1. Assuming banks rid themselves of excess reserves, and assuming the reserve requirement is 10%, then if the Fed buys $10 million of securities from the public, deposits in the banking system will ultimately expand by

a. $10 million

b. $1 million

c. $90 million

d. $100 million

2. The sale by a local bank of $400,000 of U.S. government securities to a New York dealer will

a. increase the U.S. money supply

b. increase reserves of the local bank by $400,000

c. reduce reserves of the local bank by $400,000

d. none of the above

3. Suppose you withdraw $500 in currency to finance your vacation. What is the impact on the U.S. money supply (M1)?

a. M1 increases

b. M1 decreases

c. M1 does not change

d. not enough information is provided to answer the question

4. The simple deposit expansion multiplier is

a. one minus the reserve requirement percentage

b. one times the reserve requirement percentage

c. one divided by the reserve requirement percentage

d. one divided by the marginal propensity to save

5. Assuming a 10% reserve requirement, a deposit of $3,000 cash in a local bank will ultimately

a. cause aggregate bank required reserves to rise by $3,000

b. increase aggregate bank loans and securities holdings by $27,000

c. increase aggregate bank total reserves by $3,000

d. do all of the above

ANSWER KEY - 1d, 2b, 3c, 4c, 5d