Reading 24: Money, the Price Level, and Inflation LOS f习题精 deposits, includes, quantity, 2010

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LOS f: Describe the monetary base and explain the relation among the monetary base, the money multiplier, and the quantity of money.

The monetary base in the U.S. least likely includes:

A) banks’ reserve deposits at the Fed.

B) Federal Reserve notes.

C) U.S. Treasury bills.

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The monetary base consists of Federal Reserve notes, coins, and banks’ deposits with the Federal Reserve. U.S. Treasury bills are debt securities.

 

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Which of the following items is least likely to be included in the monetary base?

A) Reserve deposits owned by commercial banks.

B) Federal Reserve notes.

C) Commercial checking deposits.

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Commercial checking deposits are not included in the monetary base.

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The change in the quantity of money is determined jointly by the:

A) Fed’s required reserve ratio and the money multiplier.

B) change in the monetary base and the money multiplier.

C) change in the monetary base and the Fed’s required reserve ratio.

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The change in the quantity of money equals the change in the monetary base times the money multiplier.

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Which of the following statements about the money multiplier for a change in the monetary base is most accurate? The money multiplier:

A) is determined by the central bank.

B) is the product of the required reserve ratio and currency as a percentage of deposits.

C) becomes smaller when the required reserve ratio increases.

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The money multiplier is calculated as (1 + c) / (r + c), where r is the required reserve ratio and c is currency as a percentage of deposits. Increasing the required reserve ratio decreases the money multiplier. A larger currency drain (currency increases as a percentage of deposits) results in a smaller money multiplier. The central bank does not determine the money multiplier; the central bank can influence it by changing the required reserve ratio, but the currency drain depends on individuals’ preferences as to how much currency to hold.

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With respect to the Fed’s open market operations, which of the following statements is least accurate?

A) The money supply is increased when the Fed sells securities to banks.

B) The Fed uses open market operations to adjust the monetary base.

C) When part of an increase in the money supply is held as cash, the multiplier effect is reduced.

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The money supply is increased when the Fed buys securities from banks, because it results in an increase in bank reserves when they are paid for. Selling securities to banks decreases the money supply. Both remaining statements are correct with respect to open market operations.