Question 1

All of the following were reasons that the Fed increase the required reserve ration in 1936 EXCEPT:

Accepted Answer

The Fed increased the required reserve ratio in 1936 primarily due to concerns over future inflation, excess reserves, and speculative bubbles, not because of fears that the economy was overheating.

Question 2

When banks hold excess reserves, the size of the money multiplier

Accepted Answer

When banks hold excess reserves, they are not loaning out all of their deposits, which decreases the amount of money being created through the simple deposit multiplier. As a result, the size of the money multiplier is less than the simple deposit multiplier would suggest.

Question 3

The size of the money multiplier depends upon all of the following EXCEPT

Accepted Answer

The size of the money multiplier depends on the required reserve ratio, the currency-deposit ratio, and excess reserves relative to deposits. However, the discount rate does not affect the size of the money multiplier.

Question 4

Which of the following equations is correct?

Accepted Answer

The answer of Which of the following equations is correct?
...

Question 5

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals

Accepted Answer

The formula for the money multiplier is:

Money Multiplier = 1/required reserve ratio

So in this case, the required reserve ratio is 0.10 or 10%, therefore:

Money Multiplier = 1/0.10 = 10

Then, we can use this formula to calculate the maximum potential increase in checkable deposits:

Maximum Increase in Checkable Deposits = Money Multiplier x Change in Reserves

Change in Reserves = $200 million

Maximum Increase in Checkable Deposits = 10 x $200 million = $2 billion

Therefore, the total amount of checkable deposits that could be created is $2 billion. Adding the currency outstanding, we get:

Total money supply = Currency Outstanding + Checkable Deposits
Total money supply = $500 million + $2 billion = $2.5 billion

So, the money multiplier in this case is 10, which means that the total money supply is ten times larger than the amount of reserves held by banks. Therefore, the best choice is B, 3.57.

Question 6

Which of the following assumptions made in deriving the simple deposit multiplier is unrealistic?

Accepted Answer

The assumption that banks loan out all of their excess reserves is unrealistic because banks may choose to hold onto their excess reserves for various reasons, such as to meet unexpected withdrawals or to maintain a higher level of liquidity.

Question 7

If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

Accepted Answer

The answer of If banks hold no excess reserves, checkable...

Question 8

Suppose the required reserve ratio is 8%, excess reserve-to-deposit ratio is 2%, and the currency-to-deposit ratio is 10%. What is the value of the money multiplier?

Accepted Answer

The answer of Suppose the required reserve ratio is 8%,...

Question 9

The Fed has the greatest control over which of the following?

Accepted Answer

The Fed has the greatest control over the nonborrowed monetary base, which includes currency in circulation and bank reserves. The Fed's policies can directly impact the nonborrowed monetary base through open market operations and setting reserve requirements. While the Fed can influence the money multiplier, discount loans, and excess reserves, it has less direct control over these factors.

Question 10

Suppose the banking system holds no excess reserves. If the required reserve ratio is 0.10 and the money multiplier is 2.5, what is the value of the currency-deposit ratio?

Accepted Answer

The answer of Suppose the banking system holds no excess...

Question 11

Suppose the required reserve ratio is 8% and banks do not hold excess reserves. Illustrate on a bank's balance sheet what happens if the Fed buys $250,000 worth of securities from a bank.

Accepted Answer

The answer of Suppose the required reserve ratio is 8%...

Question 12

Suppose the required reserve ratio is 10%, excess-to-deposit ratio is 10%, and the currency-to-deposit ratio is 20%. If the Fed buys $50 million worth of securities, what will happen to the money supply?

Accepted Answer

The answer of Suppose the required reserve ratio is 10%,...

Question 13

If currency outstanding equals $200 million, checkable deposits equal $1 billion, reserves equal $150 million, and the required reserve ratio is 0.10, the money multiplier equals

Accepted Answer

The money multiplier is equal to 1/required reserve ratio. Therefore, the money multiplier in this case is 1/0.10 = 10. The maximum amount of checkable deposits that can be supported by the given reserves is equal to the currency plus reserves, or $200 million + $150 million = $350 million. Multiplying this by the money multiplier of 10 gives the total amount of checkable deposits that can be supported by the initial reserves, which is $3.5 billion. Therefore, the money multiplier is 3.43 ($1 billion/checkable deposits = 1/0.29).

Question 14

During the Financial Crisis of 2007-2009, banks significantly increased their holdings of excess reserves. What impact did this have on the money multiplier? How would the Fed change the monetary base if it wanted to maintain a stable money supply?

Accepted Answer

The answer of During the Financial Crisis of 2007-2009, banks...

Question 15

The money multiplier

Accepted Answer

The money multiplier is an expression that shows the relationship between the monetary base (currency in circulation and bank reserves) and the money supply. It is calculated as the reciprocal of the required reserve ratio plus any excess reserves held by banks. The money multiplier is not completely controlled by the Fed, as it depends on banks' willingness to lend and individuals' willingness to borrow. The simple deposit multiplier only considers the impact of required reserves on the money supply, while the money multiplier takes into account the impact of excess reserves as well.

Question 16

Which of the following accurately describes the relationship between excess reserves and checkable deposits following the financial crisis of 2007-2009?

Accepted Answer

Excess reserves significantly increased following the financial crisis of 2007-2009, to the point where they exceeded the total amount of checkable deposits. This was largely due to the Federal Reserve's policies to inject liquidity into the banking system to stabilize it, which resulted in banks holding more reserves than required.

Question 17

Why didn't the surge in the monetary base between 2008-2012 lead to a similar surge in the money supply?

Accepted Answer

The surge in the monetary base did not lead to a similar surge in the money supply because the excess reserve-deposit ratio rose significantly, resulting in a much smaller money multiplier. This means that banks were holding onto more excess reserves, rather than loaning them out to create new deposits and money in the economy.

Quiz 14: The Federal Reserves Balance Sheet and the Money Supply Process