Question 1

If many banks fail, this is likely to:
A) cause surviving banks to lower their ratios of reserves to deposits.
B) cause surviving banks to raise their ratios of reserves to deposits.
C) have no effect on the ratio of reserves to deposits in surviving banks.
D) cause surviving banks to hold less currency.

Accepted Answer

When many banks fail, surviving banks are likely to raise their ratios of reserves to deposits in order to protect themselves from potential deposit withdrawals and to restore confidence in the banking system. This can also help prevent a further cascade of bank failures.

Question 2

If many banks fail, this is likely to:
A) increase the ratio of currency to deposits.
B) decrease the ratio of currency to deposits.
C) have no effect on the ratio of currency to deposits.
D) decrease the amount of currency in circulation, if the Fed takes no action.

Accepted Answer

When many banks fail, people tend to withdraw their money and hold onto it as currency rather than keeping it in the banks. This increases the amount of currency relative to deposits, thus increasing the ratio of currency to deposits.

Question 3

Assume that the monetary base (B) is $100 billion, the reserve-deposit ratio (rr) is 0.1, and the currency-deposit ratio (cr) is 0.1.

a. What is the money supply?
b. If $r r$ changes to $0.2$, but $c r$ is $0.1$ and $B$ is unchanged, what is the money supply?
c. If $r r$ is $0.1$ and cris $0.2$, but $B$ is unchanged, what is the money supply?

Accepted Answer

The answer of Assume that the monetary base (B) is...

Question 4

The most frequently used tool of monetary policy is:
A) open-market operations.
B) changes in the discount rate.
C) changes in reserve requirements.
D) changes in interest rate paid on reserves

Accepted Answer

Open-market operations, which involve the buying and selling of government securities by the central bank in the open market, are the most frequently used tool of monetary policy. This is because it is a flexible tool that allows the central bank to adjust the money supply and interest rates quickly and easily, and to target specific sectors of the economy if necessary. Changes in the discount rate and reserve requirements are also used, but these tools are less flexible and more difficult to implement. The interest rate paid on reserves is not typically used as a tool of monetary policy, although it can have an effect on the broader economy.

Question 5

If the Federal Reserve wishes to increase the money supply, it should:
A) decrease the discount rate.
B) increase interest paid on reserves.
C) sell government bonds.
D) decrease the monetary base.

Accepted Answer

If the Federal Reserve wishes to increase the money supply, it should decrease the discount rate. When the discount rate is decreased, it becomes cheaper for banks to borrow money from the Federal Reserve. As a result, banks have more money to lend out to consumers and businesses, which increases the money supply.

Question 6

Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be _____ securities.
A) safer and shorter-term
B) tax-favored and foreign
C) smaller-denomination and higher-grade
D) riskier and longer-term

Accepted Answer

Quantitative easing involves the purchase of longer-term and riskier securities such as government bonds, mortgage-backed securities, and corporate bonds. This is in contrast to typical open-market operations where the Fed purchases shorter-term and safer securities such as Treasury bills.

Question 7

Excess reserves are reserves that banks keep:
A) in their vaults.
B) at the central bank.
C) to meet legal reserve requirements.
D) above the legally required amount.

Accepted Answer

Excess reserves are reserves that banks keep above the legally required amount. This means that banks hold onto more money than what is required by law, and these extra reserves can be used to lend to other banks or to invest in other ways. Holding excess reserves can be seen as a precautionary measure to ensure that banks have enough cash on hand to meet unexpected demands from customers or to cope with any disruptions in the financial system.

Question 8

To increase the monetary base, the Fed can:
A) conduct open-market purchases.
B) conduct open-market sales.
C) raise the interest rate paid on reserves.
D) lower the required reserve ratio.

Accepted Answer

Conducting open-market purchases increases the monetary base by adding reserves to the banking system, as the Fed buys securities from banks, thereby increasing the amount of money in circulation.

Question 9

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base ______ and the currency-deposit and reserve-deposit ratios both ______.
A) fell; fell
B) fell; rose
C) rose; fell
D) rose; rose

Accepted Answer

During this period, the monetary base actually increased because the Federal Reserve increased bank reserves, but the currency-deposit and reserve-deposit ratios both rose as well. People withdrew their money from banks and held onto it due to fear of bank failures, which increased the currency-deposit ratio. Banks, fearing further withdrawals and being cautious about lending, held onto reserves rather than lending them out, which increased the reserve-deposit ratio.

Question 10

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier.
A) more; increase
B) more; decrease
C) fewer; increase
D) fewer; decrease

Accepted Answer

If the Federal Reserve increases the interest rate paid on reserves, banks will be incentivized to hold onto more excess reserves because they can earn more interest on them. This will decrease the money multiplier because banks will have less incentive to lend out excess reserves and create new money.

Question 11

If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then:
A) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen.
B) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had fallen.
C) the money supply would fall more than it would have fallen if the reserve-deposit ratio had risen.
D) it is impossible to be certain whether the money supply would fall or rise in this case.

Accepted Answer

When the monetary base falls and the currency-deposit ratio rises, it means that people are holding more currency than deposits. As a result, banks have a smaller amount of deposits to work with, which in turn reduces the money supply. However, if the reserve-deposit ratio remains the same, then banks are still able to lend out the same proportion of their deposits. Therefore, although the money supply would fall, it would not fall by as much as it would have if the reserve-deposit ratio had risen.

