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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. 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.
2. When banks borrow money from the Federal Reserve, these funds are called
3. If reserves in the banking system increase by $200, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is
4. Total Reserves minus vault cash equals
5. 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
6. 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
7. The amount of deposits that banks must hold in reserve is
8. If the Fed injects reserves into the banking system and they are held as excess reserves, then the money supply
9. A simple deposit multiplier equal to two implies a required reserve ratio equal to
10. When a member of the nonbank public deposits currency into her bank account,
11. 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.
12. The three players in the money supply process include
13. If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has actual reserves of
14. If reserves in the banking system increase by $100, then checkable deposits will increase by $667 in the simple model of deposit creation when the required reserve ratio is
15. Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will result in a smaller expansion of deposits than the simple model predicts.
16. 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
17. The monetary base minus reserves equals
18. In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed
19. In the model of the money supply process, the bankʹs role in influencing the money supply process is represented by
20. An increase in ________ leads to an equal ________ in the monetary base in the long run.
21. When a bank buys a government bond from the Federal Reserve, reserves in the banking system________ and the monetary base ________, everything else held constant.
22. In the simple deposit expansion model, a decline in checkable deposits of $1,000 when the required reserve ratio is equal to 10 percent implies that the Fed
23. 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.
24. Excess reserves are equal to
25. A bank has excess reserves of $4,000 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 be

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