MULTIPLE CHOICE
1. The 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. |
ANS: D DIF: 1 REF: 29-0
NAT: Analytic LOC: The role of money TOP: Barter
MSC: Interpretive
2. In an economy that relies upon barter,
| a. | trade does not require a double coincidence of wants. |
| b. | scarce resources are allocated just as easily as they are in economies that do not rely upon barter. |
| c. | there is no item in the economy that is widely accepted in exchange for goods and services. |
| d. | All of the above are correct. |
ANS: C DIF: 1 REF: 29-0
NAT: Analytic LOC: The role of money TOP: Barter
MSC: Interpretive
3. 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. |
ANS: C DIF: 2 REF: 29-0
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Barter MSC: Applicative
4. Consider five high school students working on homework in study hall.
| Rosie | has math homework | wants science homework |
| Bob | has English homework | wants history homework |
| Piper | has math homework | wants science homework |
| Dewey | has science homework | wants English homework |
| Molly | has science homework | wants math homework |
Which of the following pairs of students has a double coincidence of wants?
| a. | Rosie and Piper |
| b. | Piper and Molly |
| c. | Dewey and Molly |
| d. | Bob and Dewey |
ANS: B DIF: 1 REF: 29-0
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Barter MSC: Applicative
5. Consider five individuals with different occupations.
| Mary | provides legal advice | wants knives sharpened |
| Clark | grows tomatoes | wants legal advice |
| Nathan | styles hair | wants tomatoes |
| Polly | brews beer | wants knives sharpened |
| Paul | sharpens knives | wants beer |
Which of the following pairs of individuals has a double coincidence of wants?
| a. | Mary and Clark |
| b. | Clark and Nathan |
| c. | Nathan and Polly |
| d. | Polly and Paul |
ANS: D DIF: 1 REF: 29-0
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Barter MSC: Applicative
6. Consider four survivors on an island.
| Rupert | has machete | wants fishing spear |
| Amber | has cooking pot | wants fishing spear |
| Rob | has fishing spear | wants machete |
| Tom | has cooking pot | wants machete |
Which of the following pairs of survivors has a double-coincidence of wants?
| a. | Rupert with Amber, and Rob with Tom |
| b. | Amber with Tom |
| c. | Rupert with Rob |
| d. | None of the above are correct. |
ANS: C DIF: 1 REF: 29-0
NAT: Analytic LOC: The role of money TOP: Barter
MSC: Applicative
7. Consider the following traders who meet.
| Bob | has an apple | wants an orange |
| Ted | has an orange | wants a peach |
| Mary | has a pear | wants an apple |
| Alice | has a peach | wants an orange |
Which, if any, pairs of traders has a double coincidence of wants?
| a. | Bob with Alice |
| b. | Ted with Alice |
| c. | Bob with Mary, Ted with Bob, and Ted with Alice |
| d. | None of the pairs above has a double coincidence of wants. |
ANS: B DIF: 1 REF: 29-0
NAT: Analytic LOC: The role of money TOP: Barter
MSC: Applicative
8. The existence of money leads to
| a. | greater specialization in production, but not to a higher standard of living. |
| b. | a higher standard of living, but not to greater specialization. |
| c. | greater specialization and to a higher standard of living. |
| d. | neither greater specialization nor to a higher standard of living. |
ANS: C DIF: 1 REF: 29-0
NAT: Analytic LOC: The role of money TOP: Money
MSC: Definitional
9. When we say that trade is roundabout we mean that
| a. | people sometimes trade goods for goods. |
| b. | trades require a double coincidence of wants. |
| c. | currency is accepted primarily to make further trades. |
| d. | people must spend time searching for the products they wish to purchase. |
ANS: C DIF: 1 REF: 29-0
NAT: Analytic LOC: The role of money TOP: Trade
MSC: Definitional
Sec01 - The Monetary System - The Meaning of Money
MULTIPLE CHOICE
1. Economists use the term money to refer to
| a. | all wealth. |
| b. | all assets, including real assets and financial assets. |
| c. | all financial assets, but real assets are not regarded as money. |
| d. | those types of wealth that are regularly accepted by sellers in exchange for goods and services. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Definitional
2. Money
| a. | is a perfect store of value. |
| b. | is the most liquid asset. |
| c. | has intrinsic value, regardless of which form it takes. |
| d. | All of the above are correct. |
ANS: B DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money | Liquidity
MSC: Interpretive
3. Money is the most liquid asset available because
| a. | it is a store of value. |
| b. | it is a medium of exchange. |
| c. | it is a unit of account. |
| d. | it has intrinsic value. |
ANS: B DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money | Liquidity
MSC: Interpretive
4. The ease with which an asset can be
| a. | traded for another asset determines whether or not that asset is a unit of account. |
| b. | transported from one place to another determines whether or not that asset could serve as fiat money. |
| c. | converted into a store of value determines the liquidity of that asset. |
| d. | converted into the economy’s medium of exchange determines the liquidity of that asset. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Liquidity
MSC: Interpretive
5. When we want to 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. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Definitional
