Chapter 14

Question 1

1) The monetary base is equal to
A) all currency in circulation plus all deposits in financial institutions.
B) all currency in circulation plus checkable deposits in financial institutions.
C) all currency in circulation plus reserves held by banks.
D) checkable deposits in depository institutions plus reserves held by banks.

Answer 1

C) all currency in circulation plus reserves held by banks.

Question 2

2) Which of the following is a liability of the Fed?
A) U.S. government securities
B) currency in circulation
C) discount loans to banks
D) checkable deposits in commercial banks

Answer 2

B) currency in circulation

Question 3

3) Which of the following is an asset of the Fed?
A) reserves of banks
B) currency in circulation
C) discount loans to banks
D) checkable deposits in commercial banks

Answer 3

C) discount loans to banks

Question 4

4) Vault cash is a(an)
A) liability of the Fed and is counted as reserves.
B) asset of the Fed and is counted as reserves.
C) liability of the Fed and is not counted as reserves.
D) asset of the Fed and is not counted as reserves.

Answer 4

A) liability of the Fed and is counted as reserves.

Question 5

5) Reserves equal
A) deposits with the Fed plus holdings of U.S. government securities.
B) currency in circulation plus vault cash.
C) deposits with the Fed plus vault cash.
D) currency outstanding plus currency in circulation.

Answer 5

C) deposits with the Fed plus vault cash.

Question 6

6) The percentage of deposits that banks must hold as reserves is called the 
A) percentage rate.
B) required reserve ratio.
C) Fed rate.
D) discount rate.

Answer 6

B) required reserve ratio.

Question 7

7) The interest rate the Fed charges on loans to depository institutions is known as 
A) the federal funds rate.
B) the Fed loan rate.
C) the discount rate.
D) the interbank clearing rate.

Answer 7

C) the discount rate.

Question 8

8) If the Fed buys securities worth $10 million, then
A) bank reserves will increase by $10 million.
B) bank reserves will decrease by $10 million.
C) currency in circulation will increase by $10 million.
D) bank holdings of securities increase by $10 million.

Answer 8

A) bank reserves will increase by $10 million.

Question 9

9) If the Fed purchases securities worth $10 million from a commercial bank, the banking system’s balance sheet will show
A) an increase in securities held of $10 million and an increase in bank reserves of $10 million.
B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million.
C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.

Answer 9

C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.

Question 10

10) A $10 million open market sale will decrease the monetary base by
A) $10 million.
B) $10 million times the money multiplier.
C) $10 million divided by the money multiplier.
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public wishes to hold as currency.

Answer 10

A) $10 million.

Question 11

11) If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank’s excess reserves increase?
A) by $50,000
B) by $50,000 times the required reserve ratio
C) by $50,000 divided by the required reserve ratio
D) Not enough information has been provided to answer the question.

Answer 11

A) by $50,000

Question 12

12) The aggregate M1 consists of
A) currency plus all deposits in financial institutions.
B) currency plus all deposits in all institutions.
C) currency plus checkable deposits in financial institutions.
D) currency plus all checkable deposits.

Answer 12

C) currency plus checkable deposits in financial institutions.

Question 13

13) Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the BANKING SYSTEM can lend out?
A) $8,000
B) $10,000 
C) $40,000 
D) $50,000

Answer 13

A) $8,000

Question 14

14) Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. By how much is Wells Fargo able to increase its loans? 
A) $8 million
B) $92 million
C) $100 million
D) $1.25 billion

Answer 14

C) $100 million

Question 15

15) The money multiplier
A) equals 1 over the required reserve ratio.
B) is an expression that converts the monetary base to the money supply.
C) is larger than the simple deposit multiplier.
D) is completely controlled by the Fed.

Answer 15

B) is an expression that converts the monetary base to the money supply.

Question 16

16) If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals
A) 1.14.
B) 3.57.
C) 4.35. 
D) 5.

Answer 16

B) 3.57.

Question 17

17) The size of the money multiplier depends upon all of the following EXCEPT 
A) the required reserve ratio.
B) the currency-deposit ratio.
C) excess reserves relative to deposits.
D) the discount rate.

Answer 17

D) the discount rate.

Question 18

18) Which of the following expressions is correct?
A) B = Bnon + BR
B) BR = Bnon +B
C) Bnon = B + BR
D) Bnon = (-)BR - B

Answer 18

A) B = Bnon + BR

Question 19

19) Which of the following equations is correct? 
A) M = m(Bnon + ER)
B) M = m(Bnon + BR) 
C) M = m(C + BR)
D) M = C + R

Answer 19

B) M = m(Bnon + BR)

Question 20

20) When banks hold excess reserves, the size of the money multiplier
A) is less than the simple deposit multiplier would suggest.
B) is greater than the simple deposit multiplier would suggest.
C) is equal to the size of the simple deposit multiplier.
D) becomes infinite.

Answer 20

A) is less than the simple deposit multiplier would suggest.