Question 1

Compared to a barter economy, using money increases efficiency by reducing

Accepted Answer

A)  transaction costs.
B)  the need to exchange goods.
C)  the need to specialize.
D)  inflation.

Question 2

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

Accepted Answer

A)  increase the reserve requirements imposed on commercial banks.
B)  decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
C)  sell U.S.government securities and other financial assets that it is currently holding.
D)  raise the interest rate on loans extended to banks and other financial institutions.

Question 3

Widespread use of credit cards

Accepted Answer

A)  will increase the M1 money supply figures.
B)  will increase the M2 money supply figures but not those for M1.
C)  tends to reduce the average quantity of money that people will choose to hold.
D)  tends to increase the average quantity of money that people will choose to hold.

Question 4

The federal funds rate is the interest rate paid when

Accepted Answer

A)  the Federal Reserve makes loans to member banks.
B)  taxpayers pay overdue taxes.
C)  one bank borrows reserves from another bank.
D)  banks make loans to the federal government.
E)  the federal debt is refinanced.

Question 5

When a commercial bank borrows from a Federal Reserve bank,

Accepted Answer

A)  the commercial bank's reserves are reduced.
B)  the commercial bank's lending ability is increased.
C)  the money supply automatically declines.
D)  the net worth of the bank will decline, indicating that the bank is having financial difficulties.

Question 6

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

A)  create excess reserves and place banks in a position to extend additional loans, which will reduce the money supply.
B)  create excess reserves and place banks in a position to extend additional loans, which will expand the money supply.
C)  lead to higher interest rates.
D)  force the Fed to reduce its discount rate.

Question 7

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.

Accepted Answer

Once the $1,000 is deposited, the bank is required to hold $100 (10 percent) as required reserves. The remaining $900 represents excess reserves and can be loaned out. The bank may lend the $900 to another customer who may deposit it in another bank, which will then hold 10 percent and lend out the remaining 90 percent again. This process continues until the deposits become too small to lend. In this way, banks can potentially create $10,000 in new deposits from the original $1,000 check.

Question 8

When the Federal Reserve sells government bonds to the public, it directly

Accepted Answer

A)  increases the M1 money supply and increases the reserves of the commercial banking system.
B)  increases the M1 money supply, while reducing the reserves of the commercial banking system.
C)  reduces the M1 money supply, while increasing the reserves of the commercial banking system.
D)  reduces the M1 money supply and decreases the reserves of the commercial banking system.

Question 9

The major overall purpose of the Federal Reserve System is to

Accepted Answer

A)  keep the discount rate flexible.
B)  insure the deposits of persons holding funds with banking institutions.
C)  regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
D)  regulate the levels of excess reserves held by member banking institutions.

Question 10

Which of the following lists two things that both decrease the money supply?

Accepted Answer

A)  make open market purchases and raise the reserve requirement ratio
B)  make open market purchases and lower the reserve requirement ratio
C)  make open market sales and raise the reserve requirement ratio
D)  make open market sales and lower the reserve requirement ratio C

Question 11

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

Accepted Answer

A)  does not change the money supply.
B)  increases the money supply.
C)  decreases the money supply.
D)  has an indeterminate effect on the money supply.

Question 12

Which of the following is correct?

Accepted Answer

A)  Federal Reserve purchases of securities will increase the reserves available to commercial banks.
B)  Federal Reserve purchases of securities exert upward pressure on interest rates in the short run.
C)  The Federal Reserve System determines the ratio of currency held by the public to the money supply (M1) .
D)  Federal Reserve purchases of securities will decrease the reserves available to commercial banks.

Question 13

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

Accepted Answer

A)  paper currency and coins.
B)  coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.
C)  paper currency, coins, demand deposits, and savings deposits.
D)  government bonds, currency, demand deposits, other checkable deposits, and traveler's checks.

Question 14

You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?

