Question 1

The banking system is able to make new loans equal to

Accepted Answer

A) total legal reserves of the system. 
B) total excess reserves of the system. 
C) total required reserves of the system. 
D) a multiple of total excess reserves of the system. 
A) total legal reserves of the system. 
B) total excess reserves of the system. 
C) total required reserves of the system. 
D) a multiple of total excess reserves of the system.

Question 2

When the Fed buys government bonds in the open market the money supply will increase.

Accepted Answer

A) True 
 B)False

Question 3

A primary function of a central bank is to

Accepted Answer

A) regulate dividend payments by corporations. 
B) act as a regulator of banks. 
C) control the bond market. 
D) publish statistics on banking and related financial matters. 
A) regulate dividend payments by corporations. 
B) act as a regulator of banks. 
C) control the bond market. 
D) publish statistics on banking and related financial matters.

Question 4

Lowering the discount rate is

Accepted Answer

A) a contractionary policy stance because the cost of borrowing funds falls, thereby encouraging consumption and investment spending. 
B) a contractionary policy because it reduces banks' profit margins by lowering the return on lending. 
C) an expansionary policy stance because consumers and businesses can now borrow funds directly from the Fed at a lower cost, thereby encouraging private spending. 
D) an expansionary policy stance because it will be less costly for banks to borrow funds and this puts downward pressure on interest rates in the economy. 
A) a contractionary policy stance because the cost of borrowing funds falls, thereby encouraging consumption and investment spending. 
B) a contractionary policy because it reduces banks' profit margins by lowering the return on lending. 
C) an expansionary policy stance because consumers and businesses can now borrow funds directly from the Fed at a lower cost, thereby encouraging private spending. 
D) an expansionary policy stance because it will be less costly for banks to borrow funds and this puts downward pressure on interest rates in the economy.

Question 5

The _______ was passed by Congress in _______ to create the Federal Reserve System.

Accepted Answer

A) Federal Reserve Act; 1913 
B) National Banking Act; 1913 
C) Congressional Banking Act; 1857 
D) Federal Reserve Act; 1857 
A) Federal Reserve Act; 1913 
B) National Banking Act; 1913 
C) Congressional Banking Act; 1857 
D) Federal Reserve Act; 1857

Question 6

Between the early 1970s and the mid-2000s, banks' share of the U.S.credit market financial assets

Accepted Answer

A) has increased significantly as banks merged and consolidated their assets. 
B) has diminished significantly as nonbank financial intermediaries started to offer more and more services that were previously offered exclusively by banks. 
C) has increased steadily at the same rate as the growth in the economy's potential output. 
D) has decreased steadily as more and more large U.S.firms moved production abroad to low-wage countries. 
A) has increased significantly as banks merged and consolidated their assets. 
B) has diminished significantly as nonbank financial intermediaries started to offer more and more services that were previously offered exclusively by banks. 
C) has increased steadily at the same rate as the growth in the economy's potential output. 
D) has decreased steadily as more and more large U.S.firms moved production abroad to low-wage countries.

Question 7

Debit cards are

Accepted Answer

A) counted as money because they perform the medium of exchange function of money. 
B) not considered money because they merely show that their owners have a relationship to money. 
C) are counted as a part of M2 but not M1. 
D) counted as money because they provide access to their owners' checkable deposits. 
A) counted as money because they perform the medium of exchange function of money. 
B) not considered money because they merely show that their owners have a relationship to money. 
C) are counted as a part of M2 but not M1. 
D) counted as money because they provide access to their owners' checkable deposits.

Question 8

The deposit multiplier is given by the formula

Accepted Answer

A) change in checkable deposits ÷ change in required reserves. 
B) change in checkable deposits ÷ change in excess reserves. 
C) change in excess reserves ÷ change in checkable deposits. 
D) change in legal reserves ÷ change in excess reserves. 
A) change in checkable deposits ÷ change in required reserves. 
B) change in checkable deposits ÷ change in excess reserves. 
C) change in excess reserves ÷ change in checkable deposits. 
D) change in legal reserves ÷ change in excess reserves.

