Deck 19: The Fed, Depository Institutions, and the Money Supply Process

Question 1

What term is used for describing the buying and selling of government securities by the Fed?

A)loaned up
B)reverse repurchase agreement
C)open market operations
D)tiered market purchases

Answer 1

C

Question 2

Open market operations have an impact on which of the following?

A)the money supply
B)the supply of credit in the economy
C)the liquidity of the financial system
D)All of the above are correct.

Answer 2

D

Question 3

The Federal Open Market Committee's buying and selling of government securities

A)can initially affect the reserves of depository institutions.
B)can initially affect the money supply.
C)can initially affect the level of interest rates.
D)Both a and c are correct.

Answer 3

D

Question 4

In the money supply process, open market operations initially affect which of the following?

A)the supply of reserves available to depository institutions
B)deposit creation
C)credit availability
D)lending

Question 5

When the Fed buys securities, reserves of depository institutions

A)remain the same.
B)rise.
C)fall.
D)fall and then stabilize.

Question 6

When the Fed sells securities, reserves of depository institutions

A)remain the same.
B)rise.
C)fall.
D)rise at diminishing rates.

Question 7

The Fed can decrease reserves in the banking system through which of the following actions?

A)selling securities
B)buying securities
C)increasing discount loans
D)decreasing the required reserve ratio

Question 8

The Fed can increase reserves in the banking system through which of the following actions?

A)selling securities
B)buying securities
C)decreasing discount loans
D)increasing the required reserve ratio

Question 9

Which of the following best describes the correct order of processes through which the Fed conducts monetary policy?

A)By changing reserves, the Fed conducts open market operations, open market operations influence lending, and changes in lending influence credit availability, money supply, deposit creation, and interest rates.
B)Open market operations influence lending, changes in lending influence reserves, and changes in reserves influence credit availability, money supply, deposit creation, and interest rates.
C)Open market operations influence reserves, changes in reserves influence lending, and changes in lending influence credit availability, money supply, deposit creation, and interest rates.
D)Open market operations influence money and credit availability, changes in money and credit availability influence lending, changes in lending influence reserves, and changes in reserves influence deposit creation and interest rates.

Question 10

What institution is responsible for the buying and selling of U.S. government securities on behalf of the Fed?

A)the U.S. Treasury
B)the Federal Reserve Bank of New York
C)the Federal Reserve Bank of Richmond
D)the Office of the Comptroller of the Currency

Question 11

Open market operations immediately affect

A)short-term interest rates.
B)long-term interest rates.
C)federal funds rate.
D)Both a and c are correct.

Question 12

When the Fed buys securities

A)reserves of depository institutions rise.
B)reserves of depository institutions fall.
C)reserves of depository institutions are not affected.
D)the government deficit rises.

Question 13

The trading desk at the New York Fed is run by

A)the manager of the Fed's portfolio of securities.
B)the CEO of the New York Fed.
C)the Treasury Department.
D)the CEO of the New York Stock Exchange.

Question 14

Open market operations do which of the following?

A)create a link between the Fed's actions and the nation's money supply
B)affect the supply of reserves available to depository institutions
C)have an impact on the liquidity of the financial system
D)All of the above are correct.

Question 15

Commercial bank reserves can be held in which form(s)?

A)vault cash
B)deposits at a state bank
C)deposits at the Fed
D)vault cash and deposits at the Fed

Question 16

When the Fed buys Treasury bills from the public, which of the following may be the case?

A)it pays with funds created out of thin air
B)it pays with a check drawn on itself
C)it pays by using U.S. Treasury gold certificates
D)it pays both with funds created out of thin air and with a check drawn on itself

Question 17

Which of the following cause and effect relationships is true?

A)an increase in reserve assets enables an increase in the supply of money
B)an increase in deposit liabilities creates a surplus of credit in the economy
C)an increase in reserve assets insures a depositors account
D)a decrease in reserve assets enables an increase in the supply of money

Question 18

What is the name of the lending facility where depository institutions caught short of reserves can borrow?

A)the Fed window
B)the discount window
C)the loan window
D)the open market window

Question 19

When the Fed makes a discount loan to a bank, the assets and liabilities of both the bank and the Fed do which of the following?

A)remain the same
B)decrease by the amount of the loan
C)increase by the amount of loan
D)increase by 50 percent of the loan

Question 20

Which of the following is (are) true?

A)The Fed has complete control over the volume of open market operations.
B)The Fed cannot control the amount of borrowing from the discount window.
C)The Fed can encourage borrowing by lowering the discount rate.
D)The Fed can refuse a discount loan.
E)All of the above are true.

Question 21

What are offsetting open markets operations?

