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1) The Fed uses three policy
tools to manipulate the money supply: ________,
which affect
reserves and the monetary
base; changes in ________, which affect the
monetary base; and
changes in ________,
which affect the money multiplier.
A)
open market operations; borrowed reserves; margin
requirements
B) open market
operations; borrowed reserves; reserve
requirements
C) borrowed reserves;
open market operations; margin requirements
D) borrowed reserves; open market
operations; reserve requirements
Answer: B
2)
The Fed uses three policy tools to manipulate the
money supply: open market operations, which
affect the ________; changes in
borrowed reserves, which affect the ________; and
changes in
reserve requirements, which
affect the ________.
A) money
multiplier; monetary base; monetary base
B) monetary base; money multiplier;
monetary base
C) monetary base;
monetary base; money multiplier
D)
money multiplier; money multiplier; monetary base
Answer: C
3)
The interest rate charged on overnight loans of
reserves between banks is the
A) prime
rate.
B) discount rate.
C)
federal funds rate.
D) Treasury bill
rate.
Answer: C
4) The primary indicator of the Fed's
stance on monetary policy is
A) the
discount rate.
B) the federal funds
rate.
C) the growth rate of the
monetary base.
D) the growth rate of
M2.
Answer: B
5) The quantity of reserves demanded
equals
A) required reserves plus
borrowed reserves.
B) excess reserves
plus borrowed reserves.
C) required
reserves plus excess reserves.
D)
total reserves minus excess reserves.
Answer: C
6) Everything
else held constant, when the federal funds rate is
________ the interest rate paid on
reserves, the quantity of reserves
demanded rises when the federal funds rate
________.
A) above, rises
B)
above, falls
C) below, rises
D) below, falls
Answer: B
1
19) In the market for reserves, if the
federal funds rate is above the interest rate paid
on excess
reserves, an open market sale
________ the supply of reserves causing the
federal funds rate to
________,
everything else held constant.
A)
decreases; decrease
B) increases;
decrease
C) increases; increase
D) decreases; increase
Answer: D
Open
Market Operations
1)
________ are the most important monetary policy
tool because they are the primary
determinant of changes in the ________,
the main source of fluctuations in the money
supply.
A) Open market operations;
monetary base
B) Open market
operations; money multiplier
C)
Changes in reserve requirements; monetary base
D) Changes in reserve requirements;
money multiplier
Answer: A
2) Open market purchases
raise the ________ thereby raising the ________.
A) money multiplier; money supply
B) money multiplier; monetary base
C) monetary base; money supply
D) monetary base; money multiplier
Answer: C
3)
Open market purchases ________ reserves and the
monetary base thereby ________ the money
supply.
A) raise; lowering
B) raise; raising
C) lower;
lowering
D) lower; raising
Answer: B
4)
Open market sales shrink ________ thereby lowering
________.
A) the money multiplier; the
money supply
B) the money multiplier;
reserves and the monetary base
C)
reserves and the monetary base; the money supply
D) the money base; the money multiplier
Answer: C
5)
Open market sales ________ reserves and the
monetary base thereby ________ the money
supply.
A) raise; lowering
B) raise; raising
C) lower;
lowering
D) lower; raising
Answer: C
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6)
The two types of open market operations are
A) offensive and defensive.
B) dynamic and reactionary.
C) active and passive.
D)
dynamic and defensive.
Answer: D
7) There are two types of
open market operations: ________ open market
operations are intended
to change the
level of reserves and the monetary base, and
________ open market operations are
intended to offset movements in other
factors that affect the monetary base.
A) defensive; dynamic
B)
defensive; static
C) dynamic; defensive
D) dynamic; static
Answer:
C
8) Open market operations
intended to offset movements in noncontrollable
factors (such as float)
that affect
reserves and the monetary base are called
A) defensive open market operations.
B) dynamic open market operations.
C) offensive open market operations.
D) reactionary open market operations.
