The Monetary System 7211
75. Refer to Table 29-3. If all banks in the economy have the same reserve ratio as this bank, then
an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
a. $287.25.
b. $1,614.71.
c. $1,764.71.
d. $2,000 or more.
Table 29–4.
The First Bank of Fairfield
Assets
Liabilities
Reserves $1,000
Deposits $8,000
Loans 7,000
76. Refer to Table 29-4. The reserve ratio for this bank is
a. 8 percent.
b. 12.5 percent.
c. 87.5 percent.
d. 25 percent.
7212 The Monetary System
77. Refer to Table 29-4. If $800 is deposited into the First Bank of Fairfield, and the bank takes no
other actions, its
a. reserves will increase by $100.
b. liabilities will increase by $800.
c. assets will decrease by $800.
d. loans will increase by $800.
78. Refer to Table 29-4. Starting from the situation as depicted by the T-account, if someone
deposits $500 into the First Bank of Fairfield, and if the bank makes new loans so as to keep its
reserve ratio unchanged, then the amount of new loans that it makes will be
a. $40.
b. $437.50.
c. $71.42.
d. $428.57.
The Monetary System 7213
Table 29–5.
The First Bank of Roswell
Assets
Reserves $30,000
Deposits $200,000
Loans 170,000
79. Refer to Table 29-5. If the bank faces a reserve requirement of 6 percent, then the bank
a. is in a position to make a new loan of $12,000.
b. is in a position to make a new loan of $18,000.
c. has excess reserves of $12,000.
d. None of the above is correct.
80. Refer to Table 29-5. If the bank faces a reserve requirement of 8 percent, then the bank
a. is in a position to make a new loan of $14,000.
b. has fewer reserves than are required.
c. has excess reserves of $16,400.
d. None of the above is correct.
7214 The Monetary System
81. Refer to Table 29–5. Suppose the bank faces a reserve requirement of 10 percent. Starting from
the situation as depicted by the T-account, a customer deposits an additional $60,000 into his
account at the bank. If the bank takes no other action it will
a. have $64,000 in excess reserves.
b. have $4,000 in excess reserves.
c. be in a position to make new loans equal to $6,000
d. None of the above is correct.
82. Refer to Table 29-5. If the bank faces a reserve requirement of 20 percent, then it
a. has $10,000 of excess reserves.
b. needs $10,000 more reserves to meet its reserve requirements.
c. needs $20,000 more reserves to meet its reserve requirements.
d. just meets its reserve requirement.
The Monetary System 7215
83. Refer to Table 29–5. If the bank is holding $4,000 in excess reserves, then the reserve
requirement with which it must comply is
a. 17 percent.
b. 12 percent.
c. 13 percent.
d. 14 percent.
Table 29–6.
Bank of Pleasantville
Assets
Liabilities
Reserves
$3,000
Deposits
$50,000
Loans
47,000
84. Refer to Table 29-6. From the table it follows that the Bank of Pleasantville operates in a
a. fractional-reserve banking system, since its reserves are less than its deposits.
b. fractional-reserve banking system, since its reserves are less than its loans.
c. 100–percent-reserve banking system, since its assets are equal to its liabilities.
d. 100-percent-reserve banking system if the Fed’s reserve requirement is 10 percent; otherwise,
it operates in a fractional-reserve banking system.
7216 The Monetary System
85. Refer to Table 29-6. The Bank of Pleasantville’s reserve ratio is
a. 6.4 percent.
b. 16.7 percent.
c. 6.0 percent.
d. 15.7 percent.
86. Refer to Table 29-6. Assume there is a reserve requirement and the Bank of Pleasantville is
exactly in compliance with that requirement. Assume the same is true for all other banks. Lastly,
assume people hold only deposits and no currency. What is the money multiplier?
a. 6
b. 16.7
c. 15.6
d. 6.4
The Monetary System 7217
87. Refer to Table 29-6. If the Fed’s reserve requirement is 5 percent, then what quantity of
excess reserves does the Bank of Pleasantville now hold?
a. $500
b. $250
c. $2,000
d. $3,600
88. Refer to Table 29-6. Assume the Fed’s reserve requirement is 5 percent and all banks besides
the Bank of Pleasantville are exactly in compliance with the 5 percent requirement. Further
assume that people hold only deposits and no currency. Starting from the situation as depicted by
the T-account, if the Bank of Pleasantville decides to make new loans so as to end up with no
excess reserves, then by how much does the money supply eventually increase?
a. $10,833.33.
b. $13,000.
c. $8,333.33.
d. $10,000.
7218 The Monetary System
Table 29–7.
Bank of Springfield
Assets
Liabilities
Reserves
$19,800
Deposits
$180,000
Loans
160,200
89. Refer to Table 29-7. If the Bank of Springfield has lent out all the money it can given its level of
deposits, then what is the reserve requirement?
a. 8.1 percent
b. 11.0 percent
c. 12.4 percent
d. 89.0 percent
90. Refer to Table 29–7. Assuming the Bank of Springfield and all other banks have the same
reserve ratio, then what is the value of the money multiplier?
a. 1.1
b. 12.3
c. 8.1
d. 9.1
The Monetary System 7219
91. Refer to Table 29-7. If the Fed requires a reserve ratio of 6 percent, then what quantity of
excess reserves does the Bank of Springfield now hold?
a. $9,600
b. $10,800
c. $10,200
d. $9,000
92. Refer to Table 29–7. Assume the Fed’s reserve requirement is 10 percent and that the Bank of
Springfield makes new loans so as to make its new reserve ratio 10 percent. From then on, no
bank holds any excess reserves. Assume also that people hold only deposits and no currency.
