Question 1

Assume that the currency-deposit ratio is 0.3 and the reserve-deposit ratio is 0.2.What is the money multiplier?

Accepted Answer

The money multiplier is calculated as the reciprocal of the reserve requirement ratio. In this case, the reserve-deposit ratio is 0.2, so the money multiplier is:
1/0.2 = 5
However, we also need to take into account the currency-deposit ratio, which tells us how much money is held in currency (which is not part of bank deposits and thus not subject to reserve requirements). The money multiplier is adjusted by multiplying it by (1 + currency-deposit ratio). In this case:
(1 + 0.3) x 5 = 2.6
Therefore, the money multiplier is 2.6.

Question 2

Fractional reserve banking is the system that

Accepted Answer

Fractional reserve banking allows banks to keep reserves that are only a fraction of their deposits. This means that banks can lend out a larger portion of their deposits and earn interest on those loans, which is a major source of profit for banks. However, it also means that banks may not have enough reserves on hand to meet all of their depositors' withdrawal requests at the same time.

Question 3

High-powered money consists of

Accepted Answer

High-powered money, also known as the monetary base, includes bank reserves (both reserves held at the Fed and vault cash) plus currency held by the nonbank public. This definition matches choice A.

Question 4

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $30 million.Bank reserves are equal to

Accepted Answer

Bank reserves are the sum of vault cash and deposits by depository institutions at the central bank, which is $2 million + $1 million = $3 million.
The monetary base is the sum of currency in circulation and bank reserves, which is $15 million = $3 million (bank reserves) + currency in circulation.
Bank deposits are not relevant to calculating bank reserves.

Question 5

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank deposits are equal to

Accepted Answer

Bank deposits can be calculated by subtracting the currency held by the nonbank public from the total money supply and then dividing by the sum of one plus the reserve-deposit ratio. Here, it's ($10 million - $2 million) / (1 + 0.2) = $8 million.

Question 6

The currency-deposit ratio is determined by

Accepted Answer

The currency-deposit ratio, which measures the amount of currency held by the public relative to bank deposits, is determined by the public's behavior and preferences. It reflects the extent to which individuals and businesses prefer to hold cash versus depositing their money in a bank account. Banks and the Federal Reserve can influence the level of currency in circulation through their actions, but they do not determine the currency-deposit ratio. Congress's role in monetary policy is limited mainly to oversight and scrutiny of the Federal Reserve.

Question 7

Suppose there was a banking crisis.The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio.

Accepted Answer

When the public increases their currency-deposit ratio, it means they are holding more money as currency rather than depositing it in banks. This reduces the base on which banks can create money through the fractional reserve banking system. When banks increase their reserve-deposit ratio, they are holding more reserves relative to deposits, which further limits their ability to create new money through lending. Both actions together would shrink the money supply by the greatest amount.

Question 8

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action will increase the money supply by

Accepted Answer

The money multiplier formula is 1 / (reserve-deposit ratio + currency-deposit ratio). Plugging in the given values, the multiplier is 1 / (0.1 + 0.2) = 1 / 0.3 = 3.33. Therefore, a $1 million open-market purchase by the Federal Reserve will increase the money supply by $1 million * 3.33 = $3.33 million, which is closest to $4 million.

Question 9

Assume that the reserve-deposit ratio is 0.4.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $1,750,000.What is the reserve-deposit ratio?

Accepted Answer

The reserve-deposit ratio remains 0.4 as it is a predetermined ratio and does not change due to the Federal Reserve's open-market operations.

Question 10

Which of the following are depository institutions?

Accepted Answer

Banks and thrifts are depository institutions because they accept deposits from customers and hold them in various accounts such as checking, savings, and certificates of deposit. The other choices (A, B, and D) are not depository institutions as they do not accept deposits from customers. The Federal Reserve Banks are responsible for managing monetary policy and providing financial services to banks, the U.S. Treasury and the IRS are government entities responsible for collecting taxes and managing government finances, and investment banks and finance companies deal with securities and other financial instruments but do not accept deposits from customers.

Question 11

In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits,the money multiplier is

Accepted Answer

The money multiplier in a fractional reserve banking system is given by 1/res, where res is the reserve ratio. This multiplier indicates how much the money supply can increase for a given level of reserves.

Question 12

Vault cash is equal to $2 million,deposits by depository institutions at the central bank are $1 million,the monetary base is $15 million,and bank deposits are $35 million.Currency held by the nonbank public is

Accepted Answer

Currency held by the nonbank public can be calculated using the equation:

Currency held by the nonbank public = Monetary base - Vault cash - Deposits by depository institutions

Substituting in the given values:

Currency held by the nonbank public = $15 million - $2 million - $1 million

Currency held by the nonbank public = $12 million

Therefore, the correct answer is B) $12 million.

