Deck 30: The Monetary System

Question 1

If a bank has a reserve ratio of 8 percent,then

A)government regulation requires the bank to use at least 8 percent of its deposits to make loans.
B)the bank's ratio of loans to deposits is 8 percent.
C)the bank keeps 8 percent of its deposits as reserves and loans out the rest.
D)the bank keeps 8 percent of its assets as reserves and loans out the rest.

Answer 1

C

Question 2

Which of the following best illustrates the concept of a store of value?

A)You are a precious-metals dealer,and you are always aware of how many ounces of platinum trade for an ounce of gold.
B)You sell items on eBay,and your prices are stated in terms of dollars.
C)You keep 6 ounces of gold in your safe-deposit box at the bank for emergencies.
D)None of the above is correct.

Answer 2

C

Question 3

The primary difference between commodity money and fiat money is that

A)commodity money is a medium of exchange but fiat money is not.
B)fiat money is a medium of exchange but commodity money is not.
C)commodity money has intrinsic value but fiat money does not.
D)fiat money has intrinsic value but commodity money does not.

Answer 3

C

Question 4

Credit cards

A)defer payments.
B)are a store of value.
C)have led to wider use of currency.
D)are part of the money supply.

Question 5

An open-market purchase

A)increases the number of dollars and the number of bonds in the hands of the public.
B)increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.
C)decreases the number of dollars and the number of bonds in the hands of the public.
D)decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.

Question 6

When we 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 7

M1 includes

A)currency.
B)demand deposits.
C)traveler's checks.
D)All of the above are correct.

Question 8

Demand deposits are a type of

A)checking account.
B)time deposit.
C)money market mutual fund.
D)savings deposit.

Question 9

There is a

A)short-run tradeoff between inflation and unemployment.
B)short-run tradeoff between an increase in the money supply and inflation.
C)long-run tradeoff between inflation and unemployment.
D)long-run tradeoff between an increase in the money supply and inflation.

Question 10

When conducting an open-market sale,the Fed

A)buys government bonds,and in so doing increases the money supply.
B)buys government bonds,and in so doing decreases the money supply.
C)sells government bonds,and in so doing increases the money supply.
D)sells government bonds,and in so doing decreases the money supply.

Question 11

If R represents the reserve ratio for all banks in the economy,then the money multiplier is

A)1/(1-R).
B)1/R.
C)1/(1+R).
D)(1+R)/R.

Question 12

On a bank's T-account,which are part of the banks assets?

A)both deposits made by its customers and reserves
B)deposits made by its customers but not reserves
C)reserves but not deposits made by its customers
D)neither deposits made by its customers nor reserves

Question 13

In a system of 100-percent-reserve banking,

A)banks do not make loans.
B)currency is the only form of money.
C)deposits are banks' only assets.
D)All of the above are correct.

Question 14

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 not real assets.
D)those types of wealth that are regularly accepted by sellers in exchange for goods and services.

Question 15

Fiat money

A)is worthless.
B)has no intrinsic value.
C)may be used as a medium of exchange,but is not legal tender.
D)refers to highly liquid assets that do not serve as a medium of exchange.

Question 16

Which of the following is not included in either M1 or M2?

A)money market deposit accounts
B)large time deposit
C)demand deposits
D)money market mutual funds

Question 17

Which of the following best illustrates the medium of exchange function of money?

A)You keep some money hidden in your shoe.
B)You keep track of the value of your assets in terms of currency.
C)You pay for your oil change using currency.
D)None of the above is correct.

Question 18

Which of the following is a function of money?

A)a unit of account
B)a store of value
C)medium of exchange
D)All of the above are correct.

Question 19

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 20

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 21

Which of the following can the Fed do to change the money supply?

A)change reserves or change the reserve ratio
B)change reserves but not change the reserve ratio
C)change the reserve ratio but not change the reserve ratio
D)neither change reserves nor change the reserve ratio

Question 22

If the discount rate is raised then banks borrow

A)more from the Fed so reserves increase.
B)more from the Fed so reserves decrease.
C)less from the Fed so reserves increase.
D)less from the Fed so reserves decrease.

Question 23

The money supply increases when the Fed

A)buys bonds.The increase will be larger,the smaller is the reserve ratio.
B)buys bonds.The increase will be larger,the larger is the reserve ratio.
C)sells bonds.The increase will be larger,the smaller is the reserve ratio.
D)sells bonds.The increase will be larger,the larger is the reserve ratio.

Question 24

Bank runs

A)will affect neither the money supply nor the money multiplier.
B)are only a problem for insolvent banks.
C)can be neither prevented nor mitigated by the Federal Reserve.
D)are a problem because banks only hold a fraction of deposits as reserves.

