Econ 3229 Ch 17
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1. Each of the following items would appear as assets on the central bank's balance sheet, except:
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Loans
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Securities
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Currency
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Foreign exchange reserves
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Econ 3229 ch 17 quiz assesses understanding of central banking, focusing on balance sheets, assets, liabilities, and foreign exchange interventions. It is crucial for students in economics and finance, enhancing skills in monetary policy and bank operations.
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- 2.
2. The main asset held by a central bank is:
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Foreign exchange reserves
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Currency
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Loans
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Securities
Correct Answer
A. SecuritiesExplanation
A central bank's main asset is securities. Securities refer to financial instruments such as government bonds, treasury bills, and corporate bonds that are held by the central bank. These securities are typically purchased by the central bank as a way to manage monetary policy, control interest rates, and regulate the money supply in the economy. By holding securities, the central bank can influence the overall liquidity and stability of the financial system.Rate this question:
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- 3.
3. A central bank holds foreign exchange reserves primarily for:
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Diversification purposes
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Foreign exchange intervention
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Safekeeping
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Diversification and safekeeping
Correct Answer
A. Foreign exchange interventionExplanation
A central bank holds foreign exchange reserves primarily for foreign exchange intervention. This means that the central bank uses these reserves to stabilize the domestic currency's exchange rate by buying or selling foreign currencies in the foreign exchange market. By intervening in the foreign exchange market, the central bank can influence the value of its currency and maintain stability in the economy. The other options, such as diversification purposes and safekeeping, may also be secondary reasons for holding foreign exchange reserves, but the primary purpose is foreign exchange intervention.Rate this question:
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- 4.
4. For the Federal Reserve, the largest liability on its balance sheet is:
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Commercial bank reserves
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Currency
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Governments accounts
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Treasury certificates
Correct Answer
A. CurrencyExplanation
The largest liability on the Federal Reserve's balance sheet is currency. This refers to the physical money in circulation, such as banknotes and coins. As the central bank, the Federal Reserve is responsible for issuing and managing the nation's currency. This liability represents the amount of currency that has been issued and is held by the public and banks.Rate this question:
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- 5.
5. Reserves are:
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Assets of the central bank and liabilities of the commercial bank
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Assets of the commercial banks and liabilities of the central bank
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Liabilities of the commercial and central banks
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Assets and liabilities for the central bank
Correct Answer
A. Assets of the commercial banks and liabilities of the central bankExplanation
Reserves refer to the assets held by commercial banks, such as cash or deposits, that are maintained with the central bank. These reserves act as a form of security for the commercial banks and can be used to meet their obligations, such as withdrawals by customers. At the same time, these reserves are liabilities for the central bank, as they represent the amount of money that the central bank owes to the commercial banks. Therefore, the correct answer is "Assets of the commercial banks and liabilities of the central bank."Rate this question:
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- 6.
6. Vault cash is:
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Equal to the total amount of reserves and is an asset of the central bank
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Not reserves but is a liability of the central bank
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A part of reserves and an asset of commercial banks
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Not reserves but is an asset of central banks
Correct Answer
A. A part of reserves and an asset of commercial banksExplanation
Vault cash refers to the physical currency held by commercial banks in their vaults. It is considered a part of reserves because it can be used to meet the cash demands of customers. Additionally, vault cash is also an asset of commercial banks because it represents a valuable resource that can be used to support their operations and lending activities.Rate this question:
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- 7.
7. Monetary policy operations for central banks are run through changes in the liability category of:
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Governments accounts
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Currency
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Reserves
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Gold
Correct Answer
A. ReservesExplanation
Central banks conduct monetary policy operations by adjusting the reserves held by commercial banks. Reserves refer to the funds that commercial banks are required to hold with the central bank. By changing the level of reserves, central banks can influence the amount of money available in the economy. Increasing reserves encourages banks to lend more, stimulating economic activity, while decreasing reserves restricts lending and helps control inflation. Therefore, reserves play a crucial role in the implementation of monetary policy.Rate this question:
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- 8.