A)the buying or selling of government securities to change the direction of monetary policy
B)the buying or selling of government securities to offset a change in the monetary base in response to a random fluctuation in another factor that affects the base
C)all of the open market operations executed by the New York Fed
D)None of the above is correct.

Question 22

The excess in reserves that results from a check being credited to one bank (or other depository institution) before it is debited from another is/are called

A)excess reserves.
B)required reserves.
C)loaned-up funds.
D)Federal Reserve float.

Question 23

Though its open market operations, the Fed can

A)inject or remove reserves from the banking system.
B)manipulate factors so as to maintain existing reserve conditions.
C)counter movements in the reserves of depository institutions.
D)All of the above are correct.

Question 24

Total reserves equal

A)the required reserve ratio multiplied by deposits.
B)required reserves plus excess reserves.
C)the monetary base minus currency in the hand of the public.
D)Both b and c are correct.

Question 25

Depository institutions are required to hold reserve assets equal to a fraction of deposit liabilities. That fractions is called the ______________

A)required reserves.
B)required reserve ratio.
C)total reserves.
D)excess reserves.

Question 26

Because depository institutions are profit driven, excess reserves are used to acquire

A)liabilities.
B)required reserves.
C)assets.
D)checkable deposits.

Question 27

To say that a bank is "loaned up" means that

A)a bank has some excess reserves left to serve as a basis for lending.
B)a bank has no excess reserves left to serve as a basis for lending.
C)a bank's total reserves equal its required reserves.
D)Both b and c are correct.

Question 28

__________ is/are the reciprocal of the required reserve ratio (1/r_D).

A)The required reserve rate
B)Total reserves
C)The simple money multiplier
D)Excess reserves

Question 29

The simple money multiplier relates

A)changes in reserves and changes in deposits.
B)changes in the monetary base and changes in the money supply.
C)reserves and money.
D)reserves and the complete money multiplier.

Question 30

How much can the banking system increase deposits, given a required reserve ratio of 5 percent, an initial injection of $1,000 worth of reserves, and no excess reserve or currency drain?

A)$1,000
B)$5,000
C)$10,000
D)$20,000

Question 31

How much can the banking system increase deposits, given a required reserve ratio of 10 percent, an initial injection of $1,000 worth of reserves, and no excess reserve or currency drain?

A)$1,000
B)$5,000
C)$10,000
D)$20,000

Question 32

How much can the banking system increase deposits, given a required reserve ratio of 100 percent, an initial injection of $1,000 worth of reserves, and no excess reserve or currency drain?

A)$1,000
B)$5,000
C)$10,000
D)$20,000

Question 33

To encourage depository institutions to borrow, the Fed can do which of the following?

A)increase the required reserve ratio
B)decrease the discount rate
C)sell securities
D)All of the above are correct.

Question 34

If a bank has $500,000 in checkable liabilities, the required reserve ratio is 5 percent, and the bank has $100,000 in reserves, then excess reserves are equal to

A)$25,000.
B)$75,000.
C)$100,000.
D)Not enough information is provided to solve the problem.

Question 35

A deposit inflow

A)decreases total deposit liabilities and reserve assets.
B)decreases total deposit liabilities and increases assets.
C)increases total deposit liabilities and total assets.
D)increases total deposit liabilities and decreases assets.

Question 36

Which of the following is true?

A)The multiplier is under the Fed's direct control and is fairly stable or predictable, especially in the short run.
B)If the Fed can control the supply of reserves in the banking system, it can precisely control the money supply in the short run.
C)Over the longer run (3-6 months), as the fluctuations in the multiplier tend to offset one another, the Fed's ability to predict the multiplier, and thus control the money supply, improves considerably.
D)When excess reserves are taken into consideration, the multiplier increases.

Question 37

The monetary base is which of the following?

A)reserves plus currency in the hands of the public
B)deposits at the Fed, vault cash, and currency in the hands of the public
C)deposits at the Fed plus currency outside the Fed
D)All of the above are correct.

Question 38

The monetary base is which of the following?

A)reserves minus currency in the hands of the public
B)deposits at the Fed, vault cash, and currency in the hands of the public
C)deposits at the Fed minus currency outside the Fed
D)All of the above are correct.

Question 39

By borrowed reserves, we mean which of the following?

A)reserves borrowed from other banks
B)reserves deposited in the Fed rather than left in the bank vault
C)reserves borrowed from the Fed at the discount rate
D)the total of all reserves, because they are borrowed from the Fed

Question 40

Assume the following: a 10 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash. Also assume that First Bank just received a checking deposit of $500. What is the maximum amount of new loans First Bank can make?

A)$400
B)$450
C)$2,500
D)$5,000

Question 41

Assume that First Bank makes a $450 loan to a student named Kathy. Kathy takes the loan and spends it all at the Augustana College Bookstore. The bookstore in turn deposits Kathy's check in the bookstore account at Second Bank. What are the respective amounts of required reserves and excess reserves that Second Bank initially holds against this deposit? Assume the following: a 10 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash.

