Chapter 17

If required reserves are expressed by RR, the required reserve rate by rD, and deposits by D, the simple deposit expansion multiplier is expressed as RD × D. (1/rD )D. RR × D. 1/rD.

1/rD.

The most a bank could lend at any time without altering its assets is an amount equal to its checkable deposits. reserves. excess reserves. net worth.

excess reserves.

The Federal Reserve failed to keep the financial system operational during the 1930s because it kept the discount window open. provided too much liquidity to banks. failed to recognize the link between changes in the Fed's balance sheet and the growth rate of money. failed to supply enough cash to the economy, and commercial bank accounts at the Fed plummeted.

failed to recognize the link between changes in the Fed's balance sheet and the growth rate of money.

The monetary base is also known as M1. M2. high-powered money. free reserves.

high-powered money.

The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it ignores how central banks could change their balance sheet. assumes banks hold excess reserves. ignores the fact people might change their currency holdings. assumes there are no changes in vault cash.

ignores the fact people might change their currency holdings.

A central bank's purchase of securities made by writing checks on itself will decrease the size of its balance sheet. have no impact at all on the balance sheet. increase the size of their balance sheet. only change the composition of its assets.

increase the size of their balance sheet.

During the Great Depression, the monetary base in the United States decreased significantly. increased. remained constant. was highly erratic.

increased.

The collapse of the Thai currency, the baht, was partially due to inaction by the Federal Reserve. actions taken by the European Central Bank. information kept hidden by the central bank of Thailand. central bankers and the Minister of Finance publishing too much information.

information kept hidden by the central bank of Thailand.

The experience of the Marcos presidency in the Philippines in 1986 showed that publishing central bank balance sheets ensures their accuracy. desperation is positively correlated with sound monetary policy. transparency is unimportant for building citizens' trust in the central bank. it is important to keep the central bank independent from political pressure.

it is important to keep the central bank independent from political pressure.

If the Federal Reserve is to be independent, then the quantity of securities it purchases must be determined by the Federal Reserve itself. Congress. the amount the public does not want to purchase at the going price. the Treasury.

the Federal Reserve itself.

The money multiplier is much lower today than it was 25 years ago because people are holding less currency today. the currency-to-deposit ratio is much higher today. credit cards are more widely used. there is less currency available today.

the currency-to-deposit ratio is much higher today.

When the Fed makes a discount loan, the impact on the banking system's balance sheet is an increase in liabilities with no change in assets. an increase in assets and a decrease in liabilities. a decrease in assets and an increase in liabilities. the same as that of an open market purchase.

the same as that of an open market purchase.

Most responsible central banks publish their balance sheet weekly. monthly. quarterly. annually.

weekly.

If the required reserve rate is expressed by rD and deposits by D, the formula for calculating the amount of required reserves is (1/rD )D. 1/rD. (rD )D. D/rD.

(rD )D.

Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by 2.5 times. 3 times. 4.5 times. 6 times.

2.5 times.

On the Federal Reserve's balance sheet, securities would include private and public debt. mainly U.S. Treasury and municipal bonds. U.S. Treasury securities. bonds issued by commercial banks.

U.S. Treasury securities.

An open market sale of U.S. Treasury securities by the Fed will cause the Fed's balance sheet to show a decrease in the asset of securities and a decrease in the liability of reserves. an increase in the liability of reserves. no change in the size of the balance sheet, just the composition of assets will change from securities to cash. an increase in the asset category of securities and the liability category of reserves.

a decrease in the asset of securities and a decrease in the liability of reserves.

Vault cash is equal to the total amount of reserves and is an asset of the central bank. not reserves but is a liability of the central bank. a part of reserves and an asset of commercial banks. not reserves but is an asset of central banks.

a part of reserves and an asset of commercial banks.

Gold is used to back U.S. currency. extremely important as an asset for the Fed. a small portion of the Fed's assets. very important for monetary policy in the United States.

a small portion of the Fed's assets.

A liability of the central bank in functioning as the bankers' bank is accounts of commercial banks. securities. loans. currency.

accounts of commercial banks.

Suppose the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check. When the check returns, the Fed's balance sheet will show an increase in assets and a decrease in liabilities of $1 million. only an increase in assets of $1 million. only an increase in liabilities of $1million. an increase in assets and liabilities of $1 million.

an increase in assets and liabilities of $1 million.

When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect no change in liabilities but an increase in assets. a decrease in assets and liabilities. an increase in assets and liabilities. an increase in assets and a decrease in liabilities.

an increase in assets and liabilities.

When the Fed makes a discount loan, the impact on the banking system's balance sheet will reflect an increase in liabilities with no change in assets. an increase in assets and a decrease in liabilities. a decrease in assets and an increase in liabilities. an increase in assets and liabilities.

an increase in assets and liabilities.

Reserves are assets of the central bank and liabilities of commercial banks. assets of commercial banks and liabilities of the central bank. liabilities of commercial and central banks. assets and liabilities for the central bank.

assets of commercial banks and liabilities of the central bank.

Reserves are assets of the central bank and liabilities of the U.S. Treasury. assets of the central bank and liabilities of commercial banks. liabilities of commercial banks and assets of the U.S. Treasury. assets of commercial banks and liabilities of the central bank.

assets of commercial banks and liabilities of the central bank.

If the Fed were to increase the required reserve rate from 10 percent to 20 percent, the simple deposit expansion multiplier would double. increase by 10 percent. decrease by a factor of ten. be half as large as it was before the increase.

be half as large as it was before the increase.

Bonds issued by a foreign government in its own currency would not be held by the Fed. be held by the Fed as part of its securities. be held by the Fed as part of its foreign exchange reserves. be held by the Fed as part of its loans.

be held by the Fed as part of its foreign exchange reserves.

