Macroeconomics Chapter 13

A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and increases its excess reserves by $300. What is the legal reserve requirement? a. 10 percent b. 20 percent c. 30 percent d. 60 percent

a. 10 percent

Which of the following will cause the U.S. money supply to expand? a. A commercial bank uses excess reserves to extend a loan to a customer. b. A commercial bank purchases U.S. securities from the Fed as an investment. c. An increase in reserve requirements. d. An increase in the discount rate.

a. A commercial bank uses excess reserves to extend a loan to a customer.

Which of the following would cause the money supply in the United States to expand? a. A decrease in reserve requirements. b. An increase in the discount rate. c. The sale of bonds by a Federal Reserve bank. d. An increase in the world supply of gold.

a. A decrease in reserve requirements.

Which of the following lists two things that both increase the money supply? a. The Fed buys bonds and lowers the discount rate. b. The Fed buys bonds and raises the discount rate. c. The Fed sells bonds and lowers the discount rate. d. The Fed sells bonds and raises the discount rate.

a. The Fed buys bonds and lowers the discount rate.

Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank? a. There is no change in the supply of money; your bank's excess reserves are reduced by $800. b. There is no change in the supply of money; your bank's excess reserves are reduced by $200. c. The money supply increases by $1,000, and the excess reserves of your bank are reduced by $800. d. The money supply increases by $1,000, and the excess reserves of your bank are reduced by $200.

a. There is no change in the supply of money; your bank's excess reserves are reduced by $800.

The sale of government securities by the Fed will cause a. a decrease in both the monetary base and the money supply. b. an increase in both the monetary base and the money supply. c. an increase in the monetary base but no change in the money supply. d. a decrease in the monetary base but no change in the money supply.

a. a decrease in both the monetary base and the money supply.

Reserves that banks are required by law to keep on hand to back up their deposits are called a. required reserves. b. borrowed reserves. c. actual reserves. d. excess reserves.

a. required reserves.

Marquis decides to bank with First National Bank (FNB). He opens a checking account by depositing $1,000. According to the FNB balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in a. reserves and $1,000 in checkable deposits. b. liabilities and $2,000 in checkable deposits. c. checkable deposits and $0 in assets. d. assets and $0 in liabilities. e. reserves and $0 in liabilities.

a. reserves and $1,000 in checkable deposits.

Open market operations is the a. tool most often used by the Fed to alter the money supply. b. least effective tool the Fed has to alter the money supply. c. tool used by the Treasury to raise tax revenues. d. tool used by the Fed to regulate stock market activities.

a. tool most often used by the Fed to alter the money supply.

Compared to a barter economy, using money increases efficiency by reducing a. transaction costs. b. the need to exchange goods. c. the need to specialize. d. inflation.

a. transaction costs.

Regional Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of a. $100. b. $900. c. $1,000. d. $10,000.

b. $900.

As debit cards become more popular, individuals will reduce their holdings of currency. Other things constant, how will this impact the money supply? a. Because more money is held as deposits at banks, the money supply will fall. b. Because more money is held as deposits at banks, the money supply will expand. c. Because debit card expenditures are counted in M2 but not M1, the M1 money supply will fall. d. Because debit card expenditures are counted in M1 but not M2, the M2 money supply will fall.

b. Because more money is held as deposits at banks, the money supply will expand.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the reserve requirements imposed on commercial banks. b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. c. sell U.S. government securities and other financial assets that it is currently holding. d. raise the interest rate on loans extended to banks and other financial institutions.

b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans.

Refer to Table 13-2. The reserve requirement is 10 percent and then someone deposits an additional $50,000 into the bank, then if the bank takes no other action it will a. have $65,000 in excess reserves. b. have $55,000 in excess reserves. c. need to raise an additional $5,000 of reserves to meet the reserve requirement d. none of the above is correct.

b. have $55,000 in excess reserves.

If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will a. reduce the money supply during a period of inflation and increase it during a recession. b. reduce the size of the deposit expansion multiplier. c. increase the size of deposit expansion multiplier. d. reduce the size of the deposit expansion multiplier during a period of inflation and increase it during a recession.

b. reduce the size of the deposit expansion multiplier.

