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Multiple Choice Tutorial

Chapter 5
Money and the
Federal Reserve
1. Barter works best
a. in the absence of a double coincidence of
b. when many different product are available
in the economy
c. when money is relatively available to
establish relative prices
d. when each trader has what the other wants
and wants what the other has
D. Barter requires a coincidence of wants;
each person has to have exactly what the
other wants.
2. A coincidence of wants happens exists when
a. two people want the same thing at the same
b. one person wants to but two different
things at the same time
c. the individual who has what I want, also
wants what I have
C. A problem with barter is how the alternate
goods or services can be divided. If one
person wants eggs and the other wants a
pound of beef, but the second person still has
cattle, what to do? If the cow is killed, there
will be a lot of meat left over.
3. The essential characteristic required before
any substance can function as money is that
a. it be issued by the government
b. it be backed by a precious metal
c. the supply of it be unlimited and
d. people accept it as money
D. Money can take just about any form as long
as it is accepted by everyone and is easily
exchanged. Money can even be an electronic
impulse on a computer. All that is necessary
is to keep track of someones debit and
someone else's credit in a financial
4. To say that money functions as a medium of
exchange is to say that
a. it is the preferred form of compensation for
fortune-tellers, mediums, and those through
whom the spirit world is contacted
b. it is the generally accepted form of
payment for goods and services
c. it is the common unit of expressing the
value of goods and services
d. it is bought and sold on the stock exchange
B. Money has several purposes, one is that it is
used by consumers to buy and sell in the
market place. This is using money as a
medium of exchange.
5. School administrators announce the following
schedule of fees for the next academic year:
In-state tuition, $175 per credit hour; Out-of-
state tuition, $400 per credit hour; Room-and-
board, $3,000 per semester. This is an
example of money functioning as
a. a medium of exchange.
b. a store of value.
c. fiat money.
d. a unit of account.
D. Money is being used to measure the cost of
education in the case.
6. Mary Ellen deposits $100 into her savings
account each month. Her daughter Carolyn
keeps all her pennies in a piggy bank. These
are examples of money functioning as
a. a store of value
b. commodity money
c. a medium of exchange
d. a standard of deferred payments
A. Another purpose of money is that it can be
used as a store of value. Money put into
savings to be available at a later point in time
is using money as a store of value.
7. All of the following are examples of
commodity money except
a. cattle
b. gold
c. tobacco
d. $10 Federal Reserve notes
D. Commodity money is money that has some
intrinsic value other than money. Cattle, gold,
and tobacco have value other than being used
as money. Federal Reserve notes (dollar bills)
do not have value except as money.
8. All of the following are functions of money
a. medium of exchange.
b. unit of account.
c. index of prices.
d. standard of deferred payment.
C. Money is used as a medium of exchange,
a unit of account, and a standard of
deferred payment.
9. All of the following are problems with
commodity money except
a. often commodity money deteriorates in
b. often commodity money is too bulky for
major transactions.
c. often commodity money is not divisible into
small and uniform units.
d. often commodity money is viewed as an
unfair competitor by suppliers of fiat
D. Different forms of money always compete,
this is not a problem; in such a case a good
form of money will drive out a bad form.
10. Whatever functions as money must be
a. authorized by the government
b. accepted for deposit by banks
c. backed by precious metals like gold or
d. limited in supply
D. Because money can be just about anything,
it does not have to be sanctioned by the
government or backed up by anything. It
does not have to be in a form that can be
deposited in a bank. It does, however, have to
be limited in supply to have any value.
11. In the United States economy which one of
the following is not money?
a. a Susan B. Anthony $1 coin
b. a checking account at a bank
c. a 25-cent piece (i.e., a quarter)
d. a $100 U.S. Government savings bond
D. U.S Government savings bonds are not
transferable in terms of ownership.
Therefore, they could not be used as money.
12. The difference between bank notes, Federal
Reserve notes, and fiat money is that
a. fiat money is redeemable for gold or silver,
but the others are not.
b. bank notes are redeemable for gold or
silver but the others are not.
c. fiat money derives its acceptability as
money from the precious metal which
back it.
B. Bank notes are papers promising a specific
amount of gold or silver to bearers who
presented them to issuing banks for
redemption; an early type of money.
13. Money is legal tender if
a. people willing accept it in payment of debts
b. it is backed by gold or silver
c. it is commodity money
d. the government says it is
D. Legal tender is when the legal courts of the
land recognize certain pieces of paper as
payment of personal and public debt (public
debt is tax money owed to the government).
