14.5 Factors That Determine the Money Supply
1) An increase in the nonborrowed monetary base, everything else held constant, will cause A) the money supply to fall. B) the money supply to rise.
C) no change in the money supply. D) demand deposits to fall. Answer: B
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2) The money supply is ________ related to the nonborrowed monetary base, and ________ related to the level of borrowed reserves. A) positively; negatively B) negatively; not
C) positively; positively D) negatively; negatively Answer: C
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3) The amount of borrowed reserves is ________ related to the discount rate, and is ________ related to the market interest rate. A) negatively; negatively B) negatively; positively C) positively; negatively D) positively; positively Answer: B
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4) A ________ in market interest rates relative to the discount rate will cause discount borrowing to ________. A) fall; increase B) rise; decrease C) rise; increase
D) fall; remain unchanged Answer: C
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5) Everything else held constant, an increase in currency holdings will cause A) the money supply to rise.
B) the money supply to remain constant. C) the money supply to fall. D) checkable deposits to rise. Answer: C
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6) Everything else held constant, a decrease in holdings of excess reserves will mean A) a decrease in the money supply. B) an increase in the money supply. C) a decrease in checkable deposits. D) an increase in discount loans. Answer: B
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14.6 Overview of the Money Supply Process
1) In the model of the money supply process, the Federal Reserve's role in influencing the money supply is represented by
A) both the required reserve ratio and the market interest rate.
B) the required reserve ratio, nonborrowed reserves, borrowed reserves, and the market interest rate.
C) only borrowed reserves. D) only nonborrowed reserves. Answer: B
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2) In the model of the money supply process, the depositor's role in influencing the money supply is represented by
A) only the currency ratio.
B) both the currency ratio and excess reserve ratio.
C) the currency ratio, excess reserve ratio, and the market interest rate. D) only the market interest rate. Answer: C
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3) In the model of the money supply process, the bank's role in influencing the money supply process is represented by
A) only the excess reserve ratio.
B) both the excess reserve ratio and the market interest rate. C) only the currency ratio. D) only borrowed reserves. Answer: B
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14.7 The Money Multiplier
1) Models describing the determination of the money supply and the Fed's role in this process normally focus on ________ rather than ________, since Fed actions have a more predictable effect on the former.
A) reserves; the monetary base B) reserves; high-powered money
C) the monetary base; high-powered money D) the monetary base; reserves Answer: D
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2) The Fed can exert more precise control over ________ than it can over ________. A) high-powered money; reserves
B) high-powered money; the monetary base C) the monetary base; high-powered money D) reserves; high-powered money Answer: A
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3) The ratio that relates the change in the money supply to a given change in the monetary base is called the
A) money multiplier. B) required reserve ratio. C) deposit ratio. D) discount rate. Answer: A
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4) The formula linking the money supply to the monetary base is A) M = m/MB. B) M = m × MB. C) m = M × MB. D) MB = M × m. E) M = m + MB. Answer: B
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5) The variable that reflects the effect on the money supply of changes in factors other than the monetary base is the
A) currency-checkable deposits ratio. B) required reserve ratio. C) money multiplier. D) nonborrowed base. Answer: C
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6) An assumption in the model of the money supply process is that the desired levels of currency and excess reserves
A) are given as constants.
B) grow proportionally with checkable deposits. C) grow proportionally with high-powered money. D) grow proportionally over time. Answer: B
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7) The total amount of reserves in the banking system is equal to the ________ required reserves and excess reserves. A) sum of
B) difference between C) product of D) ratio between Answer: A
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8) The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits. A) sum of
B) difference between C) product of D) ratio between Answer: C
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9) Since the Federal Reserve sets the required reserve ratio to less than one, one dollar of reserves can support ________ of checkable deposits. A) exactly one dollar B) less than one dollar C) more than one dollar D) exactly twice the amount Answer: C
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10) The equation that shows the amount of the monetary base needed to support existing levels of checkable deposits, excess reserves, and currency is A) MB = (r × D) + ER + C. B) MB = (r + D) + ER + C.
rC) MB = + ER + C.
DD) MB = (r × D) - ER - C. Answer: A
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11) An increase in the monetary base that goes into ________ is not multiplied, while an increase that goes into ________ is multiplied. A) deposits; currency
B) excess reserves; currency C) currency; excess reserves D) currency; deposits Answer: D
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12) An increase in the monetary base that goes into currency is ________, while an increase that goes into deposits is ________. A) multiplied; multiplied B) not multiplied; multiplied C) multiplied; not multiplied D) not multiplied; not multiplied Answer: B
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13) If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply
A) increases by only the initial increase in reserves.
B) increases by only one-half the initial increase in reserves. C) increases by a multiple of the initial increase in reserves. D) does not change. Answer: D
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14) If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________. A) remains unchanged; remains unchanged B) remains unchanged; increases C) increases; increases
D) increases; remains unchanged Answer: D
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