The Monetary System 7251
60. The Fed increases the reserve requirement, but it wants to offset the effects on the money supply.
Which of the following should it do?
a. sell bonds to increase reserves
b. sell bonds to decrease reserves
c. buy bonds to increase reserves
d. buy bonds to decrease reserves
61. The reserve requirement is 4 percent, banks hold no excess reserves and people hold no
currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?
a. it increases by $250,000
b. it increases by $200,000
c. it decreases by $200,000
d. it decreases by $250,000
7252 The Monetary System
62. If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold
currency, then when the Fed purchases $20 million worth of government bonds, bank reserves
a. increase by $20 million and the money supply eventually increases by $400 million.
b. decrease by $20 million and the money supply eventually decreases by $400 million.
c. increase by $20 million and the money supply eventually increases by $100 million.
d. decrease by $20 million and the money supply eventually decreases by $100 million.
63. If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only
deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank
reserves
a. increase by $25.5 million and the money supply eventually increases by $382.5 million.
b. increase by $25.5 million and the money supply eventually increases by $170 million.
c. decrease by $25.5 million and the money supply eventually decreases by $382.5 million.
d. decrease by $25.5 million and the money supply eventually decreases by $170 million.
The Monetary System 7253
64. The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits
and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves
a. increase by $20 million and the money supply eventually increases by $20 million.
b. increase by $20 million and the money supply eventually increases by $200 million.
c. decrease by $2 million and the money supply eventually increases by $20 million.
d. decrease by $20 million and the money supply eventually decreases by $200 million.
65. The banking system currently has $10 billion of reserves, none of which are excess. People hold
only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the
reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by
how much does the money supply change?
a. It falls by $12 billion.
b. It falls by $19 billion.
c. It falls by $21 billion.
d. None of the above is correct.
7254 The Monetary System
66. The banking system currently has $50 billion of reserves, none of which are excess. People hold
only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the
reserve requirement to 12.5 percent and at the same time sells $10 billion worth of bonds, then by
how much does the money supply change?
a. It falls by $20 billion.
b. It falls by $110 billion.
c. It falls by $180 billion.
d. None of the above is correct.
67. The banking system currently has $100 billion of reserves, none of which are excess. People hold
only deposits and no currency, and the reserve requirement is 10 percent. If the Fed lowers the
reserve requirement to 5 percent and at the same time buys $10 billion worth of bonds, then by
how much does the money supply change?
a. It rises by $200 billion.
b. It rises by $800 billion.
c. It rises by $1,200 billion.
d. None of the above is correct.
The Monetary System 7255
68. The banking system currently has $200 billion of reserves, none of which are excess. People hold
only deposits and no currency, and the reserve requirement is 4 percent. If the Fed raises the
reserve requirement to 10 percent and at the same time buys $50 billion worth of bonds, then by
how much does the money supply change?
a. It rises by $600 billion.
b. It rises by $125 billion.
c. It falls by $2,500 billion.
d. None of the above is correct.
69. If the public decides to hold more currency and fewer deposits in banks, bank reserves
a. decrease and the money supply eventually decreases.
b. decrease but the money supply does not change.
c. increase and the money supply eventually increases.
d. increase but the money supply does not change.
7256 The Monetary System
70. If the public decides to hold less currency and more deposits in banks, bank reserves
a. decrease and the money supply eventually decreases.
b. decrease but the money supply does not change.
c. increase and the money supply eventually increases.
d. increase but the money supply does not change.
71. If people decide to hold more currency relative to deposits, the money supply
a. falls. The larger the reserve ratio is, the more the money supply falls.
b. falls. The larger the reserve ratio is, the less the money supply falls.
c. rises. The larger the reserve ratio is, the more the money supply rises.
d. rises. The larger the reserve ratio is, the less the money supply rises.
The Monetary System 7257
72. Suppose that in a country people gain more confidence in the banking system and so hold
relatively less currency and more deposits. As a result, bank reserves will
a. decrease and the money supply will eventually decrease.
b. decrease and the money supply will eventually increase.
c. increase and the money supply will eventually decrease.
d. increase and the money supply will eventually increase.
73. If people decide to hold more currency relative to deposits, the money supply
a. falls. The Fed could lessen the impact of this by buying Treasury bonds.
b. falls. The Fed could lessen the impact of this by selling Treasury bonds.
c. rises. The Fed could lessen the impact of this by buying Treasury bonds.
d. rises. The Fed could lessen the impact of the by selling Treasury bonds.
