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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. An assumption in the model of the money supply process is that the desired levels of currency and excess reserves
2. Both ________ and ________ are Federal Reserve assets.
3. Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has________ million dollars in vault cash.
4. If the required reserve ratio is 10 percent, the simple deposit multiplier is
5. The effect of an open market purchase on reserves differs depending on how the seller of the bonds keeps the proceeds. If the proceeds are kept in ________, the open market purchase has no effect on reserves; if the proceeds are kept as ________, reserves increase by the amount of the open market purchase.
6. The three players in the money supply process include
7. When the Fed extends a $100 discount loan to the First National Bank, reserves in the banking system
8. There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks.
9. During the bank panics of the Great Depression the excess reserve ratio
10. Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions.
11. If reserves in the banking system increase by $100, then checkable deposits will increase by $400 in the simple model of deposit creation when the required reserve ratio is
12. The total amount of reserves in the banking system is equal to the ________ required reserves and excess reserves.
13. A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 25 percent. If the reserve requirement is lowered to 20 percent, the bankʹs excess reserves will be
14. All else the same, when the Fed calls in a $100 discount loan previously extended to the First National Bank, reserves in the banking system
15. The ratio that relates the change in the money supply to a given change in the monetary base is called the
16. 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 currency ratio is
17. For which of the following is the change in reserves necessarily different from the change in the monetary base?
18. 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
19. 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 has ________ million dollars in required reserves.
20. Suppose that from a new checkable deposit, First National Bank holds eight million dollars on deposit with the Federal Reserve, nine million dollars in excess reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has________ million dollars in required reserves.
21. When the Federal Reserve calls in a discount loan from a bank, the monetary base ________ and reserves ________.
22. Suppose that from a new checkable deposit, First National Bank holds two million dollars in vault cash, one million dollars in required reserves, and faces a required reserve ratio of ten percent. Given this information, we can say First National Bank has ________ million dollars on deposit with the Federal Reserve.
23. The two most important categories of assets on the Fedʹs balance sheet are ________ and________ because they earn interest.
24. The monetary liabilities of the Federal Reserve include
25. The formula linking the money supply to the monetary base is

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