Deck 35: Interest Rates and Monetary Policy

Question 1

Which of the following is correct?

A) The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises.
B) The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.
C) The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate.
D) The asset demand for money is downsloping because bond prices and the interest rate are directly related.

Answer 1

B

Question 2

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively,the transactions demand for money can be represented by:

A) a line parallel to the horizontal axis.
B) a vertical line.
C) a downsloping line or curve from left to right.
D) an upsloping line or curve from left to right.

Answer 2

B

Question 3

If nominal GDP is $600 billion and,on the average,each dollar is spent three times per year,then the amount of money demanded for transactions purposes will be:

A) $1,800 billion.
B) $600 billion.
C) $200 billion.
D) $1,200 billion.

Answer 3

C

Question 4

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively,the total demand for money can be found by:

A) horizontally adding the transactions and the asset demand for money.
B) vertically subtracting the transactions demand from the asset demand for money.
C) horizontally subtracting the asset demand from the transactions demand for money.
D) vertically adding the transactions and the asset demand for money.

Question 5

The desire to hold money for transactions purposes arises because:

A) receipts of income and expenditures are not perfectly synchronized.
B) people fear that prices will rise.
C) households want money on hand in case a good financial investment opportunity arises.
D) low interest rates reduce the opportunity cost of holding money.

Question 6

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively,the asset demand for money can be represented by:

A) a line parallel to the horizontal axis.
B) a vertical line.
C) a downsloping line or curve from left to right.
D) an upsloping line or curve from left to right.

Question 7

It is costly to hold money because:

A) deflation may reduce its purchasing power.
B) in doing so,one sacrifices interest income.
C) bond prices are highly variable.
D) the rate at which money is spent may decline.

Question 8

In which of the following situations is it certain that the quantity of money demanded by the public will decrease?

A) Nominal GDP decreases and the interest rate decreases.
B) Nominal GDP increases and the interest rate decreases.
C) Nominal GDP decreases and the interest rate increases.
D) Nominal GDP increases and the interest rate increases.

Question 9

Which of the following statements is correct? Other things equal:

A) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right.
B) a decline in the interest rate will shift the asset demand curve for money to the right but leave the total money demand curve unchanged.
C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left.
D) inflation will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged.

Question 10

The equilibrium rate of interest in the market for money is determined by the intersection of the:

A) supply-of-money curve and the asset-demand-for-money curve.
B) supply-of-money curve and the transactions-demand-for-money curve.
C) supply-of-money curve and the total-demand-for-money curve.
D) investment-demand curve and the total-demand-for-money curve.

Question 11

The asset demand for money:

A) is unrelated to both the interest rate and the level of GDP.
B) varies inversely with the rate of interest.
C) varies inversely with the level of real GDP.
D) varies directly with the level of nominal GDP.

Question 12

The total demand for money will shift to the left as a result of:

A) a decline in nominal GDP.
B) an increase in the price level.
C) a change in the interest rate.
D) an increase in nominal GDP.

Question 13

The total demand for money curve will shift to the right as a result of:

A) an increase in nominal GDP.
B) an increase in the interest rate.
C) a decline in the interest rate.
D) a decline in nominal GDP.

Question 14

The transactions demand for money is most closely related to money functioning as a:

A) unit of account.
B) medium of exchange.
C) store of value.
D) measure of value.

Question 15

(Advanced analysis)Assume the equation for the total demand for money is L = 0.4Y + 80 - 4i,where L is the amount of money demanded,Y is gross domestic product,and i is the interest rate.If gross domestic product is $200 and the interest rate is 10 (percent),what amount of money will society want to hold?

A) $200.
B) $120.
C) $320.
D) $160.

Question 16

The opportunity cost of holding money:

A) is zero because money is not an economic resource.
B) varies inversely with the interest rate.
C) varies directly with the interest rate.
D) varies inversely with the level of economic activity.

Question 17

The asset demand for money is downsloping because:

A) the opportunity cost of holding money increases as the interest rate rises.
B) it is more attractive to hold money at high interest rates than at low interest rates.
C) bond prices rise as interest rates rise.
D) the opportunity cost of holding money declines as the interest rate rises.

Question 18

If the quantity of money demanded exceeds the quantity supplied:

A) the supply-of-money curve will shift to the left.
B) the demand-for-money curve will shift to the right.
C) the interest rate will rise.
D) the interest rate will fall.

