66) Roughly what is the required reserve ratio within the U.S. banking system?
A) Less than 10 percent.
B) 15%
C) 25%
D) 50%
E) 90%
67) From the banker’s perspective, dollars held as required reserves in bank vaults
A) earn a low rate of interest.
B) earn no rate of interest.
C) earn a market rate of interest.
D) earn profits.
68) From the banker’s perspective, dollars held as required reserves in bank vaults
A) earn a low rate of interest.
B) earn a market rate of interest.
C) are potentially profitable.
D) are like a tax.
69) For any new deposits into the banking system, the deposit expansion multiplier provides
A) no useful information regarding the potential expansion of the nation’s money supply.
B) an exact prediction of the expansion of the nation’s money supply.
C) a theoretical limit on the potential expansion of the nation’s money supply.
D) an argument that deposits don’t effect the nation’s money supply at all.
70) If the Fed were to raise the required reserve ratio,
A) excess reserves would decrease.
B) excess reserves would increase.
C) there would be no effect on the level of excess reserves.
D) there would tend to be no effect on the nation’s money supply.
71) If the Fed were to lower the required reserve ratio,
A) excess reserves would decrease.
B) excess reserves would increase.
C) there would be no effect on the level of excess reserves.
D) there would tend to be no effect on the nation’s money supply.
72) The textbook asserts that banks create money themselves. How?
A) Banks have their own printing presses, which is permitted by the Fed.
B) Banks are allowed to reach well into their required reserves as long as they can demonstrate
that it would be profitable to do so.
C) Banks, when lending out their excess reserves, unleash a process that can increase the money
supply through the deposit expansion multiplier.
D) For all of the above reasons.
73) There is a potential for banks to create money when they
A) lend out their excess reserves.
B) fail to lend out their excess reserves.
C) hold more of their customer deposits as vault cash.
D) hold all of their customer deposits as vault cash.
74) The formula for the deposit expansion multiplier =
A) 1 x required reserve ratio.
B) 1 / required reserve ratio.
C) 10 x required reserve ratio.
D) 10 / required reserve ratio.
75) Suppose the Fed buys $1 billion worth of bonds and the required reserve ratio is 10%. In the
theoretical limit, the money supply could
A) decrease by $1 billion.
B) increase by $1 billion.
C) decrease by $10 billion.
D) increase by $10 billion.
76) Suppose the Fed buys $1 billion worth of bonds and the required reserve ratio is 20%. In the
theoretical limit, the money supply could
A) decrease by $1 billion.
B) increase by $1 billion.
C) increase by $5 billion.
D) decrease by $5 billion.
77) Suppose the Fed buys $1 billion worth of bonds and the required reserve ratio is 5%. In
theoretical limit, the money supply could
A) decrease by $5 billion.
B) increase by $5 billion.
C) increase by $20 billion.
D) decrease by $20 billion.
78) Suppose you find $1000 in your attic and decide to deposit it all into your local bank, which
must hold 10% as required reserves. The deposit expansion multiplier suggests that this $1,000
“injection” of new money will, in reality, most likely
A) increase the money supply by more than $1,000.
B) increase the money supply by less than $1,000.
C) increase the money supply by exactly $1,000.
D) increase the money supply by exactly $10,000.
79) Suppose you find $1000 in your attic and decide to deposit it all into your local bank, which
must hold 20% as required reserves. The deposit expansion multiplier suggests that this $1,000
“injection” of new money will, in reality, most likely
A) increase the money supply by more than $1,000.
B) increase the money supply by less than $1,000.
C) increase the money supply by exactly $1,000.
D) increase the money supply by exactly $5,000.
80) Suppose you find $1000 in your attic and decide to deposit it all into your local bank, which
must hold 10% as required reserves. The deposit expansion multiplier suggests that this $1,000
“injection” of new money can, in the theoretical limit,
A) increase the money supply by a little more than $1,000.
B) increase the money supply by a little less than $1,000.
C) increase the money supply by only $1,000.
D) increase the money supply by $10,000.
81) Suppose you find $1000 in your attic and decide to deposit it all into your local bank, which
must hold 20% as required reserves. The deposit expansion multiplier suggests that this $1,000
“injection” of new money will most likely
A) increase the money supply by a little more than $1,000.
B) increase the money supply by a little less than $1,000.
C) increase the money supply by only $1,000.
D) increase the money supply by $5,000.
82) The deposit expansion multiplier would increase if the Fed were to
A) raise the required reserve ratio.
B) lower the required reserve ratio.
C) raise the discount rate.
D) sell bonds.
83) The deposit expansion multiplier would decrease if the Fed were to
A) raise the required reserve ratio.
B) lower the required reserve ratio.
C) lower the discount rate.
D) buy bonds.
84) Every dollar added to the total reserves of the commercial banking system
A) compels the banks to reduce their loans by more than a dollar.
B) compels the banks to expand their loans by more than a dollar.
C) enables the banks to expand their loans by more than a dollar.
