Chapter 14. Practice Questions.

Q1. Let's assume that the economy of Treasure Island had only one bank and no currency (i.e., all payments would be made by check). If the reserves of the bank were stipulated by law to be 15% of deposits, and if the monetary base were equal to 10,000,000 dinars, what would the money supply be in Treasure Island if the single bank loaned the maximum amount possible?

Q2. Let's assume that the economy of Atlantis has a multi-bank banking system with fractional reserves. Let's also assume that the banking system has a reserve ratio of 20%, that the monetary base is 10 billion Sopes, and that 15% of the monetary base is held as currency. What would the money supply be for this economy if the banks had loaned the maximum amount possible, and given the information in this question?

Q3. If the monetary base is $70.0 billion, if $20.0 billion is held as currency, if the banking system has loaned the maximum amount possible, and if the reserve ratio is 10% of deposits, then the money supply will be $_____.

Q4. Let's begin by recognizing that bank reserves include the cash in their vaults plus the reserves held at the central bank. Now, let's assume that the reserve ratio is 0.05 (or 5%), that the currency in circulation is $50 billion (and that $5 billion of the $50 billion is held in bank vaults as reserves). Let's also assume that reserves held at the central bank are equal to $225 billion. If the banks have extended loans to the maximum amount possible, what is the money supply?

Q5. What is the money multiplier for question #4 (to two significant digits)?

Q6. True / False. The three stakeholders in the determination of the US money supply are: the central bank (or the Fed), the financial institutions, and the US Congress.

Q7. True / False. The monetary base of the US includes the reserves of depository institutions that are held at the Fed plus the currency in the vaults of the depository institutions.

Q8. True / False. The money multiplier is equal to the money supply divided by the currency in circulation.

Q9. True / False. If depository institutions exist, if they are required to hold 9% of their deposits as reserves, if the monetary base is $445 billion, if the public holds $123 billion as currency, and if the depository institutions have loaned the maximum amount possible, then the money supply (to the nearest $100 million) would be $3,700 8 billion.

Q10. True / False. Assume that the currency held by the public in question #9 increases from $123 billion to $223 billion. If the monetary base were unchanged, you would predict that the money supply would increase.

Q11. True I False. In an all-currency economy, the money supply would be equal to the monetary base.

Q12. True I False. "High-powered money" is equal to the currency in circulation.

Q13. True / False. The money multiplier is equal to the money supply divided by the monetary base.

Q14. True / False. If banks would not exist, the money multiplier would be one.

Q15. True / False. If the people with deposits in financial institutions would begin to believe that many financial institutions would be on the verge of bankruptcy, you would expect that the money supply would increase as they would increase their holdings of currency.

Q16. True / False. The instruments of monetary policy available to the Fed are: (a) the use of open market operations; (b) varying the discount rate; and (c) varying the reserve ratio.

Q17. True / False. US monetary policy is determined by the Federal Open Market Committee, a Committee that has twelve voting members, of which five represent the Federal Reserve Banks, and it meets eight times a year (and can meet more often if necessary).

Q18. True / False. The monetarists prefer that monetary policy be based on rules while the Keynesians prefer that monetary policy be discretionary.

Q19. True / False. The monetarists favor rules because the monetary policy implementation lag is long and variable.

Q20. True / False. According to the monetarists, monetary policy has no short-run impact on the economy

Q21. True / False. The Monetarists maintain that one cannot rely on the Fed since it is subject to political pressure and since discretionary policy has tended to destabilize the economy

Q22. If investment would have been $1640.0 billion in 1999 and if investment would have been $1547.4 in the year 2000, what would the percentage in investment have been between these two years (to one significant digit).

Q23. Assume that you have a bond that pays you a nominal rate of interest of 3.6%. Now, let’s assume that you are in the 33% tax bracket. Finally, if you expect that inflation will be 2.5% over the next year, what do you expect your real rate of return will be after taxes (to one significant digit)?

Answers.

Q1. 66,666,667 dinars
Q2. 44.0 billion Sopes
Q3. Ms = $520.0 billion
Q4. Ms = 4645.0 billion
Q5. MM = 16.89
Ques #	Ans.	Ques #	Ans.	Ques #	Ans.	Ques #	Ans.	Ques #	Ans.
Q6.	T,T,F=F	Q10.	F	Q14.	T	Q18.	T	Q22.	-5.6%
Q7.	F	Q11.	T	Q15.	F	Q19.	F	Q23.	-0.1%
Q8.	F	Q12.	F	Q16.	T	Q20.	F
Q9.	T	Q13.	T	Q17.	T	Q21.	T