Question 19

An increase in nominal GDP increases the demand for money because:

A) interest rates will rise.
B) more money is needed to finance a larger volume of transactions.
C) bond prices will fall.
D) the opportunity cost of holding money will decline.

Question 20

The asset demand for money is most closely related to money functioning as a:

A) unit of account.
B) medium of exchange.
C) store of value.
D) measure of value.

Question 21

Answer the question on the basis of the following table in which columns (1)and (2)indicate the transactions demand (D_t)for money and columns (1)and (3)show the asset demand (D_a)for money: $\begin{array}{c}\begin{array}{c}(1)\\\underline{\text {Interest Rate}}\\12 \% \\10 \\8 \\6 \\4 \\2\end{array}\begin{array}{c}(2)\\\underline{D_{t} }\\ \$ 100 \\100 \\100 \\100 \\100 \\100\end{array}\begin{array}{c}(3)\\\underline{D_{a}} \\\$ 0 \\20 \\40 \\60 \\80 \\100\end{array}\end{array}$
The given data suggest that the amount of money that society wishes to hold as an asset:

A) varies directly with the interest rate.
B) varies inversely with the interest rate.
C) varies inversely with nominal GDP.
D) is independent of the interest rate.

Question 22

Answer the question on the basis of the following information.For transactions,households and businesses want to hold an amount of money equal to one-half of nominal GDP.The table shows the amounts of money they want to hold as an asset at various interest rates. $\begin{array}{l}\begin{array}{cc}\underline{\text { Interest Rate} } & \underline{\text { Amount of Money Demanded }}\\10 \% & \$ 20 \\8 & 40 \\6 & 60 \\4 & 80 \\2 & 100\end{array}\end{array}$ Refer to the given information.If nominal GDP is $300 and the supply of money is $230,the equilibrium interest rate will be:

A) 8 percent.
B) 6 percent.
C) 4 percent.
D) 2 percent.

Question 23

Answer the question on the basis of the following table: $\begin{array}{c}\begin{array}{c}\\\text { Interest }\\\text { Rate } \\\hline 2 \% \\4 \\6 \\8 \\10 \end{array}\begin{array}{c}\text {Transaction}\\\text {Demand for}\\\underline{\text {Money}}\\ \$ 220 \\220\\220\\220\\220\end{array}\begin{array}{c}\\\text {Asset Demand }\\\underline{\text {for Money}}\\\$ 300 \\280 \\260 \\240 \\220\end{array}\begin{array}{c}\\\text {Money}\\\underline{\text {Supply}}\\\$ 460 \\460\\460\\460\\460\end{array}\end{array}$

Refer to the given table.The equilibrium interest rate is:

A) 2 percent.
B) 4 percent.
C) 6 percent.
D) 8 percent.

Question 24

If,in the market for money,the quantity of money demanded exceeds the money supply,the interest rate will:

A) fall,causing households and businesses to hold less money.
B) rise,causing households and businesses to hold less money.
C) rise,causing households and businesses to hold more money.
D) fall,causing households and businesses to hold more money.

Question 25

If the demand for money and the supply of money both decrease,the equilibrium:

A) interest rate will decline,but we cannot predict the change in the equilibrium quantity of money.
B) quantity of money and the equilibrium interest rate will both increase.
C) quantity of money will increase,but we cannot predict the change in the equilibrium interest rate.
D) quantity of money will decline,but we cannot predict the change in the equilibrium interest rate.

Question 26

If,in the market for money,the amount of money supplied exceeds the amount of money households and businesses want to hold,the interest rate will:

A) fall,causing households and businesses to hold less money.
B) rise,causing households and businesses to hold less money.
C) rise,causing households and businesses to hold more money.
D) fall,causing households and businesses to hold more money.

Question 27

The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800.A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of:

A) 10 percent.
B) 12 percent.
C) 14 percent.
D) 16 percent.

Question 28

Other things equal,if the supply of money is reduced:

A) the demand for money will increase.
B) the interest rates will fall.
C) bond prices will fall.
D) investment spending will increase.

