Chapter 14—Banking and the Money Supply 1. The narrowest definition of the money supply includes only currency held by the nonbank public. A. True B. False 2. Currency held by banks is not included in the money supply. A. True B. False 3. In the United States, paper money is redeemable for gold. A. True B. False 4. Currency held by the nonbank public is a medium of exchange. A. True B. False 5. M1 is the narrowest measure of the money supply. A. True B. False 6. M1 includes currency held in bank vaults. A. True B. False 7. M1 includes currency held in shoeboxes by people distrustful of banks. A. True B. False 8. M1, the money supply narrowly defined, consists of coins, paper currency, checkable deposits, travelers checks, and certificates of deposit (CDs). A. True B. False 9. Demand deposits are A. long-term, high-interest savings accounts B. accounts into which banks can require depositors make regular deposits C. checkable deposits held by commercial banks that earn no interest D. negotiable order of withdrawal accounts E. loans from the Fed 10. Narrowly defined, the M1 money supply consists primarily of A. coins B. currency C. cash held by banks D. checkable deposits E. money market mutual fund accounts 11. Narrowly defined, the M1 money supply consists primarily of A. coins and currency B. gold C. gold and silver D. certificates of deposit E. checkable deposits 12. Of the following, which is not included in the narrowest definition of money, M1 A. coins in the hands of the nonbank public B. currency in the hands of the nonbank public C. gold and silver D. traveler’s checks E. checkable deposits 13. Of the following, which is not included in the narrowest definition of money, M1 A. coins and currency in bank vaults B. currency in the hands of the nonbank public C. coins in the hands of the nonbank public D. traveler’s checks E. checkable deposits 14. Coins in the United States are manufactured and distributed by the A. Federal Reserve B. U.S. Mint C. U.S. Treasury D. FBI E. Controller of the Currency 15. The M1 money supply consists of A. coins and currency held by the nonbank public B. coins and currency held by the nonbank public and currency held in banks C. coins and currency held by the nonbank public, checkable deposits, and traveler's checks D. coins and currency held in banks and checkable deposits E. paper currency 16. The M1 money supply is defined as A. one-dollar bills B. currency and coins held by the nonbank public, checkable deposits, and traveler's checks C. M3 minus M2 D. all currency and checkable deposits E. coins and currency held by the nonbank public 17. Which of the following make up the money supply as it is most narrowly defined? A. coins and currency held by the nonbank public, traveler's checks, and savings deposits B. all coins and currency held by the nonbank public C. coins and currency held by the nonbank public, checking deposits, and traveler's checks D. coins and currency held by the nonbank public, checking deposits, and savings deposits E. checking deposits, savings deposits, and money market mutual fund accounts 18. Which of the following are included in the narrowest definition of the money supply? A. cash in bank vaults B. savings deposits C. money market mutual fund accounts D. negotiable certificates of deposit E. checkable deposits 19. Which of the following is not true of Federal Reserve notes? A. They are fiat money. B. They are a liability of the Fed. C. They are redeemable for other Federal Reserve notes. D. They are redeemable for gold. E. They are counted as currency in the money supply. 20. Which of the following is not legal tender in the United States? A. a $2 bill B. a fifty-cent piece C. a $100 bill D. a $5 Federal Reserve Note E. a check 21. Stores need not accept your check but must accept currency because A. currency is backed by gold B. checks are not money but currency is C. currency is legal tender; checks are not D. currency is easier to handle E. currency is a medium of exchange; checks are not 22. If you returned a $5 Federal Reserve note to the Fed, you could receive A. $5 in silver B. $5 in gold C. 5 one-dollar bills D. 10 one-dollar bills E. a small gold bar 23. A 2005 quarter is called token money because A. it is legal tender B. its metal value exceeds it face value C. there is less than a quarter's worth of metal in it D. it can be used in the subway E. it is not generally accepted in exchange 24. The Federal Reserve's narrowest definition of money is A. M3 B. M2 C. M1 D. near money E. money market mutual funds 25. The Federal Reserve's narrowest definition of money is A. M3 B. M2 C. currency in the hands of the public plus checkable deposits plus traveller’s checks D. near money E. money market mutual funds 26. The largest component of M1 is A. currency B. checkable deposits C. traveler's checks D. money market mutual fund accounts E. savings accounts 27. What proportion of M1 is accounted for by checkable deposits and traveler’s checks? A. about 10% B. about 25% C. about 40% D. about 55% E. about 75% 28. M2 is defined as A. M1 plus savings accounts, small time deposits, and money market mutual funds B. coins, currency, and checkable deposits C. all near moneys D. M1 plus time deposits E. M1 plus money market mutual funds 29. Which of the following is not included in M2. A. small time deposits B. coins, currency, and checkable deposits C. savings accounts D. gold and silver E. money market mutual funds 30. The distinction between M1 and M2 has blurred over time because A. M1 is now larger than M2 B. depositors can transfer funds between accounts so easily C. the Federal Reserve has defined them less precisely D. M1 is becoming less liquid E. banks are offering time deposits 31. Currently, M2 is approximately A. equal to M1 B. twice the size of M1 C. half the size of M1 D. ten times the size of M1 E. three times the size of M1 32. Which of the following is true of credit cards? A. They have eliminated the use of money. B. They are currently the most popular means of payment in the United States. C. They are included in the narrow definition of money, M1. D. They are near money. E. They are a way of postponing the payment of money. 33. All of the following are part of M2 except one. Which is the exception? A. money market deposit accounts B. coins C. travelers checks D. large denomination time deposits E. savings deposits 34. Banks act as financial intermediaries by A. bringing together car buyers and auto dealers B. bringing together real estate brokers and home buyers C. printing money for all to use D. serving the credit needs of borrowers and the security needs of savers E. selling shares of stock to investors 35. From a bank's point of view, its deposits are liabilities, not assets. A. True B. False 36. Usually, a commercial bank's depositors and its owners are the same individuals. A. True B. False 37. Banks create money when they make loans. A. True B. False 38. Banks create money when they accept deposits. A. True B. False 39. Net Worth on a bank's balance sheet is A. equal to assets plus liabilities B. sometimes called the owners' equity C. equal to assets minus reserves D. the same thing as net profits E. on the asset side of the balance sheet 40. Banks earn a profit on the difference between A. interest charged to depositors and interest offered to borrowers B. interest charged on loans and interest paid on deposits C. deposit and