Deck 22: Money Prices and the Federal Reserve

Question 1

The M1 measure of money consists of the sum of:

A)currency, checking deposits, and travelers' checks.
B)currency and travelers' checks.
C)currency, checking deposits, and savings deposits.
D)checking deposits and travelers' checks.

Answer 1

currency, checking deposits, and travelers' checks.

Question 2

The direct trade of goods and services for other goods and services is called:

A)financial intermediation.
B)diversification.
C)barter.
D)using a medium of exchange.

Answer 2

barter.

Question 3

If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Answer 3

a unit of account.

Question 4

Money is:

A)the same as income.
B)all financial assets.
C)any asset used to make purchases.
D)the sum of assets minus debts.

Question 5

When money is used as a means to hold wealth, it serves as a:

A)double coincidence of wants.
B)store of value.
C)medium of exchange.
D)unit of account.

Question 6

When money is the basic measure of economic value, it serves as a:

A)double coincidence of wants.
B)store of value.
C)medium of exchange.
D)unit of account.

Question 7

Double coincidence of wants is avoided if money is used as a:

A)medium of exchange.
B)measure of value.
C)standard of deferred payment.
D)store of value

Question 8

If you use $1,000 to purchase silver bullion, which you plan to keep in a safe, you are using money as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Question 9

When money is used to purchase goods and services, it serves as a:

A)double coincidence of wants.
B)store of value.
C)medium of exchange.
D)unit of account.

Question 10

When a baker exchanges a pie for dollars, this is an example of dollars serving as:

A)barter.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Question 11

Barter is:

A)the direct trade of goods and services for other goods and services.
B)the extension of credit to borrowers using funds raised from savers.
C)an equity claim to ownership.
D)a means of channeling funds from savers to borrowers with productive investment opportunities.

Question 12

Money serves as a store of value when:

A)it is used to purchase goods and services.
B)there is direct trade of goods and services.
C)it is a basic measure of economic value.
D)it is a means of holding wealth.

Question 13

Money serves as a medium of exchange when:

A)it is used to purchase goods and services.
B)there is direct trade of goods and services.
C)it is a basic measure of economic value.
D)it is a means of holding wealth.

Question 14

Money serves as a basic yardstick for measuring economic value (a unit of account), allowing:

A)people to hold their wealth in a liquid form.
B)governments to restrict the issuance of private monies.
C)easy comparison of the relative prices of goods and services.
D)goods and services to be exchanged with a double coincidence of wants.

Question 15

If you put a $20 bill in the pocket of your winter coat at the beginning of spring so that you will be surprised when you find it again next winter, you are using money as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Question 16

When your grandfather keeps a bundle of $100 dollar bills behind a brick in the basement, this is an example of dollars serving as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Question 17

The three functions of money are:

A)spending for consumption, investment, and government purchases.
B)measuring balance of payments, exchange rates, and interest rates.
C)implementing monetary policy, fiscal policy, and structural policy.
D)serving as a medium of exchange, unit of account, and store of value.

Question 18

Finding both parties to a trade who have something the other party wishes to trade for is called a:

A)unit of account.
B)store of value.
C)medium of exchange.
D)double coincidence of wants.

Question 19

The main disadvantage of using money as a store of value is that:

A)other assets provide greater anonymity than cash.
B)barter is a more efficient way to conduct transactions than using money.
C)unlike other assets, money serves as a medium of exchange.
D)other assets pay relatively higher rates of interest than money.

Question 20

Money serves as a unit of account when:

A)it is used to purchase goods and services.
B)it is a basic measure of economic value.
C)it is a means of holding wealth.
D)there is a double coincidence of wealth.

Question 21

Commercial banks create new money:

A)when they increase their desired reserve/deposit ratio.
B)by issuing checks.
C)through multiple rounds of lending.
D)when they buy government bonds from the Federal Reserve.

Question 22

Liabilities of the commercial banking system include:

A)reserves and loans.
B)deposits.
C)reserves and deposits.
D)loans and deposits.

Question 23

The M2 measure of money consists of the sum of:

A)savings deposits, small time deposits, and money market mutual funds.
B)currency, checking and savings deposits, and small time deposits.
C)currency, checking and savings deposits.
D)M1, savings deposits, small time deposits, and money market mutual funds.

Question 24

When the actual reserve-deposit ratio exceeds the desired reserve-deposit ratio banks:

A)do nothing because this is a profitable situation.
B)stop making loans.
C)send the extra reserves to the central bank.
D)make more loans.

Question 25

In a fractional-reserve banking system the reserve/deposit ratio equals:

A)more than 100 percent.
B)currency held by the public divided by deposits.
C)100 percent.
D)less than 100 percent.