Which of the following guarantees the deposits in almost all banks up to a $250,000 limit per account? a. the Federal Reserve b. the FDIC c. the U.S. Treasury d. Bank of America Corporation

b. the FDIC

Which of the following is the primary tool the Fed uses to control the supply of money? a. The discount rate. b. The reserve requirements. c. Open market operations. d. The 30-year home-mortgage interest rate.

c. Open market operations.

When commercial banks extend loans, they are able to expand the supply of money in the United States because the U.S. has a. a fiat supply of money. b. money that is backed by gold. c. a fractional reserve banking system. d. a system of federal deposit insurance.

c. a fractional reserve banking system.

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably a. selling government securities to banks. b. selling government securities to the public. c. buying government securities from the public. d. encouraging banks to exchange their Fed deposits for currency.

c. buying government securities from the public.

Commercial banks can borrow reserves directly from the Fed at the a. prime interest rate. b. federal funds rate. c. discount rate. d. real interest rate.

c. discount rate.

In recent years, the Fed has generally set the discount rate a. lower than the federal funds rate to help financially troubled banks get more solvent. b. higher than the interest rate on 30-year fixed-rate mortgage loans. c. higher than the federal funds rate for most banks. d. equal to the rate of inflation.

c. higher than the federal funds rate for most banks.

In response to the recession of 2008-2009, the Fed doubled its asset holdings from $925 billion at mid-year 2008 to more than $2 trillion by mid-year 2009. This policy a. reduced the reserves available to banks, leading to a larger money supply. b. reduced the reserves available to banks, causing the money supply to decline. c. increased the reserves available to banks, leading to a larger money supply. d. increased the reserves available to banks, causing the money supply to decline.

c. increased the reserves available to banks, leading to a larger money supply.

Refer to Table 13-2. If the reserve requirement is 20 percent, this bank a. has $10,000 of excess reserves. b. needs $10,000 more reserves to meet its reserve requirements. c. needs $5,000 more reserves to meet its reserve requirements. d. just meets its reserve requirement.

c. needs $5,000 more reserves to meet its reserve requirements.

The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called a. excess reserves. b. fractional reserves. c. required reserves. d. certificates of deposit.

c. required reserves.

The Federal Reserve System is owned by a. federal government agencies such as the Treasury. b. the Congress of the United States. c. the banks that are members of the Federal Reserve System. d. anyone who buys stock over the counter. e. people who have deposits in member banks.

c. the banks that are members of the Federal Reserve System.

Banks are considered a safer place to deposit money now than they were prior to 1933 because a. gold reserves have increased. b. reserve requirements are higher. c. the creation of the FDIC reduced the likelihood of bank runs. d. the commercial banks are no longer permitted to extend loans to the Federal Government.

c. the creation of the FDIC reduced the likelihood of bank runs.

If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments? a. Banks are legally required to expand loans when the Fed creates excess reserves. b. Maintaining reserves in excess of demand deposits is against the law. c. Banks fear the Fed will remove the excess reserves. d. Loans and investments generally earn more interest income for the banks than excess reserves.

d. Loans and investments generally earn more interest income for the banks than excess reserves.

If the required reserve ratio were decreased, a. the money supply would tend to decrease, but the outstanding loans of banks would tend to increase. b. both the money supply and the outstanding loans of banks would tend to decrease. c. the money supply would tend to increase, but the outstanding loans of banks would tend to decrease. d. both the money supply and the outstanding loans of banks would tend to increase.

d. both the money supply and the outstanding loans of banks would tend to increase.

The term "open market operations" refers to the a. loan-making activities of commercial banks. b. effect of expansionary monetary policy on interest rates. c. operation of competitive markets in the banking industry as the result of deregulation. d. buying and selling of government securities by the Federal Reserve.

d. buying and selling of government securities by the Federal Reserve.

The value (purchasing power) of each unit of money a. is largely independent of the money supply. b. tends to increase as the money supply expands. c. increases as the general level of prices rise. d. is inversely related to the general level of prices.

d. is inversely related to the general level of prices.