Question 9

What happens when you withdraw cash from a bank?

Accepted Answer

A) The bank's reserves are reduced. 
B) The bank's reserves are increased. 
C) The bank's reserves are not affected. 
D) The bank's total reserves remain unchanged but the composition of required reserves and excess reserves change. 
A) The bank's reserves are reduced. 
B) The bank's reserves are increased. 
C) The bank's reserves are not affected. 
D) The bank's total reserves remain unchanged but the composition of required reserves and excess reserves change.

Question 10

If the Fed buys U.S.government bonds from the public, it

Accepted Answer

A) increases the volume of reserves in the banking system and the money supply tends to grow. 
B) decreases the volume of reserves in the banking system and the money supply tends to grow. 
C) increases the volume of reserves in the banking system and the money supply tends to fall. 
D) decreases the volume of reserves in the banking system and the money supply tends to fall. 
A) increases the volume of reserves in the banking system and the money supply tends to grow. 
B) decreases the volume of reserves in the banking system and the money supply tends to grow. 
C) increases the volume of reserves in the banking system and the money supply tends to fall. 
D) decreases the volume of reserves in the banking system and the money supply tends to fall.

Question 11

The reserve-requirement ratio is the interest rate the Federal Reserve System charges banks for loans.

Accepted Answer

A) True 
 B)False

Question 12

The discount rate

Accepted Answer

A) is determined by markets forces of demand and supply in the market for bank reserves. 
B) is set by the Board of Governors. 
C) is determined by investment banks. 
D) is determined by market forces of demand and supply in the credit market. 
A) is determined by markets forces of demand and supply in the market for bank reserves. 
B) is set by the Board of Governors. 
C) is determined by investment banks. 
D) is determined by market forces of demand and supply in the credit market.

Question 13

The monetary aggregate, M1, increases when

Accepted Answer

A) an individual cashes a check written by a business. 
B) an individual purchases clothes with a debit card. 
C) an individual switches funds from a savings account to a checking account. 
D) an individual buys groceries with a credit card. 
A) an individual cashes a check written by a business. 
B) an individual purchases clothes with a debit card. 
C) an individual switches funds from a savings account to a checking account. 
D) an individual buys groceries with a credit card.

Question 14

Suppose the reserve ratio is 25% and banks do not hold excess reserves.When the Fed sells $40 million of bonds to the public who then deposit the proceeds into the banking system,

Accepted Answer

A) bank reserves increase by $40 million and money supply could increase by a maximum of $40 million. 
B) bank reserves increase by $40 million and money supply could increase by a maximum of $160 million. 
C) bank reserves decrease by $40 million and money supply could decrease by a maximum of $40 million. 
D) bank reserves decrease by $40 million and money supply could decrease by a maximum of $160 million. 
A) bank reserves increase by $40 million and money supply could increase by a maximum of $40 million. 
B) bank reserves increase by $40 million and money supply could increase by a maximum of $160 million. 
C) bank reserves decrease by $40 million and money supply could decrease by a maximum of $40 million. 
D) bank reserves decrease by $40 million and money supply could decrease by a maximum of $160 million.

Question 15

The principle of fractional reserve banking makes it possible for a

Accepted Answer

A) bank to make loans. 
B) bank to print currency. 
C) bank to avoid reserve requirements. 
D) bank to sell securities. 
A) bank to make loans. 
B) bank to print currency. 
C) bank to avoid reserve requirements. 
D) bank to sell securities.

Question 16

The largest component of M1 is

Accepted Answer

A) checkable deposits. 
B) credit card balances. 
C) currency. 
D) savings deposits. 
A) checkable deposits. 
B) credit card balances. 
C) currency. 
D) savings deposits.

Question 17

The Federal Reserve buys $10,000 of government securities from commercial banks.If the required reserve ratio is 25%, what is the maximum amount of change in the nation's money supply? Assume that no banks keep excess reserves and no individuals or firms hold cash.

