Week 5

Question 1

Individuals that lend funds to a bank by opening a checking account are called

Answer 1

depositors.

Question 2

The government agency that oversees the banking system and is responsible for the conduct of monetary policy in the United States is

Answer 2

the Federal Reserve System.

Question 3

Both ________ and ________ are Federal Reserve assets.

Answer 3

securities; loans to financial institutions

Question 4

Excess reserves are equal to

Answer 4

vault cash plus deposits with Federal Reserve banks minus required reserves.

Question 5

The amount of deposits that banks must hold in reserve is

Answer 5

required reserves.

Question 6

Total Reserves minus vault cash equals

Answer 6

bank deposits with the Fed.

Question 7

A decrease in ________ leads to an equal ________ in the monetary base in the short run.

Answer 7

float; decrease

Question 8

High-powered money minus reserves equals

Answer 8

currency in circulation.

Question 9

The monetary base declines when

Answer 9

the Fed sells securities.

Question 10

When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system

Answer 10

increase by $100.

Question 11

When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant.

Answer 11

increase; increases

Question 12

A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank’s excess reserves will be
$1,000.

Answer 12

$9,000.

Question 13

A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess reserves will now be

Answer 13

-$5,000.

Question 14

Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply.

Answer 14

depositors; banks

Question 15

If the required reserve ratio is 10 percent, the simple deposit multiplier is

Answer 15

10.0

Question 16

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by

Answer 16

$100 times the reciprocal of the required reserve ratio.

Question 17

A ________ in market interest rates relative to the discount rate will cause discount borrowing to_______.

Answer 17

rise; increase

Question 18

An increase in the nonborrowed monetary base, everything else held constant, will cause

Answer 18

the money supply to rise.

Question 19

In the model of the money supply process, the Federal Reserve’s role in influencing the money supply is represented by

Answer 19

the required reserve ratio, nonborrowed reserves, and borrowed reserves.

Question 20

Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of reserves can support ________ of checkable deposits.

Answer 20

more than one dollar