7258 The Monetary System
74. If people decide to hold less currency relative to deposits, the money supply
a. falls. The Fed could lessen the impact of this by buying Treasury bonds.
b. falls. The Fed could lessen the impact of this by selling Treasury bonds.
c. rises. The Fed could lessen the impact of this by buying Treasury bonds.
d. rises. The Fed could lessen the impact of this by selling Treasury bonds.
75. During wars the public tends to hold relatively more currency and relatively fewer deposits. This
decision makes reserves
a. and the money supply increase.
b. and the money supply decrease.
c. increase, but leaves the money supply unchanged.
d. decrease, but leaves the money supply unchanged.
The Monetary System 7259
76. During recessions, banks typically choose to hold more excess reserves relative to their deposits.
This action
a. increases the money multiplier and increases the money supply.
b. decreases the money multiplier and decreases the money supply.
c. does not change the money multiplier, but increases the money supply.
d. does not change the money multiplier, but decreases the money supply.
77. People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars
of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty,
banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to
bank loans?
a. they fall $220 million
b. they fall $200 million
c. they rise $200 million
d. they rise $220 million
7260 The Monetary System
78. Suppose banks decide to hold more excess reserves relative to deposits. Other things the same,
this action will cause the
a. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
d. money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.
79. Suppose banks decide to hold fewer excess reserves relative to deposits. Other things the same,
this action will cause the
a. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
d. money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.
The Monetary System 7261
80. Suppose banks decide to hold more excess reserves relative to deposits. Other things the same,
this action will cause the
a. money supply to fall. To reduce the impact of this the Fed could lower the discount rate.
b. money supply to fall. To reduce the impact of this the Fed could raise the discount rate.
c. money supply to rise. To reduce the impact of this the Fed could lower the discount rate.
d. money supply to rise. To reduce the impact of this the Fed could raise the discount rate.
81. In December 1999 people feared that there might be computer problems at banks as the century
changed. Consequently, people wanted to hold relatively more in currency and relatively less in
deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet
depositors’ demands. These actions by the public
a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have sold bonds.
b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have bought bonds.
c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have sold bonds.
d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have bought bonds.
7262 The Monetary System
82. In the 19th century, when crop failures often led to bank runs, banks would make relatively fewer
loans and hold relatively more excess reserves. By itself, these actions by the banks should have
a. increased the money multiplier and the money supply.
b. decreased the money multiplier and increased the money supply.
c. increased the money multiplier and decreased the money supply.
d. decreased both the money multiplier and the money supply.
83. The money supply decreases if
a. households decide to hold relatively more currency and relatively fewer deposits and banks
decide to hold relatively more excess reserves and make fewer loans.
b. households decide to hold relatively more currency and relatively fewer deposits and banks
decide to hold relatively fewer excess reserves and make more loans.
c. households decide to hold relatively less currency and relatively more deposits and banks decide
to hold relatively more excess reserves and make fewer loans.
d. households decide to hold relatively less currency and relatively more deposits and banks decide
to hold relatively less excess reserves and make more loans.
The Monetary System 7263
84. A problem that the Fed faces when it attempts to control the money supply is that
a. the 100-percent-reserve banking system in the U.S. makes it difficult for the Fed to carry out
its monetary policy.
b. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its
monetary policy tools.
c. the Fed does not have a tool that it can use to change the money supply by either a small
amount or a large amount.
d. the Fed does not control the amount of money that households choose to hold as deposits in
banks.
85. A problem that the Fed faces when it attempts to control the money supply is that
a. since the U.S. has a fractional-reserve banking system, the amount of money in the economy
depends in part on the behavior of depositors and bankers.
b. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its
monetary policy tools.
c. while the Fed has the ability to change the money supply by a large amount, it does not have the
ability to change it by a small amount.
d. federal legislation in the 1950s stripped the Fed of its power to act as a lender of last resort to
banks.
7264 The Monetary System
86. Which of the following is correct?
a. The Fed can control the money supply precisely.
b. The amount of money in the economy does not depend on the behavior of depositors.
c. The amount of money in the economy depends in part on the behavior of banks.
d. None of the above is correct.
87. The Fed’s control of the money supply is not precise because
a. Congress can also make changes to the money supply.
b. there are not always government bonds available for purchase when the Fed wants to perform
open-market operations.
c. the Fed does not know where all U.S. currency is located.
d. the amount of money in the economy depends in part on the behavior of depositors and
bankers.
The Monetary System 7265
Table 29-9
Metropolis National Bank is currently holding 2% of its deposits as excess reserves.
