ECON 201 Ch. 24&25

29. If banks cannot lend all of their excess reserves: a.the money multiplier increases. b.the money multiplier decreases. c.the money multiplier stays the same. d.all of above.

b.the money multiplier decreases.

28. If there is no one who is interested in borrowing from a bank: a.the bank's excess reserves will be zero. b.there will be no process of money creation. c.the required reserve ratio must be equal to zero. d.the required reserve ratio must be equal to 100 percent.

b.there will be no process of money creation.

15. The Federal Reserve System is divided into: a. 2 districts b. 12 districts c. 26 districts d. 50 districts

b. 12 districts

3. Which of the following is not a store of value? a. Federal govt bonds b. Credit card c. Debit card d. Savings deposit

b. Credit card

Chapter 25

Money Creation

Chapter 24

Money and the Federal Reserve System

10. Decisions to buy or sell U.S. govt securities at the Fed are made by the: a. Congress b. Federal Open Market Committee c. Federal Deposit Insurance Corporation d. President's Council of Economic Advisors

b. Federal Open Market Committee

5. If a bank that is subject to a 10 percent required reserve ratio in Japan, has $90,000 in excess reserves, it can make loans of: a.$90,000. b.$10,000. c.$100,000. d.$80,000.

a. $90,000.

2. Which of the following is the most liquid store of purchasing power? a. Dollar bill b. Common stock c. Gold d. Real estate

a. A dollar bill

13. Which of the following is not part of the Federal Reserve System? a. Council of Economic Advisors b. Board of Governors c. Federal Open Market Committee d. 12 Federal Reserve District Banks e. Federal Advisory Council

a. Council of Economic Advisors

16. The government agency that provides insurance for all checkable deposits up to $250,000 in banks choosing its protection is the: a. Federal Deposit Insurance Corporation b. Federal Reserve c. Office of Management and Budget d. Treasury e. Securities and Exchange Commission

a. Federal Deposit Insurance Corporation

5. Which of the following assets is more liquid? a. Funds in a checking account b. A car c. A home D. A municipal bond

a. Funds in a checking account

1. $2 as the price of a concert ticket represents the function of money as a: a. Medium of exchange b. Unit of account c. Store of value d. All of these

b. Unit of account

23. The Fed's power to set the required reserves of commercial banks: a.provides a certain source of interest income for commercial banks. b.allows the Fed to control the lending ability of commercial banks and, thereby, control the money supply. c.allows the Fed to formulate and enforce fiscal policies. d.all of the above.

b.allows the Fed to control the lending ability of commercial banks and, thereby, control the money supply.

3. In order for a bank to earn as much profit as possible, its excess reserves should be: a.equal to its required reserves. b.as small as possible. c.less than its current cash level. d.growing at a constant rate.

b.as small as possible.

7. The MI definition of the money supply includes: a. currency in circulation and checkable deposits/checking accounts/demand deposits b. federal reserve bonds c. savings accounts and investment in stocks d. none of these

a. currency in circulation and checkable deposits/checking accounts/demand deposits

13. When the Federal Reserve sells government bonds to the public, it: a.increases the M1 money supply. b.decreases the M1 money supply. c.there is no effect on the M1 money supply. d.none of the above.

b.decreases the M1 money supply.

12. When the required reserve ratio, say by the Central Bank of China, is changed, a.the money multiplier is changed but the amount of excess reserves in the Chinese banking system is unchanged. b.the money multiplier and the amount of excess reserves in the Chinese banking system are changed. c. neither the money multiplier nor the amount of excess reserves change. d. none of the above.

b.the money multiplier and the amount of excess reserves in the Chinese banking system are changed.

7. Which of the following events would reduce the size of the "real-world" money multiplier in a country? a.Banks hold more excess reserves. b.Households hold less currency. c.The public holds less cash. d.The Fed reduces the required reserve ratio.

a.Banks hold more excess reserves

2. Which of the following is not an interest-earning asset of commercial banks? a.Required reserves. b.Govt Securities. c.Loans to borrowers in private sector. d.All of the above are interest-earning assets of commercial banks.

a.Required reserves.

25. An increase in the required reserve ratio by the Federal Reserve would: a.cause M1 to contract. b.cause M1 to expand. c.have no effect on M1 or M2. d.affect only M2, not M1.

a.cause M1 to contract

18. The Fed can raise the discount rate when it wants to: a.decrease the money supply. b.increase the money supply. c.decrease the budget deficit. d.increase the budget deficit.

a.decrease the money supply.

24. When required reserves are increased by the Bank of Japan, the: a.excess reserves of commercial banks in Japan will decrease. b.excess reserves of commercial banks in Japan will increase. c.fed budget deficit in Japan will decrease. d.money supply in Japan will rise.

a.excess reserves of commercial banks in Japan will decrease.

1. The required reserves of a bank are: a.held as deposits either within the bank and/or with the Fed Res System. b.equal to its loans. c.equal to its checkable deposits. d.none of the above.

a.held as deposits either within the bank and/or with the Fed Res System.

17. If the Federal Reserve wants to increase the availability of money and credit, it can: a.lower the discount rate. b.raise the reserve requirements. c.sell U.S. government bonds to the public. d.encourage banks to increase their interest rates.

a.lower the discount rate.

20. When the Fed lowers the discount rate, it: a.lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public. b.raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public. c.increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public. d.increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

a.lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.

8. If the required reserve ratio in Australia is decreased by the Central Bank, the: a.money multiplier increases. b.money multiplier decreases. c.amount of excess reserves the bank has decreases. d.money multiplier stays the same. e.amount of excess reserves stays the same.

a.money multiplier increases.

