Question 1

If a bank receives a $100,000 increase in checkable deposits and the required reserve ratio is 20%, what is the maximum amount the bank can lend out without altering its balance sheet?

Accepted Answer

$80,000

Question 2

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

Accepted Answer

Reserves

Question 3

Bank loans from the Federal Reserve are called __________ and represent a __________ of funds.

Accepted Answer

Discount loans; source

Question 4

If the required reserve ratio is $$r = 0.25$$, what is the simple deposit multiplier?

Accepted Answer

$$4$$

Question 5

Which instrument is designed to help investors and institutions hedge interest rate risk?

Accepted Answer

Financial derivative

Question 6

The sum of the Fed’s monetary liabilities and the U.S. Treasury’s monetary liabilities is called:

Accepted Answer

The monetary base

Question 7

If the Federal Reserve calls in a discount loan from a bank, the immediate effect is that the monetary base __________ and reserves __________.

Accepted Answer

Decreases; decreases

Question 8

When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollar—a process called:

Accepted Answer

Multiple deposit creation

Question 9

If a bank has excess reserves of $$7,000 and deposit liabilities of 100$$,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of:

Accepted Answer

$17,000

Question 10

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

Accepted Answer

$600 billion

Question 11

If $$r \u003c e + c$$, a decrease in the currency-to-deposit ratio causes the M1 money multiplier to __________ and the money supply to __________.

Accepted Answer

Increase; increase

Question 12

Initially, $$r = 15\%$$, $$c = 40\%$$, $$e = 5\%. If$$ $$e$$ falls to $$0\%$$, the M1 multiplier will __________, everything else held constant.

Accepted Answer

Increase from 2.33 to 2.55

Question 13

According to the Taylor Principle, when inflation rises, the nominal interest rate should be increased __________ than the inflation increase.

Accepted Answer

More

Question 14

Using Taylor’s rule with $$r^* = 0.03\%$$, output gap $$= +0.06\%$$, $$\pi^* = 2.0\%$$, $$\pi = 1.8\%$$, the nominal federal funds rate target should be:

Accepted Answer

$$1.96\%$$

Question 15

Which of the following best describes the dual mandate of the Federal Reserve?

Accepted Answer

Dual

Question 16

The type of monetary policy regime that the Fed followed from the 1980s up to 2006 (Bernanke’s start) is best described as:

Accepted Answer

Policy with an implicit nominal anchor

Question 17

Adjustable rate mortgages (ARMs) generally benefit borrowers when:

Accepted Answer

Interest rates are falling

Question 18

A loophole mining strategy in regulatory arbitrage is designed to:

Accepted Answer

Circumvent regulations

Question 19

When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system:

Accepted Answer

Increase by $100

Question 20

If the simple deposit expansion model is used, and the Fed sells $100 in government bonds, the change in checkable deposits will be:

Accepted Answer

$$-100 	imes (1/r)$$

Federal Reserve, Monetary Policy, and Banking: Q&A Study Guide

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