53) The reserve ratio is 20 percent and all loan proceeds are deposited in transactions accounts.
A bond dealer has $100 million in deposits, $8 million in vault cash, and $7 million in deposits at
the Fed. The Fed sells $1 million in securities to the bond dealer, who subsequently deposits the
$1 million into a bank. As a result of this transaction alone
A) the money supply falls by $1 million and total reserves fall by $1 million.
B) the money supply falls by $1 million and total reserves rise by $1 million.
C) the money supply rises by $1 million, total reserves fall by $800,000.
D) the money supply rises by $1 million, but reserves do not change.
54) Suppose that the actual money multiplier equals the maximum potential money multiplier. If
the reserve ratio is 10 percent, in order for the banking system to increase deposits by $2.5
million, the Fed must
A) permit the system to have prolonged reserve deficiencies.
B) sell $2.5 million of government securities to the general public.
C) sell $250,000 of government securities to the general public.
D) buy $250,000 of government securities from the public.
55) The Federal Open Market Committee has responsibility for
A) appointing members to the Board of Governors of the Federal Reserve system.
B) printing money.
C) issuing orders to buy or sell government securities for the Fed.
D) advising the Treasury Department on monetary policy.
56) When the Fed wants to undertake open market operations, it
A) can require all commercial banks to buy from or sell to it.
B) can require all member banks to buy from or sell to it.
C) buys or sells securities through the trading desk at the New York Federal Reserve Bank.
D) buys from or sells to the U.S. Treasury.
57) Open market operations are
A) the buying of existing corporate securities in secondary markets by private citizens, banks and
the Fed.
B) the buying and selling of existing U.S. government securities in open private markets by the
Fed.
C) the actions of the Fed that are used to finance deficit financing by the government.
D) the selling of new government securities in order to increase the money supply.
58) The level of reserves in the banking system is determined by
A) the American Banking Association.
B) the Federal Open Market Committee.
C) bond dealers.
D) the Treasury Department.
59) When the Fed buys a U.S. bond in the open market
A) its action has no effect on the total reserves or the money supply because the check it writes
increases reserves at one bank but they fall at another.
B) total reserves increase by the amount of the purchase but the money supply stays the same.
C) its action expands total reserves and the money supply.
D) its action contracts total reserves and the money supply.
60) Open market operations are conducted by the Fed
A) in the private secondary U.S. securities market.
B) in the New York Stock Exchange.
C) through the Bureau of Engraving.
D) through the Washington location of the Federal Reserve’s Bank of Governors.
61) The initial impact of the Fed’s open market sale of government securities by the Federal
Reserve is
A) an increase in the money supply by some multiple of the dollar volume of the sale.
B) an increase in commercial bank deposits at the Fed.
C) a fall in the money supply by some multiple of the dollar volume of the sale.
D) a reduction of the commercial banking system’s reserve deposits at the Fed.
62) A sale of securities by the Fed causes
A) a contraction of the money supply equal to the amount of the securities sold.
B) an expansion of the money supply equal to the amount of the securities sold.
C) a multiple expansion of the money supply greater than the amount of the securities sold.
D) a multiple contraction of the money supply greater than the amount of the securities sold.
63) If the actual money multiplier equals the potential money multiplier and if the Federal
Reserve wishes to increase the money supply by $500 when the reserve ratio is 10 percent, it
should
A) sell $50 of government bonds.
B) buy $50 of government bonds.
C) sell $5000 of government bonds.
D) buy $5000 of government bonds.
64) If the actual money multiplier equals the potential money multiplier, and if the Fed wishes to
reduce the money supply by $1 million when the reserve ratio is 10 percent, then the Fed should
A) sell $100,000 of government securities.
B) buy $100,000 of government securities.
C) sell $10,000 of government securities.
D) buy $10,000 of government securities.
65) When the Fed buys U.S. government securities, the money supply
A) increases because there is an increase in transaction deposits at the bank of the bond dealer
but there is no decrease in transaction deposits at any other bank.
B) decreases because there is an increase in the reserves of the bond dealer’s bank.
C) remains unchanged because the increase in transaction deposits at the bond dealer’s bank is
offset by a reduction in transaction deposits at the Fed.
D) remains unchanged because the increase in transaction deposits at the bond dealer’s bank is
offset by a fall in transaction deposits at another bank.
66) Open market operations are
A) the buying and selling of existing U.S. government securities in open private markets by the
Fed in order to change the money supply.
