Deck 16: Money,the Banking System,and Interest Rates

Question 1

What is the effect of a Federal Reserve open market sale? What happens to interest rates in the money market and federal funds market as a result? Provide a graph of the money market and federal funds market to illustrate.

Answer 1

An open market sale reduces bank reserves,shifts the money supply curve to the left and increases interest rates.It also reduces the supply of reserves in the federal funds market,reducing the federal funds rate.

Question 2

Assume that banks hold no excess reserves and the public does not change their currency holdings.If currency is $800,total bank reserves are $2,000,and checkable deposits are $20,000,then
(a).what is the monetary base?

Answer 2

The monetary base totals $2,800. (b).what is the money supply? The money supply amounts to $20,800. (c).if the required reserve ratio is 10% and banks hold no more excess reserves,then what will the money supply be if the Fed increases total bank reserves by $100? The money supply will be $21,800.

Question 3

If commercial banks hold checkable deposits of $100,000,reserves of $30,000,and the required reserve ratio is 20 percent,what is the maximum additional amount by which the banking system can expand the money supply?

A)$20,000
B)$30,000
C)$50,000
D)$60,000
E)-$50,000

Answer 3

C

Question 4

If you write a check on your checking account to pay your rent which your landlord deposits in a bank,then

A)the monetary base and the money supply will fall.
B)the monetary base falls but the money supply remains unchanged.
C)there is no change in the monetary base or the money supply.
D)the monetary base and the money supply will rise.

Question 5

If you write a check for $100 to your roommate who immediately deposits it,what is the maximum amount of change in the money supply?

Question 6

What tools can the Federal Reserve use to control the monetary base? Explain the way in which changes in each tool affect the level of bank reserves.Which tool do they choose to use on a day-to-day basis,and why?

Question 7

Suppose that the balance sheet of Local State Bank is as follows:

Question 8

Who are the two monetary policymaking groups located in Washington? What are their functions?

Question 9

If the Federal Reserve were to simultaneously sell government bonds in the open market and decrease the discount rate,the

A)money supply will increase.
B)money supply will decline.
C)money stock will stay the same.
D)two tools will work in opposite directions and the effect on the money supply is uncertain.

Question 10

For these questions,suppose that the reserve requirement for checking deposits is 25%,that banks do not hold any excess reserves,and that the public does not change their holdings of currency.Total reserves already existing in the banking system are $300 million.
(a).What is the money supply in this economy?

Question 11

If the Federal Reserve increases the legal reserve requirement on deposits,

A)the money stock will rise and the money multiplier will fall.
B)the monetary base will rise and the money multiplier will fall.
C)both the monetary base and the money stock will fall.
D)neither the monetary base nor the money stock will rise.

Question 12

What are the three functions of money? Which of these functions are emphasized in the classical and Keynesian models? Also,discuss how inflation reduces the efficiency by which money serves each of these functions.

Question 13

The most commonly used tool by the Federal Reserve to control the monetary base is

A)changes in the discount rate.
B)changes in tax rates on commercial banks.
C)changes in legal required reserve ratios.
D)open market operations.

Question 14

The monetary base consists of

A)government securities held by the Federal Reserve.
B)the money supply.
C)currency and bank deposits at the Federal Reserve.
D)currency and bank reserve deposits at the Federal Reserve.
E)currency and bank deposits.

Question 15

Which of the following functions express the money multiplier (m)for the narrowly defined money stock (M1)?

A)m = ΔM^s/Δ(MB)= m(rr_d)
B)m = ΔM^s/Δ(MB)= m(rr_d,CU/D,ER/D)
C)m = ΔM^s/Δ(MB)= m(rr_d + CU/D)
D)m = ΔM^s/Δ(MB)= m(rr/D,CU/D,RR/D)

Question 16

If the Federal Reserve purchases $1 million in government securities in the open market,with a 25 percent required reserve ratio on deposits,the maximum increase in deposits would be

A)$4 million.
B)$10 million.
C)$25 million.
D)-$4 million.
E)none of the above

Question 17

Assuming each policy is performed with the same magnitude,which of the following would be the most restrictive monetary policy action on the part of the Federal Reserve?

