Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Chapter 14 The Money Supply Process
14.1 Three Players in the Money Supply Process
1) The government agency that oversees the banking system and is responsible for the conduct of
monetary policy in the United States is
A) the Federal Reserve System.
B) the United States Treasury.
C) the U.S. Gold Commission.
D) the House of Representatives.
2) Individuals that lend funds to a bank by opening a checking account are called
A) policyholders.
B) partners.
C) depositors.
D) debt holders.
3) The three players in the money supply process include
A) banks, depositors, and the U.S. Treasury.
B) banks, depositors, and borrowers.
C) banks, depositors, and the central bank.
D) banks, borrowers, and the central bank.
4) Of the three players in the money supply process, most observers agree that the most
important player is
A) the United States Treasury.
B) the Federal Reserve System.
C) the FDIC.
D) the Office of Thrift Supervision.
14.2 The Fed’s Balance Sheet
1) Both ________ and ________ are Federal Reserve assets.
A) currency in circulation; reserves
B) currency in circulation; securities
C) securities; loans to financial institutions
D) securities; reserves
2) The monetary liabilities of the Federal Reserve include
A) securities and loans to financial institutions.
B) currency in circulation and reserves.
C) securities and reserves.
D) currency in circulation and loans to financial institutions.
3) Both ________ and ________ are monetary liabilities of the Fed.
A) securities; loans to financial institutions
B) currency in circulation; reserves
C) securities; reserves
D) currency in circulation; loans to financial institutions
4) The sum of the Fed’s monetary liabilities and the U.S. Treasury’s monetary liabilities is called
A) the money supply.
B) currency in circulation.
C) bank reserves.
D) the monetary base.
5) The monetary base consists of
A) currency in circulation and Federal Reserve notes.
B) currency in circulation and the U.S. Treasury’s monetary liabilities.
C) currency in circulation and reserves.
D) reserves and Federal Reserve Notes.
6) Total reserves minus bank deposits with the Fed equals
A) vault cash.
B) excess reserves.
C) required reserves.
D) currency in circulation.
7) Reserves are equal to the sum of
A) required reserves and excess reserves.
B) required reserves and vault cash reserves.
C) excess reserves and vault cash reserves.
D) vault cash reserves and total reserves.
8) Total reserves are the sum of ________ and ________.
A) excess reserves; borrowed reserves
B) required reserves; currency in circulation
C) vault cash; excess reserves
D) excess reserves; required reserves
9) Excess reserves are equal to
A) total reserves minus discount loans.
B) vault cash plus deposits with Federal Reserve banks minus required reserves.
C) vault cash minus required reserves.
D) deposits with the Fed minus vault cash plus required reserves.
10) Total Reserves minus vault cash equals
A) bank deposits with the Fed.
B) excess reserves.
C) required reserves.
D) currency in circulation.
11) The amount of deposits that banks must hold in reserve is
A) excess reserves.
B) required reserves.
C) total reserves.
D) vault cash.
12) The percentage of deposits that banks must hold in reserve is the
A) excess reserve ratio.
B) required reserve ratio.
C) total reserve ratio.
D) currency ratio.
13) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in
required reserves. Given this information, we can say First National Bank has ________ million
dollars in excess reserves.
A) three
B) nine
C) ten
D) eleven
14) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in
required reserves. Given this information, we can say First National Bank faces a required
reserve ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
15) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in
excess reserves. Given this information, we can say First National Bank has ________ million
dollars in required reserves.
A) one
B) two
C) eight
D) ten
16) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in
excess reserves. Given this information, we can say First National Bank faces a required reserve
ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
17) Suppose that from a new checkable deposit, First National Bank holds eight million dollars
on deposit with the Federal Reserve, one million dollars in required reserves, and faces a
required reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in excess reserves.
A) two
B) eight
C) nine
D) ten
18) Suppose that from a new checkable deposit, First National Bank holds eight million dollars
on deposit with the Federal Reserve, one million dollars in required reserves, and faces a
required reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in vault cash.
