Chapter 18 The Money Supply Process: Economics of Money, Banking, and Financial Markets, 5e (Mishkin)

Economics of Money, Banking, and Financial Markets, 5e (Mishkin)
Chapter 18 The Money Supply Process
17.1 Three Players in the Money Supply Process
1) The government agency that oversees the banking system and is responsible for the conduct of
monetary policy in the United States is
A) the Federal Reserve System.
B) the United States Treasury.
C) the U.S. Gold Commission.
D) the House of Representatives.
Answer: A
Ques Status: Previous Edition
AACSB: Reflective Thinking
2) Individuals that lend funds to a bank by opening a checking account are called
A) policyholders.
B) partners.
C) depositors.
D) debt holders.
Answer: C
3) The three players in the money supply process include

A) banks, depositors, and the U.S. Treasury.
B) banks, depositors, and borrowers.
C) banks, depositors, and the central bank.
D) banks, borrowers, and the central bank.
Answer: C
4) Of the three players in the money supply process, most observers agree that the most
important player is
A) the United States Treasury.
B) the Federal Reserve System.
C) the FDIC.
D) the Office of Thrift Supervision.
Answer: B
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17.2 The Fed's Balance Sheet
1) Both ________ and ________ are Federal Reserve assets.

A) currency in circulation; reserves
B) currency in circulation; securities
C) securities; loans to financial institutions
D) securities; reserves
Answer: C
2) The monetary liabilities of the Federal Reserve include

A) securities and loans to financial institutions.
B) currency in circulation and reserves.
C) securities and reserves.
D) currency in circulation and loans to financial institutions.
Answer: B
3) Both ________ and ________ are monetary liabilities of the Fed.

A) securities; loans to financial institutions
B) currency in circulation; reserves
C) securities; reserves
D) currency in circulation; loans to financial institutions
Answer: B
4) The sum of the Fed's monetary liabilities and the U.S. Treasury's monetary liabilities is called
A) the money supply.
B) currency in circulation.
C) bank reserves.
D) the monetary base.
Answer: D
5) The monetary base consists of

A) currency in circulation and Federal Reserve notes.
B) currency in circulation and the U.S. Treasury's monetary liabilities.
C) currency in circulation and reserves.
D) reserves and Federal Reserve Notes.
Answer: C
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6) Total reserves minus bank deposits with the Fed equals
A) vault cash.
B) excess reserves.
C) required reserves.
D) currency in circulation.
Answer: A
AACSB: Analytical Thinking
7) Reserves are equal to the sum of

A) required reserves and excess reserves.
B) required reserves and vault cash reserves.
C) excess reserves and vault cash reserves.
D) vault cash reserves and total reserves.
Answer: A
8) Total reserves are the sum of ________ and ________.

A) excess reserves; borrowed reserves
B) required reserves; currency in circulation
C) vault cash; excess reserves
D) excess reserves; required reserves
Answer: D
9) Excess reserves are equal to

A) total reserves minus discount loans.
B) vault cash plus deposits with Federal Reserve banks minus required reserves.
C) vault cash minus required reserves.
D) deposits with the Fed minus vault cash plus required reserves.
Answer: B
10) Total Reserves minus vault cash equals

A) bank deposits with the Fed.
B) excess reserves.
C) required reserves.
D) currency in circulation.
Answer: A
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11) The amount of deposits that banks must hold in reserve is
A) excess reserves.
B) required reserves.
C) total reserves.
D) vault cash.
Answer: B
12) The percentage of deposits that banks must hold in reserve is the
A) excess reserve ratio.
B) required reserve ratio.
C) total reserve ratio.
D) currency ratio.
Answer: B
13) Suppose that from a new checkable deposit, First National Bank holds two million dollars in
vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in
required reserves. Given this information, we can say First National Bank has ________ million
dollars in excess reserves.
A) three
B) nine
C) ten
D) eleven
Answer: B
vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in
required reserves. Given this information, we can say First National Bank faces a required
reserve ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
Answer: A
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vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in
excess reserves. Given this information, we can say First National Bank has ________ million
dollars in required reserves.
A) one
B) two
C) eight
D) ten
Answer: A
vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in
excess reserves. Given this information, we can say First National Bank faces a required reserve
ratio of ________ percent.
A) ten
B) twenty
C) eighty
D) ninety
Answer: A
17) Suppose that from a new checkable deposit, First National Bank holds eight million dollars
on deposit with the Federal Reserve, one million dollars in required reserves, and faces a
required reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in excess reserves.
A) two
B) eight
C) nine
D) ten
Answer: C
on deposit with the Federal Reserve, one million dollars in required reserves, and faces a
required reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in vault cash.
A) two
B) eight
C) nine
D) ten
Answer: A
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vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars in
required reserves.
A) one
B) two
C) eight
D) ten
Answer: A
vault cash, nine million dollars in excess reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars on
deposit with the Federal Reserve.
A) one
B) two
C) eight
D) ten
Answer: C
vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars in
excess reserves.
A) one
B) two
C) nine
D) ten
Answer: C
vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten
percent. Given this information, we can say First National Bank has ________ million dollars on
deposit with the Federal Reserve.
A) one
B) two
C) eight
D) ten
Answer: C
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on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in required reserves.
A) one
B) two
C) nine
D) ten
Answer: A
on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required
reserve ratio of ten percent. Given this information, we can say First National Bank has
________ million dollars in vault cash.
A) one
B) two
C) nine
D) ten
Answer: B
25) The interest rate the Fed charges banks borrowing from the Fed is the
A) federal funds rate.
B) Treasury bill rate.
C) discount rate.
D) prime rate.
Answer: C
26) When banks borrow money from the Federal Reserve, these funds are called
A) federal funds.
B) discount loans.
C) federal loans.
D) Treasury funds.
Answer: B
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17.3 Control of the Monetary Base
1) The monetary base minus currency in circulation equals

