Deck 11: The Monetary System

Question 1

In response to the financial crisis in 2008, the Fed created which of the following policy tools?

A)the required reserve ratio
B)quantitative easing
C)the federal funds rate
D)open market operations
E)the discount rate

Answer 1

quantitative easing

Question 2

If the Fed buys $10 million of government securities when the desired reserve ratio is 20 percent and the currency drain ratio is 5 percent, the quantity of money

A)increases by $50 million.
B)decreases by $50 million.
C)increases by $42 million.
D)decreases by $42 million.
E)increases by $7.5 million.

Answer 2

increases by $42 million.

Question 3

When money is used to compare the relative price of a burrito and a taco, money is being used as a

A)measurement of inflation.
B)token of bartering.
C)store of value.
D)unit of account.
E)medium of exchange.

Answer 3

D

Question 4

A currency drain occurs when the

A)Fed increases the required reserve ratio.
B)Fed buys U.S. government securities.
C)banks reduce the number of loans they create with their excess reserves.
D)non-bank public increases its holdings of currency outside the banking system.
E)Fed sells U.S. government securities.

Question 5

Which of the following is NOT held as an asset by banks?

A)securities
B)checkable deposits
C)reserves
D)currency in the banks' vaults
E)loans

Question 6

The Federal Open Market Committee is

A)comprised of the presidents of the 12 Federal Reserve banks.
B)the main policy making body of the Fed.
C)the government committee charged with determining income tax rates.
D)a seven-member board, each serving a 14-year term.
E)another name for the Board of Governors.

Question 7

Assume First Central Bank has a desired reserve ratio of 15 percent; $80,000 in total deposits, loans equal to $60,000, and has $20,000 in actual reserves. First Central can make additional loans totaling

A)$12,000.
B)$8,000.
C)$60,000.
D)$80,000.
E)$20,000.

Question 8

The U.S. dollar is called

A)faith money.
B)convertible money because the government stands ready to convert it into gold or silver.
C)fiat money because the law decrees it is money.
D)frail money because wear and tear ruins paper bills.
E)commodity money, because it is convertible into gold.

Question 9

When the Fed _{--------------------} securities in an open market operation, banks' reserves_{--------------------} , and therefore lending _{--------------------}_.

A)sells; increase; increases
B)buys; decrease; decreases
C)buys; do not change; does not change
D)sells; decrease; increases
E)buys; increase; increases

Question 10

Which of the following is NOT among the primary functions of money?

A)indicator of supply
B)medium of exchange
C)an object that is generally accepted in return for goods and services
D)unit of account
E)store of value

Question 11

Open market operations are when the Fed buys or sells

A)government securities from banks or some other business.
B)government securities from the government.
C)corporate securities from the government.
D)gold.
E)corporate securities from banks or some other business.

Question 12

Credit cards are
I. a generally accepted form of payment and therefore part of M1.
Ii. are included in M1 because you write a check to pay your monthly bill.
iii. a means of borrowing money.

A)ii only
B)i and ii
C)i only
D)iii only
E)i and iii

Question 13

If there is an increase in the amount of currency held outside banks, then the

A)quantity of money will increase.
B)quantity of money will decrease.
C)quantity of money and the monetary base will decrease.
D)quantity of money will not change.
E)monetary base will decrease.

Question 14

$\begin{array} { l c } \hline & \begin{array} { c } \text { Amount } \\\text { (dollars) }\end{array} \\\hline \text { Checking deposits } & 600 \\\text { Savings deposits } & 1000 \\\text { Time deposits } & 1,500 \\\text { Loans } & 1,200 \\\text { Government securities } & 2,000 \\\text { Outstanding credit card balances } & 400 \\\text { Currency in vault } & 10 \\\text { Deposits in reserve account at the Fed } & 20 \\\hline\end{array}$
The above table gives assets and deposits for a (small)bank.

-The bank's deposits that are part of M2
Are equal to

A)$30.
B)$5,100.
C)$1600.
D)$600.
E)$3,100.

Question 15

C/D is the currency drain ratio and R/D is the desired reserve ratio. The money multiplier equals

Question 16

Suppose the desired reserve ratio is 10 percent. If the Commerce Bank has total deposits of $20,000, total assets of $10,000, and actual reserves of $8000, the amount of excess reserves is

A)$2,000.
B)$6,000.
C)$0.
D)$100.
E)$800.