B) the buying and selling of existing U.S. government securities in open private markets by
citizens.
C) the selling of new government securities by banks in order to increase the money supply.
D) the selling of new government securities in open private markets by banks in order to finance
the deficit.
67) Assuming a reserve ratio of 5 percent, if a bank sells $200,000 in securities how much can
the bank loan out?
A) $10,000
B) 190,000
C) $105,000
D) $2,000,000
68) Assuming a reserve ratio of 20 percent, if a bank receives $100,000 in deposits how much
can the bank loan out?
A) $80,000
B) $100,000
C) $500,000
D) $20,000
69) The Federal Reserve will engage in open market operations when
A) it wants to punish private banks because they are not keeping the required level of reserves.
B) it wants to change the money supply.
C) it wants to change the reserve ratio.
D) it wants to increase the total amount of reserves since government securities are considered a
reserve.
70) The level of reserves in the monetary system is determined by
A) the Federal Open Market Committee.
B) the Treasury Department.
C) Congress.
D) the President of the United States.
71) When the Fed sells a U.S. bond in the open market
A) total reserves will increase.
B) total reserves will decrease.
C) total reserves do not change but the money supply increases.
D) total reserves do not change but the money supply decreases.
72) When the Fed buys a U.S. bond in the open market
A) total reserves will increase.
B) total reserves will decrease.
C) total reserves do not change but the money supply increases.
D) total reserves do not change but the money supply decreases.
73) The Fed sells $1 million in bonds to a bond dealer. The bond dealer’s bank experiences
A) a decrease in assets of $1 million as its reserves decrease and an increase in liabilities of $1
million as its deposits rise.
B) a decrease in assets of $1 million as its reserves decrease and a decrease in liabilities of $1
million as its deposits fall.
C) an increase in assets of $1 million as its deposits fell by $1 million, and a decrease in
liabilities as its reserves fell by $1 million.
D) no change in assets or liabilities.
74) If a bank’s deposits at the Fed increase by $10 million, then
A) both the bank’s assets and the Fed’s assets increase by $10 million.
B) both the bank’s liabilities and the Fed’s liabilities increase by $10 million.
C) the bank’s assets increase by $10 million and the Fed’s liabilities increase by $10 million.
D) the bank’s assets increase by $10 million, but there is no change at the Fed since it does not
really have assets or liabilities.
75) The Fed buys securities and gives a bond dealer a check for the amount. After the check has
cleared
A) reserves remain unchanged because the increase of reserves at the dealer’s bank are offset by
an increase in reserves at the Fed.
B) reserves have fallen by the amount of the check because the Fed clears the check by reducing
the bank’s deposits at the Fed.
C) reserves have risen by the amount of the check because the Fed clears the check by increasing
the amount of the bank’s deposits with the Fed.
D) reserves have fallen by the amount of the reserves times the reserve ratio and the money
supply increases by the difference between the amount of the check and the increase in the
reserves.
76) When the Fed sells government securities
A) reserves increase, leading to a decrease in the money supply by an amount more than the sale
of the government securities.
B) reserves decrease, leading to a increase in the money supply by an amount more than the sale
of the government securities.
C) reserves increase, leading to a increase in the money supply by an amount more than the sale
of the government securities.
D) reserves decrease, leading to a decrease in the money supply by an amount more than the sale
of the government securities.
77) When the Fed buys government securities
A) reserves increase, leading to a decrease in the money supply by an amount more than the
purchase of the government securities.
B) reserves decrease, leading to a increase in the money supply by an amount more than the
purchase of the government securities.
C) reserves increase, leading to a increase in the money supply by an amount more than the
purchase of the government securities.
D) reserves decrease, leading to a decrease in the money supply by an amount more than the
purchase of the government securities.
78) Tanner decides to buy a bond from Joe for $1,000. The money supply will
A) neither increase nor decrease.
B) increase by $1,000.
C) increase by more than $1,000.
D) decrease by $1,000.
79) The reserve ratio is 2 percent. If the Fed buys $1 million of U.S. government securities and
the check is deposited in Bank A, but Bank A increases its vault cash by the entire amount, then
the money supply
A) does not increase.
B) increases by $980,000.
C) increases by $1 million.
D) increases by more than $1 million.
80) A purchase of U.S. government securities by the Fed causes
A) an expansion of the money supply equal to the amount of the securities purchased.
B) a contraction of the money supply equal to the amount of the securities purchased.
C) an expansion of the money supply of more than the amount of the securities purchased.
