Review Questions Chapter 15
Economics 252
(1) Which of the following will increase commercial bank reserves?
(a) The purchase of government bonds in the open market by the Federal Reserve Banks.
(b) A decrease in the reserve ratio.
(c) An increase in the discount rate.
(d) The sale of government bonds in the open market by the Federal Reserve Banks.
(2) The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits:
(a) of commercial banks are unchanged, but their reserves increase.
(b) and reserves of commercial banks both decrease.
(c) of commercial banks are unchanged, but their reserves decrease.
(d) of commercial banks are both unchanged.
(3) Which of the following is a tool of monetary policy?
(a) Open market operations.
(b) Changes in banking laws.
(c) Changes in tax rates.
(d) Changes in government spending.
(4) The three main tools of monetary policy are:
(a) tax rate changes, the discount rate, and open market operations.
(b) tax rate changes, changes in government expenditures, and open market operations.
(c) the discount rate, the reserve ratio, and open market operations.
(d) changes in government expenditures, the reserve ratio, and the discount rate.
(5) Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of US securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:
(a) not directly affected, but the money-generating potential of the commercial banking system is increased by $12 million.
(b) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $16 million.
(c) directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by $12 million.
(d) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $12 million.
(6) Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:
(a) $1,000.
(b) $2,000
(c) $800
(d) $5,000
Utilize the information in Table 1 to answer Questions (7), (8), and (9). Assume the reserve ratio is 20 percent. Table 1
Consolidated Balance Sheet:
Commercial Banking System
Assets Liabilities and Net Worth
Reserves $72 Checkable Deposits $240
Securities $110 Loans from Federal
Loans $60 Reserve Banks $2
Consolidated Balance Sheet
Federal Reserve Banks
Assets Liabilities and Net Worth
Securities $240 Reserves of commercial
Loans to commercial Banks $72
Banks $2 Treasury deposits
Federal Reserve Notes $140
(7) In Table 1, the commercial banks have excess reserves of:
(a) $12 (b) $22 (c) $16 (d) $24
(8) In Table 1, the maximum money creating potential of the commercial banking system is:
(a) $36 (b) $17 (c) $48 (d) $24
(9) In Table 1, suppose the Federal Reserve Banks buy $2 in securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money will:
(a) be unaffected but the money creating potential of the commercial banking system will increase by another $6.
(b) directly increase by $2, and the money creating potential of the commercial banking system will be unaffected.
(c) directly increase by $8, and the money creating potential of the commercial banking system will increase by another $32.
(d) directly increase by $2, and the money creating potential of the commercial banking system will increase by another $6.
(10) Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply:
(a) contracts and commercial bank reserves increase.
(b) expands and commercial bank reserves decrease.
(c) contracts and commercial bank reserves decrease.
(d) expands and commercial bank reserves increase.
Consider the information that follows to answer Questions (11) and (12). Suppose that the Fed sells $500 of government securities to commercial banks and buys $500 of securities from individuals, who deposit the cash in checking accounts. Assume the reserve ratio is 20 percent.
(11) Considering the information above, reserves in the banking system will:
(a) remain unchanged.
(b) rise by $100.
(c) fall by $100.
(d) rise by $1,000.
(12) Considering the above information, the supply money in the economy will:
(a) remain unchanged.
(b) rise by $500.
(c) fall by $100.
(d) fall by $500.
(13) When the reserve requirement is increased:
(a) required reserves are changed into excess reserves.
(b) the excess reserves of the member banks are increased.
(c) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
(d) the excess reserves of the member banks are reduced.
(14) Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has:
(a) excess reserves of $2 billion.
(b) neither an excess or deficiency of reserves.
(c) a deficiency of reserves of $0.5 billion.
(d) excess reserves of $0.5 billion.
Consider the information in Table 2 to answer Questions (15), (16), (17), and (18).
Table 2 ( in billions of dollars)
Assets Liabilities and Net Worth
Reserves $200 Checkable Deposits $1,000
Securities $300 Capital Stock $400
Loans $500
Property $400
(15) In Table 2, the commercial banking system has excess reserves of:
(a) In Table 2, the commercial banking system has excess reserves of:
(a) zero.
(b) $2 billion.