loan balances D. liabilities and deposits E. dividends and interest 41. What do commercial banks and thrifts attempt to maximize? A. assets B. deposits C. loans D. profits E. utility 42. A bank that borrows from the Fed at 3 percent annual interest A. must hold 3 percent of its total reserves as required reserves B. must hold 97 percent of its total reserves as required reserves C. will be able to profit by charging less than 3 percent for its loans D. hopes to charge more than 3 percent for its loans E. must give up U.S. government securities to secure the loan 43. Asymmetric information in financial markets exists when one party to the transaction has more information than the other regarding risks, alternatives, and other relevant details. A. True B. False 44. Asymmetric information in financial markets exists when borrowers know more about their ability to repay loans than lenders do. A. True B. False 45. Banks have more expertise than individual households in making loans because banks A. lend larger amounts of money B. are regulated by the government C. also pay interest to savers D. are subject to severe penalties if they make bad loans E. make many more loans than individual households do 46. Asymmetric information in financial markets exists when A. teachers know more about banking than students do B. borrowers know more about their ability to repay loans than lenders do C. lenders know more about borrowers than borrowers know about themselves D. borrowers pay off a loan before it is due E. borrowers and lenders know more about banking than banks do 47. Banks help to overcome the problem of asymmetric information by A. lending only to students B. acquiring expertise in evaluating the credit histories of borrowers C. threatening borrowers D. offering only one type of loan E. providing information to lenders 48. Banks minimize the risk of loss to depositors by A. lending to casino owners B. making many different loans to different borrowers C. refusing to lend money to the U.S. government D. putting all their eggs in one basket E. making very long-term loans 49. Which of the following is not a function of a depository institution? A. serving as a financial intermediary B. providing expertise on loans C. acting as a stockbroker D. reducing the risk of savers E. linking savers and borrowers 50. As a lender, a bank holds an advantage over any individual person because A. individuals do not diversify their asset holdings B. individuals are better at enforcing loan contracts C. banks have to engage in extensive and costly searches for potential borrowers D. banks develop expertise in evaluating borrowers' loan applications E. individuals have extensive knowledge of and experience in writing loan contracts 51. Banks are financial intermediaries because they A. receive new Federal Reserve notes from the Fed and put them into circulation B. bring together the two sides of the market-savers and borrowers C. bring different savers into contact with each other D. bring about the merger of smaller banks to make larger ones E. resolve disputes between stock brokers, mortgage companies, insurance agencies, and other financial institutions 52. The practice of reducing risk through diversification could be summed up by the phrase A. a penny saved is a penny earned B. neither a borrower nor a lender be C. buy low; sell high D. don't put all your eggs in one basket E. a fool and his gold are soon parted 53. In financial markets, asymmetric information exists when A. one party to a transaction has more knowledge of relevant details than the other does B. both parties to a transaction have less knowledge of relevant details than the Fed does C. lenders know more about the borrowers than the borrowers know about themselves D. all parties to a transaction have exactly the same information E. all the information which the parties have is inaccurate 54. In banking, Assets plus Liabilities must equal Net Worth. A. True B. False 55. In banking, Assets equal Liabilities plus Net Worth. A. True B. False 56. In banking, Assets minus Net Worth equals Liabilities. A. True B. False 57. A bank's assets include all but one of the following. Which one is the exception? A. checkable deposits B. loans C. securities D. mortgages E. cash 58. Which of the following is not a liability to a bank? A. checkable deposits B. NOW accounts C. net worth D. borrowings from the Fed E. deposits with the Fed 59. On a bank's balance sheet, the value of its assets must equal A. net worth B. liabilities C. owner's equity D. liabilities plus net worth E. revenues minus costs 60. If a bank has $1 million in assets and $50,000 in net worth, its liabilities must equal A. $50,000 B. $1,050,000 C. $50 million D. $1,000,000 E. $950,000 61. If a customer deposits $1,000 cash into her checking account, the bank's A. assets rise by $1,000 and liabilities fall by $1,000 B. assets fall by $1,000 and liabilities rise by $1,000 C. assets and liabilities both fall by $1,000 D. assets and liabilities both rise by $1,000 E. profits rise by $1,000 62. On a bank's balance sheet, A. deposits and loans are assets B. deposits and loans are liabilities C. deposits are liabilities; loans are assets D. deposits are assets; loans are liabilities E. deposits and loans are not listed 63. On a bank's balance sheet, A. assets = liabilities - net worth B. assets = liabilities + net worth C. assets = liabilities D. assets = net worth E. net worth = liabilities 64. On a bank's balance sheet, A. assets are always less than liabilities B. assets equal liabilities plus net worth C. assets equal liabilities minus net worth D. liabilities equal assets plus net worth E. assets are always larger than liabilities plus net worth 65. Which of the following is a liability for a bank? A. U.S. government securities B. deposits with the Fed C. checkable deposits D. consumer and business loans E. building and furniture 66. When a customer deposits $100 into a checking account, the effect is to A. increase the bank's liabilities B. decrease the bank's liabilities C. increase the bank's assets D. decrease the bank's assets E. increase both the bank's liabilities and its assets 67. A $20 Federal Reserve note is A. an asset of the Federal Reserve B. included in M1 if it is currently in a commercial bank's vault C. a liability to you if it is in your wallet D. an asset to a commercial bank if it is currently in the bank's vault E. not legal tender because it is not redeemable for silver or gold 68. Banks are required to hold reserves against the total value of all their assets. A. True B. False 69. If you know the required reserve ratio, then you know how much each bank is holding in reserves. A. True B. False 70. If you know the required reserve ratio and the total value of a bank's assets, then you know how much the bank is holding in reserves. A. True B. False 71. If you know the required reserve ratio and the amount of a bank's deposits, then you know the minimum amount of reserves the bank is required to hold. A. True B. False 72. If a bank's reserves are exactly equal to the required amount of reserves, then it has no excess reserves. A. True B. False 73. Banks are permitted to lend all of their excess reserves. A. True B. False 74. Banks are permitted to lend all of their required reserves. A. True B. False 75. Banks are permitted to lend all of their reserves. A. True B. False 76. If the reserve