Chapter 14 Practice Quiz

You own a 5 year bond that has a face value of $1000 and pays 10% interest each year. Two years later, the interest rate goes down to 8%. You do not want to wait for 5 years to get your principle of $1, 000 back because you really need the money, so you decide to sell it on the open market. How much can you sell it for?

$1,250

If NCNB Corp's deposits are $12.5 billion, its excess reserves are $100 million, and the reserve requirement is 10%, its actual reserves are

$1.35 billion. (10% of 12.5 billion can be calculated like this: .10 * 12,500 million (12.5 billion) = 1,250 million Now add the 100 million and you get 1,350 million or $1.35 billion.)

If Suntrust Banks have demand deposits of $20 billion, actual reserves of $2 billion, and the reserve requirement is 8%, the bank's excess reserves are

$400 million. (The requirements reserves are 8% of 20 billion dollars. So the calculation would be: .08 * 20,000 million (20 billion) which equals 1,600 million. The actual reserves are 2 billion which is 2,000 million. So 2,000 million - 1,600 million = 400 million in excess reserves.)

You own a 5 year bond that has a face value of $1000 and pays 10% interest each year. Two years later, the interest rate goes up to 12%. You do not want to wait for 5 years to get your principle of $1, 000 back because you really need the money, so you decide to sell it on the open market. How much can you sell it for?

$833 (Because interest rates went up to 12%, no one will buy your bond for $1,000 because it only pays 10% per year which is $100 a year. So in order to sell it, you must reduce the price to $833. Each year the owner of the bond will get $100 but if the owner of the bond can purchase it for $833 then 100 divided by 833 = 12% So you need to solve for x. 100 / X = .12 100 = .12 * X 100 / .12 = X X = $833)

The monetary base is made up of ________. -All of the other answers. -currency in commercial bank vaults. -currency in the public's hands. -commercial banks' reserves held at the Federal Reserve District Banks

-All of the other answers.

If the reserve requirement were 12%, how much would the Deposit Expansion (money) Multiplier be?

8.33 (Divide 1 by .12 to get 8.33 This means that if someone deposited $10,000 in a demand deposit account, it can through loans expand the money supply by $83,300.)

Which is NOT a legal reserve? -Bank deposits at the Federal Reserve Bank. -Government securities -Vault cash.

Government securities

Vault cash would be considered: -neither a primary nor a secondary reserve. -a primary reserve. -a secondary reserve. -both a primary and a secondary reserve.

Primary Reserve

Which one of these is a secondary reserve? -Vault cash -Deposits at the Federal -Reserve District Bank -Treasury bills -Gold

Treasury bills

Suppose the required reserve ratio is 10% and a commercial bank has $2 million in checkable deposits appearing on the liability side of its balance sheet. How much vault cash does the bank have? -$200,000 -Vault cash cannot be determined by the information given. -$2 million -$20,000

Vault cash cannot be determined by the information given.

In order to buy securities the Fed offer

a high price and drives down interest rates. (Remember that the bond price and its interest rate are inversely related. Here is an example. Here is the equation for a bond interest rate percentage of 10%: $100 (interest per year) / $1000 (bond price) = 10% Let's say the bond price goes up to $1050. Now the equation is: $100 / $1050 = 9.5% Remember that the owner of the bond always gets $100 a year as its interest no matter what the market price is of the bond. It is 10% of the FACE value of the bond (what is written on the bond) not the market value of the bond.)

When the Fed wants to increase the money supply it: -raises the discount rate. -buys U.S. government securities. -sells U.S. government securities. -raises reserve requirements.

buys U.S. government securities. (When the Fed buys government securities, the securities are exchanged for money from the Federal Reserve. The Federal Reserve creates this new money out of thin air. This new money increases the money supply by increasing the monetary base.)

When the Fed buys United States bonds, -excess reserves in commercial banks are increased immediately. -the banking system will decrease the number of loans that are made. -the money supply will eventually decline as banks are forced to call loans due to meet reserve requirements. -the value of the money multiplier slowly declines to a new stationary level. -total bank reserves are decreased.

excess reserves in commercial banks are increased immediately.

The reserve requirement ratio is equal to: -legal required reserves times the deposit multiplier. -legal required reserves divided by total checkable deposits. -total checkable deposits times the excess reserve ratio. -total checkable deposits times the deposit multiplier. -required reserves divided by excess reserves.

legal required reserves divided by total checkable deposits.

