government

9. The commercial banking system borrows from the Federal Reserve Banks. 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) U.S. Congress

a

17. 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.

b

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.

b

22. Which of the following statements is correct? A) The supply of money decreases when the Federal Reserve Banks buy government securities from households 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 from households or businesses. D) Commercial bank reserves are a liability to commercial banks but an asset to the Federal Reserve Banks.

b

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

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.

c

18. 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

20. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank 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. Answer: A Type: A Topic: 2 E: 272-273 MA: 272-273 21. Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for them by 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.

c

39. Refer to the above data. Suppose the Fed wants to reduce the money supply by $400 billion to drive up interest rates and dampen inflation. To accomplish this it could: A) sell $20 billion of U.S. securities to the banks. B) buy $20 billion of U.S. securities from the banks. C) sell $40 billion of U.S. securities to the banks. D) buy $40 billion of U.S. securities from the banks.

c

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

Type: A Topic: 3 E: 273-274 MA: 273-274 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. Answer: B

b

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

12. 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.

c

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 the money supply.

c

Reserve ratio Type: A Topic: 3 E: 273-274 MA: 273-274 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. Answer: C

c

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

d

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

30. Which of the following will happen when the Federal Reserve buys bonds from the public in the open market 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 decline B) the money supply will decrease D) commercial bank reserves will increase

d

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. Answer: D Chapter 15: Monetary Policy McConnell/Brue: Economics, 16/e Page 464 Type: C Topic: 3 E: 273-274 MA: 273-274

d

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. Answer: D

d

14. 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 the central banks. D) doing all of the above. Chapter 15:

D

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 deposits B) Federal Reserve Notes in circulation D) reserves of commercial banks

a

16. Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal 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

5. Which of the following will increase commercial bank reserves? A) the purchase of government bonds in the open market by the Federal Reserve Banks B) a decrease in the reserve ratio C) an increase in the discount rate D) the sale of government bonds in the open market by the Federal Reserve Banks

a

8. The Federal Reserve Banks buy government securities from commercial banks. 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) and reserves of commercial banks are both unchanged.

a

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

a

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

b

43. 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 to 30 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. Answer: B Type: A Topic: 3 E: 273-274 MA: 273-274

b

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

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.

b