A) reserves.
B) the borrowed base.
C) the nonborrowed base.
D) discount loans.
Answer: A
2) The monetary base minus reserves equals

A) currency in circulation.
D) discount loans.
Answer: A
3) High-powered money minus reserves equals

A) reserves.
B) currency in circulation.
C) the monetary base.
D) the nonborrowed base.
Answer: B
4) High-powered money minus currency in circulation equals

A) reserves.
D) discount loans.
Answer: A
5) Purchases and sales of government securities by the Federal Reserve are called
A) discount loans.
B) federal fund transfers.
C) open market operations.
D) swap transactions.
Answer: C
AACSB: Written and Oral Communication
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6) When the Federal Reserve purchases a government bond from a primary dealer, reserves in
the banking system ________ and the monetary base ________, everything else held constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
Answer: A
7) When the Federal Reserve sells a government bond to a primary dealer, reserves in the
banking system ________ and the monetary base ________, everything else held constant.
Answer: D
8) When a primary dealer sells a government bond to the Federal Reserve, reserves in the
Answer: A
9) When a primary dealer buys a government bond from the Federal Reserve, reserves in the
Answer: D
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10) When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking
system
A) increase by $100.
B) increase by more than $100.
C) decrease by $100.
D) decrease by more than $100.
Answer: A
11) When the Fed sells $100 worth of bonds to a primary dealer, reserves in the banking system
Answer: C
12) When the Fed extends a $100 discount loan to the First National Bank, reserves in the
banking system
Answer: A
13) All else the same, when the Fed calls in a $100 discount loan previously extended to the First
National Bank, reserves in the banking system
Answer: C
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14) When the Federal Reserve extends a discount loan to a bank, the monetary base ________
and reserves ________.
A) remains unchanged; decrease
B) remains unchanged; increase
C) increases; increase
D) increases; remain unchanged
Answer: C
15) When the Federal Reserve calls in a discount loan from a bank, the monetary base ________
and reserves ________.
A) remains unchanged; decrease
B) remains unchanged; increase
C) decreases; decrease
D) decreases; remains unchanged
Answer: C
16) If the Fed decides to reduce bank reserves, it can