6. In which of the following sets of assets are the assets correctly ranked from most liquid to least liquid?
| a. | money, bonds, cars, houses |
| b. | money, cars, houses, bonds |
| c. | bonds, money, cars, houses |
| d. | bonds, cars, money, houses |
ANS: A DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Liquidity
MSC: Interpretive
7. Which of the following lists ranks types of assets from most liquid to least liquid?
| a. | currency, demand deposits, money market mutual funds |
| b. | currency, money market mutual funds, demand deposits |
| c. | money market mutual funds, demand deposits, currency |
| d. | demand deposits, money market mutual funds, currency |
ANS: A DIF: 2 REF: 29-1
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Liquidity MSC: Applicative
8. 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 |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Liquidity
MSC: Definitional
9. When an economy uses silver as money, then that economy’s money
| a. | serves as a store of value but not as a medium of exchange. |
| b. | serves as a medium of exchange but not as a unit of account. |
| c. | is fiat money. |
| d. | has intrinsic value. |
ANS: D DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money | Intrinsic value
MSC: Interpretive
10. 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. |
ANS: A DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Interpretive
11. The measure of the money stock called M1 includes
| a. | wealth held by people in their checking accounts. |
| b. | wealth held by people in their savings accounts. |
| c. | wealth held by people in money market mutual funds. |
| d. | everything that is included in M2 plus some additional items. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
12. Credit cards are
| a. | a medium of exchange. |
| b. | counted as part of M2 but not as part of M1. |
| c. | important for analyzing the monetary system. |
| d. | All of the above are correct. |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Interpretive
13. The set of items that serve as media of exchange clearly includes
| a. | demand deposits. |
| b. | short-term bonds. |
| c. | credit cards. |
| d. | All of the above are correct. |
ANS: A DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money
TOP: Money | Medium of exchange MSC: Interpretive
14. The set of items that serve as media of exchange clearly includes
| a. | balances that lie behind debit cards. |
| b. | demand deposits. |
| c. | deposits other than demand deposits, such as NOW accounts, on which checks can be written. |
| d. | All of the above are correct. |
ANS: D DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money
TOP: Money | Medium of exchange MSC: Interpretive
15. Dollar bills, rare paintings, and emerald necklaces are all
| a. | media of exchange. |
| b. | units of account. |
| c. | stores of value. |
| d. | All of the above are correct. |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Store of value MSC: Interpretive
16. Imagine an economy in which: (1) pieces of paper called yollars are the only thing that buyers give to sellers when they buy goods and services, so it would be common to use, say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so you might walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3) yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. In this economy,
| a. | the yardstick is a medium of exchange but it cannot serve as a unit of account. |
| b. | the yardstick is a unit of account but it cannot serve as a store of value. |
| c. | the yardstick is a medium of exchange but it cannot serve as a store of value, and the yollar is a unit of account. |
| d. | the yollar is a unit of account, but it is not a medium of exchange and it is not a liquid asset. |
ANS: B DIF: 2 REF: 29-1
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Medium of exchange | Store of value MSC: Applicative
17. Money is
| a. | the most liquid asset and a perfect store of value. |
| b. | the most liquid asset but an imperfect store of value. |
| c. | the least liquid asset but a perfect store of value. |
| d. | the least liquid asset and an imperfect store of value. |
ANS: B DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money
TOP: Money | Liquidity | Store of value MSC: Interpretive
18. Paper dollars
| a. | are commodity money and gold coins are fiat money. |
| b. | are fiat money and gold coins are commodity money. |
| c. | and gold coins are both commodity monies. |
| d. | and gold coins are both fiat monies. |
ANS: B DIF: 2 REF: 29-1
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Currency | Commodity money MSC: Interpretive
19. The Soviet government in the 1980s never abandoned the ruble as the official currency. The people of Moscow preferred to accept other items such as
| 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. | 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. |
ANS: C DIF: 3 REF: 29-1
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Medium of exchange MSC: Applicative
