Chapter 17
The Central Bank Balance Sheet and the Money Supply Process
Multiple-Choice Questions
1. The collapse of the Thai currency, the baht, was partially due to:
a. inaction by the Federal Reserve.
b. the European Central Bank.
c. information provided by the central bank of Thailand.
d. information not provided by the central bank of Thailand.
2. Each of the following items would appear as assets on the central bank’s balance sheet,
except:
a. loans.
b. securities.
c. currency.
d. foreign exchange reserves.
3. A central bank’s balance sheet will categorize the following as liabilities:
a. currency.
b. loans.
c. securities.
d. foreign exchange reserves.
4. A central bank’s balance sheet would categorize each of the following as liabilities, except:
a. currency.
b. loans.
c. the government’s account.
d. accounts of the commercial banks.
5. The main asset held by a central bank in its role as the bankers’ bank is:
a. foreign exchange reserves.
b. currency.
c. loans.
d. securities.
6. A liability of the central bank in functioning as the bankers’ bank is:
a. accounts of commercial banks.
b. securities.
c. loans.
d. currency.
7. For the Federal Reserve’s balance sheet, the asset listed securities would include:
a. private and public debt.
b. mainly U.S. Treasury and municipal bonds.
c. bonds issued by commercial banks.
d. U.S. Treasury securities.
8. If the Federal Reserve is to be independent, then the quantity of securities it purchases
is determined by:
a. the Federal Reserve itself.
b. Congress.
c. the amount the public does not want to purchase at the going price.
d. the Treasury.
9. A central bank holds foreign exchange reserves for:
a. diversification purposes.
b. foreign exchange interventions.
c. safekeeping.
d. diversification and safekeeping.
10. The quantity of securities held by the Federal Reserve is controlled through:
a. the U.S. Treasury.
b. the Fed’s annual budget.
c. open market operations.
d. the purchases made by the regional Reserve banks.
11. In the U.S., loans made by Federal Reserve to banks fall in the categories of:
a. discount loans.
b. reserves.
c. discount loans and reserves.
d. discount loans and foreign exchange reserves.
12. Which of the following statements is most correct?
a. Discount loans are initiated by the Federal Reserve.
b. Discount loans are made when banks need relatively small amounts of cash for the long term.
c. Discount loans are made when banks need relatively large amounts of cash for the long
term.
d. Discount loans are made when banks need relatively small amounts of cash for the short term.
13. Bonds issued by a foreign government in its own currency would:
a. not be held by the Fed.
b. be held by the Fed as part of its securities.
c. be held by the Fed as part of its foreign exchange reserves.
d. be held by the Fed as part of its loans.
14. Bonds issued by the U.S. Treasury would:
a. not be held by the Fed.
b. be held by the Fed as part of its securities.
c. be held by the Fed as part of its foreign exchange reserves.
d. be held by the Fed as part of its loans.
15. Liabilities of commercial banks show up on the Fed’s balance sheet as part of its:
a. liabilities.
b. securities.
c. foreign exchange reserves.
d. loans.
16. As a portion of total assets measured in billions of dollars, the most important asset on the
Fed’s balance sheet is:
a. gold.
b. securities.
c. foreign exchange reserves.
d. loans.
17. Gold is:
a. the most important asset on the Fed’s balance sheet.
b. extremely important as an asset for the Fed.
c. a small portion of the Fed’s assets.
d. very important for monetary policy in the U.S.
18. As a portion of total assets measured in billions of dollars, the least important asset on the
Fed’s balance sheet is:
a. gold.
b. securities.
c. foreign exchange reserves.
d. loans.
19. Which of the following statements is most correct?
a. Reserves are assets of the central bank and liabilities of the U.S. Treasury.
b. Reserves are assets of the central bank and liabilities of the commercial banks.
c. Reserves are liabilities of the commercial banks and assets of the U.S. Treasury.
d. Reserves are assets of the commercial banks and liabilities of the central bank.
20. Reserves are:
a. assets of the central bank and liabilities of the commercial
ba
nk.
b. assets of the commercial banks and liabilities of the central bank.
c. liabilities of the commercial and central banks.
d. assets and liabilities for the central bank.
21. Vault cash is:
a. equal to the total amount of reserves and is an asset of the central bank.
b. not reserves but is a liability of the central bank.
c. a part of reserves and an asset of commercial banks.
d. not reserves but is an asset of central banks.
22. Vault cash is not included in the central bank’s liability category of currency because:
a. only non-bank currency is in the liability category of currency.
b. vault cash really is only electronic funds.
c. vault cash is in the asset category of reserves.
d. it is the liability of the U.S. Treasury.
23. Monetary policy operations for central banks are run through changes in the liability category
of:
a. government’s accounts.
b. currency.
c. reserves.
d. gold.
24. Most responsible central banks publish their balance sheet:
a. at least once a year.
b. quarterly.
c. at least monthly.
d. semi-annually.
