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Money, Banking, and Financial Markets Practice Test: The Money Supply Process
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The money supply process is the mechanism that determines the level of money supply. It involves: Clearing checks, Issuing new currency, Withdrawing damaged currency from circulation, and Managing and making discount loans to banks.  The money supply process includes four items: Currency in circulation, Reserves, Securities, and Loans to banks.  The formula for money supply is MS = (MB x MM). MB, or monetary base, is the amount of money in circulation or available to be circulated. MM is money multiplier, which is calculated by dividing 1 by the required reserve set by the Federal... Show more
Money, Banking, and Financial Markets Practice Test: The Money Supply Process
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25 Questions

1. In the model of the money supply process, the bankʹs role in influencing the money supply process is represented by
2. In the model of the money supply process, the Federal Reserveʹs role in influencing the money supply is represented by
3. If the required reserve ratio is 25 percent, the simple deposit multiplier is
4. Everything else held constant, an increase in the currency ratio causes the M1 money multiplier to ________ and the money supply to ________.
5. The interest rate the Fed charges banks borrowing from the Fed is the
6. The monetary base minus reserves equals
7. Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts.
8. Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine million dollars in excess reserves. Given this information, we can say First National Bank faces a required reserve ratio of ________ percent.
9. The Fed can exert more precise control over ________ than it can over ________.
10. A bank has no excess reserves and demand deposit liabilities of $100,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, the bankʹs excess reserves will now be
11. The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits.
12. A decrease in ________ leads to an equal ________ in the monetary base in the long run.
13. In the simple deposit expansion model, if the banking system has excess reserves of $75, and the required reserve ratio is 20%, the potential expansion of checkable deposits is
14. If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the monetary base is
15. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1 money multiplier is
16. When an individual sells a $100 bond to the Fed, she may either deposit the check she receives or cash it for currency. In both cases
17. If the Fed injects reserves into the banking system and they are held as excess reserves, then the monetary base ________ and the money supply ________.
18. Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and one million dollars in required reserves. Given this information, we can say First National Bank has ________ million dollars in excess reserves.
19. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the excess reserves-checkable deposit ratio is
20. If the required reserve ratio is 10 percent, the simple deposit multiplier is
21. If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
22. Suppose your payroll check is directly deposited to your checking account. Everything else held constant, total reserves in the banking system ________ and the monetary base ________.
23. For which of the following is the change in reserves necessarily different from the change in the monetary base?
24. Reserves are equal to the sum of
25. If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is________ billion.

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