Economics 112

Principles of Macroeconomics

SUNY College at Oneonta

Mr. Beck

Spring 2000

Review Questions for Chapter 14 and 16

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1. Philadelphia National Bank initially has no excess reserves. The Federal Reserve Bank then purchases $10,000 worth of U.S. government bonds directly from the bank. If the required reserve ratio (m) is 20%, then the maximum that Philadelphia can now lend out is

Q1 answer
2. If a recessionary gap exists, then which one of the following policies, if any, would be appropriate?
  1. An increase in taxes.
  2. An increase in the required reserve ratio (m)
  3. A decrease in government spending (G)
  4. The purchase by the Federal Reserve Bank of U.S. government bonds on the open market.
  5. None of the above policies would be appropriate.

  6. Q2 answer
3. Philadelphia National Bank initially has no excess reserves. The Federal Reserve Bank then purchases $10,000 worth of U.S. government bonds from Mr. X who deposits the Fed's check in his checking account at Philadelphia National Bank. If the required reserve ratio (m) is 20%, then the maximum that Philadelphia can now lend out is
Q3 answer
4. Which one of the following monetary policies, if any, would be appropriate for the Federal Reserve Bank during an inflationary period?
  1. Decrease the required reserve ratio (m).
  2. Decrease the discount rate.
  3. Increase the money supply.
  4. Sell U.S. government bonds on the open market.
  5. None of the above would be an appropriate policy.

  6. Q4 answer
5. Which one of the following, if any, would be expected to occur as the result of an open market purchase of U.S. government bonds by the Federal Reserve Bank?
  1. A decrease in the reserves of the banking system.
  2. An increase in interest rates charged on loans by banks.
  3. A decrease in the money supply.
  4. An increase in investment spending (I) by businesses.
  5. None of the above would be expected to occur.

  6. Q5 answer
6. If the Federal Reserve Bank purchases a $1,000 U.S. government bond directly from Wilber National Bank, then, assuming the required reserve ratio (m) is 18%, the increase in Wilber National Bank's required reserves will be
Q6 answer
7. The Federal Reserve Bank purchases $4,000 of U.S. government bonds on the open market from Ms. A who deposits the Fed's check in her checking account at Manufacturers Hanover Trust Co. If the required reserve ratio (m) is 12.5%, then the maximum potential change in the money supply as a result of the open market operation will be
Q7 answer
8. Which one of the following would be expected to occur as the result of an open market sale of government bonds by the Federal Reserve Bank?
  1. Increase in real GDP (Y).
  2. Increase in interest rates charged on loans.
  3. Increase in number of loans made by banks.
  4. Increase in investment spending (I).
  5. Increase in the money supply.

  6. Q8 answer
9. Assume that the banking system is initially all loaned up. Demand deposits are currently $200 billion. The Federal Reserve Bank then lowers the required reserve ratio (m) from the existing 15% to 10%. As a result of this change, the final maximum and minimum potential effect on the money supply for the entire banking system is
  1. $10 billion and $0, respectively.
  2. $66.67 billion and $0, respectively.
  3. $100 billion and $0, respectively.
  4. $66.67 billion and $10 billion, respectively.
  5. $100 billion and $10 billion, respectively.

  6. Q9 answer
10. Citibank is initially all loaned up with $400 million of demand deposits. The required reserve ratio (m) is 20%. The Federal Reserve Bank then purchases $20 million of government bonds directly from Citibank at the same time that it lowers the required reserve ratio to 10%.
    After these 2 actions, Citibank will have excess reserves of
Q10 answer
11. Assume that the required reserve ratio is 15%. The Federal Reserve Bank purchases a $1,000 U.S. government bond from Mr. Allen who deposits the check in Chemical Bank, a bank previously all loaned up. Chemical lends out its excess reserves by opening up a new checking account for Mrs. Birch. She then writes a check for her full account balance to Miss Chase who cashes the check at Marine Midland Bank. After Mrs. Birch's check fully clears (is processed through the clearinghouse and returned to Chemical Bank), how much has the money supply increased?
Q11 answer
12. If the economy is in a severe recession, which one of the following sets of policies would be appropriate?
  1. Federal government budget deficits and a lowering of the required reserve ratio (m) by the Federal Reserve Bank.
  2. Federal government budget deficits and a raising of the required reserve ratio (m) by the Federal Reserve Bank.
  3. Federal government budget surpluses and a lowering of the required reserve ratio (m) by the Federal Reserve Bank.
  4. Federal government budget surpluses and a raising of the required reserve ratio (m) by the Federal Reserve Bank.
  5. Federal government budget balance and a raising of the required reserve ratio (m) by the Federal Reserve Bank.

  6. Q12 answer
13. The Federal Reserve Bank purchases $10,000 of U.S. government bonds on the open market directly from Wells Fargo Bank. If the required reserve ratio (m) is 25%, then the maximum potential change in the money supply as a result of the open market operation will be
Q13 answer
14. Chemical Bank has reserves of $300 million and demand deposit accounts of $800 million. The required reserve ratio (m) is 20%. The Federal Reserve Bank then sells $20 million of U.S. government bonds to people who have their demand deposits at Chemical Bank. After the transactions clear, what will be Chemical Bank's excess reserves?
Q14 answer
15. In a period of excess demand inflation, it would be appropriate for the Federal Reserve Bank to
  1. increase the rate of growth of the money supply.
  2. lower the required reserve ratio (m).
  3. purchase U.S. government bonds on the open market.
  4. lower the discount rate.
  5. None of the above policies would be appropriate.

