The Monetary System Answers

Sec00 - The Monetary System MULTIPLE CHOICE 1. The double coincidence of wants a. b. c. d. is required when there is no item in an economy that is widely accepted in exchange for goods and services. is required in an economy that relies on barter. is a hindrance to the allocation of resources when it is required for trade. All of the above are correct. ANS: D NAT: Analytic MSC: Interpretive DIF: 1 REF: LOC: The role of money 29-0 TOP: Barter Sec01 - The Monetary System - The Meaning of Money MULTIPLE CHOICE 1. Economists use the term money to refer to a. b. c. d. all wealth. all assets, including real assets and financial assets. all financial assets, but real assets are not regarded as money. those types of wealth that are regularly accepted by sellers in exchange for goods and services. ANS: D NAT: Analytic MSC: Definitional 6. DIF: 1 REF: LOC: The role of money 29-1 TOP: Money In which of the following sets of assets are the assets correctly ranked from most liquid to least liquid? a. b. c. d. money, bonds, cars, houses money, cars, houses, bonds bonds, money, cars, houses bonds, cars, money, houses ANS: A NAT: Analytic MSC: Interpretive DIF: 2 REF: LOC: The role of money 29-1 TOP: Liquidity 10. For purposes of analyzing the money stock and its relationship to relevant economic variables, money is best thought of as a. b. c. d. those items that can be readily accessed and used to buy goods and services. currency only. currency plus all bank accounts. currency plus all bank accounts plus bonds. ANS: A NAT: Analytic MSC: Interpretive DIF: 2 REF: LOC: The role of money 29-1 TOP: Money 15. Dollar bills, rare paintings, and emerald necklaces are all a. b. c. d. media of exchange. units of account. stores of value. All of the above are correct. ANS: C NAT: Analytic TOP: Store of value DIF: 2 REF: 29-1 LOC: The study of economics, and the definitions of economics MSC: Interpretive 1950 1951  Chapter 29 /The Monetary System 20. Currency includes a. b. c. d. paper bills and coins. demand deposits. credit cards. Both (a) and (b) are correct. ANS: A NAT: Analytic TOP: Currency DIF: 2 REF: 29-1 LOC: The study of economics, and the definitions of economics MSC: Interpretive 25. Which of the following best illustrates the unit of account function of money? a. b. c. d. You list prices for candy sold on your Web site, www.sweettooth.com, in dollars. You pay for your theater tickets with dollars. You keep 6 ounces of gold in your safe-deposit box at the bank for emergencies. None of the above is correct. ANS: A NAT: Analytic MSC: Interpretive DIF: 1 REF: LOC: The role of money 29-1 TOP: Unit of account 30. You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money? a. b. c. d. medium of exchange unit of account store of value liquidity ANS: A NAT: Analytic MSC: Definitional DIF: 1 REF: LOC: The role of money 29-1 TOP: Medium of exchange TOP: Money 35. Economists use the word "money" to refer to a. b. c. d. income generated by the production of goods and services. those assets regularly used to buy goods and services. the value of a person's assets. the value of stocks and bonds. ANS: B NAT: Analytic MSC: Definitional DIF: 1 REF: LOC: The role of money 29-1 40. Fiat money a. b. c. d. is worthless. has no intrinsic value. may be used as a medium of exchange, but it is not legal tender. performs all the functions of money except the unit-of-account function. ANS: B NAT: Analytic MSC: Definitional DIF: 1 REF: LOC: The role of money 29-1 TOP: Intrinsic value TOP: Money supply 49. Which of the following is not included in M1? a. b. c. d. currency demand deposits savings deposits travelers' checks ANS: C NAT: Analytic MSC: Definitional DIF: 1 REF: LOC: The role of money 29-1 Chapter 29 /The Monetary System  1952 50. Which of the following is not included in M1? a. b. c. d. currency demand deposits traveler’s checks credit cards ANS: D NAT: Analytic MSC: Definitional DIF: 1 REF: LOC: The role of money 29-1 TOP: Money supply TOP: Money supply TOP: Money supply TOP: Credit cards 51. Which of the following is included in M2 but not in M1? a. b. c. d. currency demand deposits savings deposits 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 56. Which of the following statements is correct? a. b. c. d. All items that are included in M1 are included also in M2. All items that are included in M2 are included also in M1. Credit cards are included in both M1 and M2. Savings deposits are included in both M1 and M2. ANS: A NAT: Analytic MSC: Definitional DIF: 2 REF: LOC: The role of money 29-1 61. Credit card limits are included in a. b. c. d. M1 but not M2. M2 but not M1. M1 and M2. neither M1 nor M2. ANS: D NAT: Analytic MSC: Definitional DIF: 1 REF: LOC: The role of money 29-1 66. Credit cards a. b. c. d. are included in M1 but not M2. are included in M1 and M2. are included in M2 but not M1 are not included in any measure of the money supply. ANS: D NAT: Analytic MSC: Definitional DIF: 1 REF: LOC: The role of money 29-1 Sec02 - The Monetary System - The Federal Reserve System MULTIPLE CHOICE 6. If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve a. b. c. d. creates dollars and uses them to purchase government bonds from the public. sells government bonds from its portfolio to the public. creates dollars and uses them to purchase various types of stocks and bonds from the public. sells various types of stocks and bonds from its portfolio to the public. ANS: A NAT: Analytic MSC: Interpretive DIF: 2 REF: 29-2 LOC: Monetary and fiscal policy TOP: Open-market operations 1953  Chapter 29 /The Monetary System 7. When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply, a. b. c. d. those assets are government bonds and the Fed’s reason for selling them is to increase the money supply. those assets are government bonds and the Fed’s reason for selling them is to decrease the money supply. those assets are items that are included in M2 and the Fed’s reason for selling them is to increase the money supply. 