A) purchase government bonds.
B) extend discount loans to banks.
C) sell government bonds.
D) print more currency.
Answer: C
17) There are two ways in which the Fed can provide additional reserves to the banking system:
it can ________ government bonds or it can ________ discount loans to commercial banks.
A) sell; extend
B) sell; call in
C) purchase; extend
D) purchase; call in
Answer: C
18) A decrease in ________ leads to an equal ________ in the monetary base in the short run.
A) float; increase
B) float; decrease
C) Treasury deposits at the Fed; decrease
D) discount loans; increase
Answer: B
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19) The monetary base declines when
A) the Fed extends discount loans.
B) Treasury deposits at the Fed decrease.
C) float increases.
D) the Fed sells securities.
Answer: D
20) An increase in ________ leads to an equal ________ in the monetary base in the short run.
A) float; decrease
B) float; increase
C) discount loans; decrease
D) Treasury deposits at the Fed; increase
Answer: B
21) Suppose a person cashes his payroll check and holds all the funds in the form of currency.
Everything else held constant, total reserves in the banking system ________ and the monetary
base ________.
A) remain unchanged; increases
B) decrease; increases
C) decrease; remains unchanged
Answer: C
22) Suppose your payroll check is directly deposited to your checking account. Everything else
held constant, total reserves in the banking system ________ and the monetary base ________.
A) remain unchanged; remains unchanged
B) remain unchanged; increases
Answer: A
23) The Fed does not tightly control the monetary base because it does NOT completely control
A) open market purchases.
B) open market sales.
C) borrowed reserves.
D) the discount rate.
Answer: C
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24) Subtracting borrowed reserves from the monetary base obtains
A) reserves.
B) high-powered money.
C) the nonborrowed monetary base.
D) the borrowed monetary base.
Answer: C
25) The relationship between borrowed reserves (BR), the nonborrowed monetary base (MBn),
and the monetary base (MB) is
A) MB = MBn - BR.
B) BR = MBn - MB.
C) BR = MB - MBn.
D) MB = BR - MBn.
Answer: C
26) Explain two ways by which the Federal Reserve System can increase the monetary base.
Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the
monetary base?
Answer: The Fed can increase the monetary base by purchasing government bonds and by
extending discount loans. Because the Fed cannot control the distribution of the monetary base
between reserves and currency, it has less control over reserves than the base.
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17.4 Multiple Deposit Creation: A Simple Model
1) When the Fed supplies the banking system with an extra dollar of reserves, deposits increase
by more than one dollar—a process called
A) extra deposit creation.
B) multiple deposit creation.
C) expansionary deposit creation.
D) stimulative deposit creation.
Answer: B
2) When the Fed supplies the banking system with an extra dollar of reserves, deposits ________
by ________ than one dollar—a process called multiple deposit creation.
A) increase; less
B) increase; more
C) decrease; less
D) decrease; more
Answer: B
3) If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a
maximum amount equal to
A) its excess reserves.
B) 10 times its excess reserves.
C) 10 percent of its excess reserves.
D) its total reserves.
Answer: A
4) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank
that previously had no excess reserves, the bank can now increase its loans by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.
Answer: B
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5) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank
that previously had no excess reserves, deposits in the banking system can potentially increase
by
A) $10.
B) $100.
Answer: C
6) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that
previously had no excess reserves, the bank can now increase its loans by
A) $10.
B) $100.
Answer: B
7) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that
previously had no excess reserves, deposits in the banking system can potentially increase by
A) $10.
B) $100.
Answer: C
8) In the simple model of multiple deposit creation in which banks do not hold excess reserves,
the increase in checkable deposits equals the product of the change in reserves and the
A) reciprocal of the excess reserve ratio.
B) simple deposit expansion multiplier.
C) reciprocal of the simple deposit multiplier.
D) discount rate.
Answer: B
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9) The simple deposit multiplier can be expressed as the ratio of the
A) change in reserves in the banking system divided by the change in deposits.
B) change in deposits divided by the change in reserves in the banking system.
C) required reserve ratio divided by the change in reserves in the banking system.
D) change in deposits divided by the required reserve ratio.
Answer: B
10) If reserves in the banking system increase by $100, then checkable deposits will increase by
$1,000 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.05.
D) 0.20.
Answer: B
$500 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.10.
C) 0.05.
D) 0.20.
Answer: D
12) If the required reserve ratio is 10 percent, the simple deposit multiplier is
A) 5.0.
B) 2.5.
C) 100.0.
D) 10.0.
Answer: D
A) 15.0.
B) 1.5.
C) 6.67.
D) 3.33.
Answer: C
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A) 5.0.
B) 2.5.
C) 4.0.
D) 10.0.
Answer: A
A) 5.0.
B) 2.5.
C) 4.0.
D) 10.0.
Answer: C
16) A simple deposit multiplier equal to one implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
Answer: A
17) A simple deposit multiplier equal to two implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
Answer: B
18) A simple deposit multiplier equal to four implies a required reserve ratio equal to
A) 100 percent.
B) 50 percent.
C) 25 percent.
D) 0 percent.
Answer: C
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19) In the simple deposit expansion model, if the banking system has excess reserves of $75, and
the required reserve ratio is 20%, the potential expansion of checkable deposits is
A) $75.
B) $750.
C) $37.50.
D) $375.
Answer: D
20) In the simple deposit expansion model, if the required reserve ratio is 20 percent and the Fed
increases reserves by $100, checkable deposits can potentially expand by
A) $100.
B) $250.
C) $500.
D) $1,000.
Answer: C
21) In the simple deposit expansion model, if the required reserve ratio is 10 percent and the Fed
increases reserves by $100, checkable deposits can potentially expand by
A) $100.
B) $250.
C) $500.
D) $1,000.
Answer: D
22) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when
the required reserve ratio is equal to 20 percent implies that the Fed
A) sold $200 in government bonds.
B) sold $500 in government bonds.
C) purchased $200 in government bonds.
D) purchased $500 in government bonds.
Answer: C
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23) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when