20. Currency includes
| a. | paper bills and coins. |
| b. | demand deposits. |
| c. | credit cards. |
| d. | Both (a) and (b) are correct. |
ANS: A DIF: 2 REF: 29-1
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Currency MSC: Interpretive
21. Which of the following is not included in M1?
| a. | a $5 bill in your wallet |
| b. | $100 in your checking account |
| c. | $500 in your savings account |
| d. | All of the above are included in M1. |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: The study of economics, and the definitions of economics
TOP: Money supply MSC: Interpretive
22. Money
| a. | is more efficient than barter. |
| b. | makes trades easier. |
| c. | allows greater specialization. |
| d. | All of the above are correct. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Definitional
23. Paper money
| a. | has a high intrinsic value. |
| b. | is the primary medium of exchange in a barter economy. |
| c. | is valuable because it is generally accepted in trade. |
| d. | is valuable only because of the legal tender requirement. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Definitional
24. 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. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Store of value
MSC: Interpretive
25. 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 theater tickets with 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. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Unit of account
MSC: Interpretive
26. 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. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Store of value
MSC: Interpretive
27. The “yardstick” people use to post prices and record debts is called
| a. | a medium of exchange. |
| b. | a unit of account. |
| c. | a store of value. |
| d. | liquidity. |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Unit of account
MSC: Definitional
28. 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. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Store of value
MSC: Interpretive
29. 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. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Medium of exchange
MSC: Interpretive
30. You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money?
| a. | medium of exchange |
| b. | unit of account |
| c. | store of value |
| d. | liquidity |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Medium of exchange
MSC: Definitional
31. 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. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Definitional
32. An 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. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Store of value
MSC: Definitional
33. Treasury Bonds are
| a. | liquid, but not a store of value. |
| b. | a store of value, but not liquid. |
| c. | both liquid and a store of value. |
| d. | neither liquid nor a store of value. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Liquidity | Store of value
MSC: Interpretive
34. Which of the following functions of money is also a common function of most other financial assets?
| a. | a unit of account |
| b. | a store of value |
| c. | medium of exchange |
| d. | None of the above is correct. |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Store of value
MSC: Definitional
35. 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. |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money
MSC: Definitional
36. 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. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Liquidity
MSC: Definitional
37. Currently, U.S. currency is
| a. | fiat money with intrinsic value. |
| b. | fiat money with no intrinsic value. |
| c. | commodity money with intrinsic value. |
| d. | commodity money with no intrinsic value. |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Commodity money | Money
MSC: Definitional
38. Fiat money
| a. | has no intrinsic value. |
| b. | is backed by gold. |
| c. | has intrinsic value equal to its value in exchange. |
| d. | is any close substitute for currency such as checkable deposits. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Intrinsic value
MSC: Definitional
39. Commodity money is
| a. | backed by gold. |
| b. | the principal type of money in use today. |
| c. | money with intrinsic value. |
| d. | receipts created in international trade that are used as a medium of exchange. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Commodity money
MSC: Definitional
40. Fiat money
| a. | is worthless. |
| b. | has no intrinsic value. |
| c. | may be used as a medium of exchange, but it is not legal tender. |
| d. | performs all the functions of money except the unit-of-account function. |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Intrinsic value
MSC: Definitional
41. Which type of money has intrinsic value?
| a. | commodity money |
| b. | fiat money |
| c. | both commodity money and fiat money |
| d. | neither commodity money nor fiat money |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Commodity money
MSC: Definitional
42. If an economy used gold as money, its money would be
| a. | commodity money, but not fiat money. |
| b. | fiat money, but not commodity money. |
| c. | both fiat and commodity money. |
| d. | functioning as a store of value and as a unit of account, but not as a medium of exchange. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Commodity money
MSC: Definitional
43. The legal tender requirement means that
| a. | people are more likely to accept the dollar as a medium of exchange. |
| b. | the government must hold enough gold to redeem all currency. |
| c. | people may not make trades with anything else. |
| d. | All of the above are correct. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Medium of exchange
MSC: Definitional
44. Writing in The New York Times in 2004, economist Hal R. Varian asserted that dollars are valuable as a result of
| a. | the fact that they are backed by gold. |
| b. | the cost incurred by the government when it prints paper currency. |
| c. | “network effects.” |
| d. | “commodity effects.” |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money | Value
MSC: Definitional
45. Writing in The New York Times in 2004, economist Hal R. Varian likens the network effects associated with dollars to the network effects associated with
| a. | fax machines. |
| b. | carbonated beverages. |
| c. | televisions and radios. |
| d. | jewelry and works of art. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money | Value
MSC: Definitional
46. In the early 1990s, the inflation rate in southern Iraq averaged about
| a. | 3 percent a year, with the U.S. dollar serving as the official currency in southern Iraq at that time. |
| b. | 20 percent a year, with a new currency, the “Saddam dinar,” serving as the official currency in southern Iraq at that time. |
| c. | 250 percent a year, with a new currency, the “Saddam dinar,” serving as the official currency in southern Iraq at that time. |
| d. | 250 percent a year, with an established currency, the “Swiss dinar,” serving as the official currency in southern Iraq at that time. |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money | Inflation rate
MSC: Interpretive
47. M1 equals currency plus demand deposits plus
| a. | nothing else. |
| b. | other checkable deposits. |
| c. | traveler's checks plus other checkable deposits. |
| d. | traveler's checks plus other checkable deposits plus savings deposits. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
48. M1 includes
| a. | currency. |
| b. | demand deposits. |
| c. | travelers' checks. |
| d. | All of the above are correct. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
