Chapter 15—Money Creation
MULTIPLE CHOICE
1. Which of the following compose the reserves of a commercial bank?
a.
checkable deposits and time deposits
b.
vault cash and deposits of the bank with the Federal Reserve
c.
U.S. securities and stock equity
d.
cash and U.S. securities
2. Which of the following does not appear on the asset side of a bank’s balance sheet?
a.
Required reserves.
c.
Loans.
b.
Checkable deposits.
d.
Excess reserves.
3. Which of the following appears on the asset side of a bank’s balance sheet?
a.
Required reserve deposits.
c.
Excess reserves.
b.
Loans.
d.
All of these.
4. Which of the following is an interest-earning asset of banks?
a.
Required reserves.
b.
Checkable deposits.
c.
Excess reserves.
d.
None of these are interest-earning assets of banks.
5. The required reserves of a bank are:
a.
held as deposits with the Federal Reserve System.
b.
equal to its loans.
c.
equal to its checkable deposits.
d.
none of these.
6. Which of the following is not an interest-earning asset of commercial banks?
a.
Required reserves.
b.
Securities.
c.
Loans.
d.
All of these are interest-earning assets of commercial banks.
7. A bank’s “required reserves” are:
a.
held as deposits with the Federal Reserve System.
b.
equal to its checkable deposits.
c.
equal to its transactions deposits.
d.
none of these.
8. Which of the following would not appear on the asset side of a commercial bank balance sheet?
a.
Reserves.
c.
Loans.
b.
Checkable deposits.
d.
Securities.
9. Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks
are subject to a uniform 10 percent reserve requirement and demand deposits are the only form of
money. A commercial bank receiving a new demand deposit of $100 would be able to extend new
loans in the amount of:
a.
$10.
c.
$100.
b.
$90.
d.
$1,000.
10. Assume a bank has total deposits of $100,000 and $20,000 is set aside to meet reserve requirements of
the Fed. Its required reserve ratio is:
a.
$20,000.
c.
0.2 percent.
b.
20 percent.
d.
1 percent.
11. Which of the following is a valid statement?
a.
Excess reserves = total reserves minus required reserves.
b.
Required reserves = the minimum reserves required by the Fed.
c.
Required reserve ratio = required reserves as a percentage to total deposits.
d.
All of these.
12. Banks normally hold few excess reserves because this practice is:
a.
subject to an excess reserves tax.
c.
against Fed policy.
b.
not profitable.
d.
illegal.
13. Banks would be expected to minimize holding excess reserves because this practice is:
a.
illegal.
c.
technically difficult.
b.
not profitable.
d.
subject to a stiff excess reserves tax.
14. In a commercial bank’s T-account, reserves and outstanding loans are recorded as:
a.
debts.
c.
assets.
b.
profits.
d.
liabilities.
15. In order for a bank to earn as much profit as possible, its excess reserves should be:
a.
equal to its required reserves.
c.
less than its vault cash.
b.
as small as possible.
d.
growing at a constant rate.
16. A bank faces a required reserve ratio of 5 percent. If the bank has $200 million of checkable deposits
and $15 million of total reserves, then how large are the bank’s excess reserves?
a.
$0.
c.
$10 million.
b.
$5 million.
d.
$15 million.
17. Which of the following would be classified as a liability for a bank?
a.
Required reserves.
c.
Loans.
b.
Excess reserves.
d.
Checkable deposits.
18. A bank’s required reserves are either held as vault cash or:
a.
used to purchase Treasury bonds.
c.
invested in the stock market.
b.
deposited with the Fed.
d.
loaned out to other commercial banks.
19. A bank has $100 million of checkable deposits, $6 million of required reserves, and $2 million of
excess reserves. What is the required reserve ratio?
a.
2 percent.
c.
6 percent.
b.
3 percent.
d.
12 percent.
20. Which of the following appears on the asset side of a bank’s balance sheet?
a.
Excess reserves.
c.
Required reserves.
b.
Loans.
d.
All of the above.
