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Chp7 Monetary System

The document consists of a series of multiple-choice questions related to economic concepts, particularly focusing on money, banking, and monetary policy. Key topics include barter, functions of money, liquidity, reserve requirements, and the role of the Federal Reserve. It also addresses the effects of monetary policy on the economy and the mechanisms through which banks operate.

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0% found this document useful (0 votes)
82 views10 pages

Chp7 Monetary System

The document consists of a series of multiple-choice questions related to economic concepts, particularly focusing on money, banking, and monetary policy. Key topics include barter, functions of money, liquidity, reserve requirements, and the role of the Federal Reserve. It also addresses the effects of monetary policy on the economy and the mechanisms through which banks operate.

Uploaded by

emery.21
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1. 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.

2. A double coincidence of wants


a. is required when there is no item in an economy that is widely accepted in exchange for
goods and services.
b. is required in an economy that relies on barter.
c. is a hindrance to the allocation of resources when it is required for trade.
d. All of the above are correct.

3. 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. financial assets such as stocks and bonds.
d. any type of wealth.

4. 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.

5. 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.

6. Any item that people can use to transfer purchasing power from the present to the future is called
a. a medium of exchange.
b. a unit of account.
c. a store of value.
d. None of the above is correct.

7. Liquidity refers to
a. the ease with which an asset is converted to the medium of exchange.
b. the measurement of the intrinsic value of commodity money.
c. the measurement of the durability of a good.
d. how many time a dollar circulates in a given year.
8. Which list ranks assets from most to least liquid?
a. money, bonds, cars, houses
b. money, cars, houses, bonds
c. bonds, money, cars, houses
d. bonds, cars, money, houses

9. 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.

10. You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in
your piggy bank illustrates money’s function as a _______. The laptop’s price is posted as $500. The
$500 price illustrates money’s function as a _____. You use the $500 to purchase the laptop. This
transaction illustrates money’s function as a ______.
a. store of value, medium of exchange, unit of
account
b. store of value, unit of account, medium of
exchange
c. medium of exchange, unit of account, store of
value
d. medium of exchange, store of value, unit of
account

11. When colonists in Virginia used tobacco as money, their money


a. was commodity money.
b. had no intrinsic value.
c. was fiat money.
d. had no store of value.

12. Fiat money


a. has no intrinsic value.
b. is backed by gold.
c. is a medium of exchange but not a unit of account.
d. is any close substitute for currency such as checkable
deposits.

13. The Soviet government in the 1980’s never abandoned the ruble as the official currency. However,
the people of Moscow preferred to accept
a. cigarettes in exchange for goods and services, because they were convinced that cigarettes
were going to soon become hard to come by.
b. American dollars in exchange for goods and services, because rubles were extremely hard
to come by.
c. goods such as cigarettes or American dollars in exchange for goods and services,
reminding us of the fact that government decree by itself is not sufficient for the success of
a commodity money.
d. All of the above are correct.
14. For purposes of analyzing the money stock and its relationship to relevant economic variables,
money is best thought of as
a. those items that can be readily accessed and used to buy goods and
services.
b. currency only.
c. currency plus all bank accounts.
d. currency plus all bank accounts plus bonds.

15. When prices rise,


a. real estate is a better unit of account than money.
b. money is a worse medium of exchange than real
estate.
c. money is a better store of value than real estate.
d. real estate is a better store of value than money.

16. 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.

17. When conducting an open-market purchase, 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.

18 Monetary policy affects employment


a. only in the long run.
b. only in the short run.
c. in both the long run and the short run.
d. in neither the long run nor the short
run.

19. The Fed’s policy decisions have an important influence on


a. inflation in the long run and employment and production in the short run.
b. inflation in the long run and employment and production in the long run.
c. inflation in the short run and employment and production in the short
run.
d. inflation in the short run and employment and production in the long run.

20. In a system of 100-percent-reserve banking, the purpose of a bank is to


a. make loans to households.
b. influence the money supply.
c. give depositors a safe place to keep their money.
d. buy and sell gold.
21 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.

22. Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8
percent, and excess reserves amount to $5 billion. What is the level of deposits?
a. $5,000 billion
b. $4,937.5 billion
c. $5,062.5 billion
d. $4,995 billion

23. Which of the following is a liability of a bank and an asset of its customers?
a. deposits of its customers and loans to its customers
b. deposits of its customers but not loans to its customers
c. loans of its customers but not the deposits of its customers
d. neither the deposits of its customers nor the loans to its
customers

24. A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new
store. On their respective balance sheets, this loan is
a. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money
supply.
b. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the
money supply.
c. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money
supply.
d. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the
money supply.