Question 26

There is $5,000,000 of currency in Econland, all held by banks as reserves. The public does not hold any currency. If the banks' desired reserve/deposit ratio is 0.25, then the money supply equals:

A)$5,000,000
B)$6,250,000
C)$10,000,000
D)$20,000,000

Question 27

Savings deposits are ________ the M1 measure of money and ________ the M2 measure of money.

A)included in; excluded from
B)included in; included in
C)excluded from; excluded from
D)excluded from; included in

Question 28

The reserve-deposit ratio equals:

A)10 percent of bank reserves.
B)10 percent of bank deposits.
C)bank reserves divided by bank deposits.
D)bank deposits divided by bank reserves.

Question 29

When a bank makes a loan by crediting the borrower's checking account balance with an amount equal to the loan:

A)money is created.
B)the bank gains new reserves.
C)the bank immediately loses reserves.
D)the Fed has made an open-market purchase.

Question 30

Bank reserves are:

A)currency and customer checking deposits.
B)currency, customer checking and savings deposits.
C)any asset used to purchase goods and services.
D)cash and similar assets held to meet depositor withdrawals or payments.

Question 31

Banks hold reserves:

A)to earn interest.
B)to increase profits.
C)only because the government requires them to hold reserves.
D)to meet depositor withdrawals and payments.

Question 32

Based on the following information, the value of the M1 measure of the money supply is ________ and the value of the M2 measure of the money supply is ________. $$\begin{array} { | l | r | } \hline { \text { Assets } } & \text { Billims af Dallars } \\\hline \text { Curency } & \mathbf { 2 0 } \\\hline \text { Demand deposits } & \mathbf { 3 0 0 } \\\hline \text { Money market rmutual Furds } & \mathbf { 8 0 0 } \\\hline \text { Traveler's checks } & 10 \\\hline \text { Bavings deposits } & \mathbf { 1 , 8 0 0 } \\\hline \text { Other checkable deposits } & \mathbf { 2 0 0 } \\\hline \text { Brmall denomination tirne deposits } & 1,100\end{array}$$

A)$530 billion; $3,700 billion
B)$330 billion; $4,230 billion
C)$520 billion; $4,320 billion
D)$530 billion; $4,230 billion

Question 33

Assets of the commercial banking system include:

A)reserves and loans.
B)deposits.
C)reserves and deposits.
D)loans and deposits.

Question 34

The components of M2 that are not also in M1:

A)sum to an amount that is smaller than the sum of the components of M1.
B)pay lower rates of interest than do the components of M1.
C)are not usable for making payments.
D)are usable for making payments, but at a greater cost or inconvenience than currency or checks.

Question 35

Money market mutual funds are ________ the M1 measure of money and ________ the M2 measure of money.

A)included in; excluded from
B)included in; included in
C)excluded from; excluded from
D)excluded from; included in

Question 36

If the Central Bank of Macroland puts an additional 1,000 dollars of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ________ and the money supply will increase by ________.

A)$1,000; $1,000
B)$9,000; $9,000
C)$9,000; $10,000
D)$1,000; $9,000

Question 37

The amount of money in the United States is determined by:

A)the Federal Reserve.
B)the combined behavior of commercial banks and the public, as well as actions of the Federal Reserve.
C)the public.
D)the combined behavior of commercial banks and the public.

Question 38

M1 differs from M2 in that:

A)M1 includes currency and balances held in checking accounts, which are not included in M2.
B)M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.
C)M1 is a broader measure of the money supply than M2.
D)the assets in M2 are more liquid than the assets in M1.

Question 39

100 percent reserve banking refers to a situation in which banks' reserves equal 100 percent of their:

A)loans.
B)deposits.
C)profits.
D)income.

Question 40

Credit card balances are not considered to be money primarily because they:

A)are rarely used to make purchases.
B)are not part of people's wealth.
C)are an asset used in making transactions.
D)do not represent an obligation to pay someone else.

Question 41

If a bank's desired reserve-deposit ratio is 0.33 and it has deposit liabilities of $100 million and reserves of $50 million, it:

A)has too few reserves and will reduce its lending.
B)has too many reserves and will increase its lending.
C)has the correct amount of reserves and outstanding loans.
D)should increase the amount of its reserves.

Question 42

In Macroland there is $12,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 12.5 percent, deposits in Macroland equal ________ and the money supply equals ________.

A)$48,000,000; $75,000,000
B)$54,000,000; $54,000,000
C)$48,000,000; $54,000,000
D)$96,000,000; $96,000,000

Question 43

If bank reserves are 200, the public holds 400 in currency, and the desired reserve-deposit ratio is 0.25, the deposits are ________ and the money supply is ________.