21. Which of the following is not an interest-earning asset of commercial banks?
a.
Required reserves.
b.
Checkable deposits.
c.
Customer savings accounts.
d.
All of the above are interest-earning assets of commercial banks.
e.
None of the above are interest-earning assets of commercial banks.
22. Which of the following is a valid statement?
a.
Required reserve ratio = required reserves as a percentage to total deposits.
b.
Required reserves = the maximum reserves required by the Fed.
c.
Excess reserves = total reserves plus required reserves.
d.
All of these.
23. The major assets and liabilities of a bank are:
a.
checkable deposits and total reserves, respectively.
b.
checkable deposits and gold, respectively.
c.
total reserves and checkable deposits, respectively.
d.
total reserves and excess reserves, respectively.
e.
checkable deposits and excess reserves, respectively.
24. The amount of assets that a bank must hold at all times is determined by the:
a.
banks’ actual reserves.
b.
required reserve ratio.
c.
actual reserve requirement.
d.
fractional reserve requirement.
e.
excess reserve requirement.
25. An individual bank can lend out at most its:
a.
actual reserves.
b.
fractional reserves.
c.
legal reserves.
d.
checkable deposits.
e.
excess reserves.
26. Which of the following is a bank liability?
a.
Required reserves.
b.
Excess reserves.
c.
Actual reserves.
d.
Checkable deposits.
e.
Loans.
27. Which of the following would appear on the asset side of a commercial bank balance sheet?
a.
Loans.
c.
Savings deposits.
b.
Checkable deposits.
d.
Net worth.
28. If a bank has $100,000 in checkable deposits, reserves of $20,000, and no excess reserves, then the
required reserve ratio is:
a.
10 percent.
b.
20 percent.
c.
25 percent.
d.
30 percent.
e.
50 percent.
29. The balance sheet for a commercial bank shows the bank’s:
a.
required reserves as assets and excess reserves as liabilities.
b.
loans as assets and required reserves as liabilities.
c.
loans as assets and checkable deposits as liabilities.
d.
checkable deposits as assets and loans as liabilities.
e.
excess reserves as assets and required reserves as liabilities.
30. If the fractional reserve system did not exist,
a.
the banking system could not create money.
b.
there would be no effect on the ability of the banking system to create money.
c.
banks would loan out its required reserves.
d.
banks would be highly susceptible to bank runs.
e.
the banking system would realize the money multiplier.
31. A banking system that provides people immediate access to their deposits, but that allows banks to
hold only a portion of those deposits on reserve, is known as:
a.
an excess reserve system.
b.
a fractional reserve system.
c.
the Fed.
d.
the FDIC.
e.
an asset-based system.
32. The percentage of checkable deposits that banks and other financial intermediaries are required to keep
in cash reserves is known as:
a.
the fractional reserve requirement.
b.
the excess reserve requirement.
c.
the required reserve ratio.
d.
the discount rate.
e.
M1.
33. The quantity of reserves held by a bank in addition to the legally required amounts is known as:
a.
actual reserves.
b.
excess reserves.
c.
the required reserve ratio.
d.
the money multiplier.
e.
the monetary base.
34. Assume that Paris First National Bank is a thriving bank with deposits of $20 million. If the required
reserve ratio is 20 percent and the bank is fully loaned out, the bank will keep what amount of required
reserves?
a.
$2 million.
b.
$4 million.
c.
$10 million.
d.
$16 million.
e.
$20 million.
35. The required reserve ratio for a bank is set by:
a.
Congress.
b.
the bank itself.
c.
the Treasury Department.
d.
the banking system.
e.
the Federal Reserve.
36. Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If
it accepts a $1,000 deposit, then its required reserves balance will be:
a.
$0.
b.
$90.
c.
$100.
d.
$900.
e.
$910
37. Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If
it accepts a $1,000 deposit, then its excess reserve balance will be:
a.
$0.
b.
$90.
c.
$100.
d.
$900.
e.
$910.
38. If loans are $300,000, checkable deposits are $600,000, and the required reserve ratio is 40 percent,
then excess reserves are:
a.
