Topic 4.

The monetary system and monetary policy

Part I. Multiple choices

(Có thể quay lại topic 3 với các câu hỏi từ 33-39)

Q1. Which list ranks assets from most to least liquid?

a. currency, fine art, stocks
b. currency, stocks, fine art
c. fine art, currency, stocks
d. fine art, stocks, currency
Q2. Fiat currency
a. has no intrinsic value.
b. is backed by gold.
c. has intrinsic value equal to its value in exchange.
d. is any close substitute for currency such as checkable deposits.
Q3. Which of the following is not included in M1?
a. currency
b. demand deposits
c. savings deposits
d. travelers’ checks
Q4. Which of the following is included in M2 but not in M1?
a. demand deposits
b. corporate bonds
c. large time deposits
d. money market mutual funds
Q5. Credit cards are
a. used as a method of payment.
b. part of the M1 money supply.
c. a method of deferring payment.
d. a unit of account.
Q6. When the Fed wants to change the money supply, it most frequently
a. changes the discount rate.
b. changes the reserve requirement.
c. conducts open market operations.
d. issues Federal Reserve notes.
Q7. When the Fed conducts open market purchases,
a. it buys Treasury securities, which increases the money supply.
b. it buys Treasury securities, which decreases the money supply.
c. it borrows from member banks, which increases the money supply.
d. it lends money to member banks, which decreases the money supply
Q8. The Fed can increase the price level by conducting open market
a. sales and raising the discount rate.
b. sales and lowering the discount rate.
c. purchases and raising the discount rate.
d. purchases and lowering the discount rate.
Q9. The Fed can influence unemployment in
a. the short and long run.
b. the short run, but not the long run.
c. the long run, but not the short run.
d. neither the short nor long run.
Q10. In a 100-percent-reserve banking system,
a. banks can create money by issuing currency.
b. banks can create money by lending out reserves.
c. the Fed can increase the money supply with open market sales.
d. banks hold as many reserves as they hold deposits
Q11. Suppose that the reserve ratio is 5 percent and that a bank has $1,000 in deposits. Its required
reserves are
a. $5.
b. $50.
c. $95.
d. $950
Q12. Suppose a bank has a 10 percent reserve ratio, $5,000 in deposits, and it loans out all it can given
the reserve ratio.
a. It has $50 in reserves and $4,950 in loans.
b. It has $500 in reserves and $4,500 in loans.
c. It has $555 in reserves and $4,445 in loans.
d. None of the above is correct.
Q13. When a bank loans out $1,000, the money supply
a. does not change.
b. decreases.
c. increases.
d. may do any of the above.
Mới loan out thì chưa có gì xảy ra cả.
Q14. If the reserve ratio is 10 percent and a bank receives a new deposit of $10, this bank
a. must increase required reserves by $1.
b. Will initially see its total reserves increase by $1.
c. will be able to make new loans up to a maximum of $1.
d. All of the above are true.
Q15. If $400 is deposited into the First Bank of Mason City,
a. the bank will be able to make additional loans totaling $320.
b. excess reserves initially increase by $320.
c. required reserves initially increase by $80.
d. All of the above are true.

