ECON 3303 Money and Banking Exam 4 Spring MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 ECON 3303 Money and Banking Exam 4 Spring 2017 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The formula for the simple deposit multiplier can be expressed as A) R = 1 rr D B) rr = 1 R T C) R = 1 rr T D) D = 1 rr R 1) 2) When the Federal Reserve calls in a discount loan from a bank, the monetary base and reserves. A) decreases; remains unchanged B) remains unchanged; decrease C) decreases; decrease D) remains unchanged; increase 2) 3) The case for Federal Reserve independence does not include the idea that A) political pressure would impart an inflationary bias to monetary policy. B) a Federal Reserve under the control of Congress or the president might make the so-called political business cycle more pronounced. C) a politically insulated Fed would be more concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. D) policy is always performed better by an elite group such as the Fed. 3) 4) When the Federal Reserve sells a government bond to a bank, reserves in the banking system and the monetary base, everything else held constant. A) increase; decreases B) decrease; increases C) increase; increases D) decrease; decreases 4) 5) The excess reserves ratio is related to expected deposit outflows, and is related to the market interest rate. A) negatively; positively B) positively; negatively C) positively; positively D) negatively; negatively 5) 6) If a bank has excess reserves of $5,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has actual reserves of A) $11,000. B) $20,000. C) $21,000. D) $26,000. 6) 7) Goal independence is the ability of to set monetary policy. A) Congress; instruments B) Congress; goals C) the central bank; goals D) the central bank; instruments 7) 8) The amount of borrowed reserves is related to the discount rate, and is related to the market interest rate. A) negatively; negatively B) positively; positively C) positively; negatively D) negatively; positively 8) 9) If Treasury deposits at the Fed are predicted to fall, the manager of the trading desk at the New York Fed bank will likely conduct open market operations to reserves. A) defensive; drain B) dynamic; inject C) dynamic; drain D) defensive; inject 9) 1

2 10) The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in, the open market purchase has no effect on reserves; if the proceeds are kept as, reserves increase by the amount of the open market purchase. A) deposits; currency B) currency; deposits C) currency; currency D) deposits; deposits 10) 11) 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) purchase; extend B) sell; call in C) purchase; call in D) sell; extend 11) 12) The Federal Open Market Committee consists of the A) seven members of the Board of Governors and seven presidents of the regional Fed banks. B) five senior members of the seven-member Board of Governors. C) twelve regional Fed bank presidents and the chairman of the Board of Governors. D) seven members of the Board of Governors and five presidents of the regional Fed banks. 12) 13) Both and are monetary liabilities of the Fed. A) securities; reserves B) currency in circulation; loans to financial institutions C) currency in circulation; reserves D) securities; loans to financial institutions 13) 14) When banks borrow money from the Federal Reserve, these funds are called A) Treasury funds. B) federal loans. C) discount loans. D) federal funds. 14) 15) The sum of the Fedʹs monetary liabilities and the U.S. Treasuryʹs monetary liabilities is called A) bank reserves. B) the monetary base. C) the money supply. D) currency in circulation. 15) 16) 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) decrease; decreases B) remain unchanged; increases C) decrease; remains unchanged D) decrease; increases 16) 17) Assuming initially that rr = 10%, c = 40%, and e = 0, a decrease in rr to 5% causes the M1 money multiplier to, everything else held constant. A) decrease from 3.11 to 2.8 B) decrease from 2.22 to 2 C) increase from 2 to 2.22 D) increase from 2.8 to ) 18) 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) 10 percent of its excess reserves. B) its excess reserves. C) its total reserves. D) 10 times its excess reserves. 18) 19) The Federal Open Market Committee usually meets times a year. A) four B) six C) eight D) twelve 19) 2

3 20) The formula for the M1 money multiplier is A) M = (1 + c)/(rr + e + c). B) M = 1/(rr + e + c). C) m = [1/(rr + e + c)] MB. D) m = (1 + c)/(rr + e + c). 20) 21) The two types of open market operations are A) active and passive. B) offensive and defensive. C) dynamic and reactionary. D) dynamic and defensive. 21) 22) If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the currency ratio is A) B) C) D) ) 23) The Federal Reserve Bank of plays a special role in the Federal Reserve System because it houses the open market desk. A) Boston B) Chicago C) San Francisco D) New York 23) 24) A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, the bankʹs excess reserves will be A) $1,000. B) $8,000. C) $9,000. D) $17, ) 25) 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. 25) 26) A decrease in leads to an equal in the monetary base in the short run. A) Treasury deposits at the Fed; decrease B) discount loans; increase C) float; increase D) float; decrease 26) 27) Open market purchases raise the thereby raising the. A) monetary base; money multiplier B) monetary base; money supply C) money multiplier; money supply D) money multiplier; monetary base 27) 28) Banks subject to reserve requirements set by the Federal Reserve System include A) only nationally chartered banks. B) all banks whether or not they are members of the Federal Reserve System. C) only banks with assets less than $100 million. D) only banks with assets less than $500 million. 28) 29) When the Fed buys $100 worth of bonds from First National Bank, reserves in the banking system A) increase by more than $100. B) increase by $100. C) decrease by more than $100. D) decrease by $ ) 30) Critics of the current system of Fed independence contend that A) the Board of Governors is held responsible for policy missteps. B) the president has too much control over monetary policy on a day-to-day basis. C) voters have too much say about monetary policy. D) the current system is undemocratic. 30) 3