$360,000.
b.
$240,000.
c.
$120,000.
d.
$60,000.
e.
$30,000.
39. If loans are $69,000, excess reserves are $1,400, and checkable deposits are $80,000, then the required
reserve ratio must be:
a.
1.75 percent.
b.
12 percent.
c.
13.75 percent.
d.
17.5 percent.
e.
0.12 percent.
40. If your bank receives a checkable deposit of $20,000, and the banking system makes loans totaling
$180,000, the maximum possible, then the required reserve ratio must be:
a.
0.10.
b.
0.20.
c.
0.25.
d.
0.40.
e.
0.50.
41. The required reserve ratio is:
a.
the minimum amount of reserves the Fed requires a bank to hold.
b.
the interest rate that the Fed charges banks who borrow from it.
c.
the interest rate on loans made by banks to other banks.
d.
the maximum percentage of the cost of a stock that can be borrowed from a bank, with the
stock offered as collateral.
e.
an appeal by the Fed to banks, asking for voluntary compliance with the Fed’s wishes.
42. The required reserve ratio is the:
a.
actual amount of reserves that banks must hold.
b.
excess amount of reserves that a bank must hold.
c.
minimum amount of reserves the Fed requires a bank to hold.
d.
total amount of reserves that banks hold at all times.
e.
maximum amount of reserves that banks can hold to remain liquid.
Exhibit 15-1 Balance sheet of First Iliad State Bank
Assets
Liabilities
$ 1,000,000
Demand deposits
$10,000,000
0
$
43. In Exhibit 15-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to
convert loans worth:
a.
$9,000,000 to required reserves.
b.
$1,500,000 to required reserves.
c.
$500,000 to required reserves.
d.
$1,000,000 to required reserves.
e.
$450,000 to required reserves.
44. In Exhibit 15-1, if the required reserve ratio is lowered to 5 percent, First Iliad State will be able to
make additional loans worth:
a.
$9,000,000.
b.
$1,500,000.
c.
$500,000.
d.
$1,000,000.
e.
$450,000.
45. In Exhibit 15-1, if the required reserve ratio is lowered to 8 percent, then First Iliad State will:
a.
have to convert loans worth $800,000 to required reserves
b.
have to convert loans worth $200,000 to required reserves.
c.
be able to make additional loans worth $800,000.
d.
be able to make additional loans worth $200,000.
e.
not have to act.
46. In Exhibit 15-1, if the required reserve ratio is raised to 18 percent, then First Iliad State will:
a.
have to convert loans worth $800,000 to required reserves.
b.
have to convert loans worth $200,000 to required reserves.
c.
be able to make additional loans worth $800,000.
d.
be able to make additional loans worth $200,000.
Exhibit 15-2 Balance Sheet of Springfield National Bank
Assets
Liabilities
$500
Demand deposits
$1,000
$500
47. In Exhibit 15-2, if Springfield National finds that it has excess reserves of $300, then the required
reserve ratio must be:
a.
30 percent.
b.
0.30 percent.
c.
0.80 percent.
d.
0.20 percent.
e.
20 percent.
48. In Exhibit 15-2, if Springfield National’s customers write checks for $200 and the required reserve
ratio is 20 percent, then its required reserves fall to:
a.
$0.
b.
$40.
c.
$160.
d.
$460.
e.
$260.
49. In Exhibit 15-2, if Springfield National has excess reserves equal to $300, and then its customers write
checks for $200, its excess reserves will fall to:
a.
$0.
b.
$100.
c.
$140.
d.
$160.
e.
$200.
50. In Exhibit 15-2, if Springfield National has excess reserves equal to $300, and the required reserve
ratio increases to 35 percent, it will:
a.
be able to cover its increased reserve requirements from its excess reserves.
b.
have to call in loans worth $350.
c.
have to call in loans worth $250.
d.
have to call in loans worth $200.
e.
have to call in loans worth $150.
51. A bank that has $10,000 in excess reserves can extend new loans up to a maximum of:
a.
