14-1. The use of money and credit controls to achieve
macroeconomic goals is:
Fiscal policy.
→ Monetary policy.
Supply-side policy.
Eclectic policy.
14-2. Which of the following is responsible for buying
and selling of government securities to influence
reserves in the banking system?
Twelve Federal Reserve banks
The Executive Branch of government
→ The Federal Open Market Committee
The Board of Governors of the Federal Reserve
14-3. Which of the following represents the money
multiplier?
Required reserve ratio × total deposits
Total reserves - required reserves
(Total reserves - required reserves) × multiplier
→ 1 ÷ (required reserve ratio)
14-4. Suppose the banks in the Federal Reserve
System have $200 billion in transactions accounts, the
required reserve ratio is 0.15, and there are no excess
reserves in the system. If the required reserve ratio is
changed to 0.10, then the amount of excess reserves
would be:
Negative $10 billion.
Negative $20 billion.
→ Positive $10 billion.
Positive $20 billion.
14-5. Suppose all of the banks in the Federal Reserve
System have $100 billion in transactions accounts, the
required reserve ratio is 0.25, and there are no excess
reserves in the system. If the required reserve ratio is
changed to 0.20, then the total lending capacity of the
system is increased by:
→ $25 billion.
$20 billion.
$10 billion.
$750 million.
14-6. Changing the reserve requirement is:
→ A powerful tool which can cause abrupt changes
in the money supply.
The most often used tool on the part of the Fed.
A tool which has little impact on the money
supply.
Effective in changing excess reserves but not the
money supply.
14-7. The federal funds rate is the interest rate
charged when:
→ One bank lends to another bank.
The Fed lends to banks.
The Fed lends to individuals.
Individual banks lend to the Fed.
14-8. The rate of interest charged by Federal Reserve
banks for lending reserves to member banks is the:
Federal funds rate.
Prime rate.
→ Discount rate.
Commercial paper rate.
14-9. When a bank borrows money from the Federal
Reserve:
This is a sign that the bank is insolvent.
Demand deposits increase for the bank.
→ Reserves increase for the bank.
The ability to lend decreases for the bank.
14-10. Which of the following is the tool used most
frequently by the Fed?
The reserve requirement
→ Open market operations
The discount rate
The fed funds rate
14-2. The FOMC plays the very important role of
setting short term interest rates and setting the level
of reserves held by private banks.
14-1. Monetary policy allows the Federal Reserve to
stabilize the macroeconomy somewhat.
14-4. If the reserve requirement is changed to 10
percent, the banking system will now only need $20
billion in reserves versus the $30 billion needed with
a .15 required reserve ratio, so banks will have excess
reserves of $10 billion.
14-3. The money multiplier tells us how much money
creation will result from each dollar of deposits.
14-6. Changing the required reserve ratio changes the
excess reserves immediately and can result in banks
quickly trying to achieve the new required level of
reserves which will impact the overall economy.
14-5. If the reserve requirement is changed to 20
percent, the banking system will now only need $20
billion in reserves versus the $25 billion needed with
a 0.25 required reserve ratio, so banks will have
excess reserves of $5 billion; this will allow for new
loans of $25 billion, since the money multiplier is 5.
14-8. Traditionally, the Fed will lend to member banks
at an interest rate known as the discount rate, which
is an overnight loan allowing member banks to meet
the minimum level of required reserves.
14-7. When a bank is deficient in reserves, it can go to
the federal funds market to borrow what it needs
from another bank.
14-10. The open market operations are conducted
daily and do not have as large undesirable effects as
altering the reserve requirement; as such, they are the
Fed's favored tool.
14-9. When a bank borrows money from the Fed, the
bank's balance sheet has an equal increase in
liabilities which includes loans from the Fed and
assets which includes the additional reserves.
14-11. When the Fed wishes to increase the reserves
of the member banks, it:
→ Buys securities.
Raises the reserve requirement.
Raises the discount rate.
Sells securities.
14-12. Tony buys a bond in the amount of $500 with a
promised interest rate of 15 percent. If the market
interest rate decreases to 5 percent, Tony can sell his
bond for up to:
$500.
$250.
→ $1,500.
$1,250.
14-13. The Fed can decrease the federal funds rate by:
Selling bonds.
→ Buying bonds which causes market interest rates
to fall.
Simply announcing a lower rate since the Fed has
direct control of this interest rate.
Changing the money multiplier.
14-14. If the Fed wishes to increase the money supply
it could:
→ Lower the discount rate.
Raise the minimum reserve ratio.
Sell securities on the open market.
Issue more bonds.
14-15. In order to increase the money supply the Fed
can:
Raise the reserve requirement, increase the
discount rate, or sell bonds.
Raise the reserve requirement, increase the
discount rate, or buy bonds.
Lower the reserve requirement, increase the
discount rate, or buy bonds.
→ Lower the reserve requirement, decrease the
discount rate, or buy bonds.
14-16. If the Fed buys $150 billion of U.S. bonds in the
open market and the reserve requirement is 5
percent, M1 will eventually:
→ Increase by $3,000 billion.
Decrease by $3,000 billion.
Increase by $300 billion.
Decrease by $300 billion.
14-17. Suppose the required reserve ratio is 20
percent, and the Fed buys $1 million worth of bonds
from the public. If the public deposits this amount into
transactions accounts, the money supply will:
Increase directly by $1 million and additional
lending capacity of $3 million will be created for the
banking system.
→ Increase directly by $1 million and additional
lending capacity of $4 million will be created for the
banking system.
Not to be affected directly, but additional lending
capacity of $5 million will be created for the banking
system.
Increase directly by $5 billion.
14-12. The market interest rate will be the yield or
return that the purchaser of the bond can expect to
earn. Using the yield formula and solving for the
current price, one can determine the highest price an
investor would be willing to pay for this existing bond.
Since the buyer will earn a 5 percent return or yield
and the annual interest payment will be $75, the bond
will sell for up to $1500 (75/0.05).
14-11. When the Fed buys securities, reserves are
injected directly into banks in exchange for their
bonds, making more loans possible.
14-14. By lowering the discount rate, the Fed
encourages banks to borrow more from the Fed,
thereby increasing reserves and lending capacity.
14-13. Bond prices and yields move in opposite
directions. If the Fed buys bonds, bond prices rise and
yields (interest rates) fall.
14-16. The money multiplier is equal to 1 ÷ required
reserve ratio, which allows a $150 billion injection to
support $3,000 billion in additional deposits, which
are included in M1.
14-15. The traditional tools of the Fed include
changing the discount rate, the reserve requirement,
and open market operations, with the last being the
most popular.
14-17. The money multiplier is equal to 1 ÷ required
reserve ratio, which allows a $1 million injection to
support $5 million in additional deposits of which $4
million will be additional loans.