Question 1

Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks.If the oversimplified money multiplier is assumed,then the money supply will
A) increase by $500 million.
B) increase by $100 million.
C) decrease by $100 million.
D) decrease by $500 million.

Accepted Answer

The oversimplified money multiplier formula is M = (1/RR) x MB, where M is the money supply, RR is the required reserve ratio, and MB is the monetary base (which includes currency in circulation and reserves held by banks).

In this scenario, the open market purchase of $100 million will increase the monetary base by $100 million. Substituting the given values into the formula, we get:

M = (1/0.2) x $100 million 
M = 5 x $100 million 
M = $500 million

Therefore, the money supply will increase by $500 million.

Question 2

If the Federal Open Market Committee decides to expand the money supply,then it will
A) raise the discount rate to member banks.
B) issue directions to purchase government securities,thus putting more reserves in member banks.
C) issue directions to sell government securities,thus taking reserves from member banks.
D) order new Federal Reserve notes delivered to member banks.

Accepted Answer

Expanding the money supply means putting more money into circulation in the economy. The Federal Reserve can do this by purchasing government securities from member banks, which puts more reserves into those banks and allows them to lend out more money. Therefore, choice B is the correct answer. Raising the discount rate (choice A) would actually decrease the money supply by making borrowing more expensive for banks. Selling government securities (choice C) would also decrease the money supply by taking reserves away from member banks. Ordering new Federal Reserve notes (choice D) would not necessarily expand the money supply if those notes are not put into circulation.

Question 3

If the Fed sells a T-bill to an individual rather than to a commercial bank,how will this affect the money supply?
A) It will increase the money supply.
B) It will increase the checking account balance of the individual.
C) It will have no effect on the money supply.
D) It will decrease the money supply.

Accepted Answer

When the Fed sells a T-bill to an individual, the individual pays for it with money from their bank account. This reduces the amount of money in circulation because the money used to buy the T-bill is effectively removed from the economy, thus decreasing the money supply.

Question 4

After the transaction in Table 13-1 is completed,what happens to actual reserves,required reserves,and excess reserves? Assume the required reserve ratio is 25 percent.
A) Actual reserves increase by $10 million,required reserves increase $2.5 million,and excess reserves increase by $7.5 million.
B) Actual reserves decrease by $10 million,required reserves decrease $2.5 million,and excess reserves decrease by $7.5 million.
C) Actual reserves increase by $10 million,required reserves are unchanged,and excess reserves increase by $10 million.
D) Actual reserves decrease by $10 million,required reserves decrease by $10 million,and excess reserves are unchanged.

Accepted Answer

The answer of After the transaction in Table 13-1 is...

Question 5

If the Fed buys a T-bill from a commercial bank,how will it pay for the T-bill?
A) It will give the bank new reserves.
B) It will write the bank a check.
C) It will transfer cash to the bank's vault.
D) It will take reserves from another bank.

Accepted Answer

When the Fed buys a T-bill from a commercial bank, it will pay for the T-bill by giving the bank new reserves. This will increase the bank's reserves and allow it to increase its lending and money creation ability. Writing a check or transferring cash would not be necessary as the payment can be made simply by creating new reserves. Taking reserves from another bank would also not be necessary as the Fed can create new reserves through open market operations.

Question 6

Which of the following is correct?
A) The Fed has very good control over the money supply and bank reserves.
B) The Fed has very poor control over the money supply and bank reserves.
C) The Fed has very good control over bank reserves but not over the money supply.
D) The Fed has very good control over the money supply but not over bank reserves.

Accepted Answer

The Federal Reserve (the Fed) has direct control over bank reserves through its open market operations, discount rate, and reserve requirements. However, its control over the money supply is less direct because it depends on the behavior of banks in lending and the preferences of the public in holding cash versus deposits.

Question 7

When the Fed wants to expand the money supply through open market operation,it
A) sells government securities to the Treasury.
B) sells government securities to member banks.
C) buys government securities from member banks.
D) buys government securities from the Treasury.

Accepted Answer

When the Fed wants to expand the money supply, it buys government securities from member banks. This increases the amount of reserves the banks have, which they can then lend out, expanding the overall money supply.

