Question 1

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply
A)increased. The central bank could have reduced the size of this increase by buying bonds.
B)increased. The central bank could have reduced the size of this increase by selling bonds.
C)decreased. The central bank could have reduced the size of this decrease by buying bonds.
D)decreased. The central bank could have reduced the size of this decrease by selling bonds.

Accepted Answer

The answer of At one time, people in a certain...

Question 2

In a fractional-reserve banking system, a decrease in reserve requirements
A)increases both the money multiplier and the money supply.
B)decreases both the money multiplier and the money supply.
C)increases the money multiplier, but decreases the money supply.
D)decreases the money multiplier, but increases the money supply.

Accepted Answer

When reserve requirements decrease in a fractional-reserve banking system, banks are allowed to lend out more of their deposits, increasing the money multiplier. This in turn leads to an increase in the money supply as more loans are made and the money is spent and re-deposited.

Question 3

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold
A)fewer reserves, so the reserve ratio will fall.
B)fewer reserves, so the reserve ratio will rise.
C)more reserves, so the reserve ratio will fall.
D)more reserves, so the reserve ratio will rise.

Accepted Answer

When the interest rate on bank deposits at the Fed increases, banks are incentivized to hold more reserves at the Fed in order to earn a higher return on those reserves. This means that banks will want to increase their reserves, causing the reserve ratio to rise. Therefore, choice D is the correct answer.

Question 4

Which of the following both increase the money supply?
A)an increase in the discount rate and an increase in the interest rate on reserves
B)an increase in the discount rate and a decrease in the interest rate on reserves
C)a decrease in the discount rate and an increase in the interest rate on reserves
D)a decrease in the discount rate and a decrease in the interest rate on reserves

Accepted Answer

The answer of Which of the following both increase the...

Question 5

If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier
A)decreases from 20 to 8.
B)decreases from 12.5 to 5.
C)increases from 8 to 20.
D)increases from 5 to 12.5.

Accepted Answer

An increase in the reserve ratio will decrease the money multiplier, as banks cannot lend out as much of their deposits. The new money multiplier would be 1/reserve ratio, so 1/0.125 = 8. Therefore, the correct choice is A, which states that the money multiplier decreases from 20 to 8.

Question 6

The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank holding in excess reserves?
A)$15 million
B)$19.5 million
C)$25.5 million
D)$0 million

Accepted Answer

First, we need to calculate the required reserves: 
$255 million * 0.085 = $21.68 million 
Then, we can calculate the excess reserves: 
$300 million - $21.68 million - $255 million = $23.32 million 
Therefore, the bank is holding $19.5 million in excess reserves (rounded to the nearest tenth).

Question 7

If the money multiplier decreased from 20 to 12.5, then
A)the Fed increased the reserve ratio from 5 percent to 8 percent.
B)the Fed increased the fed funds rate from 5 percent to 8 percent.
C)the Fed decreased the reserve ratio from 8 percent to 5 percent.
D)the Fed decreased the fed funds rate from 8 percent to 5 percent.

Accepted Answer

The money multiplier is the inverse of the reserve ratio. So when the money multiplier decreases, it means that the reserve ratio has increased. Therefore, the Fed must have increased the reserve ratio from 5 percent to 8 percent.

Question 8

Other things the same, if reserve requirements are increased, the reserve ratio
A)increases, the money multiplier increases, and the money supply increases.
B)increases, the money multiplier decreases, and the money supply decreases.
C)decreases, the money multiplier increases, and the money supply increases.
D)decreases, the money multiplier decreases, and the money supply increases.

Accepted Answer

If reserve requirements are increased, the reserve ratio increases. This means banks are required to hold a greater portion of deposits in reserves and have less available to lend out, decreasing the money multiplier. As a result, the money supply decreases.

Question 9

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold
A)fewer reserves, so the money multiplier will fall.
B)fewer reserves, so the money multiplier will rise.
C)more reserves, so the money multiplier will fall.
D)more reserves, so the money multiplier will rise.

Accepted Answer

When the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold more reserves as the opportunity cost of holding reserves increases. This will reduce the amount of lending and decrease the money multiplier, resulting in a lower overall money supply.

Question 10

The money supply increases when the Fed
A)lowers the discount rate. The increase will be larger the smaller the reserve ratio is.
B)lowers the discount rate. The increase will be larger the larger the reserve ratio is.
C)raises the discount rate. The increase will be larger the smaller the reserve ratio is.
D)raises the discount rate. The increase will be larger the larger the reserve ratio is.

Accepted Answer

When the Fed lowers the discount rate, banks can borrow money more cheaply, which encourages them to lend more money to consumers and businesses. This results in an increase in the money supply. The increase will be larger the smaller the reserve ratio is because banks are able to lend out more money for every dollar they hold in reserves, leading to a larger multiplier effect.

Question 11

Other things the same if reserve requirements are decreased, the reserve ratio
A)decreases, the money multiplier increases, and the money supply decreases.
B)increases, the money multiplier increases, and the money supply increases.
C)decreases, the money multiplier increases, and the money supply increases.
D)increases, the money multiplier increases, and the money supply decreases.

Accepted Answer

The answer of Other things the same if reserve requirements...

