Money and Banking - Ch. 14

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is A) 2.5. B) 1.67. C) 2.0. D) 0.601.

A) 2.5.

When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking system A) increase by $100. B) increase by more than $100. C) decrease by $100. D) decrease by more than $100.

A) increase by $100.

The monetary base minus currency in circulation equals A) reserves. B) the borrowed base. C) the nonborrowed base. D) discount loans.

A) reserves.

In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed A) sold $200 in government bonds. B) sold $500 in government bonds. C) purchased $200 in government bonds. D) purchased $500 in government bonds.

A) sold $200 in government bonds.

In the model of the money supply process, the depositor's role in influencing the money supply is represented by A) the currency holdings. B) the currency holdings and excess reserve. C) the currency holdings and borrowed reserve. D) the market interest rate.

A) the currency holdings.

Total reserves minus bank deposits with the Fed equals A) vault cash. B) excess reserves. C) required reserves. D) currency in circulation.

A) vault cash.

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio.

B) $100.

If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of A) $17,000. B) $19,000. C) $24,000. D) $29,000.

B) $19,000.

The amount of borrowed reserves is ________ related to the discount rate, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively

B) negatively; positively

Excess reserves are equal to A) total reserves minus discount loans. B) vault cash plus deposits with Federal Reserve banks minus required reserves. C) vault cash minus required reserves. D) deposits with the Fed minus vault cash plus required reserves.

B) vault cash plus deposits with Federal Reserve banks minus required reserves.

In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by A) $10. B) $100. C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio.

C) $100 times the reciprocal of the required reserve ratio.

A ________ in market interest rates relative to the discount rate will cause discount borrowing to_______. A) fall; increase B) rise; decrease C) rise; increase D) fall; remain unchanged

C) rise; increase

Both ________ and ________ are Federal Reserve assets. A) currency in circulation; reserves B) currency in circulation; securities C) securities; loans to financial institutions D) securities; reserves

C) securities; loans to financial institutions

If the Fed decides to reduce bank reserves, it can A) purchase government bonds. B) extend discount loans to banks. C) sell government bonds. D) print more currency.

C) sell government bonds.

If the required reserve ratio is 10 percent, the simple deposit multiplier is A) 5.0. B) 2.5. C) 100.0. D) 10.0

D) 10.0

An increase in the monetary base that goes into ________ is not multiplied, while an increase that goes into ________ is multiplied. A) deposits; currency B) excess reserves; currency C) currency; excess reserves D) currency; deposits

D) currency; deposits

Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply. A) borrowers; depositors B) banks; depositors C) depositors; borrowers D) depositors; banks

D) depositors; banks

When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar—a process called A) extra deposit creation. B) multiple deposit creation. C) expansionary deposit creation. D) stimulative deposit creation.

B) multiple deposit creation.

When the Federal Reserve purchases a government bond from a primary dealer, reserves in the banking system ________ and the monetary base ________, everything else held constant. A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases

A) increase; increases

If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves. B) 10 times its excess reserves. C) 10 percent of its excess reserves. D) its total reserves.

A) its excess reserves.

The ratio that relates the change in the money supply to a given change in the monetary base is called the A) money multiplier. B) required reserve ratio. C) deposit ratio. D) discount rate.

A) money multiplier.

Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in required reserves. A) one B) two C) eight D) ten

A) one

High-powered money minus currency in circulation equals A) reserves. B) the borrowed base. C) the nonborrowed base. D) discount loans.

A) reserves.

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is A) $480 billion. B) $480.8 billion. C) $80 billion. D) $80.8 billion.

B) $480.8 billion.

A bank has excess reserves of $4,000 and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves will be A) -$5,000. B) -$1,000. C) $1,000. D) $5,000.

B) -$1,000.

Everything else held constant, a decrease in holdings of excess reserves will mean A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in discount loans.

B) an increase in the money supply.

Everything else held constant, a decrease in the required reserve ratio on checkable deposits will mean A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in discount loans.

B) an increase in the money supply.

The simple deposit multiplier can be expressed as the ratio of the A) change in reserves in the banking system divided by the change in deposits. B) change in deposits divided by the change in reserves in the banking system. C) required reserve ratio divided by the change in reserves in the banking system. D) change in deposits divided by the required reserve ratio.

B) change in deposits divided by the change in reserves in the banking system.

Everything else held constant, if the sum of the required reserve ratio and the excess reserve ratio is greater than one, an increase in the currency-deposit ratio causes the M1 money multiplier to ________ and the money supply to ________. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease

B) increase; increase

The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn), and the monetary base (MB) is A) MB = MBn - BR. B) BR = MBn - MB. C) BR = MB - MBn. D) MB = BR - MBn.

C) BR = MB - MBn.

The monetary base consists of A) currency in circulation and Federal Reserve notes. B) currency in circulation and the U.S. Treasury's monetary liabilities. C) currency in circulation and reserves. D) reserves and Federal Reserve Notes.

C) currency in circulation and reserves

The interest rate the Fed charges banks borrowing from the Fed is the A) federal funds rate. B) Treasury bill rate. C) discount rate. D) prime rate.

C) discount rate.

When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________. A) remains unchanged; decrease B) remains unchanged; increase C) increases; increase D) increases; remain unchanged

C) increases; increase

The money multiplier is A) negatively related to high-powered money. B) positively related to the excess reserves ratio. C) negatively related to the required reserve ratio. D) positively related to holdings of excess reserves.

C) negatively related to the required reserve ratio.

Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars in excess reserves. A) two B) eight C) nine D) ten

C) nine

The excess reserves ratio is ________ related to expected deposit outflows, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively

C) positively; negatively

Subtracting borrowed reserves from the monetary base obtains A) reserves. B) high-powered money. C) the nonborrowed monetary base. D) the borrowed monetary base.

C) the nonborrowed monetary base.

If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply A) increases by only the initial increase in reserves. B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change.

D) does not change.

4) Total reserves are the sum of ________ and ________. A) excess reserves; borrowed reserves B) required reserves; currency in circulation C) vault cash; excess reserves D) excess reserves; required reserves

D) excess reserves; required reserves

Models describing the determination of the money supply and the Fed's role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former. A) reserves; the monetary base B) reserves; high-powered money C) the monetary base; high-powered money D) the monetary base; reserves

D) the monetary base; reserves