Question 17

An open market purchase of securities by the Fed leads to all of the following EXCEPT

A)an increase in the monetary base.
B)an initial increase in excess reserves.
C)an increase in banks' reserves.
D)a decrease in the quantity of money.
E)an increase in bank lending.

Question 18

If Federal Reserve notes and coins are $765 billion, and banks' reserves at the Fed are $8 billion, the gold stock is $11 billion, and the Fed owns $725 billion of government securities, what does the
Monetary base equal?

A)$744 billion
B)$1,509 billion
C)$773 billion
D)$765 billion
E)$776 billion

Question 19

If someone buries money in a tin can beneath a tree, the money is functioning as a

A)unit of account.
B)medium of exchange.
C)bartering tool.
D)store of value.
E)means of payment.

Question 20

The unit of account is defined as

A)the exchange of goods and services directly for other goods and services.
B)barter.
C)the medium of exchange.
D)an object that is accepted in return for goods and services.
E)an agreed upon measure for stating prices of goods and services.

Question 21

For anything to be considered money it must be

A)a mystical token, such as whale teeth.
B)a token, such as a green piece of paper.
C)either a commodity or a token, as long as it is generally accepted as a means of payment.
D)a valuable commodity, such as gold.
E)used in barter transactions.

Question 22

When the First Bank of Townsville makes a loan, it

A)increases its reserves.
B)prints money.
C)decreases the quantity of money.
D)borrows the money from the Fed.
E)creates a checkable deposit.

Question 23

When the Fed sells $100 million of securities to a commercial bank the

A)required reserve ratio decreases.
B)money supply increases.
C)bank's reserves decrease.
D)monetary base increases.
E)bank's reserves do not change.

Question 24

Suppose the Fed sells $100 of government securities. If the desired reserve ratio is 20 percent and there is no currency drain, then the quantity of money

A)decreases by $80.
B)decreases by $400.
C)decreases by $100.
D)increases by $100.
E)decreases by $500.

Question 25

A debit card is

A)not money because it is not officially issued by the government.
B)part of the M2 money supply but not part of the M1 money supply.
C)not money but is used to transfer bank deposits which are money.
D)money because it is generally accepted as a means of payment.
E)money because it is a means of payment.

Question 26

If the Fed increases the discount rate,

A)commercial banks pay a lower interest rate if they borrow from the Fed.
B)commercial banks increase their lending to the Fed.
C)commercial banks pay a higher interest rate if they borrow from the Fed.
D)commercial banks' assets increase.
E)commercial banks find it more profitable to increase their loans to businesses.

Question 27

A commercial bank's reserves are equal to the amount of

A)currency in the bank's vault plus the balance on its reserve account at a Federal Reserve Bank.
B)the bank's loans.
C)only the currency in its vault.
D)the bank's deposits.
E)the bank's government securities.

Question 28

A commercial bank's main goal is to

A)open checking accounts.
B)help the government when it needs money.
C)lend money to the Federal Reserve banks.
D)provide loans to its customers.
E)maximize the wealth of its stockholders.

Question 29

If the Fed sells government securities to a member of the nonbank public, then the resulting effect on the quantity of money is

A)the same as if the securities were sold to a bank.
B)much smaller than if the securities were sold to a bank.
C)much larger than if the securities were sold to a bank.
D)that there is no change in the quantity of money.
E)None of the above answers are correct.

Question 30

During the 2008 financial crisis, banks restricted_{--------------------}and the M2 money multiplier_{--------------------}

A)lending; increased
B)lending; decreased
C)deposits; decreased
D)deposits; increased
E)buying securities; increased

Question 31

The desired reserve ratio is 3 percent. Robert deposits $3,000 in Bank America. Bank America keeps its minimum desired reserves and lends the excess to Fredrica. How much does Bank America lend to Fredrica?

A)$3,000
B)$2,910
C)$2700
D)$900
E)$300

Question 32

The Fed buys $100 million U.S. government securities from Bank of America. Bank of America's balance sheet shows this transaction as _{--------------------}in total assets and _{--------------------}in reserves.