A)RR = $405, ER = $45
B)RR = $45, ER = $405
C)RR = $50, ER = $450
D)RR =$450, ER = $50

Question 42

Assume the following: a 10 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash. Given an initial $500 deposit, what is the maximum amount of new loans and deposits the banking system as a whole can create?

A)$400
B)$450
C)$2,500
D)$5,000

Question 43

If the required reserve ratio is 10 percent and banks are holding no excess reserves, and in addition deposits are $1000, what are the total reserves?

A)$1000
B)$10
C)$90
D)$100

Question 44

A lower reserve requirement would tend to

A)increase inflation.
B)increase the money available for lending.
C)lower the discount rate.
D)increase open market operations.

Question 45

If the currency deposit ratio increases, ceteris paribus, the money multiplier

A)increases.
B)decreases.
C)stays the same.
D)It is impossible to tell.

Question 46

The banking system is loaned up and reserves fall by $100. Given a required reserve ratio of 10 percent, what will happen to deposits?

A)increase by $1,000
B)decrease by $10,000
C)decrease by $1,000
D)increase by $10,000

Question 47

How is the multiplier, which takes account of excess reserves and a currency drain, related to the simple multiplier?

A)It is larger.
B)It is smaller.
C)It is impossible to tell and depends on whether the multiplier is stable.
D)It is always equal to the simple multiplier.

Question 48

Some complicating realities in the multiplier model are

A)depository institutions hold excess reserves.
B)the amount of excess reserves fluctuates over time.
C)the public holds currency.
D)All of the above are correct.

Question 49

The monetary base is which of the following?

A)total reserves
B)M1 less reserves
C)vault cash plus deposits at the Fed
D)total reserves plus currency in the hands of the public

Question 50

In general, for a given change in reserves, the smaller the required reserve ratio,

A)the larger the change in deposits and credit will be.
B)the smaller the change in deposits and credit will be.
C)the smaller the change in deposits will be and the larger the change in credit will be.
D)the larger the change in deposits will be and the smaller the change in credit will be.

Question 51

Which of the following is false?

A)Depository institutions never hold excess reserves.
B)The Fed has a great deal of influence on borrowing.
C)A large monthly increase in the money supply is generally due to the actions of the Fed.
D)The Fed influences lending in the economy.

Question 52

The currency drain affects the money multiplier by

A)increasing the multiplier.
B)decreasing the multiplier.
C)having little or no effect on the multiplier.
D)increasing the multiplier by only a small fraction.

Question 53

The money multiplier is more complicated than the simple money multiplier because it takes into account which of the following?

A)excess reserves
B)currency drain
C)the public's desire to hold currency
D)All of the above are correct.

Question 54

When the Fed reports a large monthly decrease in the money supply, you can be reasonably sure that

A)the decrease is due to prior open market sales.
B)the decrease is due to the Fed's enormous influence on borrowing and lending.
C)the decrease is due to a cumulative process linking the Fed's actions to the money supply.
D)All of the above are correct.

Question 55

Acquisitions of gold, SDRs, or other assets denominated in foreign currencies by the Fed will ______ the asset account of the Fed and _____ international reserves.

A)increase, lower
B)increase, raise
C)decrease, raise
D)decrease, lower

Question 56

__________ is an arrangement whereby the New York Fed agrees to buy securities from the securities dealers with whom it regularly does business, and the dealers agree to buy back the securities on a specific day in the near future.

A)A repurchase agreement
B)A reverse repurchase agreement
C)An offsetting open market operation
D)A Federal Reserve float

Question 57

__________ is an arrangement whereby the New York Fed agrees to sell securities to the securities dealers with whom it regularly does business and the Fed agrees to buy back the securities on a specific day in the near future.

A)A repurchase agreement
B)A reverse repurchase agreement
C)An offsetting open market operation
D)A Federal Reserve float

Question 58

During the Great Depression, bank holdings of excess reserves increased, as did the public's holdings of currency relative to deposits. These actions decreased the money multiplier. How did the Fed respond to the resulting decrease in money supply?

A)The Fed bought securities in the open market to increase reserves and lending.
B)The Fed raised reserve requirements, exacerbating the crisis.
C)The Fed lowered reserve requirements to moderate the decline in the money supply.
D)The Fed increased reserves by serving as a lender of last resort.

Question 59

Who first posited that a given increase in the reserve base causes deposits to multiply as the reserve increase shifts from bank to bank?

