Chapter 15

ECN 211: Fall Semester, 2008 Reviewed October 25, 2008 Review Questions Chapter 15 __B__ 1. Which of the following would not appear on the asset side of a commercial bank balance sheet? a. Reserves. b. Checkable deposits. c. Loans. d. Government bonds. ___B_ 2. Assume a bank has total deposits of $100,000 and $80,000 is available to make new loans after the legal reserve requirement has been met. The legal reserve requirement is: : a. $20,000. b. 20 percent. c. 0.2 percent. d. 1 percent. __C__ 3. The higher is the legal reserve requirement: a. The greater is the value of the money multiplier. b. The greater would be the amount of excess reserves in the banking system.. c. The smaller would be the ability of the banking system to create money. d. The smaller would be the amount of required reserves held by the banking system. e. __B__ 4. The quantity of reserves held by a bank in addition to the legally required amounts is known as: a. actual reserves. b. excess reserves. c. the required reserve ratio. d. the money multiplier. e. the monetary base. __A__ 5. Assume that First National Bank has checkable deposits of $20 million. If the required reserve ratio is 20 percent and the bank is fully loaned up, the bank will keep what amount of excess reserves? a. $0 million. b. $4 million. c. $10 million. d. $16 million. e. $20 million. _A___ 6. If your bank receives a checkable deposit of $20,000, and the banking system makes loans based on this initial deposit totaling $180,000 (the maximum possible), then the required reserve ratio must be: a. 10% b. 20% c. 25% d. 40% e. 90% __A__ 7. The legally required reserve ratio is:` a. the amount of reserves the Fed requires a bank to hold, based on a percentage of its deposits. b. the interest rate that the Fed charges banks who borrow from it. c. the interest rate on loans made by banks to other banks. d. the maximum percentage of the cost of a stock that can be borrowed from a bank, with the stock offered as collateral. e. an appeal by the Fed to banks, asking for voluntary compliance with the Fed's wishes. Exhibit 15-2 Balance Sheet of Springfield National Bank Assets Liabilities Total reserves $500 Demand deposits $1,000 Loans $500 __B__ 8. In Exhibit 15-2, if Springfield National finds that it has excess reserves of $300, then the required reserve ratio must be: a. 10% b. 20% c. 25% d. 30% e. 80% __B__ 9. First National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, this one bank could make new loans of as much as: a. $100. b. $900. c. $1,000. d. $90,000. __D__ 10. When new checkable deposits are created through loans that are spent and then redeposited in other banks, then a. the money supply contracts. b. excess reserves are destroyed. c. the money supply remains the same. d. the money supply expands. e. the required reserve ratio declines __A__ 11. If banks are fully loaned up (that is, they have no excess reserves) and the legal reserve requirement is raised, the amount that banks can lend is: a. reduced and the money supply contracts. b. reduced and the money supply expands. c. reduced and there is no change in the money supply. d. increased and the money supply expands. e. increased and the money supply contracts. __B__ 12. Assume a banking system is subject to a 10 percent required-reserve ratio. If there is an initial increase in excess reserves of $90,000 and all possible loans are made, the money supply: a. increases $90,000. b. increases $900,000. c. increases $990,000. d. decreases $90,000. _C_ 13. In a banking system subject to a 25 percent required-reserve, a $1,000 open-market purchase by the Fed could cause the money supply to increase by as much as: a. $250 b. $1000 c. $4000 d. $25,000 __C__ 14. In a banking system with no excess reserves and a 20 percent required-reserve ratio, a $1,000 open-market sale by the Fed would cause the money supply to: a. increase by $200. b. decrease by $200. c. decrease by $5,000. d. increase by $5,000. __A__ 15. If the required reserve ratio (the legal reserve requirement) decreases, the: a. money multiplier increases. b. money multiplier decreases. c. amount of excess reserves the bank has decreases. d. money multiplier stays the same. e. amount of excess reserves stays the same. __A__ 16. The maximum value of the money multiplier may be calculated as: a. The reciprocal of the legal reserve requirement. b. The ratio of excess reserves to loans c. The ratio of the amount of required reserves to the amount of excess reserves. d. 1 ? the legal reserve requirement. e. 1 + the legal reserve requirement. __D__ 17. If banks do not choose to loan out all of their excess reserves, the value of the money multiplier: a. increases. b. stays the same. c. goes to zero. d. decreases. e. increases, then decreases. __A__ 18. A reduction in the legal reserve requirement: a. increases excess reserves and raises the value of the money multiplier. b. reduces excess reserves and increases the value of the money multiplier. c. reduces excess reserves and reduces the value of the money multiplier d. increases excess reserves and reduces the value of the money multiplier. e. has no impact on either excess reserves or the value of the money multiplier. __C__ 19. Which of the following directs the buying and selling of U.S. government securities? a. Board of Governors. b. Federal Reserve Banks. c. Federal Open Market Committee. d. Federal Advisory Council. e. Member banks. __D__ 20. Which of the following policy actions by the Fed would most likely cause the money supply to decrease? a. A tax increase. b. A decrease in required-reserve ratios. c. A decrease in the discount rate. d. An open-market sale of government securities. __C__ 21. Which of the following is an appropriate monetary policy if the Fed wants to increase the money supply? a. An increase in the required reserve ratio. b. An increase in the discount rate. c. Purchases of bonds in open market operations. d. Higher taxes on interest income. __B__ 22. When the Fed conducts open market operations, it buys and sells: a. Stocks traded on the New York Stock Exchange b. government bonds c. foreign currency d. gold. __D__ 23. When the Fed wishes to reduce the economy's money supply, it: a. lowers the discount rate. b. lowers the required reserve ratio. c. reduces the margin requirement. d. sells some of its government bonds. e. prints more money. __A__ 24. Which of the following constitutes a consistent monetary policy (that is, a set of policies that would work in the same direction)? a. Raise the legal reserve requirement and sell bonds. c. Raise the discount rate and lower the legal reserve requirement. b. Buy bonds and raise the discount rate. d. Sell bonds and lower the legal reserve requirement. __A__ 25. Which of the following would reduce the value of the money multiplier? a. More leakages into cash at each round of re-lending in the multiplier process. c. A reduction in the legal reserve requirement. b. Banks choose to loan out more of their excess reserves. d. A rise in the discount rate. Review Questions Chapter 15 MULTIPLE CHOICE 1. ANS: B 2. ANS: B 3. ANS: C 4. ANS: B 5. ANS: A 6. ANS: A 7. ANS: A 8. ANS: B 9. ANS: B 10. ANS: D 11. ANS: A 12. ANS: B 13. ANS: C 14. ANS: C 15. ANS: A 16. ANS: A 17. ANS: D 18. ANS: A 19. ANS: C 20. ANS: D 21. ANS: C 22. ANS: B 23. ANS: D 24. ANS: A 25. ANS: A