requirement is constant, it is impossible for a bank's excess reserves to fall if its total reserves have not fallen. A. True B. False 77. A bank with $1 million in deposits and $50,000 in excess reserves, facing a required reserve ratio of 20 percent, holds total reserves of $250,000. A. True B. False 78. All depository institutions are subject to the Fed's required reserve ratios. A. True B. False 79. The ready cash kept on hand by a bank to meet the needs of those who want to withdraw funds does not earn interest for the bank. A. True B. False 80. If a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2, then the bank can lend A. $4,000 B. $16,000 C. no more than $4,800 D. no less than $3,000 E. $1,000 81. If a bank has $1 million in checkable deposits and the required reserve ratio is 0.4, then the bank can lend A. $400,000 B. $1 million C. no more than $600,000 D. no less than $300,000 E. $500,000 82. Suppose that a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2. If the bank wishes to hold no excess reserves, its actual reserves will be A. $4,000 B. $1,200 C. $3,000 D. less than $1,000 E. $4,800 83. If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its A. required reserves are $500,000 B. required reserves are $20,000 C. assets are $500,000 D. liabilities are $500,000 E. liabilities plus its net worth are $500,000 84. If the required reserve ratio is 10 percent and a bank receives a new deposit for $100,000, then the A. bank must keep $5,000 in excess reserves B. bank's required reserves increase by $45,000 C. bank's liabilities increase by $100,000 D. bank can increase its loans by up to $50,000 E. bank can increase its loans by up to $400,000 85. If the reserve ratio is 15 percent, and your bank acquires new deposits of $100,000, the maximum it can lend out of these new deposits is A. $15,000 B. $100,000 C. $85,000 D. $150,000 E. $666,667 86. Suppose that a bank has $8,000 in checkable deposits and the required reserve ratio is 0.2. If actual reserves equal $3,000, then excess reserves equal A. $1,600 B. $1,400 C. $2,400 D. $5,000 E. zero 87. Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. Required reserves are A. $1 million B. $5 million C. $10 million D. $50 million E. $100 million 88. Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. The bank has $5 million in actual reserves, so excess reserves are A. $-10 million B. $-5 million C. 0 D. $5 million E. $10 million 89. Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. If the bank has $5 million in excess reserves, then its actual reserves must be A. $0 B. $5 million C. $10 million D. $15 million E. $20 million 90. Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. If the bank has $5 million in excess reserves, then it would be able to lend out A. $0 B. $5 million C. $10 million D. $15 million E. $20 million 91. Bank reserves can be held in the form of A. loans and cash in the bank's vault B. loans and deposits with the Fed C. loans and checking accounts D. deposits with the Fed and cash in the bank's vault E. deposits with the Fed and checking accounts 92. Which of the following are the two forms in which a bank can legally hold reserves? A. gold and coins B. gold and checks C. cash in its vault and reserve deposits at the Fed D. gold and non-interest-bearing reserve deposits at the Fed E. U.S. government securities and coins 93. Reserve deposits at the Fed pay a small amount of interest. A. True B. False 94. Suppose the required reserve ratio is 0.1 and Linda deposits $4,000 in cash at the College State Bank. If the bank held no excess reserves before Linda's deposit and now increases its reserves by $500, which of the following is true? A. The bank must have lent out an additional $4,000. B. The $500 are required reserves. C. The bank has excess reserves of $100. D. Both the bank's assets and its liabilities rise by $500. E. The bank has $500 in excess reserves. 95. Suppose a commercial bank's reserves increase by $3,000 and the bank, which holds no excess reserves, makes a loan of $2,400. What is the required reserve ratio? A. 0.10 B. 0.20 C. 0.25 D. 0.75 E. 4 96. Suppose that the First National Bank acquires $500,000 in new deposits and the required reserve ratio is 12 percent. Which of the following is true? A. Required reserves on the new deposits are $12,000. B. Excess reserves on the new deposits are $500,000. C. Required reserves on the new deposits are $60,000. D. Excess reserves on the new deposits are $12,000. E. Total reserves on the new deposits are $440,000. 97. Suppose that the First National Bank acquires $500,000 in new deposits and the required reserve ratio is 12 percent. Which of the following is true? A. The First National Bank can increase the money supply by $500,000. B. The First National Bank can increase the money supply by $400,000. C. The First National Bank can increase the money supply by $440,000. D. The entire banking system can increase the money supply by no more than $500,000 if the First National Bank lends out its excess reserves. E. The entire banking system can increase the money supply by no more than $440,000 if the First National Bank lends out its excess reserves. 98. In commercial banking operations, there is a tradeoff between liquidity and profitability. A. True B. False 99. For banks, increasing liquidity usually means increasing profitability as well. A. True B. False 100. Banks in need of reserves can borrow from the Fed or in the federal funds market. A. True B. False 101. The liquidity of an asset indicates A. its buying power B. the ease with which it can be converted into the medium of exchange without a significant loss of value C. the ease with which it can be converted into another asset D. how likely people are to convert it into the medium of exchange without a significant loss of value E. how easy it is to buy with a check 102. The ability to convert a store of value into a medium of exchange with little loss of value is known as A. arbitrage B. solvency C. liquidity D. liability E. currency 103. If at the end of the business day a bank has $50,000 in excess reserves, and the required reserve ratio is 20 percent, the bank can maximize its profits if it A. keeps the excess reserves B. loans out $40,000 C. loans $50,000 to another bank D. borrows $50,000 to remove the excess reserves E. keeps $10,000 and deposits $40,000 with the Fed 104. A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is A. zero B. the prime rate C. the discount rate D. the federal funds rate E. the required reserve ratio 105. To maximize its profit, a bank will A. minimize actual reserves B. maximize actual reserves C. minimize excess reserves D. maximize excess reserves E. minimize required reserves 106. Banks borrow excess reserves from each other on a day-to-day basis in the A. federal reserve market B. stock market C. bond market D. federal funds market E. discount window at the Fed 107. In the federal funds market, A. banks make loans to the Fed B. banks make short-term loans to other banks C. banks make long-term loans to other banks D. the Fed makes short-term loans to commercial banks E. the Fed makes long-term loans to commercial banks 108. In order to meet a deficiency of excess reserves, a bank could A. buy securities B. deposit vault cash with the Fed C. turn some of its deposit at the Fed into cash D. close some checking accounts E. borrow from another bank in the federal funds