the required reserve ratio is equal to 10 percent implies that the Fed
A) sold $1,000 in government bonds.
C) purchased $1,000 in government bonds.
Answer: D
24) In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the
required reserve ratio is equal to 20 percent implies that the Fed
Answer: A
25) In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the
A) sold $1,000 in government bonds.
C) purchased $1,000 in government bonds.
Answer: B
26) In the simple deposit expansion model, a decline in checkable deposits of $500 when the
Answer: B
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27) In the simple deposit expansion model, a decline in checkable deposits of $500 when the
C) sold $50 in government bonds.
Answer: B
A) 0.01.
B) 0.10.
C) 0.20.
D) 0.25.
Answer: D
A) 0.01.
B) 0.05.
C) 0.15.
D) 0.20.
Answer: C
A) 0.01.
B) 0.10.
C) 0.20.
D) 1.00.
Answer: D
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$2,000 in the simple model of deposit creation when the required reserve ratio is
A) 0.01.
B) 0.05.
C) 0.10.
D) 0.20.
Answer: B
A) 0.04.
B) 0.25.
C) 0.40.
D) 0.50.
Answer: C
33) If a bank has excess reserves of $10,000 and demand deposit liabilities of $80,000, and if the
reserve requirement is 20 percent, then the bank has actual reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.
Answer: C
reserve requirement is 20 percent, then the bank has total reserves of
A) $16,000.
B) $20,000.
C) $26,000.
D) $36,000.
Answer: D
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A) $11,000.
B) $20,000.
C) $21,000.
D) $26,000.
Answer: C
reserve requirement is 20 percent, then the bank has total reserves of
A) $11,000.
B) $21,000.
C) $31,000.
D) $41,000.
Answer: C
A) $17,000.
B) $19,000.
C) $24,000.
D) $29,000.
Answer: B
A) $14,000.
B) $19,000.
C) $24,000.
D) $29,000.
Answer: A
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A) $17,000.
B) $22,000.
C) $27,000.
D) $29,000.
Answer: B
A) $14,000.
B) $17,000.
C) $22,000.
D) $27,000.
Answer: B
41) A bank has excess reserves of $6,000 and demand deposit liabilities of $100,000 when the
required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess
reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
Answer: C
reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
Answer: B
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reserves will be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
Answer: D
44) A bank has no excess reserves and demand deposit liabilities of $100,000 when the required
reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bank's excess reserves
will now be
A) -$5,000.
B) -$1,000.
C) $1,000.
D) $5,000.
Answer: A
reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bank's
excess reserves will be
A) $1,000.
B) $8,000.
C) $9,000.
D) $17,000.
Answer: C
reserve requirement is 25 percent. If the reserve requirement is lowered to 20 percent, the bank's
excess reserves will be
A) $1,000.
B) $5,000.
C) $8,000.
D) $9,000.
Answer: B
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47) Decisions by depositors to increase their holdings of ________, or of banks to hold
________ will result in a smaller expansion of deposits than the simple model predicts.
A) deposits; required reserves
B) deposits; excess reserves
C) currency; required reserves
D) currency; excess reserves
Answer: D
48) Decisions by depositors to increase their holdings of ________, or of banks to hold excess
reserves will result in a ________ expansion of deposits than the simple model predicts.
A) deposits; smaller
B) deposits; larger
C) currency; smaller
D) currency; larger
Answer: C
49) Decisions by ________ about their holdings of currency and by ________ about their
holdings of excess reserves affect the money supply.
A) borrowers; depositors
B) banks; depositors
C) depositors; borrowers
D) depositors; banks
Answer: D
50) Assume that no banks hold excess reserves, and the public holds no currency. If a bank sells
a $100 security to the Fed, explain what happens to this bank and two additional steps in the
deposit expansion process, assuming a 10% reserve requirement. How much do deposits and
loans increase for the banking system when the process is completed?
Answer: Bank A first changes a security for reserves, and then lends the reserves, creating loans.
It receives $100 in reserves from the sale of securities. Since all of these reserve will be excess
reserves (there was no change in checkable deposits), the bank will loan out all $100. The $100
will then be deposited into Bank B. This bank now has a change in reserves of $100, of which
$90 is excess reserves. Bank B will loan out this $90, which will be deposited into Bank C. Bank
C now has an increase in reserves of $90, $81 of which is excess reserves. Bank C will loan out
this $81 dollars and the process will continue until there are no more excess reserves in the
banking system.
For the banking system, both loans and deposits increase by $1,000.
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51) Explain two reasons why the Fed does not have complete control over the level of bank
deposits and loans. Explain how a change in either factor affects the deposit expansion process.
Answer: The Fed does not completely control the level of bank deposits and loans because
banks can hold excess reserves and the public can change its currency holdings. A change in
either factor changes the deposit expansion process. An increase in either excess reserves or
currency reduces the amount by which deposits and loans are increased.
52) Explain why the simple deposit multiplier overstates the true deposit multiplier.
Answer: The simple model ignores the role banks and their customers play in the creation
process. The bank's customers can decide to hold currency and the bank can decide to hold
excess reserves. Both of these will restrict the banking system's ability to create deposits. Thus,
the true multiplier is less than the prediction of the simple deposit multiplier.
17.5 Factors That Determine the Money Supply
1) An increase in the nonborrowed monetary base, everything else held constant, will cause
A) the money supply to fall.
B) the money supply to rise.
C) no change in the money supply.
D) demand deposits to fall.
Answer: B
2) The money supply is ________ related to the nonborrowed monetary base, and ________
related to the level of borrowed reserves.
A) positively; negatively
B) negatively; not
C) positively; positively
D) negatively; negatively
Answer: C
3) The amount of borrowed reserves is ________ related to the discount rate, and is ________
related to the market interest rate.
A) negatively; negatively
B) negatively; positively
C) positively; negatively
D) positively; positively
Answer: B
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4) A ________ in market interest rates relative to the discount rate will cause discount borrowing
to ________.
A) fall; increase
B) rise; decrease
C) rise; increase
D) fall; remain unchanged
Answer: C
5) Everything else held constant, an increase in currency holdings will cause

