Monetary system chapter 6 exercises

Chapter 6 - The Monetary System
MULTIPLE CHOICE
1.

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.
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2.

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.
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3.

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.

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4.

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.
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5.

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.
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6.

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.

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7.

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
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8.

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.
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9.

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.
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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63.

Suppose that the reserve ratio is 5 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.
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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.
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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.
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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.
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67.

Suppose a bank has $10,000 in deposits and $8,000 in loans. It has a reserve ratio of
a. 2 percent.
b. 12.5 percent
c. 20 percent.
d. 80 percent.
ANSWER: c.
20 percent.
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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.
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74.

If the reserve ratio is 5 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.
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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.
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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.
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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.
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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.
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137. Assume that banks do 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. 9 percent
d. 8.1 percent
ANSWER: b.
9.1 percent
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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
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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
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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 do 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
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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.
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are a problem because