A) two
B) eight
C) nine
D) ten
19) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars in
required reserves.
A) one
B) two
C) eight
D) ten
20) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars on
deposit with the Federal Reserve.
A) one
B) two
C) eight
D) ten
21) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars in
excess reserves.
A) one
B) two
C) nine
D) ten
22) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars on
deposit with the Federal Reserve.
A) one
B) two
C) eight
D) ten
23) Suppose that from a new checkable deposit, First National Bank holds eight million dollars
on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in required reserves.
A) one
B) two
C) nine
D) ten
24) Suppose that from a new checkable deposit, First National Bank holds eight million dollars
on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in vault cash.
A) one
B) two
C) nine
D) ten
25) The interest rate the Fed charges banks borrowing from the Fed is the
A) federal funds rate.
B) Treasury bill rate.
C) discount rate.
D) prime rate.
26) When banks borrow money from the Federal Reserve, these funds are called
A) federal funds.
B) discount loans.
C) federal loans.
D) Treasury funds.
14.3 Control of the Monetary Base
1) The monetary base minus currency in circulation equals
A) reserves.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.
2) The monetary base minus reserves equals
A) currency in circulation.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.
3) High-powered money minus reserves equals
A) reserves.
B) currency in circulation.
C) the monetary base.
D) the nonborrowed base.
4) High-powered money minus currency in circulation equals
A) reserves.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.
5) Purchases and sales of government securities by the Federal Reserve are called
A) discount loans.
B) federal fund transfers.
C) open market operations.
D) swap transactions.
6) When the Federal Reserve purchases a government bond from a primary dealer, reserves in
the banking system ________ and the monetary base ________, everything else held constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
7) When the Federal Reserve sells a government bond to a primary dealer, reserves in the
banking system ________ and the monetary base ________, everything else held constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
8) When a primary dealer sells a government bond to the Federal Reserve, reserves in the
banking system ________ and the monetary base ________, everything else held constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
9) When a primary dealer buys a government bond from the Federal Reserve, reserves in the
banking system ________ and the monetary base ________, everything else held constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
10) When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking
system
A) increase by $100.
B) increase by more than $100.
C) decrease by $100.
D) decrease by more than $100.
11) When the Fed sells $100 worth of bonds to a primary dealer, reserves in the banking system
A) increase by $100.
B) increase by more than $100.
C) decrease by $100.
D) decrease by more than $100.
12) When the Fed extends a $100 discount loan to the First National Bank, reserves in the
banking system
A) increase by $100.
B) increase by more than $100.
C) decrease by $100.
D) decrease by more than $100.
13) All else the same, when the Fed calls in a $100 discount loan previously extended to the First
National Bank, reserves in the banking system
A) increase by $100.
B) increase by more than $100.
C) decrease by $100.
D) decrease by more than $100.
14) When the Federal Reserve extends a discount loan to a bank, the monetary base ________
and reserves ________.
A) remains unchanged; decrease
B) remains unchanged; increase
C) increases; increase
D) increases; remain unchanged
15) When the Federal Reserve calls in a discount loan from a bank, the monetary base ________
and reserves ________.
A) remains unchanged; decrease
B) remains unchanged; increase
C) decreases; decrease
D) decreases; remains unchanged
16) If the Fed decides to reduce bank reserves, it can
A) purchase government bonds.
B) extend discount loans to banks.
C) sell government bonds.
D) print more currency.
17) There are two ways in which the Fed can provide additional reserves to the banking system:
it can ________ government bonds or it can ________ discount loans to commercial banks.
A) sell; extend
B) sell; call in
C) purchase; extend
D) purchase; call in
18) A decrease in ________ leads to an equal ________ in the monetary base in the short run.
A) float; increase
B) float; decrease
C) Treasury deposits at the Fed; decrease
D) discount loans; increase
19) The monetary base declines when
A) the Fed extends discount loans.