A)a $100 million increase; no change
B)no change; a $100 million decrease
C)a $100 million increase; a $100 million increase
D)a $100 million decrease; a $100 million decrease
E)no change; a $100 million increase

Question 33

Checkable deposits are money because

A)only banks and other financial institutions can offer them.
B)they are protected by the Federal Reserve.
C)they are guaranteed by banks.
D)they can be converted into currency on demand and are used directly as a means of payment.
E)checks bounce when there are not enough funds to cash them.

Question 34

Actual reserves are equal to

A)required reserves plus fractional deposits.
B)minimum balances plus desired reserves.
C)excess reserves plus liabilities.
D)desired reserves plus excess reserves.
E)government securities plus cash in the bank's vault.

Question 35

Money market mutual funds

A)are included in M1 and M2.
B)are included in M2 but not M1.
C)are included in M1 but not M2.
D)are the largest part of the monetary base.
E)None of the above are correct.

Question 36

_{--------------------}like a check and_{--------------------}considered money.

A)E-checks work; are
B)E-cash works; is
C)Debit cards work; are
D)E-cash works; is not
E)Debit cards work; are not

Question 37

Suppose the currency drain ratio is 33.33 percent and the desired reserve ratio is 10 percent. The money multiplier equals

A)3.08.
B)6.67.
C)3.00.
D)4.27.
E)2.50.

Question 38

Excess reserves are the

A)same as the required reserves.
B)amount of reserves the Fed requires banks to hold.
C)amount of reserves a bank holds at the Fed.
D)amount of reserves banks keep in their vaults.
E)amount of reserves held over what is desired.

Question 39

If the Fed purchases securities in the amount of $100,000 from First Union Bank, then the

A)assets of First Union Bank decrease by $100,000.
B)assets of the Fed decrease by $100,000.
C)liabilities of the Fed change in composition but not in amount.
D)assets of First Union Bank change in composition but not in the amount.
E)liabilities of First Union decrease by $100,000.

Question 40

When we put a price tag on goods and services, we are using money as a

A)store of value.
B)unit of account.
C)barter token.
D)medium of exchange.
E)means of payment.

Question 41

If the desired reserve ratio increases, then

A)banks are able to make more loans.
B)the Fed has supplied banks with more reserves.
C)bank customers become more willing to make deposits in banks.
D)banks' desired reserves increase and their excess reserves decrease.
E)banks can buy more government securities.

Question 42

A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in government securities, $25 in currency in its vault, and $25 in deposits at the Fed. Of these,_{--------------------} are part of M2.

A)$2,600
B)$2,200
C)$2,850
D)$3,450
E)$2,450

Question 43

Which of the following are policy tools used by the Federal Reserve?
I. the federal personal income tax
Ii. open market operations
Iii. changing the required reserve ratio

A)ii only
B)ii and iii
C)i, ii, and iii
D)iii only
E)i only

Question 44

The monetary base is the

A)sum of government securities and loans to banks held by the Fed.
B)sum of gold and foreign exchange held by the Fed.
C)sum of coins, Federal Reserve notes, and banks' reserves at the Fed.
D)minimum reserve banks must hold to cover any losses from unpaid loans.
E)sum of coins, required reserves, and banks' loans.

Question 45

A currency drain is cash_{--------------------}and has_{--------------------} effect on the money multiplier.

A)draining into the banks; an
B)draining into the banks; no
C)held outside the banks; an
D)held as reserves; no
E)held at the Fed; an

Question 46

If the desired reserve ratio is 7 percent and a bank has $10,000 of deposits, then its desired reserves are

A)$7.
B)$9,300.
C)$700.
D)$930.
E)$7,000.

Question 47

Which of the following is NOT a function of money?
I. unit of account
Ii. store of value iii. unit of debt

A)i only
B)ii only
C)iii only
D)Both ii and iii
E)Both i and ii

Question 48

New money is created in the U.S. economy by

A)U.S. Department of Mint.
B)the U.S. Congress.
C)increased federal government expenditures.
D)the U.S. Treasury.
E)banks that create checkable deposits.

Question 49

When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1

A)changes, but the direction of the change depends on whether the deposit was accepted by a thrift institution or a commercial bank.
B)increases.
C)decreases.
D)changes only if Bank of America does not have excess reserves.
E)does not change.

