Question

1.When the Federal Reserve sells securities to a commercial bank the monetary base------ and reserves-------

A. Remains unchanged; decrease B. Remains unchanged; increase C. Decrease; decrease D. Decrease; remain unchanged

2. If the required reserve ratio is 15 percent, currency in circulation is $400 Billion, checkable deposits are $800 billion, and excess reserves are $0.8 billion , then the M1 multiplier is

A. 2.5 B. 1.67 C. 2.3 D. .651

3. If the nonbank public elects to holds more currency in an economic downturn , open market operations will result in

A. A smaller multiplier and a smaller increase in the money supply

B. A smaller multiplier but a larger increase in the money supply

C. A larger multiplier but a smaller increase in the money

D. A larger increase in both

4.Everything else held constant, an increase in excess reserves( reserves not lent out) will cause

A. The money supply to rise B, the money supply to remain constant C. The money supply to decrease D. Checkable deposits to rise

5. During the bank panics of the Great Depression, the currency ratio

A. Increased sharply B. Decreased sharply C. Increased slightly D. Decreased slightly

Answer 1

1 When the Federal Reserve sells securities to a commercial bank the monetary base “Decreases” and reserves “Decreases”

2 M1 money multiplier = C + D / C + R

Where,

C = Currency in circulation

D = demand deposits

R = Reserves ie 15% of demand deposits = 15 /100 * 800 = 120

Multiplier = 400 + 800 / 400 + 120 = 1200 / 520

= 2.3

3 If the nonbank public elects to holds more currency in an economic downturn, open market operations will result in “A smaller multiplier and a smaller increase in the money supply”

4 Everything else held constant, an increase in excess reserves ( reserves not lent out) will cause “the money supply to remain constant” because the Excess reserves are not loaned out , so the money supply will not increase.

5 During the bank panics of the Great Depression, the currency ratio “Increased sharply” as people wanted to hold money instead of being let the money in the bank.