B) Treasury deposits at the Fed decrease.
C) float increases.
D) the Fed sells securities.
20) An increase in ________ leads to an equal ________ in the monetary base in the short run.
A) float; decrease
B) float; increase
C) discount loans; decrease
D) Treasury deposits at the Fed; increase
21) Suppose a person cashes his payroll check and holds all the funds in the form of currency.
Everything else held constant, total reserves in the banking system ________ and the monetary
base ________.
A) remain unchanged; increases
B) decrease; increases
C) decrease; remains unchanged
D) decrease; decreases
22) Suppose your payroll check is directly deposited to your checking account. Everything else
held constant, total reserves in the banking system ________ and the monetary base ________.
A) remain unchanged; remains unchanged
B) remain unchanged; increases
C) decrease; increases
D) decrease; decreases
23) The Fed does not tightly control the monetary base because it does NOT completely control
A) open market purchases.
B) open market sales.
C) borrowed reserves.
D) the discount rate.
24) Subtracting borrowed reserves from the monetary base obtains
A) reserves.
B) high-powered money.
C) the nonborrowed monetary base.
D) the borrowed monetary base.
25) The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn),
and the monetary base (MB) is
A) MB = MBn – BR.
B) BR = MBn – MB.
C) BR = MB – MBn.
D) MB = BR – MBn.
26) Explain two ways by which the Federal Reserve System can increase the monetary base.
Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the
monetary base?
14.4 Multiple Deposit Creation: A Simple Model
1) When the Fed supplies the banking system with an extra dollar of reserves, deposits increase
by more than one dollar—a process called
A) extra deposit creation.
B) multiple deposit creation.
C) expansionary deposit creation.
D) stimulative deposit creation.
2) When the Fed supplies the banking system with an extra dollar of reserves, deposits ________
by ________ than one dollar—a process called multiple deposit creation.
A) increase; less
B) increase; more
C) decrease; less
D) decrease; more
3) If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a
maximum amount equal to
A) its excess reserves.
B) 10 times its excess reserves.
C) 10 percent of its excess reserves.
D) its total reserves.
4) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank
that previously had no excess reserves, the bank can now increase its loans by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.
5) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank
that previously had no excess reserves, deposits in the banking system can potentially increase
by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.
6) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that
previously had no excess reserves, the bank can now increase its loans by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.
7) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that
previously had no excess reserves, deposits in the banking system can potentially increase by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.
8) In the simple model of multiple deposit creation in which banks do not hold excess reserves,
the increase in checkable deposits equals the product of the change in reserves and the
A) reciprocal of the excess reserve ratio.
B) simple deposit expansion multiplier.
C) reciprocal of the simple deposit multiplier.
D) discount rate.
9) The simple deposit multiplier can be expressed as the ratio of the
A) change in reserves in the banking system divided by the change in deposits.
B) change in deposits divided by the change in reserves in the banking system.
C) required reserve ratio divided by the change in reserves in the banking system.
D) change in deposits divided by the required reserve ratio.
10) If reserves in the banking system increase by $100, then checkable deposits will increase by
$1000 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.05.
D) 0.20.
11) If reserves in the banking system increase by $100, then checkable deposits will increase by
$500 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.05.
D) 0.20
12) If the required reserve ratio is 10 percent, the simple deposit multiplier is
A) 5.0.
B) 2.5.
C) 100.0.
D) 10.0
13) If the required reserve ratio is 15 percent, the simple deposit multiplier is
A) 15.0.
B) 1.5.
C) 6.67.
D) 3.33.
14) If the required reserve ratio is 20 percent, the simple deposit multiplier is
A) 5.0.
B) 2.5.
C) 4.0.
D) 10.0.
15) If the required reserve ratio is 25 percent, the simple deposit multiplier is
A) 5.0.
B) 2.5.
C) 4.0.
D) 10.0.