A)Sell government securities,raise reserve requirements,and lower the discount rate
B)Buy government securities,raise reserve requirements,and raise the discount rate
C)Sell government securities,lower reserve requirements,and raise the discount rate
D)Sell government securities,raise reserve requirements,and raise the discount rate

Question 18

If the Federal Reserve sells $10 million in government securities in the open market,with a 10 percent required reserve ratio on deposits,the maximum increase in deposits would be

A)-$50 million.
B)-$100 million.
C)$10 million.
D)$100 million.
E)none of the above

Question 19

Assuming the required reserve ratio is 20 percent and total reserves are set at $20 billion,then the maximum amount of deposits would be

A)$100 billion.
B)$4 billion.
B)$40 billion.
D)$60 billion.
E)$120 billion.

Question 20

Which of the following is the largest asset on a consolidated balance sheet for a commercial bank?

A)Checkable deposits
B)government bonds
C)Cash assets,including reserves
D)Loans
E)Borrowing from the Federal Reserve

Question 21

The Federal Open Market Committee is responsible for directing a.issuing government securities.
B)setting monetary policy.
C)setting reserve requirements.
D)printing money.
E)All of the above

Question 22

Which of the following statements is (are)correct?

A)Changes in reserve requirements are often used to affect banks' reserve positions
B)Changes in reserve requirements are seldom used to affect banks' reserve positions
C)Changes in the discount rate are rarely used to change banks' reserve positions
D)Increases in reserve requirements cause banks to hold less noninterest paying reserves
E)Both b and c

Question 23

If a fear of increased bankruptcies of firms causes banks to increase their reserve to deposit ratio,then

A)the money supply and money multiplier will rise.
B)the monetary base and the money multiplier will fall.
C)there will be no change in the money multiplier,but the money supply will fall.
D)the money multiplier and the money supply will fall.

Question 24

In the Keynesian model,a Federal Reserve sale of government securities in the open market will

A)raise the level of income and lower the interest rate.
B)raise the level of income and raise the interest rate.
C)lower the level of income and the interest rate.
D)lower the level of income and raise the interest rate.

Question 25

Assuming an increase in money demand,then if the Federal Reserve

A)can keep the interest rate unchanged assuming that it changes the monetary base by the appropriate amount.
B)would have to aim below their previous money stock target.
C)would not have to cut taxes to keep output from falling.
D)All of the above
E)None of the above

Question 26

The federal funds interest rate

A)can be raised or lowered by the Federal Reserve to regulate the volume of loans to banks.
B)is administered by the Open Market Committee.
C)increases when the fed conducts open market purchases.
D)is set by Congress.
E)none of the above.

Question 27

Which of the following would be an asset on a consolidated balance sheet for a commercial bank?

A)Checkable deposits
B)Time and savings deposits
C)Reserves held on deposit at the Federal Reserve
D)Borrowing from the Federal Reserve

Question 28

Which would be a liability on a balance sheet of a commercial bank?

A)An outstanding commercial loan
B)A U.S.Treasury bond
C)A certificate of deposit issued by the bank
D)Vault cash
E)None of the above

Question 29

A member of the Board of Governors of the Federal Reserve is appointed by

A)Congress for 12 years.
B)the President,with the advice and consent of the Senate,for a 14-year term.
C)the President,for life.
D)members of the House of Representatives for a 10-year term.

Question 30

If the Federal Reserve raises the discount rate,the market rate of interest

A)will rise but the monetary base will be unchanged.
B)will rise and the monetary base will fall.
C)and the monetary base will both rise.
D)will fall and the monetary base will rise.

Question 31

The Open Market Committee is composed of

A)the 7 members of the Board of Governors.
B)the 7 members of the Board of Governors and the president of the Federal Reserve Bank in New York.
C)12 voting members,and of these,5 are presidents of regional Federal Reserve banks and the other 7 are the members of the Board of Governors.
D)the presidents of each of the 12 Federal Reserve banks.

