FMGT 70

Name: _______________________________________ Date: ___________

Yr.&Sec.: ____________________________________ Score:

I. TRUE OR FALSE. Write the word TRUE if the given statement is correct and FALSE, if otherwise.
(20 points)

________________ 1. An increase in the bond purchases by the Fed will lead to an increase in the
supply of liquid money
________________ 2. Monetary policy is the responsibility of the central bank.
________________ 3. Money multiplier is necessarily greater than 1.
________________ 4. Commercial bank is the lender of last resort.
________________ 5. BSP is the one responsible in controlling the supply of money in circulation in
the Philippines.
________________ 6. Supply of money is determined by the fiscal policy of a nation’s central bank
________________ 7. Money and bonds are assets of commercial banks.
________________ 8. Government bonds are liquid form of asset.
________________ 9. Government bonds can be used to buy goods or services.
________________ 10. Increasing the reserve requirement is one type of expansionary monetary policy.

II. IDENTIFICATION: Identify the word that completes each statement. Write the appropriate letter on
the blank in each number. (20 points)

1. _______ (A. Business operation; B. Open market operation) involves the central bank either
buying bonds or selling of bonds from commercial banks or households.
2. Less money means _______ (A. less; B. more) overall spending.
3. _______ (A. Appreciation rate; B. Discount rate) is defined as the interest rate on short term
loans from the central bank to commercial banks
4. If Fed lowers the interest rate that it charges banks for short-term loans, this would make it
cheaper for commercial banks to borrow funds from the Fed. Money supply increase which
causes the equilibrium interest rate to (A. decrease; B. increase)
5. Buying bonds is considered a/an _______ (A. contractionary; B. expansionay) monetary policy.
6. Whenever the supply of any asset increases, the price of it ______ (A. falls; B. rises).
7. _______ (A. Buying; B. Selling) bonds directly from commercial banks and from households
increases the supply of money and leads to increases in consumption and investment.
8. During periods of _______ (A. inflation; B. recessions), a central bank will more likely sell
bonds to households and commercial banks.
9. _______ (A. Excess reserve ratio; B. Required reserve ratio) refers to the percentage of a
bank’s total deposits from households that must be kept on reserve at the central bank.
10. Decreasing the required reserve means that commercial banks can lend out a _______ (A. larger;
B. smaller) proportion of their total reserves which leads to an increase in the supply of money
and a decrease in the equilibrium rate.

Page 1 of 3
FMGT 70

III. COMPUTATION. In answering this part, please refer to Chapter 16 (Determinants of the
Money Supply) of the book “The Economics of Money, Banking, and Financial Markets” by Frederic
S. Mishkin. Show your solution. (30 points)

1. Suppose:
r = 0.12
C = $500 billion
D = $900 billion
ER = $0.9 billion
Calculate the following: (30 points)
a. M

b. c

c. e

d. m

e. R

f. MB

Page 2 of 3
FMGT 70

III. ESSAY. Explain each item and concisely. (20 points)

1. What could the central bank do to the reserve requirement to decrease the supply of money?
Explain. (10 points)

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

2. What will banks do when the central bank decreases the discount rate? What will be the effect on
the money supply? (10 points)

______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________


God Bless!

Page 3 of 3