A) the money supply to rise.
B) the money supply to remain constant.
C) the money supply to fall.
D) checkable deposits to rise.
Answer: C
6) Everything else held constant, a decrease in holdings of excess reserves will mean
A) a decrease in the money supply.
B) an increase in the money supply.
C) a decrease in checkable deposits.
D) an increase in discount loans.
Answer: B
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17.6 Overview of the Money Supply Process
1) In the model of the money supply process, the Federal Reserve's role in influencing the money
supply is represented by
A) both the required reserve ratio and the market interest rate.
B) the required reserve ratio, nonborrowed reserves, and borrowed reserves.
C) only borrowed reserves.
D) only nonborrowed reserves.
Answer: B
2) In the model of the money supply process, the depositor's role in influencing the money
supply is represented by
A) the currency holdings.
B) the currency holdings and excess reserve.
C) the currency holdings and borrowed reserve.
D) the market interest rate.
Answer: A
3) In the model of the money supply process, the bank's role in influencing the money supply
process is represented by
A) the excess reserve.
B) both the excess reserve and the market interest rate.
C) the currency ratio.
D) only borrowed reserves.
Answer: A
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17.7 The Money Multiplier
1) Models describing the determination of the money supply and the Fed's role in this process
normally focus on ________ rather than ________, since Fed actions have a more predictable
effect on the former.
A) reserves; the monetary base
B) reserves; high-powered money
C) the monetary base; high-powered money
D) the monetary base; reserves
Answer: D
2) The Fed can exert more precise control over ________ than it can over ________.
A) high-powered money; reserves
B) high-powered money; the monetary base
C) the monetary base; high-powered money
D) reserves; high-powered money
Answer: A
3) The ratio that relates the change in the money supply to a given change in the monetary base
is called the
A) money multiplier.
B) required reserve ratio.
C) deposit ratio.
D) discount rate.
Answer: A
4) An assumption in the model of the money supply process is that the desired levels of currency
and excess reserves
A) are given as constants.
B) grow proportionally with checkable deposits.
C) grow proportionally with high-powered money.
D) grow proportionally over time.
Answer: B
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5) The total amount of reserves in the banking system is equal to the ________ required reserves
and excess reserves.
A) sum of
B) difference between
C) product of
D) ratio between
Answer: A
6) The total amount of required reserves in the banking system is equal to the ________ the
required reserve ratio and checkable deposits.
A) sum of
B) difference between
C) product of
D) ratio between
Answer: C
7) Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of
reserves can support ________ of checkable deposits.
A) exactly one dollar
B) less than one dollar
C) more than one dollar
D) exactly twice the amount
Answer: C
8) An increase in the monetary base that goes into ________ is not multiplied, while an increase
that goes into ________ is multiplied.
A) deposits; currency
B) excess reserves; currency
C) currency; excess reserves
D) currency; deposits
Answer: D
30
9) An increase in the monetary base that goes into currency is ________, while an increase that
goes into deposits is ________.
A) multiplied; multiplied
B) not multiplied; multiplied
C) multiplied; not multiplied
D) not multiplied; not multiplied
Answer: B
10) If the Fed injects reserves into the banking system and they are held as excess reserves, then
the money supply
A) increases by only the initial increase in reserves.
B) increases by only one-half the initial increase in reserves.
C) increases by a multiple of the initial increase in reserves.
D) does not change.
Answer: D
11) If the Fed injects reserves into the banking system and they are held as excess reserves, then
the monetary base ________ and the money supply ________.
A) remains unchanged; remains unchanged
B) remains unchanged; increases
C) increases; increases
D) increases; remains unchanged
Answer: D
12) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is
________ billion.
A) $8,000
B) $1,200
C) $1,200.80
D) $8,400
Answer: B
31
deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
A) 2.5.
B) 1.67.
C) 2.0.
D) 0.601.
Answer: A
14) If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable
deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money
multiplier is
A) 2.5.
B) 1.7.
C) 7.3.
D) 0.73.
Answer: D
deposits are $800 billion, and excess reserves total $0.8 billion, then the currency-deposit ratio is
A) 0.25.
B) 0.50.
C) 0.40.
D) 0.05.
Answer: B
deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reserves-
checkable deposit ratio is
A) 0.001.
B) 0.10.
C) 0.01.
D) 0.05.
Answer: A
32
17) If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable
deposits are $1,600 billion, and excess reserves total $2,500 billion, then the excess reserves-
A) 1.56.
B) 0.48.
C) 0.72.
D) 0.56.
Answer: A
deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is
A) $480 billion.
B) $480.8 billion.
C) $80 billion.
D) $80.8 billion.
Answer: B
A) 2.5.
B) 1.67.
C) 2.3.
D) 0.651.
Answer: C
A) 2.5.
B) 2.72.
C) 2.3.
D) 0.551.
Answer: B
33
deposits are $1,000 billion, and excess reserves total $1 billion, then the money supply is
________ billion.
A) $10,000
B) $4,000
C) $1,400
D) $10,400
Answer: C
deposits are $1,000 billion, and excess reserves total $1 billion, then the M1 money multiplier is
A) 2.5.
B) 2.8.
C) 2.0.
D) 0.7.
Answer: B
deposits are $1,000 billion, and excess reserves total $1 billion, then the currency-deposit ratio is
A) 0.25.
B) 0.50.
C) 0.40.
D) 0.05.
Answer: C
deposits are $1,000 billion, and excess reserves total $1 billion, then the excess reserves-
A) 0.01.
B) 0.10.
C) 0.001.
D) 0.05.
Answer: C
34
deposits are $1,000 billion, and excess reserves total $1 billion, then the monetary base is
A) $400 billion.
B) $401 billion.
C) $500 billion.
D) $501 billion.
Answer: D
deposits are $1,000 billion, and excess reserves total $1 billion, then the M1 money multiplier is
A) 2.54.
B) 2.67.
C) 2.35.
D) 0.551.
Answer: A
27) If the required reserve ratio is one-third, currency in circulation is $300 billion, and
checkable deposits are $900 billion, then the money supply is ________ billion.
A) $2,700
B) $3,000
C) $1,200
D) $1,800
Answer: C
28) If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable
deposits are $900 billion, and there is no excess reserve, then the M1 money multiplier is
A) 2.5.
B) 2.8.
C) 2.0.
D) 0.67.
Answer: C
35
29) If the required reserve ratio is one-third, currency in circulation is $300 billion, and
checkable deposits are $900 billion, then the currency-deposit ratio is
A) 0.25.
B) 0.33.
C) 0.67.
D) 0.375.
Answer: B
30) If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable
deposits are $900 billion, and there is no excess reserve, then the monetary base is
A) $300 billion.
B) $600 billion.
C) $333 billion.
D) $667 billion.
Answer: B
31) Everything else held constant, an increase in the required reserve ratio on checkable deposits
will cause
A) the money supply to rise.
B) the money supply to remain constant.
C) the money supply to fall.
D) checkable deposits to rise.
Answer: C
32) Everything else held constant, a decrease in the required reserve ratio on checkable deposits
will mean
A) a decrease in the money supply.
B) an increase in the money supply.
C) a decrease in checkable deposits.
D) an increase in discount loans.
Answer: B
36
33) Everything else held constant, an increase in the required reserve ratio on checkable deposits
causes the M1 money multiplier to ________ and the money supply to ________.
A) decrease; increase
B) increase; increase
C) decrease; decrease
D) increase; decrease
Answer: C
34) Everything else held constant, a decrease in the required reserve ratio on checkable deposits
causes the M1 money multiplier to ________ and the money supply to ________.
Answer: B
35) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 40%,
and the excess reserve ratio = 0, an increase in the required reserve ratio to 15% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 2.55 to 2.8
B) decrease from 2.8 to 2.55
C) increase from 1.82 to 2
D) decrease from 2 to 1.82
Answer: B
and the excess reserve ratio = 0, a decrease in the required reserve ratio to 5% causes the M1
C) increase from 2 to 2.22
D) decrease from 2.22 to 2
Answer: A
37
37) Everything else held constant, if the sum of the required reserve ratio and the excess reserve
ratio is less than one, an increase in the currency-checkable deposit ratio will mean
A) an increase in currency in circulation and an increase in the money supply.
B) an increase in money supply but no change in reserves.
C) a decrease in the money supply.
D) an increase in currency in circulation but no change in the money supply.
Answer: C
ratio is less than one, a decrease in the currency-checkable deposit ratio will mean
A) an increase in currency in circulation and an increase in the money supply.
B) an increase in money supply.
C) a decrease in the money supply.
D) an increase in currency in circulation but no change in the money supply.
Answer: B
ratio is less than one, an increase in the currency-deposit ratio causes the M1 money multiplier to
________ and the money supply to ________.
B) increase; decrease
D) increase; increase
Answer: C
ratio is less than one, a decrease in the currency-deposit ratio causes the M1 money multiplier to
________ and the money supply to ________.
Answer: B
38
ratio is greater than one, an increase in the currency-deposit ratio causes the M1 money
multiplier to ________ and the money supply to ________.
Answer: B
and the excess reserve ratio = 0, an increase in the currency-deposit ratio to 50% causes the M1
C) increase from 2.33 to 2.8
D) decrease from 2.8 to 2.33
Answer: B
and the excess reserve ratio = 0, an decrease in the currency-deposit ratio to 30% causes the M1
Answer: A
44) Everything else held constant, a decrease in the excess reserves ratio causes the M1 money
Answer: B
39
45) Everything else held constant, an increase in the excess reserves ratio causes the M1 money
Answer: C
and the excess reserve ratio = 5%, a decrease in the excess reserve ratio to 0% causes the M1
Answer: A
and the excess reserve ratio = 5%, an increase in the excess reserve ratio to 10% causes the M1
Answer: B
and the excess reserve ratio = 156%, an increase in the excess reserve ratio to 200% causes the
M1 money multiplier to ________, everything else held constant.
Answer: B
40
and the excess reserve ratio = 156%, an increase in the required reserve ratio to 15% causes the
B) increase from 0.54 to 0.67
C) decrease from 0.73 to 0.71
Answer: C
and the excess reserve ratio = 156%, an increase in the currency-deposit ratio to 150% causes the
Answer: A
51) The excess reserves ratio is ________ related to expected deposit outflows, and is ________
related to the market interest rate.
Answer: C
52) The money supply is ________ related to expected deposit outflows, and is ________ related
to the market interest rate.
Answer: B
41
53) The money multiplier is
A) negatively related to high-powered money.
B) positively related to the excess reserves ratio.
C) negatively related to the required reserve ratio.
D) positively related to holdings of excess reserves.
Answer: C
54) From the start of the global financial crisis in 2007 to date, the currency ratio
A) increased sharply.
B) decreased sharply.
C) increased slightly.
D) decreased slightly.
Answer: D
Ques Status: Revised
55) From the start of the global financial crisis in 2007 to date, the excess reserve ratio
Answer: A
Ques Status: Revised
56) Explain the complete formula for the M1 money supply, and explain how changes in
required reserves, excess reserves, the currency ratio, the nonborrowed base, and borrowed
reserves affect the money supply.
Answer: The formula is M = × (MBn + BR). The formula indicates that the money
supply is the product of the multiplier times the base. Increases in any of the multiplier
components, required reserves, r; excess reserves, e; or the currency ratio, c; reduce the
multiplier and the money supply. Increases in the nonborrowed base and borrowed reserves both
increase the base and the money supply.
42
17.8 Web Appendix 1: The Fed's Balance Sheet and the Monetary Base
1) Which is the most important category of Fed assets?