Question 13

Banks hold some deposits on reserve at the Fed because

Accepted Answer

Banks hold some deposits on reserve at the Fed because these deposits meet the reserve requirements of the Fed. The amount a bank must hold in reserve depends on the size of its deposits and is set by the Fed. By holding reserves at the Fed, banks are able to ensure that they can meet their daily payment obligations and with the added benefit of earning interest on those reserves.

Question 14

Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations.It could try to get the public to ________ their currency-deposit ratio and ________ banks' reserve requirements,which would in turn change the banks' reserve-deposit ratio.

Accepted Answer

Increasing the currency-deposit ratio and raising banks' reserve requirements would reduce the money supply by encouraging people to hold more cash and requiring banks to hold more reserves, thus reducing the amount available for lending.

Question 15

The monetary base is defined as

Accepted Answer

The monetary base includes bank reserves (both reserves held at the Fed and vault cash) plus currency in circulation outside banks (held by the nonbank public).

Question 16

The money supply is $6 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.1.The monetary base is equal to

Accepted Answer

The formula for the monetary base is: Monetary Base = Currency Held by Non-bank Public + Reserves
We are given that currency held by non-bank public is $2 million.
We can find that the total reserves are: 
Reserves = Reserve-Deposit Ratio * Deposits
Reserves = 0.1 * Deposits = 0.1 * (Money Supply - Currency Held by Non-bank Public) = 0.1 * ($6 million - $2 million) = $0.4 million
Therefore, the monetary base is: 
Monetary Base = Currency Held by Non-bank Public + Reserves = $2 million + $0.4 million = $2.4 million.

Question 17

Assume that the currency-deposit ratio is 0.5.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action increased the money supply by $2 million.What is the reserve-deposit ratio?

Accepted Answer

The money multiplier is calculated as (1 + currency-deposit ratio) / (currency-deposit ratio + reserve-deposit ratio). Given the currency-deposit ratio is 0.5 and the money supply increased by $2 million from a $1 million purchase, the money multiplier is 2. Solving (1 + 0.5) / (0.5 + reserve-deposit ratio) = 2 gives a reserve-deposit ratio of 0.25.

Question 18

The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to

Accepted Answer

Bank reserves are calculated as the sum of currency held by the nonbank public and the reserves held by banks. Given the reserve-deposit ratio is 0.2 and the currency held by the nonbank public is $2 million, we can infer that the total deposits are $8 million (since the money supply is $10 million and the money supply includes both currency held by the nonbank public and deposits). With a reserve-deposit ratio of 0.2, the reserves held by banks would be 0.2 * $8 million = $1.6 million.

Question 19

Assume that the reserve-deposit ratio is 0.2.The Federal Reserve carries out open-market operations,purchasing $1,000,000 worth of bonds from banks.This action increased the money supply by $2,600,000.What is the currency-deposit ratio?

Accepted Answer

The formula for calculating the change in the money supply after an open-market operation is:

Change in Money Supply = Purchase or Sale Amount x (1 / Reserve-Deposit Ratio)

Using the given information, we can solve for the reserve base:

$1,000,000 = Purchase Amount
0.2 = Reserve-Deposit Ratio

$1,000,000 / 0.2 = $5,000,000 Reserve Base

Then, we can solve for the money supply before the open-market operation:

$5,000,000 x (1 / 0.2) = $25,000,000

Finally, we can use the given information to solve for the currency-deposit ratio:

Currency-Deposit Ratio = (Total Money Supply - Total Deposits) / Total Deposits

Total Deposits = Total Money Supply / (1 + Currency-Deposit Ratio)

$25,000,000 = $2,600,000 + Total Deposits
Total Deposits = $22,400,000

Currency-Deposit Ratio = ($25,000,000 - $22,400,000) / $22,400,000
Currency-Deposit Ratio = 0.116

Therefore, the closest answer choice is B) 0.3.

Question 20

Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $40 million,and bank deposits are $90 million.The money multiplier is equal to

Accepted Answer

The money multiplier is equal to the ratio of the monetary base to bank deposits. Therefore, the money multiplier is (40 million + 2 million) / 90 million = 0.4667. However, this is not one of the answer choices. To find the reciprocal of this fraction, we get 2.1428 or approximately 2.5. Therefore, the closest answer choice is B, which is 3.0.

Quiz 14: Monetary Policy and the Federal Reserve System