89) If the Federal Reserve purchases government securities,
A) banks’ reserves will increase.
B) the federal funds rate will rise.
C) the discount rate will be forced higher.
D) None of the above answers is correct because none of the effects occur.
90) When the Fed buys U.S. government securities from a bank, the Fed
A) loans the money needed to buy the securities to the bank.
B) increases the bank’s reserves at the Fed.
C) obtains the money for the purchase from the U.S. Treasury.
D) decreases the monetary base and raises the federal funds rate.
91) If the Fed buys $100 in securities from a commercial bank, the
A) Fed’s assets will decrease.
B) quantity of money will decrease.
C) quantity of the bank’s reserves will increase.
D) amount of the bank’s reserves will not change.
92) In response to the financial crisis of 2007 and the ensuing recession, the Fed announced three
rounds of “quantitative easing,” where the Fed purchased billions of dollars of securities. What
impact would quantitative easing have on the monetary base?
A) The monetary base would increase.
B) The monetary base would decrease.
C) The monetary base would not change.
D) While the monetary base would change, it is impossible to predict in which direction.
93) If the Fed sells government securities
A) commercial bank reserves will decrease.
B) the government’s debt will decrease.
C) commercial bank reserves will increase.
D) there will be no effect on the quantity of money.
94) The initial impact of the Fed’s open market sale of government securities to banks is
A) an increase in the quantity of money by some multiple of the dollar volume of the sale.
B) an increase in bank deposits at the Fed.
C) a decrease in the quantity of money by some multiple of the dollar volume of the sale.
D) a decrease of the banking system’s reserve deposits at the Fed.
95) A decrease in the quantity of reserves held by commercial banks could be the result of
A) a decision by U.S. households to hold less currency.
B) the sale of government securities by the Federal Reserve.
C) a decrease in the government’s budget deficit.
D) an increase in the exchange rate.
96) The Fed’s purchase of government securities could
A) increase loans made by banks.
B) be an effective anti-inflationary policy.
C) decrease the price level and have no effect on real GDP.
D) decrease bank reserves.
97) If the Fed buys $100,000 in U.S. government securities from a commercial bank, the bank
now has an additional $100,000 of
A) total assets.
B) excess reserves.
C) actual reserves.
D) net worth.
98) Which of the following will occur if the Fed buys $10 million of securities from the
University National Bank?
A) The Fed will pay by increasing the University National Bank’s deposit account with the Fed
by $10 million.
B) The University National Bank has $10 million more in securities.
C) The Fed will pay by decreasing the University National Bank’s deposit account with the Fed
by $10 million.
D) The University National Bank has $10 million less in excess reserves.
99) The Fed buys $100 million of government securities from Bank A. What is the effect on the
Federal Reserve’s balance sheet?
A) Securities increase by $100 million and Federal Reserve notes (currency) decrease by $100
million.
B) Securities increase by $100 million and reserves of Bank A increase by $100 million.
C) Securities increase by $100 million and reserves of Bank A decrease by $100 million.
D) Securities decrease by $100 million and reserves of Bank A increase by $100 million.
100) The Fed buys $100 million of government securities from Bank A. What is the effect on
Bank A’s balance sheet?
A) Securities decrease by $100 million and reserves increase by $100 million.
B) Securities decrease by $100 million and deposits decrease by $100 million.
C) Securities increase by $100 million and reserves decrease by $100 million.
D) Securities increase by $100 million and reserves increase by $100 million.
101) When the Fed lowers the federal funds rate, it can lead to
A) the Fed selling government securities.
B) an increase in lending by banks.
C) a decrease in demand deposits.
D) a decrease in the quantity of money.
102) The sale of government securities by the Fed leads to
A) a decrease in bank reserves.
B) a contraction in bank lending.
C) a decrease in the monetary base.
D) All of the above answers are correct.
103) The sale of $1 billion of securities to a bank or some other business by the Fed is an
example of
A) a last resort loan.
B) a multiple contraction of the quantity of money.
C) an open market operation.
D) a change in the required reserve ratio.
4 How Banks Create Money
1) Money is created by
A) government taxation.
B) banks taking in deposits.
C) banks making loans.
D) banks paying for depositor’s insurance.
2) The majority of money is created when
A) banks make loans.
B) new coins are minted.
C) the federal government borrows from the public.
D) the Fed sells bonds.
3) A bank creates money by
A) lending its excess reserves.
B) purchasing currency from the Federal Reserve.
C) buying bonds from the Federal Reserve.
D) printing more checks.
