ECON 303 Chapter 15 Study Questions

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.

(e) none of the above.

2) Of the four 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.

3) Reserves equal

(a) bank deposits at the Fed plus currency in circulation.

(b) vault cash plus currency in circulation.

(c) Treasury deposits plus vault cash.

(d) Treasury deposits plus bank deposits at the Fed.

(e) vault cash plus bank deposits at the Fed.

4) When the Fed sells $100 worth of bonds 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.

5) Two ways in which the Fed can provide additional reserves to the banking system are by _____ government bonds or by _____ foreign currency deposits.

(a) purchasing; purchasing

(b) purchasing; selling

(c) selling; purchasing

(d) selling; selling

(e) issuing; purchasing

6) 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.

7) A bank has excess reserves of $10,000 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) $1,000.

(b) -$1,000.

(c) $5,000.

(d) -$5,000.

8) Which of the following are liabilities on the Fed’s balance sheet?

(a) U.S. Treasury securities

(b) U.S. Treasury deposits

(c) Discount loans

(d) Only (a) and (c) of the above

9) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is

(a) $8000.

(b) $1200.

(c) $1200.8.

(d) $8400.

10) The money multiplier is smaller than the simple deposit multiplier when

(a) the excess reserves ratio is zero.

(b) the currency–checkable deposit ratio is zero.

(c) the excess reserves ratio is greater than zero.

(d) only (a) and (b) of the above are true.

11) The money multiplier is smaller than the simple deposit multiplier when

(a) the excess reserves ratio is greater than zero.

(b) the currency–checkable deposit ratio is greater than zero.

(c) the excess reserves ratio is zero.

(d) all of the above are true.

(e) only (a) and (b) of the above are true.

12) For a given level of the monetary base, an increase in the required reserve ratio on checkable deposits will mean

(a) a decrease in the money supply.

(b) an increase in the money supply.

(c) an increase in checkable deposits.

(d) an increase in discount borrowing.

13) For a given level of the monetary base, a decrease in the currency ratio causes the money multiplier to _____ and the money supply to _____.

(a) decrease; increase

(b) increase; increase

(c) decrease; decrease

(d) increase; decrease

14) Assuming initially that r = 10%, c = 40%, and e = 0, an increase in c to 50% causes

(a) the money multiplier to increase from 2.5 to 2.8.

(b) the money multiplier to decrease from 2.8 to 2.5.

(c) the money multiplier to increase from 2.33 to 2.8.

(d) the money multiplier to decrease from 2.8 to 2.33.

(e) no change in the money multiplier.

15) Assuming initially that r = 10%, c = 40%, and e = 0, an decrease in c to 30% causes

(a) the money multiplier to increase from 2.8 to 3.25.

(b) the money multiplier to decrease from 3.25 to 2.8.

(c) the money multiplier to increase from 2.8 to 3.5.

(d) the money multiplier to decrease from 3.5 to 2.8.

(e) no change in the money multiplier.

16) All else being constant, when banks increase their holdings of excess reserves,

(a) the monetary base falls by an amount equal to the increased holdings of excess reserves.

(b) the money supply falls by a multiple of the increased holdings of excess reserves.

(c) the money supply falls by an amount equal to the increased holdings of excess reserves.

(d) none of the above will occur.

17) When banks reduce their holdings of excess reserves

(a) the monetary base increases.

(b) the monetary base falls.

(c) the money supply increases.

(d) the money supply falls.

(e) the money multiplier falls.

18) The excess reserves ratio is _____ related to expected deposit outflows, and is _____ related to the market interest rate.

(a) negatively; negatively

(b) negatively; positively

(c) positively; negatively

(d) positively; positively

19) Factors that cause the excess reserves ratio to rise include:

(a) a rise in expected deposit outflows.

(b) a decline in market interest rates.

(c) a rise in market interest rates.

(d) only (a) and (b) of the above.

(e) only (a) and (c) of the above.

20) Recognizing the distinction between discount loans and the nonborrowed monetary base, the money supply model is specified as

(a) M = m ´ (MB_n – DL).

(b) M = m ´ (MB_n + DL).

(c) M = m + (MB_n – DL).

(d) M = m - (MB_n + DL).

(e) M = m/(MB_n + DL).

21) During the banking panic that occurred between October 1930 and January 1931,

(a) both currency ratio and excess reserve ratio rose.

(b) excess reserve ratio more than doubled.

(c) the money supply declined sharply.

(d) all of the above occurred.

(e) only (a) and (b) of the above occurred.

22) During the banking crisis that ended in March 1933,

(a) the money supply (M1) had declined by over 25 percent—by far the largest decline in American history.

(b) the money supply declined despite a 20 percent rise in the monetary base.

(c) both currency ratio and excess reserve ratio rose.

(d) all of the above.

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