The most important policy weapon of the Fed is: -changing the reserve requirements. -changing the discount rate. -open market operations. -moral suasion.

open market operations. (Every six weeks, the Federal Reserve conducts open market operations. It is the most popular way to either expand or contract the money supply. Selling bonds will contract the money supply and buying bonds will increase the money supply.)

When there is a great deal of inflation the Fed will: -not sell nor buy securities on the open market. -sell securities on the open market -buy securities on the open market. -both sell and buy securities on the open market.

sell securities on the open market

If the current equilibrium output level is above the full-employment output level, the Fed should consider: -selling government securities, lowering the discount rate, and raising the required reserve ratio. -selling government securities, raising the discount rate, and raising the required reserve ratio. -buying government securities, raising the discount rate, and raising the required reserve ratio. -buying government securities, lowering the discount rate, and raising the required reserve ratio.

selling government securities, raising the discount rate, and raising the required reserve ratio. (If the equilibrium GDP is above the full employment GDP, then the economy is inflationary. So the Fed can selling government securities which would then take money out of the banking system. It could also raise the cost of borrowing money by banks by raising the discount rate or it could raise the required reserve ratio which would require banks to hold a higher percentage of their demand deposits in their vaults. That would reduce the number of loans and the money multiplier.)

During the course of a bad recession the Fed would probably be doing each of the following, except: -lowering the discount rate. -lowering reserve requirements. -lowering interest rates. -selling securities on the open market.

selling securities on the open market. (Selling securities would take money out of the banking system. People and institutions would pay for the securities by paying from their demand deposits. When demand deposits goes down, M1 goes down.)

The larger the reserve ratio the: -smaller the deposit expansion multiplier. -less the impact of an increase in reserves. -larger the deposit expansion multiplier.

smaller the deposit expansion multiplier.

Our currency is issued by: -individual commercial banks. -the Internal Revenue Service. -the Federal Reserve. -the United States Treasury.

the Federal Reserve.

The most powerful (but seldom used) tool at the Federal Reserve's disposal is: -the ability to set reserve requirements. -margin requirements on stock purchases. -open-market operations. -the discount rate.

the ability to set reserve requirements. (This is true because a change in the reserve requirements would change the money multiplier. The money multiplier when increased greatly expands the number of loans that can be made. Loans represent an increase in the money supply.)

The money supply is made up of ____. -currency and credit. -the monetary base and credit. -gold, silver, and credit. -the monetary base.

the monetary base and credit.

The Federal Open Market Committee is made up of all of the following, except: -the presidents of four Federal Reserve Banks other than the New York Bank. -the board of governors. -the chairman of the board of governors. -the president of the Federal Reserve Bank of New York. -the president of the United States.

the president of the United States.

If the Fed buys Treasury bills, then: -the market rate of interest on Treasury bills will fall. -neither the price nor the market rate of interest on treasury bills will be affected. -the price of Treasury bills will rise. -the price of Treasury bills will rise AND the market rate of interest on Treasury bills will fall.

the price of Treasury bills will rise AND the market rate of interest on Treasury bills will fall.

The discount rate refers to: -the penalty paid by risky bank borrowers; that is, the amount of interest they pay in excess of the prime rate. -the rate at which money loses its value as a result of inflation. -the rate of interest that the Fed charges on loans to commercial banks and thrift institutions. -the rate at which banks write off bad loans. -the rate at which assets lose their real value as a result of inflation.

the rate of interest that the Fed charges on loans to commercial banks and thrift institutions.

The deposit expansion multiplier is: -equal to 1. -the excess reserves. -the reciprocal of the reserve ratio. -the reserve ratio. -the reciprocal of the discount rate.

the reciprocal of the reserve ratio. (The money multiplier is calculated by dividing 1 by the reserve requirement. The lower the reserve requirement, the higher the ratio.)

If the required reserve ratio was lowered: -the size of the monetary multiplier would increase. -banks would be prompted to reduce their lending. -the actual reserves of banks would increase. -None of the choices are correct.

the size of the monetary multiplier would increase.

If you wrote a check for $37.55 on your Bank of American Demand Deposit account to pay your phone bill and sent it to Verizon whose account is with CitiBank,

your bank's deposits would go down by $37.55 and its reserves would go down by $37.55. (The amount in your demand deposit account would go down by $37.55 and the reserves for Bank of America would go down by $37.55 as well.)