Monetary Policy REVIEW

Under a fractional reserve banking system, banks are required to

• keep part of their demand deposits as reserves

• expand the money supply when requested by the central bank

• insure their deposits against losses and bank runs

• pay a fraction of their interest income in taxes

• charge the same interest rate on all their loans

When the Federal Reserve buys government securities on the open market, which of the following will decrease in the short run?

• Interest rates

• Taxes

• Investment

• The amount of money loaned by banks

• The money supply

If a commercial bank has no excess reserves and the reserve requirement is 10 percent, what is the initial amount of new loans this single bank can issue if a new customer deposits $10,000?

• $100,000

• $90,333

• $10,000

• $9,000

• $1,000

When a central bank sells securities in the open market, which of the following set of events is most likely to follow?

• An increase in the money supply, a decrease in interest rates, and an increase in aggregate demand

• An increase in the money supply, an increase in interest rates, and a decrease in aggregate demand

• An increase in interest rates, an increase in the government budget deficit, and a movement toward trade surplus

• A decrease in the money supply, an increase in interest rates, and a decrease in aggregate demand

• A decrease in the money supply, a decrease in interest rates, and a decrease in aggregate demand

If the Federal Reserve institutes a policy to reduce inflation, which of the following is most likely to increase?

• Tax rates

• Investment

• Government spending

• Interest rates

• Gross domestic product

If on receiving a checking deposit of $100 a bank’s excess reserves increased by $80, the required reserve ratio must be

• 5%

• 15%

• 20%

• 35%

• 80%

The Federal Reserve can increase the money supply by

• Selling gold reserves to the banks

• Selling foreign currency holdings

• Buying government bonds on the open market

• Buying gold from foreign central banks

• Borrowing reserves from foreign governments

One way in which the Federal Reserve works to change the United States money supply is by changing the

• Number of banks in operation

• Velocity of money

• Price level

• Prime rate

• Discount rate

Assume that the reserve requirement is 20 percent. If a bank initially has no excess reserves and $10,000 cash is deposited in the bank, the maximum change in the money supply once all money is loaned out will be:

• $10,000

• $0

• $50,000

• $40,000

• $8,000

Assume the rr is 15 percent and a bank receives a new checking deposit of $200. Liabilities will ____ and required reserves will____.

• Increase by $200; Increase by $170

• Increase by $200; Increase by $30

• Increase by $200; Not change

• Decrease by $200; Decrease by $30

• Decrease by $200; Decrease by $170