175. The Fed’s countercyclical policy during expansion and prosperity includes:
a.
raising the required reserve ratio, raising the discount rate, and selling government bonds
on the open market.
b.
raising the required reserve ratio, raising the discount rate, and buying government bonds
on the open market.
c.
raising the required reserve ratio, cutting the discount rate, and selling government bonds
on the open market.
d.
raising the required reserve ratio, cutting the discount rate, and buying government bonds
on the open market.
e.
lowering the required reserve ratio, cutting discount rates, and buying government bonds
on the open market.
176. Which of the following would cause the money supply to increase?
a.
An open market purchase by the Fed.
c.
A reduction in required ratios.
b.
A reduction in the discount rate.
d.
All of these.
177. When a recession hits, we would expect the government to run a budget deficit by raising the level of
its spending or by cutting taxes, or perhaps both. The Fed would be expected to:
a.
reduce the required reserve ratio, increase the discount rate, and buy securities on the open
market.
b.
reduce the required reserve ratio, reduce the discount rate, and sell securities on the open
market.
c.
reduce the required reserve ratio, reduce the discount rate, and buy securities on the open
market.
d.
increase the required reserve ratio, reduce the discount rate, and sell securities on the open
market.
e.
increase the required reserve ratio, increase the discount rate, and sell securities on the
open market.
178. When the economy is at full employment and inflation is present, the government could create a
surplus budget by cutting its own spending and raising taxes. The Fed would be expected to:
a.
reduce the required reserve ratio, increase the discount rate, and buy securities on the open
market.
b.
reduce the required reserve ratio, reduce the discount rate, and sell securities on the open
market.
c.
reduce the required reserve ratio, reduce the discount rate, and buy securities on the open
market.
d.
increase the required reserve ratio, reduce the discount rate, and sell securities on the open
market.
e.
increase the required reserve ratio, increase the discount rate, and sell securities on the
open market.
179. Real-world accuracy of the money multiplier can be affected by:
a.
the amount of loans provided by nonbanks.
b.
the way the public divides its holding of M1 between currency and certificates of deposit.
c.
the willingness of banks to loan excess reserves.
d.
all of these.
180. If people refused to use banks to create checkable deposits, the banking system would:
a.
not be affected in the money creating process.
b.
not have a way to loan out excess reserves.
c.
be able to expand the money supply by more than the money multiplier indicates.
d.
not be able to create new money.
e.
not be able to find new borrowers.
181. If there is no one who is interested in borrowing from a bank:
a.
the bank’s excess reserves will be zero.
b.
there will be no process of money creation.
c.
the required reserve ratio must be equal to zero.
d.
the required reserve ratio must be equal to 100 percent.
182. If banks cannot lend all of their excess reserves:
a.
the money multiplier increases.
b.
the money multiplier decreases.
c.
the money multiplier stays the same.
d.
the amount of loans by the bank increases.
e.
checkable deposits decrease.
183. Economists estimate that the total lag for monetary policy is about:
a.
1-2 days.
c.
3-12 months.
b.
2 weeks to 1 month.
d.
2-4 years.
Exhibit 15-3 Balance sheet of Tucker National Bank
Assets
Liabilities
Required reserves
Checkable deposits
Excess reserves
Loans
Total
Total
184. The required reserve ratio in Exhibit 15-3 is:
a.
10 percent.
c.
80 percent.
b.
20 percent.
d.
100 percent.
185. Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 15-3.
The result would be a:
a.
$20,000 increase in excess reserves.
c.
$100,000 increase in required reserves.
b.
$20,000 increase in required reserves.
d.
zero change in required reserves.
186. Assume all banks in the system started with balance sheets as shown in Exhibit 15-3 and the Fed made
a $100,000 open market purchase. The result would be a(n):
a.
$500,000 expansion of the money supply.
b.
$100,000 expansion of the money supply.
c.
$20,000 contraction of the money supply.
d.
infinite contraction of the money supply.
e.
infinite expansion of the money supply.
187. Assume the Fed purchases a government security from a private dealer and pays with a Fed check of
$100,000. If this check is deposited by the dealer in the bank shown in Exhibit 15-3, the bank can
extend new loans in the amount of:
a.
