Chapter - The Monetary System MULTIPLE CHOICE Money a is more efficient than barter b makes trades easier c allows greater specialization d All of the above are correct ANSWER: d All of the above are correct TYPE: M DIFFICULTY: SECTION: 16.1 Paper money a has a high intrinsic value b is used in a barter economy c is valuable because it is generally accepted in trade d is valuable only because of the legal tender requirement ANSWER: c is valuable because it is generally accepted in trade TYPE: M DIFFICULTY: SECTION: 16.1 Barter a requires a double-coincidence of wants b is less efficient than money c is the trading of goods for goods d All of the above are correct ANSWER: d All of the above are correct TYPE: M DIFFICULTY: SECTION: 16.1 When Arnold use dollars to record his income and expenses, he is using money as a a unit of account b means of payment c store of value d medium of exchange ANSWER: a unit of account TYPE: M DIFFICULTY: SECTION: 16.1 Which of the following is a store of value? a currency b U.S government bonds c fine art d All of the above are correct ANSWER: d All of the above are correct TYPE: M DIFFICULTY: SECTION: 16.1 Which of the following best illustrates the unit of account function of money? a You list prices for candy sold on your Web site, www.sweettooth.com, in dollars b You pay for your WNBA tickets with dollars c You keep $10 in your backpack for emergencies d None of the above is correct ANSWER: a You list prices for candy sold on your Web site, www.sweettooth.com, in dollars TYPE: M DIFFICULTY: SECTION: 16.1 Mia puts money into a piggy bank so she can spend it later What function of money does this illustrate? a store of value b medium of exchange c unit of account d None of the above is correct ANSWER: a store of value TYPE: M DIFFICULTY: SECTION: 16.1 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 double latte using currency d None of the above is correct ANSWER: c You pay for your double latte using currency TYPE: M DIFFICULTY: SECTION: 16.1 Economists use the word “money” to refer to a income generated by the production of goods and services b those assets regularly used to buy goods and services c the value of a person’s assets d the value of stocks and bonds ANSWER: b those assets regularly used to buy goods and services TYPE: M DIFFICULTY: SECTION: 16.1 10 Liquidity refers to a the ease with which an asset is converted to the medium of exchange b a measurement of the intrinsic value of commodity money c the suitability of an asset to serve as a store of value d how many time a dollar circulates in a given year ANSWER: a the ease with which an asset is converted to the medium of exchange TYPE: M DIFFICULTY: SECTION: 16.1 11 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 ANSWER: b currency, stocks, fine art TYPE: M DIFFICULTY: SECTION: 16.1 18 M1 includes a currency b demand deposits c travelers’ checks d All of the above are correct ANSWER: d All of the above are correct TYPE: M DIFFICULTY: SECTION: 16.1 19 Which of the following is not included in M1? a currency b demand deposits c savings deposits d travelers’ checks ANSWER: c savings deposits TYPE: M DIFFICULTY: SECTION: 16.1 20 Which of the following is included in M2 but not in M1? a currency b demand deposits c savings deposits d All of the above are included in both M1 and M2 ANSWER: c savings deposits TYPE: M DIFFICULTY: SECTION: 16.1 21 Which of the following is included in M2 but not in M1? a demand deposits b corporate bonds c large time deposits d money market mutual funds ANSWER: d money market mutual funds TYPE: M DIFFICULTY: SECTION: 16.1 22 Which of the following is included in the M2 definition of the money supply? a credit cards b money market mutual funds c corporate bonds d large time deposits ANSWER: b money market mutual funds TYPE: M DIFFICULTY: SECTION: 16.1 52 When the Fed wants to change the money supply, it most frequently a changes the discount rate b changes the reserve requirement c conducts open market operations d issues Federal Reserve notes ANSWER: c conducts open market operations TYPE: M DIFFICULTY: SECTION: 16.2 53 When the Federal Reserve conducts open market transactions, it a issues Federal Reserve notes b buys or sells government bonds from the public c lowers the discount