25. Reserves are


a. the central bank of the U.S.
b. deposits that banks hold in excess of the required amount.
c. the purchase of bonds by the Federal Open Market
Committee.
d. deposits that banks have received but have not yet loaned out.

26. A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the reserve
requirement. It follows that the reserve requirement is
a. 2.5 percent.
b. 33.3 percent.
c. 25 percent.
d. 75 percent.
27. The manager of the bank where you work tells you that your bank has $6 million in excess
reserves. She also tells you that the bank has $400 million in deposits and $362 million dollars in
loans. Given this information you find that the reserve requirement must be
a. 44/400.
b. 6/362.
c. 38/400.
d. 32/400.

28. Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000
of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now
have to lend out if it decides to hold only required reserves?
a. $27,000
b. $27,190
c. $26,190
d. $9,000

29. 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.

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

31. If the reserve ratio is 5 percent, then $500 of additional reserves can create up to
a. $10,500 of new money.
b. $10,000 of new money.
c. $9,500 of new money.
d. $2,500 of new money.

32. Suppose the Federal Reserve increases bank reserves and banks lend out some of these reserves,
but at some point banks still have $5 million more they wish to lend out. If the reserve requirement is
10 percent, how much more money can banks create if they lend out the remaining amount?
a. $55 million
b. $50 million
c. $45 million
d. $40 million

33. In the nation of Wiknam, the money supply is $80,000 and reserves are $18,000. Assuming that
people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve
requirement is
a. 29 percent.
b. 22.5 percent.
c. 16 percent.
d. None of the above is correct.

Table 29-3. An economy starts with $50,000 in currency. All of this currency is deposited into a
single bank, and the bank then makes loans totaling $45,750. The T-account of the bank is shown
below.
Assets Liabilities
Reserves $4,250 Deposits $50,000
Loans 45,750
34. Refer to Table 29-3. The bank’s reserve ratio is
a. 17.5 percent.
b. 8.5 percent.
c. 91.5 percent.
d. 100 percent.

35. Refer to Table 29-3. If all banks in the economy have the same reserve ratio as this bank, then the
value of the economy’s money multiplier is
a. 9.33.
b. 1.09.
c. 10.76.
d. 11.76.

36. Refer to Table 29-3. If all banks in the economy have the same reserve ratio as this bank, then an
increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
a. $287.25.
b. $1,614.71.
c. $1,764.71.
d. $2,000 or more.

37. Bank capital is


a. the machinery, structures, and equipment of the bank.
b. the resources that owners have put into the bank.
c. the reserves of the bank.
d. the bank’s total assets.

38. The leverage ratio is calculated as


a. assets minus liabilities.
b. assets divided by bank capital
c. the reciprocal of the required reserve ratio
d. the required reserve ratio multiplied by bank capital.

39. Suppose a bank is operating with a leverage ratio of 10. A 6 percent increase in the value of assets
a. will reduce liabilities by 6 percent.
b. will result in a 60 percent increase in owner’s equity.
c. will result in a 60 percent decrease in owner’s equity.
d. will reduce liabilities by 10 percent.
40. The 2008 credit crunch occurred when banks reduced lending in response to
a. the loss of asset value for mortgage backed securities and mortgage
loans.
b. having too little capital to satisfy capital requirements.
c. an excess of bank capital.
d. an increase in the required reserve ratio.

41. When the Fed makes open-market purchases bank


a. withdrawals and lending increase.
b. withdrawals increase and lending decreases.
c. deposits and lending increase.
d. deposits increase and lending decreases.

42. The tool most often used by the Fed to control the money supply is
a. changing reserve requirements.
b. open market operations.
c. buying and selling of equities.
d. altering the discount rate.

43. If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money
supply?
a. it increases by $100,000
b. it increases by $150,000
c. it decreases by
$100,000
d. it decreases by
$200,000

44. The rate at which the Fed lends money to banks is


a. the prime rate.
b. fixed at 4%.
c. the federal funds rate.
d. the discount rate.

45. If the discount rate is lowered, banks borrow


a. less from the Fed so reserves increase.
b. less from the Fed so reserves decrease.
c. more from the Fed so reserves increase.
d. more from the Fed so reserves decrease.

46. The Fed can increase the money supply by conducting open-market
a. sales or by raising the discount rate.
b. sales or by lowering the discount rate.
c. purchases or by raising the discount rate.
d. purchases or by lowering the discount rate.

47. What does the Fed auction at the Term-Auction Facility?


a. government bonds of a quantity it sets
b. government bonds with the quantity determined at the auction
c. loans of a quantity it sets
d. loans with the quantity determined at the auction

48. Other things the same, if reserve requirements are increased, the reserve ratio
a. increases, the money multiplier increases, and the money supply increases.
b. increases, the money multiplier decreases, and the money supply
decreases.
c. decreases, the money multiplier increases, and the money supply increases.
d. decreases, the money multiplier decreases, and the money supply
increases.