Question 29

Answer the question on the basis of the following table in which columns (1)and (2)indicate the transactions demand (D_t)for money and columns (1)and (3)show the asset demand (D_a)for money: $\begin{array}{c}\begin{array}{c}(1)\\\underline{\text {Interest Rate}}\\12 \% \\10 \\8 \\6 \\4 \\2\end{array}\begin{array}{c}(2)\\\underline{D_{t} }\\ \$ 100 \\100 \\100 \\100 \\100 \\100\end{array}\begin{array}{c}(3)\\\underline{D_{a}} \\\$ 0 \\20 \\40 \\60 \\80 \\100\end{array}\end{array}$
The given data suggest that the amount of money demanded for transactions:

A) varies directly with the interest rate.
B) varies inversely with the interest rate.
C) varies inversely with nominal GDP.
D) is independent of the interest rate.

Question 30

Reserves must be deposited in the Federal Reserve Banks by:

A) only commercial banks that are members of the Federal Reserve System.
B) all depository institutions,that is,all commercial banks and thrift institutions.
C) state-chartered commercial banks only.
D) federally chartered commercial banks only.

Question 31

Answer the question on the basis of the following table in which columns (1)and (2)indicate the transactions demand (D_t)for money and columns (1)and (3)show the asset demand (D_a)for money: $\begin{array}{c}\begin{array}{c}(1)\\\underline{\text {Interest Rate}}\\12 \% \\10 \\8 \\6 \\4 \\2\end{array}\begin{array}{c}(2)\\\underline{D_{t} }\\ \$ 100 \\100 \\100 \\100 \\100 \\100\end{array}\begin{array}{c}(3)\\\underline{D_{a}} \\\$ 0 \\20 \\40 \\60 \\80 \\100\end{array}\end{array}$
Refer to the given data.If the money supply is $160,the equilibrium interest rate will be:

A) 10 percent.
B) 8 percent.
C) 6 percent.
D) 4 percent.

Question 32

Answer the question on the basis of the following information.For transactions,households and businesses want to hold an amount of money equal to one-half of nominal GDP.The table shows the amounts of money they want to hold as an asset at various interest rates. $\begin{array}{l}\begin{array}{cc}\underline{\text { Interest Rate} } & \underline{\text { Amount of Money Demanded }}\\10 \% & \$ 20 \\8 & 40 \\6 & 60 \\4 & 80 \\2 & 100\end{array}\end{array}$ Refer to the given information.If nominal GDP is $200 and the interest rate is 6 percent,the total amount of money that households and businesses will want to hold is:

A) $120.
B) $140.
C) $160.
D) $180.

Question 33

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent. Refer to the given information.If the price of this bond falls by $200,the interest rate will:

A) rise by 2.5 percentage points.
B) rise by 5 percentage points.
C) fall by 2.5 percentage points.
D) fall by 5 percentage points.

Question 34

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?

A) Loans to commercial banks.
B) Federal Reserve Notes in circulation.
C) Treasury deposits.
D) Reserves of commercial banks.

Question 35

Other things equal,if there is an increase in nominal GDP:

A) the demand for money will decrease.
B) the interest rate will rise.
C) bond prices will rise.
D) consumption spending will fall.

Question 36

Answer the question on the basis of the following information for a bond having no expiration date: bond price = $1,000;bond fixed annual interest payment = $100;bond annual interest rate = 10 percent. Refer to the given information.If the price of this bond increases to $1,250,the interest rate will:

A) fall to 9 percent.
B) fall to 8 percent.
C) rise to 11 percent.
D) rise to 12 percent.

Question 37

Which of the following statements is correct?

A) Interest rates and bond prices vary directly.
B) Interest rates and bond prices vary inversely.
C) Interest rates and bond prices are unrelated.
D) Interest rates and bond prices vary directly during inflations and inversely during recessions.

Question 38

Suppose the demand for money and the supply of money increase simultaneously.We can:

A) expect the interest rate to rise and bond prices to fall.
B) expect the interest rate to fall and bond prices to rise.
C) the nominal GDP to expand.
D) not accurately predict what will happen to interest rates or bond prices.

Question 39

Answer the question on the basis of the following table: $\begin{array}{c}\begin{array}{c}\\\text { Interest }\\\text { Rate } \\\hline 2 \% \\4 \\6 \\8 \\10 \end{array}\begin{array}{c}\text {Transaction}\\\text {Demand for}\\\underline{\text {Money}}\\ \$ 220 \\220\\220\\220\\220\end{array}\begin{array}{c}\\\text {Asset Demand }\\\underline{\text {for Money}}\\\$ 300 \\280 \\260 \\240 \\220\end{array}\begin{array}{c}\\\text {Money}\\\underline{\text {Supply}}\\\$ 460 \\460\\460\\460\\460\end{array}\end{array}$
At equilibrium in the given market for money,the total amount of money demanded is:

A) $500.
B) $480.
C) $460.
D) $440.