Answer: A
9)
When the Federal Reserve engages in a repurchase
agreement to offset a withdrawal of Treasury
funds from the Federal Reserve, the
open market operation is said to be
A)
defensive.
B) offensive.
C)
dynamic.
D) reactionary.
Answer: A
10)
The Federal Open Market Committee makes the Fed's
decisions on the purchase or sale of
government securities, but these
purchases or sales are executed by the Federal
Reserve Bank of
A) Chicago.
B) Boston.
C) New York.
D) San Francisco.
Answer: C
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27) If the Fed wants to temporarily
inject reserves into the banking system, it will
engage in
A) a repurchase agreement.
B) a matched sale-purchase transaction.
C) a reverse repurchase agreement.
D) an open market sale.
Answer: A
Discount Policy
1) Discount policy affects the money
supply by affecting the volume of ________ and the
________.
A) excess
reserves; monetary base
B) borrowed
reserves; monetary base
C) excess
reserves; money multiplier
D) borrowed
reserves; money multiplier
Answer: B
2) The discount rate is
A) the interest rate the Fed charges on
loans to banks.
B) the price the Fed
pays for government securities.
C) the
interest rate that banks charge their most
preferred customers.
D) the price banks
pay the Fed for government securities.
Answer: A
3)
The most common type of discount lending that the
Fed extends to banks is called
A)
seasonal credit.
B) secondary credit.
C) primary credit.
D)
installment credit.
Answer: C
4) The most common type of
discount lending, ________ credit loans, are
intended to help healthy
banks with
short-term liquidity problems that often result
from temporary deposit outflows.
A)
secondary
B) primary
C)
temporary
D) seasonal
Answer: B
5)
When the Fed acts as a lender of last resort, the
type of lending it provides is
A)
primary credit.
B) seasonal credit.
C) secondary credit.
D)
installment credit.
Answer: C
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6) The Fed's
discount lending is of three types: ________ is
the most common category; ________
is
given to a limited number of banks in vacation and
agricultural areas; ________ is given to
banks that have experienced severe
liquidity problems.
A) seasonal
credit; secondary credit; primary credit
B) secondary credit; seasonal credit;
primary credit
C) primary credit;
seasonal credit; secondary credit
D)
seasonal credit; primary credit; secondary credit
Answer: C
7)
The discount rate is ________ kept ________ the
federal funds rate.
A) always; below
B) typically; below
C)
typically; equal to
D) typically;
above
Answer: D
8) The discount rate refers to the
interest rate on
A) primary credit.
B) secondary credit.
C)
seasonal credit.
D) federal funds.
Answer: A
19) The most important advantage of
discount policy is that the Fed can use it to
A) precisely control the monetary base.
B) perform its role as lender of last
resort.
C) control the money supply.
D) punish banks that have deficient
reserves.
Answer: B
Reserve Requirements
1) An increase in ________ reduces the
money supply since it causes the ________ to fall.
A) reserve requirements; monetary base
B) reserve requirements; money
multiplier
C) margin requirements;
monetary base
D) margin requirements;
money multiplier
Answer: B
2) A decrease in ________ increases the
money supply since it causes the ________ to rise.
A) reserve requirements; monetary base
B) reserve requirements; money
multiplier
C) margin requirements;
monetary base
D) margin requirements;
money multiplier
Answer: B
3) The Federal Reserve has had the
authority to vary reserve requirements since the
5
A) 1920s.
B)
1930s.
C) 1940s.
D) 1950s.
Answer: B
4)
Since 1980, ________ are subject to reserve
requirements.
A) only commercial banks
B) only the member institutions of the
Federal Reserve
C) only nationally
chartered depository institutions
D)
all depository institutions
Answer: D
5) Funds held in ________
are subject to reserve requirements.
A)
all checkable deposits
B) all checkable
and time deposits
C) all checkable,
time, and money market fund deposits
D)
all time deposits
Answer: A
6) The policy tool of
changing reserve requirements is
A) the
most widely used.
B) the preferred tool
from the bank's perspective.
C) no
longer used.