49. The manager of the bank where you work tells you that the bank has $400 million in deposits and
$340 million dollars in loans. The Fed then raises the reserve requirement from 5 percent to 10
percent. Assuming everything else stays the same, how much is the bank holding in excess reserves
after the increase in the reserve requirement?
a. $0
b. $20 million
c. $40 million
d. $60 million

50. If the reserve requirement is 10 percent, which of the following pairs of changes would both allow
a bank to lend out an additional $10,000?
a. the Fed buys a $10,000 bond from the bank or someone deposits $10,000 in the bank
b. the Fed buys a $10,000 bond from the bank or the Fed lends the bank $10,000
c. the Fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank
d. the Fed sells a $10,000 bond to the bank or the Fed lends the bank $10,000

51. The Fed increases the reserve requirement, but it wants to offset the effects on the money supply.
Which of the following should it do?
a. sell bonds to increase reserves
b. sell bonds to decrease reserves
c. buy bonds to increase reserves
d. buy bonds to decrease
reserves

52. The reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits
and no currency. When the Fed sells $20 million worth of bonds to the public, bank reserves
a. increase by $20 million and the money supply eventually increases by $20 million.
b. increase by $20 million and the money supply eventually increases by $200 million.
c. decrease by $2 million and the money supply eventually increases by $20 million.
d. decrease by $20 million and the money supply eventually decreases by $200
million.

53. If people decide to hold more currency relative to deposits, the money supply
a. falls. The larger the reserve ratio is, the more the money supply falls.
b. falls. The larger the reserve ratio is, the less the money supply falls.
c. rises. The larger the reserve ratio is, the more the money supply rises.
d. rises. The larger the reserve ratio is, the less the money supply rises.
54. During wars the public tends to hold relatively more currency and relatively fewer deposits. This
decision makes reserves
a. and the money supply increase.
b. and the money supply decrease.
c. increase, but leaves the money supply unchanged.
d. decrease, but leaves the money supply unchanged.

55. People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars
of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks
choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?
a. they fall $220 million
b. they fall $200 million
c. they rise $200 million
d. they rise $220 million

56. In December 1999 people feared that there might be computer problems at banks as the century
changed. Consequently, people wanted to hold relatively more in currency and relatively less in
deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet
depositors' demands. These actions by the public
a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of
the money supply, it could have sold bonds.
b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of
the money supply, it could have bought bonds.
c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have sold bonds.
d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the
money supply, it could have bought bonds.

57. The Fed’s control of the money supply is not precise because
a. Congress can also make changes to the money supply.
b. there are not always government bonds available for purchase when the Fed wants to
perform open-market operations.
c. the Fed does not know where all U.S. currency is located.
d. the amount of money in the economy depends in part on the behavior of depositors and
bankers.

58. During a bank run, depositors decide to hold more currency relative to deposits and banks decide
to hold more excess reserves relative to deposits.
a. Both the decision to hold relatively more currency and the decision to hold relatively more
excess reserves would make the money supply increase.
b. Both the decision to hold relatively more currency and the decision to hold relatively more
excess reserves would make the money supply decrease.
c. The decision to hold relatively more currency would make the money supply increase. The
decision to hold relatively more excess reserves would make the money supply decrease.
d. The decision to hold relatively more currency would make the money supply increase. The
decision to hold relatively more excess reserves would make the money supply decrease.

59. The Fed can directly protect a bank during a bank run by
a. increasing reserve requirements.
b. selling government bonds to the bank.
c. lending reserves to the bank.
d. doing any of the above.

60. 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.

61. The federal funds rate is the


a. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities.
b. percentage of deposits that banks must hold as reserves.
c. interest rate at which the Federal Reserve makes short-term loans to banks.
d. interest rate at which banks lend reserves to each other overnight.

62. When the Fed sells 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.

63. If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move
the rate back towards its target by
a. buying bonds. This buying would reduce reserves.
b. buying bonds. This buying would increase reserves.
c. selling bonds. This selling would reduce reserves.
d. selling bonds. This selling would increase reserves.

64. If the Fed raised the reserve requirement, the demand for reserves would
a. increase, so the federal funds rate would fall.
b. increase, so the federal funds rate would rise.
c. decrease, so the federal funds rate would fall.
d. decrease, so the federal funds rate would
rise.

65. The Fed wants to increase the quantity of funds available through the Term Auction Facility. The
Fed sets the
a. price of the loan, and money supply increases.
b. quantity of borrowing, and money supply increases.
c. price of the loan, and money supply decreases.
d. quantity of borrowing, and money supply
decreases.

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