Accepted Answer

A)  The money supply increases, and the reserves of your bank decline.
B)  Both money supply and the reserves of your bank increase.
C)  There is no change in the money supply, and the reserves of your bank decline.
D)  The money supply decreases, and the reserves of your bank increase. C

Question 15

In the United States, the purchasing power of money is determined by

Accepted Answer

A)  the underlying precious metals that back each unit of currency.
B)  the value of U.S.treasury bonds that back each unit of currency.
C)  Federal Reserve policy, which controls the money supply.
D)  Congress, which controls the money supply.

Question 16

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

Accepted Answer

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 17

In defining the money supply (M1) , economists exclude savings deposits because

Accepted Answer

A)  the purchasing power of savings deposits is much less stable than that of checkable deposits and currency.
B)  savings deposits are a form of investment and, thus, a better store of value than money.
C)  savings deposits are liabilities of commercial banks, whereas checkable deposits are assets of the banks.
D)  savings deposits are not generally used as a means of payment.

Question 18

Which of the following will cause the U.S. money supply to expand?

Accepted Answer

A)  a commercial bank uses excess reserves to extend a loan to a customer
B)  a commercial bank purchases U.S.securities from the Fed as an investment
C)  an increase in reserve requirements
D)  an increase in the discount rate

Question 19

The introduction of no-load stock and bond mutual funds has made investing in stocks and bonds increasingly attractive to even the small investor. If, as a result, a large amount of money were shifted from money-market deposit funds to these stock and bond funds, how would the M1 and M2 money supply figures be affected?

Accepted Answer

A)  The M2 money supply would decline; M1 would be unaffected.
B)  The M2 money supply would increase; M1 would be unaffected.
C)  The M2 money supply would increase; M1 would decline.
D)  Both the M1 and M2 money supply figures would increase.

Question 20

When the monetary authorities expand the supply of money rapidly,

Accepted Answer

A)  its purchasing power tends to increase.
B)  holding money is a poor method of storing value.
C)  the long-run sustainable real growth rate of the economy will tend to increase.
D)  the prices of goods and services will generally decline.

Exam 13: Money and the Banking System

Compared to a barter economy, using money increases efficiency by reducing

Correct Answer
verified

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

Correct Answer
verified

Widespread use of credit cards

Correct Answer
verified

The federal funds rate is the interest rate paid when

Correct Answer
verified

When a commercial bank borrows from a Federal Reserve bank,

Correct Answer
verified

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

Correct Answer
verified

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.

When the Federal Reserve sells government bonds to the public, it directly

Correct Answer
verified

The major overall purpose of the Federal Reserve System is to

Correct Answer
verified

Which of the following lists two things that both decrease the money supply?

Correct Answer
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C

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

Correct Answer
verified

Which of the following is correct?

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

Correct Answer
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You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?

Correct Answer
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C

In the United States, the purchasing power of money is determined by

Correct Answer
verified

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

Correct Answer
verified

In defining the money supply (M1) , economists exclude savings deposits because

Correct Answer
verified

Which of the following will cause the U.S. money supply to expand?

Correct Answer
verified

Correct Answer
verified

When the monetary authorities expand the supply of money rapidly,

Correct Answer
verified

Exam 13: Money and the Banking System

Compared to a barter economy, using money increases efficiency by reducing

Correct AnswerverifiedShow Answer

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

Correct AnswerverifiedShow Answer

Widespread use of credit cards

Correct AnswerverifiedShow Answer

The federal funds rate is the interest rate paid when

Correct AnswerverifiedShow Answer

When a commercial bank borrows from a Federal Reserve bank,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

When the Federal Reserve sells government bonds to the public, it directly

Correct AnswerverifiedShow Answer

The major overall purpose of the Federal Reserve System is to

Correct AnswerverifiedShow Answer

Which of the following lists two things that both decrease the money supply?

Correct AnswerverifiedC

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

Correct AnswerverifiedShow Answer

Which of the following is correct?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?

Correct AnswerverifiedC

In the United States, the purchasing power of money is determined by

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In defining the money supply (M1) , economists exclude savings deposits because

Correct AnswerverifiedShow Answer

Which of the following will cause the U.S. money supply to expand?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When the monetary authorities expand the supply of money rapidly,

Correct AnswerverifiedShow Answer

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C

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C

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