Question 32

The portion of the money supply controlled by a central bank is

A)currency.
B)deposits.
C)reserves.
D)the monetary base.
E)the money multiplier.

Question 33

If the money supply is $1 billion,the reserve requirement is 10%,and currency holding $50 million,then reserves are

A)$50 million.
B)$100 million.
C)$20 million.
D)$40 million.
E)none of the above

Question 34

Legal reserve requirements specify that banks must hold a certain percentage of their deposit liabilities

A)in currency only.
B)as deposits at regional Federal Reserve Banks only.
C)either in currency or as deposits at regional Federal Reserve Banks.
D)None of the above

Question 35

Which of the following statements is (are)correct? The Federal Reserve

A)can,over the long run,roughly control the money supply by changing the monetary base to offset any undesirable changes in the money stock as a result of changes in currency holdings or excess reserve holdings.
B)controls the money supply better in the long-run because of short-run uncertainty regarding the money multiplier.
C)is in absolute control of the money stock at all times.
D)Both a and b

Question 36

Which of the following is not a function of the Fed?

A)control the required reserve ratio.
B)control the amount of commercial lending in the banking system.
C)serve as a lender to commercial banks.
D)conduct purchases and sales of government bonds.
E)regulate commercial banks.

Question 37

The federal funds market is the market for

A)loans from the federal government.
B)loans from the Federal Reserve.
C)government borrowing and lending.
D)interbank lending.
E)all of the above.

Question 38

Since reserve requirements on time and savings deposits were phased out in the early 1990s,

A)only the M1 money multiplier is affected by increases in time and savings deposits.
B)only the M2 money multiplier is affected by increases in time and savings deposits.
C)neither the M1 nor the M2 money multipliers are affected by increases in time and savings deposits.
D)both the M1 and M2 money multipliers are affected by increases in time and savings deposits.

Question 39

The money supply is determined

A)only by the Fed.
B)by the Fed and banks.
C)by the Fed,banks,and the public.
D)by congress.
E)by the President.

Question 40

If the Fed follows a policy of fixed exchange rates,an undervalued dollar will force the Fed to

A)conduct open market purchases.
B)raise the discount rate.
C)raise the required reserve ratio.
D)cut taxes or raise government spending.

Question 41

In the United States there were legal reserve requirements on time and savings deposits during most of the post-World War II period.Therefore,the money multiplier for the M1 definition was

A)smaller when time and saving deposits increased.
B)smaller when time and saving deposits were assumed to be fixed.
C)larger when time and saving deposits increased.
D)smaller when time and saving deposits decreased.

Question 42

With the invention of ATM machines,the public now holds less currency.As a result,we would expect to have seen

A)both the M1 and the M2 multipliers to increase over time.
B)the M1 multiplier to increase while the M2 multiplier to decrease over time.
C)the M1 multiplier to decrease while the M2 multiplier to increase over time.
D)None of the above

Question 43

Fiat money is:

A)includes currency and gold in bank vaults.
B)does not include coins.
C)is backed by any sort of commodity.
D)has no value outside of its use as money.

Question 44

An open market purchase immediately impacts the banking system balance sheet by

A)increasing required reserves.
B)increasing deposits.
C)increasing the money multiplier.
D)increasing excess reserves.
E)none of the above.

Question 45

Which of the following will lower the money multiplier?

A)An increase in the currency/checkable deposit ratio
B)A decrease in the excess reserve/checkable deposit ratio
C)A decrease in the required reserve/checkable deposit ratio
D)Either a or b
E)All of the above

Question 46

Assume that the Federal Reserve has purchased a $1,000 security from an individual,the required reserve ratio is 20 percent,and that individual deposits the proceeds in his bank.What is the increase in excess reserves for this bank?

A)$200
B)$1,000
C)$1,200
D)$800
E)$2,000

Question 47

A fall in which of the following would increase the money multiplier?

A)The monetary base
B)A change in M1
C)The level of Federal Reserve open market purchases
D)An increase in the currency to checkable deposit ratio
E)All of the above

Question 48

The Board of Governors of the Federal Reserve System is responsible for

A)approving changes in the discount rate.
B)controlling monetary policy.
C)administering discount lending.
D)Both a and b
E)All of the above

Question 49

Which of the following variables that affect the money stock are outside the direct control of the Federal Reserve?