market 109. By holding highly liquid assets to guard against sudden large withdrawals, banks A. sacrifice safety B. sacrifice profitability C. increase profitability D. hold less cash in their vaults E. earn more interest than they could on business loans 110. The liquidity of an asset A. describes the ease of conversion to cash without significant loss of value B. is its cash value relative to other assets C. indicates how much interest would flow from it if it were a financial instrument D. is of little concern to bank managers, since their primary goal is profit E. usually rises along with an asset's rate of return 111. Banks want to minimize their holdings of excess reserves because A. they will be penalized by the Federal Reserve System if excess reserves are too high B. required reserves will also be minimized C. the money multiplier will be larger leading to a greater money supply D. they want to borrow more on the federal funds market E. excess reserves earn no interest 112. A bank manager who wants to increase profitability would likely A. hold more of the bank's assets in required reserves B. hold more of the bank's assets in excess reserves C. reduce the liquidity of a bank's assets D. meet all depositors' requests for funds with little trouble E. hold more of the bank's assets in deposits at the Federal Reserve System 113. Liquidity refers to the ease with which an asset can be converted into the medium of exchange without a significant loss of value. The least liquid of the assets below is A. real estate B. currency C. traveler's checks D. oil E. checkable deposits 114. Liquidity contributes to the bank's achievement of all of the following except one. Which is the exception? A. confidence of its depositors B. income of the bank C. ability to pay funds out to depositors on demand D. flexibility in responding to investment opportunities E. ability to make an immediate loan to a valued customer 115. The federal funds rate is the interest rate paid when A. the Federal Reserve makes loans to member banks B. taxpayers pay overdue taxes C. one bank borrows reserves from another bank D. banks make loans to the federal government E. the federal debt is refinanced 116. When a member bank sells U.S. government securities to the Fed, that bank's assets and liabilities both increase. A. True B. False 117. A bank can increase the money supply by the amount of total reserves it holds. A. True B. False 118. A single bank can increase the money supply by the increase in its excess reserves times the simple money multiplier. A. True B. False 119. Banks differ from other types of businesses because banks A. earn profits B. combine economic resources to produce services C. can go out of business D. can create money E. are regulated by the government 120. When the Fed buys U.S. government securities from a member bank, the immediate effect on that member bank's balance sheet is A. a decrease in assets B. an increase in assets C. a decrease in liabilities D. an increase in liabilities E. that there is no change in the total amount of assets or liabilities 121. The immediate effect of a member bank's sale of U.S. government securities to the Fed is a(n) A. increase in that bank's required reserves B. decrease in that bank's required reserves C. increase in that bank's excess reserves D. decrease in that bank's excess reserves E. decrease in the Fed's assets 122. Suppose you bank at Bank A and you write a check to your friend, who banks at Bank B. What happens after the check clears? A. Both Bank A's and Bank B's assets increase. B. Both Bank A's and Bank B's assets decrease. C. Bank A's assets increase and Bank B's assets decrease. D. Bank A's assets decrease and Bank B's assets increase. E. There is no change in either bank's assets. 123. When a check is cleared against Bank A after being deposited at Bank B, A. both Bank A's and Bank B's liabilities increase B. both Bank A's and Bank B's liabilities decrease C. Bank A's liabilities increase and Bank B's liabilities decrease D. Bank A's liabilities decrease and Bank B's liabilities increase E. there is no change in either bank's liabilities 124. Suppose you borrow $1,000 to purchase a car. Which of the following correctly represents the changes in your personal balance sheet after the bank lends the money but before you spend it? A. assets: loan, +$1,000; liabilities and net worth: checking deposit, +$1,000 B. assets: loan, -$1,000, checking deposit, +$1,000; liabilities and net worth: no change C. assets: loan, +$1,000, checking deposit, -$1,000; liabilities and net worth: no change D. assets: checking deposit, +$1,000; liabilities and net worth: loan, +$1,000 E. assets: checking deposit, +$1,000; liabilities and net worth: loan, -$1,000 125. Suppose a bank lends you $1,000 to purchase a car. Which of the following correctly represents the changes in the bank's balance sheet before you spend the money? A. assets: loans, +$1,000; liabilities and net worth: checking deposits, +$1,000 B. assets: loans, -$1,000, checking deposits, +$1,000; liabilities and net worth: no change C. assets: loans, +$1,000, checking deposits, -$1,000; liabilities and net worth: no change D. assets: checking deposits, +$1,000; liabilities and net worth: loans, +$1,000 E. assets: checking deposits, +$1,000; liabilities and net worth: loans, -$1,000 126. If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent, A. the bank has $1,000 in additional excess reserves, of which it can lend $800 B. the bank has $1,000 in additional excess reserves, all of which it can lend out C. the bank has lost an asset and must reduce its loans D. the bank has lost a liability E. there is no change in excess reserves, since net assets do not change 127. Suppose the Fed purchases $5,000 in U.S. government securities from the Last National Bank and the Last National Bank's account at the Federal Reserve district bank increases by $5,000. Which of the following results from this transaction? A. The Last National Bank's balance sheet shows a change in the composition of its assets. B. Both the Last National Bank's assets and its liabilities rise by $5,000. C. Both the Fed's assets and its liabilities fall by $5,000. D. Only the Fed's liabilities change; its assets are unchanged. E. This transaction decreases the money supply. 128. Tony deposits $2,000 in cash at the Last National Bank and the bank credits Tony's checking account in the amount of $2,000. Which of the following is true immediately after this transaction? A. The money supply, M1, increases by $2,000. B. Only the composition of M1 changes, not its amount. C. A $2,000 loan from the Last National Bank is an asset to Tony. D. Both the assets and the liabilities of the Last National Bank fall by $2,000. E. The immediate effect of this transaction is that M1 increases by $2,000 times the money multiplier. 