Chapter 17

Bonds issued by the U.S. Treasury would: a. Not be held by the Fed. b. Be held by the Fed as part of its securities. c. Be held by the Fed as part of its foreign exchange reserves. d. Be held by the Fed as part of its loans.

Be held by the Fed as part of its securities.

Why can the central bank affect the size and composition of its balance sheet in ways that private citizens cannot? a. Because the central bank can pay on credit. b. Because the central bank can pay for purchases assets by creating liabilities. c. Because the central bank need not record assets on its balance sheet. d. Because the central bank can double count transactions on its balance sheet.

Because the central bank can pay for purchases assets by creating liabilities.

How did the financial crisis of 2007-2009 affect the size and composition of the balance sheet of the Federal Reserve?

Between December 2007 and December 2009, the assets on the Federal Reserve's balance sheet increase by 2.5 times, mostly in the form of securities. The Fed also broadened the rang of assets held to include riskier instruments such as extraordinary loans to non-banks and long-term securities (including mortgage-backed instruments and Treasury bonds). On the liability side of the balance sheet, the liquidity crisis led to an increase in commercial bank deposits at the Fed as banks held on to excess reserves. At times, the Treasury also in deposits at the Fed to help the Fed limit the increase of bank reserves as its assets rose.

In the U.S., loans made by Federal Reserve to banks fall in the categories of: a. Discount loans. b. Reserves. c. Discount loans and reserves. d. Discount loans and foreign exchange reserves.

Discount loans.

In the United States foreign exchange reserves are composed of a. American currency held by members of the foreign public. b. American bonds sold to foreign citizens. c. Foreign currency held by the Fed. d. Foreign bonds sold to the American public.

Foreign currency held by the Fed.

The United States foreign exchange reserves are composed of a. Foreign currency held by the Fed. b. American bonds said to foreign citizens. c. American currency held by members of the foreign public. d. Foreign bonds sold to the American public.

Foreign currency held by the Fed.

The monetary base is also known as: a. M1. b. M2. c. High-powered money. d. Free reserves.

High-powered money.

The currency-to-deposit ratio a. Has a positive (direct) relationships with money multiplier. b. Equals deposits divided by currency held by the public. c. Implies that cash is more desirable as interest rates fall. d. Implies that the interest rate is the benefit of holding currency.

Implies that cash is more desirable as interest rates fall.

The monetary base can be created and destroyed a. Only by commercial banks. b. By the Federal Reserve, commercial banks, or by the non-bank public. c. By the Federal Reserve or by commercial banks. d. Only by the Federal Reserve.

Only by the Federal Reserve.

Consider a situation where banks must keep 10% of deposits as required reserves, banks initially hold no excess reserves, and the amount of cash held by the public is unrelated to deposits. After moving through the whole banking system, a $60,000 open market purchases by the Federal Reserve can eventually create _____ in new money. a. $540,000 b. $60,000 c. $54,000 d. $600,000

$600,000

If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in deposit creation of: a. $9 million b. $90 million c. $10 million d. $900,000

10 million

In a nation with a $20 billion money supply and a monetary base of $4 billion, the money multiplier must equal _____. a. 5 b. 24 c. 80 d. 0.25

5

Vault cash is a. Equal to the total amount of reserves and is an asset of the central bank. b. Not reserves but is a liability of the central bank. c. A part of reserves and an asset of commercial banks. d. Not reserves but is an asset of central banks.

A part of reserves and an asset of commercial banks.

The experience of the Marcos Presidency in the Philippines in 1986 showed: a. The importance of keeping the central bank independent from political pressure. b. Published central bank balance sheets do not always reflect reality. c. Transparency is critical if people are going to trust a central bank. d. All of the answers given are correct.

All of the answers given are correct.

When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect: a. No change in liabilities but an increase in assets. b. A decrease in assets and liabilities. c. An increase in assets and liabilities. d. An increase in assets and a decrease in liabilities.

An increase in assets and liabilities.