D) still used, even with
its disadvantages.
Answer: C
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.
Answer: A
2)
Individuals that lend funds to a bank by opening a
checking account are called
A)
policyholders.
B) partners.
C) depositors.
D) debt
holders.
Answer: C
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.
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D) banks, borrowers, and
the central bank.
Answer: C
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.
Answer: B
The Fed's Balance Sheet
1) Both ________ and
________ are Federal Reserve assets.
A)
currency in circulation; reserves
B)
currency in circulation; government securities
C) government securities; discount
loans
D) government securities;
reserves
Answer: C
2) The monetary liabilities of the
Federal Reserve include
A) government
securities and discount loans.
B)
currency in circulation and reserves.
C) government securities and reserves.
D) currency in circulation and discount
loans.
Answer: B
3) Both ________ and ________ are
monetary liabilities of the Fed.
A)
government securities; discount loans
B) currency in circulation; reserves
C) government securities; reserves
D) currency in circulation; discount
loans
Answer: B
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.
Answer: D
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.
Answer: C
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6) Total reserves minus
bank deposits with the Fed equals
A)
vault cash.
B) excess reserves.
C) required reserves.
D)
currency in circulation.
Answer: A
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.
Answer: A
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
Answer: D
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.
Answer: B
10) Total Reserves minus
vault cash equals
A) bank deposits with
the Fed.
B) excess reserves.
C) required reserves.
D)
currency in circulation.
Answer: A
11) The amount of deposits
that banks must hold in reserve is
A)
excess reserves.
B) required reserves.
C) total reserves.
D) vault
cash.
Answer: B
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.
Answer:
B
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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
Answer: B
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
Answer: A
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
Answer: A
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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
Answer: A
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.
Answer: A
2) The monetary base minus reserves
equals
A) currency in circulation.
B) the borrowed base.
C) the
nonborrowed base.
D) discount loans.
Answer: A
3)
High-powered money minus reserves equals
A) reserves.
B) currency in
circulation.
C) the monetary base.
D) the nonborrowed base.
Answer: B
4)
High-powered money minus currency in circulation
equals
A) reserves.
B) the
borrowed base.
C) the nonborrowed base.
D) discount loans.
Answer:
A
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.
Answer: C
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6) When the Federal Reserve purchases a
government bond from a bank, 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
Answer: A
7) When the Federal Reserve sells a
government bond to a bank, 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
Answer: D
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8) When a bank 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
Answer: A
9)
When a bank 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
Answer: D
10)
When the Fed buys $$100 worth of bonds from First
National Bank, reserves in the banking
system
A) increase by $$100.
B) increase by more than $$100.
C) decrease by $$100.
D)
decrease by more than $$100.
Answer: A
11) When the Fed sells $$100
worth of bonds to 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.
Answer: C
12) If a person selling
bonds to the Fed cashes the Fed's check, then
reserves ________ and
currency in
circulation ________, everything else held
constant.
A) remain unchanged; declines
B) remain unchanged; increases
C) decline; remains unchanged
D) increase; remains unchanged
Answer: B
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.
Answer: B
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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
Answer: B
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) $$100 times
the required reserve ratio.
Answer: B
6) In the
simple deposit expansion model, if the Fed extends
a $$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.
Answer: B
8) The formula for the simple deposit
multiplier can be expressed as
1
A)
△
R
=
×
△
T
r
1
B)
△
D =
×
△
R
r
1
C)
△
r =
×
△
T
R
1
D)
△
R =
×
△
D
r
Answer: B
10) 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.
Answer: B
12) 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
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A) 0.01.
B)
0.10.
C) 0.05.
D) 0.20
Answer: D
14)
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.
Answer: C
18) 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.
Answer: B
21)
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) $$1,000.
Answer: C
24) In the simple deposit
expansion model, an expansion in checkable
deposits of $$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.
Answer: D
27) 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 $$500 in government bonds.
Answer: B
30) If reserves in the banking system
increase by $$100, then checkable deposits will
increase by
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