Bonds issued by the U.S. Treasury would not be held by the Fed. be held by the Fed as part of its securities. be held by the Fed as part of its foreign exchange reserves. be held by the Fed as part of its loans.

be held by the Fed as part of its securities.

Each of the following items would appear as assets on the central bank's balance sheet except which one? loans securities foreign exchange reserves currency

currency

Which one of the following is a liability on the central bank's balance sheet? loans currency securities foreign exchange reserves

currency

The monetary base is the sum of reserves and M2. M1 and reserves. currency in the hands of the public, reserves, and M1. currency in the hands of the public and reserves in the banking system.

currency in the hands of the public and reserves in the banking system.

A central bank's sale of securities from its portfolio will decrease the size of its balance sheet. have no impact at all on the balance sheet. only change the composition of its liabilities. only change the composition of its assets.

decrease the size of its balance sheet.

During the 1990s, the money multipliers for M1 and M2 decreased. remained fairly constant even though the economy grew. the M1 multiplier decreased while the M2 multiplier increased dramatically. increased dramatically as the economy grew.

decreased.

In the United States, loans made by Federal Reserve to banks are discount loans. reserves. discount loans and reserves. discount loans and foreign exchange reserves.

discount loans.

One trait a central bank has over other businesses, including banks, is that it receives all of its funding from the government. can control the size of its balance sheet. doesn't have stockholders. doesn't have a board of directors.

doesn't have stockholders.

If the Fed were to decrease the required reserve rate from 10 percent to 5 percent, the simple deposit expansion multiplier would double. decrease by 5 percent. increase by a factor of five. be half as large as it was before the reduction.

double.

A central bank holds foreign exchange reserves for diversification purposes. foreign exchange interventions. safekeeping. diversification and safekeeping.

foreign exchange interventions.

As a portion of total assets measured in billions of dollars, the smallest asset on the Fed's balance sheet is gold. securities. foreign exchange reserves. loans.

gold.

On the morning of September 11, 2001, terrorists attacked the United States and caused enormous disruptions. In assessing the performance of the Fed and the impact on financial systems in hindsight, this is a story of inaction by the Federal Reserve. great success by the Federal Reserve. appropriate actions taken too late by the Federal Reserve. catastrophic outcomes due to a lack of backup systems at the Federal Reserve.

great success by the Federal Reserve.

If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to decrease. increase. not change. decrease since failing banks lost theirs.

increase.

Each of the following items would appear as liabilities on the central bank's balance sheet except which one? loans currency the government's account accounts of the commercial banks

loans

Liabilities of commercial banks show up on the Fed's balance sheet as part of its liabilities. securities. foreign exchange reserves. loans.

loans.

The main asset held by a central bank in its role as the bankers' bank is foreign exchange reserves. currency. loans. securities.

loans.

Discount loans are initiated by the Federal Reserve. made when banks need relatively small amounts of cash for the long term. made when banks need relatively large amounts of cash for the long term. made when banks need relatively small amounts of cash for the short term.

made when banks need relatively small amounts of cash for the short term.

During the 2007-2009 financial crisis, which one of the following temporarily became the largest component of assets on the Fed's balance sheet? foreign exchange reserves U.S. Treasury securities mortgage-backed securities loans

mortgage-backed securities

An open market sale of U.S. Treasury securities by the Fed will cause the banking system's balance sheet to show only an increase in liabilities. only a decrease in assets. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing. no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

Vault cash is not included in the central bank's liability category of currency because only non-bank currency is in the liability category of currency. it really is only electronic funds. it is in the asset category of reserves. it is the liability of the U.S. Treasury.

only non-bank currency is in the liability category of currency.

The quantity of securities held by the Federal Reserve is controlled through the U.S. Treasury. the Fed's annual budget. open market operations. the purchases made by the regional Reserve Banks.

open market operations.

To obtain a discount loan from the Fed, a commercial bank must show that it will fail if it does not obtain the loan. prove that the loan will be used to make loans. provide collateral. agree to more frequent examinations.

provide collateral.

Monetary policy operations for central banks are run through changes in which liability category? government's accounts currency reserves gold

reserves

The monetary base is the sum of reserves and currency in the hands of the public. reserves and M2. currency in the hands of the public and M2. currency in the hands of the public M1.

reserves and currency in the hands of the public.

If we focus on the banking system and assume no change in the public's currency holdings, a loss of reserves by any one bank must equal the loss of reserves by the entire system. be equal to the net loss of reserves for the banking system. result in a multiple loss to the banking system. result in no change in reserves for the banking system.

result in no change in reserves for the banking system.

As a portion of total assets measured in billions of dollars, the largest asset on the Fed's balance sheet is gold. securities. foreign exchange reserves. loans.

securities.

When an individual withdraws funds from a checking account the bank's balance sheet shrinks, and the size of the Fed's balance sheet is not affected. shrinks and so does the Fed's balance sheet. shrinks, and the size of the Fed's balance sheet increases. stays the same in size, and the size of the Fed's balance sheet shrinks.

shrinks, and the size of the Fed's balance sheet is not affected.

In dollar amounts, the monetary base is larger than M2, and M1 is less than M2. M1 is smaller than the monetary base, and M2 is larger than both. the monetary base is larger than M1 and M2. the monetary base is smaller than M1, and M2 is larger than M1.

the monetary base is smaller than M1, and M2 is larger than M1.

One thing the Fed has learned over the past 25 years is that the money multiplier is fairly constant no matter what changes are made to the monetary base. the money multiplier is unstable over time. it should focus its attention on targeting M2. the money multiplier has a trend rate of growth that is fairly constant.

the money multiplier is unstable over time.