49. Which of the following is not included in M1?
| a. | currency |
| b. | demand deposits |
| c. | savings deposits |
| d. | travelers' checks |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
50. Which of the following is not included in M1?
| a. | currency |
| b. | demand deposits |
| c. | traveler’s checks |
| d. | credit cards |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
51. 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. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money
TOP: Money supply | Money supply MSC: Definitional
52. When we add up currency, demand deposits, other checkable deposits, and travelers checks, we get
| a. | the money supply, as universally defined by economists. |
| b. | the totality of common stores of value in the United States. |
| c. | M1. |
| d. | M2. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
53. 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 |
ANS: D DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
54. Which of the following is not included in either M1 or M2?
| a. | U.S. Treasury bills |
| b. | small time deposits |
| c. | demand deposits |
| d. | money market mutual funds |
ANS: A DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money
TOP: Money supply | Money supply MSC: Definitional
55. Which of the following items 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 |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
56. Which of the following statements is correct?
| a. | All items that are included in M1 are included also in M2. |
| b. | All items that are included in M2 are included also in M1. |
| c. | Credit cards are included in both M1 and M2. |
| d. | Savings deposits are included in both M1 and M2. |
ANS: A DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
57. Money market mutual funds are included in
| a. | M1 but not M2. |
| b. | M1 and M2. |
| c. | M2 but not M1. |
| d. | neither M1 nor M2. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money
TOP: Money supply | Money supply MSC: Definitional
58. Demand deposits are a type of
| a. | checking account. |
| b. | time deposit. |
| c. | money market mutual fund. |
| d. | savings deposit. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Demand deposits
MSC: Definitional
59. Demand deposits are included in
| a. | M1 but not M2. |
| b. | M2 but not M1. |
| c. | M1 and M2. |
| d. | neither M1 nor M2. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
60. Travelers checks are included in
| a. | M1 but not M2. |
| b. | M2 but not M1. |
| c. | M1 and M2. |
| d. | neither M1 nor M2. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
61. Credit card limits are included in
| a. | M1 but not M2. |
| b. | M2 but not M1. |
| c. | M1 and M2. |
| d. | neither M1 nor M2. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
62. Savings deposits are included in
| a. | M1 but not M2. |
| b. | M2 but not M1. |
| c. | M1 and M2. |
| d. | neither M1 nor M2. |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
63. Which of the following is included in both M1 and M2?
| a. | savings deposits |
| b. | demand deposits |
| c. | small time deposits |
| d. | money market mutual funds |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
64. 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. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
65. Credit cards
| a. | defer payments. |
| b. | are a store of value. |
| c. | have led to wider use of currency. |
| d. | are part of the money supply. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Credit cards
MSC: Definitional
66. Credit cards
| a. | are included in M1 but not M2. |
| b. | are included in M1 and M2. |
| c. | are included in M2 but not M1 |
| d. | are not included in any measure of the money supply. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Credit cards
MSC: Definitional
67. Which of the following statements is correct?
| a. | Credit cards are important for our system of payments, but they are not important for analyzing the monetary system. |
| b. | Account balances that lie behind debit cards are included in M1 and in M2. |
| c. | People who have credit cards probably hold more money on average than people who do not have credit cards. |
| d. | A debit card is more similar to a credit card than to a check. |
ANS: B DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
68. Which of the following statements is correct?
| a. | Credit cards are important for our system of payments, but they are not important for analyzing the monetary system. |
| b. | Account balances that lie behind debit cards are included in neither M1 nor M2. |
| c. | People who have credit cards probably hold less money on average than people who do not have credit cards. |
| d. | A debit card allows its user to postpone payment for a purchase. |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Money supply
MSC: Definitional
69. Which of the following defer payments?
| a. | credit cards and debit cards |
| b. | neither credit cards nor debit cards |
| c. | credit cards but not debit cards |
| d. | debit cards but not credit cards |
ANS: C DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Credit cards | Debit cards
MSC: Definitional
Table 29-1. The information in the table pertains to an imaginary economy.