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25. The experience of the Marcos Presidency in the Philippines in 1986 showed:
a. the importance of keeping the central bank independent from political pressure.
b. published central bank balance sheets do not always reflect reality.
c. transparency is critical if people are going to trust a central bank.
d. all of the answers given are correct.
26. The monetary base is the sum of:
a. reserves and M2.
b. M1 and reserves.
c. currency in the hands of the public, reserves and M1.
d. currency in the hands of the public and reserves in the banking system.
27. The monetary base is the sum of:
a. reserves and currency in the hands of the public.
b. reserves and M2.
c. currency in the hands of the public and M2.
d. currency in the hands of the public M1.
28. The monetary base is also known as:
a. M1.
b. M2.
c. high-powered money.
d. free reserves.
29. In dollar amounts:
a. the monetary base is larger than M2 and M1 is less than M2.
b. M1 is smaller than the monetary base and M2 is larger than both.
c. the monetary base is larger than M1 and M2.
d. the monetary base is smaller than M1 and M2 is larger than M1.
30. One trait a central bank has over other businesses including banks is that it:
a. receives all of its funding from the government.
b. can control the size of its balance sheet.
c. doesn’t have stockholders.
d. doesn’t have a board of directors.
31. When the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check,
when the check returns, the Fed’s balance sheet will show:
a. an increase in assets and a decrease in liabilities of $1 million.
b. only an increase in assets of $1 million.
c. only an increase in liabilities of $1million.
d. an increase in assets and liabilities of $1 million.
32. When a business purchases a $25,000 computer system by writing a check, the business’s
balance sheet will:
a. show an increase in assets and liabilities of $25,000.
b. only show an increase in assets of $25,000.
c. only show an increase in liabilities of $25,000.
d. still show the same total amount of assets as before the purchase.
33. When a business purchases a $50,000 computer system by writing a check, the business’s
balance sheet will:
a. only show an increase in liabilities of $50,000.
b. show an increase in assets and liabilities for $50,000.
c. not reflect any increase in assets or liabilities, only a change in the composition of assets.
d. only show an increase in assets of $50,000.
34. A central bank’s purchase of securities made by writing checks on itself will:
a. decrease the size of its balance sheet.
b. have no impact at all on the balance sheet.
c. increase the size of their balance sheet.
d. only change the composition of its assets.
35. A central bank’s sale of securities from its portfolio will:
a. decrease the size of its balance sheet.
b. have no impact at all on the balance sheet.
c. only change the composition of its liabilities.
d. only change the composition of its assets.
36. Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal
Reserve. The Fed’s balance sheet will show:
a. only an increase in the asset of securities of $2 billion.
b. only show an increase in the liability of reserves of $2 billion.
c. no change in the size of the balance sheet, just the composition of assets will change from
cash to securities.
d. an increase in the asset category of securities and the liability category of reserves by $2
billion.
37. Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal
Reserve. The Banking System‘s balance sheet will specifically show:
a. only an increase in liabilities of $2 billion.
b. only a decrease in assets of $2 billion.
c. no net change in assets or liabilities, only a change in the composition of assets with securities
decreasing and reserves increasing by $2 billion respectively.
d. no net change in assets or liabilities, only a change in the composition of assets with securities
increasing and reserves decreasing by $2 billion respectively.
38. An open market sale of U.S. Treasury securities by the Fed will cause the Fed’s balance sheet
to show:
a. a decrease in the asset of securities and a decrease in the liability of reserves.
b. an increase in the liability of reserves.
c. no change in the size of the balance sheet, just the composition of assets will change from
securities to cash.
d. an increase in the asset category of securities and the liability category of reserves.
39. An open market sale of U.S. Treasury securities by the Fed will cause the Banking System’s
balance sheet to show:
a. only an increase in liabilities.
b. only a decrease in assets.
c. no net change in assets or liabilities, only a change in the composition of assets with securities
decreasing and reserves increasing.
d. no net change in assets or liabilities, only a change in the composition of assets with securities
increasing and reserves decreasing.
40. The Fed purchases German bonds from commercial banks. Which of the following best
describes the impact on the Fed’s and the Banking System’s balance sheets resulting from this
transaction?
a. The Fed’s assets and liabilities increase, the banking systems assets and liabilities decrease.
b. The Fed‘s assets increase and its liabilities increase, for the banking system, the value of assets
and liabilities do not change, only the composition of assets changes.
c. The Fed’s assets and liabilities do not change, only the compositions of the assets change. For
the banking system, assets and liabilities increase.
d. The Fed‘s assets increase and its liabilities decrease, for the banking system, the value of assets
and liabilities do not change, only the composition of assets changes.
41. The Fed sells German bonds to commercial banks. Which of the following best describes the
impact on the Fed’s and the Banking System’s balance sheets resulting from this transaction?
a. The Fed’s assets and liabilities increase, the banking systems assets and liabilities decrease.
b. The Fed‘s assets increase and its liabilities both increase. For the banking system, the value of
assets and liabilities do not change, only the composition of assets changes.
c. The Fed’s assets and liabilities do not change, only the compositions of the assets change. For
the banking system, assets and liabilities increase.
d. The Fed‘s assets and liabilities both decrease. For the banking system, the value of assets and
liabilities do not change, only the composition of assets changes.
