The money supply will decrease by 1 ÷ reserve ratio × change in reserves = 1 ÷ 0.15 × $25.5 million = $170 million. Therefore, bank reserves decrease by $25.5 million and the money supply eventually decreases by $170 million.

Question 19

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?

Accepted Answer

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

Question 20

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?

Accepted Answer

If the Fed sells $10,000 worth of bonds, the reserves of the banking system will decrease by $10,000 x 0.04 = $400. As banks no longer hold the $10,000 in reserves, they will reduce lending and allow loans to be paid back. This contraction of the money multiplier will lead to a decrease in the money supply. The change in the money supply will be $10,000 x (1/0.04) = $250,000, but since this is a contraction and not an expansion, we take the negative of this number, which is $-250,000. Therefore, the correct answer is (D) it decreases by $250,000.

Quiz 16: The Monetary System

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

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

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

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

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

The money supply decreases if the Fed

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 money supply increases when the Fed

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 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

The money supply increases when the Fed

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

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

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?