33) Everything else held constant, an increase in the required reserve ratio on checkable deposits
causes the M1 money multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
34) Everything else held constant, a decrease in the required reserve ratio on checkable deposits
causes the M1 money multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
35) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%,
and the excess reserve ratio = 0, an increase in the required reserve ratio to 15% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 2.55 to 2.8
B) decrease from 2.8 to 2.55
C) increase from 1.82 to 2
D) decrease from 2 to 1.82
36) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%,
and the excess reserve ratio = 0, a decrease in the required reserve ratio to 5% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 2.8 to 3.11
B) decrease from 3.11 to 2.8
C) increase from 2 to 2.22
D) decrease from 2.22 to 2
37) Everything else held constant, if the sum of the required reserve ratio and the excess reserve
ratio is less than one, an increase in the currency-checkable deposit ratio will mean
A) an increase in currency in circulation and an increase in the money supply.
B) an increase in money supply but no change in reserves.
C) a decrease in the money supply.
D) an increase in currency in circulation but no change in the money supply.
38) Everything else held constant, if the sum of the required reserve ratio and the excess reserve
ratio is less than one, a decrease in the currency-checkable deposit ratio will mean
A) an increase in currency in circulation and an increase in the money supply.
B) an increase in money supply.
C) a decrease in the money supply.
D) an increase in currency in circulation but no change in the money supply.
39) Everything else held constant, if the sum of the required reserve ratio and the excess reserve
ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to
________ and the money supply to ________.
A) decrease; increase
B) increase; decrease
C) decrease; decrease
D) increase; increase
40) Everything else held constant, if the sum of the required reserve ratio and the excess reserve
ratio is less than one, a decrease in the currency-deposit ratio causes the M1 money multiplier to
________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
41) Everything else held constant, if the sum of the required reserve ratio and the excess reserve
ratio is greater than one, an increase in the currency-deposit ratio causes the M1 money
multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
42) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%,
and the excess reserve ratio = 0, an increase in the currency-deposit ratio to 50% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 2.5 to 2.8
B) decrease from 2.8 to 2.5
C) increase from 2.33 to 2.8
D) decrease from 2.8 to 2.33
43) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%,
and the excess reserve ratio = 0, an decrease in the currency-deposit ratio to 30% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 2.8 to 3.25
B) decrease from 3.25 to 2.8
C) increase from 2.8 to 3.5
D) decrease from 3.5 to 2.8
44) Everything else held constant, a decrease in the excess reserves ratio causes the M1 money
multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
45) Everything else held constant, an increase in the excess reserves ratio causes the M1 money
multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
46) Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%,
and the excess reserve ratio = 5%, a decrease in the excess reserve ratio to 0% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 2.33 to 2.55
B) decrease from 2.55 to 2.33
C) increase from 1.67 to 1.82
D) decrease from 1.82 to 1.67
47) Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%,
and the excess reserve ratio = 5%, an increase in the excess reserve ratio to 10% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 2.15 to 2.33
B) decrease from 2.33 to 2.15
C) increase from 1.54 to 1.67
D) decrease from 1.67 to 1.54
48) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%,
and the excess reserve ratio = 156%, an increase in the excess reserve ratio to 200% causes the
M1 money multiplier to ________, everything else held constant.
A) increase from 0.15 to 0.33
B) decrease from 0.73 to 0.61
C) increase from 0.54 to 0.67
D) decrease from 1.67 to 1.54
49) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%,
and the excess reserve ratio = 156%, an increase in the required reserve ratio to 15% causes the
M1 money multiplier to ________, everything else held constant.
A) increase from 0.15 to 0.33
B) increase from 0.54 to 0.67
C) decrease from 0.73 to 0.71
D) decrease from 1.67 to 1.54
50) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%,
and the excess reserve ratio = 156%, an increase in the currency-deposit ratio to 150% causes the
M1 money multiplier to ________, everything else held constant.
A) increase from 0.73 to 0.78
B) decrease from 0.73 to 0.61
C) increase from 1.54 to 1.67
D) decrease from 1.67 to 1.54
51) The excess reserves ratio is ________ related to expected deposit outflows, and is ________
related to the market interest rate.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
52) The money supply is ________ related to expected deposit outflows, and is ________ related
to the market interest rate.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
53) The money multiplier is
A) negatively related to high-powered money.
B) positively related to the excess reserves ratio.
C) negatively related to the required reserve ratio.