42. To obtain a discount loan from the Fed, a commercial bank must:
a. prove that it will fail if it does not obtain the loan.
b. prove that the loan will be used to make loans.
c. provide collateral.
d. agree to more frequent examinations.
43. When the Fed makes a discount loan, the impact on the Fed’s balance sheet will reflect:
a. no change in liabilities but an increase in assets.
b. a decrease in assets and liabilities.
c. an increase in assets and liabilities.
d. an increase in assets and a decrease in liabilities.
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44. When the Fed makes a discount loan, the impact on the Banking System’s balance sheet is:
a. an increase in liabilities with no change in assets.
b. an increase in assets and a decrease in liabilities.
c. a decrease in assets and an increase in liabilities.
d. the same as that of an open market
purcha
s
e.
45. When the Fed makes a discount loan, the impact on the Banking System’s balance sheet will
reflect:
a. an increase in liabilities with no change in assets.
b. an increase in assets and a decrease in liabilities.
c. a decrease in assets and an increase in liabilities.
d. an increase in assets and liabilities.
46. During the 2007-2009 financial crisis which of the following temporarily became the largest
component of assets on the Fed’s balance sheet:
a. foreign exchange reserves.
b. loans.
c. U.S. Treasury securities.
d. mortgage backed securities.
47. Which of the following have the same impact on the Fed’s balance sheet?
a. An open market purchase and an increase in loans by the Fed to banks
b. An open market sale and an increase in foreign exchange reserves
c. An open market purchase and a decrease in foreign exchange reserves
d. An increase in loans by the Fed to banks and a decrease in foreign exchange reserves
48. Mary decides to withdraw $500 out of her checking account. The impact of this transaction
on the Banking System’s balance sheet will be to:
a. only reduce checkable deposits by $500.
b. increase reserves and reduce checkable deposits by $500 respectively.
c. decrease reserves and checkable deposits by $500 respectively.
d. only reduce reserves by the required reserve rate times $500.
49. Tom decides to withdraw $300 out of his checking account. The impact of this transaction on
the Fed’s balance sheet will be:
a. no change in total assets or total liabilities, but an increase in the liability of currency and a
decrease in the liability of reserves by $300 respectively.
b. no change in total assets but the liability of currency increases by $300.
c. total assets decrease by $300 and the liability of currency increases by $300.
d. no change in either total assets or total liabilities.
50. When an individual withdraws funds from a checking account the:
a. bank’s balance sheet shrinks but the size of the Fed’s balance sheet is not affected.
b. bank’s balance sheet shrinks and so does the Fed’s balance sheet.
c. bank’s balance sheet shrinks but the size of the Fed’s balance sheet increases.
d. size of the bank’s balance sheet stays the same but the size of the Fed’s balance sheet shrinks.
51. Harry gets $1,000 in currency from his grandfather when he graduates from college. He
deposits these funds into his checking account. Considering Harry’s personal balance sheet, his
assets:
a. increased by $1,000 when he deposited the $1,000 into his checking account.
b. Increased when he received the $1,000 in currency from his grandfather.
c. And liabilities increased by $1,000 when he deposited the funds into his checking account.
d. Increased by $1,000 and his liabilities decreased by $1,000 when he deposited the funds into
his checking account.
52. Harry gets $1,000 in currency from his grandfather when he graduates from college. He
deposits these funds into his checking account. What is the impact on the monetary base of
Harry‘s deposit?
a. The monetary base did not change
b. The monetary base increased by $1,000
c. The monetary base decreased by $1,000
d. The monetary base increases by more than a $1,000
53. Over the two-year period during which the financial crisis occurred, the amount of assets in
the Federal Reserve balance sheet increased by:
a. 2.5 times.
b. 3 times.
c. 4.5 times.
d. 6 times.
54. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s required reserves will:
a. not change.
b. increase by $100,000.
c. decrease.
d. increase but by less than $100,000.
55. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s reserves will:
a. increase by $100,000.
b. increase by less than $100,000.
c. not change.
d. decrease.
56. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A’s excess reserves will:
a. increase by less than $100,000.
b. not change.
c. decrease by less than $100,000.
d. increase by $100,000.
57. The most a bank could lend at any time without altering its assets is an amount equal to its:
a. checkable deposits.
b. reserves.
c. excess reserves.
d. net worth.
58. Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits
at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum
amount Bank A could lend?
a. $85 million
b. $15 million
c. $14 million
d. $5 million
59. Bank A has checkable deposits of $140 million, vault cash equaling $1 million and deposits
at the Fed equaling $14 million. If the required reserve rate is ten percent what is the amount of
excess reserves Bank A is holding?
a. It does not have any excess reserves
b. $15 million
c. $2 million
d. $1 million