Tutorial Questions #10

ECON7200

1. Classify each of these transactions as an asset, a liability, or neither for each of the

“players” in the money supply process—the federal reserve, banks, and depositors.

a. You get a $10,000 loan from the bank to buy an automobile.

b. You deposit $400 into your checking account at the local bank.

c. The Fed provides an emergency loan to a bank for $1,000,000.

d. A bank borrows $500,000 in overnight loans from another bank.

e. You use your debit card to purchase a meal at a restaurant for $100.

2. During the holiday season, when the public’s holdings of currency increase, what

defensive open market operations typically occur? Why?

3. Following the global financial crisis in 2008, assets on the Federal Reserve’s balance

sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3

trillion by 2011. Many of the assets held are longer-term securities acquired through

various loan programs instituted as a result of the crisis. In this situation, how could

reverse repos (matched sale–purchase transactions) help the Fed reduce its assets held in

an orderly fashion, while reducing potential inflationary problems in the future?

4. What are the advantages and disadvantages of quantitative easing as an alternative to

conventional monetary policy when short-term interest rates are at the zero lower bound?

5. If you decide to hold $100 less cash than usual and therefore deposit $100 more cash in

the bank, what effect will this have on checkable deposits in the banking system if the rest

of the public keeps its holdings of currency constant?

6. Describe how each of the following can affect the money supply: (a) the central bank; (b)

banks; and (c) depositors.

MCQs

1. The government agency that oversees the banking system and is responsible for the

conduct of monetary policy in the United States is

A) the Federal Reserve System.

B) the United States Treasury.

C) the U.S. Gold Commission.

D) the House of Representatives.

2. Individuals that lend funds to a bank by opening a checking account are called

A) policyholders.

B) partners.

C) depositors.

D) debt holders.

3. Total reserves are the sum of ________ and ________.

A) excess reserves; borrowed reserves

B) required reserves; currency in circulation

C) vault cash; excess reserves

D) excess reserves; required reserves

4. Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%,

and the excess reserve ratio = 156%, an increase in the currency-deposit ratio to 150% causes

the M1 money multiplier to ________, everything else held constant.

A) increase from 0.73 to 0.78

B) decrease from 0.73 to 0.61

C) increase from 1.54 to 1.67

D) decrease from 1.67 to 1.54

5. Suppose that from a new checkable deposit, First National Bank holds two million dollars

in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten

percent. Given this information, we can say First National Bank has ________ million dollars

in excess reserves.

A) one

B) two

C) nine

D) ten

6. If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable

deposits are $900 billion, and there is no excess reserve, then the M1 money multiplier is

A) 2.5.

B) 2.8.

C) 2.0.

D) 0.67.

7. The interest rate the Fed charges banks borrowing from the Fed is the

A) federal funds rate.

B) Treasury bill rate.

C) discount rate.

D) prime rate.

8. The monetary base minus currency in circulation equals

A) reserves.

B) the borrowed base.

C) the nonborrowed base.

D) discount loans.

9. In the market for reserves, when the federal funds rate is above the interest rate paid on

excess reserves, the demand curve for reserves is

A) vertical.

B) horizontal.

C) positively sloped.

D) negatively sloped.

10. In the market for reserves, when the federal funds interest rate is below the discount rate,

the supply curve of reserves is

A) vertical.

B) horizontal.

C) positively sloped.

D) negatively sloped.