D) a contraction of the money supply of more than the amount of the securities purchased.
81) A sale of U.S. government securities by the Fed causes a(n)
A) expansion of the money supply equal to the amount of the securities sold.
B) contraction of the money supply equal to the amount of the securities sold.
C) expansion of the money supply of more than the amount of the securities sold.
D) contraction of the money supply of more than the amount of the securities sold.
82) The reserve ratio is 10 percent. If the Fed buys $1 million of U.S. government securities from
a bond dealer by transmitting the funds to the dealer’s deposit account at Bank ABC, then
A) Bank ABC can make no additional loans.
B) Bank ABC can make additional loans up to $900,000.
C) Bank ABC can make additional loans up to $1 million.
D) Bank ABC cannot make any additional loans, but the system as a whole can make additional
loans up to $1 million.
83) The reserve ratio is 10 percent. After the Fed buys $1 million in U.S. government securities
from a bond dealer by transmitting the funds to the dealer’s deposit account at Bank A, Bank A
lends a construction company an amount equal to its excess reserves. The construction company
spends the entire amount on lumber from a lumber yard, which deposits the construction
company’s check in its deposit account with Bank A. The maximum loan Bank A can now make
is
A) $900,000.
B) $100,000.
C) $810,000.
D) $1 million.
84) The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a
bond dealer by transmitting the funds to the dealer’s deposit account at Bank A. Bank A loans the
maximum amount possible to a construction company, which buys materials from a lumber yard.
The lumberyard deposits the construction company’s check in Bank B. What is the maximum
loan Bank A can now make and the maximum loan Bank B can now make?
A) Bank A: 0; Bank B: $640,000
B) Bank A: 0; Bank B: $800,000
C) Bank A: $800,000; Bank B: $640,000
D) Bank A: $800,000; Bank B: 0
85) The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a
bond dealer by transmitting the funds to the dealer’s deposit account at Bank A. Bank A makes
the maximum loan possible to a construction company, which buys materials with the loan. The
check is deposited in Bank B, which loans out all it can to a car dealership. To this point, the
money supply has increased by
A) $1 million.
B) $1.8 million.
C) $2.44 million.
D) $3 million.
86) Suppose that the reserve ratio is 5 percent. A bank’s customer deposits into her account
$100,000 in funds from a check written on an account at another bank. The maximum potential
increase in the money supply resulting from this transaction is equal to
A) $0.
B) $5,000.
C) $100,000.
D) $20,000,000.
87) When the Fed buys a $20,000 bond from a bond dealer
A) reserves of the banking system increase by $20,000, but the money supply will only be able
to increase by something less than this amount.
B) reserves of the banking system increase by $20,000, but the money supply can increase by
more than $20,000.
C) reserves of the banking system remain unchanged, but the money supply increases by
$20,000.
D) reserves of the banking system remain unchanged, but the money supply decreases by
$20,000.
88) If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10
percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by
________, and the money supply can increase by as much as ________.
A) $80,000; $800,000
B) $10,000; $100,000
C) $90,000; $1,000,000
D) $90,000; $900,000
89) For the money expansion process to produce the maximum potential multiplier effect
A) all loans of a given bank have to be deposited in that bank.
B) the required reserve ratio has to be 100 percent.
C) the Fed has to sell government bonds to back up the loans.
D) all loans from banks have to be redeposited throughout the banking system.
90) Open market operations are
A) the procedures for approving loans at commercial banks.
B) the procedures of applying for loans at commercial banks.
C) the Federal Reserve’s purchase and sale of existing U.S. government securities.
D) steps a bank must complete before it can invest in stocks on the open market.
91) When the Fed buys U.S. government securities on the open market
A) the reserves of the banking system expand.
B) the reserves of the banking system contract.
C) the money supply contracts.
D) the total reserves of the banking system will fall below required reserves.
92) Which one of the following would increase reserves for the banking system?
A) The Fed sells government securities on the open market.
B) The Fed buys government securities on the open market.
C) You take $100 out of a checking account and then deposit the same amount in a savings
account.
D) You purchase a U.S. Treasury bond from a bond dealer.
93) Open market operations involve
A) the buying and selling of existing corporate bonds.
B) the buying and selling of existing corporate stocks.
C) the buying and selling of existing federal government bonds.
D) the buying and selling of Federal Reserve bonds.
94) If the Fed purchases $50,000 in government bonds from a bank, then the
A) liabilities of the bank rise by $50,000.
B) reserves of the bank fall by $50,000.