4) Banks create money whenever they
A) accept a deposit.
B) lend excess reserves to a borrower.
C) receive monthly payments on their loans.
D) receive interest on existing loans.
5) Whenever a bank’s actual reserves exceed its desired reserves, the bank
A) can lend out additional funds.
B) needs to call in loans.
C) will go out of business.
D) must increase the amount of its required reserves by obtaining more cash.
6) Commercial banks are able to create money by
A) printing Federal Reserve Notes.
B) making loans.
C) making customers pay back their loans.
D) exchanging their reserves at the Fed for currency.
7) If the desired reserve ratio is 3 percent and deposits totaled $575 billion, banks would hold
A) $534.75 in reserves.
B) $17.25 billion in excess reserves.
C) $1,725 billion in currency.
D) $17.25 billion in reserves.
8) A bank with $100 million in deposits has $15 million of cash in the bank, $10 million in
deposits with the Fed, and $15 million in government securities in its vault. Its total reserves
equal
A) $10 million.
B) $15 million.
C) $25 million.
D) $40 million.
9) If required reserves are $150 and deposits are $1000, what is the required reserve ratio?
A) 10 percent
B) 15 percent
C) 5 percent
D) 85 percent
10) If a customer deposits $10,000 in currency into a checking account, the bank’s total reserves
________.
A) increase
B) do not change
C) are greater than 100 percent
D) decrease
11) A bank’s required reserves are calculated by multiplying ________.
A) its deposits by the required reserve ratio
B) the sum of its deposits and cash in its vault by the required reserve ratio
C) cash in its vault by the required reserve ratio
D) the gold in its vault by the required reserve ratio
12) When bank deposits increase from $1 million to $2 million, banks’ required reserves increase
from $100,000 to $200,000. The required reserve ratio is ________.
A) 10.0
B) 0.10
C) 1.00
D) 0.25
13) Excess reserves are
A) desired reserves minus actual reserves.
B) required reserves minus actual reserves.
C) liquidity funds minus actual reserves.
D) actual reserves minus desired reserves.
14) The difference between actual reserves and required reserves is
A) net worth.
B) excess reserves.
C) illegal reserves.
D) desired reserves.
15) Excess reserves are equal to
A) the sum of desired reserves plus any reserves that are more than are required.
B) actual reserves minus desired reserves.
C) actual reserves plus desired reserves.
D) desired reserves minus actual reserves.
16) The commercial banks on Sunny Island have checking deposits of $4 million, reserves of
$600,000, and loans of $2.4 million. The desired reserve ratio is 10 percent. The banks have
________ of desired reserves and ________ of excess reserves.
A) $600,000; $0
B) $400,000; $200,000
C) $400,000; $600,000
D) $600,000; $200,000
17) Suppose a bank has $1,500,000 in deposits and the desired reserve ratio is 12 percent. If the
bank is currently holding $200,000 in reserves, the excess reserves are equal to
A) zero.
B) $180,000.
C) $120,000.
D) $20,000.
18) If Bank A holds $200 in reserves, deposits are $1000, and the desired reserve ratio is 15
percent, how much are excess reserves?
A) zero, because banks never hold excess reserves
B) $200
C) $50
D) $150
19) A small commercial bank has $10,000 in actual reserves, $60,000 in deposits, and has a 10
percent desired reserve ratio. Its excess reserves are
A) $4,000.
B) $10,000.
C) $50,000.
D) $6,000.
20) Suppose that a bank begins with $500 million in deposits and $100 million in reserves and is
just meeting its desired reserve ratio. Now suppose a decrease in the required reserve ratio lowers
the desired reserve ratio to 10 percent. After the fall in the desired reserve ratio but before the
bank makes any changes, the bank’s excess reserves are
A) 0.
B) $400 million.
C) $450 million.
D) $50 million.
21) Suppose a bank has a desired reserve requirement ratio of 12 percent. If someone deposits
$1,000 in the bank
A) immediately after the deposit, excess reserves increase by $880.
B) the bank can make loans of $1,000.
C) the bank’s desired reserves rise by $1,000.
D) Both answers B and C are correct.
22) Suppose a bank is exactly meeting its desired reserve ratio of 10 percent and a new deposit of
$75,000 is made. Immediately after the deposit is made, the bank’s excess reserves equal
A) zero.
B) $7,500.
C) $67,500.
D) It is impossible to determine without additional information.
23) A bank cannot create money unless its ________.