8. The monetary base is the sum of:
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Reserves and M2
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M1 and reserves
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Currency in the hands of the public, reserves and M1
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Currency in the hands of the public and reserves in the banking system
Correct Answer
A. Currency in the hands of the public and reserves in the banking systemExplanation
The monetary base is the total amount of currency in circulation that is held by the public and the reserves held by the banking system. This includes physical currency in the hands of the public as well as the reserves held by banks in their accounts with the central bank.Rate this question:
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- 9.
9. A central bank's sale of securities from its portfolio will:
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Decrease the size of its balance sheet
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Have no impact at all on the balance sheet
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Only change the composition of its liabilities
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Only change the composition of its assets
Correct Answer
A. Decrease the size of its balance sheetExplanation
When a central bank sells securities from its portfolio, it is essentially removing assets from its balance sheet. As a result, the size of the balance sheet decreases. This is because the balance sheet represents the central bank's assets and liabilities, and selling securities reduces the amount of assets held by the central bank. Therefore, the correct answer is that the sale of securities will decrease the size of the central bank's balance sheet.Rate this question:
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- 10.
10. Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will specifically show:
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Only an increase in the asset of securities of $2 billion
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Only show an increase in the liability of reserves of $2 billion
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No change in the size of the balance sheet, just the composition of assets will change from cash to securities
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An increase in the asset category of securities and the liability category of reserves by $2 billion
Correct Answer
A. An increase in the asset category of securities and the liability category of reserves by $2 billionExplanation
The correct answer is that the Fed's balance sheet will show an increase in the asset category of securities and the liability category of reserves by $2 billion. This means that the Fed will have $2 billion worth of securities as assets and $2 billion worth of reserves as liabilities. This open market purchase of U.S. Treasury securities increases the Fed's balance sheet size and changes the composition of assets from cash to securities.Rate this question:
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- 11.
11. An open market sale of U.S. Treasury securities by the Fed will cause the Banking System's balance sheet to show:
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Only an increase in liabilities
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Only a decrease in assets
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No net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing
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No net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing
Correct Answer
A. No net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasingExplanation
When the Fed conducts an open market sale of U.S. Treasury securities, it means that the Fed is selling these securities to the public. As a result, the Banking System's balance sheet will show no net change in assets or liabilities. However, there will be a change in the composition of assets, with securities increasing as the Fed sells them, and reserves decreasing as the public pays for the securities. This means that the Banking System will have more securities and fewer reserves, but the overall value of assets and liabilities will remain the same.Rate this question:
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- 12.
12. The Fed sells German bonds to commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?
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The Fed's assets and liabilities increase, the banking systems assets and liabilities decrease
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The Fed's assets increase and its liabilities both increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes
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The Fed's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase
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The Fed's assets and liabilities both decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes
Correct Answer
A. The Fed's assets increase and its liabilities both increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changesExplanation
When the Fed sells German bonds to commercial banks, its assets increase because it receives cash from the sale of the bonds. At the same time, its liabilities also increase because it owes the commercial banks the cash received from the sale. For the banking system, the value of assets and liabilities does not change because the commercial banks are simply exchanging their cash for the German bonds. However, the composition of assets changes as the commercial banks now hold German bonds instead of cash.Rate this question:
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- 13.
13. When the Fed makes a discount loan, the impact on the Fed's balance sheet is:
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An increase in liabilities with no change in assets
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An increase in assets and a decrease in liabilities
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A decrease in assets and an increase in liabilities
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The same as that of an open market purchase
Correct Answer
A. The same as that of an open market purchase -
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14. Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be:
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No change in total assets or total liabilities, but an increase in the liability of currency and a decrease in the liability of reserves by $300 respectively
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No change in total assets but the liability of currency increases by $300
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Total assets decrease by $300 and the liability of currency increases by $300
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No change in either total assets or total liabilities
Correct Answer
A. No change in total assets or total liabilities, but an increase in the liability of currency and a decrease in the liability of reserves by $300 respectivelyExplanation
When Tom withdraws $300 from his checking account, there is no change in the total assets or total liabilities on the Fed's balance sheet. However, there is an increase in the liability of currency by $300, as the Fed is now responsible for providing Tom with the withdrawn cash. At the same time, there is a decrease in the liability of reserves by $300, as the funds that Tom withdrew were previously held as reserves in his checking account.Rate this question:
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- 15.
