Chapter 15 Money, Banking, and Central Banking 753
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)
b
uy 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 20 percent. The Fed buys $1 million in U.S. government securities. The
most the money supply can increase is
A) $1 million. B) $4 million. C) $5 million. D) $10 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)
b
anks are required to hold only a fraction of their deposit liabilities as reserves.
B) most banks maintain a relatively large stock of reserves.
C)
b
anks hold reserves equal to their net worth.
D)
b
anks generally are required to hold surplus funds on deposit with other banks.
112) If the reserve ratio is raised, the money multiplier
A) is lowered. B) is increased. C) stays the same. D) is doubled.
113) The maximum potential money multiplier is equal to
A) the reserve ratio. B) the inverse of the required reserve ratio.
C) one minus the reserve ratio D) the number of dollars on reserve.
114) If the reserve ratio is 25 percent, the maximum potential money multiplier is
A) 1. B) 4. C) 8. D) 25.
115) With a reserve ratio of 10 percent, the maximum potential money multiplier is
A) 1. B) 5. C) 10. D) 100.
116) For the past several decades, the U.S. M1 multiplier has been between ________.
A) 1.0 and 2.0. B) 2.5 and 3.0. C) 3.0 and 6.0. D) 6.5 and 10.0.
117) The larger is the reserve ratio,
A) the greater is the increase in the money supply for an increase in bank deposits.
B) the more likely it is there will be currency drains.
C) the smaller is the maximum potential money multiplier.
D) the more difficult it is for the Federal Reserve to control the money supply.
118) By affecting the amount of reserves in the banking system, the Fed can
A) affect the size of the money supply. B) change the marginal tax rates.
C) increase government purchases. D) reduce government purchases.
119) Initially, the reserve ratio is 10 percent. Now banks decide they want an additional 10 percent of
deposits as reserves. There are no currency drains. If the Fed buys $1 million of U.S. government
securities, the money supply will
A) not change because of the excess reserves banks keep on hand.
B) increase by $1 million.
C) increase by $5 million.
D) increase by $10 million.
120) Following a new deposit of $50 at a bank, drawn on funds previously held on deposit at another
bank, when the reserve ratio is 10 percent, the maximum potential increase in the money supply
will be
A) $0. B) $50. C) $400. D) $500.
121) If the reserve ratio is 10 percent and reserves in the commercial banking system increase by
$10,000, the maximum possible expansion of demand deposits is
A) $10,000. B) $90,000. C) $100,000. D) $1,000,000.
122) When the Federal Reserve sells a government security to a bond dealer, which transmits
payment from a transactions deposit account at a bank,
A) the cash of the Federal Reserve will decrease.
B) the net worth of the commercial bank will decrease.
C) the loans of the commercial bank will increase.
D) the money supply will decrease.
123) If the Federal Reserve sells $100 of securities through a commercial bank when the reserve
requirement is 10 percent, the maximum potential change in the money supply is
A) a $100 increase. B) a $1,000 increase.
C) a $100 decrease. D) a $1,000 decrease.
124) If the Federal Reserve buys $500 of government securities when the required reserve ratio is 20
percent, the maximum potential change in the money supply is a(n)
A) increase by $100. B) increase by $2,500.
C) decrease by $100. D) decrease by $2,500.
125) Which of the following would reduce the money multiplier?
A) Reducing the reserve ratio
B) Bond purchases by the Fed
C) Cash drains from banks
D) Bank reductions in desired reserve holdings
126) Which of the following would reduce the money multiplier?
A) The purchase of bonds by the Fed
B) Lowering the reserve ratio
C) Increases in the reserve ratio
D) A flow of currency into the banking system
127) According to the text, the actual M1 multiplier in the U.S. today is
A)
b
etween 0 and 1. B)
b
etween 1.5 and 2.0.
C) negative. D) over 10.
128) According to the text, the actual M2 multiplier in the United States today is
A) about 5. B)
b
etween 1.0 and 2.0.
C) negative. D) over 10.
129) The formula 1
required reserve ratio is the
A) federal funds rate. B) discount rate.
C) potential money multiplier. D) actual change in the money supply.
130) The actual money multiplier multiplied by the change in total reserves is the
A) federal funds rate. B) discount rate.
C) potential money multiplier. D) actual change in the money supply.
131) The potential money multiplier gives us
A) the growth in real national income when the money supply increases.
B) the growth in the money supply when income increases.
C) the maximum potential change in the money supply due to a change in reserves.
D) the maximum potential change in the money supply due to a change in income.
132) When people decide to increase the amount of currency they are currently holding
A) the potential money multiplier will increase.
B) the potential money multiplier will decrease.
C) the actual money multiplier will increase.
D) the actual money multiplier will decrease.
133) When banks reduce the reserve ratio, the potential money multiplier
A) increases.
B) decreases.
C) remains unchanged.