A) required reserves are greater than actual reserves
B) excess reserves are zero
C) desired reserves are greater than actual reserves
D) excess reserves equal deposits multiplied by the reserve ratio
24) You withdraw $2,000 from your account. Your bank has a desired reserve ratio of 20
percent. This transaction, by itself, will directly reduce
A) the quantity of money by $1,600.
B) deposits by $1,600.
C) the quantity of money by $2,000.
D) deposits by $2,000.
TBK Bank Balance Sheet
Assets Liabilities
Reserves $120
Deposits $600
Loans 580
Net worth 100
Total asset $700
Total liabilities $700
25) The above table presents the balance sheet of the TBK commercial bank. What is this bank’s
actual reserve ratio?
A) 50 percent
B) 12 percent
C) 20 percent
D) 17.14 percent
26) The above table presents the balance sheet of the TBK commercial bank. If the desired
reserve ratio is 25 percent, what is this bank’s desired reserves?
A) $120
B) $150
C) $175
D) $30
Assets
Liabilities
Reserves $100
Loans $600
Total $700
Deposits $400
Net Worth $300
Total $700
27) The above table gives the initial balance sheet for Mini Bank. Mini Bank’s actual reserve
ratio equals ________.
A) 25 percent
B) 12.5 percent
C) 33.3 percent
D) 20 percent
28) The above table gives the initial balance sheet for Mini Bank. If the bank’s desired reserve
ratio is 10 percent, how much does this bank have in excess reserves?
A) $60
B) $90
C) $40
D) $10
29) The above table gives the initial balance sheet for Mini Bank. If the bank’s desired reserve
ratio is 10 percent, it will make
A) more loans.
B) fewer loans.
C) no change in its lending.
D) you cannot predict what the bank will do from this balance sheet without more information.
Assets
Liabilities
Reserves $30
Loans $970
Total $1,000
Deposits $1,000
Total $1,000
30) The above table gives the initial balance sheet for Mega Bank. Mega Bank’s desired reserves
equal its required reserves. Based on the initial balance sheet, what is the required reserve ratio
for Mega Bank?
A) 3 percent
B) 10 percent
C) 30 percent
D) 1.4 percent
31) The above table gives the initial balance sheet for Mega Bank. Barney comes into the bank
and deposits $50 of currency into his checking account. The desired reserve ratio is 3 percent.
After Barney’s deposit, but before any other actions occur, MegaBank will have excess reserves
of
A) $15.00.
B) $33.00.
C) $48.50.
D) $50.00.
32) The above table gives the initial balance sheet for Mega Bank. Barney comes into the bank
and deposits $50 of currency into his checking account. The desired reserve ratio is 3 percent.
After Barney’s deposit, but before any other actions occur, what volume of loans will be made by
MegaBank if the bank wants more profit and holds no excess reserves?
A) $15.00
B) $33.00
C) $48.50
D) $50.00
Assets
Liabilities
Reserves $500
Loans $2,500
Total assets $1,000
Deposits $3,000
Total $3,000
33) The table above shows the balance sheet for Ralph’s Bank. If the desired reserve ratio is 15
percent, Ralph’s Bank has desired reserves of ________.
A) $375
B) $2,500
C) $500
D) $450
34) The table above shows the balance sheet for Ralph’s Bank. If the desired reserve ratio is 15
percent, Ralph’s Bank has excess reserves of ________.
A) $50
B) $500
C) $450
D) $2,500
35) The table shows the balance sheet for Ralph’s Bank. If the desired reserve ratio is 15 percent,
the maximum additional amount that Ralph’s Bank can loan is equal to ________.
A) $50
B) $500
C) $450
D) $2,500
36) When a bank has excess reserves
A) it can create money.
B) it can make loans.
C) it has too many loans.
D) Both answers A and B are correct.
37) A bank can only make a loan if it has
A) excess reserves.
B) a creditworthy customer willing to pay a high interest rate.
C) permission from the Federal Reserve.
D) reserves equal to its deposits.
38) Given a desired reserve ratio of 20 percent, a commercial bank that has received a new
deposit of $100 can make additional loans of
A) $0.
B) $20.
C) $80.
D) $120.
39) A bank has no excess reserves. Then it receives a new deposit for $100,000. If it has a
desired reserve ratio of 20 percent, by how much can it increase its loans?
A) $20,000
B) $80,000
C) $120,000
D) $180,000
40) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio
is 15 percent. How many loans can Bank A create at Bank A?
A) zero, because Bank A has no excess reserves
B) $200
C) $50
D) $850
41) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio
is 20 percent. How many deposits can Bank A create?
