Monetary Policy Practice Problems Key
1. If the price index rises from 100 to 130, the value of the dollar will fall by about:
A)
15 percent. B) 19 percent. C) 23 percent. D) 30 percent.
Answer: C
2. The Federal Open Market Committee (FOMC):
A)
provides advice on banking policy to the FED.
B)
monitors regulatory banking laws for member banks.
C)
sets policy on the sale and purchase of government bonds by the FED.
D)
follows the actions and operations of financial markets to keep them open and competitive.
Answer: C
3. A commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve
ratio is 20%. The excess reserves of the bank are:
A)
$10,000. B) $20,000. C) $40,000. D) $50,000.
Answer: A
4. A commercial bank has checkable-deposit liabilities of $50,000 and a reserve ratio of 20 percent. What is the
amount of required reserves?
A)
$10,000 B) $50,000 C) $250,000 D) $1 million
Answer: A
5. A single commercial bank must meet a 25 percent reserve requirement. If it initially has no excess reserves and
then $2,000 in cash is deposited in the bank, it can increase its loans by a maximum of:
A)
$2,000. B) $1,500. C) $1,250. D) $1,000.
Answer: B
6. If the reserve ratio is 25 percent, what level of excess reserves does a bank acquire when a business deposits a
$12,000 check drawn on another bank?
A)
$3,000 B) $6,000 C) $9,000 D) $12,000
Answer: C
7. Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in
excess reserves. The maximum amount of money which the banking system could create is:
A)
$110 million. B) $330 million. C) $660 million. D) $1,353 million.
Answer: C
8. If the required reserve ratio were 15 percent, the value of the monetary multiplier would be:
A)
5.50. B) 6.67. C) 7.32. D) 8.54.
Answer: B
9. The tools of monetary policy for altering the reserves of commercial banks are the:
A)
tax rate and level of government spending.
B)
consumer price index and unemployment rate.
C)
public debt, budget surplus, and budget deficit.
D)
discount rate, reserve ratio, and open-market operations.
Answer: D
10. The Board of Governors of the Federal Reserve System can increase commercial bank reserves by:
A)
increasing the discount rate.
B)
increasing the reserve ratio.
C)
decreasing the prime interest rate.
D)
buying government securities in the open market.
Answer: D
11. Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government
securities from the public, then the money supply will immediately:
A)
increase by $80 million, and the maximum money-lending potential of the commercial banking
system will increase by $80 million.
B)
increase by $80 million, but the maximum money-lending potential of the commercial banking
system will decrease by $80 million.
C)
increase by $80 million, and the maximum money-lending potential of the commercial banking
system will increase by $400 million.
D)
decrease, because the securities are an asset to the commercial banks and a liability to the
Federal Reserve.
Answer: C
12. Assume the required reserve ratio is 25 percent. If the Federal Reserve sells $120 million in government
securities to the public, the money supply will immediately:
A)
decrease by $120 million and the maximum money-lending potential of the commercial banking
system will decrease by $120 million.
B)
decrease by $120 million and the maximum money-lending potential of the commercial banking
system will decrease by $480 million.
C)
increase by $120 million and the maximum money-lending potential of the commercial banking
system will increase by $480 million.
D)
increase because the securities are an asset to the commercial banks and a liability to the Federal
Reserve.
Answer: B
13. Assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks
buy $3 billion in government securities from commercial banks we can say that, as a result of this transaction, the
lending ability of the commercial banking system will:
A)
decrease by $9 billion.
C)
increase by $12 billion.
B)
increase by $9 billion.
D)
increase by $15 billion.
Answer: C
14. The most frequently used monetary device for achieving price stability is:
A)
open-market operations. B) the discount rate. C) the reserve ratio. D) the prime interest
rate.
Answer: A
15. If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will:
A)
increase the excess reserves of member banks and thus increase the money supply.
B)
increase the excess reserves of member banks and thus decrease the money supply.
C)
decrease the excess reserves of member banks and thus decrease the money supply.
D)
decrease
Answer: C
16. When the Fed wants to raise the Federal funds rate, it:
A)
sells bonds to banks and the public.
B)
buys bonds from banks and the public.
D)
decreases the discount rate.
D)
decreases the reserve ratio.
Answer: A
17. Suppose the Federal Reserve buys $500 billion worth of government securities from the public. If
the required reserve ratio is 25 percent, the maximum increase in the money supply is
A. $1,600 billion
B. $1,800 billion
C. $2,000 billion
D. $2,200 billion
E. $2,400 billion
Answer: C
18. Which of the following policy combinations is most likely to cure inflation?
Open-Market Operations
Taxes
Government Spending
A. Buy Securities
Increase
Decrease
B. Buy Securities
Decrease
Increase
C. Buy Securities
Decrease
Decrease
D. Sell Securities
Decrease
Decrease
E. Sell Securities
Increase
Decrease
Answer: E
19. Suppose that all banks keep only the minimum reserves required by law. The legal reserve
requirement is 20 percent. If Mike deposits the $200 he received as a graduation gift into his checking
account, the maximum increase in the total money supply will be
A. $100
B. $200
C. $800
D. $1,000
E. $1,100
Answer: C
20. If the reserve requirement is 10 percent, the existence of $500 worth of excess reserves in the
banking system can lead to a maximum expansion of the money supply equal to
A. $500
B. $1000
C. $3500
D. $4000
E. $5000
Answer: E