Chapter 3: Monetary policy

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 amount by which this bank may increase its loans is

• $2,000

• $8,000

• $10,000

• $20,000

• $50,000

A commercial bank’s ability to create money depends on which of the following?

• The existence of a central bank

• A fractional reserve banking system

• Gold or silver reserves backing up the currency

• A large national debt

• The existence of both checking accounts and savings accounts

Commercial banks can create money by

• transferring depositors' accounts at the Federal Reserve for conversion to cash

• buying Treasury bills from the Federal Reserve

• sending vault cash to the Federal Reserve

• maintaining a 100 percent reserve requirement

• lending excess reserves to customers

4. Banks create money when

• they make loans

• the loans they make are repaid

• they keep all excess reserves

• customers increase their cash withdrawals from their savings accounts

• the money multiplier is less than one

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be

• $10

• $100

• $900

• $1,000

• $1,100

Assume a country’s banking system has limited reserves. If the reserve requirement is 10 percent and the central bank sells $10,000 in government bonds on the open market, the money supply will

• increase by a maximum of $9,000

• increase by a maximum of $90,000

• decrease by a maximum of $9,000

• decrease by a maximum of $10,000

• decrease by a maximum of $100,000

Assume the nominal interest rate on a 15-year fixed-rate mortgage loan is 5 percent. If the expected inflation rate is 2 percent, the expected real interest rate is

• 2%

• 3%

• 5%

• 7%

• 10%

A central bank 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

Which of the following would lead to an increase in nominal interest rates?

• An expansionary monetary policy accompanied by an increase in the demand for money

• Stable economic growthAn expansionary monetary policy accompanied by a decrease in the demand for money

• An expansionary monetary policy conducted without any change in the demand for money

• A contractionary monetary policy accompanied by an increase in the demand for money

• A contractionary monetary policy accompanied by a decrease in the demand for money

Which of the following is a determinant of the amount of money the commercial banking system can create?

• The marginal propensity to consume

   

• The marginal propensity to save

• The total number of banks

• The size of the federal debt

•   The reserve requirement