Money, Banking, and the Financial System (Hubbard/O’Brien)
Chapter 14 The Federal Reserve‘s Balance Sheet and the Money Supply Process
14.1 The Federal Reserve’s Balance Sheet and the Monetary Base
1) The monetary base is equal to
A) all currency in circulation plus all deposits in financial institutions.
B) all currency in circulation plus checkable deposits in financial institutions.
C) all currency in circulation plus reserves held by banks.
D) checkable deposits in depository institutions plus reserves held by banks.
2) Which of the following is a liability of the Fed?
A) U.S. government securities
B) currency in circulation
C) discount loans to banks
D) checkable deposits in commercial banks
3) Which of the following is an asset of the Fed?
A) reserves of banks
B) currency in circulation
C) discount loans to banks
D) checkable deposits in commercial banks
4) Which of the following is a liability of the Fed?
A) reserves
B) U.S. government securities
C) discount loans to banks
D) checkable deposits in commercial banks
5) The paper currency of the United States is issued by
A) state governments and the Fed.
B) state governments and the U.S. Treasury.
C) the U.S. Congress.
D) the Fed.
6) The difference between currency outstanding and currency in circulation is equal to
A) vault cash.
B) bank reserves.
C) coins issued by the U.S. Treasury.
D) zero; they are the same thing.
7) Vault cash is a(an)
A) liability of the Fed and is counted as reserves.
B) asset of the Fed and is counted as reserves.
C) liability of the Fed and is not counted as reserves.
D) asset of the Fed and is not counted as reserves.
8) In July 2010, the largest liability of the Fed was
A) currency in circulation.
B) reserves.
C) discount loans to banks.
D) vault cash.
9) As of July 2010, the value of currency in circulation was about
A) $90 billion.
B) $900 billion.
C) $90 trillion.
D) $900 trillion.
10) As of July 2010, which of the following was true?
A) deposits of foreign governments and international organizations > bank reserves > currency in
circulation
B) currency in circulation > bank reserves > deposits of foreign governments and international
organizations
C) bank reserves > currency in circulation > deposits of foreign government and international
organizations
D) currency in circulation > deposits of foreign governments and international organizations >
bank reserves
11) Reserve deposits are
A) assets for financial institutions, but liabilities for the Fed.
B) liabilities for financial institutions, but assets for the Fed.
C) assets for both financial institutions and the Fed.
D) liabilities for both financial institutions and the Fed.
12) Reserves equal
A) deposits with the Fed plus holdings of U.S. government securities.
B) currency in circulation plus vault cash.
C) deposits with the Fed plus vault cash.
D) currency outstanding plus currency in circulation.
13) The percentage of deposits that banks must hold as reserves is called the
A) percentage rate.
B) required reserve ratio.
C) Fed rate.
D) discount rate.
14) The primary assets of the Fed are
A) discount loans and reserves.
B) discount loans and government securities.
C) government securities and reserves.
D) discount loans and open market operations.
15) The Fed’s portfolio of securities consists principally of
A) municipal bonds.
B) corporate bonds.
C) U.S. Treasury obligations.
D) obligations of foreign governments.
16) When the Fed extends loans to depository institutions
A) it increases the level of reserves.
B) it decreases the level of reserves.
C) it reduces the total value of the assets on its balance sheet.
D) it reduces the total value of the liabilities on its balance sheet.
17) When the Fed lends to depository institutions, the loans are called
A) federal funds.
B) discount loans.
C) repurchase agreements.
D) reverse repurchase agreements.
18) The interest rate the Fed charges on loans to depository institutions is known as
A) the federal funds rate.
B) the Fed loan rate.
C) the discount rate.
D) the interbank clearing rate.
19) What is the most direct method the Fed uses to change the monetary base?
A) open market operations
B) changing the required reserve ratio
C) changing the federal funds rate
D) changing the level of discount loans
20) Open market operations involve
A) the Fed making discount loans to depository institutions.
B) the Fed buying and selling common stock in order to affect the liquidity of the stock market.
C) the Fed buying and selling U.S. government securities.
D) private investors buying and selling securities directly on exchanges, rather than through
brokers.