$1,000.
c.
$10,000.
b.
$9,000.
d.
$100,000.
52. Best National Bank is subject to a 10 percent required reserve ratio. If this bank received a new
checkable deposit of $1,000, it could make new loans of:
a.
$100.
c.
$1,000.
b.
$900.
d.
$10,000.
53. Best National Bank is subject to a 20 percent required reserve ratio. If this bank received a new
checkable deposit of $1,000, it could make new loans of:
a.
$500.
c.
$1,000.
b.
$800.
d.
$5,000.
54. If a bank that is subject to a 10 percent required reserve ratio has $20,000 in excess reserves, it can
make new loans of:
a.
$2,000.
c.
$20,000.
b.
$18,000.
d.
$200,000.
55. Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The
maximum money supply that can be supported is:
a.
$13 million.
c.
$97 million.
b.
$30 million.
d.
$333.3 million.
56. If a single banks faces a required reserve ratio of 20 percent, has total reserves of $500,000, and
checkable deposit liabilities of $400,000, what is the maximum amount of money this bank could
create (add to the money supply)?
a.
$420,000.
c.
$80,000.
b.
$100,000.
d.
$2,100,000.
57. Assume a simplified banking system in which all banks are subject to a uniform reserve requirement
of 20 percent and checkable deposits are the only from of money. A bank that received a new
checkable deposit of $10,000 would be able to extend new loans up to a maximum of:
a.
$2,000.
c.
$9,000.
b.
$8,000.
d.
$10,000.
58. If a bank receives a new checkable deposit of $10,000, and the required reserve ratio is 20 percent,
then the bank can lend out:
a.
$2,000.
b.
$10,000.
c.
$40,000.
d.
$8,000.
e.
$0.
59. Suppose a bank has checkable deposits of $100,000 and the required reserve ratio is 20 percent. If the
bank currently has $100,000 in reserves, it could expand the money supply by as much as:
a.
$100,000.
b.
$400,000.
c.
$0.
d.
$20,000.
e.
$80,000.
60. A bank creates money when it:
a.
gets new checkable deposits which the depositor formerly held as cash.
b.
has a loan paid off, which creates excess reserves for the bank.
c.
makes a loan from its excess reserves.
d.
holds back excess reserves because of an increase in the required reserve ratio.
e.
gets more excess reserves because of a decrease in the required reserve ratio.
61. A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000.
If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans
by:
a.
$10,000.
b.
$15,000.
c.
$75,000.
d.
$5,000.
e.
$0.
62. When new checkable deposits are created through loans,
a.
the money supply contracts.
b.
excess reserves are destroyed.
c.
the money supply remains the same.
d.
the money supply expands.
e.
the required reserve ratio declines
63. If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum
amount of checkable deposits the bank can have if excess reserves are zero is:
a.
$100,000.
b.
$80,000.
c.
$300,000.
d.
$20,000.
e.
$200,000.
64. Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by
depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit,
there are $1,000 in:
a.
reserves and $1,000 in checkable deposits.
b.
liabilities and $2,000 in checkable deposits.
c.
checkable deposits and $0 in assets.
d.
assets and $0 in liabilities.
e.
reserves and $0 in liabilities.
65. If Matt Taylor gets his $800 loan from the Paris First National Bank in cash rather than in the form of
a new checkable deposit, the:
a.
Paris First National Bank will get $800 in new reserves.
b.
Paris First National Bank will not get $800 in new reserves.
c.
assets of the Paris First National Bank will increase by $800.
d.
assets of the Paris First National Bank will decease by $88.
e.
liabilities of the Paris First National Bank will increase by $800.
66. Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks
are subject to a uniform 10 percent reserve requirement and checkable deposits are the only form of
money. A commercial bank receiving a new checkable deposit of $100 would be able to extend new
loans in the amount of:
a.
$10.
c.
$100.
b.
$90.
d.
$1,000.