Question 50

A barter system of payment is

A)similar to a money system of payment because both use one asset as a unit of account.
B)different from a money system of payment because the barter system is a better unit of account.
C)similar to a money system of payment because both are used as stores of value and units of account.
D)similar to a money system of payment because both require a double coincidence of wants.
E)different from a money system of payment because money does not require a double coincidence of wants.

Question 51

If the Fed buys government securities from the non-bank public, then

A)deposits at banks decrease and banks' reserves increase.
B)loans at banks decrease.
C)reserves at banks decrease.
D)deposits at banks increase and banks' reserves decrease.
E)deposits at banks increase and banks' reserves increase.

Question 52

At any point in time, a single bank can loan an amount equal to

A)its required reserves.
B)its excess reserves.
C)its total reserves.
D)the amount of loans the bank made in the past.
E)its government securities.

Question 53

_{--------------------}in the currency drain ratio and _{--------------------}in the desired reserve ratio the money
Multiplier.

A)An increase; a decrease; decrease
B)A decrease; a decrease; increase
C)An increase; a decrease; increase
D)An increase; an increase; increase
E)A decrease; an increase; decrease

Question 54

Assume the desired reserve ratio is 10 percent, banks loan all excess reserves and the currency Drain is zero. If the Fed sells $100 million of U.S. government securities to Boise Bank, the monetary Base increases by

A)$100 million.
B)$10 million.
C)$1,000 million.
D)$1 million.
E)$90 million.

Question 55

The desired reserve ratio is 10 percent and banks have no excess reserves. Juliet deposits $300 in her bank. What is the maximum that Juliet's bank can now loan?

A)$330
B)$270
C)$300
D)$30
E)$3,000

Question 56

The_{--------------------} the desired reserve ratio, the _{--------------------} the_{--------------------} in the quantity of money created from an initial increase of $100,000 in the monetary base.

A)larger; larger; decrease
B)larger; smaller; decrease
C)larger; larger; increase
D)smaller; larger; decrease
E)smaller; larger; increase

Question 57

Which of the following best describes a double coincidence of wants?

A)You have what another wants and you want what they have.
B)Neither buyer wants a good.
C)Two buyers want the same good.
D)A buyer and a seller rather than two buyers or two sellers must meet.
E)None of the above answers is correct.

Question 58

Which of the following is money?

A)debit cards
B)checkable deposits
C)e-checks
D)checks
E)credit cards

Question 59

M1 is composed of

A)currency held by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses.
B)traveler's checks, credit cards, and e-cash.
C)currency held by individuals and businesses, traveler's checks, and the credit line on credit cards.
D)checkable deposits owned by individuals and businesses, saving deposits, and certificates of deposit.
E)currency inside of banks, traveler's checks, and government-issued checks.

Question 60

The voting members of the Federal Open Market Committee consists of the

A)six Board of Governor members and six Federal Reserve Bank presidents.
B)12 Board of Governor members and the seven Federal Reserve Bank presidents.
C)12 Board of Governor members and the five Federal Reserve Bank presidents.
D)seven Board of Governor members and the 12 Federal Reserve Bank presidents.
E)seven Board of Governor members and five Federal Reserve Bank presidents.

Question 61

The Citizens First Bank sells $100,000 of government securities to the Fed. This sale immediately

A)decreases the bank's checkable deposits.
B)increases the bank's reserves.
C)decreases the quantity of money.
D)decreases the bank's assets.
E)increases the bank's required reserves.

Question 62

The discount rate is

A)equal to the nominal interest rate minus the inflation rate.
B)the interest rate that commercial banks have to pay for any reserves that they borrow from the non-bank public.
C)the interest rate that commercial banks receive for the reserves that they have on reserve at the Fed.
D)the interest rate that commercial banks have to pay to the owners of bank deposits.
E)the interest rate that commercial banks pay for reserves that they borrow from the Fed.

Question 63

Banks can make loans as long as they have

A)reserves.
B)required reserves.
C)excess reserves.
D)excess government securities.
E)deposits.

Question 64

The process of money creation by the banking system is limited, in part, by the

A)laws passed each year by the U.S. Congress.
B)Comptroller of the Currency.
C)desired reserve ratio.
D)number of banks.
E)number of depositors.

