Question 1

Why did the monetary base increase rapidly during the economic crisis of 2008?

Accepted Answer

During the economic crisis of 2008, the Federal Reserve (Fed) increased the monetary base by purchasing more assets, such as Treasury securities and mortgage-backed securities, and extending more loans to banks. This was done in an effort to provide liquidity to the banking system and stabilize the financial markets. The increase in the monetary base helped increase the money supply and stimulate economic activity during a time of severe recession.

Question 2

Explain how the Fed would use its four tools to decrease and to increase the money supply.

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Question 3

Discuss the changes that have and will in the future affect the usefulness of the M1 and M2 money supply figures as indicators of monetary policy.

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Question 4

What are the advantages of a fractional reserve banking system compared to a system that requires 100 percent of deposits to be kept on reserve?

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Question 5

How do changes in open market operations alter the monetary base,and how do changes in the monetary base translate to changes in the money supply?

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Question 6

The type of banking system under which banks are required to hold only a portion of their assets in reserve against the checking deposits of their customers is called:

Accepted Answer

Fractional reserve banking system is a type of banking system where banks are required to hold only a portion of their assets in reserve against the checking deposits of their customers. This means that banks are allowed to lend out more money than they actually have on reserve, which can lead to an increase in the money supply and a boost in economic activity.

Question 7

What advantages does a money economy have over a barter economy?

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Question 8

Which of the following actions of the Fed would increase the money supply?

Accepted Answer

All of the above actions would increase the money supply. When the Fed purchases U.S. government securities, it injects new money into the economy, increasing the money supply. When the discount rate is reduced, it becomes cheaper for banks to borrow money from the Fed, increasing their ability to lend to customers and increasing the money supply. When the required reserve ratio is reduced, banks are required to hold less money in reserve and can lend out more, which increases the money supply.

Question 9

Which of the following is the best definition of money?

Accepted Answer

Money is generally accepted as payment for goods and services or repayment of debt. It can take the form of cash, checks, credit or debit cards, or any other easily exchangeable asset. Money serves as a medium of exchange, unit of account, and store of value in economic transactions.

Option B is close, but not complete. Money can be easily converted into a liquid asset, but not all liquid assets are money.

Option C is outdated as most modern currencies are not backed by precious metals.

Option D only refers to the production of paper and coin currency by the Federal Reserve, but money includes not only cash but other forms of payment as well.

Question 10

You deposit a $1,000 scholarship check in the bank.If the required reserve ratio is 10 percent,explain how the banking system will create new money and how much money can potentially be created.

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Question 11

What is the difference between the Treasury and the Federal Reserve? Is there any difference in the effect on the money supply between the sale of bonds by the Treasury and the sale of bonds by the Fed?

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Question 12

In the United States,the money supply (M1)consists of

Accepted Answer

M1 includes the most liquid and easily accessible forms of money, which are coins, paper currency, demand deposits (checking accounts), other checkable deposits (such as negotiable order of withdrawal accounts), and traveler's checks. Government bonds and savings deposits are not included in M1 because they are not as easily accessible for transactions.

Question 13

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First Guarantee Bank has no excess reserves.If a new customer deposits $50,000,the bank could extend new loans up to a maximum of:

Accepted Answer

The maximum amount of new loans the bank can extend is calculated by multiplying the deposit by the reciprocal of the reserve requirement: 
$50,000 x (1/0.20) = $250,000 
Since the bank has no excess reserves, it must hold $10,000 in reserves ($50,000 x 0.20 = $10,000), leaving a maximum of $40,000 in new loans that can be extended. Therefore, the correct answer is B.

Question 14

Are outstanding credit card balances counted as part of the money supply?

Accepted Answer

Outstanding credit card balances are not considered part of the money supply because they represent borrowed funds, not actual money that can be used as a means of payment.

Question 15

Briefly explain the three functions of money.

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Question 16

Why is there more than one definition of the money supply? What is the difference between them?

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Question 17

If a number of people suddenly deposit into their checking accounts a great deal of cash previously kept in their pockets or at home,other things constant,their actions will

Accepted Answer

When people deposit cash into their checking accounts, it increases the bank's reserves, allowing them to extend additional loans. This increases the money supply, as the money deposited is now available for others to borrow and spend. Therefore, choice B is the best answer.

Question 18

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply,it could

Accepted Answer

Increasing the interest rate paid on excess reserves encourages banks to hold onto excess reserves rather than extend more loans, which effectively reduces the money supply in circulation.

Question 19

Other things constant,if the Fed decreased the discount rate,

Accepted Answer

If the Fed decreases the discount rate, it becomes cheaper for commercial banks to borrow from the Fed. This will increase the incentive for banks to borrow, which will tend to increase borrowing and expand the money supply. This is because the banks have more funds available to lend to their customers, which increases spending and investment in the economy. The earnings of the Fed may not necessarily increase, and the incentive to borrow from the Fed may not be reduced with a decrease in the discount rate. Conversely, if the Fed were to increase the discount rate, borrowing would become more expensive, and the money supply would tend to shrink.

Question 20

Does the Federal Reserve operate like an ordinary commercial bank? What is the Fed's job?

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Quiz 13: Amoney and the Banking System