Chapter 20: Money Supply and Money Demand

1. Suppose the money supply data of Hong Kong is as follows:

The money supply M1 and M2 are _______________________ and _______________________ respectively.

• A. $12 million … $19 million

• B. $12 million … $23 million

• C. $13 million … $19 million

• D. $13 million … $23 million

2. The money supply M2 in Hong Kong will increase if

• A. someone withdraws HK$10,000 from his savings account with a licensed bank in Hong Kong and holds it in cash.

• B. someone deposits HK$1,000 cash in his current account with a licensed bank in Hong Kong.

• C. someone transfers HK$20,000 from his savings account to his current account with a licensed bank in Hong Kong.

• D. someone transfers HK$5,000 from his time deposit account with a deposit-taking company to his current account with a licensed bank in Hong Kong.

3. Mr. Chan withdraws HK$1,000,000 from his current account. He then puts HK$500,000 as time deposits in a restricted licence bank, and the remaining HK$500,000 as savings deposits in a licensed bank.

What would be the immediate effect of the above actions on the Hong Kong dollar money supply?

• A. Both M1 and M2 will decrease.

• B. Both M1 and M3 will decrease.

• C. M1 will increase and M3 will remain unchanged.

• D. Both M2 and M3 will decrease.

4. Miss Lee withdraws HK$50,000 from her time deposit with a restricted licence bank. Then she remits HK$10,000 overseas. She deposits HK$10,000 as a time deposit with a licensed bank and holds the remainder in cash. As a result, Hong Kong money supply M1 will ________________ and M3 will __________________.

• A. increase … remain unchanged

• B. increase … decrease

• C. remain unchanged … decrease

• D. decrease … increase

5. Below is the balance sheet of a banking system. Suppose the banking system has excess reserves of $500 million and the public always hold $1,000 million cash.

Which of the following statements about the banking system are CORRECT?

(1) The required reserve ratio is 20%.

(2) The actual banking multiplier is 5.

(3) The maximum possible amount of deposits is $7,500 million.

(4) The money supply is $6,000 million.

• A. (1) and (2) only

• B. (3) and (4) only

• C. (1), (3) and (4) only

• D. (2), (3) and (4) only

6. Study the following information.

If the banks are fully loaned up, which of the following statements about the banking system is CORRECT?

• A. The deposits will be $20,000.

• B. The loans will increase by $5,000.

• C. Bank reserves will decrease by $500.

• D. The money supply will remain unchanged.

7. Study the following balance sheet of a banking system. The required reserve ratio is 25% and the public hold $50 million cash.

Suppose the public deposit $10 million cash into the banking system. If the banks lend out all of their excess reserves, the money supply will be _________________________.

• A. $890 million

• B. $1,040 million

• C. $1,080 million

• D. $1,090 million

8. The table below shows the balance sheet of a banking system. Suppose the amount of excess reserves is $1,000 and the public do not hold any cash.

Suppose the public withdraw $1,500 cash from the banking system. If the banks no longer hold any excess reserves and there is no cash leakage, what will happen eventually after the deposit contraction process is completed?

(1) Bank loans will fall by $1,500.

(2) The money supply will fall by $1,000.

(3) Bank deposits will fall by $2,500.

• A. (1) only

• B. (1) and (2) only

• C. (2) and (3) only

• D. (1), (2) and (3)

9. Refer to the following balance sheet of a banking system. Suppose the banks do not hold excess reserves.

Suppose the central bank raises the required reserve ratio by 5 percentage points. Which of the following statements is CORRECT?

• A. Bank reserves will be $250 million.

• B. The maximum possible amount of deposits will be $800 million.

• C. The maximum possible amount of loans will be $750 million.

• D. The monetary base will decrease by $50 million.

10. A bank received a deposit of $5,000 from a foreign country. After the deposit creation process is completed, the amount of deposits of the whole banking system increases by $25,000. We can conclude that

• A. banks hold excess reserves.

• B. total money supply has increased by $20,000.

• C. the actual reserve ratio of the banking system is 20%.

• D. the public do not hold cash.