Accepted Answer

A) the money supply will expand by $10,000 
B) the money supply will expand by $30,000 
C) the money supply will expand by $40,000 
D) the money supply will expand by $7,500 
A) the money supply will expand by $10,000 
B) the money supply will expand by $30,000 
C) the money supply will expand by $40,000 
D) the money supply will expand by $7,500

Question 18

The Fed's most important and most frequently used tool of monetary policy is

Accepted Answer

A) moral suasion. 
B) open-market operations. 
C) changes in the discount rate. 
D) changes in required reserve ratios. 
A) moral suasion. 
B) open-market operations. 
C) changes in the discount rate. 
D) changes in required reserve ratios.

Question 19

For a given level of reserves, an increase in the reserve requirement ratio will

Accepted Answer

A) decrease legal reserves and decrease the money supply. 
B) increase legal reserves and decrease excess reserves. 
C) increase legal reserves and increase excess reserves. 
D) increase excess reserves and increase the money supply. 
A) decrease legal reserves and decrease the money supply. 
B) increase legal reserves and decrease excess reserves. 
C) increase legal reserves and increase excess reserves. 
D) increase excess reserves and increase the money supply.

Question 20

Scenario 1: Fed Buys Bonds from Sheila Jones
Consider a banking system in which the reserve requirement is 10%, banks try not to hold excess reserves, consumers and firms hold money only in the form of checking account balances, and all loan proceeds are spent.Suppose initially all banks in the system are loaned up.Now, suppose that the Fed buys a $100,000 bond from Sheila Jones, who banks at the Perez Bank, and that she deposits her check in her checking account at Perez Bank.
-Refer to Scenario 1.Immediately following Sheila's $100,000 deposit into her checking account, Perez Bank

Accepted Answer

A) has no excess reserves. 
B) has $10,000 in excess reserves. 
C) has $90,000 in excess reserves. 
D) has $100,000 in excess reserves. 
A) has no excess reserves. 
B) has $10,000 in excess reserves. 
C) has $90,000 in excess reserves. 
D) has $100,000 in excess reserves.

Exam 24: The Nature and Creation of Money

The banking system is able to make new loans equal to

When the Fed buys government bonds in the open market the money supply will increase.

A primary function of a central bank is to

Lowering the discount rate is

The _______ was passed by Congress in _______ to create the Federal Reserve System.

Between the early 1970s and the mid-2000s, banks' share of the U.S.credit market financial assets

Debit cards are

The deposit multiplier is given by the formula

What happens when you withdraw cash from a bank?

If the Fed buys U.S.government bonds from the public, it

The reserve-requirement ratio is the interest rate the Federal Reserve System charges banks for loans.

The discount rate

The monetary aggregate, M1, increases when

Suppose the reserve ratio is 25% and banks do not hold excess reserves.When the Fed sells $40 million of bonds to the public who then deposit the proceeds into the banking system,

The principle of fractional reserve banking makes it possible for a

The largest component of M1 is

The Federal Reserve buys $10,000 of government securities from commercial banks.If the required reserve ratio is 25%, what is the maximum amount of change in the nation's money supply? Assume that no banks keep excess reserves and no individuals or firms hold cash.

The Fed's most important and most frequently used tool of monetary policy is

For a given level of reserves, an increase in the reserve requirement ratio will

Economics: the Study of Choice

Confronting Scarcity: Choices in Production

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Aggregate Demand and Aggregate Supply

Economic Growth

The Nature and Creation of Money

Monopoly

The World of Imperfect Competition

Wages and Employment in Perfect Competition

Interest Rates and the Markets for Capital and Natural Resources

Imperfectly Competitive Markets for Factors of Production

Public Finance and Public Choice

Inflation and Unemployment

International Trade

The Economics of the Environment

Inequality, Poverty, and Discrimination

Macroeconomics: the Big Picture

Measuring Total Income and Output

Aggregate Demand and Aggregate Supply

Economic Growth

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Macro Inflation and Unemployment

Macro a Brief History of Macroeconomic Thought and Policy

Economic Development

Socialist Economies in Transition

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The _ was passed by Congress in _ to create the Federal Reserve System.