The Federal Reserve System 

1. Which of the following tools of the Federal Reserve System is the most used in controlling the money supply?

A. the discount rate.

B. open market operations.

C. the required reserve ratio.

D. margin requirements.

E. jawboning or moral suasion.

2. When the Federal Reserve buys U.S. bonds:

A. excess reserves in commercial banks are increased immediately.

B. the banking system will decrease loan-based demand deposits (i.e. money will be destroyed rather than created).

C. total bank reserves are decreased.

D. the value of the money multiplier slowly increases to a new stationary level.

E. the money supply will eventually decline as banks are forced to call loans due to meet reserve requirements.

3. All else equal, when the FED decreases the discount rate:

A. the money multiplier increases.

B. the money multiplier decreases.

C. banks will lend more money but charge higher interest rates.

D. reserves in individual banks decrease.

E. banks will borrow more money from the FED, increase their loans, and thereby increase the money supply.

4. Suppose that the banking system has demand deposits of $150 billion and reserves of $24 billion. The required reserve ratio is 15%. (Assume that there are no savings deposits or cash holdings by individuals). The banking system has excess reserves of:

A. zero.

B. $1.5 billion.

C. $3.6 billion.

D. $22.5 billion.

5. Suppose that the situation is the same as in question #4 except that the FED has just made a $2 billion open market purchase of government bonds. If all banks increase their loans to the maximum extent possible (i.e. they hold no excess reserves) total demand deposits would be equal to:

A. $173.3 billion.

B. $163.3 billion.

C. $150 billion.

D. 160 billion.

E. $136.7 billion.

6. The actual money multiplier:

A. increases as the excess reserve ratio decreases.

B. is given by (MB ) MS), where MS is the money supply and MB is the monetary base.

C. is increased as the public withdraws more and more cash from the banking system.

D. is always equal to 1/rr, where rr = the required reserve ratio.

E. times currency in the system is equal to the money supply.

7. The quantity of currency in circulation isn't a very important tool of the FED because the:

A. FED can't coin money or print currency.

B. FED can't affect the quantity of currency in circulation.

C. mix of currency and other money supply components is determined primarily by the public's need and preference for currency versus demand deposits.

D. effects of changes in the quantity of currency are too strong and unpredictable to make it a very useful tool.

8. The excess reserve ratio set by banks depends on the:

A. margin requirements ratio and the reserve requirements ratio.

B. reserve requirement ratio and the discount rate.

C. interest rate charged to borrwers and the interest rate banks must pay to borrow reserves.

D. potential money multiplier and the autonomous spending multiplier.

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