1. If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then
- m = E/D.
- D = E × m.
- D = E − 1/m.
- D = m/E.
2. The Fed's normalization plan for monetary policy included
- raising the federal funds target rate.
- raising the interest rate paid on excess reserves.
- using repos to insure adequate excess reserves in the banking system.
- raising the reserve ratio on deposits to soak up the excess liquidity in the system.
3. All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually
- remain constant.
- move in the same direction as the bonds' interest rate yield.
4. The collateral used for repos and reverse repos is (are)
- corporate securities.
- government bonds.
5. In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that
- banks did not have enough reserves to continue lending to firms.
- the Fed injected reserves into the banking system, but the interest rates remained high.
- firms did not want to borrow from banks because they had little need for extra liquidity.
- banks held on to excess reserves and people chose to pay off loans rather than spend.
6. The possible asymmetry of monetary policy is the central idea of the
- invisible hand concept.
- ratchet analogy.
- pushing-on-a-string analogy.
- bandwagon effect.
7. Monetary policy is thought to be
- equally effective in moving the economy out of a depression as in controlling demand-pull inflation.
- more effective in moving the economy out of a depression than in controlling demand-pull inflation.
- more effective in controlling demand-pull inflation than in moving the economy out of a recession.
- only effective in moving the economy out of a depression.
8. Which of the following would reduce the money supply?
- Commercial banks use excess reserves to buy government bonds from the public.
- Commercial banks loan out excess reserves.
- Commercial banks sell government bonds to the public.
- A check clears from Bank A to Bank B.
9. When the reserve requirement is increased,
- required reserves are changed into excess reserves.
- the excess reserves of banks are increased.
- a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
- the excess reserves of banks are reduced.