| Type of Money | Amount |
| Large time deposits | $80 billion |
| Small time deposits | $75 billion |
| Demand deposits | $75 billion |
| Other checkable deposits | $40 billion |
| Savings deposits | $10 billion |
| Travelers' checks | $1 billion |
| Money market mutual funds | $15 billion |
| Currency | $110 billion |
| Credit card balances | $10 billion |
| Miscellaneous categories of M2 | $25 billion |
70. Refer to Table 29-1. What is the M1 money supply?
| a. | $215 billion |
| b. | $216 billion |
| c. | $226 billion |
| d. | $301 billion |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply
MSC: Applicative
71. Refer to Table 29-1. What is the M2 money supply?
| a. | $125 billion |
| b. | $296 billion |
| c. | $351 billion |
| d. | $431 billion |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply
MSC: Applicative
72. Given the following information, what are the values of M1 and M2?
| Small time deposits | $650 billion |
| Demand deposits and other checkable deposits | $300 billion |
| Savings deposits | $750 billion |
| Money market mutual funds | $600 billion |
| Travelers' checks | $25 billion |
| Large time deposits | $600 billion |
| Currency | $100 billion |
| Miscellaneous categories in M2 | $25 billion |
| a. | M1 = $400 billion, M2 = $2,475 billion. |
| b. | M1 = $125 billion, M2 = $3,025 billion. |
| c. | M1 = $425 billion, M2 = $2, 450 billion. |
| d. | M1 = $425 billion, M2 = $1,875 billion. |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply
MSC: Definitional
73. The amount of currency per person in the United States is about
| a. | $70. |
| b. | $300. |
| c. | $2,100. |
| d. | $3,300. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Currency
MSC: Definitional
74. In the U.S., the average adult holds about $3,300 in
| a. | currency. |
| b. | wealth. |
| c. | M1. |
| d. | M2. |
ANS: A DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Currency
MSC: Definitional
75. Which of the following might explain why the United States has so much currency per person?
| a. | U.S. citizens are holding a lot of foreign currency. |
| b. | Currency may be a preferable store of wealth for criminals. |
| c. | People use credit and debit cards more frequently. |
| d. | All of the above help explain the abundance of currency. |
ANS: B DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Currency
MSC: Definitional
76. In the United States, currency holdings per person average about
| a. | $60; one explanation for this relatively small average is that many people use credit and debit cards to make transactions. |
| b. | $60; one explanation for this relatively small average is that U.S. citizens hold a lot of foreign currency. |
| c. | $3,300; one explanation for this relatively large amount is that criminals probably prefer currency as a medium of exchange. |
| d. | $3,300; one explanation for this relatively large average is that U.S. citizens hold a lot of foreign currency. |
ANS: C DIF: 2 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Currency
MSC: Definitional
77. One surprising thing about the U.S. money stock is that
| a. | banks hold so much currency relative to the public. |
| b. | the public holds so much currency relative to banks. |
| c. | there is so little currency per person. |
| d. | there is so much currency per person. |
ANS: D DIF: 1 REF: 29-1
NAT: Analytic LOC: The role of money TOP: Currency
MSC: Definitional
Sec02 - The Monetary System - The Federal Reserve System
MULTIPLE CHOICE
1. The Federal Reserve
| a. | was created in 1836. |
| b. | was created to facilitate the federal government’s collection of taxes as well as its expenditures. |
| c. | is an example of a central bank. |
| d. | All of the above are correct. |
ANS: C DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Interpretive
2. The Federal Reserve
| a. | was created in 1913. |
| b. | has more than one specific job to perform. |
| c. | is an example of a central bank. |
| d. | All of the above are correct. |
ANS: D DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Interpretive
3. The members of the Federal Reserve’s Board of Governors
| a. | are appointed by the president of the U.S. and confirmed by the U.S. Senate. |
| b. | serve six-year terms. |
| c. | are also the presidents of the regional Federal Reserve banks. |
| d. | share power equally, with no governor having any more influence or power than any other governor. |
ANS: A DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Interpretive
4. At any given time, the voting members of the Federal Open Market Committee include
| a. | five of the 12 presidents of the regional Federal Reserve banks. |
| b. | the president of the Federal Reserve Bank of New York. |
| c. | the seven members of the Board of Governors. |
| d. | All of the above are correct. |
ANS: D DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Federal Open Market Committee MSC: Definitional
5. At the Federal Reserve,
| a. | the nation’s monetary policy is made by the Federal Open Market Committee, which meets twice a year. |
| b. | the nation’s monetary and fiscal policies are made by the Federal Open Market Committee, which meets twice a year. |
| c. | the nation’s monetary policy is made by the Federal Open Market Committee, which meets about every six weeks. |
| d. | the nation’s monetary and fiscal policies are made by the Federal Open Market Committee, which meets about every six weeks. |
ANS: C DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Federal Open Market Committee | Monetary policy MSC: Interpretive
6. If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve
| a. | creates dollars and uses them to purchase government bonds from the public. |
| b. | sells government bonds from its portfolio to the public. |
| c. | creates dollars and uses them to purchase various types of stocks and bonds from the public. |
| d. | sells various types of stocks and bonds from its portfolio to the public. |
ANS: A DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Open-market operations
MSC: Interpretive
7. When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply,
| a. | those assets are government bonds and the Fed’s reason for selling them is to increase the money supply. |
| b. | those assets are government bonds and the Fed’s reason for selling them is to decrease the money supply. |
| c. | those assets are items that are included in M2 and the Fed’s reason for selling them is to increase the money supply. |
| d. | those assets are items that are included in M2 and the Fed’s reason for selling them is to decrease the money supply. |
ANS: B DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Open-market operations
