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15. When the Fed purchases $1000 worth of government bonds from the public, the U.S. money
supply eventually increases by
a. more than $1000.
b. exactly $1000.
c. less than $1000.
d. None of the above are correct.
16. If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money
supply?
a. it increases by $100,000
b. it increases by $150,000
c. it decreases by $100,000
d. it decreases by $200,000
7232 The Monetary System
17. If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, it could
a. buy $300,000 worth of bonds.
b. buy $225,000 worth of bonds.
c. sell $300,000 worth of bonds.
d. sell $225,000 worth of bonds.
18. The discount rate is the interest rate that
a. banks charge one another for loans.
b. banks charge the Fed for loans.
c. the Fed charges banks for loans.
d. the Fed charges Congress for loans.
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19. The rate at which the Fed lends money to banks is
a. the prime rate.
b. fixed at 4%.
c. the federal funds rate.
d. the discount rate.
20. The discount rate is
a. the interest rate the Fed charges banks.
b. one divided by the difference between one and the reserve ratio.
c. the interest rate banks receive on reserve deposits with the Fed.
d. the interest rate that banks charge on overnight loans to other banks.
7234 The Monetary System
21. The discount rate is
a. the rate at which public banks lend to other public banks.
b. the rate at which the Fed lends to banks.
c. the percentage difference between the face value of a Treasury bond and what the Fed pays
for it.
d. the percentage of deposits banks hold as excess reserves.
22. The interest rate the Fed charges on loans it makes to banks is called
a. the prime rate.
b. the federal funds rate.
c. the discount rate.
d. the LIBOR.
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23. The interest rate that the Fed charges banks that borrow reserves from it is the
a. federal funds rate.
b. discount rate.
c. reserve requirement.
d. prime rate.
24. If the discount rate is lowered, banks borrow
a. less from the Fed so reserves increase.
b. less from the Fed so reserves decrease.
c. more from the Fed so reserves increase.
d. more from the Fed so reserves decrease.
25. If the discount rate is raised then banks borrow
a. more from the Fed so reserves increase.
b. more from the Fed so reserves decrease.
c. less from the Fed so reserves increase.
d. less from the Fed so reserves decrease.
7236 The Monetary System
26. When the Fed decreases the discount rate, banks will
a. borrow more from the Fed and lend more to the public. The money supply increases.
b. borrow more from the Fed and lend less to the public. The money supply decreases.
c. borrow less from the Fed and lend more to the public. The money supply increases.
d. borrow less from the Fed and lend less to the public. The money supply decreases.
27. The Fed can increase the money supply by conducting open-market
a. sales or by raising the discount rate.
b. sales or by lowering the discount rate.
c. purchases or by raising the discount rate.
d. purchases or by lowering the discount rate.
28. The Fed can decrease the money supply by conducting open-market
a. sales or by raising the discount rate.
b. sales or by lowering the discount rate.
c. purchases or by raising the discount rate.
d. purchases or by lowering the discount rate.
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29. To increase the money supply, the Fed can
a. buy government bonds or increase the discount rate.
b. buy government bonds or decrease the discount rate.
c. sell government bonds or increase the discount rate.
d. sell government bonds or decrease the discount rate.
30. To decrease the money supply, the Fed can
a. buy government bonds or increase the discount rate.
b. buy government bonds or decrease the discount rate.
c. sell government bonds or increase the discount rate.
d. sell government bonds or decrease the discount rate.
31. What does the Fed auction at the Term-Auction Facility?
a. government bonds of a quantity it sets
b. government bonds with the quantity determined at the auction
c. loans of a quantity it sets
d. loans with the quantity determined at the auction
7238 The Monetary System
32. Which of the following can banks use to borrow from the Federal Reserve?
a. the discount window or the term auction facility
b. the discount window but not the term auction facility
c. the term auction facility but not the discount window
d. Banks cannot borrow from the Federal Reserve, only the government can.
33. The Fed sets the interest that borrowers pay on loans from
a. the discount window and the term auction facility
b. the discount window but not the term auction facility
c. the term auction facility but not the discount window
d. neither the discount window nor the term auction facility
34. Reserves increase if the Federal Reserve
a. raises the discount rate or auctions more credit.
b. raises the discount rate but not if it auctions more credit.
c. lowers the discount rate or auctions more credit.
d. lowers the discount rate but not if it auctions more credit.
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35. Reserves decrease if the Federal Reserve
a. raises the discount rate or auctions more credit.
b. raises the discount rate but not if it auctions more credit.
c. lowers the discount rate or auctions more credit.
d. lowers the discount rate but not if it auctions more credit.
36. The Fed increases reserves if it conducts open market
a. purchases or auctions term credit.
b. purchases but not if it auctions term credit
c. sales or auctions term credit
d. sales but not if it auctions term credit
37. The Fed decreases reserves if it conducts open market
a. purchases or auctions term credit.
b. purchases but not if it auctions term credit
c. sales or auctions term credit
d. sales but not if it auctions term credit
7240 The Monetary System
38. Which of the following is correct?
a. A bank’s deposits at the Federal Reserve counts as part of the bank’s reserves. The Federal
Reserve pays interest on these deposits.
b. A bank’s deposits at the Federal Reserve counts as part of the bank’s reserves. The Federal
Reserve does not pay interest on these deposits.
c. A bank’s deposits at the Federal Reserve does not count as part of the bank’s reserves. The
Federal Reserve pays interest on these deposits.
d. A bank’s deposits at the Federal Reserve does not count as part of the bank’s reserves. The
Federal Reserve does not pay interest on these deposits.
