MACRO EXAM #4 TEST BANK QUIZ
QUESTIONS AND ANSWERS
What is an open market operation?
An open market operation is _______. - Answer-the purchase or sale of government
securities by the Federal Reserve System in the open market
The People's Bank of China, China's central, conducted an open market operation
that injected 270 billion yuan into China's banking system.
In the open market operation described in the news clip, explain whether the
People's Bank of China buys or sells securities.
The People's Bank of China _______ securities because _______.
Suppose People's Bank of China buys 20 billion yuan of government securities from
ICBC.
Show how the transaction changes the balance sheets by filling in the numbers. -
Answer-buys; money is being injected into the banking system
Securities=20
Reserves of ICBC=20
Securities=−20
Reserves=20
People's Bank of China boosts liquidity with open market operations
People's Bank of China, China's central, conducted an open market operation that
injected 270 billion yuan into China's banking system.
Explain how the open market operation described in the news clip will change the
quantity of money in China.
(a)The Bank of China makes an open market _______.
(b)Reserves in the banking system _______. Banks _______ loans.
(c)Bank deposits _______ and the quantity of money _______. - Answer-
(a)purchase
(b)increase; make more
(c)increase; increases
Your bank manager tells you that she does not create money; she just lends what is
deposited.
Explain why she is wrong and how she creates money.
The banking system creates money because _______. - Answer-a bank that has
excess reserves can make loans. When a bank creates a loan, the bank increases
the balance of the borrower's account and that increase in deposits is new money
What is the fraction of a bank's total deposits that it holds in reserve? What is the
ratio of reserves to deposits that a bank wants to hold?
What is the effect of a larger desired reserve ratio?
(a)The fraction of a bank's total deposits that it holds in reserve is the _______, and
the ratio of reserves to deposits that a bank wants to hold is its _______.
(b)The greater the desired reserve ratio, _______. - Answer-(a)actual reserve ratio;
desired reserve ratio
(b)the smaller the money multiplier
, What is the effect of an open market sale of $1 million of securities by the Fed?
(a)The quantity of money _______ by $1 million multiplied by _______.
(b)Desired reserve ratio = R/D; Currency drain ratio = C/D; Monetary base = MB;
Quantity of money = M.
The formula used to calculate the money multiplier is _______.
(c)The sign of the money multiplier is _______.
(d)The quantity of money _______. - Answer-(a)decreases;the money multiplier
(b)(1 + C/D)/(R/D)+ (C/D)
(c)positive
(d)decreases
The currency drain ratio is 0.2 and the desired reserve ratio is 0.4.
What is the money multiplier? - Answer-(1 + 0.2)÷(0.4+0.2)
=2
The money multiplier is 2.0 and the currency drain ratio is 0.2.
What is the desired reserve ratio? - Answer-[(1 + 0.2)÷(2.0)]−0.2,
=0.4.
The table shows the quantities of M1, M2, and the monetary base in October 2020.
What are the values of the M1 money multiplier and the M2 money multiplier in
October 2020?
M1=5,579.9
M2=18,811.6
Monetary base=3,115.6
The M1 money multiplier is ______
The M2 money multiplier is _____ - Answer-The M1 money multiplier is
1.8(5,579.9/3,115.6)
The M2 money multiplier is 6(18,811.6/3,115.6)
If the Fed wants to increase the quantity of money, what actions does it take?
What is the effect on reserves in the banking system, loans, bank deposits, and the
quantity of money?
(a)If the Fed wants to increase the quantity of money, it makes an open market
_______.
(b)Reserves in the banking system _______. Banks _______ loans.
(c)Bank deposits _______ and the quantity of money _______. - Answer-
(a)purchase
(b)increase;make more
(c)increase;increase
f the Fed wants to decrease the quantity of money, what actions does it take?
What is the effect on reserves in the banking system, loans, bank deposits, and the
quantity of money?
(a)If the Fed wants to
decrease
the quantity of money, it makes an open market _______.
(b)Reserves in the banking system _______. Banks _______ loans.