$20,000.
c.
$100,000.
b.
$80,000.
d.
$120,000.
Exhibit 15-4 Balance sheet of Tucker National Bank
Assets
Liabilities
Required reserves
Checkable deposits
Excess reserves
Loans
Total
Total
188. The required reserve ratio in Exhibit 15-4 is:
a.
5 percent.
c.
15 percent.
b.
10 percent.
d.
20 percent.
189. Suppose Connie Rich deposits $500 in the bank in Exhibit 15-4. The result would be that the bank
must increase its required reserves to:
a.
$4,100.
c.
$5,100.
b.
$4,500.
d.
$5,500.
190. In Exhibit 15-4, the bank could make:
a.
$1,000 in new loans.
c.
$16,000 in new loans.
b.
$4,000 in new loans.
d.
$20,000 in new loans.
191. Assume all banks in the system started with the balance sheet shown in Exhibit 15-4 and the Fed
makes a $1,000 open market purchase. The result would be a(n):
a.
infinite contraction of the money supply.
c.
$1,000 expansion of the money supply.
b.
infinite expansion of the money supply.
d.
$5,000 expansion of the money supply.
Exhibit 15-5 Balance sheet of Tucker National Bank
Assets
Liabilities
Required reserves
Checkable deposits
Excess reserves
Loans
Total
Total
192. The required reserve ratio in Exhibit 15-5 is:
a.
10 percent.
c.
20 percent.
b.
15 percent.
d.
25 percent.
193. In Exhibit 15-5, the bank could:
a.
extend new loans by $5,000.
c.
call in $5,000 existing loans.
b.
extend new loans by $20,000.
d.
call in $20,000 existing loans.
194. Suppose Brad Jones deposits $20,000 into his checking account in the bank shown in Exhibit 15-5.
The result would be that the bank must increase its required reserves to:
a.
$5,000.
c.
$25,000.
b.
$20,000.
d.
$30,000.
195. If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the money
multiplier for the system would be:
a.
4.
c.
10.
b.
5.
d.
25.
196. Suppose Connie Rich deposits $100,000 into her checking account in the bank shown in Exhibit 15-6.
The result would be a:
a.
zero change in required reserves.
c.
$100,000 increase in required reserves.
b.
$10,000 increase in required reserves.
d.
$20,000 increase in excess reserves.
Exhibit 15-6 Balance sheet of Tucker National Bank
Assets
Liabilities
Required reserves
Checkable deposits
Excess reserves
Loans
Total
Total
197. The required reserve ratio in Exhibit 15-6 is:
a.
10 percent.
c.
80 percent.
b.
20 percent.
d.
100 percent.
Exhibit 15-7 Lower Walloon National Bank
Assets
Liabilities
Reserves
Checkable deposits
198. In Exhibit 15-7, if the required reserve ratio is 20 percent, and Mr. Brown deposits $10,000 in Lower
Walloon National Bank. The Lower Walloon National bank has excess reserves of:
a.
$2,000.
b.
$8,000.
c.
$0.
d.
$10,000.
e.
$40,000.
199. In Exhibit 15-7, if Lower Walloon National bank loans out all of its excess reserves to James Brown so
that Mr. Brown can upgrade his restaurant, and the money is put into Mr. Brown’s account at the
Lower Walloon National bank, then the bank will have reserves of:
a.
$10,000, loans of $8,000, and checkable deposits of $18,000.
b.
$2,000, loans of $4,000, and checkable deposits of $14,000.
c.
$6,000, loans of $4,000, and checkable deposits of $10,000.
d.
$10,000, loans of $8,000, and checkable deposits of $10,000.
e.
$0, loans of $8,000, and checkable deposits of $18,000.
200. In Exhibit 15-7, if Mr. Brown pays out all of the proceeds of the loan to Mr. John White who is going
to make the renovations of the restaurant, the Lower Walloon National bank will now have:
a.
$6,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits.
b.
$2,000 in reserves, $4,000 in loans, and $10,000 in checkable deposits.
c.