Question 40

Answer the question on the basis of the following table: $\begin{array}{c}\begin{array}{c}\\\text { Interest }\\\text { Rate } \\\hline 2 \% \\4 \\6 \\8 \\10 \end{array}\begin{array}{c}\text {Transaction}\\\text {Demand for}\\\underline{\text {Money}}\\ \$ 220 \\220\\220\\220\\220\end{array}\begin{array}{c}\\\text {Asset Demand }\\\underline{\text {for Money}}\\\$ 300 \\280 \\260 \\240 \\220\end{array}\begin{array}{c}\\\text {Money}\\\underline{\text {Supply}}\\\$ 460 \\460\\460\\460\\460\end{array}\end{array}$

Refer to the given table.An increase in the money supply of $20 billion will cause the equilibrium interest rate to:

A) fall by 4 percentage points.
B) fall by 2 percentage points.
C) rise by 4 percentage points.
D) rise by 2 percentage points.

Question 41

Which of the following will increase commercial bank reserves?

A) The purchase of government bonds in the open market by the Federal Reserve Banks.
B) A decrease in the reserve ratio.
C) An increase in the discount rate.
D) The sale of government bonds in the open market by the Federal Reserve Banks.

Question 42

In the United States,monetary policy is the responsibility of the:

A) U.S.Treasury.
B) Department of Commerce.
C) Board of Governors of the Federal Reserve System.
D) U.S.Congress.

Question 43

The Federal Reserve Banks buy government securities from commercial banks.As a result,the checkable deposits:

A) of commercial banks are unchanged,but their reserves increase.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged,but their reserves decrease.
D) and reserves of commercial banks are both unchanged.

Question 44

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S.securities from the public,which deposits this amount into checking accounts.As a result of these transactions,the supply of money is:

A) not directly affected,but the money-creating potential of the commercial banking system is increased by $12 million.
B) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $16 million.
C) directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by an additional $12 million.
D) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Question 45

The securities held as assets by the Federal Reserve Banks consist mainly of:

A) corporate bonds.
B) Treasury bills,Treasury notes,and Treasury bonds.
C) common stock.
D) certificates of deposit.

Question 46

The purchase of government securities from the public by the Fed will cause:

A) commercial bank reserves to decrease.
B) the money supply to increase.
C) demand deposits to decrease.
D) the interest rate to increase.

Question 47

When a commercial bank borrows from a Federal Reserve Bank:

A) the supply of money automatically increases.
B) it indicates that the commercial bank is unsound financially.
C) the commercial bank's lending ability is increased.
D) the commercial bank's reserves are reduced.

Question 48

Open-market operations refer to:

A) purchases of stocks in the New York Stock Exchange.
B) the purchase or sale of government securities by the Fed.
C) central bank lending to commercial banks.
D) the specifying of loan maximums on stock purchases.

Question 49

Which of the following is not a tool of monetary policy?

A) Open-market operations.
B) Changes in banking laws.
C) Changes in the rate of interest paid on reserves held at Federal Reserve Banks.
D) Changes in the reserve ratio.

Question 50

The four main tools of monetary policy are:

A) tax rate changes,the discount rate,open-market operations,and the federal funds rate.
B) tax rate changes,changes in government expenditures,open-market operations,and interest on reserves.
C) the discount rate,the reserve ratio,interest on reserves,and open-market operations.
D) changes in government expenditures,the reserve ratio,the federal funds rate,and the discount rate.

Question 51

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district.As a result:

A) commercial bank reserves are increased by $10,000.
B) the supply of money automatically declines by $7,500.
C) commercial bank reserves are increased by $7,500.
D) the supply of money is automatically increased by $10,000.

Question 52

If the Federal Reserve System buys government securities from commercial banks and the public:

A) commercial bank reserves will decline.
B) commercial bank reserves will be unaffected.
C) it will be easier to obtain loans at commercial banks.
D) the money supply will contract.

