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Eco 4223 Final Exam latest update Practice Questions (Original) EXAM | 2026–2027 Latest Update |
Original Questions & Answers with Detailed Rationales | Graded A+
Section 1: The Money Supply Process & Banking System
Q1. If currency held by the public equals $100 billion, reserves
held by banks equal $50 billion, and bank deposits equal $500
billion, then the money supply equals:
A. $150 billion.
B. $550 billion.
C. $600 billion.
D. $650 billion.
Correct Answer: C
Rationale: The money supply (M1) equals currency held by the
public plus checkable deposits: $100B + $500B = $600B.
Reserves are not part of the money supply held by the nonbank
public.
Q2. In a system with fractional-reserve banking:
A. All banks must hold reserves equal to a fraction of their
loans.
B. All banks must hold reserves equal to a fraction of their
deposits.
C. Banks hold no reserves.
D. Reserves equal deposits.
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Correct Answer: B
Rationale: Fractional-reserve banking requires banks to hold
reserves equal to a fraction of their deposit liabilities, not their
loans.
Q3. In a 100% reserve banking system, if a customer deposits
$100 currency into a bank, then the money supply:
A. Increases by $100.
B. Remains the same.
C. Decreases by $100.
D. Doubles.
Correct Answer: B
Rationale: In a 100% reserve system, the bank holds the entire
deposit as reserves and makes no loans. Currency in circulation
falls by $100, but deposits rise by $100, leaving the money
supply unchanged.
Q4. If the ratio of reserves to deposits (rr) increases while the
ratio of currency to deposits (cr) is constant and the monetary
base (B) is constant, then:
A. The money supply increases.
B. The money supply decreases.
C. The money supply remains unchanged.
D. The money multiplier rises.
Correct Answer: B
Rationale: A higher reserve-deposit ratio reduces the money
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multiplier (m=(1+cr)/(rr+cr)m=(1+cr)/(rr+cr)), so for a given
monetary base the money supply falls.
Q5. To reduce the money supply, the Fed:
A. Buys government bonds.
B. Sells government bonds.
C. Lowers the discount rate.
D. Lowers reserve requirements.
Correct Answer: B
Rationale: Open-market sales drain reserves from the banking
system, contracting deposits and the money supply.
Q6. When the Fed makes an open-market sale, it:
A. Increases the monetary base.
B. Decreases the monetary base.
C. Leaves the monetary base unchanged.
D. Increases the money multiplier.
Correct Answer: B
Rationale: Selling securities removes reserves from the banking
system, reducing the monetary base.
Q7. To prevent banks from using excess reserves to make loans
that would increase the money supply, the Fed could conduct
open-market _______ and _______ the interest rate paid on
bank reserves:
A. Sales; raise.
B. Purchases; lower.
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C. Sales; lower.
D. Purchases; raise.
Correct Answer: A
Rationale: Open-market sales drain reserves, and raising the
interest rate paid on reserves increases the incentive to hold
reserves rather than lend them, both restraining money growth.
Q8. If the Fed wishes to increase the money supply, it should:
A. Decrease the discount rate.
B. Increase the discount rate.
C. Sell government bonds.
D. Raise reserve requirements.
Correct Answer: A
Rationale: A lower discount rate reduces the cost of borrowing
reserves from the Fed, encouraging lending and deposit
creation.
Q9. Direct loans made to member banks by the Fed are called:
A. Discount loans.
B. Federal funds loans.
C. Repurchase agreements.
D. Term auction facilities.
Correct Answer: A
Rationale: Loans from the Fed’s discount window are discount
loans.
Eco 4223 Final Exam latest update Practice Questions (Original) EXAM | 2026–2027 Latest Update |
Original Questions & Answers with Detailed Rationales | Graded A+
Section 1: The Money Supply Process & Banking System
Q1. If currency held by the public equals $100 billion, reserves
held by banks equal $50 billion, and bank deposits equal $500
billion, then the money supply equals:
A. $150 billion.
B. $550 billion.
C. $600 billion.
D. $650 billion.
Correct Answer: C
Rationale: The money supply (M1) equals currency held by the
public plus checkable deposits: $100B + $500B = $600B.
Reserves are not part of the money supply held by the nonbank
public.
Q2. In a system with fractional-reserve banking:
A. All banks must hold reserves equal to a fraction of their
loans.
B. All banks must hold reserves equal to a fraction of their
deposits.
C. Banks hold no reserves.
D. Reserves equal deposits.
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Correct Answer: B
Rationale: Fractional-reserve banking requires banks to hold
reserves equal to a fraction of their deposit liabilities, not their
loans.
Q3. In a 100% reserve banking system, if a customer deposits
$100 currency into a bank, then the money supply:
A. Increases by $100.
B. Remains the same.
C. Decreases by $100.
D. Doubles.
Correct Answer: B
Rationale: In a 100% reserve system, the bank holds the entire
deposit as reserves and makes no loans. Currency in circulation
falls by $100, but deposits rise by $100, leaving the money
supply unchanged.
Q4. If the ratio of reserves to deposits (rr) increases while the
ratio of currency to deposits (cr) is constant and the monetary
base (B) is constant, then:
A. The money supply increases.
B. The money supply decreases.
C. The money supply remains unchanged.
D. The money multiplier rises.
Correct Answer: B
Rationale: A higher reserve-deposit ratio reduces the money
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multiplier (m=(1+cr)/(rr+cr)m=(1+cr)/(rr+cr)), so for a given
monetary base the money supply falls.
Q5. To reduce the money supply, the Fed:
A. Buys government bonds.
B. Sells government bonds.
C. Lowers the discount rate.
D. Lowers reserve requirements.
Correct Answer: B
Rationale: Open-market sales drain reserves from the banking
system, contracting deposits and the money supply.
Q6. When the Fed makes an open-market sale, it:
A. Increases the monetary base.
B. Decreases the monetary base.
C. Leaves the monetary base unchanged.
D. Increases the money multiplier.
Correct Answer: B
Rationale: Selling securities removes reserves from the banking
system, reducing the monetary base.
Q7. To prevent banks from using excess reserves to make loans
that would increase the money supply, the Fed could conduct
open-market _______ and _______ the interest rate paid on
bank reserves:
A. Sales; raise.
B. Purchases; lower.
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C. Sales; lower.
D. Purchases; raise.
Correct Answer: A
Rationale: Open-market sales drain reserves, and raising the
interest rate paid on reserves increases the incentive to hold
reserves rather than lend them, both restraining money growth.
Q8. If the Fed wishes to increase the money supply, it should:
A. Decrease the discount rate.
B. Increase the discount rate.
C. Sell government bonds.
D. Raise reserve requirements.
Correct Answer: A
Rationale: A lower discount rate reduces the cost of borrowing
reserves from the Fed, encouraging lending and deposit
creation.
Q9. Direct loans made to member banks by the Fed are called:
A. Discount loans.
B. Federal funds loans.
C. Repurchase agreements.
D. Term auction facilities.
Correct Answer: A
Rationale: Loans from the Fed’s discount window are discount
loans.
