Deck 29: The Monetary System

Question 1

Joe wants to trade eggs for sausage.Lashonda wants to trade sausage for eggs.Joe and Lashonda have a double-coincidence of wants.

Answer 1

True

Question 2

Marc puts prices on surfboards and skateboards at his sporting goods store.He is using money as a unit of account.

Answer 2

True

Question 3

Roundabout trade is beneficial for an economy.

Answer 3

True

Question 4

In order for currency to be widely used as a medium of exchange,it is sufficient for the government to designate it as legal tender.

Question 5

Gary's wealth is $1 million.Economists would say that Gary has $1 million worth of money.

Question 6

Sandra routinely uses currency to purchase her groceries.She is using money as a unit of account.

Question 7

Demand deposits are balances in bank accounts that depositors can access by writing a check.

Question 8

The series of bank failures in 1907 occurred despite the creation of the Federal Reserve many years earlier.

Question 9

Bottles of very fine wine are less liquid than demand deposits.

Question 10

M1 includes savings deposits.

Question 11

In an economy that relies on barter,trade requires a double-coincidence of wants.

Question 12

Credit cards are a medium of exchange.

Question 13

When the Soviet Union began breaking up in the late 1980s,cigarettes began replacing the ruble as the medium of exchange even though the ruble was legal tender.The cigarettes provide an example of fiat money.

Question 14

When money functions as a unit of account,then it cannot be commodity money.

Question 15

A debit card is more similar to a credit card than to a check.

Question 16

M2 is both larger and more liquid than M1.

Question 17

Money allows people to specialize in what they do best,thereby raising everyone's standard of living.

Question 18

The use of money allows trade to be roundabout.

Question 19

According to economists,a collection of valuable jewels is not money.

Question 20

U.S.dollars are an example of commodity money and hides used to make trades are an example of fiat money.

Question 21

The money multiplier equals 1/(1 - R),where R represents the reserve ratio.

Question 22

The money supply of Hooba is $10,000 in a 100-percent-reserve banking system.If Hooba decreases the reserve requirement to 10 percent,the money supply could increase by no more than $9,000.

Question 23

If the Fed buys bonds in the open market,the money supply decreases.

Question 24

Because of the multiple tools at its disposal,the Fed can control the money supply very precisely.

Question 25

Assume that when $100 of new reserves enter the banking system,the money supply ultimately increases by $625.Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits.If,at a point in time,reserves for all banks amount to $500,then at that same point in time,loans for all banks amount to $2,625.

Question 26

The Federal Reserve was created in 1913 after a series of bank failures in 1907.

Question 27

Federal Reserve governors are given long terms to insulate them from politics.

Question 28

Banks still could contribute to changes in the money supply,even if they were required to hold all deposits in reserve.

Question 29

Banks cannot influence the money supply if they hold all deposits in reserve.

Question 30

Members of the Board of Governors are appointed by the president of the U.S.and confirmed by the U.S.Senate.

Question 31

The Federal Reserve is a privately operated commercial bank.

Question 32

If the Fed decreases reserve requirements,the money supply will increase.

Question 33

Monetary policy is determined by a committee whose voting members include all the presidents of the regional Federal Reserve Banks.

Question 34

If banks hold any amount of their deposits in reserve,then they do not have the ability to influence the money supply.

Question 35

When the Federal Reserve decreases the discount rate,the quantity of reserves increases and the money supply increases.

Question 36

An increase in reserve requirements increases reserves and decreases the money supply.

Question 37

Just after the terrorist attack on September 11,2001,the Fed stood ready to lend financial institutions funds.When the Fed did this,it was acting in its role of lender of last resort.

Question 38

Assume that when $100 of new reserves enter the banking system,the money supply ultimately increases by $800.Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits.If,at a point in time,reserves for all banks amount to $750,then at that same point in time,loans for all banks amount to $6,000.

Question 39

As banks create money,they create wealth.

Question 40

The Federal Reserve primarily uses open-market operations to change the money supply.

Question 41

Are credit cards and debit cards money? What's the difference between credit and debit cards?

Question 42

Other things the same,if banks decide to hold a smaller part of their deposits as excess reserves,the money supply will fall.

Question 43

Compare the Board of Governors and the Federal Open Market Committee.

Question 44

What is the difference between money and wealth?

Question 45

What does the text mean by the question,"Where Is All the Currency?" How does it answer the question?

Question 46

Which of the three functions of money are commonly met by each of the following assets in the U.S.economy?
a.
paper dollar
b.
precious metals
c.
collectibles such as baseball cards,stamps,and antiques

Question 47

Bank runs and the accompanying increase in the money multiplier caused the U.S.money supply to rise by 28 percent from 1929 to 1933.

Question 48

During the early 1930s there were a number of bank failures in the United States.What did this do to the money supply? The New York Federal Reserve Bank advocated open market purchases.Would these purchases have reversed the change in the money supply and helped banks? Explain.

Question 49

Designers of the Federal Reserve System were concerned that the Fed might form policy favorable to one part of the country or to a particular party.What are some ways that the organization of the Fed reflects such concerns?

Question 50

Which two of the Ten Principles of Economics imply that the Fed can profoundly affect the economy?

Question 51

If the reserve ratio is 20 percent,how much money can be created from $100 of reserves? Show your work.

Question 52

What is meant by the term "lender of last resort?" In what circumstances might the Fed be a lender of last resort?

Question 53

Explain how each of the following changes the money supply.
a.
the Fed buys bonds
b.
the Fed raises the discount rate
c.
the Fed raises the reserve requirement

Question 54

Explain why banks can influence the money supply if the required reserve ratio is less than 100 percent.