D) positively related to holdings of excess reserves.
54) From the start of the global financial crisis in 2007 to date, the currency ratio
A) increased sharply.
B) decreased sharply.
C) increased slightly.
D) decreased slightly.
55) From the start of the global financial crisis in 2007 to date, the excess reserve ratio
A) increased sharply.
B) decreased sharply.
C) increased slightly.
D) decreased slightly.
56) Explain the complete formula for the M1 money supply, and explain how changes in
required reserves, excess reserves, the currency ratio, the nonborrowed base, and borrowed
reserves affect the money supply.
43
Copyright © 2019 Pearson Education, Inc.
14.8 Web Appendix 1: The Fed’s Balance Sheet and the Monetary Base
1) Which is the most important category of Fed assets?
A) securities
B) discount loans
C) gold and SDR certificates
D) cash items in the process of collection
2) The two most important categories of assets on the Fed’s balance sheet are ________ and
________ because they earn interest.
A) discount loans; coins
B) securities; discount loans
C) gold; coins
D) cash items in the process of collection; SDR certificate accounts
3) The Fed’s holdings of securities consist primarily of ________, but also in the past have
included ________.
A) Treasury securities; bankers’ acceptances
B) municipal securities; bankers’ acceptances
C) bankers’ acceptances; Treasury securities
D) Treasury securities; municipal securities
4) The volume of loans that the Fed makes to banks is affected by the Fed’s setting of the interest
rate on these loans, called the
A) federal funds rate.
B) prime rate.
C) discount rate.
D) interbank rate.
5) Special Drawing Rights (SDRs) are issued to governments by the ________ to settle
international debts and have replaced ________ in international transactions.
A) Federal Reserve System; gold
B) Federal Reserve System; dollars
C) International Monetary Fund; gold
D) International Monetary Fund; dollars
6) When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a
claim on the gold or SDRs, and in turn is credited with deposit balances at the ________.
A) Federal Reserve System; Fed
B) Federal Reserve System; IMF
C) International Monetary Fund; Fed
D) International Monetary Fund; IMF
7) Which of the following are NOT assets on the Fed’s balance sheet?
A) discount loans
B) U.S. Treasury deposits
C) cash items in the process of collection
D) U.S. Treasury bills
8) Which of the following are NOT assets on the Fed’s balance sheet?
A) securities
B) discount loans
C) cash items in the process of collection
D) deferred availability cash items
9) Which of the following are NOT liabilities on the Fed’s balance sheet?
A) discount loans
B) bank deposits
C) deferred availability cash items
D) U.S. Treasury deposits
10) When the Fed purchases artwork to decorate the conference room at the Federal Reserve
Bank of Kansas City
A) reserves rise, but the monetary base falls.
B) reserves fall.
C) currency in circulation falls.
D) the monetary base rises.
11) A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other
asset is just an open market ________ of these assets, ________ the monetary base.
A) purchase; raising
B) sale; raising
C) purchase; lowering
D) sale; lowering
12) An increase in Treasury deposits at the Fed causes
A) the monetary base to increase.
B) the monetary base to decrease.
C) Fed assets to increase but has no effect on the monetary base.
D) Fed assets to decrease but has no effect on the monetary base.
13) An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.
A) reserves; monetary base
B) Fed liabilities; money multiplier
C) Fed assets; monetary base
D) Fed assets; money multiplier
14) U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury.
Thus an increase in U.S. Treasury deposits ________ the monetary base.
A) a liability; an asset; increases
B) a liability; an asset; decreases
C) an asset; a liability; increases
D) an asset; a liability; decreases
15) An increase in which of the following leads to a decline in the monetary base?
A) float
B) discount loans
C) foreign deposits at the Fed
D) SDRs
16) Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in
Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of
the conference room. Suppose further that, at a public auction, the bank sells the painting for
$19.95. This sale will cause ________ in the monetary base, everything else held constant.
A) an increase of $19.95
B) an increase of more than $19.95
C) a decrease of $19.95
D) a decrease of more than $19.95
17) Suppose the Bank of China permanently decreases its purchases of U.S. government bonds
and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant,
a open market ________ would be the appropriate monetary policy action for the Fed to take to
offset the expected ________ in the monetary base in the United States.
A) purchase; decrease
B) purchase; increase
C) sale; decrease
D) sale; increase
14.9 Web Appendix 2: The M2 Money Multiplier
1) The equation that represents M2 in the model of the money supply process is
A) M2 = C + D.
