C) the monetary base falls, but bank reserves remain unchanged. D) bank reserves rise, but the monetary base remains unchanged. Answer: D

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21) When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system

A) increase by $100.

B) increase by more than $100. C) decrease by $100.

D) decrease by more than $100. Answer: A

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22) All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system A) increase by $100.

B) increase by more than $100. C) decrease by $100.

D) decrease by more than $100. Answer: C

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23) When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________.

A) remains unchanged; decrease B) remains unchanged; increase C) increases; increase

D) increases; remain unchanged Answer: C

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24) When the Federal Reserve calls in a discount loan from a bank, the monetary base ________ and reserves ________.

A) remains unchanged; decrease B) remains unchanged; increase C) decreases; decrease

D) decreases; remains unchanged Answer: C

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25) If the Fed decides to reduce bank reserves, it can A) purchase government bonds. B) extend discount loans to banks. C) sell government bonds. D) print more currency. Answer: C

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26) There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks. A) sell; extend B) sell; call in

C) purchase; extend D) purchase; call in Answer: C

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27) A decrease in ________ leads to an equal ________ in the monetary base in the short run. A) float; increase B) float; decrease

C) Treasury deposits at the Fed; decrease D) discount loans; increase Answer: B

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28) The monetary base declines when A) the Fed extends discount loans.

B) Treasury deposits at the Fed decrease. C) float increases.

D) the Fed sells securities. Answer: D

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29) An increase in ________ leads to an equal ________ in the monetary base in the short run. A) float; decrease B) float; increase

C) discount loans; decrease

D) Treasury deposits at the Fed; increase Answer: B

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30) A decrease in ________ leads to an equal ________ in the monetary base in the long run. A) float; increase B) float; decrease C) securities; increase D) securities; decrease Answer: D

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31) An increase in ________ leads to an equal ________ in the monetary base in the long run. A) float; increase B) float; decrease C) securities; increase D) securities; decrease Answer: C

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32) Suppose a person cashes his payroll check and holds all the funds in the form of currency. Everything else held constant, total reserves in the banking system ________ and the monetary base ________.

A) remain unchanged; increases B) decrease; increases

C) decrease; remains unchanged D) decrease; decreases Answer: C

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33) Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________. A) remain unchanged; remains unchanged B) remain unchanged; increases C) decrease; increases D) decrease; decreases Answer: A

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34) The Fed does not tightly control the monetary base because it does not completely control A) open market purchases. B) open market sales. C) borrowed reserves. D) the discount rate. Answer: C

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35) Subtracting borrowed reserves from the monetary base obtains A) reserves.

B) high-powered money.

C) the nonborrowed monetary base. D) the borrowed monetary base. Answer: C

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36) The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is

A) MB = MBn - BR. B) BR = MBn - MB. C) BR = MB - MBn. D) MB = BR - MBn. Answer: C

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37) Explain two ways by which the Federal Reserve System can increase the monetary base. Why is the effect of Federal Reserve actions on bank reserves less exact than the effect on the monetary base?

Answer: The Fed can increase the monetary base by purchasing government bonds and by

extending discount loans. If the person selling the security chooses to keep the proceeds in currency, bank reserves do not increase. Because the Fed cannot control the distribution of the monetary base between reserves and currency, it has less control over reserves than the base. Ques Status: Previous Edition

14.4 Multiple Deposit Creation: A Simple Model

1) When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollara process called A) extra deposit creation. B) multiple deposit creation. C) expansionary deposit creation. D) stimulative deposit creation. Answer: B

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2) When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollara process called multiple deposit creation. A) increase; less B) increase; more C) decrease; less D) decrease; more Answer: B

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3) If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to A) its excess reserves.

B) 10 times its excess reserves. C) 10 percent of its excess reserves. D) its total reserves. Answer: A

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4) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, the bank can now increase its loans by A) $10. B) $100.

C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: B

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5) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves, deposits in the banking system can potentially increase by A) $10. B) $100.

C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: C

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6) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, the bank can now increase its loans by A) $10. B) $100.

C) $100 times the reciprocal of the required reserve ratio. D) $100 times the required reserve ratio. Answer: B

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7) In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, deposits in the banking system can potentially increase by