Question 1

Which of the following is the largest component of the assets of the Federal Reserve?

Accepted Answer

A)   U.S. Treasury deposits
B)   U.S. government securities
C)   Foreign exchange
D)   Time deposits
E)   Checkable depositsF) C) and E)
G) None of the above

Question 2

The M1 money supply consists primarily of:

Accepted Answer

A)   savings deposits.
B)   certificates of deposit.
C)   miscellaneous near-monies.
D)   checkable deposits.
E)   money market mutual fund accounts.F) B) and C)
G) B) and D)

Question 3

Assume that there are no excess reserves in the banking system when the reserve requirement is 20%. The purchase of $10,000 in U.S. government securities by the Fed from Academy National Bank has the potential to ultimately increase the money supply by:

Accepted Answer

A)   $2,000.
B)   $8,000.
C)   $10,000.
D)   $20,000.
E)   $50,000.F) All of the above
G) A) and B)

Question 4

Banks in need of reserves can borrow from the Fed or in the federal funds market.

Accepted Answer

A) True 
 B)False

Question 5

If the Fed decreases the required reserve ratio at a time when banks are holding no excess reserves, the Fed is:

Accepted Answer

A)   forcing banks to increase the money supply.
B)   forcing banks to decrease the money supply.
C)   making it possible for banks to increase the money supply but not forcing them to do so.
D)   making it possible for banks to decrease the money supply but not forcing them to do so.
E)   conducting open market operations but not changing the money supply.F) A) and C)
G) B) and C)

Question 6

A higher discount rate generally decreases excess reserves.

Accepted Answer

A) True 
 B)False

Question 7

The Fed primarily uses the reserve requirement to control the money supply.

Accepted Answer

A) True 
 B)False

Question 8

If the required reserve ratio is 20 percent and the Fed buys a $10,000 security from a depository institution that currently has no excess reserves, the money supply:

Accepted Answer

A)   decreases by $10,000.
B)   increases by $5,000.
C)   decreases by $5,000.
D)   increases by $50,000.
E)   decreases by $50,000.F) B) and E)
G) A) and E)

Question 9

M1 includes currency held in bank vaults.

Accepted Answer

A) True 
 B)False

Question 10

The table below shows the balance sheet of Leftbank. Leftbank's total reserves:

Accepted Answer

A)   rose by $9,000.
B)   were not affected by this transaction.
C)   fell by $9,000.
D)   fell by $10,000.
E)   rose by $10,000.F) A) and B)
G) B) and E)

Question 11

When the Fed buys U.S. government securities from a bank, that bank's excess reserves and total reserves increase, but there is no change in required reserves.

Accepted Answer

A) True 
 B)False

Question 12

When a customer deposits $1,000 in a bank, the deposit is:

Accepted Answer

A)   an asset of the Federal Reserve.
B)   included in M1 if it is currently in a commercial bank's vault.
C)   a liability to the customer.
D)   an asset to a commercial bank if it is currently in the bank's vault.
E)   a liability for the bank as the bank owes it to the customer.F) B) and E)
G) B) and C)

Question 13

Banks earn a profit on the difference between:

Accepted Answer

A)   the interest charged from depositors and the interest offered to borrowers.
B)   the interest charged on loans and the interest paid on deposits.
C)   the deposit and loan balances.
D)   liabilities and deposits.
E)   dividends and interest.F) A) and E)
G) C) and D)

Question 14

The Reserve Bank of Glassen is the apex banking institution in the country of Glassen. Money supply in Glassen will increase when:

Accepted Answer

A)   the Reserve Bank of Glassen buys bonds from commercial banks.
B)   the Reserve Bank of Glassen raises the required reserve ratio for commercial banks.
C)   the Reserve Bank of Glassen sells government bonds to commercial banks.
D)   the Reserve Bank of Glassen raises the discount rate for commercial banks.
E)   the Reserve Bank of Glassen prints new checks.F) C) and E)
G) All of the above

Question 15

In commercial banking operations, there is a trade-off between liquidity and profitability.

Accepted Answer

A) True 
 B)False

Question 16

Money expansion stops when new reserves introduced into the banking system have been converted into:

Accepted Answer

A)   excess reserves.
B)   securities.
C)   deposits.
D)   required reserves.
E)   loans.F) B) and E)
G) C) and D)

Question 17

If you returned a $5 Federal Reserve note to the Fed, you could receive:

Accepted Answer

A)   $5 in silver.
B)   $5 in gold.
C)   5 one-dollar bills.
D)   10 one-dollar bills.
E)   a small gold bar.F) A) and D)
G) B) and C)

Question 18

If the required reserve ratio is 0.2, and the Fed buys $3,000 of U.S. government securities, the maximum amount by which the money supply can increase is:

Accepted Answer

A)   $200.
B)   $2,000.
C)   $600.
D)   $15,000.
E)   $1,500.F) B) and C)
G) All of the above

Question 19

Many people prefer debit cards to checks because:

Accepted Answer

A)   checkbooks are not required and direct payments are made.
B)   checks are unsafe for use.
C)   debit cards delay money payments.
D)   using checks is time consuming.
E)   debit cards help account holders get a loan from the card issuer.F) B) and E)
G) A) and B)

Question 20

During the 2008 crisis, the Fed demanded interest payments on reserves held at the Fed.

Accepted Answer

A) True 
 B)False

Exam 14: Banking and the Money Supply

If the required reserve ratio is 20 percent and the Fed buys a $10,000 security from a depository institution that currently has no excess reserves, the money supply:

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Money expansion stops when new reserves introduced into the banking system have been converted into:

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The table below shows the balance sheet of Leftbank. Leftbank's total reserves:

Correct AnswerverifiedShow Answer

A higher discount rate generally decreases excess reserves.

Correct AnswerverifiedShow Answer

If the required reserve ratio is 0.2, and the Fed buys $3,000 of U.S. government securities, the maximum amount by which the money supply can increase is:

Correct AnswerverifiedShow Answer

Many people prefer debit cards to checks because:

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Banks in need of reserves can borrow from the Fed or in the federal funds market.

Correct AnswerverifiedShow Answer

If you returned a $5 Federal Reserve note to the Fed, you could receive:

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The Fed primarily uses the reserve requirement to control the money supply.

Correct AnswerverifiedShow Answer

During the 2008 crisis, the Fed demanded interest payments on reserves held at the Fed.

Correct AnswerverifiedShow Answer

M1 includes currency held in bank vaults.

Correct AnswerverifiedShow Answer

Assume that there are no excess reserves in the banking system when the reserve requirement is 20%. The purchase of $10,000 in U.S. government securities by the Fed from Academy National Bank has the potential to ultimately increase the money supply by:

Correct AnswerverifiedShow Answer

If the Fed decreases the required reserve ratio at a time when banks are holding no excess reserves, the Fed is:

Correct AnswerverifiedShow Answer

When a customer deposits $1,000 in a bank, the deposit is:

Correct AnswerverifiedShow Answer

In commercial banking operations, there is a trade-off between liquidity and profitability.

Correct AnswerverifiedShow Answer

The M1 money supply consists primarily of:

Correct AnswerverifiedShow Answer

When the Fed buys U.S. government securities from a bank, that bank's excess reserves and total reserves increase, but there is no change in required reserves.

Correct AnswerverifiedShow Answer

Banks earn a profit on the difference between:

Correct AnswerverifiedShow Answer

The Reserve Bank of Glassen is the apex banking institution in the country of Glassen. Money supply in Glassen will increase when:

Correct AnswerverifiedShow Answer

Which of the following is the largest component of the assets of the Federal Reserve?

Correct AnswerverifiedShow Answer

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