ECON  303 Chapter 16 Study Questions

 

1)            Money supply models tend to focus on the monetary base rather than on reserves since

(a)    Fed actions have no effect on reserves but have a predictable effect on the monetary base.

(b)    Fed actions in general have little effect on reserves but have a predictable effect on the monetary base.

(c)    Fed actions have a more predictable effect on the monetary base.

(d)    none of the above.

 

2)            The formula linking the money supply to the monetary base is

(a)    M = m/MB.

(b)    M = m ´ MB.

(c)    m = M ´ MB.

(d)    MB = M ´ m.

(e)    M = m + MB.

 

3)            The equation linking the monetary base to the levels of checkable deposits and currency is

(a)    MB = R + C.

(b)    MB = (r ´ D) + ER.

(c)    MB = (r ´ D) + ER + C.

(d)    both (a) and (b) are correct.

(e)    both (a) and (c) are correct.

 

4)            An increase in the monetary base that goes into currency is _____, while an increase that goes into deposits is _____.

(a)    multiplied; multiplied

(b)    not multiplied; multiplied

(c)    multiplied; not multiplied

(d)    not multiplied; not multiplied

(e)    added; subtracted

 

5)            The formula for the checkable deposits that includes excess reserves and currency is

(a)    m = 1/(r + e + c).

(b)    M = 1/(r + e + c).

(c)    M = (1 + c)/(r + e + c).

(d)    D = 1/(r + e + c).

(e)    D = (1/(r + e + c)) ´ MB.

 

6)            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 currency ratio is

(a)    .25.

(b)    .50.

(c)    .40.

(d)    .05.

 

7)            If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money supply is

(a)    $2700.

(b)    $3000.

(c)    $1200.

(d)    $1800.

 

8)            If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money multiplier is approximately

(a)    2.5.

(b)    2.8.

(c)    2.0.

(d)    0.67.

 

9)            If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the monetary base is

(a)    $300 billion.

(b)    $600 billion.

(c)    $333 billion.

(d)    $667 billion.

 

10)         Because an increase in the monetary base will mean an increase in the level of currency in circulation,

(a)    the actual money multiplier will be smaller than the simple deposit multiplier.

(b)    a given change in the monetary base will lead to a smaller increase in checkable deposits than indicated by the simple deposit multiplier.

(c)    a given change in the monetary base will lead to a larger increase in checkable deposits than indicated by the simple deposit multiplier.

(d)    both (a) and (b) of the above will occur.

 

11)         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.

 

12)         For a given level of the monetary base, an increase in the required reserve ratio on checkable deposits causes the money multiplier to _____ and the money supply to _____.

(a)    decrease; increase

(b)    increase; increase

(c)    decrease; decrease

(d)    increase; decrease

 

13)         Given the monetary base, a decrease in the currency ratio means

(a)    an increase in the nonborrowed base, but an equal decrease in the borrowed base.

(b)    an increase in the borrowed base offset by an equal decrease in the nonborrowed base.

(c)    an increase in the money supply.

(d)    a decrease in the money supply.

(e)    none or the above.

 

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 = 15%, c = 40%, and e = 5%, an increase in e to 10% causes

(a)    the money multiplier to increase from 2.15 to 2.33.

(b)    the money multiplier to decrease from 2.33 to 2.15.

(c)    the money multiplier to increase from 1.54 to 1.67.

(d)    the money multiplier to decrease from 1.67 to 1.54.

(e)    no change in the money multiplier.

 

16)         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.

 

17)         The money multiplier is

(a)    negatively related to the currency–checkable deposit ratio.

(b)    positively related to the required reserve ratio.

(c)    positively related to holdings of excess reserves.

(d)    both (a) and (b) of the above.

 

18)         Factors that cause an increase in the money multiplier include:

(a)    a lowering of the required reserve ratio.

(b)    a decrease in the market interest rate.

(c)    an increase in expected deposit outflows.

(d)    only (a) and (b) of the above.

 

19)         Factors that cause a decline in the money multiplier include:

(a)    a lowering of the required reserve ratio.

(b)    an increase in the market interest rate.

(c)    an increase in expected deposit outflows.

(d)    all of the above.

 

20)         The Fed does not tightly control the monetary base because it does not completely control

(a)    open market purchases.

(b)    open market sales.

(c)    discount loans.

(d)    the discount rate.

(e)    all of the above.

 

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

(a)    M = m ´ (MBn – DL).

(b)    M = m ´ (MBn + DL).

(c)    M = m + (MBn – DL).

(d)    M = m - (MBn + DL).

(e)    M = m/(MBn + DL).

 

22)         The Fed lacks complete control over the money supply because it cannot perfectly predict

(a)    the amount of discount borrowing by banks.

(b)    shifts from deposits to currency.

(c)    the level of excess reserves held by banks.

(d)    any of the above.

 

23)         All else constant, a rise in market interest rates leads to

(a)    a rise in excess reserves and a rise in the money supply.

(b)    a rise in discount borrowing and a rise in the money supply.

(c)    a fall in excess reserves and a fall in the money supply.

(d)    a fall in discount borrowing and a rise in the money supply.

(e)    none of the above.

 

24)         Factors that cause an increase in the money supply include:

(a)    a decline in the discount loan rate.

(b)    a decline in market interest rates.

(c)    an increase in expected deposit outflows.

(d)    only (a) and (b) of the above.

 

25)         The examination of the 1980–2002 period suggests that

(a)    the longer the time period, the better control the Fed has over the money supply.

(b)    factors other than changes in the nonborrowed base influence money supply growth over short periods of time.

(c)    a decline in the money multiplier from January 1987 to April 1991 is explained by a rise in the currency ratio.

(d)    all of the above are true.

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

 

26)         In the early 1930s, the currency ratio rose, as did the level of excess reserves. Money supply analysis predicts that, all else constant, the money supply should have

(a)    risen.

(b)    fallen.

(c)    remain unchanged.

(d)    Any of the above are possible, since the two factors work in opposite directions.

 

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