Practice 26

Practice Problems 26 and 27
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. The tool of monetary policy that involves the Fed's buying and selling of government bonds is:
A. moral suasion.
B. reserve requirements.
C. the discount rate.
D. open-market operations.
E. setting government transfer payments.
____
2. The Fed's main liabilities are:
A. currency and bank reserves.
B. the facilities of the twelve district banks.
C. corporate stocks and bonds.
D. U.S. Treasury bills.
E. loans to member banks.
____
3. To _______ the money supply, the Fed could ________.
A. increase; decrease the money multiplier
B. decrease; lower the reserve requirements
C. increase; conduct open-market purchases
D. decrease; lower the discount rate
E. increase; increase government spending.
____
4. When the Fed decreases bank's reserves through an open-market operation:
A. deposits increase, currency in circulation increases, and the monetary base remains the
same.
B. the monetary base decreases, the money multiplier decreases, and the money supply
increases.
C. loans increase, the federal funds rate rises, and the discount rate rises.
D. the monetary base decreases, loans decrease, and the money supply decreases.
E. the monetary base decreases, loans decrease, and the money multiplier decreases.
____
5. Suppose that the reserve ratio is 10% when the Fed buys $25,000 of U.S. Treasury bills from the banking
system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the
money supply.
A. $666,667
B. $111,111
C. $500,000
D. $1,000,000
E. $250,000
____
6. Suppose that the reserve ratio is 10% when the Fed buys $100,000 of U.S. Treasury bills from the banking
system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the
money supply.
A. $666,667
B. $111,111
C. $250,000
D. $1,000,000
E. $900,000
____
7. Suppose that the reserve ratio is 10% when the Fed buys $11,000 of U.S. Treasury bills from the banking
system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the
money supply.
A. $666,667
B. $110,000
C. $250,000
D. $1,000,000
E. $1,100,000
____
8. The federal funds rate is the interest rate at which:
A. banks borrow funds directly from the Federal Reserve.
B. banks borrow excess reserves from other banks.
C. influential companies borrow from banks.
D. households' savings are invested in the Federal Reserve.
E. the government borrows funds from the Federal Reserve.
____
9. If the required reserve ratio is 10%, and the Fed performs an open market purchase of $100, what is the
maximum possible change in the money supply resulting from this purchase?
A. $100
B. $1000
C. $10,000
D. $10
E. $900
____ 10. When a bank borrows from the Federal Reserve, it pays the:
A. required reserve ratio.
B. discount rate.
C. federal funds rate.
D. prime rate.
E. mortgage rate.
Practice Problems 26 and 27
Answer Section
MULTIPLE CHOICE
1. ANS:
SKL:
2. ANS:
SKL:
3. ANS:
SKL:
4. ANS:
SKL:
5. ANS:
SKL:
6. ANS:
SKL:
7. ANS:
SKL:
8. ANS:
SKL:
9. ANS:
SKL:
10. ANS:
SKL:
D
PTS:
Definitional
A
PTS:
Fact-Based
C
PTS:
Critical Thinking
D
PTS:
Critical Thinking
C
PTS:
Critical Thinking
D
PTS:
Critical Thinking
B
PTS:
Critical Thinking
B
PTS:
Definitional
B
PTS:
Study Guide
B
PTS:
Fact-Based
1
DIF: E
REF: Module 27
1
DIF: E
REF: Module 27
1
DIF: M
REF: Module 27
1
DIF: M
REF: Module 27
1
DIF: M
REF: Module 27
1
DIF: M
REF: Module 27
1
DIF: M
REF: Module 27
1
DIF: E
REF: Module 27
1
DIF: M
REF: Module 27
1
DIF: E
REF: Module 27