A)Alexander Hamilton
B)James Pennington
C)Chester Phillips
D)James Meade

Question 60

The simple money multiplier is

A)the reciprocal of the required reserve ratio.
B)the multiple by which the money supply will change due to a change in the monetary base.
C)(1/r_D).
D)Both a and c are correct.

Question 61

The money multiplier describes the relationship between

A)changes in reserves and changes in deposits.
B)changes in the monetary base and changes in the money supply.
C)reserves and money.
D)reserves and the complete money multiplier.

Question 62

Which of the following equations best reflects the role of the simple multiplier?

A)TR = r_D * D
B) $\Delta$ D = 1/r_D * $\Delta$ TR
C) $\Delta$ MB
D) MB = TR + C

Question 63

Which of the following equations best reflects the role of the money multiplier?

A)RR = r_D *D
B) $\Delta$ D = 1/r_D * $\Delta$ TR
C) $\Delta$ MB
D) MB = TR + C

Question 64

Which of the following equations best represents the relationship between required reserves and deposits?

A)D = r_D * RR
B)TR = RR + ER
C)RR = r_D * D
D)MB = TR + C

Question 65

Which of the following best describes open market operations?

A)the buying of government securities by dealers in the open market
B)the selling of government securities by brokers to finance a government deficit
C)the buying and selling of government securities by the Fed to change the monetary base
D)how depository institutions purchase assets

Question 66

How much can the banking system increase deposits, given a required reserve ratio of 20 percent, an initial injection of $1,000 worth of reserves, and no excess reserve or currency drain?

A)$1,000
B)$5,000
C)$10,000
D)$20,000

Question 67

Which Reserve Bank buys or sells United States Government securities on behalf of the Fed?

A)the Federal Reserve Bank of San Francisco
B)the Federal Reserve Bank of St. Louis
C)the Federal Reserve Bank of New York
D)the Federal Reserve Bank of Kansas City

Question 68

Treasury bills bought by the Fed from the public are paid for with checks drawn on which of the following?

A)the Fed
B)FDIC
C)the Federal Government
D)the General Accounting Office

Question 69

When the Fed makes a discount loan to a depository institution, reserve assets of the bank increase by what share of the loan?

A)12.8 percent
B)45 percent
C)67.9 percent
D)100 percent

Question 70

What is the term used when reserves increase from a check being credited to one bank before it is debited from another?

A)bank credit
B)simple money float
C)Federal Reserve float
D)required reserve float

Question 71

If a bank has $500,000 in checkable liabilities, the required reserve ratio is 10 percent, and the bank has $100,000 in reserves, then excess reserves are equal to

A)$10,000.
B)$25,000.
C)$50,000.
D)$100,000.

Question 72

If a bank has $500,000 in checkable liabilities, the required reserve ratio is 20 percent, and the bank has $100,000 in reserves, then excess reserves are equal to

A)$0.
B)$100,000.
C)$400,000.
D)Not enough information is provided to solve the problem.

Question 73

Total reserves are which of the following?

A)vault cash plus deposits at the Fed
B)required plus excess reserves
C)usually assumed to be greater than what banks would hold without Fed requirements
D)All of the above are correct.

Question 74

Total reserves are which of the following?

A)vault cash plus deposits at the Fed
B)required minus excess reserves
C)usually assumed to be less than banks would hold without Fed requirements
D)All of the above are correct.

Question 75

Total reserves are which of the following?

A)vault cash minus deposits at the Fed
B)required plus excess reserves
C)usually assumed to be less than banks would hold without Fed requirements
D)All of the above are correct.

Question 76

If the required reserve ratio is 20 percent and a bank receives a deposit of $100, it can make a loan of

A)$100.
B)$500.
C)$20.
D)$80.

Question 77

If the required reserve ratio is 10 percent and a bank receives a deposit of $100, it can make a loan of

A)$900.
B)$100.
C)$10.
D)$90.

Question 78

If the required reserve ratio is 5 percent and a bank receives a deposit of $100, it can make a loan of

A)$95.
B)$5.
C)$105.
D)$1,900.

Question 79

Which of the following statements is false?

A)The total expansion of deposits is a multiple of the initial injection of reserves into the banking system.
B)In the simplest model, ignoring excess reserves and a currency drain, deposits equal the quantity of reserves times the multiplier, where the multiplier is equal to the reciprocal of the reserve requirement ratio.
C)The lower the reserve requirements, the larger the multiplier; the higher the reserve requirements, the smaller the multiplier.
D)In a more developed model, where excess reserve and currency holdings are taken into account, the multiplier is larger than in the simple model and is influenced by the behavior of banks and the public.

Question 80

Assuming a simple money multiplier, if the Fed increases bank reserves by $100 and the required reserve ratio is 10 percent, then the maximum increase in deposits within the banking system as a whole is

A)$10,000.
B)$1,000.
C)$100.
D)$90.