129. Exhibit 14-1 Refer to Exhibit 14-1. If Eubank is holding no excess reserves, what must the required reserve ratio be? A. 5 percent B. 4 percent C. 10 percent D. 20 percent E. 2 percent 130. Exhibit 14-1 Refer to Exhibit 14-1. Assume the required reserve ratio is 10%. If Stu Dent deposits $10,000 in cash into his checkable deposit account, how much will Eubank have in excess reserves? A. $10,000 B. $1,000 C. $9,000 D. $60,000 E. $6,000 131. Exhibit 14-1 Refer to Exhibit 14-1. If the interest rate on loans is 10 percent, the annual cost to Eubank of holding excess reserves is A. 10 percent of $500,000 B. 10 percent of net worth C. 10 percent of excess reserves D. $10,000 E. 0 132. What essential factor enables commercial banks to create money? A. required reserves B. excess reserves C. state and local government securities D. U.S. government securities E. net worth 133. In order to increase the money supply, the banking system must have A. required reserves B. the authority to buy corporate stocks C. the authority to print U.S. currency D. excess reserves E. the authority to engage in interstate banking 134. Exhibit 14-2 Refer to Exhibit 14-2. What kind of transaction just took place at Countybank? A. A customer withdrew $1,000 from her checking account. B. A customer deposited a $1,000 check in her savings account. C. A customer deposited $1,000 in her checking account. D. The bank purchased a security with $1,000 cash. E. The bank borrowed $1,000 from the Federal Reserve. 135. Exhibit 14-2 Refer to Exhibit 14-2. By how much can this bank alone now increase its lending? Assume a required reserve ratio of 10 percent. A. $1,000 B. $10,000 C. $0 D. $90 E. $900 136. If a bank borrows $1,000 from the Fed and lends it out, the bank sets in motion a process that will result in an expansion of the money supply by a multiple of that $1,000. A. True B. False 137. Which of the following would likely increase the money supply? A. One bank buys government securities from another bank. B. The required reserve ratio increases. C. The Fed increases the reserves of commercial banks and the banks hold these as excess reserves. D. The discount rate increases. E. A bank sells government securities to the Fed. 138. If the Fed purchases government securities on the open market, the money supply will A. decrease B. increase only if the seller of those securities is a commercial bank C. increase only if the seller of those securities is a commercial bank belonging to the Fed D. increase through the system of securities dealers rather than through the commercial banking system E. increase through the commercial banking system regardless of who the seller is 139. In the money and credit expansion process, when r = the required reserve ratio, the total change in checkable deposits is equal to the initial change in excess reserves A. multiplied by r B. plus the change in required reserves C. divided by 1/r D. multiplied by 1/r E. divided by the change in required reserves 140. When the Fed buys U.S. government securities from a member bank, that bank's excess reserves, required reserves, and total reserves all increase. A. True B. False 141. When the Fed buys U.S. government securities from a bank, that bank's excess reserves and required reserves increase but total reserves decrease. A. True B. False 142. When the Fed buys U.S. government securities from a bank, that bank's required reserves and total reserves increase but excess reserves decrease. A. True B. False 143. When the Fed buys U.S. government securities from a bank, that bank's excess reserves and total reserves increase, but there is no change in required reserves. A. True B. False 144. If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution, what happens to the money supply, using the simple multiplier? A. Nothing. B. It increases by $5,000. C. It decreases by $5,000. D. It increases by $50,000. E. It decreases by $50,000. 145. If the required reserve ratio is 20 percent and the Fed buys a $10,000 security from a depository institution that currently has no excess reserves, what happens to the money supply, using the simple multiplier? A. Nothing. B. It increases by $5,000. C. It decreases by $5,000. D. It increases by $50,000. E. It decreases by $50,000. 146. The money expansion process continues until there are no more A. required reserves in the system B. demand deposits in the system C. excess reserves in the system that banks are willing to lend D. liabilities in the system E. assets in the system 147. Money expansion stops when new reserves introduced into the banking system have been converted into A. excess reserves B. securities C. deposits D. required reserves E. loans 148. The banking system creates money in the sense that it A. prints money B. creates excess reserves from loans C. creates loans from excess reserves D. creates required reserves from loans E. creates loans from required reserves 149. Banks create new deposits by A. lending out excess reserves B. lending out required reserves C. raising interest rates on loans D. calling in loans E. printing new checks 150. The simple money multiplier A. equals the reciprocal of the required reserve ratio B. assumes banks hold excess reserves C. is larger as the required reserve ratio increases D. equals required reserves plus excess reserves E. equals total reserves minus required reserves 151. The simple money multiplier is defined as A. the reciprocal of the interest rate B. 1/required reserve ratio C. excess reserves plus required reserves D. the reciprocal of the federal funds rate E. the reciprocal of the discount rate 152. If r is the required reserve ratio, which of the following is the simple money multiplier? A. r B. 1/(1 - r) C. 1 - r D. 1/r E. r2 153. The simple money multiplier equals A. the required reserve ratio B. the reciprocal of the required reserve ratio C. 1 minus the required reserve ratio D. 1 minus the reciprocal of the required reserve ratio E. the square of the required reserve ratio 154. The simple money multiplier equals A. 1 divided by the dollar amount of required reserves B. the dollar amount of total reserves divided by the dollar amount of excess reserves C. the dollar amount of excess reserves divided by the dollar amount of total reserves D. 1 divided by the percentage of deposits that must be held by a bank in the form of reserves E. 1 divided by the percentage of deposits that can be lent out by a bank 155. If the simple money multiplier is 5, the required reserve ratio must be A. 5 percent B. 0 C. 10 percent D. 50 percent E. 20 percent 156. Suppose the reserve requirement is 15 percent. Which of the following is true? A. The simple money multiplier is 15. B. The simple money multiplier is 1/15. C. The simple money multiplier is 30,000. D. The simple money multiplier is 1/30,000. E. The simple money multiplier is 1/0.15. 157. If checking deposits increase by $6,000 after all rounds of the money-creation process when the Fed buys $1,200 worth of U.S. government securities, the maximum value of the required reserve ratio is A. 5 B. 0.75 C. 0.2 D. 1.2 E. 1.0 158. If an increase in excess reserves of $10 million increases checkable deposits in the banking system by a maximum of $200 million, the required reserve ratio is A. 0 B. 5 percent C. 10 percent D. 20 percent E. 2 percent 159. If the required reserve ratio is 0.2, and the Fed buys $3,000 of U.S. government securities, the maximum amount by which the money supply can increase is A. $200 B. $2,000 C. $600 D. $15,000 E. $1,500 160. Suppose the required reserve ratio is 0.2 and the Fed buys $100,000 in government securities from Big Bank. How much money can the commercial banking system create? A. $1,000,000 B. $500,000 C. $100,000 D. $80,000 E. none 161. The higher the required reserve ratio, A. the larger the money multiplier B. the smaller the money multiplier C. the more excess reserves there are after each round of the money-creation process D. the more money that can be