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Questions on Determinants of The Money Supply | ECON 4130, Study notes of Banking and Finance

Rensselaer Polytechnic Institute (RPI)Banking and Finance
Prof. John J. Heim

Backtest chapter 16-19 Material Type: Notes; Professor: Heim; Class: MONEY & BANKING; Subject: Economics; University: Rensselaer Polytechnic Institute; Term: Fall 2010;

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Chapter 16
Determinants of the Money Supply
T Multiple Choice
1) Money supply models tend to focus on the monetary base rather than on reserves since
(a) Fed actions have no effect on reserves but have a predictable effect on the monetary base.
(b) Fed actions in general have little effect on reserves but have a predictable effect on the monetary
base.
(c) Fed actions have a more predictable effect on the monetary base.
(d) none of the above.
Answer: C
Question Status: Previous Edition
2) 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
Question Status: Previous Edition
3) 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
Question Status: Previous Edition
4) 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
Question Status: Previous Edition
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Chapter 16

Determinants of the Money Supply

„ Multiple Choice

  1. Money supply models tend to focus on the monetary base rather than on reserves since (a) Fed actions have no effect on reserves but have a predictable effect on the monetary base. (b) Fed actions in general have little effect on reserves but have a predictable effect on the monetary base. (c) Fed actions have a more predictable effect on the monetary base. (d) none of the above. Answer: C Question Status: Previous Edition

  2. 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 Question Status: Previous Edition

  3. 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 Question Status: Previous Edition

  4. 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

556 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition

  1. 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 Question Status: New

  2. 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 Question Status: Previous Edition

  3. The equation linking the monetary base to the levels of checkable deposits and currency is (a) MB = R + C. (b) MB = (r × D) + ER. (c) MB = (r × D) + ER + C. (d) both (a) and (b) are correct. (e) both (a) and (c) are correct. Answer: E Question Status: New

  4. The equation linking the monetary base to the levels of checkable deposits and currency is (a) MB = (r × D) + R + C. (b) MB = (r + D) + ER + C. (c) MB = (r/D) + ER + C. (d) MB = (r – D) + ER – C. (e) MB = (r × D) – ER – C. Answer: A Question Status: New

  5. 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 (e) deposits; excess reserves Answer: D Question Status: New

558 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition

  1. The formula for the checkable deposits that includes excess reserves and currency is (a) m = 1 /(r + e + c). (b) M = 1 /(r + e + c). (c) M = (1 + c)/(r + e + c). (d) D = 1 /(r + e + c). (e) D = (1/(r + e + c)) × MB. Answer: E Question Status: New

  2. The formula for the money supply that includes excess reserves and currency is (a) m = 1 /(r + e + c). (b) D = 1 /(r + e + c). (c) M = (1 + c)/(r + e + c). (d) D = (1/(r + e + c)) × MB. (e) M = ((1 + c)/(r + e + c)) × MB. Answer: E Question Status: New

  3. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is (a) $8000. (b) $1200. (c) $1200.8. (d) $8400. Answer: B Question Status: Previous Edition

  4. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money multiplier is approximately (a) 2.5. (b) 1.67. (c) 2.0. (d) 0.601. Answer: A Question Status: Previous Edition

  5. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the currency ratio is (a) .25. (b) .50. (c) .40. (d) .05. Answer: B

Chapter 16 Determinants of the Money Supply 559

  1. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the excess reserves–checkable deposit ratio is (a) 0.001. (b) 0.10. (c) 0.01. (d) 0.05. Answer: A Question Status: Previous Edition

  2. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the monetary base is (a) $480 billion. (b) $480.8 billion. (c) $80 billion. (d) $80.8 billion. Answer: B Question Status: Previous Edition

  3. If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money multiplier is approximately (a) 2.5. (b) 1.67. (c) 2.3. (d) 0.651. Answer: C Question Status: Previous Edition

  4. If the required reserve ratio is 5 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money multiplier is approximately (a) 2.5. (b) 2.72. (c) 2.3. (d) 0.551. Answer: B Question Status: Previous Edition

  5. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the money supply is (a) $10,000. (b) $4000. (c) $1400. (d) $10,400. Answer: C

Chapter 16 Determinants of the Money Supply 561

  1. If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money supply is (a) $2700. (b) $3000. (c) $1200. (d) $1800. Answer: C Question Status: Previous Edition