Q16. In Wellville, the money supply is $80,000 and reserves are $18,000. Assuming that people hold only
deposits and no currency, and that banks hold only required reserves, the required reserve ratio is
a. 29 percent.
b. 22.5 percent.
c. 16 percent.
d. None of the above are correct.
Cu = 0 -> D = 80000, R = 18000 ->
Q17. Which list contains only actions that increase the money supply?
a. make open market purchases, raise the reserve requirement ratio
b. make open market purchases, lower the reserve requirement ratio
c. make open market sales, raise the reserve requirement ratio
d. make open market sales, lower the reserve requirement ratio
Q18. Which of the following lists ranks the Fed’s monetary policy tools from most to least frequently
used?
a. discount rate changes, reserve requirement changes, open market transactions
b. reserve requirement changes, open market transactions, discount rate changes
c. open market transactions, discount rate changes, reserve requirement changes
d. None of the above lists ranks the tools correctly.
Q19. In a fractional reserve banking system, an increase in reserve requirements
a. increases both the money multiplier and the money supply.
b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply.
Q20. When the Fed decreases the discount rate, banks will borrow more from the Fed, lend
a. more to the public, and so the money supply will decrease.
b. less to the public, and so the money supply will decrease.
c. more to the public, and so the money supply will increase.
d. less to the public, and so the money supply will increase.
Q21. If the reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed sells $10
million dollars of bonds to the public, bank reserves
a. increase by $1 million and the money supply eventually increases by $10 million.
b. increase by $10 million and the money supply eventually increases by $100 million.
c. decrease by $1 million and the money supply eventually increases by $10 million.
d. decrease by $10 million and the money supply eventually decreases by $100 million
Q22. If the public decides to hold more currency and fewer deposits in banks, bank reserves
a. decrease and the money supply eventually decreases.
b. decrease but the money supply does not change.
c. increase and the money supply eventually increases.
d. increase but the money supply does not change.
Q23. At one time, the country of Aquilonia had no banks, but had currency of $10 million. Then a
banking system was established with a reserve requirement of 20 percent. The people of Aquilonia
deposited half of their currency into the banking system. If banks do not hold excess reserves, what is
Aquilonia’s money supply now?
 a. $10 million
b. $12 million
c. $25 million
d. $30 million
Before: Cu = 10, D = 0, R = 0 -> MB = 10
After: cr = 1, rr = 20%, m = 5/3 -> MS = 5/3 x 10 = 50/3
Q24. The banking system has $10 million in reserves, the reserve requirement is 20 percent, and there
are no excess reserves. The public holds $10 million in cash. Then bankers decide that it is prudent to
hold some excess reserves, and so begin to hold 25 percent of deposits in the form of reserves. Other
things the same, this action will cause the money supply to
a. change forms, but not size.
b. fall by $10 million.
c. fall by $5 million.
d. fall by $.5 million
Before: R = 10, rr = 20%, Cu = 10 -> D = 10/20% = 50, MS = 60
After: rr = 25%. cr = 1, Cu = 10, R = 10, D = 10 / 25% = 40
MS fall 10
Q25. The banking system has $10 million in reserves, the reserve requirement is 20 percent, and there
are no excess reserves. The public holds $10 million in cash. Then bankers decide that it is prudent to
hold some excess reserves, and so begin to hold 25 percent of deposits in the form of reserves. At the
same time, the public decides to withdraw $5 million in currency from the banking system. Other things
the same, these actions will cause the money supply to
a. change forms, but not size.
b. fall by $10 million.
c. fall by $25 million.
d. fall by $35 million
Before: R = 10, rr = 20%, Cu = 10, D = 10/20% = 50, MS = 60
After: R = 5, Cu = 15, rr = 25% -> D = 5/25% = 20 -> MS = 35
Q26. At one time, the country of Sylvania had no banks, but had currency of $10 million. Then a banking
system was established with a reserve requirement of 20 percent. The people of Sylvania now keep half
their money in the form of currency and half in the form of bank deposits. If banks do not hold excess
reserves, how much currency do the people of Sylvania now hold?
a. $2 million
b.$5 million
c. $8.33 million
d. $9.09 million
Before: Cu = 10, R = 0, D = 0
After: MB unchanged -> Cu = 5
Q27. Assume that banks do not hold excess reserves. The banking system has $50 million in reserves
and has a reserve requirement of 10 percent. The public holds $20 million in currency. Then the public
decides to withdraw $5 million in currency from the banking system. If the Fed wants to keep the money
supply stable by changing the reserve requirement, then what will the new reserve requirement be?
a. 10 percent
b. 9.1 percent
c. 9 percent
d. 8.1 percent
Before: R = 50, rr = 10%, D = 500, Cu = 20, MS = 520
After: MS = 520, Cu = 20 + 5 = 25, D = 495, R = 50 – 5 = 45.
rrr = 45/495 =
Q28. Bank runs
a. will affect neither the money supply nor the money multiplier.
b. are only a problem for insolvent banks.
c. can be neither prevented nor stopped by the Federal Reserve.
d. are a problem because banks only hold a fraction of deposits as reserves.
Q29. The banking system has $20 million in reserves and has a reserve requirement of 20 percent. The
public holds $20 million in currency. Bankers did not use to hold any excess reserves, but difficult
economic times make them decide that it is prudent to hold 25 percent of deposits as reserves. At the
same time, the public decides to deposit $6.7 million in currency into the banking system. Other things
equal, what must the Fed do to bank reserves to keep the money supply the same?
a. reduce reserves by $6.7 million
b. reduce reserves by $5 million
c. increase reserves by $3 million
d. No action by the Fed is necessary.
This is because the withdrawn amount will be added to currency which is also part of money supply.
Deposits will fall but currency will rise. Hence money supply will remain remain. Thus , no action will

be required to taken by fed to maintain the money supply.