Question 53

Which of the following is correct? When the Federal Reserve buys government securities from the public,the money supply:

A) contracts and commercial bank reserves increase.
B) expands and commercial bank reserves decrease.
C) contracts and commercial bank reserves decrease.
D) expands and commercial bank reserves increase.

Question 54

Which of the following is a tool of monetary policy?

A) Open-market operations.
B) Changes in banking laws.
C) Changes in tax rates.
D) Changes in government spending.

Question 55

The commercial banking system borrows from the Federal Reserve Banks.As a result,the checkable deposits:

A) of commercial banks are unchanged,but their reserves increase.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged,but their reserves decrease.
D) and reserves of commercial banks are both unchanged.

Question 56

The Federal Reserve Banks sell government securities to the public.As a result,the checkable deposits:

A) of commercial banks are unchanged,but their reserves increase.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged,but their reserves decrease.
D) and reserves of commercial banks are both unchanged.

Question 57

Federal Reserve Notes in circulation are:

A) an asset as viewed by the Federal Reserve Banks.
B) a liability as viewed by the Federal Reserve Banks.
C) neither an asset nor a liability as viewed by the Federal Reserve Banks.
D) part of M1 but not of M2.

Question 58

The Federal Reserve System regulates the money supply primarily by:

A) controlling the production of coins at the U.S.mint.
B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.
C) altering the reserves of commercial banks,largely through sales and purchases of government bonds.
D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.

Question 59

Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public,which pays for them by drawing checks.As a result,commercial bank reserves will:

A) increase by $10 billion.
B) remain unchanged.
C) decrease by $2 billion.
D) increase by $2 billion.

Question 60

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent.If this bank sells a bond for $1,000 to a Federal Reserve Bank,it can expand its loans by a maximum of:

A) $1,000.
B) $2,000.
C) $800.
D) $5,000.

Question 61

Open-market operations change:

A) the size of the monetary multiplier but not commercial bank reserves.
B) commercial bank reserves but not the size of the monetary multiplier.
C) neither commercial bank reserves nor the size of the monetary multiplier.
D) both commercial bank reserves and the size of the monetary multiplier.

Question 62

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$

Refer to the given data.Suppose the Fed bought $20 billion of U.S.securities from the banks.This would:

A) increase bank reserves to $80 billion,reduce bank-held securities to $120 billion,and,assuming a full money multiplier effect,increase the money supply (checkable deposits)by $200 billion.
B) increase bank reserves to $80 billion,reduce bank-held securities to $120 billion,and,assuming a full money multiplier effect,decrease the money supply (checkable deposits)by $200 billion.
C) reduce bank reserves to $40 billion,increase bank-held securities to $160 billion,and,assuming a full money multiplier effect,increase the money supply (checkable deposits)by $200 billion.
D) reduce bank reserves to $40 billion,increase bank-held securities to $160 billion,and,assuming a full money multiplier effect,decrease the money supply (checkable deposits)by $200 billion.

Question 63

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

A) Open-market operations.
B) The reserve ratio.
C) The discount rate.
D) The federal funds rate.

Question 64

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$
Refer to the given data.The monetary multiplier for the commercial banking system is:

A) 5.
B) 10.
C) 12.5.
D) 20.

Question 65

When the required reserve ratio is increased,the excess reserves of member banks are:

A) reduced,but the multiple by which the commercial banking system can lend is unaffected.
B) reduced and the multiple by which the commercial banking system can lend is increased.
C) increased and the multiple by which the commercial banking system can lend is increased.
D) reduced and the multiple by which the commercial banking system can lend is reduced.

Question 66

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$
Refer to the given data.Suppose the Fed sold $10 billion of U.S.securities to the banks.This would:

A) increase bank reserves to $70 billion,reduce bank-held securities to $130 billion,and ultimately increase the money supply (checkable deposits)by $100 billion.
B) increase bank reserves to $70 billion,reduce bank-held securities to $130 billion,and ultimately decrease the money supply (checkable deposits)by $100 billion.
C) reduce bank reserves to $50 billion,increase bank-held securities to $150 billion,and ultimately increase the money supply (checkable deposits)by $100 billion.
D) reduce bank reserves to $50 billion,increase bank-held securities to $150 billion,and ultimately decrease the money supply (checkable deposits)by $100 billion.

Question 67

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$
Refer to the given data.The commercial banking system has excess reserves of:

A) $10 billion.
B) $5 billion.
C) $2 billion.
D) zero.