B) M2 = C + D + T – MMF.
C) M2 = C + D – T + MMF.
D) M2 = C + D + T + MMF.
2) In the model of the money supply process for M2, the relationship between checkable deposits
and the M2 money supply is represented by
A) D = × M2.
B) D = (1 + c + t + mm) × M2.
C) M2 = × D.
D) M2 = .
3) The M2 money supply is represented by
A) M2 = × MB.
B) M2 = × .
C) MB = × M2.
D) MB = × .
4) The M2 money multiplier is
A) negatively related to high-powered money.
B) positively related to the time deposit ratio.
C) positively related to the required reserve ratio.
D) positively related to the excess reserves ratio.
5) Everything else held constant, an increase in the currency ratio will mean ________ in the M2
money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
6) Everything else held constant, a decrease in the currency ratio will mean ________ in the M1
money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
7) Everything else held constant, an increase in the required reserve ratio will mean ________ in
the M2 money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
8) Everything else held constant, an increase in the required reserve ratio will result in ________
in M1 and ________ in M2.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
9) Everything else held constant, an increase in the time deposit ratio will mean ________ in the
M2 money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
10) Everything else held constant, an increase in the time deposit ratio will result in ________ in
the M1 money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease
11) Everything else held constant, an increase in the money market fund ratio will mean
________ in the M2 money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
12) Everything else held constant, an increase in the money market fund ratio will result in
________ in the M1 money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease
13) Everything else held constant, an increase in the excess reserve ratio will mean ________ in
the M2 money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
14) Everything else held constant, an increase in the excess reserve ratio will mean ________ in
the M1 money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease
1) Factors causing an increase in currency holdings include
A) an increase in the interest rates paid on checkable deposits.
B) an increase in the cost of acquiring currency.
C) a decrease in bank panics.
D) an increase in illegal activity.
2) Part of the increase in currency holdings in the 1960s and 1970s can be attributed to
A) increases in income tax rates.
B) the switch from progressive to proportional income taxes.
C) the adoption of regressive taxes.
D) bracket creep due to inflation and progressive income taxes.
3) Everything else held constant, an increase in wealth will cause the holdings of checkable
deposits to the holdings of currency to ________ and the currency ratio will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
4) Everything else held constant, an increase in the interest rate paid on checkable deposits will
cause ________ in the amount of checkable deposits held relative to currency holdings and
________ in the currency ratio.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
5) The increase in the availability of ATMs has caused the cost of acquiring currency to
________ which will cause the currency ratio to ________, everything else held constant.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
6) The steepest increase in the currency ratio since 1892 occurred during
A) World War II.
B) the Great Depression.
C) the interwar years.
D) the past twenty years.
7) The factor accounting for the steepest rise in the currency ratio since 1892 is
A) taxes.
B) bank panics.
C) illegal activity.
D) an increase in wealth.
8) The increase in the currency ratio during World War II was due to
A) bank panics.
B) a drop in the rate of interest paid on checking deposits.
C) the spread of ATMs.
D) high taxes and illegal activities.
9) The upward trend in the currency-deposit ratio during 1994-2007 can be explained by
A) the increased holdings of U.S. currency by foreigners.
B) bank panics.
C) a drop in the rate of interest paid on checking deposits.
D) high taxes and illegal activities.
10) The declining trend in the currency-deposit ratio during 2007-2014 can be explained by
A) the increased holdings of U.S. currency by foreigners.
B) bank panics.
C) a drop in the rate of interest paid on checking deposits.
D) the increasing use of debit cards.
14.11 Web Appendix 4: The Great Depression Bank Panics, 1930–1933, and the Money Supply
1) During the bank panics of the Great Depression the currency ratio
A) increased sharply.
B) decreased sharply.
C) increased slightly.
D) decreased slightly.
2) During the bank panics of the Great Depression the excess reserve ratio
A) increased sharply.
B) decreased sharply.
C) increased slightly.
D) decreased slightly.
3) In the early 1930s, the currency-deposit ratio rose, as did the level of excess reserves. Money
supply analysis predicts that, everything else held constant, the money supply should have
A) risen.
B) fallen.
C) remain unchanged.
D) either risen, fallen, or remain unchanged.
4) The monetary base increased by 20% during the contraction of 1929-1933, but the money
supply fell by 25%. Explain why this occurred. How can the money supply fall when the base
increases?