A)Currency/deposit ratio
B)Excess reserve/deposit ratio
C)Required reserve/deposit ratio
D)The speed of the money creation process.
E)Both a and b

Question 50

If the reserve requirement decreases from 20% to 25% and the currency to deposit ratio increases from 10% to 15% then

A)the money multiplier and the money supply rises.
B)the money multiplier and the money supply stays the same.
C)the money multiplier and the money supply falls.
D)the money multiplier rose and the money supply falls.

Question 51

If the Federal Reserve simultaneously sells government bonds in the open market and raises reserve requirements,the

A)money supply will increase.
B)money supply will decrease.
C)money supply will stay the same.
D)two tools will work against one another and the net effect on the money supply is uncertain.

Question 52

If the money supply is $200 million,the reserve requirement is 20%,and currency holding $10 million,then reserves are

A)$10 million.
B)$40 million.
C)$30 million.
D)$40 million.
E)none of the above

Question 53

During the Great Depression,the money supply fell 28%.During that same time,the monetary base ____ and the currency-to-deposit ratio and reserve-to-deposit ratios both _____.

A)rose; fell
B)rose; rose
C)fell; rose
D)fell; fell

Question 54

The fall in the money multiplier and money supply during the Great Depression

A)suggests that the public but not banks can be a major participant in the money supply process.
B)implies that banks but not the public can be a major participant in the money supply process.
C)means that neither the banks nor the public were involved in the money supply process.
D)illustrates that both the public and banks can be major players in the money supply process.

Question 55

Assuming the Federal Reserve makes an open-market purchase of a government security worth $10,000.By writing a check to pay for this security,the Federal Reserve

A)reduces the balance of its assets by $10,000.
B)reduces the balance of its liabilities by $10,000.
C)neither reduces the balance of its assets nor the balance of its liabilities by $10,000.
D)creates a new $10,000 liability against itself.
E)both c and d are correct.

Question 56

Assume the Federal Reserve increases the required reserve ratio from 10 to 20 percent and reserves are $80 billion.Then the change in the money supply will be

A)$80 billion.
B)$20 billion.
C)$400 billion.
D)$800 billion.
E)none of the above

Question 57

Assuming a decrease in money demand,then to keep interest rates constant the Fed must

A)keep the money supply constant.
B)conduct an open market sale of bonds.
C)accommodate the decreased demand for money by the public by increasing the money supply.
D)All of the above
E)None of the above

Question 58

"Lender of last resort" means that the central bank

A)has to lend money to failing banks.
B)should lend money to individuals if their bankruptcy would threaten the banking system.
C)should lend money to banks that are suffering short-term liquidity shortages.
D)should lend money to pay for government deficits.
E)None of the above

Question 59

Primary assets held by the Federal Reserve are

A)loans to commercial banks.
B)U.S.government securities.
C)Federal Reserve notes.
D)reserve deposits by banks.

Question 60

Primary liabilities of the Federal Reserve include

A)Federal Reserve notes.
B)U.S.government securities.
C)loans to banks.
D)reserve deposits by banks.
E)Both a and d

Question 61

If the monetary base doubles but the ratios of currency/deposit and reserves/deposits remain the same,then:

A)The money supply doubles.
B)The money supply quandrouples.
C)The money supply changes by two times the money multiplier.
D)The money supply remains unchanged.

Question 62

Why did the money supply fall during the Great Depression?

A)The monetary base fell throughout the Great Depression.
B)The amount of currency fell during the Great Depression.
C)The ratio of currency/deposits fell during the Great Depression.
D)The money multipier rose during the Great Depression.
E)None of the above.

Question 63

Which of the following are NOT true?

A)Credit cards are the same as debit cards when determining the money supply.
B)Credit cards are included in M2 but not M1.
C)Credit cards do not impact the demand for money.
D)Credit cards are a means of payment.
E)All of the above are true.