Macroeconomics 102 Chapter 16

Reserves Loans $60,000 440,000 Deposits $500,000 Metropolis National Bank is currently holding 2% of deposits as excess reserves. Assume that no banks in the economy want to hold excess reserves and that people only hold deposits and no currency. How much does the money supply ultimately increase when Metropolis National Bank lends out its excess reserves? a. $120,000 b. $100,000 c. $110,000 d. None of the above are correct.

b. $100,000

If R represents the reserve ratio for all banks in the economy, then the money multiplier is a. 1/(1-R). b. 1/R. c. 1/(1+R). d. (1+R)/R.

b. 1/R.

You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money? a. liquidity b. medium of exchange c. store of value d. unit of account

b. medium of exchange

If the reserve requirement is 15 percent a bank desires to hold no excess reserves and it receives a new deposit of $10, then this bank a. will initially see its total reserves increase by $15. b. will be able to make new loans up to a maximum of $8.50. c. must increase its required reserves by $10. d. All of the above are correct.

b. will be able to make new loans up to a maximum of $8.50.

The federal funds rate is the interest rate that a. banks charge the Fed for loans. b. the Fed charges banks for loans. c. banks charge one another for loans. d. the Fed charges Congress for loans.

c. banks charge one another for loans.

If an economy used gold as money, its money would be a. fiat money, but not commodity money. b. functioning as a store of value and as a unit of account, but not as a medium of exchange. c. commodity money, but not fiat money. d. both fiat and commodity money.

c. commodity money, but not fiat money.

If the reserve requirement is 10 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $100, a. its total reserves initially increase by $10. b. it will be able to make new loans up to a maximum of $10. c. it must increase its required reserves by $10. d. None of the above is correct.

c. it must increase its required reserves by $10.

Imagine an economy in which: (1) pieces of paper called yollars are the only thing that buyers give to sellers when they buy goods and services, so it would be common to use, say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so you might walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3) yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. In this economy, a. the yardstick is a medium of exchange but it cannot serve as a unit of account. b. the yollar is a unit of account, but it is not a medium of exchange and it is not a liquid asset. c. the yardstick is a unit of account but it cannot serve as a store of value. d. the yardstick is a medium of exchange but it cannot serve as a store of value, and the yollar is a unit of account.

c. the yardstick is a unit of account but it cannot serve as a store of value.

The manager of the bank where you work tells you that your bank has $5 million in excess reserves. She also tells you that the bank has $300 million in deposits and $255 million dollars in loans. Given this information you find that the reserve requirement must be a. 50/300. b. 40/255. c. 50/255. d. 40/300.

d. 40/300.

Which of the following is not correct? a. The President of the New York Federal Reserve Regional Bank always gets to vote on the decisions made by the Federal Open Market Committee. b. U.S. monetary policy is made by the Federal Open Market Committee. c. The regional Federal Reserve Banks play a role in regulating banks and ensuring the health of the banking system. d. The Federal Open Market Committee meets every 12 weeks.

d. The Federal Open Market Committee meets every 12 weeks.

The money supply increases when the Fed a. sells bonds. The increase will be larger, the smaller is the reserve ratio. b. sells bonds. The increase will be larger, the larger is the reserve ratio. c. buys bonds. The increase will be larger, the larger is the reserve ratio. d. buys bonds. The increase will be larger, the smaller is the reserve ratio.

d. buys bonds. The increase will be larger, the smaller is the reserve ratio.

The reserve requirement is 4%, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 of bonds what happens to the money supply? a. it increases by $250,000 b. it decreases by $200,000 c. it increases by $200,000 d. it decreases by $250,000

d. it decreases by $250,000

A decrease in the money supply might indicate that the Fed had a. purchased bonds in an attempt to reduce the federal funds rate. b. sold bonds in an attempt to reduce the federal funds rate. c. purchased bonds in an attempt to increase the federal funds rate. d. sold bonds in an attempt to increase the federal funds rate.

d. sold bonds in an attempt to increase the federal funds rate.

Reserves Loans $2,000 18,000 Deposits $20,000 If the Fed's reserve requirement is 9 percent, then what quantity of excess reserves does the Bank of Pleasantville now hold? a. $200 b. $400 c. $1,000 d. $250

a. $200

If the reserve ratio is 9 percent, then a decrease in reserves of $6,000 can cause the money supply to fall by as much as a. $66,666.67. b. $100,555.56. c. $90,900.00. d. $60,000.00.

a. $66,666.67.

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank. Refer to Scenario 29-2. Suppose the Bank of Tazi purchased 50 million tazes of Tazian Treasury Bonds from the banks. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much does the money supply change? a. 1,000 million tazes b. 1,250 million tazes c. 625 million tazes d. None of the above is correct.

a. 1,000 million tazes

Reserves $2,000 Loans Deposits $10,000 8,000 The reserve ratio for this bank is a. 20 percent. b. 100 percent. c. 0 percent. d. 80 percent.

a. 20 percent.

If the reserve ratio is 4 percent, then the money multiplier is a. 25. b. 4. c. 2. d. 20.

a. 25.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by a. selling bonds. This selling would reduce the money supply. b. buying bonds. This buying would reduce the money supply. c. selling bonds. This selling would increase the money supply. d. buying bonds. This buying would increase the money supply.

a. selling bonds. This selling would reduce the money supply.

Reserve requirements are regulations concerning a. the amount of reserves banks must hold against deposits. b. the interest rate at which banks can borrow from the Fed. c. the amount banks are allowed to borrow from the Fed. d. reserves banks must hold based on the number and type of loans they make.

a. the amount of reserves banks must hold against deposits.