Homework Assignment #2
(Due 1:30PM Hong Kong Time, March 16, 2022)
Please complete it independently and upload an electronic copy to Blackboard by the deadline. Late
assignment will NOT be accepted!
Multiple Choices (3 points each)
1) Of the three players in the money supply process, most observers agree that the most important
player is
A) the United States Treasury.
B) the Federal Reserve System.
C) the FDIC.
D) the Office of Thrift Supervision.
2) The monetary base consists of
A) currency in circulation and Federal Reserve notes.
B) currency in circulation and the U.S. Treasury's monetary liabilities.
C) currency in circulation and reserves.
D) reserves and Federal Reserve Notes.
3) Excess reserves are equal to
A) total reserves minus discount loans.
B) vault cash plus deposits with Federal Reserve banks minus required reserves.
C) vault cash minus required reserves.
D) deposits with the Fed minus vault cash plus required reserves.
4) When the Federal Reserve purchases a government bond from a primary dealer, reserves in the
banking system ________ and the monetary base ________, everything else held constant.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases
5) The Fed does not tightly control the monetary base because it does NOT completely control
A) open market purchases.
B) open market sales.
C) borrowed reserves.
D) the discount rate.
6) In the simple deposit expansion model, if the Fed purchases $100 worth of bonds from Bank
A that previously had no excess reserves, Bank A can now increase its loans by
A) $10.
B) $100.
C) $100 times the reciprocal of the required reserve ratio.
D) $100 times the required reserve ratio.
7) Decisions by depositors to increase their holdings of ________, or of banks to hold ________ will
result in a smaller expansion of deposits than the simple model predicts when the excess reserve ratio
is small.
A) deposits; required reserves
B) deposits; excess reserves
C) currency; required reserves
D) currency; excess reserves
8) If the required reserve ratio is 15 percent, the simple deposit multiplier is
A) 15.0.
B) 1.5.
C) 6.67.
D) 3.33.
9) An increase in the monetary base that goes into ________ is not multiplied, while an increase that
goes into ________ is multiplied.
A) deposits; currency
B) excess reserves; currency
C) currency; excess reserves
D) currency; deposits
10) If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable
deposits are $800 billion, and excess reserves total $0.8 billion, then the M1 money multiplier is
A) 2.5.
B) 1.67.
C) 2.3.
D) 0.651.
11) Assuming initially that the required reserve ratio = 10%, the currency-deposit ratio = 75%, and
the excess reserve ratio = 156%, an increase in the currency-deposit ratio to 150% causes the M1
money multiplier to ________, everything else held constant.
A) increase from 0.73 to 0.78
B) decrease from 0.73 to 0.61
C) increase from 1.54 to 1.67
D) decrease from 1.67 to 1.54
12) The interest rate charged on overnight loans of reserves between banks is the
A) prime rate.
B) discount rate.
C) federal funds rate.
D) Treasury bill rate.
13) If the central bank targets a monetary aggregate, it is likely to lose control over the interest rate
because
A) of fluctuations in the demand for reserves.
B) of fluctuations in the consumption function.
C) bond values will tend to remain stable.
D) of fluctuations in the business cycle.
14) A foreign exchange intervention with an offsetting open market operation that leaves the
monetary base unchanged is called
A) an unsterilized foreign exchange intervention.
B) a sterilized foreign exchange intervention.
C) an exchange rate feedback rule.
D) a money neutral foreign exchange intervention.
15) Everything else held constant, if a central bank makes an unsterilized ________ of foreign
assets, then the domestic money supply will ________ and the domestic currency will
appreciate.
A) purchase; increase
B) purchase; decrease
C) sale; increase
D) sale; decrease
16) Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged
for 1/20th of an ounce of gold and one Swiss Franc could be exchanged for 1/100th of an ounce of
gold, an exchange rate of ________ francs to the dollar would stimulate a flow of gold from the
United States to Switzerland.
A) 7
B) 6
C) 5
D) 4
17) Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is,
above par, the central bank must intervene to sell the ________ currency by purchasing
________ assets.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
18) Under a fixed exchange rate regime, if a country has an ________ exchange rate, then its
central bank's attempt to keep its currency from depreciating will result in a ________ of
international reserves.
A) undervalued; gain
B) undervalued; loss
C) overvalued; gain
D) overvalued; loss
19) Under a fixed exchange rate regime, a central bank that does not want to acquire international
reserves to keep its currency from ________ will decide to ________ its currency.
A) depreciating; revalue
B) depreciating; devalue
C) appreciating; revalue
D) appreciating; devalue
20) Hong Kong chooses to have ________ and ________ and therefore, cannot have an independent
monetary policy at the same time.
A) capital control; a fixed exchange rate
B) free capital mobility; a fixed exchange rate
C) free capital mobility; a flexible exchange rate
D) capital control; a flexible exchange rate
21) A country that dollarizes
A) maximizes its seignorage.
B) earns the same amount of seignorage as it would with a currency board.
C) earns the same amount of seignorage as it would with exchange-rate targeting.
D) eliminates its seignorage.
E) must pay seignorage to other governments to use their currency.
22) When interest rates fall in the United States (with the price level fixed), the value of the dollar
________, domestic goods become ________ expensive, and net exports ________.
A) falls; less; fall
B) falls; less; rise
C) falls; more; fall
D) rises; less; fall
23) Under a fixed exchange rate regime, if a central bank must intervene to purchase the
________ currency by selling ________ assets, then, like an open market sale, this action
reduces the monetary base and the money supply, causing the interest rate on domestic assets to
rise.
A) domestic; foreign
B) domestic; domestic
C) foreign; foreign
D) foreign; domestic
Short Answer Question (15 points)
Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate
Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis?
Short Answer and Graphical Question (16 points)
If a central bank has an interest-rate target, why will an increase in the demand for reserves lead to a
rise in the money supply? Use a graph of the market for reserves to explain.