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60. A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in
his bank, Bank B. Which of the following statements pertaining to this transaction is most
true?
a
. Banks A's reserves will decrease by the required reserve rate times $20,000 and Banks B's
reserves will increase by (1- required reserve rate) times $20,000
b. Bank A's reserves decrease by $20,000 and Bank B's reserves increase by $20,000
c. Neither Bank A's nor B's reserves will change
d. Bank B's reserves will decrease and Bank A's reserves will increase by $20,000
61. If the required reserve rate is ten percent and banks do not hold any excess reserves and there
are no changes in currency holdings, a $1 million open market purchase by the Fed will result in
deposit creation of:
a. $9 million.
b. $90 million.
c. $10 million.
d. $900,000.
62. The formula for required reserves is:
a. (1/rD ) D.
b. 1/rD.
c. rD.
d. D/rD.
63. If required reserves are expressed by RR; the required reserve rate by rD and deposits by D,
the simple deposit expansion multiplier is expressed as:
a. RD × D.
b. (1/rD ) D.
c. RR × D.
d. 1/rD.
64. If the Fed were to increase the required reserve rate from ten percent to twenty percent, the
simple deposit expansion multiplier would:
a. double.
b. increase by 10 percent.
c. decrease by a factor of ten.
d. be half as large as it was before the increase.
65. If the Fed were to decrease the required reserve rate from ten percent to five percent, the
simple deposit expansion multiplier would:
a. double.
b. decrease by 5 percent.
c. increase by a factor of five.
d. be half as large as it was before the reduction.
66. If the required reserve rate is ten percent and banks do not hold any excess reserves and there
are no changes in currency holdings, a $1 million open market purchase by the Fed will result in
what change in loans?
a. No change
b. A decrease of $1 million
c. An increase of $10 million
d. An increase of $1 million
67. If we focus on the banking system and assume no change in the public's currency holdings, a
loss of reserves by any one bank must:
a. equal the loss of reserves by the entire system.
b. be equal to the net loss of reserves for the banking system.
c. result in no change in reserves for the banking system.
d. result in a multiple loss to the banking system.
68. If we assume a ten percent required reserve rate, and banks not holding any excess reserves
and no change in currency holdings, an open market sale of $5 million of U.S. Treasury
securities by the Fed, will result in deposits:
a. decreasing by $50 million.
b. increasing by $5 million.
c. increasing by $50 million.
d. not changing.
69. The simple deposit expansion multiplier is really too simple for understanding the link
between changes in a central bank's balance sheet and the quantity of money in the economy
because it:
a. ignores how central banks could change their balance sheet.
b. assumes banks hold excess reserves.
c. ignores the fact people might change their currency holdings.
d. ignores changes in vault cash.
70. Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an
amount that equals three percent of deposits, and the public withdraws ten percent of every
deposit in cash. An open market purchase of $1 million by the Fed will see banking system
deposits increase by:
a. more than $1 million but less than $10 million.
b. exactly $1 million.
c. less than $1 million.
d. more than $10 million but less than $20 million.
71. Which of the following best completes the statement? If people increase their currency
holdings, all else the same, the monetary base:
a. does not change but the quantity of M2 will decrease.
b. increases as does the quantity of M2.
c. decreases as does the quantity of M2.
d. does not change and neither does M2.
72. If there were an increase in the number of bank failures, we should expect the amount of
excess reserves in the banking system to:
a. decrease.
b. increase.
c. not change.
d. decrease since failing banks lost theirs.
73. If M = the quantity of money, m, the money multiplier, MB, the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then
C + R would equal:
a. M.
b. R.
c. MB.
d. ER.
74. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = Excess reserves, then
RR would equal:
a. MB.
b. D –
C.
c
. M/MB.
d. R – ER.
75. If M = the quantity of money, m the money multiplier, MB the Monetary Base, C =
Currency, D = Deposits, R = Reserves, RR = required reserves, and ER = excess reserves,
then m would equal:
a. R/ER.
b. M/MB.
c. C + D.
d. D - C
76. The use of deposit sweeping allows banks to:
a. pay higher rates of interest than are allowed by law.
b. reduce the amount of required reserves they must hold.
c. pay less for FDIC insurance.
d. weed out less profitable deposits.
77. The money multiplier is much lower today than it was twenty-five years ago because:
a. people are holding less currency today.
b. the currency-to-deposit ratio is much higher today.
c. there is less currency available today.
d. credit cards are more widely used.
78. During the Great Depression, the monetary base in the U.S.:
a. decreased significantly.
b. increased.
c. remained constant.
d. was highly erratic.
79. During the early years of the Great Depression, the monetary base and M2:
a. both increased significantly.
b. both decreased significantly.
c. moved in opposite directions; M2 increased while the monetary base decreased.
d. moved in opposite directions; the monetary base increased but M2 decreased.
80. During the early years of the Great Depression, a study of the money aggregates reveals
that the money multiplier:
a. was at an all-time high.
b. increased from 1929 right through 1936.
c. decreased.
d. was constant from 1929 through 1936.