This is why is says on each of our dollars,
this note is legal tender for all debts public
and private.
14. An important function of commercial banks,
in addition to storing money and keeping it
safe, is to
a. print new currency.
b. issue fiat money.
c. mint coins.
d. make loans.
D. We have what is called a partial reserve
banking system. Banks only keep a part of
their assets in reserve, the rest is free to lend
out; the interest earned on the money that is
lent out is how banks make a profit.
15. The first bankers were probably
a. carpenters
b. stock brokers
c. goldsmiths
d. sea captains
C. In the very early days of capitalism, gold
and silver were the primary forms of money.
When a person had a lot of gold he would
want to keep his gold safely somewhere. So he
would give his money to a goldsmith. These
goldsmiths, in turn, discovered that they
could lend a portion of their gold holdings
out to make interest income. Thus they
became our first banks.
16. In the world of banking, checks are
a. written instructions from a depositor to the
b. written instruction from one depositor to
c. a form of commodity money
d. token money
A. A check is simply instructions to a bank to
free the funds in a persons bank account.
17. Fractional reserve banking occurs when
a. a bank has reserves which exceed it
b. a bank has reserves which are equal to its
c. a bank has reserves which are less than its
d. some depositors lose their deposits through
poor banking management
C. A fractional reserve banking system is a
system that allows its banks to lend out a
portion of every dollar deposited in the bank.
This is what allows a bank to make a profit.
18. When prices rise
a. the purchasing power of money rises
b. the purchasing power of money falls
c. the purchasing power of money remains
d. the purchasing power of money either rises
or falls, depending upon the size of the
national debt
B. As prices rise it takes more money to buy the
same amount of goods and services as used to
be the case. This is what we call inflation.
19. Which of the following is most critical for
the maintenance of an efficient, productive
a. money backed by gold or silver
b. steadily rising prices
c. an unlimited and unregulated supply of
d. a properly functioning monetary system
D. A stable and properly functional monetary
system is a pillar which any economy is built
20. The United States is said to have a dual
banking system because
a. some banks make mortgage loans and some
banks do not.
b. some banks have state charters and some
have national charters.
c. two different types of banks are authorized
to issue bank notes.
B. If you wanted to start a bank, you would need
a license. You could get a license either from the
federal government or the state banking
commission which the bank would reside. If
you got your license from the federal
government you would be a national bank and
would have the word national in your name.
21. All of the following are powers of the
Federal Reserve System except
a. the ability to buy and sell government
b. the authority to issue Federal Reserve
c. the responsibility to clear checks
d. the obligation to make loans to the general
D. The Federal Reserve is known as a bankers
bank. It only does business with other
financial institutions and not the general
public or businesses.
22. Which one of the following is not a function
of the Federal Reserve banks? The banks
serve as
a. lenders to major corporations.
b. lenders to banks.
c. lenders to the federal government.
d. banks to bankers.
A. A Federal Reserve bank is what is called a
bankers bank, it only does business with
financial institutions. It does not do business
with consumers or businesses.
23. The discount rate is
a. the interest rate charge to commercial
banks for loans from the Federal Reserve
b. the rate or percent of deposits which banks
are required to hold on reserve
c. the rate of interest paid on government
d. the charge for cashing a check at a Federal
Reserve bank
A. Only financial institutions can borrow
money from the Fed. The interest rate they
pay to borrow this money is called the
discount rate.
24. Between 1930 and 1933 many banks in the
U.S. failed because
a. the FDIC moved too slowly to prevent the
bank failures.
b. most bankers were either corrupt or
c. of excessive regulation by the federal
d. people lost confidence in them.
D. Our banking system works because we
believe it works. Because we have a partial
reserve banking system, if enough depositors
lose faith and withdraw their money from
banks, the whole banking system would fail.
25.The Federal Reserve banks probably could
have prevented many of the bank failures in
the early 1930s by
a. raising the reserve requirements of the
commercial banks
b. lending large sums of money to the
commercial banks
c. improving the system whereby checks are
B. Incredibly as it is, the Fed actually tightened
the money supply in the early years of the
Great Depression. The proper policy would
have been to loosen the money supply to get
more money in circulation in order to
encourage an increase in spending.
26. Because Federal Reserve banks have
unlimited power to create money,
a. they are more likely to fail than other
b. they are the cause of most inflation in the
c. they cannot fail.
d. FDIC insurance against bank failure is
C. Technically the Fed cannot fail because it
can always meet its commitments by creating
new money. However, if it does this too much,
the result would be inflation.