Question 65

_{--------------------}by the Fed means that the Fed_{--------------------}

A)Credit easing; bought private securities from financial institutions
B)Quantitative easing; required private banks to increase their lending to home buyers
C)Credit easing; made loans directly to home buyers
D)Quantitative easing; decreased in the required reserve ratio
E)Credit easing; tried to lower long-term interest rates

Question 66

A commercial bank is defined as

A)a firm that is chartered to accept deposits and make loans.
B)the institution that sets regulations for commercial activities.
C)any institution that accepts deposits.
D)a firm that obtains funds by selling shares and then buys U.S. Treasury bills.
E)any institution that makes loans.

Question 67

Which of the following is a thrift institution?
I. a credit union
Ii. the Fed
Iii. a savings bank

A)Both i and iii
B)i only
C)ii only
D)i, ii, and iii
E)iii only

Question 68

The goal of a commercial bank is to

A)minimize its taxes paid to state governments.
B)maximize its stockholders' wealth.
C)establish good regulations for commercial activities.
D)accept only deposits made in money.
E)make only safe, no-risk loans.

Question 69

If the Fed buys a $100,000 government security from a bank when the desired reserve ratio is 10 percent and the currency drain ratio is 50 percent, the bank can loan a maximum of

A)$100,000.
B)$60,000.
C)$40,000.
D)$90,000.
E)$50,000.

Question 70

If Joe withdraws a $100 bill from his checking account and Jack deposits another $100 bill in his savings account, by how will M1 and M2 change?

A)M1 will increase, and M2 will increase.
B)Both M1 and M2 will remain the same.
C)M1 will decrease, but M2 will remain the same.
D)M1 will remain the same, and M2 will increase.
E)M2 will decrease by $100.

Question 71

What is a problem with barter that makes it so difficult to use?

A)Barter requires use of only fiat money.
B)Barter omits the store of value role for money.
C)Individuals have to produce something to trade with.
D)Barter is very efficient but illegal because it avoids taxation.
E)Barter requires a double coincidence of wants.

Question 72

If Jose deposits $2,000 in his bank and the desired reserve ratio is 10 percent, what is the amount of new loans that the bank can make?

A)$2,000
B)$2,200
C)$200
D)$1,800
E)$1,900

Question 73

A credit card is

A)not money.
B)money.
C)not money but the card's credit line is money.
D)barter money.
E)fiat money.

Question 74

The amount of loans that a bank can create is limited by

A)the bank's excess reserves.
B)the bank's government securities.
C)a directive from the Federal Reserve System, which takes into account the bank's financial stability.
D)a law enacted by Congress.
E)the real interest rate.

Question 75

If the Fed buys government securities, then

A)banks' excess reserves decrease.
B)the quantity of money is not changed, just its composition.
C)bank reserves are destroyed.
D)the quantity of money decreases.
E)new bank reserves are created.

Question 76

If currency outside of banks is $800 billion; traveler's checks are $10 billion; checkable deposits owned by individuals and businesses are $700 billion; savings deposits are $4,000 billion; small time deposits are $1,000 billion; and money market funds and other deposits are $800 billion, then M2 equals_{--------------------} billion.

A)$5,800
B)$1,510
C)$7,310
D)$710
E)$2,510

Question 77

The required reserve ratio is 20 percent and banks have no excess reserves. Katie deposits $300 in her bank. What are the bank's excess reserves immediately after Katie makes her deposit?

A)$30
B)$240
C)$90
D)$300
E)$60

Question 78

The Board of Governors has

A)seven members appointed to 14-year terms.
B)seven members appointed for life.
C)14 members appointed to 10-year terms.
D)four members appointed to seven-year terms.
E)14 members appointed to four-year terms.

Question 79

Regulating the amount of money in the United States is one of the most important responsibilities of the

A)State Department.
B)U.S. Mint.
C)Treasury Department.
D)Federal Reserve.
E)state governments.

Question 80

The monetary base is equal to the sum of coins,

A)and checkable deposits at banks.
B)currency and checkable deposits at banks.
C)U.S. government securities owned by the Federal Reserve and Federal Reserve notes.
D)currency, banks' reserves at the Federal Reserve and checkable deposits at banks.
E)currency and banks' reserves at the Federal Reserve.