c.
change in money supply = (1/m) × change in reserves.
d.
change in money supply = m/change in reserves.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
187. If the required reserve ratio, m, is 20 percent, then the oversimplified money multiplier is
a.
10.
b.
5.
c.
4.
d.
2.
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
Banks and Money Creation
BLOOMS: Application
188. A single bank is limited in its ability to create money because
a.
loan recipients usually take the proceeds of the loan in cash.
b.
the FDIC will not permit it to create money unless the loans are guaranteed by the federal government.
c.
the money loaned will probably be deposited in another bank.
d.
federal legislation prohibits banks from creating money except to finance international trade.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
189. The government banking regulation that places an upper limit on the money supply is
a.
b.
c.
d.
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
190. Which of the following is a drawback of FDIC insurance?
a.
It leads to excess industry profits.
b.
It has failed to arrest the trend of bank failures.
c.
It leads to the problem of moral hazard.
d.
It undercuts private insurance companies.
c
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
191. The Ponderosa Bank receives a new deposit of $2,500. The reserves requirement is 20 percent. How much can this
bank loan out as a result of this deposit?
a.
$25,000
b.
$12,500
c.
$3,125
d.
$2,000
e.
$500
Easy
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
Banks and Money Creation
192. If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the
maximum amount by which the money supply can be increased?
a.
$25 million
b.
$20 million
c.
$5 million
d.
$2.5 million
Easy
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
Banks and Money Creation
193. Milly Miser removes $250,000 from her mattress and opens a checking account. This single transaction immediately
increases the money supply by
a.
$250,000.
b.
$50,000.
c.
$0.
d.
−$250,000.
c
Moderate
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
Banks and Money Creation
194. The required reserve ratio is 10 percent, but banks actually keep 20 percent on reserve. The actual money multiplier
will be
a.
10.
b.
9.
c.
5.
d.
2.
e.
1.
c
Difficult
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
Banks and Money Creation
195. The maximum increase in the money supply possible from a deposit of $D into the banking system where R is the
reserve requirement is
a.
(1/R)(D − R).
b.
R × D.
c.
(1/R)(1 − R)D.
d.
(1/R)D.
Difficult
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
196. The banking system receives a new cash deposit of $250,000. Total deposits eventually rise by $1 million. The value
of the reserve ratio is
a.
25.
b.
4.
c.
0.50.
d.
0.25.
e.
0.20.
Difficult
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
Banks and Money Creation
BLOOMS: Application
197. The money creation process generated by an injection of reserves stops when
a.
people deposit their loans into other banks.
b.
reserve requirements are raised.
c.
the increase in required reserves equals the size of the injection.
d.
bankers begin to fear runs and stop making loans.
c
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
198. An increase in the reserve ratio would tend to
a.
increase excess reserves and raise the money multiplier.
b.
decrease excess reserves and decrease the money multiplier.
c.
increase excess reserves and decrease the money multiplier.
d.
decrease excess reserves and raise the money multiplier.
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
199. If people begin to hold more cash, the money multiplier process will
a.
increase in intensity.
b.
remain the same.
c.
decrease in actual size.
d.
cause larger amounts of excess reserves.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Banks and Money Creation
200. The money creation formula is oversimplified because it assumes that
a.
every recipient of a bank loan will redeposit the proceeds in another bank.
b.
loan recipients will not take any of the proceeds in cash.
c.
every bank lends out all excess reserves.
d.
All of the above are correct.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Why the Money Creation Formula is Oversimplified
201. Which of the following might limit the money creation process to an amount less than the potential amount?
a.
bank pursuit of profits
b.
public holding some cash
c.
business demand for loan
d.
increased use of credit cards
DISC: The role of money
United States – BPROG: Analytic
The role of money
Why the Money Creation Formula is Oversimplified
202. The deposit creation formula can be defined as
a.
one minus the required reserve ratio.
b.
the same as the GDP income multiplier.
c.
the reciprocal of the required reserve ratio.
d.
one plus the required reserve ratio.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Why the Money Creation Formula is Oversimplified
203. Systemic risks are most likely to exist with regard to
a.
small governments.
b.
large governments.
c.
small financial institutions.
d.
large financial institutions.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Systemic Risk and the “Too Big to Fail” Doctrine
204. The money multiplier yielded by the deposit creation formula assumes that
a.
banks hold no excess reserves.