Question 25

In a fractional-reserve banking system,a decrease in reserve requirements

A)increases both the money multiplier and the money supply.
B)decreases both the money multiplier and the money supply.
C)increases the money multiplier,but decreases the money supply.
D)decreases the money multiplier,but increases the money supply.

Question 26

The banking system currently has $50 billion of reserves,none of which are excess.People hold only deposits and no currency,and the reserve requirement is 10 percent.If the Fed raises the reserve requirement to 12.5 percent and at the same time sells $10 billion worth of bonds,then by how much does the money supply change?

A)It falls by $20 billion.
B)It falls by $110 billion.
C)It falls by $180 billion.
D)None of the above is correct.

Question 27

If the Fed sells government bonds to the public,then reserves

A)increase and the money supply increases.
B)increase and the money supply decreases.
C)decrease and the money supply increases.
D)decrease and the money supply decreases.

Question 28

To increase the money supply,the Fed could

A)sell government bonds.
B)increase the discount rate.
C)decrease the reserve requirement.
D)None of the above is correct.

Question 29

Which of the following is not a tool of monetary policy?

A)open market operations
B)reserve requirements
C)changing the discount rate
D)increasing the government budget deficit

Question 30

During the Great Depression in the early 1930s,

A)bank runs closed many banks.
B)the money supply rose sharply.
C)the Fed decreased reserve requirements.
D)both a and b are correct.

Question 31

When there is a reserve requirement,banks

A)must hold exactly the required quantity of reserves.
B)may hold more than,but not less than,the required quantity of reserves.
C)may hold less than,but not more than,the required quantity of reserves.
D)must seek the Fed's permission whenever they wish to expand or contract their loans to customers.

Question 32

The money supply decreases if

A)households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans.
B)households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans.
C)households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans.
D)households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.

Question 33

Today,bank runs are

A)uncommon because of the high reserve requirement.
B)uncommon because of FDIC deposit insurance.
C)common because of the low reserve requirement.
D)common because the FDIC is nearly bankrupt.

Question 34

If the public decides to hold less currency and more deposits in banks,bank reserves

A)decrease and the money supply eventually decreases.
B)decrease but the money supply does not change.
C)increase and the money supply eventually increases.
D)increase but the money supply does not change.

Question 35

Suppose banks decide to hold more excess reserves relative to deposits.Other things the same,this action will cause the

A)money supply to fall.To reduce the impact of this the Fed could lower the discount rate.
B)money supply to fall.To reduce the impact of this the Fed could raise the discount rate.
C)money supply to rise.To reduce the impact of this the Fed could lower the discount rate.
D)money supply to rise.To reduce the impact of this the Fed could raise the discount rate.

Question 36

Which of the following will not help to prevent bank runs?

A)government insurance of deposits
B)fractional reserve banking
C)100% reserve banking
D)All of the above prevent bank runs.

Question 37

The money multiplier equals

A)1/R,where R represents the quantity of reserves in the economy.
B)1/R,where R represents the reserve ratio for all banks in the economy.
C)1/(1+R),where R represents the quantity of reserves in the economy.
D)1/(1+R),where R represents the reserve ratio for all banks in the economy.

Question 38

The discount rate is the interest rate that

A)banks charge one another for loans.
B)banks charge the Fed for loans.
C)the Fed charges banks for loans.
D)the Fed charges Congress for loans.

Question 39

Which of the following is correct?

A)The Fed can control the money supply precisely.
B)The amount of money in the economy does not depend on the behavior of depositors.
C)The amount of money in the economy depends in part on the behavior of banks.
D)None of the above is correct.

Question 40

Which of the following is correct?

A)A bank's deposits at the Federal Reserves counts as part of the bank's reserves.The Federal Reserve pays interest on these deposits.
B)A bank's deposits at the Federal Reserves counts as part of the bank's reserves.The Federal Reserve does not pay interest on these deposits.
C)A bank's deposits at the Federal Reserves does not count as part of the bank's reserves.The Federal Reserve pays interest on these deposits.
D)A bank's deposits at the Federal Reserves does not counts as part of the bank's reserves.The Federal Reserve does not pay interest on these deposits.

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

The Federal Reserve is a privately operated commercial bank.

Question 48

Roundabout trade decreases production.

Question 49

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 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

The use of money allows trade to be roundabout.

Question 55

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

Question 56

Money is the only asset that functions as a store of value.

Question 57

When the Fed buys government bonds,

A)the money supply increases and the federal funds rate increases.
B)the money supply increases and the federal funds rate decreases.
C)the money supply decreases and the federal funds rate increases.
D)the money supply decreases and the federal funds rate decreases.

Question 58

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

Question 59

What is the difference between money and wealth?