31) If reserves in the banking system increase by $100, then checkable deposits will increase by
$2,000 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.05.
C) 0.10.
D) 0.20.
32) If reserves in the banking system increase by $200, then checkable deposits will increase by
$500 in the simple model of deposit creation when the required reserve ratio is
A) 0.04.
B) 0.25.
C) 0.40.
D) 0.50.
33) If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has actual reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.
34) If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has total reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.
35) If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has actual reserves of
A) $11,000.
B) $20,000.
C) $21,000.
D) $26,000.
36) If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has total reserves of
A) $11,000.
B) $21,000.
C) $31,000.
D) $41,000.
37) If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 15 percent, then the bank has actual reserves of
A) $17,000.
B) $19,000.
C) $24,000.
D) $29,000.
38) If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 10 percent, then the bank has actual reserves of
A) $14,000.
B) $19,000.
C) $24,000.
D) $29,000.
39) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 15 percent, then the bank has actual reserves of
A) $17,000.
B) $22,000.
C) $27,000.
D) $29,000.
40) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 10 percent, then the bank has actual reserves of
A) $14,000.
B) $17,000.
C) $22,000.
D) $27,000.
41) A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the
required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess
reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
42) A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the
required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess
reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
43) A bank has excess reserves of $10,000 and demand deposit liabilities of $100,000 when the
required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess
reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
44) A bank has no excess reserves and demand deposit liabilities of $100,000 when the required
reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess reserves
will now be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
45) A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the
reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank’s
excess reserves will be
A) $1,000.
B) $8,000.
C) $9,000.
D) $17,000.
46) A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the
reserve requirement is 25 percent. If the reserve requirement is lowered to 20 percent, the bank’s
excess reserves will be
A) $1,000.
B) $5,000.
C) $8,000.
D) $9,000.
47) Decisions by depositors to increase their holdings of ________, or of banks to hold
________ will result in a smaller expansion of deposits than the simple model predicts.
A) deposits; required reserves
B) deposits; excess reserves
C) currency; required reserves
D) currency; excess reserves
48) Decisions by depositors to increase their holdings of ________, or of banks to hold excess
reserves will result in a ________ expansion of deposits than the simple model predicts.
A) deposits; smaller
B) deposits; larger
C) currency; smaller
D) currency; larger
49) Decisions by ________ about their holdings of currency and by ________ about their
holdings of excess reserves affect the money supply.
A) borrowers; depositors
B) banks; depositors
C) depositors; borrowers
D) depositors; banks
50) Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells
a $100 security to the Fed, explain what happens to this bank and two additional steps in the
deposit expansion process, assuming a 10% reserve requirement. How much do deposits and
loans increase for the banking system when the process is completed?
51) Explain two reasons why the Fed does not have complete control over the level of bank
deposits and loans. Explain how a change in either factor affects the deposit expansion process.
52) Explain why the simple deposit multiplier overstates the true deposit multiplier.
15.5 Factors That Determine the Money Supply
1) An increase in the nonborrowed monetary base, everything else held constant, will cause
A) the money supply to fall.
B) the money supply to rise.
C) no change in the money supply.
D) demand deposits to fall.
2) The money supply is ________ related to the nonborrowed monetary base, and ________
related to the level of borrowed reserves.
A) positively; negatively
B) negatively; not
C) positively; positively
D) negatively; negatively
3) The amount of borrowed reserves is ________ related to the discount rate, and is ________
related to the market interest rate.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
4) A ________ in market interest rates relative to the discount rate will cause discount borrowing
to ________.
A) fall; increase
B) rise; decrease
C) rise; increase
D) fall; remain unchanged
5) Everything else held constant, an increase in currency holdings will cause
A) the money supply to rise.
B) the money supply to remain constant.
C) the money supply to fall.
D) checkable deposits to rise.
6) Everything else held constant, a decrease in holdings of excess reserves will mean
A) a decrease in the money supply.
B) an increase in the money supply.
C) a decrease in checkable deposits.
D) an increase in discount loans.
15.6 Overview of the Money Supply Process
1) In the model of the money supply process, the Federal Reserve‘s role in influencing the money
supply is represented by
A) both the required reserve ratio and the market interest rate.
B) the required reserve ratio, nonborrowed reserves, and borrowed reserves.
C) only borrowed reserves.
D) only nonborrowed reserves.
2) In the model of the money supply process, the depositor’s role in influencing the money
supply is represented by
A) the currency holdings.
B) the currency holdings and excess reserve.
C) the currency holdings and borrowed reserve.
D) the market interest rate.
3) In the model of the money supply process, the bank’s role in influencing the money supply
process is represented by
A) the excess reserve.
B) both the excess reserve and the market interest rate.
C) the currency ratio.
D) only borrowed reserves.
15.7 The Money Multiplier
1) Models describing the determination of the money supply and the Fed’s role in this process
normally focus on ________ rather than ________, since Fed actions have a more predictable
effect on the former.
A) reserves; the monetary base
B) reserves; high-powered money
C) the monetary base; high-powered money
D) the monetary base; reserves
2) The Fed can exert more precise control over ________ than it can over ________.