MSC: Interpretive
8. Which of the following is not correct?
| a. | The twelve regional Federal Reserve Banks play a role in regulating banks and ensuring the health of the banking system. |
| b. | U.S. monetary policy is made by the Federal Open Market Committee. |
| c. | The Federal Open Market Committee meets every 12 weeks. |
| d. | All of the above are correct. |
ANS: C DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Interpretive
9. All Fed purchases and sales of
| a. | corporate stocks and bonds are conducted at the New York Fed’s trading desk. |
| b. | government bonds are conducted at the New York Fed’s trading desk. |
| c. | real estate and other real assets are conducted by the Federal Open Market Committee. |
| d. | All of the above are correct. |
ANS: B DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Open-market operations
MSC: Interpretive
10. Which of the following is not correct?
| a. | The president of the New York Fed gets to vote at every meeting of the Federal Open Market Committee, but this is not true of the presidents of the other regional Federal Reserve Banks. |
| b. | The Fed’s policy decisions influence the economy’s rate of inflation in the short run and the economy’s employment and production in the long run. |
| c. | The Fed’s primary tool of monetary policy is open-market operations. |
| d. | All of the above are correct. |
ANS: B DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Interpretive
11. The agency responsible for regulating the money supply in the United States is
| a. | the Comptroller of the Currency. |
| b. | the U.S. Treasury. |
| c. | the Federal Reserve. |
| d. | the U.S. Bank. |
ANS: C DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
12. The Federal Reserve
| a. | is a central bank; it is responsible for conducting the nation’s monetary policy; and it plays a role in regulating banks. |
| b. | is a central bank; it is responsible for conducing the nation’s monetary policy; but it plays no role in regulating banks. |
| c. | is not a central bank; it is responsible for conducing the nation’s monetary policy; and it plays a role in regulating banks. |
| d. | is a central bank; it plays a role in regulating banks; but it is not responsible for conducting the nation’s monetary policy. |
ANS: A DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
13. The Federal Reserve does all except which of the following?
| a. | It controls the supply of money. |
| b. | It acts as a lender of last resort to banks. |
| c. | It makes loans to large business firms. |
| d. | It tries to ensure the health of the banking system. |
ANS: C DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
14. Members of the Board of Governors
| a. | are appointed by the U.S. president, while presidents of the regional Federal Reserve Banks are appointed by those banks' boards of directors. |
| b. | are appointed by the regional Federal Reserve Banks' boards of directors while the presidents of the regional Federal Reserve Banks are appointed by the U.S. president. |
| c. | and the presidents of the regional Federal Reserve Banks are appointed by the U.S. president. |
| d. | and the presidents of the regional Federal Reserve Banks are appointed by the regional Federal Reserve Banks' boards of directors. |
ANS: A DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
15. The president of each regional Federal Reserve Bank is appointed by
| a. | the U.S. president with the approval of the Senate. |
| b. | the Board of Governors. |
| c. | the voting members of the Federal Open Market Committee. |
| d. | the board of directors of that regional Federal Reserve Bank. |
ANS: D DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
16. Decisions by policymakers concerning the money supply constitute
| a. | monetary policy. |
| b. | fiscal policy. |
| c. | banking policy. |
| d. | operations policy. |
ANS: A DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Monetary policy
MSC: Definitional
17. Which of the following entities actually executes open-market operations?
| a. | the Board of Governors |
| b. | the New York Federal Reserve Bank |
| c. | the Federal Open Market Committee |
| d. | the Open Market Committees of the regional Federal Reserve Banks |
ANS: B DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
18. Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?
| a. | the Board of Governors |
| b. | the FOMC |
| c. | the regional Federal Reserve Bank presidents |
| d. | the Central Bank Policy Commission |
ANS: B DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
19. The New York Federal Reserve Bank
| a. | president always gets to vote at the FOMC meetings. |
| b. | conducts open market transactions. |
| c. | is one of 12 regional Federal Reserve Banks. |
| d. | All of the above are correct. |
ANS: D DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
20. All of the presidents of the regional Federal Reserve banks
| a. | attend each FOMC meeting. |
| b. | have voting rights at each FOMC meeting. |
| c. | are appointed by the president of the U.S. and confirmed by the U.S. Senate. |
| d. | All of the above are correct. |
ANS: A DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
21. The Board of Governors
| a. | is currently chaired by the Speaker of the House of Representatives. |
| b. | has as its members individuals who are appointed by the president and confirmed by the Senate. |