  2. If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the money multiplier is approximately (a) 2.5. (b) 2.8. (c) 2.0. (d) 0.67. Answer: C Question Status: Previous Edition

  3. If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the currency ratio is (a) .25. (b) .33. (c) .67. (d) .375. Answer: B Question Status: Previous Edition

  4. If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the level of excess reserves in the banking system is (a) $300 billion. (b) $30 billion. (c) $3 billion. (d) 0. Answer: D Question Status: Previous Edition

  5. If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the monetary base is (a) $300 billion. (b) $600 billion. (c) $333 billion. (d) $667 billion. Answer: B

562 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition

  1. Because an increase in the monetary base will mean an increase in the level of currency in circulation, (a) the actual money multiplier will be smaller than the simple deposit multiplier. (b) a given change in the monetary base will lead to a smaller increase in checkable deposits than indicated by the simple deposit multiplier. (c) a given change in the monetary base will lead to a larger increase in checkable deposits than indicated by the simple deposit multiplier. (d) both (a) and (b) of the above will occur. Answer: D Question Status: Previous Edition

  2. Because an increase in the monetary base will mean an increase in the level of currency in circulation, (a) the actual money multiplier will be larger than the simple deposit multiplier. (b) a given change in the monetary base will lead to a smaller increase in checkable deposits than indicated by the simple deposit multiplier. (c) a given change in the monetary base will lead to a larger increase in checkable deposits than indicated by the simple deposit multiplier. (d) both (a) and (c) of the above will occur. Answer: B Question Status: Previous Edition

  3. Comparison of the simple model of money creation with the money supply model accounting for depositor and bank behavior indicates that (a) an increase in the monetary base that goes into currency is not multiplied. (b) the money multiplier is negatively related to the currency ratio. (c) the money multiplier is positively related to the excess reserve ratio (d) all of the above occur. (e) only (a) and (b) of the above. Answer: E Question Status: Study Guide

  4. The money multiplier is smaller than the simple deposit multiplier when (a) the currency–checkable deposit ratio is zero. (b) the currency–checkable deposit ratio is greater than zero. (c) banks choose to hold excess reserves. (d) only (b) and (c) of the above are true. (e) only (a) and (b) of the above are true. Answer: D

564 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition

  1. For a given level of the monetary base, an increase in the required reserve ratio on checkable deposits causes the money multiplier to _____ and the money supply to _____. (a) decrease; increase (b) increase; increase (c) decrease; decrease (d) increase; decrease Answer: C Question Status: Revised

  2. For a given level of the monetary base, a decrease in the required reserve ratio on checkable deposits causes the money multiplier to _____ and the money supply to _____. (a) decrease; increase (b) increase; increase (c) decrease; decrease (d) increase; decrease Answer: B Question Status: Revised

  3. Assuming initially that r = 10%, c = 40%, and e = 0, an increase in r to 15% causes (a) the money multiplier to increase from 2.55 to 2.8. (b) the money multiplier to decrease from 2.8 to 2.55. (c) the money multiplier to increase from 1.82 to 2. (d) the money multiplier to decrease from 2 to 1.82. (e) no change in the money multiplier. Answer: A Question Status: New

  4. Assuming initially that r = 10%, c = 40%, and e = 0, a decrease in r to 5% causes (a) the money multiplier to increase from 2.8 to 3.11. (b) the money multiplier to decrease from 3.11 to 2.8. (c) the money multiplier to increase from 2 to 2.22. (d) the money multiplier to decrease from 2.22 to 2. (e) no change in the money multiplier. Answer: A Question Status: New

  5. For a given level of the monetary base, an increase in the currency–checkable deposit ratio will mean (a) an increase in currency in circulation and an increase in the money supply. (b) an increase in money supply but no change in reserves. (c) a decrease in the money supply. (d) an increase in currency in circulation but no change in the money supply. Answer: C

Chapter 16 Determinants of the Money Supply 565

  1. Given the monetary base, a decrease in the currency ratio means (a) an increase in the nonborrowed base, but an equal decrease in the borrowed base. (b) an increase in the borrowed base offset by an equal decrease in the nonborrowed base. (c) an increase in the money supply. (d) a decrease in the money supply. (e) none or the above. Answer: C Question Status: Study Guide

  2. For a given level of the monetary base, a decrease in the currency–checkable deposit ratio will mean (a) an increase in currency in circulation and an increase in the money supply. (b) an increase in money supply. (c) a decrease in the money supply. (d) an increase in currency in circulation but no change in the money supply. Answer: B Question Status: Revised

