Banking Chapter 17 1 When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check, when the check returns, the Fed's balance sheet will show

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

Multiple Choice Questions

1. The collapse of the Thai currency, the baht, was partially due to:

A. Inaction by the Federal Reserve

2. Each of the following items would appear as assets on the central bank’s balance sheet,

except:

A. Loans

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

3. A central bank’s balance sheet will categorize the following as liabilities:

D. Foreign exchange reserves

4. A central bank’s balance sheet would categorize each of the following as liabilities, except:

D. Accounts of the commercial banks

5. The main asset held by a central bank in its role as the Banker’s Bank is:

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

6. A liability of the central bank in functioning as the bankers’ bank is:

D. Currency

7. For the Federal Reserve’s balance sheet, the asset listed Securities would include:

A. Private and public debt

8. If the Federal Reserve is to be independent, the quantity of securities it purchases is

D. The Treasury

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

9. A central bank holds foreign exchange reserves primarily for:

D. Diversification and safekeeping

10. The quantity of securities held by the Federal Reserve is controlled through:

A. The U.S. Treasury

11. In the U.S., loans made by Federal Reserve to banks fall in the categories of:

D. Discount loans and foreign exchange reserves

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

12. Which of the following statements is most correct?

A. Discount loans are initiated by the Federal Reserve

13. Bonds denominated in the currency of the nation that issued them would:

A. Not be held by the Fed.

14. Bonds issued by the U.S. Treasury would:

D. Be held by the Fed as part of its loans

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

15. Liabilities of commercial banks show up on the Fed’s balance sheet as part of its:

A. Liabilities

16. As a portion of total assets measured in billions of dollars, the most important asset on the

Fed’s balance sheet is:

D. Loans

17. Gold is:

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

18. As a portion of total assets measured in billions of dollars, the least important asset on the

Fed’s balance sheet is:

A. Gold

19. For the Federal Reserve, the largest liability on its balance sheet is:

D. Treasury certificates

20. Over ninety percent of the Fed’s liabilities is in:

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

21. Compared to the Federal Reserve, the European Central Bank (ECB) has:

D. Fewer total liabilities because the ECB does not issue currency

22. Which of the following statements is most correct?

23. Reserves are:

D. Assets and liabilities for the central bank

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

24. Vault cash is:

A. Equal to the total amount of reserves and is an asset of the central bank

25. Vault cash is not included in the central bank’s liability category of currency because:

D. It is the liability of the U.S. Treasury

26. Monetary policy operations for central banks are run through changes in the liability

category of:

A. Government’s accounts

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

27. Most responsible central banks publish their balance sheet:

A. At least once a year

28. The experience of the Marcos Presidency in the Philippines in 1986 showed:

A. The importance of keeping the central bank independent from political pressure

29. The monetary base is the sum of:

A. Reserves and M2

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

30. The monetary base is the sum of:

D. Currency in the hands of the public M1

31. The monetary base is also known as:

A. M1

32. In dollar amounts:

A. The monetary base is larger than M2 and M1 is less than M2

33. One trait a central bank has over other businesses including banks is that it:

34. When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a

check, when the check returns, the Fed’s balance sheet will show:

A. An increase in assets and a decrease in liabilities of $1 million

35. When a business purchases a $25,000 computer system by writing a check, the business’s

balance sheet will:

A. Show an increase in assets and liabilities of $25,000

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

36. When a business purchases a $50,000 computer system by writing a check, the business’s

balance sheet will:

A. Only show an increase in liabilities of $50,000

37. A central bank’s purchase of securities made by writing checks on itself will:

A. Decrease the size of its balance sheet

38. A central bank’s sale of securities from its portfolio will:

D. Only change the composition of its assets

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

39. Considering a central bank’s balance sheet, when the value of an asset increases:

A. Nothing happens to its balance sheet

40. Considering a central bank’s balance sheet, when the value of a liability decreases:

D. An asset must decrease

41. Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal

Reserve. The Fed’s balance sheet will specifically show:

A. Only an increase in the asset of securities of $2 billion

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

42. Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal

Reserve. The Banking System’s balance sheet will specifically show:

A. Only an increase in liabilities of $2 billion

43. An open market sale of U.S. Treasury securities by the Fed will cause the Fed’s balance

sheet to show:

D. An increase in the asset category of securities and the liability category of reserves

44. An open market sale of U.S. Treasury securities by the Fed will cause the Banking

System’s balance sheet to show:

A. Only an increase in liabilities

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

45. The Fed purchases German bonds from commercial banks. Which of the following best

describes the impact on the Fed’s and the Banking System’s balance sheets resulting from this

transaction?

D. The Fed’s assets increase and its liabilities decrease, for the banking system, the value of

assets and liabilities do not change, only the composition of assets changes

46. The Fed sells German bonds to commercial banks. Which of the following best describes

the impact on the Fed’s and the Banking System’s balance sheets resulting from this

transaction?

A. The Fed’s assets and liabilities increase, the banking systems assets and liabilities decrease

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

47. Which of the following statements is most correct?

A. During the 1990s Americans held more cash than Europeans but the amount of cash

Americans held per resident decreased

48. To obtain a discount loan from the Fed, a commercial bank must:

A. Prove that it will fail if it does not obtain the loan

49. When the Fed makes a discount loan, the impact on the Fed’s balance sheet will reflect:

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

50. When the Fed makes a discount loan, the impact on the Banking System’s balance sheet

is:

A. An increase in liabilities with no change in assets

51. When the Fed makes a discount loan, the impact on the Banking System’s balance sheet

will reflect:

A. An increase in liabilities with no change in assets

52. During the 2007-2009 financial crisis which of the following became the largest

component of assets on the Fed’s balance sheet:

A. foreign exchange reserves

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

53. Which of the following have the same impact on the Fed’s balance sheet?

D. An increase in loans by the Fed to banks and a decrease in foreign exchange reserves

54. Mary decides to withdraw $500 out of her checking account. The impact of this

transaction on the Banking System’s balance sheet will be to:

55. Tom decides to withdraw $300 out of his checking account. The impact of this transaction

D. No change in either total assets or total liabilities

Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process

56. When an individual withdraws funds from a checking account the:

D. Size of the bank’s balance sheet stays the same but the size of the Fed’s balance sheet

shrinks

57. Harry gets $1000 in currency from his grandfather when he graduates from college. He

deposits these funds into his checking account. Considering Harry’s personal balance sheet,

his assets:

D. Increased by $1000 and his liabilities decreased by $1000 when he deposited the funds into

his checking account

58. Harry gets $1000 in currency from his grandfather when he graduates from college. He

deposits these funds into his checking account. What is the impact on the monetary base of

D. The monetary base increases by more than a $1000