Metropolis National Bank
Assets
Liabilities
Reserves
$60,000
Deposits
$500,000
Loans
$440,000
88. Refer to Table 29-9. Metropolis National Bank is currently holding 2% of deposits as excess
reserves. What is the reserve requirement?
a. 12 percent
b. 10 percent
c. 8 percent
d. 6 percent
89. Refer to Table 29-9. Metropolis National Bank is currently holding 2% of deposits as excess
reserves. Assuming that all banks have the same required reserve ratio, and then none want to
hold excess reserves what is the value of the money multiplier?
a. 8.25
b. 10
c. 12
d. 20
7266 The Monetary System
90. Refer to Table 29-9. Metropolis National Bank is currently holding 2% of deposits as excess
reserves. Assume that no banks in the economy want to hold excess reserves and that people only
hold deposits and no currency. How much does the money supply ultimately increase when
Metropolis National Bank lends out its excess reserves?
a. $100,000
b. $110,000
c. $120,000
d. None of the above are correct.
91. Refer to Table 29-9. Metropolis National Bank is holding 2% of its deposits as excess reserves.
Assume that no banks in the economy want to maintain holdings of excess reserves and that
people only hold deposits and no currency. The Fed makes open market purchases of $10,000.
The person who sold bonds to the Fed deposits all the funds in Metropolis National Bank. If the
bank now loans out all its excess reserves, by how much will the money supply increase?
a. $190,000
b. $200,000
c. $240,000
d. None of the above are correct.
The Monetary System 7267
Scenario 29-1.
The monetary policy of Namdian is determined by the Namdian Central Bank. The local currency
is the dia. Namdian banks collectively hold 100 million dias of required reserves, 25 million dias of
excess reserves, 250 million dias of Namdian Treasury Bonds, and their customers hold 1,000
million dias of deposits. Namdians prefer to use only demand deposits and so the money supply
consists of demand deposits.
92. Refer to Scenario 29-1. Assume that banks desire to continue holding the same ratio of excess
reserves to deposits. What is the reserve requirement and what is the reserve ratio?
a. 2 percent, 8 percent
b. 8 percent, 10 percent
c. 10 percent, 12.5 percent
d. None of the above is correct.
93. Refer to Scenario 29–1. Assuming the only other item Namdian banks have on their balance
sheets is loans, what is the value of existing loans made by Namdian banks?
a. 625 million dias
b. 875 million dias
c. 1,125 million dias
d. None of the above is correct.
7268 The Monetary System
94. Refer to Scenario 29-1. Suppose the Central Bank of Namdia loaned the banks of Namdia 5
million dias. Suppose also that both the reserve requirement and the percentage of deposits
held as excess reserves stay the same. By how much would the money supply of Namdia
change?
a. 60 million dias
b. 50 million dias
c. 40 million dias
d. None of the above is correct.
95. Refer to Scenario 29-1 . Suppose the Central Bank of Namdia purchases 25 million dias of
Namdian Treasury Bonds from banks. Suppose also that both the reserve requirement and the
percentage of deposits held as excess reserves stay the same. By how much would the money
supply of Namdia change?
a. 200 million dias
b. 150 million dias
c. 100 million dias
d. None of the above is correct.
The Monetary System 7269
Scenario 29-2.
The Monetary Policy of Tazi is controlled by the country’s central bank known as the Bank of
Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the
banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have
issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds.
Tazians prefer to use only demand deposits and so all money is on deposit at the bank.
96. Refer to Scenario 29-2. Assume that banks desire to continue holding the same ratio of excess
reserves to deposits. What is the reserve requirement and the reserve ratio for Tazian Banks?
a. 5 percent, 8 percent
b. 4 percent, 8 percent
c. 4 percent, 5 percent
d. None of the above is correct.
97. Refer to Scenario 29-2. Assuming the only other thing Tazian banks have on their balance
sheets is loans, what is the value of existing loans made by Tazian banks?
a. 6,900 million tazes
b. 7,125 million tazes
c. 7,350 million tazes
d. None of the above is correct.
7270 The Monetary System
98. Refer to Scenario 29-2. Suppose the Bank of Tazi loaned the banks of Tazi 10 million tazes.
Suppose also that both the reserve requirement and the percentage of deposits held as excess
reserves stay the same. By how much would the money supply change?
a. 250 million tazes
b. 200 million tazes
c. 125 million tazes
d. None of the above is correct.
99. Refer to Scenario 29-2. Suppose the Bank of Tazi purchased 50 million tazes of Tazian
Treasury Bonds from the banks. Suppose also that both the reserve requirement and the
percentage of deposits held as excess reserves stay the same. By how much does the money
supply change?
a. 625 million tazes
b. 1,000 million tazes
c. 1,250 million tazes
d. None of the above is correct.