16) A simple deposit multiplier equal to one implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
17) A simple deposit multiplier equal to two implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
18) A simple deposit multiplier equal to four implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
19) In the simple deposit expansion model, if the banking system has excess reserves of $75, and
the required reserve ratio is 20%, the potential expansion of checkable deposits is
A) $75.
B) $750.
C) $37.50.
D) $375.
20) In the simple deposit expansion model, if the required reserve ratio is 20 percent and the Fed
increases reserves by $100, checkable deposits can potentially expand by
A) $100.
B) $250.
C) $500.
D) $1,000.
21) In the simple deposit expansion model, if the required reserve ratio is 10 percent and the Fed
increases reserves by $100, checkable deposits can potentially expand by
A) $100.
B) $250.
C) $500.
D) $1,000.
22) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when
the required reserve ratio is equal to 20 percent implies that the Fed
A) sold $200 in government bonds.
B) sold $500 in government bonds.
C) purchased $200 in government bonds.
D) purchased $500 in government bonds.
23) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when
the required reserve ratio is equal to 10 percent implies that the Fed
A) sold $1,000 in government bonds.
B) sold $100 in government bonds.
C) purchased $1000 in government bonds.
D) purchased $100 in government bonds.
24) In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the
required reserve ratio is equal to 20 percent implies that the Fed
A) sold $200 in government bonds.
B) sold $500 in government bonds.
C) purchased $200 in government bonds.
D) purchased $500 in government bonds.
25) In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the
required reserve ratio is equal to 10 percent implies that the Fed
A) sold $1,000 in government bonds.
B) sold $100 in government bonds.
C) purchased $1,000 in government bonds.
D) purchased $100 in government bonds.
26) In the simple deposit expansion model, a decline in checkable deposits of $500 when the
required reserve ratio is equal to 10 percent implies that the Fed
A) sold $500 in government bonds.
B) sold $50 in government bonds.
C) purchased $50 in government bonds.
D) purchased $500 in government bonds.
27) In the simple deposit expansion model, a decline in checkable deposits of $500 when the
required reserve ratio is equal to 20 percent implies that the Fed
A) sold $250 in government bonds.
B) sold $100 in government bonds.
C) sold $50 in government bonds.
D) purchased $100 in government bonds.
28) If reserves in the banking system increase by $100, then checkable deposits will increase by
$400 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.20.
D) 0.25.
29) If reserves in the banking system increase by $100, then checkable deposits will increase by
$667 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.05.
C) 0.15.
D) 0.20.
30) If reserves in the banking system increase by $100, then checkable deposits will increase by
$100 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.20.
D) 1.00.
31) If reserves in the banking system increase by $100, then checkable deposits will increase by
$2,000 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.05.
C) 0.10.
D) 0.20.
32) If reserves in the banking system increase by $200, then checkable deposits will increase by
$500 in the simple model of deposit creation when the required reserve ratio is
A) 0.04.
B) 0.25.
C) 0.40.
D) 0.50.
33) If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has actual reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.
34) If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has total reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.
35) If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has actual reserves of
A) $11,000.
B) $20,000.
C) $21,000.
D) $26,000.
36) If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has total reserves of
A) $11,000.
B) $21,000.
C) $31,000.
D) $41,000.
37) If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 15 percent, then the bank has actual reserves of
A) $17,000.
B) $19,000.
C) $24,000.
D) $29,000.
38) If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 10 percent, then the bank has actual reserves of
A) $14,000.
B) $19,000.
C) $24,000.
D) $29,000.
39) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 15 percent, then the bank has actual reserves of
A) $17,000.
B) $22,000.
C) $27,000.
D) $29,000.
40) If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the
reserve requirement is 10 percent, then the bank has actual reserves of
A) $14,000.
B) $17,000.
C) $22,000.
D) $27,000.
41) A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the
required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess
reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
42) A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the
required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank’s excess
reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.