  3. For a given level of the monetary base, an increase in the currency ratio causes the money multiplier to _____ and the money supply to _____. (a) decrease; increase (b) increase; decrease (c) decrease; decrease (d) increase; increase Answer: C Question Status: Revised

  4. For a given level of the monetary base, a decrease in the currency ratio causes the money multiplier to _____ and the money supply to _____. (a) decrease; increase (b) increase; increase (c) decrease; decrease (d) increase; decrease Answer: B Question Status: Revised

  5. Assuming initially that r = 10%, c = 40%, and e = 0, an increase in c to 50% causes (a) the money multiplier to increase from 2.5 to 2.8. (b) the money multiplier to decrease from 2.8 to 2.5. (c) the money multiplier to increase from 2.33 to 2.8. (d) the money multiplier to decrease from 2.8 to 2.33. (e) no change in the money multiplier. Answer: B Question Status: New

Chapter 16 Determinants of the Money Supply 567

  1. For a given level of the monetary base, an increase in the excess reserves ratio causes the money multiplier to _____ and the money supply to _____. (a) decrease; increase (b) increase; increase (c) decrease; decrease (d) increase; decrease Answer: C Question Status: Revised

  2. Assuming initially that r = 15%, c = 40%, and e = 5%, a decrease in e to 0% causes (a) the money multiplier to increase from 2.33 to 2.55. (b) the money multiplier to decrease from 2.55 to 2.33. (c) the money multiplier to increase from 1.67 to 1.82. (d) the money multiplier to decrease from 1.82 to 1.67. (e) no change in the money multiplier. Answer: A Question Status: New

  3. Assuming initially that r = 15%, c = 40%, and e = 5%, an increase in e to 10% causes (a) the money multiplier to increase from 2.15 to 2.33. (b) the money multiplier to decrease from 2.33 to 2.15. (c) the money multiplier to increase from 1.54 to 1.67. (d) the money multiplier to decrease from 1.67 to 1.54. (e) no change in the money multiplier. Answer: B Question Status: New

  4. The excess reserve ratio of the banking system is (a) negatively related to the market interest rate and expected deposit outflows. (b) positively related to the market interest rate and expected deposit outflows. (c) positively related to the market interest rate and negatively related to expected deposit outflows. (d) negatively related to the market interest rate and positively related to expected deposit outflows. (e) unaffected by the market interest rate and expected deposit outflows. Answer: D Question Status: Study Guide

  5. The excess reserves ratio is _____ related to expected deposit outflows, and is _____ related to the market interest rate. (a) negatively; negatively (b) negatively; positively (c) positively; negatively (d) positively; positively Answer: C

568 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition

  1. Factors that cause the excess reserves ratio to rise include: (a) a rise in expected deposit outflows. (b) a decline in market interest rates. (c) a rise in market interest rates. (d) only (a) and (b) of the above. (e) only (a) and (c) of the above. Answer: D Question Status: Previous Edition

  2. Factors that cause the excess reserves ratio to fall include: (a) a decline in expected deposit outflows. (b) a rise in market interest rates. (c) a decline in market interest rates. (d) only (a) and (b) of the above. (e) only (a) and (c) of the above. Answer: D Question Status: Previous Edition

  3. The money supply is _____ related to expected deposit outflows, and is _____ related to the market interest rate. (a) negatively; negatively (b) negatively; positively (c) positively; negatively (d) positively; positively Answer: B Question Status: Previous Edition

  4. The money multiplier is negatively related to (a) the currency–checkable deposit ratio. (b) the required reserve ratio. (c) discount borrowings from the Fed. (d) all of the above. (e) both (a) and (b) of the above. Answer: E Question Status: Previous Edition

  5. The money multiplier is negatively related to (a) high-powered money. (b) the excess reserves ratio. (c) discount borrowings from the Fed. (d) both (a) and (b) of the above. Answer: B

570 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition

  1. Factors that cause an increase in the money multiplier include: (a) a lowering of the required reserve ratio. (b) a decrease in the market interest rate. (c) an increase in expected deposit outflows. (d) only (a) and (b) of the above. Answer: A Question Status: Previous Edition

  2. Factors that cause an increase in the money multiplier include: (a) a lowering of the required reserve ratio. (b) an increase in market interest rates. (c) an increase in expected deposit outflows. (d) all of the above. (e) only (a) and (b) of the above. Answer: E Question Status: Previous Edition