A)200; 600
B)400; 800
C)600; 1,000
D)800; 1,200

Question 44

If the public switches from using cash for most transactions to using checks instead, then all else equal, the money supply will:

A)increase.
B)decrease.
C)not change.
D)either increase or decrease.

Question 45

When an individual deposits currency into a checking account:

A)bank reserves increase, which allows banks to lend more and increases the money supply.
B)bank reserves decrease, which reduces the amount banks can lend and reduces the growth of the money supply.
C)bank reserves are unchanged.
D)bank liabilities increase, which reduces the amount banks can lend and reduces the growth of the money supply.

Question 46

The Federal Reserve consists of ________ regional banks, ________ governors on the Board of Governors, and ________ voting members of the Federal Open Market Committee.

A)7; 12; 12
B)12; 7; 12
C)12; 7; 19
D)14; 7; 21

Question 47

After the Federal Reserve increases reserves in the banking system, banks create new deposits through multiple rounds of lending and accepting deposits until the:

A)Federal Reserve requires them to stop.
B)deposit insurance limit is reached.
C)actual reserve-deposit ratio is greater than the desired reserve-deposit ratio.
D)actual reserve-deposit ratio is equal to the desired reserve-deposit ratio.

Question 48

In Macroland there is $10,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10 percent, deposits in Macroland equal ________ and the money supply equals ________.

A)$50,000,000; $60,000,000
B)$55,000,000; $55,000,000
C)$50,000,000; $55,000,000
D)$100,000,000; $100,000,000

Question 49

The Board of Governors consists of ________ governors appointed for staggered ________ terms.

A)5; 12-year
B)5; 14-year
C)7; 12-year
D)7; 14-year

Question 50

The two main responsibilities of the Federal Reserve System are to ________ and to ________.

A)apprehend counterfeiters; regulate the stock market
B)enable banks to make affordable mortgages; control the exchange rate of the U.S. dollar
C)insure bank deposits; print currency
D)conduct monetary policy; oversee financial markets

Question 51

If the desired reserve-deposit ratio is 0.25 and the banking system receives an additional $10 million in reserves, bank deposits will increase by:

A)$10 million.
B)$250 million.
C)$40 million.
D)$4 million.

Question 52

The seven leaders of the Federal Reserve System headquartered in Washington, D.C. constitute the:

A)Federal Reserve Bank of Washington, D.C.
B)Federal Open Market Committee.
C)Federal Economic Advisory Board.
D)Board of Governors.

Question 53

The central bank of the United States is:

A)Bank of America.
B)Bank of the United States.
C)the U.S. Treasury.
D)the Federal Reserve System.

Question 54

The Federal Reserve System is:

A)a group of 12 commercial banks.
B)the central bank of the United States.
C)a firm that accepts deposits from the nonbank public and lends them to borrowers.
D)the branch of the U.S. Treasury that keeps the U.S. gold reserves.

Question 55

The money supply in Econland is 1,000, and currency held by the public equals bank reserves. The desired reserve-deposit ratio is 0.25. Bank reserves equal ________.

A)200
B)250
C)500
D)800

Question 56

If banks' desired reserve ratio increases from 0.10 to 0.15, the public still desires to hold the same amount of currency, the money supply will:

A)increase.
B)decrease.
C)not change.
D)either increase or decrease.

Question 57

If the desired reserve/deposit ratio equals 0.10, then every dollar of currency in bank reserves supports ________ of deposits and the money supply, while every dollar of currency held by the public contributes ________ to the money supply.

A)$1; $10
B)$0.10; $1
C)$1; $0.10
D)$10; $1

Question 58

In Macroland there is $1,000,000 in currency that can either be held by the public as currency or deposited into banks. Banks' desired reserve/deposit ratio is 10 percent. If the public of Macroland decides to hold more currency, increasing the proportion they hold from 50 percent to 75 percent, the money supply in Macroland will ________.

A)increase.
B)decrease.
C)remain the same.
D)either increase or decrease.

Question 59

The money supply will increase by a multiple of the increase in bank reserves created by the central bank unless:

A)there is fractional reserve banking.
B)there is 100 percent reserve banking.
C)the public holds no currency.
D)banks' desired reserve/deposit ratio is 0.20.

Question 60

The Federal Reserve System first began operations in:

A)1789.
B)1865.
C)1914.
D)1934

Question 61

Bank depositors will not lose their deposits in a banking panic if:

A)there is fractional reserve banking.
B)there is 100 percent reserve banking.
C)there is a central bank.
D)the actual reserve-deposit ratio equals the desired reserve-deposit ratio.