rate d increases its lending to member banks ANSWER: b buys or sells government bonds from the public TYPE: M DIFFICULTY: SECTION: 16.1 54 When the Fed conducts open market purchases, a it buys Treasury securities, which increases the money supply b it buys Treasury securities, which decreases the money supply c it borrows from member banks, which increases the money supply d it lends money to member banks, which decreases the money supply ANSWER: a it buys Treasury securities, which increases the money supply TYPE: M DIFFICULTY: SECTION: 16.1 55 When the Fed conducts open market sales, a it sells Treasury securities, which increases the money supply b it sells Treasury securities, which decreases the money supply c it borrows from member banks, which increases the money supply d it lends money to member banks, which decreases the money supply ANSWER: b it sells Treasury securities, which decreases the money supply TYPE: M DIFFICULTY: SECTION: 16.1 56 When the Fed conducts open market purchases, a it buys Treasury securities, which increases the money supply b it buys Treasury securities, which decreases the money supply c it sells Treasury securities, which increases the money supply d it sells Treasury securities, which decreases the money supply ANSWER: a it buys Treasury securities, which increases the money supply TYPE: M DIFFICULTY: SECTION: 16.1 57 The Fed can increase the money supply by conducting open market a sales and raising the discount rate b sales and lowering the discount rate c purchases and raising the discount rate d purchases and lowering the discount rate ANSWER: d purchases and lowering the discount rate TYPE: M DIFFICULTY: SECTION: 16.1 58 The Fed can increase the price level by conducting open market a sales and raising the discount rate b sales and lowering the discount rate c purchases and raising the discount rate d purchases and lowering the discount rate ANSWER: d purchases and lowering the discount rate TYPE: M DIFFICULTY: SECTION: 16.2 63 Suppose that the reserve ratio is percent and that a bank has $1,000 in deposits Its required reserves are a $5 b $50 c $95 d $950 ANSWER: b $50 TYPE: M DIFFICULTY: SECTION: 16.3 64 Suppose that the reserve ratio is 10 percent and that a bank has $2,000 in deposits Its required reserves are a $20 b $200 c $1,880 d $1,800 ANSWER: b $200 TYPE: M DIFFICULTY: SECTION: 16.3 65 Suppose a bank has a 10 percent reserve ratio, $5,000 in deposits, and it loans out all it can given the reserve ratio a It has $50 in reserves and $4,950 in loans b It has $500 in reserves and $4,500 in loans c It has $555 in reserves and $4,445 in loans d None of the above is correct ANSWER: b It has $500 in reserves and $4,500 in loans TYPE: M DIFFICULTY: SECTION: 16.3 66 Suppose a bank has a 10 percent reserve ratio, $4,000 in deposits, and it loans out all it can given the reserve ratio a It has $40 in reserves and $3,960 in loans b It has $400 in reserves and $3,600 in loans c It has $444 in reserves and $3,556 in loans d None of the above is correct ANSWER: b It has $400 in reserves and $3,600 in loans TYPE: M DIFFICULTY: SECTION: 16.3 67 Suppose a bank has $10,000 in deposits and $8,000 in loans It has a reserve ratio of a percent b 12.5 percent c 20 percent d 80 percent ANSWER: c 20 percent TYPE: M DIFFICULTY: SECTION: 16.3 73 If the reserve ratio is 10 percent and a bank receives a new deposit of $10, this bank a must increase required reserves by $1 b will initially see its total reserves increase by $1 c will be able to make new loans up to a maximum of $1 d All of the above are true ANSWER: a must increase required reserves by $1 TYPE: M DIFFICULTY: SECTION: 16.2 74 If the reserve ratio is percent and a bank receives a new deposit of $200, it a must increase required reserves by $190 b will initially see reserves increase by $190 c will be able to make new loans up to a maximum of $190 d None of the above is true ANSWER: c will be able to make new loans up to a maximum of $190 TYPE: M DIFFICULTY: SECTION: 16.2 75 If you deposit $3,000 into First Hawkeye Bank, the a bank’s required reserves increase by the reserve ratio times $3,000 b bank will be able to lend out $3,000 times the reserve ratio c bank initially sees reserves increase by $0 d All of the above are correct