Chapter 25 Exam
Which of the following best describes how banks create money?
Banks create checking account deposits when making loans from excess reserves.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's required reserves increase by
$2,000.
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of
$5 million.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of
$50,000.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A can make a maximum loan of
$8,000.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's excess reserves increase by
$8,000.
The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.
Federal Reserve's Board of Governors; four presidents from the other 11 Federal Reserve banks
The M2 measure of the money supply equals
M1 plus savings account balances plus small-denomination time deposits plus non institutional money market fund shares.
The most liquid measure of money supply is
M1.
Which of the following is one of the most important benefits of money in an economy?
Money makes exchange easier, leading to more specialization and higher productivity.
The purchase of Treasury securities by the Federal Reserve will, in general,
increase the quantity of reserves held by banks.
A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.
increases; increases
A decrease in the reserve requirement ________ bank reserves and ________ the money supply.
increases; increases
Banks can make additional loans when required reserves are
less than total reserves.
Fiat money has
little to no intrinsic value and is authorized by the central bank or governmental body.
A balance sheet
measures assets, liabilities, and net worth at a giving instance in time.
Of the three primary tools the Federal Reserve uses to conduct monetary policy, the tool used most often is
open market operations.
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
open market operations, discount policy, and reserve requirements.
If the central bank can act as a lender of last resort during a banking panic, banks can
satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
Which of the following is not a major function of the Federal Reserve System?
setting income tax rates
The seven members of the Board of Governors of the Federal Reserve are appointed by
the President.
The discount rate is
the interest rate the Fed charges to banks for loans from the Fed.
A bank holds its reserves as ________ and ________.
vault cash; deposits at the Federal Reserve
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's reserves immediately increase by
$10,000.
f a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________.
increase; not change
The major assets on a bank's balance sheet are its
reserves, loans, and holdings of securities.
If the required reserve ratio is 5 percent, then the simple deposit multiplier is
20.
To decrease the money supply, the Federal Reserve could
conduct an open market sale of Treasury securities.
Which of the following is not counted in M1?
credit card balances
The M1 measure of the money supply equals
currency plus checking account balances plus traveler's checks.
A fractional reserve banking system is one in which banks hold less than 100 percent of ________ as reserves.
deposits
The required reserves of a bank equal its ________ the required reserve ratio.
deposits multiplied by
A person's wealth
equals the value of the person's assets minus his or her liabilities.
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
The largest liability on the balance sheet of most banks is its
checking account and savings account deposits of its customers.
The statement, "My iPhone is worth $700" represents money's function as
a unit of account.
Banks can continue to make loans until their
actual reserves equal their required reserves.