27. Which of the following was not an action
taken to end the financial crisis of the 1930s?
a. creation of the Federal Reserve System
b. creation of the Federal Deposit Insurance
c. a one week bank holiday
d. revision of the banking laws.
A. The Federal Reserve System was established
in 1913, the same year that the income tax
became law. Woodrow Wilson was the
President at that time.
28. The members of the Board of Governors of
the Fed are
a. elected by the member banks
b. chosen by the state Governors
c. elected for seven year terms
d. selected by the President with approval by
the Senate
D. All presidential appointments have to be
approved by the Senate according to our
Constitution. There are seven members of the
Board of Governors. There terms are for 14
years after which they cannot be
redesignated, except for the chairman who
serves for four years, but he can be
redesignated by the President.
29. The Federal Open Market Committee of the
a. is responsible for regulation of commodity
b. is responsible for regulation of the New York
Stock Exchange
c. uses the buying and selling of U.S. government
securities to accomplish its objectives
C. The main function of the Open Market
Committee is to decide when and how much
to buy or sell government securities. During
periods of inflation, more securities would be
sold; during periods of unemployment, more
securities would be bought.
30. The number of Federal Reserve banks is
a. seven.
b. twelve.
c. fourteen.
d. about 10,000.
B. The United States is divided into 12
federal reserve districts. Each district has
a Federal Reserve bank.
31. The job of the Federal Deposit Insurance
Corporation is to
a. guarantee that investors will not lose
money by investing in government bonds.
b. insure U.S. Treasury deposits in the
Federal Reserve banks.
c. insure commercial banks against the
possibility of losing money.
d. insure the deposits in commercial banks
and savings banks.
D. The Federal Deposit Insurance Corporation
(FDIC) was established by the U.S. Congress.
Each bank account of participating banks is
insured up to $100,000.
32. One of the purposes of the banking reforms
of the 1930s was to
a. require banks to invest in more stocks.
b. require banks to invest in more corporate
c. discourage the public from putting so much
faith in the banking system.
d. restrict banks assets primarily to loans
and government securities.
D. Before this banks held their assets in many
different ways. Many of these forms became
worthless as a result of the stock market
crash in October of 1929 and the ensuing
Great Depression.
33.The U.S. has more banks per capita than
most other countries primarily because it
a. has more people.
b. has a more prosperous economy.
c. has restricted branch banking.
d. continues to prohibit bank holding
C. Where one bank may be more efficient,
government rules prohibit certain types of
banking practices, thus branch banking is
somewhat restricted, especially across
state lines. This, however, is in the process
of changing.
34. All of the following are goals of the Fed
a. a high level of employment in the U.S.
b. stability in interest rates.
c. rising prices (to encourage production).
d. stability in financial markets.
C. The primary goal of the Fed is price
stability. With a threat of inflation, the Fed
will decrease the money supply in order to
bring down prices. If unemployment and
falling prices is a problem, the Fed will take
steps to increase the nations money supply.
35. Deregulation of banks and other depository
institutions did all of the following except
a. allow all depository institutions to offer
checking accounts.
b. allow all depository institutions to offer
money market accounts.
c. allow thrift institutions more latitude in
investing their assets.
d. allow the FDIC to open branch banks of its
D. The FDIC is what it has always been; an
institution that insures bank deposits.
36. Deregulation in the 1970s, it is now
recognized, produced a disaster resulting in a
financial bailout. This is an example of
a. moral hazard.
b. the Laffer Curve.
c. Classical economics.
A. This is a typical case of moral hazard. Moral
hazard takes place when the risks of
investments are eliminated by promise of a bail
out if anything goes wrong. Generous
depository insurance provided this protection.
This encouraged banks to make risky
investments hoping to make big gains with no
fear of loss. The resultant collapse in banking
led to the huge $200 bailout of 1989.
37. Insurance protecting individuals from the
loss of their bank deposits
a. makes bank officials especially careful
about the loans and investments they make.
b. makes it virtually impossible for a bank to
c. is so costly that few banks can afford it.
d. makes depositors less concerned about the
safety of their money than the interest rate
it is earning.
D. The purpose of the insurance, like the FDIC,
is to shore up citizens confidence in the
banking system. As long as people believe
that the system will work, it will work.