15. The term for turning reserves into bank deposits is called:
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Discounting
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Balance sheet adjustment
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Multiple deposit creation
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Spreading
Correct Answer
A. Multiple deposit creationExplanation
Multiple deposit creation refers to the process by which banks create additional deposits in the banking system through the lending and borrowing activities. When a bank receives a deposit, it keeps a fraction of it as reserves and lends out the rest. This loan amount is then deposited in another bank, which in turn keeps a fraction as reserves and lends out the rest. This process continues, resulting in the creation of multiple deposits from a single initial deposit. Therefore, multiple deposit creation is the term used to describe the process of turning reserves into bank deposits.Rate this question:
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- 16.
16. If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will:
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Increase by less than $100,000
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Not change
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Decrease by less than $100,000
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Increase by $100,000
Correct Answer
A. Increase by $100,000Explanation
If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will increase by $100,000. This is because when the Fed buys the bond, it pays Bank A $100,000, which increases Bank A's reserves. Since the reserves are in excess of what is required by regulations, they are considered excess reserves. Therefore, the correct answer is that Bank A's excess reserves will increase by $100,000.Rate this question:
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- 17.
17. Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent what is the maximum amount Bank A could lend?
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$85 million
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$15 million
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$14 million
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$5 million
Correct Answer
A. $5 millionExplanation
Bank A has checkable deposits of $100 million. The required reserve rate is ten percent. This means that Bank A is required to hold ten percent of its checkable deposits as reserves. Therefore, Bank A must hold $10 million as reserves.
Bank A has vault cash equaling $1 million and deposits at the Fed equaling $14 million. These are both considered reserves.
To calculate the maximum amount Bank A could lend, we subtract the required reserves from the total reserves.
Total reserves = vault cash + deposits at the Fed = $1 million + $14 million = $15 million
Required reserves = 10% of checkable deposits = 10% of $100 million = $10 million
Maximum amount Bank A could lend = Total reserves - Required reserves = $15 million - $10 million = $5 million
Therefore, the correct answer is $5 million.Rate this question:
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- 18.
18. If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchased by the Fed will result in deposit creation of:
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$9 million
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$90 million
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$10 million
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$900,000
Correct Answer
A. $10 millionExplanation
If the required reserve rate is ten percent and banks do not hold any excess reserves, it means that banks are required to hold ten percent of their deposits as reserves. When the Fed purchases $1 million in the open market, this money is injected into the banking system. Since banks are required to hold ten percent of their deposits as reserves, they can lend out the remaining ninety percent. Therefore, the initial $1 million purchase by the Fed will result in a deposit creation of $10 million ($1 million divided by 0.10).Rate this question:
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- 19.
19. If the Fed were to increase the required reserve rate from ten percent to twenty percent, the simple deposit expansion multiplier would:
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Double
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Increase by 10 percent
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Decrease by a factor of 10
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Be half as large as it was before the increase
Correct Answer
A. Be half as large as it was before the increaseExplanation
If the Fed increases the required reserve rate from ten percent to twenty percent, it means that banks are required to hold a larger portion of their deposits as reserves. This reduces the amount of money that banks can lend out, leading to a decrease in the simple deposit expansion multiplier. The multiplier determines how much the money supply can expand through the lending process. Therefore, the multiplier would be half as large as it was before the increase in the required reserve rate.Rate this question:
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Mar 20, 2023Quiz Edited by
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May 08, 2012Quiz Created by
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