67. If your bank faces a 20 percent required reserve ratio and receives a cash deposit of $4,000 into a
checkable deposit account, the maximum total amount of money possible after the banking system
makes all loans is:
a.
$800.
b.
$3,200.
c.
$4,000.
d.
$16,000.
e.
$20,000.
68. Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If
it accepts a $1,000 deposit, then its loan balance can increase by a maximum of:
a.
$0.
b.
$90.
c.
$100.
d.
$900.
e.
$910.
69. Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If
it accepts a $1,000 deposit, then Odyssey National can increase the money supply by:
a.
$900.
b.
$910.
c.
$1,000.
d.
$9,000.
e.
$10,000.
70. Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If
it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can
increase the money supply by:
a.
$900.
b.
$910.
c.
$1,000.
d.
$9,000.
e.
$10,000.
71. Best National Bank operates with a 20 percent required reserve ratio. One day a depositor withdraws
$500 from his or her checking account at this bank. As a result, the bank’s excess reserves:
a.
fall by $500.
c.
rise by $100.
b.
fall by $400.
d.
rise by $500.
72. If banks are fully loaned up, have no excess reserves, and the required reserve ratio is raised, the
amount that banks can lend is:
a.
reduced and the money supply contracts.
b.
reduced and the money supply expands.
c.
reduced and there is no change in the money supply.
d.
increased and the money supply expands.
e.
increased and the money supply contracts.
73. If your bank receives a checkable deposit of $20,000 cash, and the banking system makes loans
totaling $60,000, the maximum possible, then the money multiplier must be:
a.
2.
b.
2.5.
c.
3.
d.
3.5.
e.
4.
74. If the required reserve ratio is 10 percent, $1,000 cash deposited into a checkable deposit account will
generate, assuming willing borrowers, an increase in the money supply of:
a.
$900.
b.
$1,100.
c.
$9,000.
d.
$10,000.
e.
$11,000.
75. Assume all banks in the system started have a 10 percent required reserve ratio and the Fed made a
$20,000 open market purchase. The result would be a(n):
a.
$200,000 expansion of the money supply.
c.
$20,000 contraction of the money supply.
b.
$20,000 expansion of the money supply.
d.
infinite contraction of the money supply.
76. If your bank faces a 20 percent required reserve ratio and receives a checkable deposit of $4,000, it can
make additional loans worth a maximum of:
a.
$800.
b.
$3,200.
c.
$4,000.
d.
$16,000.
e.
$20,000.
77. If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:
a.
4.00.
c.
0.40.
b.
2.50.
d.
0.25.
78. Assume a simplified banking system subject to a 10 percent required reserve ratio. If there is an initial
increase in excess reserves of $90,000 and all possible loans are made, the money supply:
a.
increases $90,000.
c.
increases $990,000.
b.
increases $900,000.
d.
decreases $90,000.
79. Assume a simplified banking system subject to a 20 percent required reserve ratio. If there is an initial
increase in excess reserves of $100,000, the money supply:
a.
increases $100,000.
c.
increases $600,000.
b.
increases $500,000.
d.
decreases $500,000.
80. In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-market
purchase by the Fed would cause the money supply to:
a.
increase by $1,000.
c.
decrease by $4,000.
b.
decrease by $1,000.
d.
increase by $4,000.
81. In a simplified banking system with a 20 percent required reserve ratio, a $1,000 open-market sale by
the Fed would cause the money supply to:
a.
increase by $200.
c.
decrease by $5,000.
b.
decrease by $200.
d.
increase by $5,000.
82. Which of the following events would reduce the size of the “real-world” money multiplier?
a.
Banks hold more excess reserves.
b.
Households hold less currency.
c.
The Fed increases the discount rate.
d.
The Fed reduces the required reserve ratio.
83. Assume a simplified banking system subject to a 25 percent required reserve ratio. If there is an initial
increase in excess reserves of $100,000, the money supply:
a.
increases $100,000.
c.
increases $125,000.
b.
increases $400,000.
d.
decreases $500,000.
