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Chapter_test6
Indicate whether the statement is true or false.
1. As banks create money, they create wealth.
a. True
b. False
2. If the Fed decreases reserve requirements, the money supply will increase.
a. True
b. False
3. Money allows people to specialize in what they do best, thereby raising everyone’s standard of living.
a. True
b. False
4. Assume that when $100 of new reserves enter the banking system, the money supply ultimately increases by $800.
Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits. If, at a point in
time, reserves for all banks amount to $750, then at that same point in time, loans for all banks amount to $6,000.
a. True
b. False
5. In the months of November and December, people in the United States hold a larger part of their money in the form of
currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply
increases.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
6. Credit cards
a. represent the largest component of M1.
b. are not included in M1 but are included in
M2.
c. are a form of money unique to the U.S.
d. are not considered money.
7. When the Federal Reserve conducts open-market operations to increase the money supply, it
a. redeems Federal Reserve notes.
b. buys government bonds from the public.
c. raises the discount rate.
d. decreases its lending to member banks.
8. 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
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d. buy bonds to decrease
reserves
9. Suppose banks desire to hold no excess reserves and that the Fed has set a reserve requirement of 6 percent. If you
deposit $8,000 into First Raven Bank,
a. First Raven’s required reserves increase by $480.
b. First Raven will be able to lend out $7,520.
c. First Raven’s assets and liabilities both will increase by
$8,000.
d. All of the above are correct.
10. 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.
11. Which of the following best illustrates the concept of a store of value?
a. You are a precious-metals dealer, and you are always aware of how many ounces of platinum trade for an
ounce of gold.
b. You sell items on eBay, and your prices are stated in terms of dollars.
c. You keep 6 ounces of gold in your safe-deposit box at the bank for emergencies.
d. None of the above is correct.
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. Which of the following is included in both M1 and M2?
a. currency
b. demand deposits
c. other checkable deposits
d. All of the above are
correct.
14. The Federal Reserve
a. is responsible for conducting the nation’s monetary policy, and it plays a role in regulating banks.
b. is responsible for conducing the nation’s monetary policy, but it plays no role in regulating banks.
c. is not responsible for conducting the nation’s monetary policy, and it plays a role in regulating banks.
d. is not responsible for conducing the nation’s monetary policy, and it plays no role in regulating
banks.
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15. If the reserve requirement is 12 percent and banks desire to hold no excess reserves, when a bank receives a new
deposit of $1,000,
a. it must increase its required reserves by more than $150.
b. its total reserves initially increase by $120.
c. it will be able to make new loans up to a maximum of $880.
d. None of the above is correct.
16. If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would
a. rise from 10 to 20.
b. rise from 5 to 10.
c. fall from 10 to 5.
d. not change.
Table 29-7.
Bank of Springfield
Assets Liabilities
Reserves $19,800 Deposits $180,000
Loans 160,200
17. Refer to Table 29-7. Assume the Fed’s reserve requirement is 10 percent and that the Bank of Springfield makes new
loans so as to make its new reserve ratio 10 percent. From then on, no bank holds any excess reserves. Assume also that
people hold only deposits and no currency. Then by what amount does the economy’s money supply increase?
a. $37,800
b. $18,000
c. $2,000
d. $16,300
18. The money supply increases when the Fed
a. lowers the discount rate. The increase will be larger the smaller the reserve ratio
is.
b. lowers the discount rate. The increase will be larger the larger the reserve ratio is.
c. raises the discount rate. The increase will be larger the smaller the reserve ratio is.
d. raises the discount rate. The increase will be larger the larger the reserve ratio is.
19. If the federal funds rate were above 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.
Table 29-4.
The First Bank of Fairfield
Assets Liabilities
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Reserves $1,000 Deposits $8,000
Loans 7,000
20. Refer to Table 29-4. If $800 is deposited into the First Bank of Fairfield, and the bank takes no other actions, its
a. reserves will increase by $100.
b. liabilities will increase by $800.
c. assets will decrease by $800.
d. loans will increase by $800.
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