(c)Bank deposits _______ and the quantity of money _______. - Answer-(a)sale
QUESTIONS AND ANSWERS
What is an open market operation?
An open market operation is _______. - Answer-the purchase or sale of government
securities by the Federal Reserve System in the open market
The People's Bank of China, China's central, conducted an open market operation
that injected 270 billion yuan into China's banking system.
In the open market operation described in the news clip, explain whether the
People's Bank of China buys or sells securities.
The People's Bank of China _______ securities because _______.
Suppose People's Bank of China buys 20 billion yuan of government securities from
ICBC.
Show how the transaction changes the balance sheets by filling in the numbers. -
Answer-buys; money is being injected into the banking system
Securities=20
Reserves of ICBC=20
Securities=−20
Reserves=20
People's Bank of China boosts liquidity with open market operations
People's Bank of China, China's central, conducted an open market operation that
injected 270 billion yuan into China's banking system.
Explain how the open market operation described in the news clip will change the
quantity of money in China.
(a)The Bank of China makes an open market _______.
(b)Reserves in the banking system _______. Banks _______ loans.
(c)Bank deposits _______ and the quantity of money _______. - Answer-
(a)purchase
(b)increase; make more
(c)increase; increases
Your bank manager tells you that she does not create money; she just lends what is
deposited.
Explain why she is wrong and how she creates money.
The banking system creates money because _______. - Answer-a bank that has
excess reserves can make loans. When a bank creates a loan, the bank increases
the balance of the borrower's account and that increase in deposits is new money
What is the fraction of a bank's total deposits that it holds in reserve? What is the
ratio of reserves to deposits that a bank wants to hold?
What is the effect of a larger desired reserve ratio?
(a)The fraction of a bank's total deposits that it holds in reserve is the _______, and
the ratio of reserves to deposits that a bank wants to hold is its _______.
(b)The greater the desired reserve ratio, _______. - Answer-(a)actual reserve ratio;
desired reserve ratio
(b)the smaller the money multiplier
, What is the effect of an open market sale of $1 million of securities by the Fed?
(a)The quantity of money _______ by $1 million multiplied by _______.
(b)Desired reserve ratio = R/D; Currency drain ratio = C/D; Monetary base = MB;
Quantity of money = M.
The formula used to calculate the money multiplier is _______.
(c)The sign of the money multiplier is _______.
(d)The quantity of money _______. - Answer-(a)decreases;the money multiplier
(b)(1 + C/D)/(R/D)+ (C/D)
(c)positive
(d)decreases
The currency drain ratio is 0.2 and the desired reserve ratio is 0.4.
What is the money multiplier? - Answer-(1 + 0.2)÷(0.4+0.2)
=2
The money multiplier is 2.0 and the currency drain ratio is 0.2.
What is the desired reserve ratio? - Answer-[(1 + 0.2)÷(2.0)]−0.2,
=0.4.
The table shows the quantities of M1, M2, and the monetary base in October 2020.
What are the values of the M1 money multiplier and the M2 money multiplier in
October 2020?
M1=5,579.9
M2=18,811.6
Monetary base=3,115.6
The M1 money multiplier is ______
The M2 money multiplier is _____ - Answer-The M1 money multiplier is
1.8(5,579.9/3,115.6)
The M2 money multiplier is 6(18,811.6/3,115.6)
If the Fed wants to increase the quantity of money, what actions does it take?
What is the effect on reserves in the banking system, loans, bank deposits, and the
quantity of money?
(a)If the Fed wants to increase the quantity of money, it makes an open market
_______.
(b)Reserves in the banking system _______. Banks _______ loans.
(c)Bank deposits _______ and the quantity of money _______. - Answer-
(a)purchase
(b)increase;make more
(c)increase;increase
f the Fed wants to decrease the quantity of money, what actions does it take?
What is the effect on reserves in the banking system, loans, bank deposits, and the
quantity of money?
(a)If the Fed wants to
decrease
the quantity of money, it makes an open market _______.
(b)Reserves in the banking system _______. Banks _______ loans.
(c)Bank deposits _______ and the quantity of money _______. - Answer-(a)sale