21) If the Fed buys securities worth $10 million, then
A) bank reserves will increase by $10 million.
B) bank reserves will decrease by $10 million.
C) currency in circulation will increase by $10 million.
D) bank holdings of securities increase by $10 million.
22) If the Fed purchases securities worth $10 million from a commercial bank, the banking
system’s balance sheet will show
A) an increase in securities held of $10 million and an increase in bank reserves of $10 million.
B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million.
C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.
23) If the Fed purchases $1 million in securities from the nonbank public, the monetary base will
rise by $1 million
A) if the public holds the proceeds as currency.
B) if the public deposits the proceeds as checkable deposits.
C) if the public deposits the proceeds with the Treasury in a monetary base account.
D) whether the public holds the proceeds as currency or deposits them as checkable deposits.
24) A $10 million open market purchase will increase the monetary base by
A) $10 million.
B) $10 million times the money multiplier.
C) $10 million divided by the money multiplier.
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public
wishes to hold as currency.
25) A $10 million open market purchase will increase bank reserves by
A) $10 million.
B) $10 million times the money multiplier.
C) $10 million divided by the money multiplier.
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public
wishes to hold as currency.
26) A $10 million open market sale will decrease the monetary base by
A) $10 million.
B) $10 million times the money multiplier.
C) $10 million divided by the money multiplier.
D) an amount between $0 and $10 million, depending on the fraction of the purchase the public
wishes to hold as currency.
27) A $10 million open market sale will decrease the reserves of the banking system by
A) $10 million.
B) $10 million times the money multiplier.
C) $10 million divided by the money multiplier.
D) an amount between $0 and $10 million, depending on the fraction of the sale the public
wishes to hold as currency.
28) If the Fed sells securities worth $10 million to a commercial bank, the Fed’s balance sheet
will show
A) an increase in securities held of $10 million and an increase in bank reserves of $10 million.
B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million.
C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.
29) In managing the monetary base, the Fed most often uses
A) open market purchases.
B) printing money.
C) discount loans.
D) tax increases.
30) If the Fed makes a discount loan of $2 million to a commercial bank, the Fed’s balance sheet
will show
A) an increase in discount loans of $2 million and an increase in bank reserves of $2 million.
B) an increase in discount loans of $2 million and a decrease in bank reserves of $2 million.
C) a decrease in discount loans of $2 million and an increase in bank reserves of $2 million.
D) a decrease in discount loans of $2 million and a decrease in bank reserves of $2 million.
31) Although open market operations and discount loans both change the monetary base, the Fed
has
A) greater control over open market operations than over discount loans.
B) greater control over discount loans than over open market operations.
C) very little control over either discount loans or open market operations.
D) complete control over both discount loans and open market operations.
32) Which of the following statements is correct?
A) The volume of open market operations is determined jointly by the actions of the Fed, the
banking system, and the nonbank public.
B) The Fed’s control over discount lending is more complete than its control over open market
operations.
C) The Fed completely controls the volume of open market operations.
D) The Fed has complete control over the volume of both discount loans and open market
operations.
33) Which of the following statements is correct?
A) The discount rate is determined by market forces.
B) The Fed’s control over discount lending is more complete than its control over open market
operations.
C) Decisions by both banks and the Fed determine the volume of discount loans.
D) The discount rate is typically greater than other short-term market interest rates.
34) On the books of the Fed the difference between borrowed reserves and discount loans is
equal to
A) excess reserves.
B) required reserves.
C) currency in circulation.
D) zero; they are the same thing.
35) Which of the following expressions is correct?
A) B = Bnon + BR
B) BR = Bnon + B
C) Bnon = B + BR
D) Bnon = –BR – B
36) What unusual policy actions did the Fed take during the Financial Crisis of 2007-2009 that
affected its balance sheet?
37) Why did banks increase their holdings of excess reserves during the Financial Crisis of 2007-
2009?
38) Illustrate the effect of the Fed purchasing $50 million worth of mortgage-backed securities
on the Fed’s balance sheet.
39) Illustrate the effect of an open market sale of $20 million worth of Treasury bills on the Fed’s
balance sheet.