D) sometimes increases, and sometimes decreases depending on the rate of inflation.
134) If proceeds from loans are NOT deposited back in the banking system, then
A) the magnitude of the multiplier process is reduced.
B) there is no effect on the magnitude of the multiplier process.
C) the magnitude of the multiplier process is increased.
D) the Fed intervenes by selling more Federal government bonds.
135) The value of the money multiplier depends on
A) the reserve ratio.
B) the ratio of total assets to total liabilities for the banking system as a whole.
C) the interest rate offered on bonds currently being sold by the Fed.
D) the interest rate offered on bonds currently being purchased by the Fed.
136) If the reserve ratio decreases from 20 percent to 10 percent, then the potential money multiplier
A) increases from 5 to 10. B) decreases from 10 to 5.
C) does not change. D) decreases from 20 to 10.
137) An increase in the reserve ratio
A) has an expansionary effect on the money supply.
B) has a contractionary effect on the money supply.
C) increases the money multiplier.
D) will cause banks to make more loans.
138) Suppose that the Fed purchases $1,000,000 worth of bonds and that the reserve ratio is 25
percent. Then, the maximum potential expansion of deposits is
A) $4,000,000. B) $10,000,000. C) $400,000. D) $25,000,000.
139) What is a fractional reserve banking system? How long has the fractional reserve banking
system been in existence?
140) What are reserves? Discuss the various types of reserves used in the U.S. banking system.
141) As far as reserves and deposits are concerned, describe the assets and liabilities of a bank.
142) Explain what happens to the money supply when the Fed sells bonds on the open market. What
happens to the assets and liabilities of the Fed?
143) Suppose the Fed purchases $1 million in bonds in the open market. Explain how the money
supply can increase by more than $1 million.
144) Why does the money supply increase when the Fed buys a bond but does not change when a
business buys a bond?
145) Explain how the Fed increases the money supply when it buys bonds in the open market.
146) How are the assets and liabilities changed for a bond dealer, the bond dealer s bank, and the Fed
when the Fed buys $100,000 in bonds?
147) Suppose a person deposits a paycheck in a bank. The transaction deposits are money, so has the
money supply increased? Explain.
15.7 Federal Deposit Insurance
1) The Federal Deposit Insurance Corporation insures
A)
b
anks against lawsuits. B) the federal funds market.
C) the deposits held in member banks. D) the deposits held in the Fed.
2) The FDIC was created because
A)
b
anks failed to create money the way the Fed wanted them to.
B) people worried about bank failures after World War I, even though very few banks
actually failed.
C) there were so many bank failures in the 1930s.
D) the Fed kept the required reserve ratio too low.
3) Which of the following has been a problem faced by the FDIC in its provision of federal deposit
insurance?
A) Moral hazard arising from the tendency for the highest risk banks to be those most
interested in obtaining deposit insurance in the first place
B) Adverse selection arising from the tendency for banks to take on more risk after they
receive deposit insurance
C) Moral hazard arising from the tendency for banks to take on more risk after they receive
deposit insurance
D) A relatively low number of bank failures each year, which has reduced the need for
deposit insurance
4) Which of the following statements about the FDIC is correct?
I. The deposit insurance premiums charged by the FDIC to a member bank fully reflect the
riskiness of that bank s assets
II. The manner in which the FDIC is set up helps protect depository institutions from the rigors
of true market competition
A) I only B) II only C) Both I and II D) Neither I nor II
5) Bank runs are a possibility because
A) the FDIC is inefficient.
B)
b
ankers are often poor businesspeople.
C) in difficult times people want currency instead of demand deposits.
D)
b
anks do not keep enough reserves to cover all their depository liabilities.
6) The manner in which FDIC deposit insurance is set up in the United States encourages banks to
A)
b
e too conservative in their lending practices.
B) maintain excess reserves that are too great.
C) make riskier loans than they otherwise would.
D) reject some loans that probably would be profitable.
7) If the FDIC eliminated its insurance program for deposits, then
A) the banking system would probably fail.
B) individual depositors would have more incentive to ascertain the soundness and solvency
of the bank.
C)
b
anks would probably hold fewer reserves.
D) moral hazard would be increased.
8) Asymmetric information before a transaction takes place generates the problem of
A) flawed bank regulation. B) intermediation.
C) adverse selection. D)
b
ank runs.
9) Deposit insurance shields depositors from the adverse effects of risky decisions and thereby
A) encourages riskier behavior on the part of managers of depository institutions.
B) encourages depositors to monitor the managers of depository institutions more closely.
C) encourages moral hazard on the part of depositors.
D) generates a more efficient banking system.
10) The fact that individuals whose credit worthiness is less than it appears to be are those who are
most willing to borrow funds at any given interest rate is an example of
A) adverse selection. B) symmetric information.
C) moral bonuses. D) diverse origins.