Question 62

Deposit insurance is a system in which the government guarantees that:

A)depositors will not lose any money even if their bank goes bankrupt.
B)people can have deposits at commercial banks.
C)commercial banks will not go bankrupt.
D)commercial banks will not lose any deposits.

Question 63

The Federal Open Market Committee makes decisions about ________ policy.

A)monetary
B)fiscal
C)banking
D)deposit insurance

Question 64

The seven Fed governors, the president of the Federal Reserve Bank of New York, and four of the presidents of the other regional Federal Reserve Banks constitute the:

A)National Monetary Commission.
B)Board of Governors.
C)Federal Open Market Committee.
D)Federal Reserve System.

Question 65

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

A)conducting open-market operations.
B)changing the Federal Reserve discount rate.
C)changing bank reserve requirement ratios.
D)changing interest rates.

Question 66

An open-market purchase of government securities by the Fed will:

A)increase bank reserves, and the money supply will increase.
B)decrease bank reserves, and the money supply will increase.
C)increase bank reserves, and the money supply will decrease.
D)decrease bank reserves, and the money supply will decrease.

Question 67

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10 percent. If the Central Bank prints an additional 200 econs and uses this new currency to buy government bonds from the public, the money supply in Macroland will increase from ________ econs to ________ econs, assuming that the public does not wish to change the amount of currency it holds.

A)20,000; 22,000
B)5,000; 2,000
C)3,000; 5,000
D)5,000; 7,000

Question 68

When the central bank sells $1,000,000 worth of government bonds to the public, the money supply:

A)decreases by more than $1,000,000.
B)decreases by $1,000,000.
C)decreases by less than $1,000,000.
D)increases by $1,000,000.

Question 69

During the Great Depression in the United States between 1930 and 1933, banks' reserve/deposit ratio ________ and the amount of currency held by the public ________, while the money supply ________.

A)increased; increased; increased
B)decreased; decreased; decreased
C)increased; increased; decreased
D)decreased; decreased; increased

Question 70

When the Fed sells government securities, the banks':

A)reserves will increase and lending will expand, causing an increase in the money supply.
B)reserves will decrease and lending will contract, causing a decrease in the money supply.
C)reserve requirements will increase and lending will contract, causing a decrease in the money supply.
D)reserves/deposit ratio will increase and lending will expand, causing an increase in the money supply.

Question 71

In an open-market purchase the Federal Reserve ________ government bonds from the public and the supply of bank reserves ________.

A)buys; increases
B)buys; decreases
C)sells; decreases
D)sells; increases

Question 72

One of the serious drawbacks of the deposit insurance system in the United States is that:

A)bank failures continue to occur regularly.
B)the system took away the Federal Reserve's ability to conduct open-market operations.
C)the system took away the Federal Reserve's ability to change reserve requirements.
D)if insured intermediaries make many bad loans, the taxpayers may be responsible for covering the losses.

Question 73

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve-deposit ratio is 0.10. Assuming the values of the currency held by the public and the desired reserve-deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ________ government bonds.

A)purchase of 50
B)purchase of 250
C)sale of 500
D)sale of 50

Question 74

The U.S. Congress instituted a system of deposit insurance for banks in:

A)1789.
B)1865.
C)1913.
D)1934.

Question 75

When the Federal Reserve sells government bonds to the public, this is an example of a(n):

A)open-market sale.
B)open-market purchase.
C)discount loan.
D)bank panic.

Question 76

When the Federal Reserve buys government bonds from the public, this is an example of a(n):

A)open-market sale.
B)open-market purchase.
C)discount loan.
D)bank panic.

Question 77

When the central bank buys $1,000,000 worth of government bonds from the public, the money supply:

A)increases by more than $1,000,000.
B)increases by $1,000,000.
C)increases by less than $1,000,000.
D)decreases by $1,000,000.

Question 78

Historically, the most important tool of monetary policy is:

A)reserve requirement ratios.
B)the discount rate.
C)open-market operations.
D)market interest rates.

Question 79

A banking panic is an episode in which:

A)depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system.
B)commercial banks, fearing Federal Reserve sanctions, unwillingly participate in open-market operations.
C)commercial banks, concerned about high interest rates, rush to borrow at the Federal Reserve discount rate.
D)depositors, afraid of increasing interest rates, attempt to engage in discount-window borrowing at the Federal Reserve.

Question 80

In an open-market sale the Federal Reserve ________ government bonds and the supply of bank reserves ________.

A)buys; increases
B)buys; decreases
C)sells; increases
D)sells; decreases