  3. Factors that cause an increase in the money multiplier include: (a) an increase in the required reserve ratio. (b) a decrease in market interest rates. (c) an increase in expected deposit outflows. (d) none of the above. Answer: D Question Status: Revised

  4. The money multiplier is inversely related to (a) the excess reserve ratio. (b) the currency ratio. (c) the required ratio on checkable deposits. (d) all of the above. (e) both (a) and (b) of the above. Answer: D Question Status: Study Guide

  5. Factors that cause a decline in the money multiplier include: (a) an increase of the required reserve ratio. (b) an increase in the market interest rate. (c) a decline in expected deposit outflows. (d) only (a) and (b) of the above. Answer: A

Chapter 16 Determinants of the Money Supply 571

  1. Factors that cause a decline in the money multiplier include: (a) a lowering of the required reserve ratio. (b) an increase in the market interest rate. (c) an increase in expected deposit outflows. (d) all of the above. Answer: C Question Status: Previous Edition

  2. Factors that cause a decline in the money multiplier include: (a) a lowering of the required reserve ratio. (b) a decrease in the market interest rate. (c) an increase in expected deposit outflows. (d) only (b) and (c) of the above. Answer: D Question Status: Previous Edition

  3. Factors that cause a decline in the money multiplier include: (a) an increase in the required reserve ratio. (b) a decrease in the market interest rate. (c) an increase in market interest rates. (d) all of the above. (e) only (a) and (b) of the above. Answer: E Question Status: Previous Edition

  4. Factors that cause a decline in the money multiplier include: (a) a lowering of the required reserve ratio. (b) a decrease in the market interest rate. (c) a decrease in expected deposit outflows. (d) only (b) and (c) of the above. Answer: B Question Status: Previous Edition

  5. Factors that cause a decline in the money multiplier include: (a) an increase in the required reserve ratio. (b) a decrease in the market interest rate. (c) an increase in expected deposit outflows. (d) all of the above. (e) only (a) and (b) of the above. Answer: D

Chapter 16 Determinants of the Money Supply 573

  1. Recognizing the distinction between discount loans and the nonborrowed monetary base, the money supply model is specified as (a) M = m × (MBn – DL). (b) M = m × (MBn + DL). (c) M = m + (MBn – DL). (d) M = m − (MBn + DL). (e) M = m/(MBn + DL). Answer: B Question Status: New

  2. An increase in the nonborrowed monetary base, ceteris paribus, 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 Question Status: Previous Edition

  3. The money supply is _____ related to the nonborrowed monetary base, and _____ related to the level of discount loans. (a) positively; negatively (b) not; not (c) negatively; not (d) positively; positively (e) negatively; negatively Answer: D Question Status: New

  4. The amount of discount loans 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 Question Status: Previous Edition

  5. A _____ in market interest rates relative to the discount rate will cause discount borrowing to _____ (a) fall; increase (b) rise decrease (c) rise; remain unchanged (d) rise; increase (e) fall; decrease Answer: D Question Status: New

574 Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition

  1. The Fed lacks complete control over the money supply because it cannot perfectly predict (a) the amount of discount borrowing by banks. (b) shifts from deposits to currency. (c) the level of excess reserves held by banks. (d) any of the above. Answer: D Question Status: Previous Edition

  2. The Fed lacks complete control over the money supply because (a) it cannot determine the amount of discount borrowing by banks. (b) it has no control over shifts from deposits to currency. (c) it has no control over the level of reserves in the banking system. (d) of all of the above. (e) of only (a) and (b) of the above. Answer: E Question Status: Previous Edition

  3. Other things equal, rising market interest rates encourage banks to (a) increase discount borrowings from the Fed. (b) hold more excess reserves. (c) hold fewer excess reserves. (d) do both (a) and (b) of the above. (e) do both (a) and (c) of the above. Answer: E Question Status: Previous Edition

  4. Other things equal, an increase in the discount rate encourages banks to (a) hold fewer excess reserves. (b) increase discount borrowing from the Fed. (c) decrease discount borrowing from the Fed. (d) do both (a) and (b) of the above. Answer: C Question Status: Previous Edition

  5. Equal increases in the discount rate and market interest rates cause banks to (a) hold fewer excess reserves. (b) increase discount borrowing from the Fed. (c) decrease discount borrowing from the Fed. (d) do both (a) and (b) of the above. Answer: A