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44. An open-market sale
a. increases the number of dollars and the number of bonds in the hands of the public.
b. increases the number of dollars in the hands of the public and decreases the number of bonds in
the hands of the public.
c. decreases the number of dollars and the number of bonds in the hands of the public.
d. decreases the number of dollars in the hands of the public and increases the number of bonds in
the hands of the public.
45. If the Federal Open Market Committee decides to increase the money supply, then the Federal
Reserve
a. creates dollars and uses them to purchase government bonds from the public.
b. sells government bonds from its portfolio to the public.
c. creates dollars and uses them to purchase various types of stocks and bonds from the public.
d. sells various types of stocks and bonds from its portfolio to the public.
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46. If the Federal Open Market Committee decides to decrease the money supply, it will
a. sell government bonds.
b. purchase corporate bonds.
c. purchase government bonds.
d. reduce interest rates.
47. When the Federal Reserve sells assets from its portfolio to the public with the intent of changing
the money supply,
a. those assets are government bonds and the Fed’s reason for selling them is to increase the
money supply.
b. those assets are government bonds and the Fed’s reason for selling them is to decrease the
money supply.
c. those assets are items that are included in M2 and the Fed’s reason for selling them is to
increase the money supply.
d. those assets are items that are included in M2 and the Fed’s reason for selling them is to
decrease the money supply.
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48. Over one time horizon or another, Fed policy decisions influence
a. inflation and employment.
b. inflation but not employment.
c. employment but not inflation.
d. neither inflation nor employment.
49. Monetary policy affects employment
a. only in the long run.
b. only in the short run.
c. in both the long run and the short run.
d. in neither the long run nor the short run.
50. The Fed can influence unemployment in
a. the short run and in the long run.
b. the short run, but not in the long run.
c. the long run, but not in the short run.
d. neither the short nor the long run.
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51. The Fed’s policy decisions have an important influence on
a. inflation in the long run and employment and production in the short run.
b. inflation in the long run and employment and production in the long run.
c. inflation in the short run and employment and production in the short run.
d. inflation in the short run and employment and production in the long run.
52. There is a
a. short–run tradeoff between inflation and unemployment.
b. short–run tradeoff between an increase in the money supply and inflation.
c. long–run tradeoff between inflation and unemployment.
d. long-run tradeoff between an increase in the money supply and inflation.
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Multiple Choice – Section 03: Banks and the Money Supply
1. In a system of 100-percent-reserve banking,
a. banks do not make loans.
b. currency is the only form of money.
c. deposits are banks’ only assets.
d. All of the above are correct.
2. In a system of 100-percent-reserve banking,
a. banks do not accept deposits.
b. banks do not influence the supply of money.
c. loans are the only asset item for banks.
d. All of the above are correct.
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3. In a system of 100-percent-reserve banking, the purpose of a bank is to
a. make loans to households.
b. influence the money supply.
c. give depositors a safe place to keep their money.
d. buy and sell gold.
4. In a 100-percent-reserve banking system, if people decided to decrease the amount of currency
they held by increasing the amount they held in checkable deposits, then
a. M1 would increase.
b. M1 would decrease.
c. M1 would not change.
d. M1 might rise or fall.
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5. A bank which must hold 100 percent reserves opens in an economy that had no banks and a
currency of $150. If customers deposit $50 into the bank, what is the value of the money supply?
a. $50
b. $100
c. $150
d. $200
6. In a fractional-reserve banking system, a bank
a. does not make loans.
b. does not accept deposits.
c. keeps only a fraction of its deposits in reserve.
d. None of the above is correct.
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7. Under a fractional-reserve banking system, banks
a. hold more reserves than deposits.
b. generally lend out a majority of the funds deposited.
c. cause the money supply to fall by lending out reserves.
d. All of the above are correct.
8. Banks are able to create money only when
a. interest rates are above 2%.
b. the Fed sells U.S. government bonds.
c. the reserve ratio is 100%.
d. only a fraction of deposits are held in reserve.
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9. If a bank has a reserve ratio of 8 percent, then
a. government regulation requires the bank to use at least 8 percent of its deposits to make loans.
b. the bank’s ratio of loans to deposits is 8 percent.
c. the bank keeps 8 percent of its deposits as reserves and loans out the rest.
d. the bank keeps 8 percent of its assets as reserves and loans out the rest.
10. A bank’s reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to
a. $8.
b. $80.
c. $92.
d. $920.
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11. A bank’s reserve ratio is 10 percent and the bank has $5,000 in deposits. Its reserves amount to
a. $50.
b. $500.
c. $4,500.
d. $4,950.
12. A bank’s reserve ratio is 5 percent and the bank has $2,280 in reserve. Its deposits amount to
a. $114.
b. $2,166.
c. $2,400.
d. $45,600.
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13. Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8
percent, and excess reserves amount to $5 billion. What is the level of deposits?
a. $5,000 billion
b. $4,937.5 billion
c. $5,062.5 billion
d. $4,995 billion
14. If a bank that desires to hold no excess reserves and has just enough reserves to meet the
required reserve ratio of 15 percent receives a deposit of $600, it has a
a. $600 increase in excess reserves and no increase in required reserves.
b. $600 increase in required reserves and no increase in excess reserves.
c. $510 increase in excess reserves and a $90 increase in required reserves.
d. $90 increase in excess reserves and a $510 increase in required reserves.