Commercial bank reserves generally _____ the largest liability on the central bank's balance sheet and _____ the most important liability in determining the money supply. a. Are not; are not b. Are; are not c. Are not; are d. Are; are

Are not; are

When the Federal Reserve buys $5 million in U.S. government bonds from Bank Y a. Bank Y alone can now create $5 million more in new money. b. Bank Y must call in $5 million worth of loans as a result. c. Bank Y loses $5 million in reserves and the Fed gains them. d. Bank Y will be more profitable than before, even if it takes no further action.

Bank Y alone can now create $5 million more in new money.

For the money supply to change as much as predicted by the simple deposit expansion multiplier when we have a change in reserves, we must assume that a. The more money held in deposits, the less cash held by the public. b. Banks hold no excess reserves. c. All banks engage in open market operations. d. The public holds as much cash as possible.

Banks hold no excess reserves.

If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would: a. Double. b. Increase by 10 percent. c. Decrease by a factor of ten. d. Be half as large as it was before the increase.

Be half as large as it was before the increase.

Which of the following is true about publication of the balance sheets for the Federal Reserve and European Central Bank? a. Both are published online. b. The European Central Bank's balance sheet is published more often. c. The Federal Reserve's balance sheet is available online; the European Central Bank's is available only in printed form. d. The Federal Reserve's balance sheet is published more often.

Both are published online.

Which of the following is true about bank reserves? a. Both required reserves and excess reserves are liabilities for the central bank. b. For a single commercial bank, its required reserves plus its reserves on hand equal its excess reserves. c. Banks today are strictly constrained by reserve requirements. d. Today banks hold reserves with the primary goal of ensuring banking system stability.

Both required reserves and excess reserves are liabilities for the central bank.

After the financial crisis of 2007-2009, on the balance sheet of the Fed, we see that _____. a. Securities held decreased by more than $1 trillion b. Commercial bank deposits increased to 100 times their old level c. During the crisis the Fed stopped paying interest on bank reserves d. The balance sheet has overall gotten much smaller after the crisis

Commercial bank deposits increased to 100 times their old level

The three major liabilities on a central bank's balance sheet are a. Reserves, securities, and foreign exchange reserves. b. Securities, foreign exchange reserves, and loans. c. Cash in bank vaults, cash held by the public, and securities. d. Currency, the government's account, and reserves.

Currency, the government's account, and reserves.

Each of the following items would appear as assets on the central bank's balance sheet, except: a. Loans. b. Securities. c. Currency. d. Foreign exchange reserves.

Currency.

All else equal, then banks hold more excess reserves an economy's ability to expand deposits _____; when the public holds less cash an economy's ability to expand deposits _____. a. Increases; increases b. Increases; decreases c. Decreases; decreases d. Decreases; increases

Decreases; increases

For short-run monetary policy, central banks today generally focus on _____ due to the volatility of the _____. a. Interest rates; money multiplier b. The money supply; monetary base c. Interest rates; monetary base d. The money supply; money multiplier

Interest rates; money multiplier

When the Federal Reserve buys $200 billion of U.S. Treasury bonds from a commercial bank, on the Fed's balance sheet a. There is no change in its total assets. b. The cash account falls by $200 billion. c. Its assets and liabilities both rise by $200 billion. d. Its liabilities in total rise by $200 billion, while its assets fall by the same amount.

Its assets and liabilities both rise by $200 billion.

Reserves held by commercial banks are a. Assets on the central bank's balance sheet in its role as the government's bank. b. Liabilities on the central bank's balance sheet in its role as the government's bank. c. Assets on the central bank's balance sheet in its role as bankers' bank. d. Liabilities on the central bank's balance sheet in its role as bankers' bank.

Liabilities on the central bank's balance sheet in its role as bankers' bank.

The central bank's monetary base is made up of _____ that are held _____. a. Liabilities; publicly b. Assets; publicly c. Liabilities; privately d. Assets; privately

Liabilities; privately

Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws then percent of every deposit in cash. An open market purchase of $1 million by the Fed will see banking system deposits increase by: a. More than $1 million but less than $10 million. b. Exactly $1 million. c. Less than $1 million. d. More than $10 million but less than $20 million.