38. When many depository institutions -
especially thrifts - failed in the 1970s and
a. most depositors got their money back.
b. most depositors lost everything.
c. most of the losses to depositors were paid
out of the pockets of the owners of these
A. The government was involved in a multi
billion dollar bailout of many thrift
institutions. This along with the FSLIC,
which no longer exists, protected most
39. Cleaning up the mess created by the failure
of so many thrift institutions in the 1980s has
involved all of the following except
a. increasing deposit insurance premiums.
b. asking the American taxpayer to pay
nearly $125 billion to cover losses.
c. shutting down weak and failing thrifts.
d. creating a new super-agency with great
new powers to oversee the day-to-day
operations of thrifts.
D. The result of the bail out was a restoration
of confidence and the survival of many
savings and loans. However, the distinction
between savings and loans and banks was
obliterated; today there is little difference.
40. Banks are referred to as financial
intermediaries because they
a. receive new Federal Reserve notes from the
Fed and put them into circulation
b. bring together the two sides of the market-
savers and borrowers
c. bring different savers into contact with
each other
d. bring about the merger of smaller banks to
make larger ones
B. The purpose of banks is to take in money
from savers, to keep a small portion of this
money to meet day to day transactions, and
then to lend out the rest of it.
41. When liquidity refers to the ease with which
an asset can be converted into the medium of
exchange without a significant loss of value,
the least liquid of the assets below is
a. real estate.
b. currency.
c. a travelers check.
d. oil.
A. Of the options listed above, real estate would
be the most difficult to convert to a medium
of exchange.
42. Immediately after it accepts its first deposit
the day it opens its doors, the balance sheet of
the Brand New National Bank will likely
contain all of the following except
a. net worth.
b. checkable deposits.
c. stock in the district Federal Reserve bank.
d. loans.
D. A bank has to attract money before it has
any to lend. Every dollar in a bank comes
from someones deposit.
43. All of the following might be assets of a bank
a. building
b. furniture
c. outstanding loans
d. checkable deposits
D. Checkable deposits are not assets of a bank
because because they are liabilities. This is
money that the bank owes depositors.
44. University Center National Bank has
checkable deposits of $800,000, outstanding
loans and other securities valued at $550,000
and $250,000 of cash in its vault. When the
reserve requirement is 20%, the bank has
a. total reserves of $160,000
b. total reserves of $300,00
c. excess reserves of $90,000
d. excess reserves of $250,00
C. The banks assets equal $800,000. Of this it
can legally lend out .80 x $800,000 or
$640,000. Because it has already lent out
$550,000 it has $90,000 it can still lend out.
45. The requirement that banks hold required
reserves comes from the
a. Federal Reserve
b. stockholders of the bank
c. depositors of the bank
d. Federal Deposit Insurance Corporation
A. The Federal Reserve is our central bank.
It has a certain amount of authority over
all financial institutions.
46. Liquidity contributes to the banks
achievement of all of the following except
a. confidence of the depositors.
b. income of the bank.
c. ability to pay funds out to depositors on
d. flexibility to make an immediate loan to a
valued customer.
B. A banks assets are not dependent on the
form in which a bank holds those assets.
Liquidity, therefore, does not determine the
income of a bank.
47. The federal funds rate is the rate of interest
paid when
a. the Federal Reserve makes loans to
member banks
b. taxpayers pay overdue taxes
c. one bank briefly borrows reserves from
another bank
d. banks make loans to the federal
C. Banks can borrow money from depositors,
the Fed, or other banks. When it borrows
from other banks short term, one day, the
interest paid is determined by the federal
funds rate.
48. The Fed performs all of the following
functions except
a. makes loans to banks
b. clears checks for banks
c. holds deposits of banks
d. mints U.S. coins
D. The minting of U.S. coins is a function of
the U.S. Treasury.
49. Most of the assets of the Fed are held in the
form of
a. gold
b. U.S. government securities
c. loans to member banks
d. U.S. Treasury deposits
B. A U.S. government security is a bond that
the federal government has sold; this is how
the federal government borrows money. The
Fed is a major purchaser of these securities.
50. Most of the liabilities of the Fed are in the
form of
a. Federal Reserve notes.
b. checkable deposits.
c. U.S. Treasury deposits.
d. loans to member banks.
A. Federal Reserve notes are the dollar bills
we use in the market place. These bills are
IOUs of the Federal Reserve. Therefore,
they are considered liabilities of the
Federal Reserve because they represent
what is owed.