lent in each round of the money-creation process E. the fewer required reserves after each round of the money-creation process 162. If the Fed increases the required reserve ratio at a time when banks are holding excess reserves, A. it forces banks to increase the money supply B. it forces banks to decrease the money supply C. it makes it possible for banks to increase the money supply but does not force them to do so D. the money supply will not increase as much as if the Fed left the reserve ratio alone E. it is conducting open market operations but not changing the money supply 163. If each bank in the United States had to keep 100 percent of checkable deposits as reserves, each $1 the Fed injected into new reserves could increase the money supply by as much as A. $1 B. $2 C. $100 D. zero E. a penny 164. Suppose the reserve requirement ratio is 20 percent. Assuming no bank holds excess reserves and nobody withdraws cash, a $10,000 injection of new excess reserves by the Fed can create A. $2,000 in new checkable deposits B. $10,000 in new checkable deposits C. $50,000 in new checkable deposits D. $500,000 in new checkable deposits E. $50,000 in cash 165. The actual money multiplier is smaller than the simple money multiplier because A. the actual multiplier involves M2 rather than M1 B. cash withdrawals reduce the amount banks can lend out C. withdrawals from checkable deposits increase the amount of excess reserves each bank receives D. the Fed wants to reduce the money supply E. the actual multiplier uses a different measure of reserve requirements 166. If banks allow some of their excess reserves to remain in the vault, A. the simple money multiplier will exceed the actual money multiplier B. the simple money multiplier will understate the expansion of credit C. the actual money multiplier and the simple money multiplier will be equal D. banks will earn more interest E. credit expansion will be greater than if they had lent out these reserves 167. If people choose to hold some of a newly received loan as cash instead of keeping it in a checking account, the money supply A. will not increase as a result of that loan B. decreases as a result of that loan C. will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal increases excess reserves D. will not increase as much from that point on as it would if borrowers redeposited all of the money because cash is not included in the money supply E. will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal decreases excess reserves 168. The extent of money expansion will be A. greater if banks hold on to excess reserves B. greater if private individuals hold on to cash C. greater if banks hold on to excess reserves but less if private individuals hold on to cash D. less if banks hold on to excess reserves but greater if private individuals hold on to cash E. less if banks hold on to excess reserves or private individuals hold on to cash 169. Under which of the following circumstances will the simple money multiplier most overstate the change in checkable deposits arising from a change in excess reserves? A. The public withdraws no cash and banks hold no excess reserves. B. The public withdraws no cash and banks hold excess reserves. C. The public withdraws cash and banks hold no excess reserves. D. The public withdraws cash and banks hold excess reserves. E. The required reserve ratio equals 1. 170. The money multiplier will be A. larger if banks hold on to excess reserves but smaller if private citizens hold on to cash B. smaller if banks hold on to excess reserves but larger if private citizens hold on to cash C. smaller if either banks hold on to excess reserves or private citizens hold on to cash D. larger if either banks hold on to excess reserves or private citizens hold on to cash E. constant whether or not banks and citizens try to alter their holdings of excess reserves and cash 171. An increase in banks' desire for liquidity will A. decrease the extent of monetary expansion but not the value of the multiplier B. increase the extent of monetary expansion but not the value of the multiplier C. decrease both the extent of monetary expansion and the value of the multiplier D. increase both the extent of monetary expansion and the value of the multiplier E. decrease the multiplier but increase the total amount of money in the economy 172. If banks choose not to lend out their excess reserves then the money supply will not expand. A. True B. False 173. If the Fed wishes to reduce the money supply, it can sell U.S. government securities to member banks. A. True B. False 174. When the Fed sells U.S. government securities to a member bank, the immediate effect on that bank's balance sheet is a(n) A. decrease in assets and an increase in liabilities B. increase in assets and a decrease in liabilities C. increase in both assets and liabilities D. decrease in both assets and liabilities E. change in the type of assets the bank is holding, but no change in liabilities 175. The immediate effect of a bank's purchase of U.S. government securities from the Fed is a(n) A. decrease in the bank's liabilities B. increase in the bank's liabilities C. increase in the bank's required reserves D. increase in the bank's actual reserves E. decrease in the bank's actual reserves 176. The Fed can reduce the money supply by A. buying securities from a bank B. buying securities from a private citizen C. selling securities D. issuing new Federal Reserve notes E. saving failing banks 177. Suppose the banking system has no excess reserves and required reserves equal to 20 percent of checkable deposits. If the Fed sells $10,000 in securities to Joe Bankustomer, what is the most that checkable deposits in the banking system fall? (Hint: Compare what the banking system might have done if it had loaned at every opportunity; also include the initial transaction with the Fed.) A. $2,000 B. $10,000 C. $20,000 D. $50,000 E. $500,000 178. Suppose the Fed sells $10 million in government securities to a commercial bank. If the required reserve ratio is 0.2, what is the maximum amount by which checkable deposits in the banking system can change? (Hint: Compare what the banking system might have done if it had loaned at every opportunity; also include the initial transaction with the Fed.) A. +$10,000,000 B. -$10,000,000 C. +$50,000,000 D. -$50,000,000 E. +$20,000,000 179. If the Fed sells a member bank a $3,000 security, the required reserve ratio is 20 percent, banks hold no excess reserves, and all loans are redeposited, then the money supply (Hint: Compare what the banking system might have done if it had loaned at every opportunity; also include the initial transaction with the Fed.) A. increases by less than $15,000 B. decreases by less than $15,000 C. increases by $15,000 D. decreases by more than $15,000 E. decreases by $15,000 180. Suppose that the required reserve ratio is 0.2, and the Fed buys $5,000 of U.S. government securities from Bank A, which lends $4,000 and keeps $1,000 in its vault in cash. In this round of the money-creation process, the money supply, as measured by M1, has increased by A. $1,000 B. $4,000 C. $5,000 D. $10,000 E. $3,000 181. If a bank calls in a loan to replenish its reserves, A. its required reserves increase B. its required reserves decrease C. another bank's required reserves increase D. another bank's actual reserves increase E. another bank's actual