More than $1 million but less than $10 million.

During the 2007-2009 financial crisis which of the following became the largest component of assets on the Fed's balance sheet: a. Foreign exchange reserves. b. Loans. c. U.S. Treasury securities. d. Mortgage backed securities.

Mortgage backed securities.

Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Banking System's balance sheet will specifically show: a. Only an increase in liabilities of $2 billion. b. Only a decrease in assets of $2 billion. c. No net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively. d. No net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing by $2 billion respectively.

No net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively.

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's required reserves will: a. Not change. b. Increase by $100,000. c. Decrease. d. Increase but by less than $100,000.

Not change.

The quantity of securities held by the Federal Reserve is controlled through: a. The U.S. Treasury b. The Fed's annual budget c. Open market operations. d. The purchases made by the regional Reserve banks.

Open market operations.

The monetary base is the sum of: a. Reserves and currency in the hands of the public. b. Reserves and M2. c. Currency in the hands of the public and M2. d. Currency in the hands of the public M1.

Reserves and currency in the hands of the public.

On the balance sheet of the Federal Reserve, commercial bank accounts refer to _____ and _____. a. Demand deposits; liabilities b. Reserves; liabilities c. Demand deposits; assets d. Reserves; assets

Reserves; liabilities

The three primary assets on a central bank's balance sheet are a. Currency, foreign exchange reserves, and deposits. b. Cash, stocks, and bonds. c. Securities, currency, and borrowing. d. Securities, foreign exchange reserves, and loans.

Securities, foreign exchange reserves, and loans.

Before the financial crisis of 2007-2009, the Fed controlled the federal funds rate and the availability of money and credit by adjusting its holdings of liquid securities, primarily _____. a. Foreign exchange reserves b. Currency holdings c. Short-term Treasury bills d. Loans

Short-term Treasury bills

Harry gets $1000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact on the monetary base of Harry's deposit? a. The monetary base did not change b. The monetary base increased by $1000 c. The monetary base decreased by $1000 d. The monetary base increases by more than a $1000

The monetary base did not change

In dollar amounts: a. The monetary base is larger than M2 and M1 is less than M2. b. M1 is smaller than the monetary base and M2 is larger than both. c. The monetary base if larger than M1 and M2. d. 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.

We can move from that unrealistically simple deposit expansion multiplier to a more realistic one by acknowledging that a. Changes in public cash holdings don't affect reserves. b. The public holds more cash as the amount of deposits rises. c. Banks generally hold no excess reserves. d. The more excess reserves a bank holds, the less safe it is.

The public holds more cash as the amount of deposits rises.

Which of the following is not an important reason bank managers keep some excess reserves on hand today? a. To provide funds for day-to-day business b. To ensure bank system stability and soundness c. To insure against unforeseen outflows of funds

To ensure bank system stability and soundness

For the Federal Reserve's balance sheet, the asset listed Securities would include: a. Private and public debt. b. Mainly U.S. Treasury and municipal bonds. c. Bonds issued by commercial banks. d. U.S. Treasury securities.

U.S. Treasury securities.

The link between the central bank's balance sheet and the money supply is _____ because _____ is too variable. a. Strong; the monetary base b. Weak; the money multiplier c. Strong; the money multiplier d. Weak; the monetary base

Weak; the money multiplier

Which of the following transactions would affect the balance sheets for the Federal Reserve, the banking system, and the non-bank public? a. Federal Reserve purchases of foreign government bonds. b. Open market operations where the Federal Reserve sells securities to a bank. c. Bank borrowing from the Federal Reserve. d. Withdrawal of cash from an ATM.

Withdrawal of cash from an ATM.

Which of the following is true about disclosure of central bank information? a. Most central banks provide information less than once a month. b. Without timely disclosure, there is no way to know if policymakers are doing their jobs. c. Historically, delays in disclosure have little correlation with problems within their central banks. d. Although some central banks have delayed disclosure, to date none has falsified information to the public.

Without timely disclosure, there is no way to know if policymakers are doing their jobs.