| c. | has 10 members. |
| d. | All of the above are correct. |
ANS: B DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
22. Which of the following is correct?
| a. | The Federal Reserve has 14 regional banks. The Board of Governors has 12 members who serve 7-year terms. |
| b. | The Federal Reserve has 14 regional banks. The Board of Governors has 7 members who serve 14-year terms. |
| c. | The Federal Reserve has 12 regional banks. The Board of Governors has 12 members who serve 7-year terms. |
| d. | The Federal Reserve has 12 regional banks. The Board of Governors has 7 members who serve 14-year terms. |
ANS: D DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
23. Which of the following statements about the Federal Reserve is not correct?
| a. | The members of the Board of Governors are also presidents of the Federal Reserve's regional banks. |
| b. | The Federal Open Market Committee makes monetary policy. |
| c. | All members of the Board of Governors sit on the Federal Open Market Committee. |
| d. | The Federal Reserve serves as a bank regulator. |
ANS: A DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
24. Which individuals among the following serve four-year terms?
| a. | the members of the Board of Governors |
| b. | the Chair of the Board of Governors |
| c. | the members of the FOMC |
| d. | All of the above are correct. |
ANS: B DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
25. Who was appointed chairman of the Board of Governors in 2005 by President George W. Bush?
| a. | Alan Greenspan |
| b. | Bennett McCallum |
| c. | R. Glenn Hubbard |
| d. | Ben Bernanke |
ANS: D DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
26. The 12 regional Federal Reserve Banks
| a. | are not allowed to make loans to banks in their districts. |
| b. | regulate banks in their districts. |
| c. | have more voting members on the FOMC than does the Board of Governors. |
| d. | are each headed by a member of the Board of Governors. |
ANS: B DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
27. Which of the following does the Federal Reserve not do?
| a. | conduct monetary policy |
| b. | act as a lender of last resort |
| c. | convert Federal Reserve Notes into gold |
| d. | serve as a bank regulator |
ANS: C DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
28. At any meeting of the Federal Open Market Committee, that committee’s voting members consist of
| a. | 5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors. |
| b. | 5 Federal Reserve Regional Bank Presidents and 5 members of the Board of Governors. |
| c. | 12 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors. |
| d. | 12 Federal Reserve Regional Bank Presidents and 5 members of the Board of Governors. |
ANS: A DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Federal Open Market Committee MSC: Definitional
29. Who among the following is not always a voting member of the FOMC?
| a. | the president of the New York Fed |
| b. | the Chairman of the Board of Governors |
| c. | a member of the Board of Governors other than the chair |
| d. | the president of the Philadelphia Fed |
ANS: D DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy
TOP: Federal Open Market Committee MSC: Definitional
30. The problem faced by the Fed stems from two of the Ten Principles of Economics. Those principles are as follows:
| a. | (1) Governments can usually improve market outcomes, and (2) society faces a short-run trade-off between inflation and unemployment. |
| b. | (1) Governments can sometimes improve market outcomes, and (2) interest rates fall when the government prints too much money. |
| c. | (1) Society faces a short-run trade-off between inflation and unemployment, and (2) prices rise when the government prints too much money. |
| d. | (1) Society faces a long-run trade-off between inflation and unemployment, and (2) prices rise when the government prints too much money. |
ANS: C DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Monetary policy
MSC: Interpretive
31. 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. |
ANS: B DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Monetary policy
MSC: Applicative
32. Over one time horizon or another, Fed policy decisions influence
| a. | inflation and employment. |
| b. | inflation but not employment. |
| c. | employment but not inflation. |
| d. | neither inflation nor employment. |
ANS: A DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Inflation | Unemployment
MSC: Definitional
33. There is a
| a. | short-run tradeoff between inflation and unemployment. |
| b. | short-run tradeoff between an increase in the money supply and inflation. |
| c. | long-run tradeoff between inflation and unemployment. |
| d. | long-run tradeoff between an increase in the money supply and inflation. |
ANS: A DIF: 1 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Inflation | Unemployment
MSC: Definitional
34. The Fed can influence unemployment in
| a. | the short run and in the long run. |
| b. | the short run, but not in the long run. |
| c. | the long run, but not in the short run. |
| d. | neither the short nor the long run. |
ANS: B DIF: 2 REF: 29-2
NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve System
MSC: Definitional
Sec03 - The Monetary System - Banks and the Money Supply
MULTIPLE CHOICE
1. In a system of 100-percent-reserve banking,
| a. | banks do not make loans. |
| b. | currency is the only form of money. |
| c. | deposits are banks’ only assets. |
| d. | All of the above are correct. |
ANS: A DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserves
MSC: Interpretive