84. If the required reserve ratio decreases, the:
a.
money multiplier increases.
b.
money multiplier decreases.
c.
amount of excess reserves the bank has decreases.
d.
money multiplier stays the same.
e.
amount of excess reserves stays the same.
85. The money multiplier equals:
a.
1 / excess reserves.
b.
excess reserves / loans.
c.
required reserve ratio / excess reserves.
d.
1 / actual reserves.
e.
1 / required reserve ratio.
86. If a bank keeps some of its excess reserves, the money multiplier:
a.
increases.
b.
stays the same.
c.
goes to zero.
d.
decreases.
e.
increases, then decreases.
87. If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new
money that can be created by the banking system, including the initial deposit, is:
a.
$25,000.
b.
$2,500.
c.
$4,000.
d.
$40,000.
e.
$10,000.
88. When the required reserve ratio is lowered,
a.
the money multiplier increases, and the amount of excess reserves increases in the banking
system.
b.
the money multiplier decreases, and the amount of excess reserves increases in the
banking system.
c.
the money multiplier decreases, and the amount of excess reserves decreases in the
banking system.
d.
the money multiplier increases, and the amount of excess reserves decreases in the
banking system.
e.
there is no change in either the money multiplier or the amount of excess reserves in the
banking system.
89. Suppose the Fed purchases $100 million of U.S. securities from security dealers. If the reserve
requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero
excess reserves both before and after the transaction, the total impact on the money supply will be a:
a.
$100 million decrease in the money supply.
b.
$100 million increase in the money supply.
c.
$200 million increase in the money supply.
d.
$500 million increase in the money supply.
90. Suppose the Fed bought $150 million of U.S. securities from security dealers. The reserve requirement
is 20 percent, and there are no initial excess reserves. A few weeks later, if the public’s holdings of
currency are constant and the banks have loaned all excess reserves, the money supply will increase
by:
a.
$150 million.
c.
$600 million.
b.
$300 million.
d.
$750 million.
91. Suppose the Fed sells $100 million of U.S. securities to the security dealers. If the reserve requirement
is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves
both before and after the transaction, the total impact on the money supply will be a:
a.
$100 million decrease.
c.
$500 million decrease.
b.
$500 million increase.
d.
$100 million increase.
92. When the required reserve ratio is changed,
a.
the money multiplier is changed but the amount of excess reserves in the banking system
is unchanged.
b.
the money multiplier is unchanged but the amount of excess reserves in the banking
system is changed.
c.
the size of the money multiplier and the amount of excess reserves change in the opposite
direction from the required reserve ratio.
d.
the size of the money multiplier and the amount of excess reserves change in the same
direction as the required reserve ratio.
e.
neither the money multiplier nor the amount of excess reserves change.
93. Because the banking system operates using fractional reserves,
a.
the money multiplier is greater than one.
b.
excess reserves are equal to zero.
c.
required reserves are equal to 100 percent.
d.
banks can loan out only their required reserves.
e.
the money multiplier must be equal to zero.
94. When the required reserve ratio is 20 percent, the money multiplier is:
a.
0.2.
b.
1.2.
c.
2.
d.
2.5.
e.
5.
95. If the banking system’s money multiplier is 4, then a $2,000 increase in checkable deposits when banks
hold excess reserves will result in which of the following events?
a.
The money supply will decrease
b.
The money supply will not change.
c.
The money supply will increase by exactly $8,000.
d.
The money supply will increase by more than $8,000.
e.
The money supply will increase by less than $8,000.
96. Which of the following appears on the liability side of the Fed’s balance sheet?
a.
Federal Reserve notes.
c.
Loans to banks.
b.
U.S. government securities.
d.
All of these.
97. When the Federal Reserve sells government bonds to the public, it:
a.
increases the M1 money supply and increases the reserves of the commercial banking
system.
b.
increases the M1 money supply, while reducing the reserves of the commercial banking
system.
c.
reduces the M1 money supply, while increasing the reserves of the commercial banking
system.
d.
reduces the M1 money supply and decreases the reserves of the commercial banking
system.