Q30. When an individual deposits currency into a checking account
A) bank reserves decrease, which reduces the amount banks can lend and reduces the growth of the
money supply.
B) bank liabilities increase, which reduces the amount banks can lend and reduces the growth of the
money supply.
C) bank reserves are unchanged.
D) bank reserves increase, which allows banks to lend more and increases the money supply.
Q31. When the interest rate on newly issued bonds increases, the price of existing bonds
A) increases only if the coupon rate is below the new rate.
B) decreases.
C) may either increase or decrease.
D) increases
Q32. Suppose that the central bank unexpectedly reduces the growth rate of the money supply. In the
short-run the effects of this are shown by
a. moving to the left along the short-run Phillips curve.
b. moving to the right along the short-run Phillips curve.
c. shifting the short run Phillips curve right.
d. shifting the short run Phillips curve left.
Q33. When an individual deposits currency into a checking account
A) bank reserves are unchanged.
B) bank reserves increase, which allows banks to lend more and increases the money supply.
C) bank liabilities increase, which reduces the amount banks can lend and reduces the growth of the
money supply.
D) bank reserves decrease, which reduces the amount banks can lend and reduces the growth of the
money supply.

Part II. Short answer Questions and Exercises

Q33. Using separate graphs, demonstrate what happens to the money supply, money demand, the
value of money, and the price level if:
a. the central bank increases the money supply.
The Fed increases the money supply. When the Fed increases the money supply, we find the
consequences of their action by shifting the money supply curve to the right from MS1 to MS2. This
shift causes the value of money to fall, so the price level rises.

b. people decide to demand less money at each value of money.

People decide to demand less money at each value of money. Since people want to hold less at each
value of money, it follows that the money demand curve will shift to the left from MD1 to MD2. The
decrease in money demand results in a lower value of money and so a higher price level.

Q34. The Fed sells government bonds. Use the graph of money market to predict the change in the
value of money.
Q35. Assume that public holds no cash, and the commercial banks always hold the required percent of
deposits as reserves. The required percent of deposits is 25%. The total amount of paper bills issued by
Central bank is 100 million USD.
a. What is the money multiplier? What is the money supply?
MB = 100 mil, rr = 25% -> m = 1/rr = 4, MS = 400
b. Assume that the Central bank wants to increase money supply by twenty million dollars to bring the
economy back to the potential level. Given the above information, how can the Central bank attain this
target by using the Open Market Operation?
Buy 5 mil. of treasury bonds -> ….. ->…
c. Assume that the Central bank wants to decrease money supply by twenty million dollars to bring the
economy back to the potential level. Given the above information, how can the Central bank attain this
target by changing required reserve ratio?
MS new = 380, m new = 3.8 so rr = 1/3.8 x 100%
Q36. a) Suppose that the required reserve ratio is 20% and you deposit $120,000 into 𝐴𝐵𝐶 bank.
Assume that banks hold no excess reserves and households hold no currency. What is the money
multiplier? What is the total increase in deposits in the banking system? What is the change in the
money supply?
b) Suppose that the required reserve ratio is 10% and you withdraw $40,000 from 𝐴𝐵𝐶 Bank. What is
the money multiplier? What is the total decrease in deposits in the banking system? What is the change
in the money supply?
Q37. Suppose that in an assumed economy people hold cash at a rate of 20 percent of deposits, the
reserve requirement is 20 percent of deposits, and monetary base is $6,000 billion.
1 What is the money multiplier?
2 What is the money supply?
3 What should the central bank do in the open market if it wants to increase the money supply by
$40 billion? Illustrate graphically.
4 How should the central bank change the reserve to deposit ratio to increase the money supply
by $40 billion? Illustrate graphically.