Question 1

If the money multiplier is 4, what is the reserve requirement?

Accepted Answer

The money multiplier is the inverse of the reserve requirement ratio. If the money multiplier is 4, the reserve requirement is 1/4, which is 25%.

Question 2

Which of the following acts created the central bank of the United States as we know it today?

Accepted Answer

The Federal Reserve Act of 1913 established the Federal Reserve System, which is the central bank of the United States.

Question 3

What is the most important function of the Federal Reserve?

Accepted Answer

Open market operations are the most important function of the Federal Reserve as they are the primary tool used to influence the supply of money in the economy and achieve monetary policy goals.

Question 4

The federal funds rate is the interest rate that banks charge other banks for _____ loans.

Accepted Answer

The federal funds rate is the interest rate at which banks lend reserve balances to other banks on an overnight basis.

Question 5

Under which condition would the Fed be most likely to engage in its role as the lender of last resort?

Accepted Answer

The Fed acts as a lender of last resort primarily to prevent bank runs and maintain stability in the financial system. If savers withdraw money due to a lack of confidence, it can lead to a liquidity crisis, prompting the Fed to step in.

Question 6

Which of these is a liability for a bank?

Accepted Answer

Customers' checking account balances are liabilities for a bank because they represent money the bank owes to its customers.

Question 7

If the reserve requirement changes from 10% to 15%, what happens to the money multiplier?

Accepted Answer

The money multiplier is the reciprocal of the reserve requirement. So, if the reserve requirement increases, the money multiplier decreases.

Question 8

If a bank has a total of $80,000 in deposits and has made three loans in the amounts of $10,000, $20,000, and $30,000, what is this bank's reserve ratio (assuming it has no other deposits or made any other loans)?

Accepted Answer

The reserve ratio is calculated as the reserves divided by total deposits. The bank has $80,000 in deposits and has loaned out $60,000 ($10,000 + $20,000 + $30,000), leaving $20,000 in reserves. The reserve ratio is $20,000 / $80,000 = 25%.

Question 9

Which of these would be the lowest interest rate?

Accepted Answer

The federal funds rate is typically the lowest interest rate as it is the rate at which banks lend to each other overnight.

Question 10

Which of these are functions performed by the Federal Reserve Banks and their branches? I. regulating and supervising member banks
II) distributing coins and currency
III) setting interest rates paid by homeowners

Accepted Answer

The Federal Reserve Banks regulate and supervise member banks and distribute coins and currency. However, they do not directly set interest rates paid by homeowners; they influence interest rates through monetary policy.

Question 11

The main feature of fractional reserve banking is that banks:

Accepted Answer

Fractional reserve banking is a system where banks keep a fraction of deposits as reserves and lend out the remainder, allowing them to create money through lending.

Question 12

If Eighth Street Bank receives a $1,000 deposit, loans out $800, and keeps $200 in reserves, the total assets of Eighth Street Bank increased by:

Accepted Answer

The total assets of the bank increase by the full amount of the deposit, which is $1,000, as both the reserves and the loan are part of the bank's assets.

Question 13

Suppose banks hold 20% of money in reserves. What is the money multiplier?

Accepted Answer

The money multiplier is calculated as 1 divided by the reserve ratio. With a reserve ratio of 20% (or 0.20), the money multiplier is 1 / 0.20 = 5.

Question 14

How is money created "out of thin air" by banks?

Accepted Answer

Banks create money through the process of fractional reserve banking, where they loan out a portion of deposits, which are then redeposited and loaned out again, effectively multiplying the money supply.

Question 15

There are _____ Regional Federal Reserve Banks; the only Regional Bank president who is a permanent member of the Federal Open Market Committee is based in _____.

Accepted Answer

There are 12 Regional Federal Reserve Banks, and the president of the New York Fed is the only Regional Bank president who is a permanent member of the Federal Open Market Committee (FOMC).

Question 16

When the Federal Reserve prints money, what does it do with it?

Accepted Answer

When the Federal Reserve prints money, it typically buys bonds to inject money into the economy, which helps to lower interest rates.

Question 17

If the reserve requirement is 20%, but the banks hold an additional 10% of deposits as excess reserves, what is the leakage-adjusted money multiplier?

Accepted Answer

The leakage-adjusted money multiplier is calculated as 1 / (reserve requirement + excess reserves). Here, it is 1 / (0.20 + 0.10) = 1 / 0.30 = 3.33.

Question 18

Which of the following is NOT true about the Fed's Board of Governors?

Accepted Answer

Members of the Board of Governors are appointed by the President of the United States and confirmed by the Senate, not elected by voters.

Question 19

In order for the Federal Reserve to raise interest rates, it needs to:

Accepted Answer

Reducing the money supply decreases the amount of money available for lending, which increases interest rates.

Question 20

Which of these is NOT a leakage in money creation?

Accepted Answer

Depositing a large jar of coins at the bank does not constitute a leakage in money creation; instead, it increases the bank's reserves, potentially allowing for more money creation through lending.

Quiz 12: Money Creation and the Federal Reserve