A) securities
B) discount loans
C) gold and SDR certificates
D) cash items in the process of collection
Answer: A
2) The two most important categories of assets on the Fed's balance sheet are ________ and
________ because they earn interest.
A) discount loans; coins
B) securities; discount loans
C) gold; coins
D) cash items in the process of collection; SDR certificate accounts
Answer: B
3) The Fed's holdings of securities consist primarily of ________, but also in the past have
included ________.
A) Treasury securities; bankers' acceptances
B) municipal securities; bankers' acceptances
C) bankers' acceptances; Treasury securities
D) Treasury securities; municipal securities
Answer: A
4) The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest
rate on these loans, called the
A) federal funds rate.
B) prime rate.
C) discount rate.
D) interbank rate.
Answer: C
43
5) Special Drawing Rights (SDRs) are issued to governments by the ________ to settle
international debts and have replaced ________ in international transactions.
A) Federal Reserve System; gold
B) Federal Reserve System; dollars
C) International Monetary Fund; gold
D) International Monetary Fund; dollars
Answer: C
6) When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a
claim on the gold or SDRs, and in turn is credited with deposit balances at the ________.
A) Federal Reserve System; Fed
B) Federal Reserve System; IMF
C) International Monetary Fund; Fed
D) International Monetary Fund; IMF
Answer: A
7) Which of the following are NOT assets on the Fed's balance sheet?
A) discount loans
B) U.S. Treasury deposits
C) cash items in the process of collection
D) U.S. Treasury bills
Answer: B
8) Which of the following are NOT assets on the Fed's balance sheet?
A) securities
B) discount loans
C) cash items in the process of collection
D) deferred availability cash items
Answer: D
9) Which of the following are NOT liabilities on the Fed's balance sheet?
A) discount loans
B) bank deposits
C) deferred availability cash items
D) U.S. Treasury deposits
Answer: A
44
10) When the Fed purchases artwork to decorate the conference room at the Federal Reserve
Bank of Kansas City
A) reserves rise, but the monetary base falls.
B) reserves fall.
C) currency in circulation falls.
D) the monetary base rises.
Answer: D
11) A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other
asset is just an open market ________ of these assets, ________ the monetary base.
A) purchase; raising
B) sale; raising
C) purchase; lowering
D) sale; lowering
Answer: A
12) An increase in Treasury deposits at the Fed causes

