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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. Assuming initially that r = 10%, c = 40%, and e = 0, a decrease in r to 5% causes the M1 money multiplier to ________, everything else held constant.
2. 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.
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 excess reserves-checkable deposit ratio is
4. An increase in ________ leads to an equal ________ in the monetary base in the short run.
5. The Fed does not tightly control the monetary base because it does not completely control
6. High-powered money minus currency in circulation equals
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. In the simple deposit expansion model, if the required reserve ratio is 10 percent and the Fed increases reserves by $100, checkable deposits can potentially expand by
9. The formula that links checkable deposits to the money supply is
10. If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the level of excess reserves in the banking system is
11. If a bank has excess reserves of $7,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 15 percent, then the bank has actual reserves of
12. When the Fed supplies the banking system with an extra dollar of reserves, deposits ________ by ________ than one dollara process called multiple deposit creation.
13. The relationship between borrowed reserves, the nonborrowed monetary base, and the monetary base is
14. When the Federal Reserve extends a discount loan to a bank, the monetary base ________ and reserves ________.
15. When the Fed sells $100 worth of bonds to First National Bank, reserves in the banking system
16. The money supply is ________ related to the nonborrowed monetary base, and ________ related to the level of borrowed reserves.
17. The simple deposit multiplier can be expressed as the ratio of the
18. Individuals that lend funds to a bank by opening a checking account are called
19. If the required reserve ratio is 15 percent, the simple deposit multiplier is
20. If a person selling bonds to the Fed cashes the Fedʹs check, then reserves ________ and currency in circulation ________, everything else held constant.
21. If the required reserve ratio is equal to 10 percent, a single bank can increase its loans up to a maximum amount equal to
22. Decisions by ________ about their holdings of currency and by ________ about their holdings of excess reserves affect the money supply.
23. The formula that links checkable deposits to the monetary base is
24. The variable that reflects the effect on the money supply of changes in factors other than the monetary base is the
25. If the required reserve ratio is 5 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

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