$2,000 in reserves, $8,000 in loans, and $10,000 in checkable deposits.
d.
$0 in reserves, $8,000 in loans, and $10,000 in checkable deposits.
e.
$10,000 in reserves, $8,000 in loans, and $2,000 in checkable deposits.
201. In Exhibit 15-7, if the required reserve ratio is increased to 25 percent, the Lower Walloon National
bank needs to keep:
a.
$2,000 on reserve at all times.
b.
$2,500 on reserve at all times.
c.
$10,000 on reserve at all times.
d.
$0 on reserve at all times.
e.
legal and excess reserves equal to each other at all times.
202. In Exhibit 15-7, if the required reserve ratio is 20 percent for all banks, and every bank in the banking
system loans out all of its excess reserves. Then a $10,000 deposit from Mr. Brown in checkable
deposits could create for the entire banking system:
a.
$8,000 worth of new money.
b.
$2,000 worth of new money.
c.
$10,000 worth of new money.
d.
$40,000 worth of new money.
e.
no new money.
TRUE/FALSE
1. Excess reserves equal total reserves plus required reserves.
2. The required reserves of a bank are determined by multiplying the bank’s checkable deposits by the
required reserve ratio.
3. Reserves of banks appear on their balance sheet as liabilities.
4. In a simplified system, a bank receiving a new deposit can extend new loans equal to the amount by
which its excess reserves increase.
5. The amount of checkable deposits in an economy cannot exceed the amount of currency that the
government has issued.
6. A bank can lend out its excess reserves but not its required reserves.
7. If the required reserve ratio is 4 percent, then $100 of reserves can support up to $2,500 of checkable
deposits.
8. Banks create money when they make loans.
9. The required reserve ratio is required reserves stated as a percentage of checkable deposits.
10. Excess reserves equal total reserves plus required reserves.
11. Banks do not create money when they make loans.
12. The required reserve ratio is required reserves stated as a percentage of the money supply.
13. In a system in which all banks have a uniform reserve requirement, the money multiplier is equal to 1
divided by the prime rate.
14. In a simplified banking system, the money multiplier falls as the required reserve ratio decreases.
15. In a simplified system where all banks have uniform reserve requirements and checkable deposits are
the only form of money, the money multiplier is equal to 1 over the required reserve ratio.
16. A decrease in the required reserve ratio will increase banks’ excess reserves and decrease the money
multiplier.
17. If the Federal Reserve wishes to increase the money supply it should decrease the discount rate and/or
decrease the required reserve ratio and/or buy government securities on the open market.
18. In a system in which all banks have a uniform reserve requirement, the money multiplier is equal to 1
divided by the required reserve ratio.
19. In a simplified banking system, the money multiplier falls as the required reserve ratio rises.
20. As discussed in the text, a bank can extend new loans equal to the amount by which its excess reserves
increase.
21. Reserves of member banks appear on the Fed’s balance sheet as liabilities.
22. Most of the Fed’s assets are held in the form of loans to its member banks.
23. An open-market purchase by the Federal Reserve injects excess reserves into the banking system and
allows the money supply to expand.
24. An open-market purchase by the Federal Reserve withdraws excess reserves from the banking system
and causes the money supply to contract.
25. A decrease in the discount rate by the Federal Reserve causes the money stock to expand.
26. An increase in the discount rate by the Federal Reserve causes the money stock to expand.
27. Banks that wish to borrow required reserves can turn to the federal funds market.
28. The market in which banks make loans of reserves for terms of over one year is called the federal
funds market.
29. In the banking system of the United States, banks that wish to borrow to make up reserve deficiencies
must turn to the federal funds market.
30. Raising the required reserve ratio causes the money multiplier to increase.
31. The total lag for fiscal policy tends to be shorter than the total lag for monetary policy.
ESSAY
1. Discuss how a single bank creates money. What is the limit to which a single bank can add to the
money supply? By how much can an entire banking system add to the money supply?
2. Describe the three basic tools used by the Fed to change the money supply. Which of these tools is
most relied on in practice? Least relied on? Why?
3. How can the Fed increase the money supply? How can the Fed decrease the money supply? Be
specific.