A) the monetary base to increase.
B) the monetary base to decrease.
C) Fed assets to increase but has no effect on the monetary base.
D) Fed assets to decrease but has no effect on the monetary base.
Answer: B
13) An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.
A) reserves; monetary base
B) Fed liabilities; money multiplier
C) Fed assets; monetary base
D) Fed assets; money multiplier
Answer: A
14) U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury.
Thus an increase in U.S. Treasury deposits ________ the monetary base.
A) a liability; an asset; increases
B) a liability; an asset; decreases
C) an asset; a liability; increases
D) an asset; a liability; decreases
Answer: B
45
15) An increase in which of the following leads to a decline in the monetary base?
A) float
B) discount loans
C) foreign deposits at the Fed
D) SDRs
Answer: C
16) Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in
Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of
the conference room. Suppose further that, at a public auction, the bank sells the painting for
$19.95. This sale will cause ________ in the monetary base, everything else held constant.
A) an increase of $19.95
B) an increase of more than $19.95
C) a decrease of $19.95
D) a decrease of more than $19.95
Answer: C
17) Suppose the Bank of China permanently decreases its purchases of U.S. government bonds
and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant,
a open market ________ would be the appropriate monetary policy action for the Fed to take to
offset the expected ________ in the monetary base in the United States.
A) purchase; decrease
B) purchase; increase
C) sale; decrease
D) sale; increase
Answer: A
46
17.9 Web Appendix 2: The M2 Money Multiplier
1) The equation that represents M2 in the model of the money supply process is
A) M2 = C + D.
B) M2 = C + D + T - MMF.
C) M2 = C + D - T + MMF.
D) M2 = C + D + T + MMF.
Answer: D
2) In the model of the money supply process for M2, the relationship between checkable deposits
and the M2 money supply is represented by
A) D = × M2.
B) D = (1 + c + t + mm) × M2.
C) M2 = × D.
D) M2 = .
Answer: A
3) The M2 money supply is represented by

