ECON UNIT 4 TEST

A commercial bank has actual reserves of 50,000 and the checkable deposits of 200,000 and the required reserve ratio is 20%. The excess reserves of the bank are

10,000. multiply deposits by RR ratio and subtract actual- CD(RR) = excess

Suppose a commercial banking system has 240,000 of outstanding checkable deposits and actual reserves of 85,000. if the reserve ratio is 25 percent, the banking system can expand the money supply by a maximum of

100,000

if the required reserve ratio is 20 percent and commercial bankers decide to additional excess reserves equal to 5 percent of any newly acquired checkable then the effective monetary multiplier for the banking system will be

4

The bank can safely expand its loans by a maximum of

40,000. reserves-loans?

The monetary multiplier is

5. 1/reserve ratio

Refer to the info above. The commercial bank has a required reserves of

60,000.. multiply checkable deposits by reserve ration

Which of the following will happen when the Federal Reserve buys bonds from the public in the openmarket and cash in the hands of the public does not change?A) the required reserve ratio will increase C) the deposits of commercial banks will declineB) the money supply will decrease D) commercial bank reserves will increase

D) commercial bank reserves will increase

Assuming no currency drains, when the Federal Reserve Banks purchase government securities thereserves of commercial banks are:A) decreased by a multiple of the amount of the purchase.B) decreased by the amount of the purchase.C) increased by a multiple of the amount of the purchase.D) increased by the amount of the purchase.

D) increased by the amount of the purchase.

44. 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.

D) reduced and the multiple by which the commercial banking system can lend is reduced.

42. When the reserve requirement is increased:A) required reserves are changed into excess reserves.B) the excess reserves of member banks are increased.C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.D) the excess reserves of member banks are reduced

D) the excess reserves of member banks are reduced

If P equals the price level expressed as an index number and D equals the value of the dollar, then:

D= 1/P

Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed?

Increased by 1200

When bankers hold excess reserves:

The money-creating potential of the banking system decreases

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.

a liability as viewed by the Federal Reserve Banks.

when economists say that money serves as a medium of exchange, they mean it is

a means of payment

27. The Federal Reserve System regulates the money supply primarily by:A) controlling the production of coins at the United States mint.B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.C) altering the reserves of commercial banks, largely through sales and purchases of government bonds.D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of themoney supply.

altering the reserves of commercial banks, largely through sales and purchases of government bonds

demand deposit are also called

checking accounts

Assume the reserve ratio is 20 percent and bank were loaning out all their excess reserve. If people collectively cash out 10 billion from their checking accounts, then the loaning ability of the commercial banks has been

decreased by 40 billion

41. 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.

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier

The Fed can change the money supply by:A) changing bank reserves through the sale or purchase of government securities.B) changing the quantities of required and excess reserves by altering the legal reserve ratio.C) changing the discount rate so as to encourage or discourage commercial banks in borrowing from thecentral banks.D) doing all of the above.

doing all of the above

Henry Trudeau deposits $2,000 in currency in the First Street Bank. Later that same day Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has:

increased by 5400

13. The three main tools of monetary policy are:A) tax rate changes, the discount rate, and open-market operations.B) tax rate changes, changes in government expenditures, and open-market operations.C) the discount rate, the reserve ratio, and open-market operations.D) changes in government expenditures, the reserve ratio, and the discount rate.

the discount rate, the reserve ratio, and open-market operations.

19. The purchase of government securities from the public by the Fed will cause:A) commercial bank reserves to decrease. C) demand deposits to decreaseB) the money supply to increase. D) the interest rate to increase.=

the money supply to increase.

Open-market operations refer to:A) purchases of stocks in the New York Stock Exchange.B) the purchase or sale of government securities by the Fed.C) central bank lending to commercial banks.D) the specifying of loan maximums on stock purchases.

the purchase or sale of government securities by the Fed

If the required reserves ratio was lowered

the size of the monetary multipler would increase

7. The Federal Reserve Banks sell government securities to the public. 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) of commercial banks are both unchanged

.B) and reserves of commercial banks both decrease.

29. 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.

.D) expands and commercial bank reserves increase.

Suppose the reserve requirement is 10 percent. If a bank has $4 million of checkable deposits and actual reserves of 1 million, the bank:

200,000

Using the original bank sheet, assume that the bank makes a loan of 20,000 and has a check cleared against it for the amount of the loan. The banks reserves and checkable deposits will now be

80,000 and 100,000

8. The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkabledeposits: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. a

:A) of commercial banks are unchanged, but their reserves increase.

When a check is drawn and cleared, the

bank against which the check is cleared loses reserves and deposits equal to the amount of the check.

the establishment of federally insured deposit program resulted from the

bank panics of 1930-1933

Which are liabilities to a bank?

capital stock and demand deposits

21. Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for themby drawing checks. As a result, commercial bank reserves will:A) increase by $10 billion. C) decrease by $2 billion.B) remain unchanged. D) increase by $2 billion.

decrease by $2 billion

other things equal, an excessive increase in the money supply will

decrease the purchasing power of each dollar

Which of the following statements is correct? Other things equal:

deflation will shift both the transactions demand curve for money and the total money demand curve to the left

In the U.S economy the money supply is controlled by the

federal reserve system

40. If the Fed were to increase the legal reserve ratio, we would expect:A) lower interest rates, an expanded GDP, and depreciation of the dollar.B) lower interest rates, an expanded GDP, and appreciation of the dollar.C) higher interest rates, a contracted GDP, and appreciation of the dollar.D) higher interest rates, a contracted GDP, and depreciation of the dollar.

higher interest rates, a contracted GDP, and appreciation of the dollar

It is costly to hold money because:

in doing so, one sacrifices interest income.

