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Chapter 15: The Money Supply Process and the Money Multipliers

True/False
1) The monetary base is composed of the assets of the Fed.
2) The monetary base is composed of reserves and currency.
3) The monetary base is composed of gold and reserves.
4) Reserves are a liability of the Fed.
5) Federal Reserve notes are an asset of the Fed.
6) Federal Reserve notes are liabilities of the Fed but assets of the banking system.
7) Reserves are assets for banks and part of high-powered money.
8) Bonds are assets for the Fed and part of high-powered money.
9) Gold is part of high-powered money.
10) The money supply is comprised of deposits and currency.
11) Transaction deposits are part of the money supply but not part of the monetary
base.
12) An increase in the monetary base causes a larger increase in the money supply.
14) When Joan withdraws $100 from a checkable account, the monetary base rises
by $100.
15) When a bank sells a bond and holds the proceeds as reserves, the money supply
increases.
16) When a bank makes a loan, the money supply increases.
17) The simple deposit multiplier is always greater than or equal to one.
18) When banks hold more excess reserves, the process of multiple deposit creation
is less powerful.
20) When the Fed wants to lower interest rates, it buys bonds.
21) When the Fed wants to increase the money supply, it sells bonds.
22) When the Fed makes a loan, the monetary base increases but the money supply
does not.
23) The deposit multiplier is inversely related to the reserve requirement.
24) The simple deposit multiplier assumes that all loaned funds eventually become
deposits.

31) During a financial panic, banks hold more reserves and the money supply falls,
ceteris paribus.
33) The money multiplier m1 is always less than or equal to 1/rr.
36) M1 is always greater than or equal to M2.
53) If the Fed wants to increase the money supply, it can lower the reserve
requirement.
(T, easy, section 4)
61) During a financial panic, the money supply can fall since banks hold more
excess reserves.
Multiple Choice
1) Which of the following are NOT liabilities of the Fed?
a) Federal Reserve notes
b) bank reserves
c) discount loans
d) They are all liabilities of the Fed.
2) Which of the following is an asset of the Fed?
a) Federal Reserve notes
b) bank reserves
c) gold
d) They are all liabilities of the Fed.
3) Which of the following is a liability of the Fed?
a) bonds
b) bank reserves
c) discount loans
d) They are all liabilities of the Fed.
4) Which of the following is part of the monetary base?
a) Federal Reserve notes
b) bonds
c) discount loans
d) none of the above
9) If the Fed sells $50 in securities and the reserve requirement is 25%, according to
the simple formula for the money multiplier, the money supply
a) falls by $50.
b) falls by $200.
c) rises by $50.

d) rises by $200.
10) If the Fed sells $50 in securities and the reserve requirement is 25%, according
to the simple formula for the money multiplier, the monetary base
a) falls by $50.
b) falls by $200.
c) rises by $50.
d) rises by $200.
11) If the Fed buys $100 in securities and the reserve requirement is 10%, according
to the simple formula for the money multiplier, the money supply
a) falls by $100.
b) falls by $1000.
c) rises by $100.
d) rises by $1000.
12) If the Fed buys $300 in securities and the reserve requirement is 5%, according
to the simple formula for the money multiplier, the money supply
a) falls by $315.
b) falls by $6000.
c) rises by $315.
d) rises by $6000.
13) A change in the monetary base leads to a larger change in the money supply
since
a) reserves earn interest for the bank.
b) banks lend excess reserves, which become deposits.
c) a change in the monetary base changes the likelihood that households hold
cash.
d) none of the above.
14) Central banks make money from interest on
a) loans.
b) notes.
c) reserves.
d) all of the above.
15) Central banks make money from interest on
a) gold.
b) notes.
c) reserves.
d) none of the above.
16) The balance sheet below shows a
Federal Reserve

Assets
$400 Bonds
a)
b)
c)
d)

Liabilities
$300 Reserves
$100 Notes

$400 increase in the monetary base.


$400 decrease in the monetary base.
$300 decrease in the money supply.
$300 decrease in the monetary base.

17) The balance sheet below shows a


Federal Reserve
Assets
Liabilities
+$500 Bonds
+$200 Reserves
+$300 Notes
a)
b)
c)
d)

$500 increase in the monetary base.


$200 increase in the monetary base.
$500 increase in the money supply.
$300 increase in the money supply.

18) The balance sheet below shows a


Banking System
Assets
Liabilities
$300 Reserves
+$300 Bonds
a)
b)
c)
d)

$300 increase in the monetary base.


$300 decrease in the monetary base.
$300 increase in the money supply.
$300 decrease in the money supply.

20) If the Fed were to sell gold, the money supply would
a) increase.
b) decrease.
c) stay the same.
d) cannot be determined.
21) When the Bank of Japan buys a Japanese government bond, the supply of yen
a) rises.
b) falls.
c) stays the same.
d) cannot be determined.
22) When the Bank of England buys euros, the supply of pounds

a)
b)
c)
d)

rises.
falls.
stays the same.
cannot be determined.

26) During a financial panic, the money supply _____, ceteris paribus.
a) rises
b) falls
c) stays the same
d) moves with interest rates
34) An increase in the reserve requirement (ceteris paribus) would lead to:
a) a decrease in m1.
b) an increase in m2.
c) no change in m1.
d) no change in m2.
35) An increase in money market mutual fund deposits (ceteris paribus) would lead
to:
a) an increase in m1.
b) an increase in m2.
c) a decrease in m2.
d) a decrease in m1.
36) Ceteris paribus, an increase in the excess reserve ratio will cause m1 to:
a) increase by a larger proportion.
b) decrease.
c) stay the same.
d) increase by the same proportion.
38) A decrease in the excess reserve ratio will cause m2 to:
a) increase.
b) decrease by a larger proportion.
c) stay the same.
d) fall by a smaller proportion.
49) Which of the following is considered to be a relatively risk-free investment?
a) Corporate bonds
b) Checking accounts
c) Mutual funds
d) Stocks

Short Answer
1) Why is the Federal Reserve virtually guaranteed to make a profit?
2) What are the two components of the monetary base?
currency and reserves
5) If the Fed buys $300 in securities from the banking system and the reserve
requirement is 20%, find the change in the money supply according to the simple
formula for the deposit multiplier.
6) The Fed wants to increase the money supply by $6000. If the reserve requirement
is 10%, what type and size of open market operations should the Fed perform?
26) During financial panics, banks become much less tolerant of risk. Explain how
that would affect the deposit creation process.
Banks would hold more excess reserves and household would hold more
cash. The excess reserve and currency ratios would rise, and the money multipliers
would fall, reflecting a less powerful deposit creation process.