Then by what amount does the economy’s money supply increase?
a. $37,800
b. $18,000
c. $2,000
d. $16,300
7220 The Monetary System
Table 29-8
First National Bank
Assets
Liabilities and Owners’ Equity
Reserves
$1,200
Deposits
$9,000
Loans
$8,000
Debt
$800
Short-term securities
$800
Capital (owners’ equity)
$200
93. Refer to Table 29-8. The required reserve ratio is 12 percent. Which of the following is true?
a. This banks reserve ratio is 12 percent. Its excess reserves are $0.
b. This banks reserve ratio is 13.3 percent. Its excess reserves are $120.
c. This banks reserve ratio is 15 percent. Its excess reserves are $240.
d. This banks reserve ratio is 10 percent. Its excess reserves are $300.
94. Refer to Table 29-8. The required reserve ratio is 12 percent and First National Bank sells $120
of its short-term securities to the Federal Reserve. This action will
a. increase First National’s reserves by $120. Its excess reserves are $240.
b. decrease First National’s reserves by $120. Its excess reserves are $0.
c. increase First National’s loans by $120. Its reserves decrease by $120.
d. decrease First National’s loans by $120. Its reserves increase by $120.
The Monetary System 7221
95. Refer to Table 29-8. This bank’s leverage ratio is
a. 2.
b. 50.
c. 13.3.
d. 7.5.
96. First National Bank (FNB) has a reserve ratio of 20 percent, a required reserve ratio of 10
percent, and deposits of $1,000. If FNB receives an additional deposit of $100,
a. then it has required reserves of $210 and holds excess reserves of $10.
b. then it has required reserves of $10 and holds excess reserves of $20.
c. then it has required reserves of $110 and holds excess reserves of $190.
d. then it has required reserves of $110 and holds excess reserves of $0.
7222 The Monetary System
97. Bank capital is
a. the machinery, structures, and equipment of the bank.
b. the resources that owners have put into the bank.
c. the reserves of the bank.
d. the bank’s total assets.
98. The leverage ratio is calculated as
a. assets minus liabilities.
b. assets divided by bank capital
c. the reciprocal of the required reserve ratio
d. the required reserve ratio multiplied by bank capital.
The Monetary System 7223
99. Suppose a bank is operating with a leverage rate of 10. A 6 percent increase in the value of
assets
a. will reduce liabilities by 6 percent.
b. will result in a 60 percent increase in owner’s equity.
c. will result in a 60percent decrease in owner’s equity.
d. will reduce liabilities by 10 percent.
100. Bank regulators impose capital requirements in order to
a. increase the amount of leverage in the economy.
b. provide an incentive for banks to hold risky assets.
c. ensure banks can pay off depositors.
d. increase the probability of a credit crunch.
7224 The Monetary System
Multiple Choice – Section 04: The Fed’s Tools of Monetary Control
1. Which of the following can the Fed do to change the money supply?
a. change reserves or change the reserve ratio
b. change reserves but not change the reserve ratio
c. change the reserve ratio but not change the reserve ratio
d. neither change reserves nor change the reserve ratio
2. When the Federal Reserve conducts open-market operations to increase the money supply, it
a. redeems Federal Reserve notes.
b. buys government bonds from the public.
c. raises the discount rate.
d. decreases its lending to member banks.
The Monetary System 7225
3. When the Fed conducts open-market purchases,
a. it buys Treasury securities, which increases the money supply.
b. it buys Treasury securities, which decreases the money supply.
c. it borrows money from member banks, which increases the money supply.
d. it lends money to member banks, which decreases the money supply.
4. When the Fed conducts open-market purchases,
a. banks buy Treasury securities from Fed, which increases the money supply.
b. banks buy Treasury securities from the Fed, which decreases the money supply.
c. it buys Treasury securities, which increases the money supply.
d. it buys Treasury securities, which decreases the money supply.
7226 The Monetary System
5. When the Fed conducts open-market sales,
a. it sells Treasury securities, which increases the money supply.
b. it sells Treasury securities, which decreases the money supply.
c. it auctions term loans, which increases the money supply.
d. it auctions term loans, which decreases the money supply.
6. If the Fed sells government bonds to the public, then reserves
a. increase and the money supply increases.
b. increase and the money supply decreases.
c. decrease and the money supply increases.
d. decrease and the money supply decreases.
The Monetary System 7227
7. Which of the following increase when the Fed makes open market purchases?
a. currency and reserves
b. currency but not reserves
c. reserves but not currency
d. neither currency nor reserves
8. Which of the following increases when the Fed makes open-market sales?
a. currency and reserves
b. currency but not reserves
c. reserves but not currency
d. neither currency nor reserves
7228 The Monetary System
9. When the Fed makes open-market purchases bank
a. withdrawals and lending increase.
b. withdrawals increase and lending decreases.
c. deposits and lending increase.
d. deposits increase and lending decreases.
10. When the Fed makes open-market sales bank
a. withdrawals and lending increase.
b. withdrawals increase and lending decreases.
c. deposits and lending increase.
d. deposits increase and lending decreases.
The Monetary System 7229
11. Which tool of monetary policy does the Federal Reserve use most often?
a. term auctions
b. open-market operations
c. changes in reserve requirements
d. changes in the discount rate
12. The tool most often used by the Fed to control the money supply is
a. changing reserve requirements.
b. open market operations.
c. buying and selling of equities.
d. altering the discount rate.
7230 The Monetary System
13. The most common method employed by the Fed to increase the money supply is the
a. sale of U.S. government bonds.
b. purchase of U.S. government bonds.
c. sale of gold.
d. increase of the federal debt ceiling.
14. The Fed’s primary tool to change the money supply is
a. changing the interest rate on reserves.
b. changing the reserve requirement.
c. conducting open market operations.
d. redeeming Federal Reserve notes.