Question

1. M1 refers to:

a- the most narrowly defined money supply definition.
b-currency held by the public plus checking account balances.
c-the smallest of the money-supply definitions.
d-all of these

2. Which one of the following in NOT considered part of M2?

a-small time deposits of less than 100,000$

b-money market mutual fund shares

c-large time deposits of more than 100,000$

d-savings deposits

3. which one of the following is not part of the federal reserve system?

a-council of economic advisors

b-board of governors

c-federal open market committee

d-12 federal reserve district banks

4. The Federal Deposit Insurance Corporation (FDIC)

a-insures all demand deposit accounts up to 10$ million in banks choosing FDIC protection.

b-was created as a government-owned corporation following the creation of the World Bank and the International Monetary Fund after World War2

c-rarely evaluates bank performance to detect weaknesses in operation.

d-was created to reduce the risk of banking by compensating depositors and keeping bank failures from spreading.

5. a bank has $100 million of checkable deposits, 6$ million for required reserves, and 2$ million of excess reserves. What is the required reserve ratio?

a-2 percent

b-3 percent

c-6 percent

d- 12percent

6. assume a simplified banking system subject to a 10 percent required reserve ratio. if there is an initial increase in excess reserves of $90,000 and all possible loans are made, the money supply:

1. increases $90,000
2. increases $900,000
3. increases $990,000
4. decreases $90,000

7. In a simplified banking system in which all banks are subject to a 25 percent required reserve, a $1,000 open-market purchase by the Fed would cause the money supply to
8. a. increase by $1,000.
9. b. decrease by $1,000.
10. c. decrease by $4,000.
11. d. increase by $4,000.

8- which of the following policy actions by the fed would cause the money supply to increase

1. an open-market sale of government securities.
2. An increase in required-reserve ratios.
3. An increase in the discount rate.
4. An open-market purchase of government securities.

Answer 1

1. d-all of these

M1 = C + DD + OD

Here, C refers to currency and includes coins and paper notes held by the public.

DD refers to demand deposits of the people with the commercial banks. These are checkable deposits which can be withdrawn or transferred on demand

OD are other deposits which includes:

(i) Demand deposits with RBI of public financial institutions like IDBI.

(ii) Demand deposits with RBI of foreign central banks and of the foreign governments.

(iii) Demand deposits of international financial institutions like IMF and World bank.

2. c-large time deposits of more than 100,000$

M2 is a broader concept of the supply of money compared to M1. Besides all the components of M1, it also includes savings of the people with the post offices. Thus,

M2 = M1 + Deposits with post office saving bank account

3. a-council of economic advisors

Federal reserve system consists of board of governors, 12 district banks, open market committee.

4. d-was created to reduce the risk of banking by compensating depositors and keeping bank failures from spreading.

FDIC provides insurance to depositors in banks in order to reduce the banking risk. This saves banks from getting failed as banks lend depositors money to borrowers and when banks are not able to recover that amount from borrowers then they are not able to honor depositors.

5. Required reserve ratio = Required reserves / Total deposits x 100 = 6 million / 100 million x 100 = 6%

Answer is c-6 percent

6. Money supply = Excess reserve x Multiplier = Excess reserve x 1/Reserve ratio = 90,000 x 1/0.10 = 90,000 x 10

= $ 900,000

Answer is increases $900,000

7. Purchase of government securities by Fed increase money supply.

Increase in money supply = 1/required reserve ratio x Open market purchase = 1/0.25 x 1000 = 4 x 1000 = $ 4000

Answer is d. increase by $4,000

8. d) An open-market purchase of government securities.

Sale of government securities decreases money supply. Increase in required reserve ratio required banks to keep more money with themselves and lend less. Discount rate increase means Fed charges more interest rate from banks in return of lending which reduces borrowing of banks and thus lend less to public. So, increase in discount rate and required reserve ratio reduces money supply. Purchase of government securities injects new money in the economy and thus increases money supply.