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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. When the Fed supplies the banking system with an extra dollar of reserves, deposits increase by more than one dollara process called
2. A simple deposit multiplier equal to two implies a required reserve ratio equal to
3. 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 money supply is________ billion.
4. 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.
5. Total Reserves minus vault cash equals
6. 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 currency, the open market purchase________ reserves; if the proceeds are kept as deposits, the open market purchase ________ reserves.
7. If reserves in the banking system increase by $100, then checkable deposits will increase by$2,000 in the simple model of deposit creation when the required reserve ratio is
8. When the Federal Reserve sells a government bond to a bank, reserves in the banking system________ and the monetary base ________, everything else held constant.
9. A ________ in market interest rates relative to the discount rate will cause discount borrowing to________.
10. Total reserves are the sum of ________ and ________.
11. 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
12. 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.
13. When banks borrow money from the Federal Reserve, these funds are called
14. Individuals that lend funds to a bank by opening a checking account are called
15. When the Federal Reserve purchases a government bond from a bank, reserves in the banking system ________ and the monetary base ________, everything else held constant.
16. Everything else held constant, a decrease in holdings of excess reserves will mean
17. 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 ________.
18. 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 currency ratio is
19. When the Fed buys $100 worth of bonds from First National Bank, reserves in the banking system
20. The total amount of required reserves in the banking system is equal to the ________ the required reserve ratio and checkable deposits.
21. If the required reserve ratio is 15 percent, the simple deposit multiplier is
22. In the simple deposit expansion model, if the Fed extends a $100 discount loan to a bank that previously had no excess reserves, the bank can now increase its loans by
23. The formula that links checkable deposits to the money supply is
24. Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply.
25. If a bank has excess reserves of $20,000 and demand deposit liabilities of $80,000, and if the reserve requirement is 20 percent, then the bank has total reserves of

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