51. Which of the following statements is
a. There are twelve regional banks in the
Federal Reserve System.
b. The Fed tries to maintain stability in
financial markets.
c. The coins and currency in circulation in the
U.S. are produced by the Fed.
C. Coins and currency are produced by the
U.S Treasury and not the Federal Reserve.
52. The Fed can increase the amount of excess
reserves in banks by
a. selling U.S. government securities
b. raising the discount rate
c. borrowing from member banks
d. reducing the required reserve ratio
D. Excess reserves is cash on hand above a
banks required reserves. The three main
ways the Fed can increase banks excess
reserves is to buy government securities,
lower the discount rate, and to reduce the
required reserves imposed on banks.
53. By far the most important (i.e., most
frequently used) mechanism by the Fed for
increasing excess reserves in the banks is
a. selling U.S. government securities.
b. buying U.S. government securities.
c. raising the required reserve ratio.
d. reducing the required reserve ratio.
B. When the Fed buys government securities
from banks the securities are exchanged for
cash, therefore the banks reserves increase.
Only cash can be held in reserves by banks.
54. Assuming that a bank is exactly meeting its
reserve requirement, the sale by Academy
National Bank to the Fed of $10,000 in U.S.
government securities immediately increases
the excess reserves of the bank by
a. $2000.
b. $8000.
c. $10,000.
d. $20,000.
C. The securities were not counted as a part of
a banks reserves. But when the securities
were exchanged for cash, because cash is
counted as a part of a banks reserves, its
excess reserves increases by the full $10,000.
55. Assume there are no excess reserves in the
banking system when the reserve requirement
is 20%. The purchase by the Fed of $10,000 in
U.S government securities from Academy
National Bank has the potential of ultimately
increasing the money supply by a total of
a. $8,000.
b. $10,000
c. $50,000.
C. Since there was exactly zero excess reserves
to begin with, the infusion of $10,000 in cash
means that the bank now has exactly $10,000
in excess reserves, which we assume it lends
out. Because the multiplier is 1 divided by the
reserve requirement or 1 divided by 1/5
equals 5, 5 times $10,000 = $50,000.
56. When a bank makes a loan of $5000 to a
regular customer the immediate effect is that
a. the banks assets and liabilities both
increase by $5000
b. the bank subtracts $5000 from the
customers account
c. total bank reserves decrease by $4000
A. The loan is an asset because it is money that
is owed to the bank. Because two sides of a
banks ledger have to be equal, when the
banks assets increase by $5,000, so to its
liabilities increase by $5,000; assets must
equal liabilities on a banks balance sheet.
57. An individual bank in a banking system can
lend no more than its excess reserves because
a. credit-worthy borrowers are hard to find.
b. of the required reserve ratio.
c. the bank risks the loss of reserves when
borrowers spend the money.
d. low interest rates make lending
C. A bank has to keep reserves in order to meet
day to day transactions. When depositors
come to withdraw their money, a bank has to
make sure it has the money on hand to give to
these people. Therefore a bank can only lend
money out of its excess reserves.
58. If an initial increase in excess reserves of
$20,000 can generate a maximum increase in
the money supply of $80,000, the required
reserve ratio must be
a. 4%.
b. 10%.
c. 20%.
d. 25%.
D. The formula for the deposit multiplier is 1
divided by the reserve ratio. 25% is equal to
1/4. One divided by 1/4 is equal to 4. 25% is
the answer because 4 times $20,000 is equal
to $80,000.
59. Assume the Fed initiates a money and credit
expansion process by purchasing $5000 in U.S.
securities from banks. Also, assume any
expansion takes place to the greatest extent
possible. If the reserve requirement is 10%,
a. required reserves will have increased by
b. excess reserves will have increased by $5000.
c. loans will have increased by $5000.
A. The deposit multiplier in this case is 10. The
total amount of money generated will be
$50,000. Of this 1/10, or $5,000, must be kept
as required reserves.
60. A bank gains excess reserves in all of the
following cases except
a. the bank sell U.S. securities to the Fed
b. the required reserve ratio is increased
c. the bank sells U.S. securities to the public
d. the bank borrows from the Fed
B. When the required reserve ratio
increases, banks have to keep more of
their assets in reserve, therefore, a bank
loses excess reserves.
61. In the money and credit expansion process,
when r = the required reserve ratio, the total
change in checkable deposits is equal to the
initial change in excess reserves
a. multiplied by r.
b. plus the change in required reserves.
c. divided by 1/r.
d. multiplied by 1/r.