39. Which of the following both increase the money supply?
a. an increase in the discount rate and an increase in the interest rate on reserves
b. an increase in the discount rate and a decrease in the interest rate on reserves
c. a decrease in the discount rate and an increase in the interest rate on reserves
d. a decrease in the discount rate and a decrease in the interest rate on reserves
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40. If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to
hold
a. fewer reserves, so the reserve ratio will fall.
b. fewer reserves, so the reserve ratio will rise.
c. more reserves, so the reserve ratio will fall.
d. more reserves, so the reserve ratio will rise.
41. If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to
hold
a. fewer reserves, so the money multiplier will fall.
b. fewer reserves, so the money multiplier will rise.
c. more reserves, so the money multiplier will fall.
d. more reserves, so the money multiplier will rise.
7242 The Monetary System
42. Reserve requirements are regulations concerning
a. the amount banks are allowed to borrow from the Fed.
b. the amount of reserves banks must hold against deposits.
c. reserves banks must hold based on the number and type of loans they make.
d. the interest rate at which banks can borrow from the Fed.
43. In a fractional-reserve banking system, an increase in reserve requirements
a. increases both the money multiplier and the money supply.
b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply.
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44. In a fractional-reserve banking system, a decrease in reserve requirements
a. increases both the money multiplier and the money supply.
b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply.
45. Other things the same, if reserve requirements are increased, the reserve ratio
a. increases, the money multiplier increases, and the money supply increases.
b. increases, the money multiplier decreases, and the money supply decreases.
c. decreases, the money multiplier increases, and the money supply increases.
d. decreases, the money multiplier decreases, and the money supply increases.
7244 The Monetary System
46. Other things the same if reserve requirements are decreased, the reserve ratio
a. decreases, the money multiplier increases, and the money supply decreases.
b. increases, the money multiplier increases, and the money supply increases.
c. decreases, the money multiplier increases, and the money supply increases.
d. increases, the money multiplier increases, and the money supply decreases.
47. If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier
a. decreases from 20 to 8.
b. decreases from 12.5 to 5.
c. increases from 8 to 20.
d. increases from 5 to 12.5.
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48. If the money multiplier decreased from 20 to 12.5, then
a. the Fed increased the reserve ratio from 5 percent to 8 percent.
b. the Fed increased the fed funds rate from 5 percent to 8 percent.
c. the Fed decreased the reserve ratio from 8 percent to 5 percent.
d. the Fed decreased the fed funds rate from 8 percent to 5 percent.
49. The manager of the bank where you work tells you that the bank has $400 million in deposits and
$340 million dollars in loans. The Fed then raises the reserve requirement from 5 percent to 10
percent. Assuming everything else stays the same, how much is the bank holding in excess
reserves after the increase in the reserve requirement?
a. $0
b. $20 million
c. $40 million
d. $60 million
7246 The Monetary System
50. The manager of the bank where you work tells you that the bank has $300 million in deposits and
$255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank
holding in excess reserves?
a. $15 million
b. $19.5 million
c. $25.5 million
d. $0 million
51. When there is a reserve requirement, banks
a. must hold exactly the required quantity of reserves.
b. may hold more than, but not less than, the required quantity of reserves.
c. may hold less than, but not more than, the required quantity of reserves.
d. must seek the Fed’s permission whenever they wish to expand or contract their loans to
customers.
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52. If the reserve requirement is 10 percent, which of the following pairs of changes would both allow
a bank to lend out an additional $10,000?
a. the Fed buys a $10,000 bond from the bank or someone deposits $10,000 in the bank
b. the Fed buys a $10,000 bond from the bank or the Fed lends the bank $10,000
c. the Fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank
d. the Fed sells a $10,000 bond to the bank or the Fed lends the bank $10,000
53. In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent.
Other things the same this should have
a. increased both the money multiplier and the money supply.
b. decreased both the money multiplier and the money supply.
c. increased the money multiplier and decreased the money supply.
d. decreased the money multiplier and increased the money supply.
7248 The Monetary System
54. At one time, people in a certain country had no access to banks; they relied exclusively on
currency. Then, a fractional-reserve banking system was created. As a result, the money supply
a. increased. The central bank could have reduced the size of this increase by buying bonds.
b. increased. The central bank could have reduced the size of this increase by selling bonds.
c. decreased. The central bank could have reduced the size of this decrease by buying bonds.
d. decreased. The central bank could have reduced the size of this decrease by selling bonds.
55. In a fractional-reserve banking system with no excess reserves and no currency holdings, if the
central bank buys $100 million worth of bonds,
a. reserves and the money supply increase by less than $100 million.
b. reserves increase by $100 million and the money supply increases by $100 million.
c. reserves increase by $100 million and the money supply increases by more than $100 million.
d. both reserves and the money supply increase by more than $100 million.
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56. The money supply increases when the Fed
a. buys bonds. The increase will be larger, the smaller is the reserve ratio.
b. buys bonds. The increase will be larger, the larger is the reserve ratio.
c. sells bonds. The increase will be larger, the smaller is the reserve ratio.
d. sells bonds. The increase will be larger, the larger is the reserve ratio.
57. The money supply decreases if the Fed
a. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
b. sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
c. buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
d. buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
7250 The Monetary System
58. The money supply increases when the Fed
a. lowers the discount rate. The increase will be larger the smaller the reserve ratio is.
b. lowers the discount rate. The increase will be larger the larger the reserve ratio is.
c. raises the discount rate. The increase will be larger the smaller the reserve ratio is.
d. raises the discount rate. The increase will be larger the larger the reserve ratio is.
59. The Fed purchases $200 worth of government bonds from the public. The reserve requirement is
12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S.
money supply eventually increases by
a. $25.
b. between $200 and $300.
c. $1,600.
d. $2,500.