4. If the fractional reserve system did not exist, a.the banking system could not increase the money supply. b.there would be no effect on the ability of the banking system to create money. c.banks would loan out its required reserves. d.banks would be highly susceptible to bank runs. e.the banking system would maintain a higher level of money multiplier.

a.the banking system could not increase the money supply.

11. When the required reserve ratio is lowered, a.the money multiplier increases, and the amount of excess reserves increases in the banking system. b.the money multiplier decreases, and the amount of excess reserves increases in the banking system. c.the money multiplier decreases, and the amount of excess reserves decreases in the banking system. d.the money multiplier increases, and the amount of excess reserves decreases in the banking system. e.there is no change in either the money multiplier or the amount of excess reserves in the banking system.

a.the money multiplier increases, and the amount of excess reserves increases in the banking system.

11. Members of the Federal Reserve Board of Governors serve one nonrenewable term of: a. 4 years b. 7 years c. 14 years d. life

c. 14 years

14. The Fed's principal decision-making body, which directs buying and selling U.S. govt securities, is known as the: a. Federal Deposit Insurance Corporation b. Board of fed's district presidents c. Federal Open Market Committee (FOMC) d. Federal advisory council

c. Federal Open Market Committee (FOMC)

9. The conduct of monetary policy is the responsibility of: a. commercial banks b. U.S. Treasury c. Federal Reserve System d. Congress & President

c. Federal Reserve System

15. Decisions regarding purchases and sales of government securities by the Fed are made by the: a.Federal Deposit Insurance Commission (FDIC). b.Discount Committee (DC). c.Federal Open Market Committee (FOMC). d.Federal Funds Committee (FFC).

c.Federal Open Market Committee (FOMC).

14. Which of the following directs the buying and selling of U.S. government securities? a.Board of Governors. b.Federal Reserve Banks. c.Federal Open Market Committee. d.Federal Advisory Council. e.The U.S. largest commercial banks.

c.Federal Open Market Committee.

22. The federal funds market is the market in which: a.banks borrow from the Fed. b.bank customers borrow from their banks c.banks borrow from each other. d.the federal government borrows from the Fed. e.the federal government borrows from members of the general public.

c.banks borrow from each other.

27. When a recession hits, we would expect the president/congress to run a budget deficit by raising the level of its spending "G" or by cutting taxes, or perhaps both. The Federal reserve system would be expected to: a.reduce the required reserve ratio, increase the discount rate, and buy securities on the open market. b.reduce the required reserve ratio, reduce the discount rate, and sell securities on the open market. c.reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market. d.increase the required reserve ratio, reduce the discount rate, and sell securities on the open market. e.increase the required reserve ratio, increase the discount rate, and sell securities on the open market.

c.reduce the required reserve ratio, reduce the discount rate, and buy securities on the open market.

26. If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would: a.buy bonds, reduce the discount rate, and reduce reserve requirements. b.sell bonds, reduce the discount rate, and reduce reserve requirements. c.sell bonds, increase the discount rate, and increase reserve requirements. d.buy bonds, increase the discount rate, and increase reserve requirements.

c.sell bonds, increase the discount rate, and increase reserve requirements.

6. Which of the following is not a component of the MI money supply? a. Checking accounts/demand deposits b. Large-denomination (more than $50) bills c. Interest-earning checking accounts/ deposits d. $50,000 investment in a mutual fund

d. $50,000 investment in a mutual fund

9. The money multiplier equals: a. 1 / excess reserve ratio. b. excess reserve ratio / loans. c. required reserve ratio / excess reserve ratio. d. 1 / required reserve ratio.

d. 1 / required reserve ratio.

4. Anything can be money if it acts as a: a. Unit of account b. Store of value c. Medium of exchange d. All of the above

d. All of the above

8. Which of the following compose the M2 money supply? a. currency only b. currency, checkable deposits, and traveler's checks c. MI plus large (denomination) time deposits and investments in stocks d. MI plus savings deposits and small denomination time deposits

d. MI plus savings deposits and small denomination time deposits

12. The seven members of the Board of Governors serve 14 year terms to: a. control the money supply b. keep inflation within a reasonable range c. keep unemployment at/around the natural rate of unemployment d. all of the above

d. all of the above

10. If a bank keeps some of its excess reserves, the money multiplier: a. increases. b. stays the same. c. goes to zero. d. decreases. e. increases, then decreases.

d. decreases.

6. If banks in a country, say, Canada, are fully loaned up, have no excess reserves, and the required reserve ratio is lowered, the amount that banks can lend is: a.reduced and the money supply contracts. b.reduced and the money supply expands. c.reduced and there is no change in the money supply. d.increased and the money supply expands. e.none of the above.

d.increased and the money supply expands.

19. Which of the following policy actions by the Fed would cause the money supply to decrease? a.an open-market purchase of govt bonds. b.a decrease in required reserve ratios. c.a decrease in the discount rate. d.none of these.

d.none of these.

16. The discount rate is the interest rate: a.commercial banks charge their low-risk customers for a loan. b.savings and loan associations pay for using savings deposit funds. c.the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000 or more. d.the Federal Reserve charges banking institutions for borrowing its funds.

d.the Federal Reserve charges banking institutions for borrowing its funds.

21. When the discount rates fall, the cost: a.of loans to bankers' best customers goes up. b.of loans between banks rise. c.of international loans rise. d.to banks of borrowing from the Fed falls.

d.to banks of borrowing from the Fed falls.