Question 68

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves)and buys $500 of securities from individuals,who deposit the cash in checking accounts. As a result of the given transactions,reserves in the banking system will:

A) remain unchanged.
B) rise by $100.
C) fall by $100.
D) rise by $1,000.

Question 69

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 20 percent.All figures are in billions and each question should be answered independently of changes specified in all preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 200 \\300 \\500 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$1,100\\400\\\\\\\end{array}\end{array}$

Refer to the given data.The commercial banking system has excess reserves of:

A) zero.
B) $2 billion.
C) $5 billion.
D) $10 billion.

Question 70

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves)and buys $500 of securities from individuals,who deposit the cash in checking accounts. As a result of the given transactions,excess reserves in the banking system will:

A) remain unchanged.
B) rise by $100.
C) fall by $100.
D) rise by $1,000.

Question 71

If the Fed were to reduce the legal reserve ratio,we would expect:

A) lower interest rates,an expanded GDP,and a higher rate of inflation.
B) lower interest rates,an expanded GDP,and a lower rate of inflation.
C) higher interest rates,a contracted GDP,and a higher rate of inflation.
D) higher interest rates,a contracted GDP,and a lower rate of inflation.

Question 72

An increase in the legal reserve ratio:

A) increases the money supply by increasing excess reserves and increasing the monetary multiplier.
B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
C) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
D) decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

Question 73

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$

Refer to the given data.Suppose the Fed wants to reduce the money supply by $400 billion to drive up interest rates and dampen inflation.Assuming that the money multiplier is operating to full effect,to accomplish the desired reduction,the Fed could:

A) sell $20 billion of U.S.securities to the banks.
B) buy $20 billion of U.S.securities from the banks.
C) sell $40 billion of U.S.securities to the banks.
D) buy $40 billion of U.S.securities from the banks.

Question 74

A decrease in the reserve ratio increases the:

A) amount of actual reserves in the banking system.
B) amount of excess reserves in the banking system.
C) number of government securities held by the Federal Reserve Banks.
D) ratio of coins to paper currency in the economy.

Question 75

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system.Assume that the reserve requirement is 10 percent.All figures are in billions and each question should be answered independently of changes specified in any preceding ones. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\underline{\text { Assets}}\\\text { Reserves}\\\text { Securities}\\\text { Loans}\\\text { Property} \end{array}\begin{array}{l}\\\$ 60 \\140 \\260 \\400 \end{array}\begin{array}{lll}\quad\quad \underline{\text { Liabilities \& Net Worth }}\\\text { Checkable Deposits}\\\text { Stock Shares}\\\\\\\end{array}\begin{array}{lll}\\\$600\\260\\\\\\\end{array}\end{array}$

Refer to the given data.Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy.Assuming that the money multiplier is operating to full effect,to accomplish the desired increase,the Fed could:

A) sell $20 billion of U.S.securities to the banks.
B) buy $20 billion of U.S.securities from the banks.
C) sell $40 billion of U.S.securities to the banks.
D) buy $40 billion of U.S.securities from the banks.

Question 76

When the reserve requirement is increased:

A) required reserves are changed into excess reserves.
B) the excess reserves of member banks are increased.
C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D) the excess reserves of member banks are reduced.

Question 77

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent.If the reserve requirement is now raised to 30 percent,the banking system then has:

A) excess reserves of $2 billion.
B) neither an excess nor a deficiency of reserves.
C) a deficiency of reserves of $.5 billion.
D) excess reserves of only $.5 billion.

Question 78

When the required reserve ratio is decreased,the excess reserves of member banks are:

A) reduced,but the multiple by which the commercial banking system can lend is unaffected.
B) reduced and the multiple by which the commercial banking system can lend is increased.
C) increased and the multiple by which the commercial banking system can lend is increased.
D) increased and the multiple by which the commercial banking system can lend is reduced.

Question 79

Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?

A) The required reserve ratio will increase.
B) The money supply will decrease.
C) The deposits of commercial banks will decline.
D) Commercial bank reserves will increase.

Question 80

Answer the question on the assumption that the legal reserve ratio is 20 percent.Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves)and buys $500 of securities from individuals,who deposit the cash in checking accounts. As a result of the given transactions,the supply of money in the economy will:

A) remain unchanged.
B) rise by $500.
C) fall by $100.
D) fall by $500.