  6. Q15 answer
16. Two monetary policies that the Federal Reserve Bank may use is:

1. decreasing the required reserve ratio (m) and

2. selling U.S. government bonds to the public on the open market.

    Although these 2 policies would be used under different economic circumstances, both policies do have one characteristic in common.
    The common characteristic of both policies is that they both

  1. decrease required reserves.
  2. increase reserves.
  3. decrease excess reserves.
  4. increase excess reserves.

  5. Q16 answer
17. Assume the Federal Reserve Bank purchases a $10,000 U.S. government bond directly from a bank. If the required reserve ratio (m) is 20%, then the potential resultant maximum and minimum effect on the money supply of the Fed action is

2 answers required: Maximum: _________, Minimum: _________

Q17 answer
18. A decrease in the required reserve ratio (m) by the Federal Reserve Bank is designed to
  1. increase interest rates, the money supply, and real GDP (Y).
  2. decrease interest rates and real GDP (Y), but increase the money supply.
  3. increase interest rates, but decrease the money supply and real GDP (Y).
  4. decrease interest rates, but increase the money supply and real GDP (Y).
  5. decrease interest rates, the money supply, and real GDP (Y).

  6. Q18 answer
19. Citibank is initially all loaned up with $160 million of reserves. The required reserve ratio (m) is 20%. The Federal Reserve Bank then lowers m to 16%. As a result of this action, Citibank may now lend out
Q19 answer
20. It is most probable that the public debt will
  1. be paid off during the next Administration, if a Republican is elected president.
  2. be paid off by the end of this fiscal year.
  3. be paid off sometime during the next century.
  4. be paid off eventually.
  5. never be paid off.

  6. Q20 answer
21. The "crowding-out" effect of a large federal government deficit is created by the deficit causing
  1. real GDP (Y) to increase.
  2. real GDP (Y) to decrease.
  3. interest rates to increase.
  4. interest rates to decrease.

  5. Q21 answer
22. For 1999, economists claim that interest rates can stay low with a government policy mix of a
  1. federal government budget surplus combined with an increase in the money supply by the Federal Reserve Bank.
  2. federal government budget surplus combined with a decrease in the money supply by the Federal Reserve Bank.
  3. federal government budget deficit combined with an increase in the money supply by the Federal Reserve Bank.
  4. federal government budget deficit combined with a decrease in the money supply by the Federal Reserve Bank.

  5. Q22 answer
23. A federal government budget deficit will be most desirable under which one of the following conditions?
  1. An economy is initially in a recession and the deficit generates a large "crowding-out" effect.
  2. An economy is initially in a recession and the deficit generates a large "crowding-in" effect.
  3. An economy is initially at full employment and the deficit generates a large "crowding-out" effect.
  4. An economy is initially at full employment and the deficit generates a large "crowding-in" effect.

  5. Q23 answer
24. Which one of the following is not true about a large federal government budget deficit?
  1. It may be inflationary.
  2. It may result in a reduction in investment spending by businesses.
  3. It may cause higher interest rates.
  4. It may increase the national (public) debt to a level which will bankrupt the government.

  5. Q24 answer
     

Formulas


A government deficit is the amount by which G > T.

(G is government spending; T is net taxes which is Taxes - Transfer payments)

Required Reserve Ratio (m)  =   Required Reserves/Demand Deposits

Required Reserves  =  m x  Demand Deposits

Excess Reserves  =  Reserves - Required Reserves

Money Multiplier  =  1/m
 

Resultant change in the money supply = 1/m  x initial change in excess reserves

(This formula represents the maximum potential change in the money supply banks can create.)
 
 

Answers



 

1. $10,000  Return to Q1
Solution to Q1

 

2. d  Return to Q2
Solution to Q2

 

3. $8,000  Return to Q3
Solution to Q3


 

4. d  Return to Q4
Solution to Q4

 

5. d  Return to Q5
Solution to Q5

 

6. 0  Return to Q6
Solution to Q6

 

7. $32,000  Return to Q7
Solution to Q7

 

8. b  Return to Q8
Solution to Q8

 

9. c  Return to Q9
Solution to Q9

 

10. $60 million  Return to Q10
Solution to Q10

 

11. $1,850  Return to Q11
Solution to Q11

 

12. a  Return to Q12
Solution to Q12

 

13. $40,000  Return to Q13
Solution to Q13

 

14. $124 million  Return to Q14
Solution to Q14

 

15. e  Return to Q15
Solution to Q15

 

16. a  Return to Q16
Solution to Q16

 

17. Maximum = $50,000, Minimum = $0  Return to Q17
Solution to Q17

 

18. d  Return to Q18
Solution to Q18

 

19. $32 million  Return to Q19
Solution to Q19

 

20. e  Return to Q20
Solution to Q20

 

21. c  Return to Q21
Solution to Q21

 

22. a  Return to Q22
Solution to Q22

 

23. b  Return to Q23
Solution to Q23

 

24. d  Return to Q24
Solution to Q24

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