A) M2 = × MB.
B) M2 = × .
C) MB = × M2.
D) MB = × .
Answer: A
4) The M2 money multiplier is

A) negatively related to high-powered money.
B) positively related to the time deposit ratio.
C) positively related to the required reserve ratio.
D) positively related to the excess reserves ratio.
Answer: B
47
5) Everything else held constant, an increase in the currency ratio will mean ________ in the M2
money multiplier and ________ in the M2 money supply.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease
Answer: D
6) Everything else held constant, a decrease in the currency ratio will mean ________ in the M1
money multiplier and ________ in the M2 money multiplier.
Answer: A
7) Everything else held constant, an increase in the required reserve ratio will mean ________ in
the M2 money multiplier and ________ in the M2 money supply.
Answer: D
8) Everything else held constant, an increase in the required reserve ratio will result in ________
in M1 and ________ in M2.
Answer: D
48
9) Everything else held constant, an increase in the time deposit ratio will mean ________ in the
M2 money multiplier and ________ in the M2 money supply.
Answer: A
10) Everything else held constant, an increase in the time deposit ratio will result in ________ in
the M1 money multiplier and ________ in the M2 money multiplier.
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease
Answer: B
11) Everything else held constant, an increase in the money market fund ratio will mean
________ in the M2 money multiplier and ________ in the M2 money supply.
Answer: A
12) Everything else held constant, an increase in the money market fund ratio will result in
________ in the M1 money multiplier and ________ in the M2 money multiplier.
Answer: B
49
13) Everything else held constant, an increase in the excess reserve ratio will mean ________ in
the M2 money multiplier and ________ in the M2 money supply.
Answer: D
14) Everything else held constant, an increase in the excess reserve ratio will mean ________ in
the M1 money multiplier and ________ in the M2 money multiplier.
Answer: C
17.10 Web Appendix 3: Explaining the Behavior of the Currency Ratio
1) Factors causing an increase in currency holdings include

A) an increase in the interest rates paid on checkable deposits.
B) an increase in the cost of acquiring currency.
C) a decrease in bank panics.
D) an increase in illegal activity.
Answer: D
2) Part of the increase in currency holdings in the 1960s and 1970s can be attributed to
A) increases in income tax rates.
B) the switch from progressive to proportional income taxes.
C) the adoption of regressive taxes.
D) bracket creep due to inflation and progressive income taxes.
Answer: D
50
3) Everything else held constant, an increase in wealth will cause the holdings of checkable
deposits to the holdings of currency to ________ and the currency ratio will ________.
A) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: B
4) Everything else held constant, an increase in the interest rate paid on checkable deposits will
cause ________ in the amount of checkable deposits held relative to currency holdings and
________ in the currency ratio.
Answer: B
5) The increase in the availability of ATMs has caused the cost of acquiring currency to
________ which will cause the currency ratio to ________, everything else held constant.
A) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: C
6) The steepest increase in the currency ratio since 1892 occurred during
A) World War II.
B) the Great Depression.
C) the interwar years.
D) the past twenty years.
Answer: B
51
7) The factor accounting for the steepest rise in the currency ratio since 1892 is
A) taxes.
B) bank panics.
C) illegal activity.
D) an increase in wealth.
Answer: B
8) The increase in the currency ratio during World War II was due to
A) bank panics.
B) a drop in the rate of interest paid on checking deposits.
C) the spread of ATMs.
D) high taxes and illegal activities.
Answer: D
9) The upward trend in the currency-deposit ratio during 1994-2007 can be explained by
A) the increased holdings of U.S. currency by foreigners.
B) bank panics.
C) a drop in the rate of interest paid on checking deposits.
D) high taxes and illegal activities.
Answer: A
AACSB: Application of Knowledge
10) The declining trend in the currency-deposit ratio during 2007-2014 can be explained by
A) the increased holdings of U.S. currency by foreigners.
B) bank panics.
C) a drop in the rate of interest paid on checking deposits.
D) the increasing use of debit cards.
Answer: D
AACSB: Application of Knowledge
52
17.11 Web Appendix 4: The Great Depression Bank Panics, 1930–1933, and the Money Supply
1) During the bank panics of the Great Depression the currency ratio
Answer: A
2) During the bank panics of the Great Depression the excess reserve ratio
Answer: A
3) In the early 1930s, the currency-deposit ratio rose, as did the level of excess reserves. Money
supply analysis predicts that, everything else held constant, the money supply should have
A) risen.
B) fallen.
C) remain unchanged.
D) either risen, fallen, or remain unchanged.
Answer: B
4) The monetary base increased by 20% during the contraction of 1929-1933, but the money
supply fell by 25%. Explain why this occurred. How can the money supply fall when the base
increases?
Answer: The banking crisis caused the public to fear for the safety of their deposits, increasing
both the currency ratio and bank holdings of excess reserves in anticipation of deposit outflows.
Both of these changes reduce the money multiplier and the money supply. In this case, the fall in
the multiplier due to increases of currency and excess reserves more than offset the increase in
the base, causing the money supply to fall.
53

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Chapter 18 The Money Supply Process

17.1 Three Players in the Money Supply Process

3) The three players in the money supply process include

1) Both ________ and ________ are Federal Reserve assets.

2) The monetary liabilities of the Federal Reserve include

3) Both ________ and ________ are monetary liabilities of the Fed.

5) The monetary base consists of

7) Reserves are equal to the sum of

8) Total reserves are the sum of ________ and ________.

9) Excess reserves are equal to

10) Total Reserves minus vault cash equals

1) The monetary base minus currency in circulation equals

2) The monetary base minus reserves equals

3) High-powered money minus reserves equals

4) High-powered money minus currency in circulation equals

16) If the Fed decides to reduce bank reserves, it can

17.5 Factors That Determine the Money Supply

5) Everything else held constant, an increase in currency holdings will cause

1) Which is the most important category of Fed assets?

12) An increase in Treasury deposits at the Fed causes

3) The M2 money supply is represented by

4) The M2 money multiplier is

17.10 Web Appendix 3: Explaining the Behavior of the Currency Ratio

1) Factors causing an increase in currency holdings include

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1) Both and are Federal Reserve assets.

3) Both and are monetary liabilities of the Fed.

8) Total reserves are the sum of and .