Question 8

In Table 13-1,if the required reserve ratio is 10 percent,what will happen to the money supply? Use the oversimplified money multiplier in your calculations.
A) The money supply will decrease by $100 million.
B) The money supply will decrease by $10 million.
C) The money supply will not change.
D) The money supply will increase by $10 million.
E) The money supply will increase by $100 million.

Accepted Answer

The answer of In Table 13-1,if the required reserve ratio...

Question 9

When the Fed wants to expand the money supply,it
A) buys government securities.
B) sells government securities.
C) buys common stock.
D) sells common stock.

Accepted Answer

When the Fed wants to expand the money supply, it buys government securities. This increases the amount of money in circulation and stimulates economic activity. Selling government securities would have the opposite effect and contract the money supply. Buying or selling common stock is not a strategy typically used by the Fed to expand or contract the money supply.

Question 10

____ is the rate that applies when banks borrow and lend reserves to one another.
A) The repo rate
B) The discount rate
C) The coupon rate
D) The federal fund rate

Accepted Answer

The federal fund rate is the rate that applies when banks borrow and lend reserves to one another. The repo rate and the discount rate are rates at which central banks lend money to commercial banks. The coupon rate is the interest rate paid on a bond.

Question 11

The Fed conducts an open market purchase of Treasury bills of $10 million.If the required reserve ratio is 0.10,what change in the money supply can be expected using the oversimplified money multiplier?
A) $100 million
B) $10 million
C) 0
D) −$10 million
E) −$100 million

Accepted Answer

The oversimplified money multiplier formula is Change in Money Supply = (1/Required Reserve Ratio) x Initial Change in Bank Reserves. In this case, the initial change in bank reserves is $10 million. With a required reserve ratio of 0.10, the money multiplier is 1/0.10 = 10. Therefore, the change in money supply is expected to be $10 million x 10 = $100 million.

Question 12

In Table 13-1,the Federal Reserve System has
A) sold $10 million in government securities to banks,taking payment in cash.
B) sold $10 million in government securities to banks,taking payment from the bank's reserves.
C) purchased $10 million in government securities from banks,paying for them with increases in banks' reserves.
D) purchased $10 million in government securities from banks,paying for them with new Federal Reserve notes.

Accepted Answer

When the Federal Reserve System purchases government securities from banks, it increases the banks' reserves by paying for the securities with newly created electronic credits in the banks' accounts. This is shown as an increase in the assets and liabilities of the banking system on the Federal Reserve's balance sheet. Therefore, option C is the correct answer.

Question 13

If the Fed sells a T-bill to a commercial bank,how will this affect the money supply?
A) It will increase the money supply.
B) It will increase bank reserves.
C) It will decrease the money supply.
D) It will have no effect on the money supply.

Accepted Answer

When the Fed sells a T-bill to a commercial bank, the bank's reserves decrease because it spent money to purchase the T-bill. This means that the bank has less money to lend out to customers, which reduces the money supply. Therefore, the correct answer is C, it will decrease the money supply.

Question 14

The Fed relies on open market operations,which work
A) with the Treasury in creating money to finance bonds.
B) through major stock exchanges to influence bond prices.
C) directly through the nonbank public to change their assets.
D) through the banking system by affecting their reserves.

Accepted Answer

Open market operations involve the buying and selling of government securities (bonds) by the Federal Reserve with member banks. When the Fed buys bonds, it increases the reserves of banks, giving them more money to lend out which can lead to an increase in the money supply. Conversely, when the Fed sells bonds, it decreases bank reserves and lowers the amount of money available for lending, leading to a decrease in the money supply. Therefore, the Fed relies on open market operations through the banking system to affect their reserves.

Question 15

The Fed's purchase and sale of government securities is known as
A) margin operations.
B) open market operations.
C) bank reserve operations.
D) cash management operations.

Accepted Answer

The Fed's purchase and sale of government securities is known as open market operations. The Fed conducts these operations to influence the money supply and interest rates in the economy.

