Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
59. Over the two-year period during which the financial crisis occurred, the amount of assets
in the Federal Reserve balance sheet increased by:
D. 6 times
60. The term for turning reserves into bank deposits is called:
A. Discounting
61. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s required reserves
will:
D. Increase but by less than $100,000
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
62. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s reserves will:
D. Decrease
63. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s excess reserves will:
A. Increase by less than $100,000
64. The most a bank could lend at any time without altering its assets is an amount equal to
its:
A. Checkable deposits
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
65. Bank A has checkable deposits of $100 million, vault cash equaling $1 million and
deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the
maximum amount Bank A could lend?
A. $85 million
66. Bank A has checkable deposits of $140 million, vault cash equaling $1 million and
deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the
amount of excess reserves Bank A is holding?
A. It does not have any excess reserves
67. A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits
in his bank, Bank B. Which of the following statements pertaining to this transaction is most
D. Bank B’s reserves will decrease and Bank A’s reserves will increase by $20,000
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
68. If the required reserve rate is ten percent and banks do not hold any excess reserves and
there are no changes in currency holdings, a $1 million open market purchased by the Fed will
result in deposit creation of:
A. $9 million
69. The formula for required reserves is:
70. If required reserves are expressed by RR; the required reserve rate by rD and deposits by
D, the simple deposit expansion multiplier is expressed as:
A. RDD
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
71. If the Fed were to increase the required reserve rate from ten percent to twenty percent,
the simple deposit expansion multiplier would:
A. Double
72. If the Fed were to decrease the required reserve rate from ten percent to five percent, the
simple deposit expansion multiplier would:
D. Be half as large as it was before the reduction
73. If the required reserve rate is ten percent and banks do not hold any excess reserves and
there are no changes in currency holdings, a $1 million open market purchase by the Fed will
result in what change in loans?
A. No change
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
74. If we focus on the banking system and assume no change in the public’s currency
holdings, a loss of reserves by any one bank must:
A. Equal the loss of reserves by the entire system
75. If we assume a ten percent required reserve rate, and banks not holding any excess
reserves and no change in currency holdings, an open market sale of $5 million of U.S.
Treasury securities by the Fed, will result in deposits:
D. Not changing
76. The simple deposit expansion multiplier is really too simple for understanding the link
between changes in a central bank’s balance sheet and the quantity of money in the economy
because it:
A. Ignores how central banks could change their balance sheet
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
77. Assume that the required reserve rate is ten percent, banks want to hold excess reserves in
an amount that equals three percent of deposits, and the public withdraws ten percent of every
deposit in cash. An open market purchase of $1 million by the Fed will see banking system
deposits increase by:
D. More than $10 million but less than $20 million
78. Which of the following best completes the statement? If people increase their currency
holdings, all else the same, the monetary base:
D. Does not change and neither does M2
79. If there were an increase in the number of bank failures, we should expect the amount of
excess reserves in the banking system to:
D. Decrease since failing banks lost theirs
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
80. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves,
then C + R would equal:
A. M
81. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves,
then RR would equal:
82. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves,
then m would equal:
D. D – C
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
83. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR equals required reserves, rD = the required reserve
rate and ER = Excess reserves, then RR would equal:
A. R – ER
84. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR equals required reserves, rD = the required reserve
D. ER/RR
85. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR equals required reserves, rD = the required reserve
rate and ER = Excess reserves, then C + D would equal:
D. C/D
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
86. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR equals required reserves, rD = the required reserve
rate and ER = Excess reserves, then ER/D would equal the:
A. Amount of excess reserves
87. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR equals required reserves, rD = the required reserve
rate and ER = Excess reserves, then RR/D would equal the:
D. Monetary base
D. Weed out less profitable deposits
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
89. The money multiplier is much lower today than it was twenty-five years ago because:
D. Credit cards are more widely used
90. During the Great Depression, the monetary base in the U.S.:
D. Was highly erratic
91. During the early years of the Great Depression, the monetary base and M2:
A. Both increased significantly
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
17–32
92. During the early years of the Great Depression, a study of the money aggregates reveals
that the money multiplier:
A. Was at an all-time high
93. One thing the Fed has learned over the past twenty-five years is:
D. It should focus its attention on targeting M2
94. During the 1990s, the money multipliers for M1 and M2:
D. Increased dramatically as the economy grew
Short Answer Questions
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
95. The author opens Chapter 17 with a contrast between the Fed’s actions in response to the
terrorist attacks of September, 2001 and its response to the financial crisis of the Great
Depression. Why was the Fed successful at dealing with the crisis in 2001, and not as
successful with the crisis of the early 1930s?
96. The assets that appear on the central bank’s balance sheet include the category of loans.
Who are central banks lending to and are these loans associated with the central bank
functioning as the government’s bank? Explain.
Chapter 17 – The Central Bank Balance Sheet and the Money Supply Process
97. The Federal Reserve’s Balance sheet would include an item labeled Currency. Is this an
asset or a liability of the Fed, and does it include all currency that is printed? Explain.
98. If the central banks of most countries do not set the exchange rates, why do they hold
foreign exchange as one of their assets?