11) Which of the following statements is/are correct?
I. Depository institution managers undertake riskier actions than they otherwise would
because of the existence of deposit insurance
II. Because of the existence of deposit insurance, depositors in savings and loans and other
banks have little incentive to investigate the financial stability of these institutions
A) I only B) II only C) Both I and II D) Neither I nor II
12) Lenders generally want borrowers to agree to invest prudently, yet once a loan is made
borrowers may use the funds in a highly risky fashion. This leads to the problem of
A) critical mass. B) deposit insurance.
C) investor selection. D) moral hazard.
13) The Federal Deposit Insurance Corporation
A) insures the deposits held by the Fed.
B) insures the deposits held in banks.
C) insures banks against lawsuits by depositors.
D) insures the open market operations of the Fed.
14) As of 2010, the FDIC insured deposit accounts up to which of the following amounts?
A) $10,000. B) $25,000. C) $100,000. D) $250,000.
15) The FDIC helps prevent
A) risky behavior on the part of bankers. B) inflation.
C)
b
ank runs. D) risky behavior on the part of depositors.
16) The FDIC fee system encourages depository institutions to
A) make riskier loans than they would otherwise.
B) reject loans that probably would have been profitable.
C) seek only a modest rate of return.
D) operate their institutions in too conservative a fashion.
17) Asymmetric information before a transaction takes place generates the problem of
A)
b
ank runs. B) irrational behavior.
C) moral hazard. D) adverse selection.
18) If depository insurance exists, bank managers may make riskier loans than they would have
otherwise, which is an example of
A) regulatory lag. B) irrational behavior.
C) moral hazard. D) adverse selection.
19) Which of the following is NOT a potential problem due to federal depository insurance?
A) Banks have an incentive to make riskier loans than they would otherwise.
B) Depositors have little incentive to monitor the behavior of the managers of the depository
institutions.
C) Depositors demand greater interest rates on their deposits to compensate them for the
riskier behavior of the managers of the depository institutions.
D) Lenders have less incentive to investigate the credit worthiness of borrowers.
20) Bank examinations by the FDIC help reduce the ________ problem, by preventing
b
ank
managers from allocating funds already obtained from depositors to non creditworthy loans.
A) moral hazard B) principled hazard
C) adverse selection D) contrary selection
21) In addition to insuring accounts, the FDIC today has the additional power of
A) setting reserve requirements.
B) establishing FOMC goals.
C) establishing the discount rate.
D) establishing higher capital requirements for banks.
22) The Federal Deposit Insurance Corporation
A) increases the stability of the banking system by reducing the likelihood of bank runs.
B) discourages banks from engaging in excessive risk taking.
C) only insures deposits in money center banks.
D) was established after the Panic of 1907.
23) Because deposits are insured by the FDIC, most of us do not look at the lending behavior of our
banks. This creates a(n) ________ problem.
A) moral hazard B) principled hazard
C) adverse selection D) contrary selection
24) Bank X had a reputation for asking few questions when it provided loans. Five years later, the
majority of the loans were not repaid. This is because the bank had failed to address the
A) adverse selection problem. B) moral hazard problem.
C) contrary selection problem. D) free rider problem.
25) Which of the following represents a preventative measure against bank runs?
A) The President of the United States can order banks to pay depositors.
B) The Federal Reserve can lower reserve requirements to ensure that banks have sufficient
funds.
C) The FDIC provides deposit insurance.
D) None of the above is correct.
26) What would cause a bank run?
A) Depositors feel that the bank does not have sufficient assets to cover their deposits.
B) Depositors feel that they are earning too low of a return on their deposits.
C) Borrowers feel that they are being charged too high of an interest rate on their loans.
D) Bank managers choose to hold more excess reserves.
27) What effect has the presence of federal deposit insurance had on the banking industry?
A) Banks now hold more excess reserves.
B) Banks have made it more difficult for customers to qualify for loans.
C) Banks have made riskier loans.
D) Depositors have become more vigilant in monitoring the decisions made by managers of
their banks.
28) The government agency that insures deposits held in banks in the United States is
A) the Federal Reserve System.
B) the Federal Bank Insurance Corporation.
C) the Federal Asset Insurance Corporation.
D) the Federal Deposit Insurance Corporation.
29) Due to the existence of the FDIC, banks
A) may make riskier loans knowing that their depositors are insured.
B) have not changed their behavior even with the existence of insurance.
C)
b
ecome more cautious in making loans.
D) are no longer concerned about net worth.
30) In which year was the Federal Deposit Insurance Corporation (FDIC) established?
A) 1913 B) 1929 C) 1933 D) 1951
31) The primary purpose of the FDIC is to reduce the potential for
A) government regulations. B) reserve cheating.
C)
b
ank runs. D) excessive interest rates.
32) Explain the forces that caused the savings and loan debacle in the latter half of the 1980s.