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

Multiple Choice

• m = E/D.
• D = E m.
• D = E 1/m.
• D = m/E.

2. The Fed's normalization plan for monetary policy included

Multiple Choice

• 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

Multiple Choice

• fall.
• rise.
• remain constant.
• move in the same direction as the bonds' interest rate yield.

4. The collateral used for repos and reverse repos is (are)

Multiple Choice

• corporate securities.
• autos.
• homes.
• government bonds.

5. In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that

Multiple Choice

• 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

Multiple Choice

• invisible hand concept.
• ratchet analogy.
• pushing-on-a-string analogy.
• bandwagon effect.

7. Monetary policy is thought to be

Multiple Choice

• 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?

Multiple Choice

• 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,

Multiple Choice

• 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.

10.