Sharon sells a government security worth 4,600,000 to the federal reserves bank of Kansas City. She deposits these funds into her checking account to the first commerce bank. Her checking account had a 150,000 balance before the sale of the security of the reserves of the first commerce bank.

increased by 4,600,000

what is the relationship between prices and the value of the dollar

inverse

the value of money varies

inversely with the price level

The federal reserve system

is basically an independent agency.

fiat money

money because the government asserts that it is

A commercial bank's required reserves can be calculated by

multiplying its checkable- deposit liabilities by the reserve ratio

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 to30 percent, the banking system then has:A) excess reserves of $2 billion. C) a deficiency of reserves of $.5 billion.B) neither an excess nor a deficiency of reserves. D) excess reserves of only $.5 billion.

neither an excess nor a deficiency of reserves.

9. The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkabledeposits: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) U.S. Congress

of commercial banks are unchanged, but their reserves increase

The primary purpose of the legal reserve requirement is to

provide a means by which monetary authorities can influence the lending ability of commercial banks

other things equal, If there is an increase in nominal GDP

the interest rate will raise

If the quantity of money demanded exceeds the quantity supplied:

the interest rate will rise

if the demand for money and the supply of money both decrease, the equilibrium

the quantity of money will decline, but we can not predict the change in the equilibrium interest rate

asset demand for money

varies inversely with the rate of interest

A bank is in the position to make loans when required reserves

are less than actual reserves

a commercials bank reserves are

assets to the commercials bank and liabilities to the federal reserve bank holding them

the federal reserve system is divided into

12 districts

22. Which of the following statements is correct?A) The supply of money decreases when the Federal Reserve Banks buy government securities fromhouseholds or businesses.B) Excess reserves are the amount by which actual reserves exceed required reserves.C) Commercial banks decrease the supply of money when they purchase government bonds fromhouseholds or businesses.D) Commercial bank reserves are a liability to commercial banks but an asset to the Federal ReserveBanks.

B) Excess reserves are the amount by which actual reserves exceed required reserves.

3. The securities held as assets by the Federal Reserve Banks consist mainly of:A) corporate bonds. C) common stock.B) Treasury bills and Treasury bonds. D) certificates of deposit.

B) Treasury bills and Treasury bonds.

What is one significant characteristic of fractional reserve banking?

Banks can create money through lending their reserves

2. In the United States monetary policy is the responsibility of the:A) U.S. Treasury.B) Department of Commerce.C) Board of Governors of the Federal Reserve System.

Board of Governors of the Federal Reserve System.

If the Federal Reserve System buys government securities from commercial banks and the public:A) commercial bank reserves will decline.B) commercial bank reserves will be unaffected.C) it will be easier to obtain loans at commercial banks.D) the money supply will contract.

C) it will be easier to obtain loans at commercial banks

11. Commercial banks and thrifts usually hold only small amounts of excess reserves because:A) the presence of such reserves tends to boost interest rates and reduce investment.B) the Fed constantly uses open market operations to eliminate excess reserves.C) the Fed does not pay interest on reserves.D) the Fed does not want commercial banks and thrifts to be too liquid.

C) the Fed does not pay interest on reserves.

Refer to the diagram of the money market. The vertical money supply curve Sm reflects the fact that

the stock of money is determined by the federal reserve system and does not change when the interest rate changes

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

directly increased by $4 million and the money-creating potential of the commercial banking system isincreased by $12 million

what is the main body assisting the board of governors of the federal reserve system in determining monetary supply

federal open market committee

20. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If thisbank 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.

A) $1,000.

16. Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from theFederal Reserve Bank in its district. As a result:A) commercial bank reserves are increased by $10,000.B) the supply of money automatically declines by $7,500.C) commercial bank reserves are increased by $7,500.D) the supply of money is automatically increased by $10,000.

A) commercial bank reserves are increased by $10,000

1. Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?A) loans to commercial banks C) Treasury depositsB) Federal Reserve Notes in circulation D) reserves of commercial banks

A) loans to commercial banks

Which of the following is a tool of monetary policy?A) open market operations C) changes in tax ratesB) changes in banking laws D) changes in government spending

A) open market operations

5. Which of the following will increase commercial bank reserves?A) the purchase of government bonds in the open market by the Federal Reserve BanksB) a decrease in the reserve ratioC) an increase in the discount rateD) the sale of government bonds in the open market by the Federal Reserve Banks

A) the purchase of government bonds in the open market by the Federal Reserve Banks

A commercial bank has required reserves of 6000 and the reserve ratio is 20 percent. where are the commercial bank's checkable- deposit liabilities

30,000, work backwards multiply answer choices by reserve ratio to get 6000

6. When a commercial bank borrows from a Federal Reserve Bank:A) the supply of money automatically increases.B) it indicates that the commercial bank is unsound financially.C) the commercial bank's lending ability is increased.D) the commercial bank's reserves are reduced.

C) the commercial bank's lending ability is increased

2. Reserves must be deposited in the Federal Reserve Banks by:A) only commercial banks which are members of the Federal Reserve System.B) all depository institutions, that is, all commercial banks and thrift institutions.C) state chartered commercial banks only.D) federally chartered commercial banks only.

all depository institutions, that is, all commercial banks and thrift institutions