81. One thing the Fed has learned over the past twenty-five years is:
a. the money multiplier is fairly constant no matter what changes are made to the monetary base.
b. the money multiplier is unstable over time.
c. the money multiplier has a trend rate of growth that is fairly constant.
d. it should focus its attention on targeting M2.
82. During the 1990s, the money multipliers for M1 and M2:
a. decreased.
b. remained fairly constant even though the economy grew.
c. the M1 multiplier decreased while the M2 multiplier increased dramatically.
d. increased dramatically as the economy grew.
Short Answer Questions
83. The authors open Chapter 17 with a contrast between the Fed's actions in response to the
terrorist attacks of September, 2001 and its response to the financial crisis of the Great
Depression. Why was the Fed successful at dealing with the crisis in 2001, and not as successful
with the crisis of the early 1930s?
84. The assets that appear on the central bank's balance sheet include the category of loans. Who
are central banks lending to and are these loans associated with the central bank functioning as
the government's bank? Explain.
85. The Federal Reserve's Balance sheet would include an item labeled currency. Is this an asset
or a liability of the Fed, and does it include all currency that is printed? Explain.
86. If the central banks of most countries do not set the exchange rates, why do they hold foreign
exchange as one of their assets?
87. Why do most central banks publish their balance sheets so frequently?
88. Suppose a student writes a check in the amount of $300 to the college bookstore for
textbooks. Discuss briefly the impact on the student's balance sheet, his/her bank's balance sheet
and the balance sheet of the Fed.
89. Explain the impact on the Fed's balance sheet from a $10 million open market purchase of
U.S. Treasury Securities. Be sure to identify which categories of assets and liabilities change and
by what amounts.
29
90. Follow a $1 billion purchase of U.S. Treasury bonds by the Fed from commercial banks.
Discuss the changes that occur to the balance sheet of the banking system and the balance sheet
of the Fed.
91. If the Fed sells euros valued at $100 million to commercial banks, will this change the size
of the Fed's liabilities and assets? Explain.
92. Given the prevalence of electronic payment mechanisms like credit cards and debit cards and
the safety of checks, why is the amount of currency in the hands of the public increasing?
93. The Treasury usually requires most businesses to regularly deposit taxes withheld from
employees into accounts at designated commercial banks. On a regular basis, the funds in these
accounts are transferred to the Treasury's account at the Fed. Discuss what is happening to the
balance sheet of the banking system as the businesses are making deposits and these tax accounts
are increasing. What happens to the banking system's balance sheet when the funds
are tra
ns
ferre
d
to the Fed?
94. You receive a $1,000 gift from your grandmother when you graduate from college. Your
grandmother withdrew the $1,000 from her checking account and gave you ten $100 bills. You
deposit the ten bills into your checking account. Discuss the impact of these transactions on your
grandmother's balance sheet, your balance sheet, and the Fed's balance sheet.
95. What happens to the monetary base if people, fearing a bank run, convert their checking
deposits into currency holdings?
96. The required reserve rate set by the Fed is ten percent of all checkable deposits. A bank sells
$1 million of U.S. Treasury securities it owns to the Fed. Describe what this transaction does to
the bank's total reserves, its required reserves and its excess reserves.
97. If reserves pay interest below the market federal funds rate, why would a bank hold
any excess reserves?
98. Traveler's checks have no reserve requirements and are included in M1. When people travel
during the summer and convert some of their checking account deposits into traveler's checks,
explain what happens to the monetary base.
32
99. Why is it more correct to say that the Fed (the central bank) controls the monetary base than to
say it controls the amount of reserves?
100. If we assume the required reserve rate is ten percent (0.1), and that the public does not
change their currency holdings and that banks do not hold any excess reserves, what will be the
change in deposits resulting from a $150 million open market purchase by the Fed?
101. Why would it be correct to say that, if we assume that people do not change their currency
holdings and that banks do not hold any excess reserves, the equation really could
be stated as ?
102. Total banking system reserves equal $58.65 billion. The total banking system checkable
deposits subject to reserve requirements are $510 billion. The required reserves are $51 billion.
33
What is the required reserve rate, and what is the excess reserve rate?
103. What would be the amount of deposits D, given that the monetary base MB = $750 billion,
the required reserve rate (rD) = 0.1, the excess reserve rate (ER/D) = 0.005, and non-bank
currency to deposits (C/D) equaled 1.2?
104. You are given the following information: Reserves (R) in the banking system amount to $48
billion, of which $45.8 billion are required. Currency in the hands of the public amounts to
$692.5 billion while checkable deposits amount to $650 billion. Calculate the money multiplier.
105. What was the main reason the Fed stopped announcing growth targets for money aggregates
in the early 2000s?
106. During the financial crisis of 2007-2009, the deposit expansion multiplier plummeted to a
fraction of its normal value. Why?
Essay Questions
107. Explain why the Fed making more discount loans to banks, or an open market purchase, or
an increase in foreign exchange reserves all have the same effect on its balance sheet. What is
that effect on the monetary base?
108. Considering changes to the monetary base, are discount loans and federal funds borrowing
equivalent? Explain.