reserves decrease 182. Exhibit 14-3 Refer to Exhibit 14-3. What kind of transaction just took place at Leftbank? A. The bank received a shipment of cash from the Fed. B. A customer deposited $10,000 cash in his account. C. The bank sold a security to the Fed. D. The Fed sold a security to the bank. E. The bank borrowed $10,000 from the Fed. 183. Exhibit 14-3 Refer to Exhibit 14-3. Leftbank's total reserves A. rose by $9,000 B. were not affected by this transaction C. fell by $9,000 D. fell by $10,000 E. rose by $10,000 184. Suppose the reserve requirement ratio is 10 percent. Assuming no bank holds excess reserves and nobody withdraws cash, a $100,000 reduction of excess reserves by the Fed can eventually A. reduce checkable deposits by $2 million B. raise checkable deposits by $10 million C. reduce checkable deposits by $1 million D. raise checkable deposits by $200,000 E. reduce checkable deposits by $10,000 185. The appropriate open market operation for reducing the money supply is A. buying U.S. government securities B. limiting the amount loaned to banks C. buying up Federal Reserve notes D. selling U.S. government securities E. increasing the reserve requirement 186. The simple money multiplier is equal to 1 minus the required reserve ratio. A. True B. False 187. Which of the following is not an activity of the Fed? A. making loans to the public B. clearing banks' checks C. lending funds to the federal government D. purchasing U.S. government securities E. holding deposits of the U.S. Treasury 188. Which of the following is not one of the procedures the Fed uses to change the money supply? A. buying government securities B. selling government securities C. lending reserves through the discount window D. changing the required reserve ratio E. extending loans to the public 189. The Fed performs all of the following functions except one. Which is the exception? A. making loans to banks B. clearing checks for banks C. holding deposits of banks D. minting U.S. coins E. holding deposits of the U.S. Treasury 190. Congressional control over the Fed is A. substantial because it can cut off necessary appropriations B. limited because the Fed is not dependent on Congress for the funds to support its operations C. substantial because the members of the Board of Governors can be replaced every four years D. substantial because Congress has created a Super Board to oversee the Fed E. limited because members of the Fed Board are appointed for life 191. Which of the following statements is correct? A. To control the money supply, the Fed relies primarily on the reserve requirement. B. The discount rate is the rate of interest banks charge to their best customers. C. The Fed changes the reserve requirement frequently. D. Because the Fed has no way to earn income, it is dependent upon Congress for appropriations. E. Banks can turn a borrower's IOU into money—i.e., they can create money. 192. If the Fed buys a $1,000 U.S. government bond from a bank, it pays it by giving the bank $1,000 in reserves—reserves that it simply creates out of thin air. A. True B. False 193. If a bank receives $2,500 of reserves by selling a government bond to the Fed, its ability to make loans increases by $2,500. A. True B. False 194. Open market operations involve A. opening the discount window B. buying stocks in the stock market C. buying and selling government securities in the open market D. opening new markets for commodities E. selling failed banks to other banks 195. If the Fed decreases the required reserve ratio at a time when banks are holding no excess reserves, the Fed is A. forcing banks to increase the money supply B. forcing banks to decrease the money supply C. making it possible for banks to increase the money supply but not forcing them to do so D. making it possible for banks to decrease the money supply but not forcing them to do so E. conducting open market operations but not changing the money supply 196. The Fed's purchase of U.S. government securities constitutes a(n) A. contractionary policy because it lowers the amount of total reserves in the banking system B. contractionary policy because it lowers the amount of excess reserves in the banking system C. expansionary policy because it raises the amount of total reserves in the banking system D. expansionary policy because it lowers the amount of total reserves in the banking system E. expansionary policy because it raises the amount of required reserves in the banking system 197. The Fed's sale of U.S. government securities in its open market operations constitutes a(n) A. contractionary policy because it lowers the amount of total reserves in the banking system B. contractionary policy because it lowers the amount of required reserves in the banking system C. expansionary policy because it raises the amount of total and excess reserves in the banking system D. expansionary policy because it raises the amount of excess reserves and lowers the amount of required reserves in the banking system E. expansionary policy because it raises the amount of required reserves in the banking system 198. The Fed's most important monetary policy tool is A. printing money B. clearing checks C. setting the required reserve ratio D. setting the discount rate E. conducting open market operations 199. The primary tool the Fed uses to control the money supply today is A. the discount rate B. the required reserve ratio C. the discount window D. chartering E. open market operations 200. Suppose the Fed wishes to make only a small change in the money supply. Which of its policy tools is it most likely to use? A. the prime interest rate B. loans made to the public C. Fed Fund Rate D. open market operations E. the required reserve ratio 201. The Fed relies primarily on the discount rate to control the money supply. A. True B. False 202. A fall in the discount rate will usually encourage bank borrowing from the Fed and therefore reduce the money supply. A. True B. False 203. Raising the discount rate is A. an expansionary policy because it raises the ratio of excess to total reserves in the banking system B. a contractionary policy on the part of member banks of the Fed because it raises firms' costs of borrowing from them C. a contractionary policy on the part of the Fed because it raises commercial banks' cost of borrowing from it D. an expansionary policy on the part of member banks of the Fed because it raises their profits relative to those of nonmember banks E. an expansionary policy on the part of the Fed because increasing the interest rates banks are allowed to charge will increase their willingness to make loans 204. A higher discount rate generally A. leads more banks to borrow from the Fed B. increases required reserves C. decreases excess reserves D. increases the money supply E. encourages savers to put more into checking accounts 205. The Federal Reserve may increase the money supply by A. selling a bond to a member bank B. selling a bond to a securities dealer C. lending reserves to banks D. increasing required reserve ratios E. increasing the discount rate 206. The Fed can increase the amount of excess reserves in the banking system by A. lending at the discount window B. raising the required reserve ratio C. selling securities D. lowering the federal funds rate E. selling off member banks 207. Through changes in the discount rate, the Federal Reserve can A. force banks to increase