Money and Banking
Final Practice quiz
Jenny Ellis, Fall 2002
The final will consist of 30 multiple choice questions and three problems. Two of the problems and approximately 1/2 of the test will cover new material (chapters 15-17). The remainder is comprehensive. I suggest you review past midterms and the homework sets. Remember also that your textbook website has a practice quiz for every chapter. Good luck!
1. When the Fed wants to decrease the level of reserves of the banking system, it can
A) buy government bonds from the general public.
B) sell government bonds to banks.
C) increase discount loans to banks.
D) do any of the above.
E) do only (a) and (b) of the above.
2. If a bank has excess reserves of $15,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of
A) $11,000. B) $21,000. C) $31,000. D) $41,000.
3. If the required reserve ratio is 20 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by
A) $100. B) $250. C) $500. D) $1,000.
4. High-powered money less reserves equals
A) reserves. B) currency in circulation.
C) the monetary base. D) the nonborrowed base.
5. 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; deposits B) deposits; currency
C) currency; deposits D) currency; currency
6. Because an increase in the monetary base will mean an increase in the level of currency in circulation,
A) the actual money multiplier will be smaller than the simple deposit multiplier.
B) a given change in the monetary base will lead to a smaller increase in checkable deposits than indicated by the simple deposit multiplier.
C) a given change in the monetary base will lead to a larger increase in checkable deposits than indicated by the simple deposit multiplier.
D) both (a) and (b) of the above will occur.
7. If the required reserve ratio is five percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money multiplier is approximately
A) 2.5. B) 2.72. C) 2.3. D) 0.551.
8. All else constant, a rise in market interest rates leads to
A) a rise in excess reserves and a rise in the money supply.
B) a rise in discount borrowing and a rise in the money supply.
C) a fall in excess reserves and a fall in the money supply.
D) a fall in discount borrowing and a rise in the money supply.
E) none of the above.
9. Factors that cause a decline in the money multiplier include:
A) an increase of the required reserve ratio.
B) an increase in the market interest rate.
C) a decline in expected deposit outflows.
D) only (a) and (b) of the above.
10. Factors that cause a decline in the money supply include:
A) a lowering of the required reserve ratio.
B) a decline in the discount rate.
C) an increase in expected deposit outflows.
D) only (b) and (c) of the above.
11. The Fed uses three policy tools to manipulate the money supply: open market operations, which affect the _____; changes in the discount rate, which affect the _____ by influencing the quantity of discount loans; and changes in reserve requirements, which affect the _____.
A) monetary base; monetary base; money multiplier
B) money multiplier; monetary base; monetary base
C) monetary base; money multiplier; monetary base
D) money multiplier; money multiplier; monetary base
12. The Federal Reserve will engage in a repurchase agreement it wants to _____ reserves _____ in the banking system.
A) increase; permanently B) increase; temporarily
C) decrease; temporarily D) decrease; permanently
13. The major loan extended to Continental Illinois in 1984 is an example of which type of discount loan?
A) Seasonal credit
B) Extended credit
C) Adjustment credit
D) Installment credit
14. Changes in the reserve requirement are an infrequently used monetary policy tool since
A) this tool is too blunt.
B) this tool is too weak.
C) banks find it costly to adjust to such changes.
D) both (a) and (c) of the above are true
15. In the market for reserves, a lower discount rate shifts the _____ curve to the _____ and causes the federal funds interest rate to fall.
A) demand; left
B) demand; right
C) supply; right
D) supply; left
16. _____ is the most important monetary policy tool because it is the primary determinant of changes in _____, the main source of fluctuations in the money supply.
A) Open market operations; reserves and the monetary base
B) Open market operations; the money multiplier
C) Changes in reserve requirements; reserves and the monetary base
D) Changes in reserve requirements; the money multiplier
Answers: B C C B C, D B B A C, A B B D C, A