4 31) In the market for reserves, when the federal funds interest rate is below the discount rate, the supply curve of reserves is A) negatively sloped. B) vertical. C) positively sloped. D) horizontal. 31) 32) The percentage of deposits that banks must hold in reserve is the A) total reserve ratio. B) required reserve ratio. C) excess reserve ratio. D) currency ratio. 32) 33) 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 A) sold $200 in government bonds. B) sold $500 in government bonds. C) purchased $200 in government bonds. D) purchased $500 in government bonds. 33) 34) Which of the following is NOT an entity of the Federal Reserve System? A) The Comptroller of the Currency B) Federal Reserve Banks C) The Board of Governors D) The Federal Open Market Committee 34) 35) In the market for reserves, a lower interest rate paid on excess reserves A) decreases the supply of reserves. B) decreases the effective floor for the federal funds rate. C) increases the supply of reserves. D) increases the effective floor for the federal funds rate. 35) 36) Prior to 1980, member banks left the Federal Reserve System due to A) a desire to avoid credit controls. B) a desire to avoid interest rate regulations. C) the high cost of required reserves. D) the high cost of discount loans. 36) 37) Reserves are equal to the sum of A) required reserves and excess reserves. B) vault cash reserves and total reserves. C) required reserves and vault cash reserves. D) excess reserves and vault cash reserves. 37) 38) The Federal Open Market Committeeʹs ʺbalance of risksʺ is an assessment of whether, in the future, its primary concern will be A) lower inflation or a stronger economy. B) higher exchange rates or higher unemployment. C) higher inflation or a weaker economy. D) higher inflation or a stronger economy. 38) 39) Everything else held constant, in the market for reserves, when the demand for federal funds intersects the reserve supply curve on the vertical section, increasing the discount rate A) increases the federal funds rate. B) has no effect on the federal funds rate. C) has an indeterminate effect on the federal funds rate. D) lowers the federal funds rate. 39) 40) If the required reserve ratio is 15 percent, the simple deposit multiplier is A) B) C) D) ) 4

5 41) High-powered money minus reserves equals A) reserves. B) the nonborrowed base. C) the monetary base. D) currency in circulation. 41) 42) When bad storms slow the check-clearing process, float tends to causing the Fed to initiate defensive open market. A) decrease; purchases B) decrease; sales C) increase; sales D) increase; purchases 42) 43) 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) decrease; more B) decrease; less C) increase; less D) increase; more 43) 44) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed A) sought less control over banks in the 1980s. B) was willing to take on powerful groups that may threaten its autonomy. C) was so secretive about the conduct of future monetary policy. D) was supportive of congressional attempts to limit the central bankʹs autonomy. 44) 45) Everything else held constant, an increase in the currency ratio causes the M1 money multiplier to and the money supply to. A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease 45) 46) 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 faces a required reserve ratio of percent. A) ten B) twenty C) eighty D) ninety 46) 47) If a member of the nonbank public sells a government bond to the Federal Reserve in exchange for currency, the monetary base will, but. A) rise; currency in circulation will remain unchanged B) rise; reserves will remain unchanged C) remain unchanged; reserves will fall D) remain unchanged; reserves will rise 47) 48) Total Reserves minus vault cash equals A) required reserves. B) excess reserves. C) currency in circulation. D) bank deposits with the Fed. 48) 49) What makes the Federal Reserve so unique compared to other central banks around the world is its A) regulatory functions. B) monetary policy functions. C) decentralized structure. D) centralized structure. 49) 50) If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is A) B) C) D) ) 5

6 Answer Key Testname: ECON3303_EXAM4_SPRING2017 1) D 2) C 3) D 4) D 5) B 6) C 7) C 8) D 9) A 10) B 11) A 12) D 13) C 14) C 15) B 16) C 17) D 18) B 19) C 20) D 21) D 22) C 23) D 24) C 25) B 26) D 27) B 28) B 29) B 30) D 31) B 32) B 33) A 34) A 35) B 36) C 37) A 38) C 39) B 40) B 41) D 42) C 43) D 44) C 45) C 46) A 47) B 48) D 49) C 50) D 6