98. Which of the following is the most frequently used tool the Fed uses to control the supply of money?
a.
The discount rate.
c.
Open market operations.
b.
The reserve requirements.
d.
The 30-year home-mortgage interest rate.
99. The term “open market operations” refers to the:
a.
loan-making activities of commercial banks.
b.
effect of expansionary monetary policy on interest rates.
c.
operation of competitive markets in the banking industry as the result of deregulation.
d.
buying and selling of government securities by the Federal Reserve.
100. Which of the following would be most appropriate if the Federal Reserve wanted to increase the
money supply in order to stimulate the economy?
a.
Buy U.S. government securities.
b.
Force the Treasury to reduce the national debt.
c.
Raise the discount rate.
d.
Increase the reserve requirements.
101. Which of the following directs the buying and selling of U.S. government securities?
a.
Board of Governors.
b.
Federal Reserve Banks.
c.
Federal Open Market Committee.
d.
Federal Advisory Council.
e.
Member banks.
102. Which of the following directs open market operations?
a.
Board of Governors.
b.
Federal Reserve Banks.
c.
Federal Open Market Committee
d.
Federal Advisory Council.
e.
Member banks.
103. Which of the following policy actions by the Fed would cause the money supply to decrease?
a.
An open market purchase of government securities.
b.
A decrease in required reserve ratios.
c.
A decrease in the discount rate.
d.
An open-market sale of government securities.
104. Which of the following policy actions by the Fed would cause the money supply to increase?
a.
An open market sale of government securities.
b.
An increase in required reserve ratios.
c.
An increase in the discount rate.
d.
An open-market purchase of government securities.
105. Decisions regarding purchases and sales of government securities by the Fed are made by the:
a.
Federal Deposit Insurance Commission (FDIC).
b.
Discount Committee (DC).
c.
Federal Open Market Committee (FOMC).
d.
Federal Funds Committee (FFC).
106. If the Fed wishes to increase the money supply then it should:
a.
increase the required reserve ratio.
b.
increase the discount rate.
c.
buy government securities on the open market.
d.
do any of these.
107. Which of the following is in charge of the buying and selling of government securities by the Fed?
a.
The president.
c.
The Congress.
b.
The Federal Open Market Committee.
d.
None of these.
108. In a simplified banking system in which all banks are subject to a 10 percent required reserve ratio, a
$1,000 open market sale by the Fed to a bank would cause the money supply to:
a.
increase by $1,000.
b.
increase by $100,000.
c.
decrease by $10,000.
d.
decrease by $1,000.
e.
remain unchanged.
109. Which of the following is an appropriate monetary policy if the Fed wants to increase the money
supply?
a.
An increase in the required reserve ratio.
b.
An increase in the discount rate.
c.
Purchases of bonds in open market operations.
d.
Higher taxes on interest income.
110. When the Fed conducts open market operations, it buys and sells:
a.
stocks.
c.
foreign currency
b.
government securities.
d.
gold.
111. When the Fed purchases government securities, it:
a.
increases banks’ reserves and makes possible an increase in the money supply.
b.
decreases banks’ reserves and makes possible a decrease in the money supply.
c.
automatically raises the discount rate.
d.
uses discounting operations to influence margin requirements.
e.
has no effect on either the money supply or the discount rate.
112. When the Fed wishes to reduce the economy’s money supply, it:
a.
lowers the discount rate.
b.
lowers the required reserve ratio.
c.
reduces the margin requirement.
d.
sells some of its government securities.
e.
prints more money.
113. When the Fed buys government securities, it:
a.
lowers the cost of borrowing from the Fed, encouraging banks to make loans to the
general public.
b.
raises the cost of borrowing from the Fed, discouraging banks from making loans to the
general public.
c.
increases the amount of excess reserves that banks hold, encouraging them to make loans
to the general public.
d.
increases the amount of excess reserves that banks hold, discouraging them from making
loans to the general public.
e.
decreases the amount of excess reserves that banks hold, discouraging them from making
loans to the general public.