ECON 232 Chapter 15 Study Quiz
1. A change in the legal reserve ratio affects the:
A. amount of actual reserves in the banking system.
B. amount of excess reserves in the banking system.
C. number of government securities held by the Federal Reserve Banks.
D. ratio of coins to paper currency in the economy.

 
2.
Answer the next question(s) on the basis of the information in the following table.

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Refer to the above table. The equilibrium interest rate in this economy is:
A. 3 percent.
B. 4 percent.
C. 5 percent.
D. 6 percent.


 
3. The sale of government bonds by the Federal Reserve Banks to commercial banks will:
A. increase aggregate supply.
B. decrease aggregate supply.
C. increase aggregate demand.
D. decrease aggregate demand.

 
4. An increase in the legal reserve ratio:
A. increases the money supply by increasing excess reserves and increasing the monetary multiplier.
B. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
C. increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
D. decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

 
5. An easy money policy in the United States is most likely to:
A. decrease the foreign demand for dollars and appreciate the international value of the dollar.
B. decrease the foreign demand for dollars and depreciate the international value of the dollar.
C. increase the foreign demand for dollars and appreciate the international value of the dollar.
D. increase the foreign demand for dollars and depreciate the international value of the dollar.

 
6. Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply:
A. contracts and commercial bank reserves increase.
B. expands and commercial bank reserves decrease.
C. contracts and commercial bank reserves decrease.
D. expands and commercial bank reserves increase.

 
7.

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Refer to the above balance sheets. The commercial banks have excess reserves of:
A. $12.
B. $22.
C. $16.
D. $24.


 
8. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:
A. $1,000.
B. $2,000.
C. $800.
D. $5,000.

 
9. A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves.
A. True
B. False

 
10. The purpose of an easy money policy is to shift the:
A. aggregate demand curve leftward.
B. aggregate demand curve rightward.
C. aggregate supply curve leftward.
D. investment demand curve leftward.

 
11.

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Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. Which of the following would shift the money supply curve from Ms1 to Ms3?
A. an increase in the discount rate
B. purchases of U.S. securities by the Fed in the open market
C. sales of U.S. securities by the Fed in the open market
D. an increase in the reserve ratio


 
12. If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:
A. sell government securities, raise reserve requirements, and raise the discount rate.
B. buy government securities, raise reserve requirements, and raise the discount rate.
C. sell government securities, lower reserve requirements, and lower the discount rate.
D. sell government securities, raise reserve requirements, and lower the discount rate.

 
13. The job of the Fed in limiting the supply of money may be made more complex if commercial banks initially have substantial excess reserves.
A. True
B. False

 
14. The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits:
A. of commercial banks are unchanged, but their reserves increase.
B. and reserves of commercial banks both decrease.
C. of commercial banks are unchanged, but their reserves decrease.
D. and reserves of commercial banks are both unchanged.

 
15. All else equal, when the Federal Reserve Banks engage in an easy money policy, the interest rates received on government bonds usually:
A. fall.
B. rise.
C. remain constant.
D. move in the same direction as the bonds' price.

 
16. Federal Reserve Notes in circulation are:
A. an asset as viewed by the Federal Reserve Banks.
B. a liability as viewed by the Federal Reserve Banks.
C. neither an asset nor a liability as viewed by the Federal Reserve Banks.
D. part of M1, but not of M2 or M3.

 
17. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:
A. not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million.
B. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $16 million.
C. directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by $12 million.
D. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $12 million.

 
18. Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has:
A. excess reserves of $2 billion.
B. neither an excess nor a deficiency of reserves.
C. a deficiency of reserves of $.5 billion.
D. excess reserves of only $.5 billion.

 
19. A contraction of the money supply:
A. increases the interest rate and decreases aggregate demand.
B. increases both the interest rate and aggregate demand.
C. lowers the interest rate and increases aggregate demand.
D. lowers both the interest rate and aggregate demand.

 
20. If the economy is operating in the vertical range of the aggregate supply curve, a reduction in the money supply will:
A. increase the interest rate and increase employment.
B. reduce the interest rate and increase employment.
C. increase the interest rate and reduce the price level, assuming it is flexible downward.
D. reduce the interest rate and increase the price level.

 
21.
Answer the next question(s) on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks and buys $500 of securities from individuals, who deposit the cash in checking accounts.
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As a result of the above transactions, the supply of money in the economy will:
A. remain unchanged.
B. rise by $500.
C. fall by $100.
D. fall by $500.


 
22.
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Refer to the above diagram. The shift of the aggregate demand curve from AD1 to AD2 might result from the Fed:
A. selling bonds in the open market.
B. increasing the discount rate.
C. increasing the reserve ratio.
D. buying bonds in the open market.


 
23. Suppose the United States is experiencing an 8 percent rate of unemployment with stable prices and a trade deficit. All else equal, the use of appropriate monetary policy to reduce unemployment would:
A. cause the dollar to appreciate in value.
B. have no impact on the U.S. trade deficit.
C. decrease the U.S. trade deficit.
D. increase the U.S. trade deficit.

 
24. Other things equal, an increase in productivity will:
A. reduce aggregate supply and increase real output.
B. reduce both the interest rate and the international value of the dollar.
C. increase both aggregate supply and real output.
D. increase net exports, increase investment, and reduce aggregate demand.

 
25. All else equal, an easy money policy in the United States:
A. increases U.S. imports.
B. increases the international value of the dollar.
C. reduces the foreign demand for U.S. dollars.
D. aggravates an existing U.S. trade deficit.

 
26. The discount rate is the interest:
A. rate at which the central banks lend to the U.S. Treasury.
B. rate at which the Federal Reserve Banks lend to commercial banks.
C. yield on long-term government bonds.
D. rate at which commercial banks lend to the public.

 
27. When the required reserve ratio is increased, the excess reserves of member banks are:
A. reduced, but the multiple by which the commercial banking system can lend is unaffected.
B. reduced and the multiple by which the commercial banking system can lend is increased.
C. increased and the multiple by which the commercial banking system can lend is increased.
D. reduced and the multiple by which the commercial banking system can lend is reduced.

 
28.

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Refer to the above table. Suppose the Fed reduces the interest rate from 6 to 5 percent at a time when the investment demand declines from that shown by columns (1) and (2) to that shown by columns (1) and (3). As a result of these two occurrences, investment will:
A. increase by $10 billion.
B. decrease by $10 billion.
C. increase by $20 billion.
D. decrease by $20 billion.


 
29. Other things equal, a tight money policy during a period of demand-pull inflation will:
A. lower the interest rate, increase investment, and reduce net exports.
B. lower the price level, increase investment, and increase aggregate demand.
C. increase productivity, aggregate supply, and real output.
D. increase the interest rate, reduce investment, and reduce aggregate demand.

 
30. An increase in the money supply will:
A. lower interest rates and lower the equilibrium GDP.
B. lower interest rates and increase the equilibrium GDP.
C. increase interest rates and increase the equilibrium GDP.
D. increase interest rates and lower the equilibrium GDP.

 

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