Question 12

Open-market operations change the ______; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the ______.
A) monetary base; monetary base; monetary base
B) money multiplier; money multiplier; money multiplier
C) monetary base; money multiplier; monetary base
D) money multiplier; monetary base; money multiplier

Accepted Answer

Open-market operations affect the monetary base, as it involves the buying and selling of government securities by the central bank, which influences the level of reserves in the banking system. Changes in interest rates paid on reserves affect the money multiplier, as it determines the incentive for banks to hold reserves and make loans. Changes in the discount rate affect the monetary base, as it is the rate at which banks can borrow from the central bank, which affects the level of reserves in the system.

Question 13

Quantitative easing is most closely akin to:
A) discount lending.
B) open-market operations.
C) fractional-reserve banking.
D) capital requirements.

Accepted Answer

Quantitative easing involves the central bank purchasing securities in the open market in order to increase the money supply and stimulate economic activity. This closely resembles open-market operations, where the central bank buys or sells government securities to manipulate the money supply. Discount lending is when the central bank lends money to commercial banks at a discounted rate, fractional-reserve banking is the practice of banks holding only a fraction of deposits in reserve, and capital requirements refer to regulations mandating banks hold a certain level of capital to protect against losses. These are not directly related to quantitative easing.

Question 14

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by:
A) a significant increase in the reserve-deposit ratio.
B) a significant decrease in the reserve-deposit ratio.
C) open-market purchases.
D) open-market sales.

Accepted Answer

The quantitative easing policy led to a significant increase in bank reserves held at the Federal Reserve. Banks, uncertain about the economic outlook and facing stricter regulations, held onto these reserves rather than lending them out, which increased the reserve-deposit ratio. This was a partial offset to the increase in the monetary base, as it meant that the additional reserves did not translate directly into a proportional increase in the money supply circulating in the broader economy.

Question 15

As the U.S. economy approached the millennium, January 1, 2000, many people cautiously began to hold larger than normal quantities of currency as protection against a possible disruption of banking services that could result from computer glitches.

a. How did this greater preference for currency affect the money supply?
b. How could the Federal Reserve offset such an increase in currency preferences?

Accepted Answer

The answer of As the U.S. economy approached the millennium,...

Question 16

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ______ and _____ the interest rate paid on bank reserves.
A) purchases; raise
B) purchases; lower
C) sales; raise
D) sales; lower

Accepted Answer

The Federal Reserve could conduct open-market sales and raise the interest rate paid on bank reserves to prevent banks from using excess reserves to make loans, thereby increasing the money supply. Open-market sales remove liquidity from the banking system, making it more expensive for banks to obtain funds, while raising the interest rate on reserves encourages banks to hold onto their reserves instead of lending them out.

Question 17

To increase the money multiplier, the Fed can:
A) conduct open-market purchases.
B) conduct open-market sales.
C) raise the interest rate paid on reserves.
D) lower the interest rate paid on reserves.

Accepted Answer

The answer of To increase the money multiplier, the Fed...

Question 18

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _____ increases in the monetary base and _____ increases in money supply.
A) no; no
B) large; larger
C) large; smaller
D) small; smaller

Accepted Answer

The quantitative easing operations led to large increases in the monetary base (through the purchase of securities by the Federal Reserve) but resulted in smaller increases in the money supply, as not all of the increase in the monetary base translated into a proportional increase in money circulating in the economy.

Question 19

When the Fed increases the interest rate paid on reserves, it:
A) increases the reserve-deposit ratio (rr).
B) decreases the reserve-deposit ratio (rr).
C) increases the monetary base (B).
D) decreases the monetary base (B).

Accepted Answer

When the Fed increases the interest rate paid on reserves, it incentivizes banks to hold more excess reserves, which in turn increases the reserve-deposit ratio. An increase in the reserve-deposit ratio means that banks are holding a higher percentage of deposits in reserve and lending out less, thereby decreasing the money supply.

Question 20

In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in bank accounts. This action would be expected to ______ the currency-deposit ratio and ______ the money supply.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Accepted Answer

The tax on checks would discourage people from writing checks, leading to an increase in the currency-deposit ratio as people hold more currency relative to deposits. This, in turn, would decrease the money supply since the banking system would have fewer deposits to use as a basis for creating additional money through loans.

Quiz 4: The Monetary System: What It Is and How It Works

If many banks fail, this is likely to:

If many banks fail, this is likely to:

The most frequently used tool of monetary policy is:

If the Federal Reserve wishes to increase the money supply, it should:

Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be _____ securities.

Excess reserves are reserves that banks keep:

To increase the monetary base, the Fed can:

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base and the currency-deposit and reserve-deposit ratios both .

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _ excess reserves, which will _ the money multiplier.

If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then:

Open-market operations change the ; changes in interest rate paid on reserves change the ; and changes in the discount rate change the __.

Quantitative easing is most closely akin to:

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by:

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market __ and _ the interest rate paid on bank reserves.

To increase the money multiplier, the Fed can:

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _ increases in the monetary base and _ increases in money supply.

When the Fed increases the interest rate paid on reserves, it:

In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in bank accounts. This action would be expected to the currency-deposit ratio and the money supply.