A) high-powered money; reserves
B) high-powered money; the monetary base
C) the monetary base; high-powered money
D) reserves; high-powered money
3) The ratio that relates the change in the money supply to a given change in the monetary base
is called the
A) money multiplier.
B) required reserve ratio.
C) deposit ratio.
D) discount rate.
4) An assumption in the model of the money supply process is that the desired levels of currency
and excess reserves
A) are given as constants.
B) grow proportionally with checkable deposits.
C) grow proportionally with high-powered money.
D) grow proportionally over time.
5) The total amount of reserves in the banking system is equal to the ________ required reserves
and excess reserves.
A) sum of
B) difference between
C) product of
D) ratio between
6) The total amount of required reserves in the banking system is equal to the ________ the
required reserve ratio and checkable deposits.
A) sum of
B) difference between
C) product of
D) ratio between
7) Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of
reserves can support ________ of checkable deposits.
A) exactly one dollar
B) less than one dollar
C) more than one dollar
D) exactly twice the amount
8) An increase in the monetary base that goes into ________ is not multiplied, while an increase
that goes into ________ is multiplied.
A) deposits; currency
B) excess reserves; currency
C) currency; excess reserves
D) currency; deposits
9) An increase in the monetary base that goes into currency is ________, while an increase that
goes into deposits is ________.
A) multiplied; multiplied
B) not multiplied; multiplied
C) multiplied; not multiplied
D) not multiplied; not multiplied
10) If the Fed injects reserves into the banking system and they are held as excess reserves, then
the money supply
A) increases by only the initial increase in reserves.
B) increases by only one-half the initial increase in reserves.
C) increases by a multiple of the initial increase in reserves.
D) does not change.
11) If the Fed injects reserves into the banking system and they are held as excess reserves, then
the monetary base ________ and the money supply ________.
A) remains unchanged; remains unchanged
B) remains unchanged; increases
C) increases; increases
D) increases; remains unchanged
12) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is
________ billion.
A) $8,000
B) $1,200
C) $1,200.80
D) $8,400
13) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
A) 2.5.
B) 1.67.
C) 2.0.
D) 0.601.
14) If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable
deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money
multiplier is
A) 2.5.
B) 1.7.
C) 7.3.
D) 0.73.
15) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the currency-deposit ratio is
A) 0.25.
B) 0.50.
C) 0.40.
D) 0.05.
16) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reserves-
checkable deposit ratio is
A) 0.001.
B) 0.10.
C) 0.01.
D) 0.05.
17) If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable
deposits are $1,600 billion, and excess reserves total $2,500 billion, then the excess reserves-
checkable deposit ratio is
A) 1.56.
B) 0.48.
C) 0.72.
D) 0.56.
18) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is
A) $480 billion.
B) $480.8 billion.
C) $80 billion.
D) $80.8 billion.
19) If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
A) 2.5.
B) 1.67.
C) 2.3.
D) 0.651.
20) If the required reserve ratio is 5 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
A) 2.5.
B) 2.72.
C) 2.3.
D) 0.551.
21) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $1,000 billion, and excess reserves total $1 billion, then the money supply is
________ billion.
A) $10,000
B) $4,000
C) $1,400
D) $10,400
22) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $1,000 billion, and excess reserves total $1 billion, then the M1 money multiplier is
A) 2.5.
B) 2.8.
C) 2.0.
D) 0.7.
23) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $1,000 billion, and excess reserves total $1 billion, then the currency-deposit ratio is
A) 0.25.
B) 0.50.
C) 0.40.
D) 0.05.
24) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $1,000 billion, and excess reserves total $1 billion, then the excess reserves-
checkable deposit ratio is
A) 0.01.
B) 0.10.
C) 0.001.
D) 0.05.
25) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $1,000 billion, and excess reserves total $1 billion, then the monetary base is
A) $400 billion.
B) $401 billion.
C) $500 billion.
D) $501 billion.
26) If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable
deposits are $1,000 billion, and excess reserves total $1 billion, then the M1 money multiplier is
A) 2.54.
B) 2.67.
C) 2.35.
D) 0.551.
27) If the required reserve ratio is one-third, currency in circulation is $300 billion, and
checkable deposits are $900 billion, then the money supply is ________ billion.
A) $2,700
B) $3,000
C) $1,200
D) $1,800
28) If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable
deposits are $900 billion, and there is no excess reserve, then the M1 money multiplier is
A) 2.5.
B) 2.8.
C) 2.0.
D) 0.67.
29) If the required reserve ratio is one-third, currency in circulation is $300 billion, and
checkable deposits are $900 billion, then the currency-deposit ratio is
A) 0.25.
B) 0.33.
C) 0.67.
D) 0.375.
30) If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable
deposits are $900 billion, and there is no excess reserve, then the monetary base is
A) $300 billion.
B) $600 billion.
C) $333 billion.
D) $667 billion.
31) Everything else held constant, an increase in the required reserve ratio on checkable deposits
will cause
A) the money supply to rise.
B) the money supply to remain constant.
C) the money supply to fall.
D) checkable deposits to rise.
32) Everything else held constant, a decrease in the required reserve ratio on checkable deposits
will mean
A) a decrease in the money supply.
B) an increase in the money supply.
C) a decrease in checkable deposits.
D) an increase in discount loans.
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