Chapter 16 (29) Practice Test: The Monetary System: Multiple Choice
Chapter 16 (29) Practice Test: The Monetary System: Multiple Choice
Chapter 16 (29) Practice Test: The Monetary System: Multiple Choice
This practice test is by no means comprehensive and should not be the only source of studying for
the test. Furthermore, the level of difficulty of the actual test could be different from this practice
test. The idea here is to give you more practice on the topics discussed in class.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
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____ 21. Suppose the Fed requires banks to hold 10 percent of their deposits as reserves. A bank has $20,000 of excess
reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it
decides to hold only required reserves?
a. $29,000
b. $28,100
c. $19,100
d. $11,000
Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single
bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below.
Assets Liabilities
Reserves $750 Deposits $10,000
Loans 9,250
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Scenario 29-2.
The Monetary Policy of Tazi is controlled by the country’s central bank known as the Bank of Tazi. The local
unit of currency is the Taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300
million Tazes of required reserves, 75 million Tazes of excess reserves, have issued 7,500 million Tazes of
deposits, and hold 225 million Tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits
and so all money is on deposit at the bank.
____ 33. Refer to Scenario 29-2. Assume that banks desire to continue holding the same ratio of excess reserves to
deposits. What is the reserve requirement and the reserve ratio for Tazian Banks?
a. 5 percent, 8 percent
b. 4 percent, 8 percent
c. 4 percent, 5 percent
d. None of the above is correct.
____ 34. Refer to Scenario 29-2. Assuming the only other thing Tazian banks have on their balance sheets is loans,
what is the value of existing loans made by Tazian banks?
a. 6,900 million Tazes
b. 7,125 million Tazes
c. 7,350 million Tazes
d. None of the above is correct.
____ 35. Refer to Scenario 29-2. Suppose the Bank of Tazi loaned the banks of Tazi 10 million Tazes. Suppose also
that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By
how much would the money supply change?
a. 250 million Tazes
b. 200 million Tazes
c. 125 million Tazes
d. None of the above is correct.
____ 36. Refer to Scenario 29-2. Suppose the Bank of Tazi purchased 50 million Tazes of Tazian Treasury Bonds
from the banks. Suppose also that both the reserve requirement and the percentage of deposits held as excess
reserves stay the same. By how much does the money supply change?
a. 625 million Tazes
b. 1,000 million Tazes
c. 1,250 million Tazes
d. None of the above is correct.
____ 37. To increase the money supply, the Fed could
a. sell government bonds.
b. increase the discount rate.
c. decrease the reserve requirement.
d. None of the above is correct.
____ 38. When the Fed conducts open market purchases, reserves
a. increase and banks can increase lending.
b. increase and banks must decrease lending.
c. decrease and banks can increase lending.
d. decrease and banks must decrease lending.
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____ 39. In a fractional-reserve banking system with no excess reserves and no currency holdings, if the central bank
buys $100 million of bonds,
a. reserves and the money supply increase by less than $100 million.
b. reserves increase by $100 million and the money supply increases by $100 million.
c. reserves increase by $100 million and the money supply increases by more than $100
million.
d. both reserves and the money supply increase by more than $100 million.
____ 40. The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits
and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 20
percent and at the same time buys $1 billion of bonds, then by how much does the money supply change?
a. It falls by $45 billion.
b. It falls by $52 billion.
c. It falls by $55 billion.
d. None of the above is correct.
____ 41. Suppose banks decide to hold fewer excess reserves relative to deposits. Other things the same, this action
will cause the
a. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
d. money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.
____ 42. If people decide to hold more currency relative to deposits, the money supply
a. falls. The larger the reserve ratio is, the more the money supply falls.
b. falls. The larger the reserve ratio is, the less the money supply falls.
c. rises. The larger the reserve ratio is, the more the money supply rises.
d. rises. The larger the reserve ratio is, the less the money supply rises.
____ 43. In December 1999 people feared that there might be computer problems at banks as the century changed.
Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In
anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These
actions by the public
a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of
the money supply, it could have sold bonds.
b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of
the money supply, it could have bought bonds.
c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have sold bonds.
d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have bought bonds.
____ 44. The Fed can directly protect a bank during a bank run by
a. increasing reserve requirements.
b. selling government bonds to the bank.
c. lending reserves to the bank.
d. doing any of the above.
____ 45. Imagine that the federal funds rate was above the level the Federal Reserve had targeted. To move the rate
back towards it’s target the Federal Reserve could
a. buy bonds. This buying would reduce reserves.
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b. buy bonds. This buying would increase reserves.
c. sell bonds. This selling would reduce reserves.
d. sell bonds. This selling would increase reserves.
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Chapter 29 Practice Test
Answer Section
MULTIPLE CHOICE
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NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
16. ANS: A PTS: 1 DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Open Market Committee
MSC: Definitional
17. ANS: B PTS: 1 DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Monetary policy
MSC: Applicative
18. ANS: A PTS: 1 DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Inflation | Unemployment
MSC: Definitional
19. ANS: B PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserves | Money supply
MSC: Interpretive
20. ANS: D PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
21. ANS: A PTS: 1 DIF: 3 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
22. ANS: D PTS: 1 DIF: 1 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Fractional-reserve banking
MSC: Applicative
23. ANS: A PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserve ratio
MSC: Applicative
24. ANS: D PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Money multiplier
MSC: Applicative
25. ANS: C PTS: 1 DIF: 3 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Money multiplier
MSC: Applicative
26. ANS: B PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Money multiplier
MSC: Applicative
27. ANS: C PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: The study of economics and definitions in economics
TOP: Money multiplier MSC: Applicative
28. ANS: C PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Open-market operations
MSC: Interpretive
29. ANS: A PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Banks | T-accounts
MSC: Interpretive
30. ANS: C PTS: 1 DIF: 1 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
31. ANS: B PTS: 1 DIF: 1 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Money multiplier
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MSC: Applicative
32. ANS: B PTS: 1 DIF: 1 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Money multiplier
MSC: Applicative
33. ANS: C PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserve ratio
MSC: Applicative
34. ANS: A PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserve ratio
MSC: Applicative
35. ANS: B PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserve ratio
MSC: Applicative
36. ANS: B PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserve ratio
MSC: Applicative
37. ANS: C PTS: 1 DIF: 1 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Money supply | Reserve requirements MSC: Definitional
38. ANS: A PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Open-market operations | Reserves
MSC: Interpretive
39. ANS: C PTS: 1 DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Fractional-reserve banking | Open-market operations MSC: Applicative
40. ANS: A PTS: 1 DIF: 3 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Money multiplier | Open-market operations MSC: Analytical
41. ANS: C PTS: 1 DIF: 3 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves | Money multiplier
MSC: Applicative
42. ANS: B PTS: 1 DIF: 3 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Currency | Money multiplier
MSC: Applicative
43. ANS: D PTS: 1 DIF: 3 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Money multiplier | Open-market operations MSC: Analytical
44. ANS: C PTS: 1 DIF: 1 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Banks | Federal Reserve System
MSC: Definitional
45. ANS: B PTS: 1 DIF: 3 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Federal funds rate | Open-market operations MSC: Analytical
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