Question 1

A bank receives a $100,000 discount loan from the Federal Reserve. If the required reserve ratio is 10%, what is the maximum potential increase in deposits in the banking system, assuming no currency drain or excess reserves?

Accepted Answer

$1,000,000

Question 2

Which of the following is reported as an asset on a commercial bank’s balance sheet?

Accepted Answer

Reserves (vault cash + deposits at the Fed)

Question 3

If the required reserve ratio is $20,000 on $200,000 of checkable deposits, and a bank holds $80,000 in reserves, what is the maximum deposit outflow it can sustain without falling below its required reserves?

Accepted Answer

$60,000

Question 4

Which formula correctly expresses the monetary base ($MB$) in terms of currency in circulation ($C$), bank reserves ($R$), and U.S. Treasury monetary liabilities?

Accepted Answer

$MB = C + R$

Question 5

If the simple deposit expansion multiplier is $m = 1/rr$, what is the value of $m$ if the required reserve ratio ($rr$) is 25%?

Accepted Answer

$m = 1/0.25 = 4$

Question 6

A bank has excess reserves of $7,000 and deposit liabilities of $100,000. If the reserve requirement is 10%, what is the bank’s actual reserves?

Accepted Answer

$17,000$

Question 7

When the Federal Reserve calls in a discount loan from a bank, what is the immediate effect on the monetary base and reserves?

Accepted Answer

Monetary base decreases; reserves decrease

Question 8

Which of the following best describes the effect of adjustable rate mortgages (ARMs) on borrowers when interest rates rise?

Accepted Answer

Borrowers face higher payments

Question 9

If the required reserve ratio is one-third, currency in circulation is $300 billion, checkable deposits are $900 billion, and there are no excess reserves, then the monetary base is:

Accepted Answer

$600 billion$

Question 10

Which of the following is a financial derivative used to transfer hedge rate risk?

Accepted Answer

Swap contract

Question 11

If the Federal Reserve extends a $100 discount loan to a bank that previously had no excess reserves, by how much can deposits in the banking system potentially increase, assuming a required reserve ratio of 10%?

Accepted Answer

$1,000$

Question 12

Which of the following is NOT included in the monetary base?

Accepted Answer

Savings deposits

Question 13

If the M1 money multiplier is $m = (1 + c)/(r + e + c)$, where $c$ is the currency ratio, $r$ is the required reserve ratio, and $e$ is the excess reserve ratio, what happens to $m$ if $c$ increases?

Accepted Answer

$m$ increases

Question 14

According to the Taylor Principle, when inflation rises, the nominal interest rate should be adjusted:

Accepted Answer

More than the inflation increase

Question 15

Using Taylor’s rule: $i = r^* + \pi + 0.5(\pi - \pi^*) + 0.5(output\ gap)$, if $r^* = 2.0\%$, $\pi = 1.8\%$, $\pi^* = 2.0\%$, and output gap = 0.06%, what is the nominal federal funds rate target?

Accepted Answer

1.96%

Question 16

Which of the following best describes the Fed’s dual mandate?

Accepted Answer

Dual

Question 17

If the Federal Reserve increases the required reserve ratio, what is the immediate effect on the simple deposit multiplier?

Accepted Answer

It decreases

Question 18

Which of the following is a real-world example of regulatory arbitrage?

Accepted Answer

Banks using loopholes in financial regulations to avoid capital requirements

Question 19

If a bank sells $1,000 in government bonds, what is the effect on its reserves, assuming no other changes?

Accepted Answer

Reserves decrease by $1,000

Question 20

Which of the following is true about the Open Market Trading Desk (Markets Group)?

Accepted Answer

It is located at the Federal Reserve Bank of New York

Federal Reserve, Monetary Policy, and Banking System: Key Concepts and Calculations

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