Question 1

If a bank keeps some of its excess reserves, the money multiplier:

Accepted Answer

A)   increases.
B)   stays the same.
C)   goes to zero.
D)   decreases.E) All of the above
F) B) and C)

Question 2

Which of the following would cause the money supply in the United States to decrease?

Accepted Answer

A)   an increase in reserve requirements
B)   a decrease in the discount rate
C)   a purchase of U.S. government bonds by the Federal Reserve
D)   an increase in the world supply of goldE) A) and B)
F) A) and C)

Question 3

When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?

Accepted Answer

A)   It purchases U.S. government securities.
B)   It increases the discount rate.
C)   It increases the required reserve ratio.
D)   It sells bonds on the open market.E) All of the above
F) A) and B)

Question 4

For a bank to earn as much profit as possible, its excess reserves should be:

Accepted Answer

A)   equal to its required reserves.
B)   as small as possible.
C)   less than its vault cash.
D)   growing at a constant rate.E) None of the above
F) C) and D)

Question 5

When a recession hits, we would expect the government to run a budget deficit by raising the level of its spending or by cutting taxes, or perhaps both. The Fed would be expected to:

Accepted Answer

A)   reduce the required reserve ratio, increase the discount rate, and buy securities on the open market.
B)   reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market.
C)   reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market.
D)   increase the required reserve ratio, reduce the discount rate, and sell securities on the open market.E) None of the above
F) A) and B)

Question 6

When the required reserve ratio is changed,

Accepted Answer

A)   the money multiplier is changed but the amount of excess reserves in the banking system is unchanged.
B)   the money multiplier is unchanged but the amount of excess reserves in the banking system is changed.
C)   the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio.
D)   the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio.E) B) and C)
F) C) and D)

Question 7

Banks would be expected to:

Accepted Answer

A)   minimize holding excess reserves because the practice of holding more than the required reserves is illegal.
B)   minimize holding excess reserves because the practice of holding more than the required reserves is not profitable.
C)   maximize holding excess reserves because the practice of holding more than the required reserves increases the assets of the bank.
D)   maximize holding excess reserves because the practice of holding more than the required reserves reduces the tax paid by the bank to the Federal Reserve.E) A) and B)
F) A) and C)

Question 8

Which of the following actions by the Fed would increase the money supply?

Accepted Answer

A)   reducing the required reserve ratio
B)   selling government bonds in the open market
C)   increasing the discount rate
D)   increasing the income tax rateE) C) and D)
F) A) and B)

Question 9

Discuss how a single bank creates money. What is the limit to which a single bank can add to the money supply? By how much can an entire banking system add to the money supply?

Accepted Answer

A single bank is limited in its money cr...

Question 10

During a period of inflation, the Fed is likely to:

Accepted Answer

A)   sell government securities to banks in order to reduce the amount of loanable funds.
B)   buy government securities from banks in order to reduce the amount of loanable funds.
C)   cut the discount rate to increase the affordability of loanable funds.
D)   cut the required reserve ratio in order to reduce the amount of excess reserves banks have to loan out.E) C) and D)
F) A) and B)

Question 11

Which of the following is a valid statement?

Accepted Answer

A)   The required reserve ratio equals the required reserves as a percentage of total deposits.
B)   The required reserves equal the maximum reserves required by the Fed.
C)   Excess reserves equal total reserves plus required reserves.
D)   The required reserve ratio equals percentage of savings account deposit, but not checkable deposits, required by the Fed.E) A) and B)
F) None of the above

Question 12

When the required reserve ratio is lowered,

Accepted Answer

A)   increases, and the amount of excess reserves increases in the banking system.
B)   decreases, and the amount of excess reserves increases in the banking system.
C)   decreases, and the amount of excess reserves decreases in the banking system.
D)   increases, and the amount of excess reserves decreases in the banking system.E) A) and D)
F) A) and B)

Question 13

A bank's "required reserves" are:

Accepted Answer

A)   held as deposits with the Federal Reserve System.
B)   equal to its checkable deposits.
C)   equal to its transactions deposits.
D)   equal to its loans.E) A) and B)
F) A) and C)

Question 14

A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

Accepted Answer

A)   $10,000.
B)   $15,000.
C)   $75,000.
D)   $5,000.E) None of the above
F) C) and D)

Question 15

The term "open market operations" refers to the:

Accepted Answer

A)   loan-making activities of commercial banks.
B)   effect of expansionary monetary policy on interest rates.
C)   operation of competitive markets in the banking industry as the result of deregulation.
D)   buying and selling of government securities by the Federal Reserve.E) B) and D)
F) None of the above

Question 16

Which of the following directs the buying and selling of U.S. government securities?

Accepted Answer

A)   Board of Governors
B)   Federal Reserve Banks
C)   Federal Open Market Committee
D)   Federal Advisory CouncilE) B) and D)
F) A) and B)

Question 17

If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new money that can be created by the banking system, including the initial deposit, is:

Accepted Answer

A)   $25,000.
B)   $2,500.
C)   $4,000.
D)   $40,000.E) A) and B)
F) A) and C)

Question 18

Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum change in the money supply that can be supported is:

Accepted Answer

A)   $13 million.
B)   $30 million.
C)   $97 million.
D)   $333.3 million.E) A) and D)
F) A) and C)

Question 19

Exhibit 15-2 Balance Sheet of Springfield National Bank

In Exhibit 15-2, if Springfield National's customers write checks for $200 and the required reserve ratio is 20 percent, then its required reserves fall to:

Accepted Answer

A)   $0.
B)   $40.
C)   $160.
D)   $460.E) None of the above
F) A) and B)

Question 20

If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:

Accepted Answer

A)   4.00.
B)   2.50.
C)   0.40.
D)   0.25.E) A) and B)
F) A) and C)

Exam 25: Money Creation

During a period of inflation, the Fed is likely to:

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A bank currently has checkable deposits of $100,000, total reserves of $30,000, and loans of $70,000. If the required reserve ratio is lowered from 20 percent to 15 percent, this bank can increase its loans by:

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Which of the following actions by the Fed would increase the money supply?

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Banks would be expected to:

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Suppose the required reserve ratio is 3 percent, and currency and reserves total $10 million. The maximum change in the money supply that can be supported is:

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If a bank receives a new deposit of $10,000, and the required reserve ratio is 25 percent, then the new money that can be created by the banking system, including the initial deposit, is:

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When the Federal Reserve System wants to increase the money supply, which of the following actions would the Fed choose?

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Which of the following directs the buying and selling of U.S. government securities?

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The term "open market operations" refers to the:

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If the required reserve ratio is a uniform 25 percent on all deposits, the money multiplier will be:

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If a bank keeps some of its excess reserves, the money multiplier:

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Discuss how a single bank creates money. What is the limit to which a single bank can add to the money supply? By how much can an entire banking system add to the money supply?

Correct AnswerverifiedA single bank is limited in its money cr...View AnswerShow Answer

Exhibit 15-2 Balance Sheet of Springfield National Bank In Exhibit 15-2, if Springfield National's customers write checks for $200 and the required reserve ratio is 20 percent, then its required reserves fall to:

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When the required reserve ratio is changed,

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A bank's "required reserves" are:

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Which of the following would cause the money supply in the United States to decrease?

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Which of the following is a valid statement?

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For a bank to earn as much profit as possible, its excess reserves should be:

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When a recession hits, we would expect the government to run a budget deficit by raising the level of its spending or by cutting taxes, or perhaps both. The Fed would be expected to:

Correct AnswerverifiedShow Answer

When the required reserve ratio is lowered,

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A single bank is limited in its money cr...
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