ANSWER: a banks required reserves increase by the reserve ratio times $3,000 TYPE: M DIFFICULTY: SECTION: 16.2 76 In 1991 the Federal Reserve lowered the reserve requirement ratio from 12 percent to 10 percent Other things the same this should have a increased both the money multiplier and the money supply b decreased both the money multiplier and the money supply c increased the money multiplier and decreased the money supply d decreased the money multiplier and increased the money supply ANSWER: a increased both the money multiplier and the money supply TYPE: M DIFFICULTY: SECTION: 16.2 106 To increase the money supply, the Fed could a sell government bonds b decrease the discount rate c increase the reserve requirement d None of the above is correct ANSWER: b decrease the discount rate TYPE: M DIFFICULTY: SECTION: 16.3 107 To decrease the money supply, the Fed could a sell government bonds b increase the discount rate c increase the reserve requirement d All of the above are correct ANSWER: d All of the above are correct TYPE: M DIFFICULTY: SECTION: 16.3 137 Assume that banks not hold excess reserves The banking system has $50 million in reserves and has a reserve requirement of 10 percent The public holds $20 million in currency Then the public decides to withdraw $5 million in currency from the banking system If the Fed wants to keep the money supply stable by changing the reserve requirement, then what will the new reserve requirement be? a 10 percent b 9.1 percent c percent d 8.1 percent ANSWER: b 9.1 percent TYPE: M DIFFICULTY: SECTION: 16.3 138 The banking system has $20 million in reserves and has a reserve requirement of 20 percent Bankers did not use to hold any excess reserves, but difficult economic times make them decide that it is prudent to hold 25 percent of deposits as reserves Other things equal, by how much must the Fed increase bank reserves so as to keep the money supply the same? a $4 million b $5 million c $20 million d No action by the Fed is necessary ANSWER: b $5 million TYPE: M DIFFICULTY: SECTION: 16.3 139 The banking system has $20 million in reserves and has a reserve requirement of 20 percent The public holds $10 million in currency Bankers did not use to hold any excess reserves, but difficult economic times make them decide that it is prudent to hold 25 percent of deposits as reserves At the same time, the public decides to withdraw $10 million in currency from the banking system Other things equal, by how much must the Fed increase bank reserves so as to keep the money supply the same? a $10 million b $12.5 million c $50 million d No action by the Fed is necessary ANSWER: b $12.5 million TYPE: M DIFFICULTY: SECTION: 16.3 140 The banking system has $20 million in reserves and has a reserve requirement of 20 percent The public holds $20 million in currency Bankers did not use to hold any excess reserves, but difficult economic times make them decide that it is prudent to hold 25 percent of deposits as reserves At the same time, the public decides to deposit $6.7 million in currency into the banking system Other things equal, what must the Fed to bank reserves to keep the money supply the same? a reduce reserves by $6.7 million b reduce reserves by $5 million c increase reserves by $3 million d No action by the Fed is necessary ANSWER: d No action by the Fed is necessary TYPE: M DIFFICULTY: SECTION: 16.3 141 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 stopped by the Federal Reserve d are a problem because banks only hold a fraction of deposits as reserves.SWER: d banks only hold a fraction of deposits as reserves TYPE: M DIFFICULTY: SECTION: 16.3 are a problem because ... and $3 ,60 0 in loans c It has $444 in reserves and $3,5 56 in loans d None of the above is correct ANSWER: b It has $400 in reserves and $3 ,60 0 in loans TYPE: M DIFFICULTY: SECTION: 16. 3 67 Suppose... DIFFICULTY: SECTION: 16. 3 66 Suppose a bank has a 10 percent reserve ratio, $4,000 in deposits, and it loans out all it can given the reserve ratio a It has $40 in reserves and $3, 960 in loans b It... SECTION: 16. 2 63 Suppose that the reserve ratio is percent and that a bank has $1,000 in deposits Its required reserves are a $5 b $50 c $95 d $950 ANSWER: b $50 TYPE: M DIFFICULTY: SECTION: 16. 3 64