A) zero, because Bank A has no excess reserves
B) $200
C) $800
D) $400
University National Bank Balance Sheet
Assets Liabilities
Reserves $320
Loans 12
Total assets $440
Deposits $440
Total liabilities $440
42) The above table has the balance of the University National Bank. All figures are in millions
of dollars. The desired reserve ratio is 20 percent. What is the value of excess reserves held by
the University National Bank?
A) $88 million
B) $232 million
C) $320 million
D) $352 million
43) The above table has the balance of the University National Bank. All figures are in millions
of dollars. The desired reserve ratio is 20 percent. What would be the total increase in loans at
this bank if all excess reserves were loaned out?
A) $528 million
B) $352 million
C) $232 million
D) $0
44) When part of the quantity of money is held in currency, then
A) a currency drain occurs.
B) there is a higher level of excess reserves.
C) the money multiplier will increase in value.
D) the Fed will find it beneficial to increase the discount rate.
45) An increase in currency held outside the banks is ________.
A) a currency drain
B) income
C) a currency surplus
D) wealth
46) Currency outside of banks increases from $100 million to $200 million. This change is
considered
A) a currency drain.
B) a decrease in the monetary base.
C) expansionary monetary policy.
D) contractionary monetary policy.
47) An increase in the currency drain
A) leads to an increase in excess reserves.
B) decreases the size of the money multiplier.
C) results in an increase in deposits.
D) results in an increase in required reserves.
48) The larger the public’s currency drain from the banking system, the
A) smaller is the monetary base.
B) smaller is the money multiplier.
C) larger is the monetary base.
D) larger is the money multiplier.
49) In February, 2010 the U.S. M1 money multiplier crashed to 0.786. Each $1 increase in the
monetary base resulted in the quantity of money increasing by only $0.79. Where did the
remaining $0.21 disappear?
A) Banks held part of the $0.21 as excess reserves.
B) Banks loaned out the $0.21.
C) Consumers held part of the $0.21 as currency.
D) Both A and C are correct.
50) When the Fed conducts an open market operation by purchasing securities from a bank,
________.
A) public holdings of securities increase
B) the bank’s deposits increase but its reserves do not change
C) the bank’s deposits increase but its reserves decrease
D) the bank’s reserves increase
51) Which of the following best describes the chain of events in the money creation process?
A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing
deposits and also the quantity of money. The new deposits then create additional excess reserves.
B) Currency is drained from the quantity of money into the banking system, where it is lent out.
The loans are spent, increasing the currency drain and also the quantity of money.
C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors
come in, desired reserves decrease and the quantity of money increases.
D) Low interest rates discourage people from holding currency. When they deposit the currency,
interest rates rise, increasing the quantity of money.
52) The monetary expansion process from an open market operation continues until
A) required reserves are eliminated.
B) the Federal Reserve takes actions to stop the process.
C) the discount rate is lower than market interest rates.
D) excess bank reserves are eliminated.
53) The money multiplier determines how much
A) real GDP will be expanded given an increase in autonomous investment.
B) the monetary base will be expanded given a change in the quantity of money.
C) the quantity of money will be expanded given a change in the monetary base.
D) money demand will expand given a change in the quantity of money.
54) The money multiplier is
A) the amount by which a change in the quantity of money is multiplied to determine the change
in the monetary base.
B) the amount by which a change in the monetary base is multiplied to determine the change in
the quantity of money.
C) equal to bank reserves divided by the change in the monetary base.
D) equal to bank reserves divided by the change the quantity of money.
55) When the monetary base increases by $2 billion, the quantity of money increases by $10
billion. Thus, the money multiplier equals
A) 0.2.
B) 5.
C) 20.0.
D) 0.5.
56) When the monetary base increases by $4 billion, the quantity of money increases by $10
billion. Thus, the money multiplier equals
A) 0.4.
B) 2.5.
C) 40.0.
D) none of the above.
57) If an increase in the monetary base of $8 billion increases the quantity of money by $64
billion, then the money multiplier is equal to ________.
A) $64 billion
B) 8
C) $8 billion
D) 1/8
58) Suppose that the money multiplier is 3. If the monetary base increases by $1 million, the
quantity of money will
A) increase by $3 million.
B) increase by $333,333.
C) decrease by $3 million.
D) decrease by $333,333.
59) Suppose that the money multiplier is 4. If the monetary base decreases by $2 million, the
quantity of money will
A) increase by $8 million.
B) increase by $500,000.
C) decrease by $8 million.
D) decrease by $500,000.