ECO 372T Wk 5 – Practice: Knowledge Check

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government

Multiple Choice

• budget deficit, the purchase of securities in the open market, a higher discount rate, and higher reserve requirements.
• budget deficit, the sale of securities in the open market, a higher discount rate, and lower reserve requirements.
• budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
• budget surplus, the purchase of securities in the open market, a lower discount rate, and lower reserve requirements.

Lowering the discount rate has the effect of

Multiple Choice

• turning required into excess reserves.
• turning excess into required reserves.
• making it less expensive for commercial banks to borrow from central banks.
• forcing commercial banks to call in outstanding loans from their best customers.

Assets     Liabilities and Net Worth

Reserves  $51  Checkable Deposits $140

Loans      109  Stock Shares   130

Securities       100

Property  10

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The commercial banking system has excess reserves of

Multiple Choice

• $9 billion.
• $7 billion.
• $6.1 billion.
• $5 billion.

Which of the following statements about quantitative easing is most accurate?

Multiple Choice

• Quantitative easing refers to the Fed’s use of open-market operations to buy trillions of dollars’ worth of medium- and longer-maturity financial assets.
• Quantitative easing has become one of the permanently recognized tools of monetary policy.
• Quantitative easing significantly lowered interest rates in the aftermath of the financial crisis.
• Quantitative easing is the new official name for open-market operations.

The possible asymmetry of monetary policy is the central idea of the

Multiple Choice

• invisible hand concept.
• ratchet analogy.
• pushing-on-a-string analogy.
• bandwagon effect.

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out

Multiple Choice

• $1 million.
• $1.2 million.
• $200,000.
• $800,000.

Reserves  $100

Checkable Deposits 1,000

Loans (to customers)      300

Property  400

Securities (owned)  300

Stock Shares   100

Refer to the accompanying table of information for the Moolah Bank. Assume that the listed amounts constitute this bank’s complete set of accounts. Moolah’s

Multiple Choice

• assets are $1,100.
• liabilities are $1,100.
• net worth is $300.
• profit is $1,000.

When a check is drawn and cleared, the

Multiple Choice

• reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction.
• bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
• bank receiving the check loses reserves and deposits equal to the amount of the check.
• bank against which the check is cleared acquires reserves and deposits equal to the amount of the check.

The Fed’s normalization plan for monetary policy included

Multiple Choice

• raising the federal funds target rate.
• raising the interest rate paid on excess reserves.
• using repos to insure adequate excess reserves in the banking system.
• raising the reserve ratio on deposits to soak up the excess liquidity in the system.

Assets     Liabilities and Net Worth

Reserves  $20  Checkable Deposits $100

Loans      25    Stock Shares   50

Securities       15

Property  90

Refer to the accompanying balance sheet for the First National Bank of Bunco. All figures are in millions. If this bank has excess reserves of $6 million, the legal reserve ratio must be

Multiple Choice

• 10 percent.
• 12 percent.
• 14 percent.
• 20 percent.

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of

Multiple Choice

• the MPS.
• its actual reserves.
• its excess reserves.
• the reserve ratio.

The basic purpose of imposing legal reserve requirements on commercial banks is to

Multiple Choice

• assure the liquidity of commercial banks.
• provide a device through which the credit-creating activities of banks can be controlled.
• provide a proper ratio between earning and no-earning bank assets.
• provide the central banks with necessary working capital.

Which of the following would not be a consequence of negative interest rates?

Multiple Choice

• People’s deposits in banks would have shrinking balances over time.
• Reduced bank reserves that could cause a contraction in the economy.
• People would want to put more money in banks.
• People would rather hold cash than bank deposits

Banks’ borrowed funds come mostly from

Multiple Choice

• buying bonds and loans.
• buying stocks and selling Treasury bonds.
• issuing stocks and buying Treasury bonds.
• issuing bonds and accepting deposits.

Which of the following would reduce the money supply?

Multiple Choice

• Commercial banks use excess reserves to buy government bonds from the public.
• Commercial banks loan out excess reserves.
• Commercial banks sell government bonds to the public.
• A check clears from Bank A to Bank B.

If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?

Multiple Choice

• recall Federal Reserve Notes from circulation
• raise the legal reserve requirement
• buy bonds in the open market
• raise the discount rate

Monetary policy is thought to be

Multiple Choice

• equally effective in moving the economy out of a depression as in controlling demand-pull inflation.
• more effective in moving the economy out of a depression than in controlling demand-pull inflation.
• more effective in controlling demand-pull inflation than in moving the economy out of a recession.
• only effective in moving the economy out of a depression

A decrease in the interest rate will cause a(n)

Multiple Choice

• increase in the transactions demand for money.
• decrease in the transactions demand for money.
• decrease in the amount of money held as an asset.
• increase in the amount of money held as an asset.

Type of Deposit      Reserve Requirement

Checkable Deposits

$7.8 – 48.3 Million 3%

Over $48.3 Million 10

Noncheckable personal savings and time deposits 0

Refer to the accompanying table. If a bank has $60 million in savings deposits and $40 million in checkable deposits, then its required reserves are

Multiple Choice

• $30 million.
• $3 million.
• $1.8 million.
• $1.2 million.

Assets     Liabilities + Net Worth

Reserves  $60  Checkable Deposits $150

Loans      100  Stock Shares   135

Securities       25

Property  100

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. The maximum amount by which the commercial banking system can expand the supply of money by lending is

Multiple Choice

• $250 billion.
• $350 billion.
• $450 billion.
• $600 billion.