D. The deposit multiplier is one divided by the
reserve ratio. So one divided by 1/r times the
initial change in excess reserves will equal the
ultimate change in checkable deposits.
62. The potential expansion of the money supply
when there are excess reserves can only be
realized when
a. people chose not to increase their cash
b. banks lend only a portion of their cash
c. borrowers set aside part of their loans for
d. borrowers cut back on borrowing
A. The multiplier process is dependant on
people spending their money. If people decide
to save more of their money, the multiplier
process is limited.
63. If the banking system has no excess reserves,
a multiple contraction of money will
necessarily occur if
a. the reserve requirement is reduced.
b. banks sell U.S. government securities to the
c. loans are repaid to the banks.
C. The multiplier process works in reverse.
Lets suppose that the multiplier is 5. An
increase of loans by $100 will result in $500 of
checkable deposits. But if $100 is paid back,
the reverse of a loan, then $500 of potential
checkable deposits is taken out of the system.
64. Lowering the discount rate is a way to
expand the money supply because
a. it encourages banks to borrow from the
Fed so banks can more easily accommodate
their customers needs for loans
b. in encourages business customers to
borrow directly from the Fed
c. a lower discount rate reduces the amount
of reserves that banks are required to keep
A. The discount rate is the interest rate that
banks pay to borrow money from the Fed.
When this rate is lowered, it becomes less
expensive to borrow money from the Fed, so
banks will tend to increase their borrowing.
65. In order to increase the money supply the
banking system must have
a. required reserves
b. the authority to but corporate checks
c. the authority to print U.S. currency
d. excess reserves
D. Banks can only lend money out from the
excess reserves.
66. By reducing the required reserve ratio, the
Fed can not only create excess reserves, but
a. increase mortgage interest rates.
b. reduce borrowing by corporations.
c. increase the safety of bank deposits.
d. increase the money multiplier.
D. The money multiplier is equal to the
reciprocal of the reserve requirement. So as
the reserve requirement decreases the value
of the multiplier increases. In other words, as
the denominator of a fraction increases, the
value of the number increases.
67. The appropriate open market operation for
reducing the money supply is
a. buying U.S. government securities.
b. limiting the amount loaned to banks.
c. buying up Federal Reserve notes.
d. selling U.S. government securities.
D. When banks exchange cash for government
securities, their excess reserves decrease.
Therefore, the amount of money they have to
lend out decreases, thus decreasing the
money supply.
68. Which of the following statements is correct?
a. To control the money supply, the Fed relies
primarily on the reserve requirement.
b. The discount rate is the rate of interest
which banks charge to their best customers.
c. The Fed changes the reserve requirement
d. Banks can turn a borrowers IOU into
money, that is, they can create money.
D. When people borrow money they will spend
the money. Anytime money is spent, there is a
multiple effect on the money as money
changes hands and people spend a percentage
of any money they receive.
69. Increasing the discount rate has the same
effect on the money supply as
a. reducing the reserve requirement.
b. discovering a large new deposit of gold.
c. selling (by the Fed) of U.S. government
C. When the Fed sells U.S. government
securities to banks, banks reserves diminish
as the securities replace cash. When the Fed
increases the discount rate, banks will borrow
less money from the Fed and therefore lend
out less money. So the two actions have the
same result, less lending by banks and less
money circulating in the economy.
70. Required reserves must be held
a. either as vault cash or as a deposit at the
b. on both checkable deposits and savings
c. entirely at the Fed, for safety.
d. entirely in the banks vault, for availability.
A. Only cash can be used as reserves. This cash
can be kept at the bank, or at the Fed, or
some in both places.
71. Money is created immediately when
a. the Fed reduces the reserve requirement.
b. the Fed reduces the discount rate.
c. banks make loans.
d. the Fed buys U.S. government securities
from banks.
C. Money is not really created when banks lend
money, although we call it money creation.
What is really happening is that money is
being multiplied as it is spent and respent as
it goes from person to person.
72. Banks earn interest on all of the following
a. U.S. government securities.
b. loans to other banks.
c. mortgage loans.
d. reserves deposited at the Fed.
D. A bank does not earn interest on its reserves.
This is true even if those reserves are kept at
the Federal Reserve.
73. When the reserve requirement is 10%, each
time an individual bank gains $1000 in
reserves, it is able to make loans totaling
a. $900.
b. $1000.
c. $100.
d. $9000.
A. The required reserve of $1000 with a
reserve requirement of 10% is equal to
$100. Therefore, a bank can lend out $900
of the $1000.