Question 12

The money supply increases when the Fed
A)buys bonds. The increase will be larger, the smaller is the reserve ratio.
B)buys bonds. The increase will be larger, the larger is the reserve ratio.
C)sells bonds. The increase will be larger, the smaller is the reserve ratio.
D)sells bonds. The increase will be larger, the larger is the reserve ratio.

Accepted Answer

When the Fed buys bonds, it increases the reserves of banks, enabling them to make more loans and increase the money supply. The increase in the money supply will be larger when the reserve ratio (the amount of reserves banks are required to hold relative to their deposits) is smaller because banks can lend out a larger percentage of their deposits.

Question 13

When there is a reserve requirement, banks
A)must hold exactly the required quantity of reserves.
B)may hold more than, but not less than, the required quantity of reserves.
C)may hold less than, but not more than, the required quantity of reserves.
D)must seek the Fed's permission whenever they wish to expand or contract their loans to customers.

Accepted Answer

Banks are required to hold a certain percentage of their deposits as reserves, but they are allowed to hold more than the required amount if they choose to do so. However, they are not allowed to hold less than the required amount.

Question 14

Reserve requirements are regulations concerning
A)the amount banks are allowed to borrow from the Fed.
B)the amount of reserves banks must hold against deposits.
C)reserves banks must hold based on the number and type of loans they make.
D)the interest rate at which banks can borrow from the Fed.

Accepted Answer

Reserve requirements refer to the amount of money that banks must hold in reserve against customer deposits. This reserve serves as a cushion in the event of financial distress, and also to ensure that banks have enough money on hand to meet customer withdrawal requests. The reserve requirements are determined by the central bank (in the US, the Federal Reserve), and failure to meet the requirements can result in financial penalties.

Question 15

The money supply decreases if the Fed
A)sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
B)sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
C)buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
D)buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

Accepted Answer

The answer of The money supply decreases if the Fed
A)sells...

Question 16

In a fractional-reserve banking system, an increase in reserve requirements
A)increases both the money multiplier and the money supply.
B)decreases both the money multiplier and the money supply.
C)increases the money multiplier, but decreases the money supply.
D)decreases the money multiplier, but increases the money supply.

Accepted Answer

An increase in reserve requirements means that banks must hold more reserves and can lend out less money. This decreases the money multiplier, as there is less potential for money to be created through lending. As a result, the money supply decreases.

Question 17

If the reserve requirement is 10 percent, which of the following pairs of changes would both allow a bank to lend out an additional $10,000?
A)the Fed buys a $10,000 bond from the bank or someone deposits $10,000 in the bank
B)the Fed buys a $10,000 bond from the bank or the Fed lends the bank $10,000
C)the Fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank
D)the Fed sells a $10,000 bond to the bank or the Fed lends the bank $10,000

Accepted Answer

When the Fed buys a $10,000 bond from the bank, the bank would receive $10,000 in reserves which can be used to lend out an additional $10,000 (assuming a reserve requirement of 10%). Similarly, when the Fed lends the bank $10,000, the bank would receive $10,000 in reserves which can also be used to lend out an additional $10,000 (assuming a reserve requirement of 10%). The other options either involve a decrease in reserves (selling a bond to the bank) or an increase in deposits (someone depositing $10,000 in the bank), but neither of these changes would necessarily enable the bank to lend out an additional $10,000.

Question 18

The manager of the bank where you work tells you that the bank has $400 million in deposits and $340 million dollars in loans. The Fed then raises the reserve requirement from 5 percent to 10 percent. Assuming everything else stays the same, how much is the bank holding in excess reserves after the increase in the reserve requirement?
A)$0
B)$20 million
C)$40 million
D)$60 million

Accepted Answer

The answer of The manager of the bank where you...

Question 19

In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have
A)increased both the money multiplier and the money supply.
B)decreased both the money multiplier and the money supply.
C)increased the money multiplier and decreased the money supply.
D)decreased the money multiplier and increased the money supply.

Accepted Answer

Lowering the reserve requirement means that banks have to keep less money in reserves and can lend out more, leading to an increase in the money multiplier and the money supply.

Question 20

In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds,
A)reserves and the money supply increase by less than $100 million.
B)reserves increase by $100 million and the money supply increases by $100 million.
C)reserves increase by $100 million and the money supply increases by more than $100 million.
D)both reserves and the money supply increase by more than $100 million.

Accepted Answer

The answer of In a fractional-reserve banking system with no...

Quiz 29: The Monetary System

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply

In a fractional-reserve banking system, a decrease in reserve requirements

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold

Which of the following both increase the money supply?

If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier

The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank holding in excess reserves?

If the money multiplier decreased from 20 to 12.5, then

Other things the same, if reserve requirements are increased, the reserve ratio

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold

The money supply increases when the Fed

Other things the same if reserve requirements are decreased, the reserve ratio

The money supply increases when the Fed

When there is a reserve requirement, banks

Reserve requirements are regulations concerning

The money supply decreases if the Fed

In a fractional-reserve banking system, an increase in reserve requirements

If the reserve requirement is 10 percent, which of the following pairs of changes would both allow a bank to lend out an additional $10,000?

In 1991, the Federal Reserve lowered the reserve requirement from 12 percent to 10 percent. Other things the same this should have

In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million worth of bonds,