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15. On a bank’s T-account, which are part of the bank’s assets?
a. both deposits made by its customers and reserves
b. deposits made by its customers but not reserves
c. reserves but not deposits made by its customers
d. neither deposits made by its customers nor reserves
16. On a bank’s T-account, which are part of the banks liabilities?
a. both deposits made by its customers and reserves
b. deposits made by its customers but not reserves
c. reserves but not deposits made by its customers
d. neither deposits made by its customers nor reserves
17. Which of the following is an asset of a bank and a liability for its customers?
a. deposits of its customers and loans to its customers
b. deposits of its customers but not loans to its customers
c. loans to its customers but not the deposits of its customers
d. neither the deposits of its customers nor the loans to its customers
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18. Which of the following is a liability of a bank and an asset of its customers?
a. deposits of its customers and loans to its customers
b. deposits of its customers but not loans to its customers
c. loans of its customers but not the deposits of its customers
d. neither the deposits of its customers nor the loans to its customers
19. A bank’s assets equal its liabilities under
a. both 100-percent-reserve banking and fractional-reserve banking.
b. 100-percent-reserve banking but not under fractional-reserve banking.
c. fractional-reserve banking but not under 100-percent-reserve banking.
d. neither 100-percent-reserve banking nor fractional-reserve banking.
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20. A bank loans Kellie’s Print Shop $350,000 to remodel a building near campus to use as a new
store. On their respective balance sheets, this loan is
a. an asset for the bank and a liability for Kellie’s Print Shop. The loan increases the money
supply.
b. an asset for the bank and a liability for Kellie’s Print Shop. The loan does not increase the
money supply.
c. a liability for the bank and an asset for Kellie’s Print Shop. The loan increases the money
supply.
d. a liability for the bank and an asset for Kellie’s Print Shop. The loan does not increase the
money supply.
21. A bank loans Greg’s Ice Cream $250,000 to remodel a building near campus to use as a new
store. On their respective balance sheets, this loan is
a. a liability for the bank and an asset for Greg’s Ice Cream. The loan increases the money
supply.
b. a liability for the bank and an asset for Greg‘s Ice Cream. The loan does not increase the
money supply.
c. an asset for the bank and a liability for Greg’s Ice Cream. The loan increases the money
supply.
d. an asset for the bank and a liability for Greg‘s Ice Cream. The loan does not increase the
money supply.
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22. Reserves are
a. the central bank of the U.S.
b. deposits that banks hold in excess of the required amount.
c. the purchase of bonds by the Federal Open Market Committee.
d. deposits that banks have received but have not yet loaned out.
23. A bank has a 5 percent reserve requirement, $5,000 in deposits, and has loaned out all it can
given the reserve requirement.
a. It has $25 in reserves and $4,975 in loans.
b. It has $250 in reserves and $4,750 in loans.
c. It has $1,000 in reserves and $4,000 in loans.
d. None of the above is correct.
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24. A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can
given the reserve requirement.
a. It has $80 in reserves and $9,920 in loans.
b. It has $800 in reserves and $9,200 in loans.
c. It has $1,250 in reserves and $8,750 in loans.
d. None of the above is correct.
25. A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the reserve
requirement. It follows that the reserve requirement is
a. 2.5 percent.
b. 33.3 percent.
c. 25 percent.
d. 75 percent.
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26. A bank has $500,000 in deposits and $475,000 in loans. It has loaned out all it can. It has a
reserve ratio of
a. 2.5 percent.
b. 5 percent.
c. 9.5 percent.
d. 25 percent.
27. The manager of the bank where you work tells you that your bank has $6 million in excess
reserves. She also tells you that the bank has $400 million in deposits and $362 million dollars in
loans. Given this information you find that the reserve requirement must be
a. 44/400.
b. 6/362.
c. 38/400.
d. 32/400.
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28. The manager of the bank where you work tells you that your bank has $10 million in excess
reserves. She also tells you that the bank has $400 million in deposits and $375 million dollars in
loans. Given this information you find that the reserve requirement must be
a. 10/400.
b. 25/400.
c. 35/400.
d. 15/400.
29. A bank has a 10 percent reserve requirement, $36,000 in loans, and has loaned out all it can given
the reserve requirement.
a. It has $3,600 in deposits.
b. It has $32,400 in deposits.
c. It has $39,600 in deposits.
d. It has $40,000 in deposits.
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30. A bank has a 20 percent reserve requirement, $8,000 in loans, and has loaned out all it can given
the reserve requirement.
a. It has $6,400 in deposits.
b. It has $10,000 in deposits.
c. It has $9,600 in deposits.
d. It has $1,600 in deposits.
31. Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5
percent, and excess reserves are $30 billion. What is the level of loans?
a. $270 billion
b. $5,400 billion
c. $6,000 billion
d. $5,100 billion
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32. The reserve requirement is 12 percent. Lucy deposits $600 into a bank. By how much do excess
reserves change?
a. $600
b. $528
c. $72
d. $12
33. If a bank desires to hold no excess reserves, the reserve requirement is 8 percent, and it receives
a new deposit of $500,
a. its required reserves increase by $40.
b. its total reserves initially increase by $460.
c. it will be able to make a new loan of up to $492.
d. All of the above are correct.