Question 16

The Fed conducts an open market sale of Treasury bills of $5 million.If the required reserve ratio is 0.20,what change in the money supply can be expected using the oversimplified money multiplier?
A) $25 million
B) $5 million
C) 0
D) −$5 million
E) −$25 million

Accepted Answer

The oversimplified money multiplier formula is 1/required reserve ratio. In this case, the required reserve ratio is 0.20, so the money multiplier is 1/0.20 = 5. This means that for every $1 decrease in the monetary base (in this case, the $5 million sale of Treasury bills), the money supply will decrease by $5 (or by a multiple of $5). Therefore, the change in the money supply can be expected to be -$5 million x 5 = -$25 million, or a decrease of $25 million.

Question 17

Which of the following is the most frequently used tool of monetary policy?
A) changing the discount rate
B) changing reserve requirements
C) open market operations
D) interest rate changes

Accepted Answer

Open market operations is the most frequently used tool of monetary policy as it allows central banks to directly control the money supply by buying or selling government securities in the open market. This affects the levels of reserves held by commercial banks, which in turn influences the availability and cost of credit in the economy. Changing the discount rate and reserve requirements are also tools used by central banks, but they are less frequently used and have a more indirect impact on the money supply. Interest rate changes can be a result of monetary policy decisions, but they are not a tool in themselves.

Question 18

The money supply contracts when the Fed
A) replaces old worn-out notes and bills.
B) borrows from the Treasury.
C) sells government securities.
D) purchases stocks from corporate businesses.

Accepted Answer

The money supply contracts when the Fed sells government securities because when the Fed sells securities it takes money out of the hands of the public, reducing the overall money supply in the economy. Options A, B, and D do not directly impact the money supply in the same way.

Question 19

Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities from member banks.If the oversimplified money multiplier is assumed,then the money supply will
A) increase by $500 million.
B) increase by $100 million.
C) decrease by $100 million.
D) decrease by $500 million.

Accepted Answer

The oversimplified money multiplier is 1/required reserve ratio. In this case, the oversimplified money multiplier would be 1/0.10 = 10. An open-market sale of $50 million in government securities from member banks will decrease bank reserves by $50 million, causing a contraction of the money supply by $50 million * 10 (the oversimplified money multiplier) = $500 million. Therefore, the correct answer is D.

Question 20

When the Fed purchases government securities from a commercial bank,the bank
A) loses its ability to make loans.
B) automatically becomes poorer.
C) loses equity in the Fed.
D) receives reserves that can be loaned out.

Accepted Answer

When the Fed purchases government securities from a commercial bank, it pays for them by crediting the bank's reserve account with the Fed. This increases the bank's reserves and therefore its ability to lend out money, as required by the reserve requirement. So, the bank receives reserves that can be loaned out.

Quiz 13: Monetary Policy Conventional and Unconventional

Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks.If the oversimplified money multiplier is assumed,then the money supply will

If the Federal Open Market Committee decides to expand the money supply,then it will

If the Fed sells a T-bill to an individual rather than to a commercial bank,how will this affect the money supply?

After the transaction in Table 13-1 is completed,what happens to actual reserves,required reserves,and excess reserves? Assume the required reserve ratio is 25 percent.

If the Fed buys a T-bill from a commercial bank,how will it pay for the T-bill?

Which of the following is correct?

When the Fed wants to expand the money supply through open market operation,it

In Table 13-1,if the required reserve ratio is 10 percent,what will happen to the money supply? Use the oversimplified money multiplier in your calculations.

When the Fed wants to expand the money supply,it

____ is the rate that applies when banks borrow and lend reserves to one another.

The Fed conducts an open market purchase of Treasury bills of $10 million.If the required reserve ratio is 0.10,what change in the money supply can be expected using the oversimplified money multiplier?

In Table 13-1,the Federal Reserve System has

If the Fed sells a T-bill to a commercial bank,how will this affect the money supply?

The Fed relies on open market operations,which work

The Fed's purchase and sale of government securities is known as

The Fed conducts an open market sale of Treasury bills of $5 million.If the required reserve ratio is 0.20,what change in the money supply can be expected using the oversimplified money multiplier?

Which of the following is the most frequently used tool of monetary policy?

The money supply contracts when the Fed

Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities from member banks.If the oversimplified money multiplier is assumed,then the money supply will

When the Fed purchases government securities from a commercial bank,the bank