C) assets of the bank rise by $50,000.
D) reserves of the bank rise by $50,000.
95) If the FOMC decides to engage in the selling of government bonds, what is the effect on the
money supply?
A) a decrease
B) an increase
C) no change
D) an initial increase followed by an additional rise when the bonds mature
96) The Fed’s buying and selling of existing government securities is called
A) market interventions.
B) open market operations.
C) changes in the reserve requirement ratio.
D) changes in the difference between the discount rate and the federal funds rate.
97) When a bank sells a bond to the Fed
A) its liabilities decrease.
B) its liabilities increase.
C) its reserves initially decrease.
D) its reserves initially increase.
98) When a bank buys a bond from the Fed
A) its liabilities decrease.
B) its liabilities increase.
C) its reserves initially decrease.
D) its reserves initially increase.
99) If the FOMC decides that the Fed should buy bonds it
A) instructs the New York Federal Reserve Bank’s trading desk to buy them.
B) asks the Congress for permission to buy them.
C) requires the President’s signature on the buy order.
D) requires the permission of the Financial Oversight Committee.
100) If the money multiplier is 2.5 and the Fed buys $8 million in securities on the open market,
transaction deposits could potentially
A) increase by $20 million.
B) increase by $25 million.
C) decrease by $20 million.
D) decrease by $25 million.
101) Suppose that the reserve ratio is 25%. What is the value of the potential money multiplier?
A) 2
B) 5
C) 2.5
D) 4
102) The Fed buys $1 million in bonds from a bond dealer. The bond dealer’s bank experiences
A) an increase in assets of $1 million as its reserves increase and a decrease in liabilities as its
transactions deposits fall.
B) no change in assets or liabilities. Assets both increased and decreased by the amount of the
check.
C) a decrease in assets of $1 million as the checking account of the bond dealer increased, and a
decrease in liabilities as the bank’s deposits with the Fed increased by $1 million.
D) an increase in assets of $1 million as its reserves increase and an increase in liabilities of $1
million as the deposits in the bond dealer’s transactions account increases by $1 million.
103) Other things being equal, when the Fed buys U.S. government securities
A) the U.S. Treasury must immediately issue new securities to replace the securities that the Fed
has removed from the market.
B) the Fed’s total assets and total liabilities immediately expand by exactly the amount of the
Fed’s purchase.
C) the quantity of deposits in the U.S. banking system expands by less than the amount of the
Fed’s purchase.
D) the quantity of paper currency and coins in circulation expands by more than the amount of
the Fed’s purchase.
104) A purchase of U.S. government securities by the Fed causes
A) a multiple contraction of the money supply because deposits fall by more than the amount of
the securities purchased.
B) a contraction of the money supply equal to the amount of the securities because all other
transactions occur within the banking system.
C) a multiple expansion of the money supply because the reserve ratio is less than one.
D) an expansion of the money supply equal to the amount of the securities because all other
transactions occur within the banking system.
105) The reserve ratio is 10 percent. Depositors regularly keep 10 percent of their deposits as
cash. If the Fed buys $1 million of U.S. government securities, excess reserves
A) increase by $800,000.
B) increase by $810,000.
C) increase by $900,000.
D) increase by $1 million.
106) To expand the money supply, the Fed should
A) buy U.S. government securities.
B) sell U.S. government securities.
C) raise the required reserve ration.
D) cut taxes.
107) To contract the money supply, the Fed should
A) reduce the differential between the discount rate and the federal funds rate.
B) increase government spending and cut taxes.
C) lower the required reserve ratio.
D) sell U.S. government securities.
108) The reserve ratio equals 2 percent. The Fed buys $1 million in U.S. government securities.
The most the money supply can increase is
A) $10 million.
B) $40 million.
C) $50 million.
D) $100 million.
109) To increase the money supply
A) the Federal Reserve should sell government securities.
B) the commercial banks should reduce their loans.
C) the Federal Reserve should buy government securities.
D) the Federal Reserve should reduce its loans to banks.
110) A decrease in the reserve ratio will
A) cause the money supply to decrease.
B) cause the money supply to increase.
C) not affect the money supply.
D) decrease the money multiplier.
111) The reason that the commercial banking system can generate a multiple expansion or
contraction of the money supply is that
A) banks are required to hold only a fraction of their deposit liabilities as reserves.
B) most banks maintain a relatively large stock of reserves.
C) banks hold reserves equal to their net worth.
D) banks generally are required to hold surplus funds on deposit with other banks.