reserves but can't force them to decrease reserves B. force banks to decrease reserves but can't force them to increase reserves C. force either an increase or a decrease in reserves D. give banks an incentive to either increase or decrease reserves but cannot force them to change E. affect a commercial bank's major customers by lending to them directly 208. Lowering the discount rate is a way to expand the money supply because A. it encourages banks to borrow from the Fed so they can more easily accommodate their customers' needs for loans B. it encourages business customers to borrow directly from the Fed C. a lower discount rate reduces the amount of reserves banks are required to keep D. a lower discount rate automatically reduces excess reserves E. it encourages banks to sell U.S. government securities and increase their cash reserves 209. If a bank receives $1,000 in currency as a new deposit, its ability to make loans increases by $1,000. A. True B. False 210. Increasing the required reserve ratio is A. a contractionary policy because it lowers the amount of total reserves in the banking system B. a contractionary policy because it lowers the amount of excess reserves in the banking system C. an expansionary policy because it raises the amount of total reserves in the banking system D. an expansionary policy because it raises the amount of excess reserves in the banking system E. an expansionary policy because it raises the amount of required reserves in the banking system 211. Decreasing the required reserve ratio is A. a contractionary policy because it lowers the amount of total reserves in the banking system B. a contractionary policy because it lowers the amount of excess reserves in the banking system C. an expansionary policy because it raises the amount of required reserves in the banking system D. an expansionary policy because it raises the amount of total reserves in the banking system E. an expansionary policy because it raises the amount of excess reserves in the banking system 212. To increase the money supply, the Fed might A. increase the reserve requirement and the discount rate B. decrease the reserve requirement and the discount rate C. increase the reserve requirement and decrease the discount rate D. sell government securities and increase the discount rate E. sell bonds on the open market 213. To increase the money supply, the Fed might A. increase the discount rate and sell bonds on the open market B. decrease the reserve requirement and buy bonds on the open market C. increase the reserve requirement and sell bonds on the open market D. increase the discount rate and lower the reserve requirement E. sell government securities and increase the discount rate 214. Assume there are no excess reserves in the banking system when the reserve requirement is 20%. The purchase by the Fed of $10,000 in U.S. government securities from Academy National Bank has the potential of ultimately increasing the money supply by a total of A. $2,000 B. $8,000 C. $10,000 D. $20,000 E. $50,000 215. By reducing the required reserve ratio, the Fed can not only create excess reserves but also A. increase mortgage interest rates B. reduce borrowing by corporations C. increase the safety of bank deposits D. reduce the risk of bank failure E. increase the money multiplier 216. The Fed primarily uses the reserve requirement to control the money supply. A. True B. False 217. Approximately 75 percent of the liabilities of the Fed are in the form of Federal Reserve notes. A. True B. False 218. Which of the following is the largest component of assets of the Federal Reserve? A. U.S. Treasury deposits B. U.S. government securities C. foreign exchange D. time deposits E. checkable deposits 219. The largest component of the Federal Reserve's asset portfolio is A. loans to banks B. Federal Reserve notes C. coins D. U.S. government securities E. mortgage loans 220. The largest component of the Federal Reserve's liabilities is in the form of A. government securities B. Federal Reserve notes C. U.S. Treasury deposits D. bank deposits E. coins 221. The majority of the Fed's liabilities are A. discount loans B. U.S. government securities C. loans to member banks D. Federal Reserve notes E. reserves of member banks 222. The Fed is profitable because it A. is managed efficiently B. pays no interest on its liabilities but earns interest on its assets C. earns interest on bank deposits D. invests in the stock market E. pays its workers poorly 223. The majority of the Fed's assets are A. discount loans B. U.S. government securities C. loans to member banks D. Federal Reserve notes E. reserves of member banks 224. The Fed operates A. on a balanced budget B. at a loss, since Federal Reserve notes and member bank deposits earn no interest C. at a profit, since Federal Reserve notes and bank deposits earn no interest, but government securities and loans to commercial banks do D. at a profit, since Federal Reserve notes and member bank deposits earn interest E. at a loss, since Federal Reserve notes and member bank deposits earn interest, but government securities and loans to commercial banks do not 225. If the Fed buys U.S. government securities from a bank and credits the bank's reserve account, A. the Fed's assets decrease B. the Fed's assets increase C. the Fed's liabilities decrease D. the member bank's assets decrease E. the member bank's liabilities decrease 226. If the Fed sells U.S. government securities to a member bank and debits that bank's reserve account, A. the Fed's assets decrease B. the Fed's assets increase C. the Fed's liabilities increase D. the member bank's assets decrease E. the member bank's liabilities decrease 227. The immediate effect of a bank's purchase of U.S. government securities from the Fed is a(n) A. decrease in the bank's assets B. increase in the bank's assets C. decrease in the Fed's assets D. increase in the Fed's assets E. decrease in both the bank's and the Fed's assets 228. Most of the assets of the Fed are held in the form of A. gold B. U.S. government securities C. loans to member banks D. U.S. Treasury deposits E. checkable deposits 229. Most of the Fed’s liabilities are in the form of A. Federal Reserve notes B. checkable deposits C. U.S. Treasury deposits D. loans to member banks E. certificates of deposit 230. A counterfeit $100 bill of extremely high quality that began circulating around 1990 is called a A. false note B. superhero C. supernote D. C note E. None of the answers is correct 231. The U.S. Treasury is committed to keeping the designs of U.S. currency unchanged. A. True B. False 232. The world’s largest source of bogus American currency is A. Colombia B. Ecuador C. Canada D. China E. Czech Republic 233. The chance of encountering fake U.S. currency abroad is only about A. 1 in 10 B. 1 in 100 C. 1 in 1,000 D. 1 in 10,000 E. 1 in 1,000,000 234. Which of the following is not money? A. check B. coin C. currency D. debit card E. credit card 235. Transactions using debit cards and other electronic transfers now exceed payments by check. A. True B. False 236. Katie Sierra is willing to pay a higher interest rate. With no income verification, she can apply for a type of loan commonly called A. lion loans B. liars loans C. phantom loans D. vaporware loans E. prime-rate loans Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776
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