b.
banks hold excess reserves.
c.
recipients of loans take some of the proceeds in cash.
d.
recipients of loans do not redeposit their funds in other banks.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Why the Money Creation Formula is Oversimplified
205. During a period of economic depression, such as has existed for a long period in Japan, a profit-oriented bank will
act in such a way that
a.
dampens the fluctuations.
b.
makes the depression worse.
c.
is neutral with respect to the fluctuations.
d.
is counter-cyclical and stabilizing.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Need for Monetary Policy
206. It is necessary for the Federal Reserve to regulate the money supply because
a.
banks tend to act in a counter-cyclical manner with regard to the money supply.
b.
banks are not profit-oriented, and tend to be unresponsive to the needs of business.
c.
left to itself, the banking system will create a gyrating money supply that will be destabilizing.
d.
left to itself, the banking system will not be able to increase or decrease the money supply.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Need for Monetary Policy
207. One problem for economic stability is that in a period of inflation
a.
banks will be tempted to increase lending in order to increase profits.
b.
banks will be tempted to decrease lending in order to increase profits.
c.
profit-oriented banks will tend to hold excess reserves and decrease the money supply.
d.
deposits will decrease and banks will have to reduce lending.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
The Need for Monetary Policy
208. During the financial crisis of 2007-2009, the U.S. government determined that
a.
AIG was too big to fail but Lehman Brothers was not.
b.
Lehman Brothers was too big to fail but AIG was not.
c.
both Lehman Brothers and AIG were too big to fail.
d.
neither Lehman Brothers nor AIG were too big to fail.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Systemic Risk and the “Too Big to Fail” Doctrine
209. Which of the following is the term used to describe a failing bank selling off a substantial amount of assets in a short
time period in order to remain solvent?
a.
fire sale
b.
short sale
c.
long sale
d.
liquidity sale
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Systemic Risk and the “Too Big to Fail” Doctrine
210. Banks will keep excess reserves when:
a.
they do not foresee profitable opportunities to make loans
b.
business conditions generally are depressed
c.
they do not foresee opportunities to make secure loans
d.
All of the above are correct.
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
The Need for Monetary Policy
211. Which of the following statements is correct?
a.
from the bank’s point of view, loans to customers are assets of the bank
b.
from the bank’s point of view, loans to customers are liabilities of the bank
c.
from the customer’s point of view, loans to customers are assets of the customer
d.
from the customer’s point of view, loans to customers are liabilities of the customer
e.
a and b only
f.
a and d only
DISC: The role of money
United States – BPROG: Reflective Thinking – BPROG: Analysis
The role of money
The Origins of the Money Supply
212. Define the following terms and explain their importance to the study of macroeconomics:
a.
money
b.
M1
c.
near money
d.
bank run
aggregate demand.
and money market deposit accounts.
all accounts.
Easy
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
How the Quantity of Money Is Measured
213. What is a barter system? What are the drawbacks of this system?
(a)
Difficulty of double coincidence of wants
(b)
Lack of common unit of value
(c)
Lack of a system for future payments
(d)
Lack of system for storage of value
Moderate
DISC: The role of money
The role of money
The Nature of Money
214. Why are the following included in the broader definition of supply known as M2?
(a)
money market deposit accounts
(b)
money market mutual funds
(c)
savings accounts
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
How the Quantity of Money Is Measured
215. What is fiat money? Why is fiat money important in the United States today?
value.
Moderate
DISC: The role of money
United States – BPROG: Analytic
The role of money
The Nature of Money
216. In what sense can it be said that money is a social invention? How does a barter system of trade compare to the
invention of money?
217. The banking system of the United States is a fractional reserve system. What dangers does this pose for the safety of
the banking system?
218. Bankers have a reputation for conservatism in politics, dress, and business affairs. Is there an economic rationale for
this conservatism? Explain.
219. Why are credit cards not considered part of the money supply?
220. What may limit the size of the money supply expansion to an amount less than indicated by the oversimplified
deposit creation formula?
221. Explain the “too big to fail” doctrine.
222. What is the criticism leveled against deposit insurance by the FDIC?
223. Discuss some of the government regulations designed to ensure depositors’ safety and to control the money supply.
224. Explain why monetary policy is needed specifically with regard to the existence of excess reserves. Compare and
contrast the effectiveness of monetary policy during the Great Depression and the Great Recession?