Question 55

What is the difference between commodity money and fiat money? Why do people accept fiat money in trade for goods and services?

Question 56

In the months of November and December,people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays.As a result,other things the same the money supply increases.

Question 57

Describe the two things that limit the precision of the Fed's control of the money supply and explain how each limits that control.

Question 58

What makes the New York Federal Reserve regional bank so important?

Question 59

Economists argue that the move from barter to money increased trade and production.How is this possible?

Question 60

Draw a simple T-account for First National Bank which has $5,000 of deposits,a required reserve ratio of 10 percent,and excess reserves of $300.Make sure you balance sheet balances.

Question 61

Consider four survivors on an island.

Which of the following pairs of survivors has a double-coincidence of wants?

A) Rupert with Amber,and Rob with Tom
B) Amber with Tom
C) Rupert with Rob
D) None of the above are correct.

Question 62

Consider five individuals with different occupations.

Which of the following pairs of individuals has a double coincidence of wants?

A) Mary and Clark
B) Clark and Nathan
C) Nathan and Polly
D) Polly and Paul

Question 63

When we say that trade is roundabout we mean that

A) people sometimes trade goods for goods.
B) trades require a double coincidence of wants.
C) currency is accepted primarily to make further trades.
D) people must spend time searching for the products they wish to purchase.

Question 64

The existence of money leads to

A) greater specialization in production,but not to a higher standard of living.
B) a higher standard of living,but not to greater specialization.
C) greater specialization and to a higher standard of living.
D) neither greater specialization nor to a higher standard of living.

Question 65

Money is the most liquid asset available because

A) it is a store of value.
B) it is a medium of exchange.
C) it is a unit of account.
D) it has intrinsic value.

Question 66

Which of the following lists ranks types of assets from most liquid to least liquid?

A) currency,demand deposits,money market mutual funds
B) currency,money market mutual funds,demand deposits
C) money market mutual funds,demand deposits,currency
D) demand deposits,money market mutual funds,currency

Question 67

Which list ranks assets from most to least liquid?

A) currency,fine art,stocks
B) currency,stocks,fine art
C) fine art,currency,stocks
D) fine art,stocks,currency

Question 68

Money

A) is a perfect store of value.
B) is the most liquid asset.
C) has intrinsic value,regardless of which form it takes.
D) All of the above are correct.

Question 69

In an economy that relies upon barter,

A) trade does not require a double coincidence of wants.
B) scarce resources are allocated just as easily as they are in economies that do not rely upon barter.
C) there is no item in the economy that is widely accepted in exchange for goods and services.
D) All of the above are correct.

Question 70

Consider five high school students working on homework in study hall.

Which of the following pairs of students has a double coincidence of wants?

A) Rosie and Piper
B) Piper and Molly
C) Dewey and Molly
D) Bob and Dewey

Question 71

Which of the following is an example of barter?

A) A parent gives a teenager a $10 bill in exchange for her babysitting services.
B) A homeowner gives an exterminator a check for $50 in exchange for extermination services.
C) A barber gives a plumber a haircut in exchange for the plumber fixing the barber's leaky faucet.
D) All of the above are examples of barter.

Question 72

Consider the following traders who meet.

Which,if any,pairs of traders has a double coincidence of wants?

A) Bob with Alice
B) Ted with Alice
C) Bob with Mary,Ted with Bob,and Ted with Alice
D) None of the pairs above has a double coincidence of wants.

Question 73

Economists use the term money to refer to

A) all wealth.
B) all assets,including real assets and financial assets.
C) all financial assets,but real assets are not regarded as money.
D) those types of wealth that are regularly accepted by sellers in exchange for goods and services.

Question 74

For purposes of analyzing the money stock and its relationship to relevant economic variables,money is best thought of as

A) those items that can be readily accessed and used to buy goods and services.
B) currency only.
C) currency plus all bank accounts.
D) currency plus all bank accounts plus bonds.

Question 75

Suppose that in a country the total holdings of banks were as follows:
required reserves = $45 million
excess reserves = $15 million
deposits = $750 million
loans = $600 million
Treasury bonds = $90 million
Show that the balance sheet balances if these are the only assets and liabilities.
Assuming that people hold no currency,what happens to each of these values if the central bank changes the reserve requirement ratio to 3%,banks still want to hold the same percentage of excess reserves,and banks don't change their holdings of Treasury bonds? How much does the money supply change by?

Question 76

When we want to measure and record economic value,we use money as the

A) liquid asset.
B) medium of exchange.
C) unit of account.
D) store of value.

Question 77

The ease with which an asset can be

A) traded for another asset determines whether or not that asset is a unit of account.
B) transported from one place to another determines whether or not that asset could serve as fiat money.
C) converted into a store of value determines the liquidity of that asset.
D) converted into the economy's medium of exchange determines the liquidity of that asset.

Question 78

When an economy uses silver as money,then that economy's money

A) serves as a store of value but not as a medium of exchange.
B) serves as a medium of exchange but not as a unit of account.
C) is fiat money.
D) has intrinsic value.

Question 79

In which of the following sets of assets are the assets correctly ranked from most liquid to least liquid?

A) money,bonds,cars,houses
B) money,cars,houses,bonds
C) bonds,money,cars,houses
D) bonds,cars,money,houses

Question 80

The double coincidence of wants

A) is required when there is no item in an economy that is widely accepted in exchange for goods and services.
B) is required in an economy that relies on barter.
C) is a hindrance to the allocation of resources when it is required for trade.
D) All of the above are correct.