D) enables the banks to expand their loans by one dollar.
E) is one less dollar in the hands of the public.
85) Fill in the blanks: Whenever the Fed ________ excess reserves in the banking system, they
tend to ________ the overall money supply.
A) raises; reduce
B) raises; increase
C) lowers; increase
D) lowers; stabilize
86) Which activity of the Fed would tend to increase excess reserves throughout the banking
system?
A) Purchases of government bonds on a mass scale
B) An increase in the required reserve ratio
C) An increase of the discount rate
D) Sales of government bonds on a mass scale
87) The non-bank public chooses among various financial assets in deciding what kind of
liquidity it wants to hold. It thereby increases or decreases
A) the narrowly-defined money stock (M1).
B) the reserves of commercial banks.
C) the reserves commercial banks are required to hold.
D) all of the above, at least potentially.
E) none of the above, since only the Fed can alter the money supply.
88) The overall money supply would tend to increase if the Fed were to
A) increase the required reserve ratio.
B) increase the discount rate.
C) buy government bonds.
D) exchange crisp dollar bills for worn and tattered dollar bills.
89) Which activity of the Fed would tend to increase the nation’s money supply?
A) Sales of government bonds
B) Lowering the discount rate
C) Raising the required reserve ratio
D) None of the above.
90) When we hear on the news, “The Fed has lowered interest rates today,” the Fed has most
likely
A) raised the discount rate.
B) lowered the required reserve ratio.
C) raised the federal funds rate.
D) purchased government bonds.
91) When we hear on the news, “The Fed has increased interest rates today,” the Fed has most
likely
A) raised the required reserve ratio.
B) sold government bonds.
C) lowered the discount rate.
D) bought government bonds.
92) When the Fed buys bonds on a mass scale
A) bonds go to the Fed, and dollars go into the banking system, so the money supply tends to
rise.
B) bonds go to the Fed, and dollars exit the banking system, so the money supply tends to fall.
C) banks have more bonds and fewer dollars, so the money supply tends to fall.
D) banks have more bonds and fewer dollars, so the money supply tends to rise.
93) When the Fed sells bonds on a mass scale
A) bonds go to the Fed, and dollars go into the banking system, so the money supply tends to
rise.
B) bonds go to the Fed, and dollars exit the banking system, so the money supply tends to fall.
C) banks have fewer bonds and more dollars, so the money supply tends to rise.
D) banks have more bonds and fewer dollars, so the money supply tends to fall.
94) If the Fed were to attempt to increase the money supply, it would most likely do so
A) by manipulating the discount rate.
B) by manipulating the required reserve ratio.
C) by altering the amount of gold held in Fort Knox.
D) by engaging in open market operations.
95) A purchase of government bonds from the public by the Federal Reserve Banks
A) adds to the money stock.
B) has the effect of pulling wealth and therefore money out of the private sector.
C) increases the money stock directly and simultaneously increases commercial bank reserves.
D) puts additional reserves into the commercial banking system.
E) reduces the wealth of the public.
96) Open market operations refers to the Fed’s
A) manipulation of the required reserve ratio.
B) purchase and sale of government bonds.
C) manipulation of the discount rate.
D) use of all of the above techniques.
97) What happens when the Fed sells government bonds?
A) The money supply tends to rise.
B) The money supply tends to remain unchanged.
C) The money supply tends to fall.
D) The U.S. budget deficit necessarily rises.
98) What happens to the money supply when the Fed sells government bonds?
A) The money supply tends to rise.
B) The money supply tends to fall.
C) Nothing.
D) It’s impossible to determine, because bonds aren’t money.
99) Which Fed policy would be part of a restrictive monetary policy?
A) Lowering the discount rate.
B) Buying government bonds.
C) Both of the above.
D) None of the above.
100) Which Fed policy would be part of a restrictive monetary policy?
A) Raising tax rates.
B) Lowering the discount rate.
C) Selling government bonds.
D) Reducing the required reserve ratio.
E) None of the above.
101) Which Fed policy would be part of an expansionary monetary policy?
A) Buying government bonds.
B) Raising the discount rate.
C) Both of the above.
D) None of the above.
102) Which Fed policy would be part of an expansionary monetary policy?
A) Selling government bonds.
B) Reducing the discount rate.
C) Increasing the required reserve ratio.
D) All of the above.
E) None of the above.
103) At the moment, the Federal Reserve keeps the discount rate above the fed funds rate. In so
doing, they are
A) discouraging commercial banks from borrowing from the Fed.
B) encouraging commercial banks to borrow from each other.
C) doing both A and B.
D) doing none of the above.
104) Beginning in December 2007, the Fed began cutting the federal funds rate from 4.25% to
less than 1%. During this time, it was engaged in ________ monetary policy in order to reduce
the threat of a ________ in the US economy.
A) expansionary; stagflation
B) contractionary; stagflation
C) expansionary; recession
D) contractionary; recession
105) Federal Reserve Chairman Ben Bernanke once said if all else fails, the Fed could drop
money from helicopters to help the US economy. If “helicopter Ben” ever comes to the rescue
and begins dropping money from the sky, the will be engaged in
A) shenanigans.