(c) $5 billion
(d) $10 billion.
(16) In Table 2, the money multiplier for the commercial banking system is:
(a) 5 (b) 10 (c) 15 (d) 20
(17) In Table 2, if the Fed increased the reserve requirement to 25 percent, a deficiency of reserves in the commercial banking system of _____ would occur and the money multiplier would fall to _____.
(a) $50 billion; 5.
(b) $10 billion; 4.
(c) $50 billion; 4.
(d) $10 billion; 8.
(18) In Table 2, if the Fed reduced the reserve requirement to 16 percent, excess reserves in the commercial banking system would increase by _______ and the monetary multiplier would rise to _____.
(a) $10 billion; 5.
(b) $40 billion; 6.25.
(c) $10 billion; 10
(d) $40 billion; 12.5.
(19) The interest rate at which the Federal Reserve Banks lend to commercial banks is called the:
(a) prime rate.
(b) short-term rate.
(c) discount rate.
(d) federal funds rate.
(20) Suppose that, for every 1-percentage point decline in the discount rate, commercial banks collectively borrow and additional $2 billion from the Federal Reserve Banks. Also assume that the reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will:
(a) increase by $0.5 billion and the money supply will increase by $2.5 billion.
(b) decline by $1 billion and the money supply will decline by $10 billion.
(c) increase by $1 billion and the money supply will increase by $10 billion.
(d) increase by $10 billion and the money supply will increase by $100 billion.
(21) Which of the following best describes the cause-effect chain of an easy money policy?
(a) A decrease in money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
(b) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
(c) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
(d) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
(22) Upon which of the following industries is a tight money policy likely to be most effective?
(a) personal services (b)clothing (c)food processing (d) residential construction.
(23) Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?
(a) A tax increase and an increase in the money supply.
(b) A tax reduction and an increase in the money supply.
(c) A reduction in government expenditures and a decline in the money supply.
(d) A tax increase and an increase in the interest rate.
(24) If the Federal Reserve authorities were attempting to reduce demand pull inflation, the proper policies would be to:
(a) sell government securities, raise reserve requirements, and raise the discount rate.
(b) buy government securities, raise reserve requirements, and raise the discount rate.
(c) sell government securities, lower reserve requirements, and lower the discount rate.
(d) sell government securities, raise reserve requirements, and lower the discount rate.
Utilize Figure 1 in answering Questions (25) and (26).
Figure 1
Real GDP (billions
of dollars) Investment (Billions of dollars) AS Q(f)
(25) In Figure 1, if the interest rate is 8 percent, and the goal of the Fed is full-employment output of Q(f), it should:
(a) increase the interest rate from 8 percent to 10 percent.
(b) decrease the interest rate from 8 percent to 4 percent.
(c) decrease the interest rate from 8 percent to 6 percent.
(d) maintain the interest rate at 8 percent.
(26) In Figure 1, if the interest rate is 4 percent, full employment output is Q(f), and the Fed desires to undo demand-pull inflation, it should:
(a) increase the interest rate from 4 percent to 6 percent.
(b) decrease the interest rate from 4 percent to 2 percent.
(c) increase investment spending by $20 billion.
(d) maintain the interest rate at 4 percent.
(27) One of the strengths of monetary policy relative to fiscal policy is that monetary policy:
(a) can be implemented more quickly.
(b) is subject to closer political scrutiny.
(c) produces an offsetting net export effect.
(d) entails a larger multiplier effect.
(28) An easy money policy may be less effective than a tight money policy because:
(a) the Federal Reserve Banks are always willing to make loans to commercial banks which are short of reserves.
(b) fiscal policy always works at cross purposes with an easy money policy.
(c) changes in exchange rates complicate an easy money policy more than it does a tight money policy.
(d) commercial banks may not be able to find loan customers.
(29) Monetary policy is thought to be:
(a) equally effective in moving the economy out of a depression as in controlling demand-pull inflation.
(b) more effective in moving the economy out of a depression than in controlling demand-pull inflation.
(c) more effective in controlling demand-pull inflation that moving the economy out of a depression.
(d) only effective in moving the economy out of a depression.
(30) The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the:
(a) federal funds rate.
(b) prime interest rate.
(c) discount rate.
(d)