2. In a system of 100-percent-reserve banking,
| a. | banks do not accept deposits. |
| b. | banks do not influence the supply of money. |
| c. | loans are the only asset item for banks. |
| d. | All of the above are correct. |
ANS: B DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserves | Money supply
MSC: Interpretive
3. 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. |
ANS: C DIF: 1 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserves
MSC: Interpretive
4. In a fractional-reserve banking system, a bank
| a. | does not make loans. |
| b. | does not accept deposits. |
| c. | keeps only a fraction of its reserves in deposits. |
| d. | keeps only a fraction of its deposits in reserve. |
ANS: D DIF: 1 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserves
MSC: Definitional
5. On a T-account for a bank,
| a. | reserves and deposits are both assets. |
| b. | reserves are assets and deposits are liabilities. |
| c. | deposits are assets and reserves are liabilities. |
| d. | reserves and deposits are both liabilities. |
ANS: B DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: T-accounts
MSC: Interpretive
6. 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. |
ANS: C DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserve ratio
MSC: Interpretive
7. Suppose that banks desire to hold no excess reserves, the reserve requirement is 5 percent, and a bank receives a new deposit of $1,000. This bank
| a. | will increase its required reserves by $50. |
| b. | will initially see its total reserves increase by $1,000. |
| c. | will be able to make a new loan of $950. |
| d. | All of the above are correct. |
ANS: D DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
8. Suppose banks desire to hold no excess reserves. If the reserve requirement is 10 percent and if a bank receives a new deposit of $10, then this bank
| a. | must increase its 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 correct. |
ANS: A DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
9. Suppose banks desire to hold no excess reserves. If the reserve requirement is 15 percent and if a bank receives a new deposit of $10, then this bank
| a. | must increase its required reserves by $10. |
| b. | will initially see its total reserves increase by $15. |
| c. | will be able to make new loans up to a maximum of $8.50. |
| d. | All of the above are correct. |
ANS: C DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
10. Suppose that banks desire to hold no excess reserves. If the reserve requirement is 5 percent and a bank receives a new deposit of $400, it
| a. | must increase required reserves by $20. |
| b. | will initially see reserves increase by $400. |
| c. | will be able to use this deposit to make new loans amounting to $380. |
| d. | All of the above are correct. |
ANS: D DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
11. If banks desire to hold no excess reserves, the reserve ratio is 10 percent, and a bank that was previously just meeting its reserve requirement receives a new deposit of $400, then initially the bank has a
| a. | $400 increase in excess reserves and no increase in required reserves. |
| b. | $400 increase in required reserves and no increase in excess reserves. |
| c. | $360 increase in excess reserves and $40 increase in required reserves. |
| d. | $40 increase in excess reserves and $360 increase in required reserves. |
ANS: C DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
12. Suppose the Fed requires banks to hold 10 percent of their deposits as reserves. A bank has $20,000 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. | $29,000 |
| b. | $28,100 |
| c. | $19,100 |
| d. | $11,000 |
ANS: A DIF: 3 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
13. Suppose banks desire to hold no excess reserves and that the Fed has set a reserve requirement of 10 percent. If you deposit $9,000 into First Jayhawk Bank,
| a. | First Jayhawk’s required reserves increase by $900. |
| b. | First Jayhawk will be able to lend out $8,100. |
| c. | First Jayhawk’s assets and liabilities both will increase by $9,000. |
| d. | All of the above are correct. |
ANS: D DIF: 2 REF: 29-3
NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserves
MSC: Applicative
Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited
into a single bank, and the bank then makes loans totaling $9,250. The
T-account of the bank is shown below.
| Assets | Liabilities |
| Reserves $750 | Deposits $10,000 |
| Loans 9,250 | |
14. Refer to Table 29-2. This bank operates in a
| a. | system of 0-percent-reserve banking. |
| b. | system of 100-percent-reserve banking. |
| c. | system of Federal-Reserve banking. |
| d. | fractional-reserve banking system. |
ANS: D DIF: 1 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Fractional-reserve banking
MSC: Applicative
15. Refer to Table 29-2. The bank’s reserve ratio is
| a. | 7.50 percent. |
| b. | 8.12 percent. |
| c. | 92.50 percent. |
| d. | 100 percent. |
ANS: A DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Reserve ratio
MSC: Applicative
16. Refer to Table 29-2. 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. | 1.33. |
| b. | 10.00. |
| c. | 10.81. |
| d. | 13.33. |
ANS: D DIF: 2 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Money multiplier
MSC: Applicative
17. Refer to Table 29-2. 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. | $866.67. |
| b. | $1,666.67. |
| c. | $2,000.00. |
| d. | an infinite amount. |
ANS: C DIF: 3 REF: 29-3
NAT: Analytic LOC: The role of money TOP: Money multiplier
MSC: Applicative
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