B) expansionary monetary policy.
C) operation financial Armageddon.
D) contractionary monetary policy.
106) The money supply would tend to fall if the Fed
A) sells bonds.
B) buys bonds.
C) lowers the discount rate.
D) lowers reserve requirements.
107) When a commercial bank borrows directly from the Fed, it pays
A) a zero rate of interest.
B) an interest rate called the federal funds rate.
C) an interest rate called the discount rate.
D) the Fed in a mutually agreed upon quantity of gold reserves in its vaults.
108) The “discount rate” is the rate used by the Fed when
A) the Fed extends a short-term loan directly to a commercial bank.
B) the Fed extends a short-term loan to one of the regional Federal Reserve banks.
C) the Fed calculates the present value of particular long-term investment projects.
D) the Fed makes cash available for the federal government.
109) The term for the Fed’s day-to-day technique for controlling the stock of money is
A) discounting operations.
B) interest-rate operations.
C) liquidity operations.
D) open market operations.
E) treasury operations.
110) The term for the Fed’s day-to-day technique for controlling the stock of money is called
A) discounting operations.
B) interest-rate operations.
C) liquidity operations.
D) open heart operations.
E) none of the above.
111) Which is the most popular tool of the Fed used to control the stock of money?
A) Manipulating reserve requirements.
B) Buying and selling government bonds.
C) Manipulating the discount rate.
D) Issuing new U.S. Treasury bonds.
112) In trying to control the size of the money stock from day to day, the Fed relies principally
on
A) adjustments in legal reserve requirements.
B) changes in the central bank discount rate.
C) purchases and sales of U.S. government bonds.
D) the issue and withdrawal of currency from commercial banks.
113) The Federal Reserve uses open market operations rather than changes in legal reserve
requirements as its principal tool of monetary management because changes in legal reserve
requirements
A) can be easily evaded by commercial banks.
B) must secure Congressional approval.
C) would be excessively powerful and disruptive.
D) would be less profitable for the Federal Reserve Banks.
114) A reduction of the discount rate by the Federal Reserve Banks has the direct effect of
A) making it less costly for commercial banks to borrow from the Fed.
B) making it more costly for the Treasury to finance deficits.
C) increasing commercial bank reserves.
D) increasing the stock of money.
E) doing all of the above.
115) If the Fed purchases government bonds, it
A) decreases bank reserves and the supply of money.
B) decreases bank reserves but increases the supply of money.
C) increases bank reserves and the supply of money.
D) increases bank reserves but decreases the supply of money.
116) When Federal Reserve Banks add to their holdings of government securities,
A) commercial banks must reduce their net lending.
B) commercial bank reserves increase.
C) the Fed is extending less credit to the economy.
D) the stock of money declines.
117) What happens when the Federal Reserve purchases U.S. government bonds?
A) Interest rates rise because bonds become scarcer.
B) Commercial bank reserves increase.
C) The national debt declines in size.
D) The growth rate of the money stock falls.
E) All of the above occur.
118) The Federal Open Market Committee (FOMC) is responsible for managing the nation’s
A) domestic economic policy.
B) international trade policy.
C) money supply.
D) gold and silver reserves.
E) wage and retirement policies.
119) Which organization is responsible for managing the nation’s money supply?
A) Fort Knox
B) The United States Congress
C) The United States Treasury
D) The Federal Open Market Committee
E) The American Economic Association
120) According to your text, open market operations
A) can be a difficult and delicate task.
B) are free from political pressures.
C) are designed solely in the national interest.
D) have failed to be effective ever since the U.S. has gone off the gold standard.
121) A primary goal of the Fed, if it sought after monetary equilibrium, is to
A) keep interest rates stable.
B) keep jobs plentiful.
C) keep the quantity supplied of money equal to the quantity demanded.
D) get the national debt paid off in a timely manner.
E) keep the M1 money supply is tied to the amount of gold reserves held in Fort Knox.
122) When monetary equilibrium occurs,
A) the demand for final goods and services equals the supply of final goods and services.
B) gross business investment falls to zero.
C) relative prices remain constant.
D) the quantity supplied of money equals the quantity demanded.
123) If monetary equilibrium were to occur
A) inflation would not occur.
B) deflation would not occur.
C) the price level would be stable.
D) all of the above would be true.
E) none of the above would be true.
124) According to your textbook authors, monetary calculation would improve if
A) the government subsidizes business production.
B) the Fed sought to establish monetary equilibrium.
C) Congress seeks to establish a budget surplus.
D) domestic producers are protected from foreign competition.
125) The goal of a gold standard is to
A) return money back to its natural state.
B) shift wealth from the middle class to the rich.
C) reduce uncertainty by limiting the power of the Federal Reserve to increase the amount of
money in circulation.
D) conserve on natural resources, such as pulpwood, used to make paper money.