PART I : TRUE OR FALSE
_____ 1. In the U.S., the central bank is under the direct control of the President of the U.S.
_____ 2. The Federal Open Market Committee is the major policy-making group in the Federal Reserve System.
_____ 3. One of the functions of the Federal Reserve System in the U.S. is to supervise the commercial banks and other lending institutions.
_____ 4. By increasing the required reserve ratio (RRR) the Federal Reserve System can convert actual reserves into excess reserves.
_____ 5. By increasing the required reserve ratio (RRR) the Federal Reserve System can increase the simple money multiplier.
_____ 6. Changing the required reserve ratio will not change the actual money multiplier.
_____ 7. Changing the discount rate is a powerful tool of monetary policy in the U.S. because in that country, commercial banks traditionally borrow from the Federal Reserve.
_____ 8. In the United States, open market operations are the purchase and sale of securities by the central bank.
_____ 9. When the central bank buys bonds from the commercial banks, it reduces their reserves and forces them to call in loans, thus reducing the money supply.
_____ 10. When the central bank buys bonds from securities dealers, there is no effect on bank reserves and no effect on the money supply.
_____ 11. The largest and most important liability of the Federal Reserve System is Federal Reserve Notes in circulation.
_____ 12. Federal Reserve Notes can be exchanged for gold or silver at the Federal Reserve Bank in Washington, D.C.
_____ 13. Deposits of commercial banks at the Federal Reserve Bank are assets of the commercial banks and liabilities of the Federal Reserve Banks.
_____ 14. In the United States, the monetary base includes the Federal Reserve notes in the vaults of the Federal Reserve Banks.
_____ 15. The size of a nation's money supply will be determined by the size of the monetary base and the size of the actual money multiplier.
______ 16. Open market operations can change the size of the actual money multiplier but not the size of the monetary base.
_____ 17. In the money multiplier process, expansion will continue until all new reserves are converted into currency outside of banks or excess reserves.
_____ 18. Actual reserves are equal to required reserves plus excess reserves.
_____ 19. If the required reserve ratio is less than one, the actual money multiplier will be larger than the simple money multiplier.
_____ 20. The central bank controls the money supply in order to affect the rate of interest in order to affect the level of real GDP and employment.
_____ 21. The transactions demand for money reflects the fact that payments do not necessarily occur at the same time as receipts.
_____ 22. The speculative motive for holding money is due to uncertainty in the timing of payments and receipts.
_____ 23. The quantity of real money demanded will increase if the price level increases.
_____ 24. The quantity of real money demanded will increase if the real GDP increases.
_____ 25. The real interest rate is the opportunity cost of holding wealth in the form of wealth.
_____ 26. An increase in real GDP will shift the demand curve for real balances to the right.
_____ 27. If an increase in interest rates reduces the demand for money, it will increase the velocity of circulation.
_____28. As the interest rate falls, the price of bonds will tend to rise.
_____ 29. The money market will be in equilibrium only when the bond market is in equilibrium.
PART II: FILL IN THE BLANKS
1. The Federal Reserve has three policy tools to carry out its monetary policy. They are (1) required reserve ratios, (2) the discount rate, and (3) _________________________________________ .
2. The ________________________________ is made up of the actual reserves of the banking system plus the potential reserves of the banking system.
3. The actual money multiplier shows how much a change in the monetary base affects the ______________________________________ .
4. The three major reasons why people hold part of their wealth in the form of money are : (1) the transactions motive, (2) the _______________________ motive and (3) the speculative motive.