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 NAT: Analytic MSC: Interpretive DIF: 2 REF: 29-2 LOC: Monetary and fiscal policy TOP: Open-market operations 12. The Federal Reserve a. b. c. d. is a central bank; it is responsible for conducting the nation’s monetary policy; and it plays a role in regulating banks. is a central bank; it is responsible for conducing the nation’s monetary policy; but it plays no role in regulating banks. is not a central bank; it is responsible for conducing the nation’s monetary policy; and it plays a role in regulating banks. 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 NAT: Analytic MSC: Definitional DIF: 1 REF: 29-2 LOC: Monetary and fiscal policy TOP: Federal Reserve System 16. Decisions by policymakers concerning the money supply constitute a. b. c. d. monetary policy. fiscal policy. banking policy. operations policy. ANS: A NAT: Analytic MSC: Definitional DIF: 1 REF: 29-2 LOC: Monetary and fiscal policy TOP: Monetary policy TOP: Federal Reserve System 27. Which of the following does the Federal Reserve not do? a. b. c. d. conduct monetary policy act as a lender of last resort convert Federal Reserve Notes into gold serve as a bank regulator ANS: C NAT: Analytic MSC: Definitional DIF: 1 REF: 29-2 LOC: Monetary and fiscal policy 33. There is a a. b. c. d. short-run tradeoff between inflation and unemployment. short-run tradeoff between an increase in the money supply and inflation. long-run tradeoff between inflation and unemployment. 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 Chapter 29 /The Monetary System  1954 34. The Fed can influence unemployment in a. b. c. d. the short run and in the long run. the short run, but not in the long run. the long run, but not in the short run. neither the short nor the long run. ANS: B NAT: Analytic MSC: Definitional DIF: 2 REF: 29-2 LOC: Monetary and fiscal policy TOP: Federal Reserve System Sec03 - The Monetary System - Banks and the Money Supply MULTIPLE CHOICE 1. In a system of 100-percent-reserve banking, a. b. c. d. banks do not make loans. currency is the only form of money. deposits are banks’ only assets. All of the above are correct. ANS: A NAT: Analytic MSC: Interpretive 6. DIF: 2 REF: LOC: The role of money 29-3 TOP: Reserves If a bank has a reserve ratio of 8 percent, then a. b. c. d. government regulation requires the bank to use at least 8 percent of its deposits to make loans. the bank’s ratio of loans to deposits is 8 percent. the bank keeps 8 percent of its deposits as reserves and loans out the rest. the bank keeps 8 percent of its assets as reserves and loans out the rest. ANS: C NAT: Analytic MSC: Interpretive DIF: 2 REF: LOC: The role of money 29-3 TOP: Reserve ratio 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. b. c. d. $400 increase in excess reserves and no increase in required reserves. $400 increase in required reserves and no increase in excess reserves. $360 increase in excess reserves and $40 increase in required reserves. $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 37. Regulations on the a. b. c. d. maximum amount of reserves that banks can hold against deposits are called reserve requirements. minimum amount of reserves that banks must hold against deposits are called reserve requirements. extent to which banks can buy and sell bonds are called open-market requirements. extent to which banks can make new loans are called open-market requirements. ANS: B NAT: Analytic MSC: Definitional DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Reserve requirements 1955  Chapter 29 /The Monetary System 40. A bank’s assets equal its liabilities under a. b. c. d. both 100-percent-reserve banking and fractional-reserve banking. neither 100-percent-reserve banking nor fractional-reserve banking. 100-percent-reserve banking but not under fractional-reserve banking. fractional-reserve banking but not under 100-percent-reserve banking. ANS: A NAT: Analytic TOP: Banks DIF: 2 REF: 29-3 LOC: The Study of economics, and the definitions of economics MSC: Interpretive 41. If the reserve ratio for all banks is 20 percent, then $100 of new reserves can generate a. b. c. d. $60 of new money in the economy. $250 of new money in the economy. $500 of new money in the economy. $2,000 of new money in the economy. ANS: C DIF: 2 REF: 29-3 NAT: Analytic LOC: The Study of economics, and the definitions of economics TOP: Money multiplier MSC: Applicative 42. If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is a. b. c. d. 2.7 percent. 12.5 percent. 37.5 percent. 40 percent. ANS: C NAT: Analytic TOP: Reserve ratio DIF: 2 REF: 29-3 LOC: The Study of economics, and the definitions of economics MSC: Applicative 47. When the Fed purchases $200 worth of government bonds from the public, the U.S. money supply eventually increases by a. b. c. d. more than $200. exactly $200. less than $200. All of the above are possible. ANS: A DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy MSC: Applicative TOP: Open-market operations 48. Which of the following is correct? When there is a reserve requirement, banks a. b. c. d. must hold exactly the required quantity of reserves. may hold more than, but not less than, the required quantity of reserves. may hold less than, but not more than, the required quantity of reserves. must seek the Fed’s permission whenever they wish to expand or contract their loans to customers. ANS: B DIF: 2 REF: 29-3 NAT: Analytic LOC: The Study of economics, and the definitions of economics TOP: Reserve requirements MSC: Interpretive 49. The discount rate is the interest rate that a. b. c. d. banks charge one another for loans. banks charge the Fed for loans. the Fed charges banks for loans. the Fed charges Congress for loans. ANS: C NAT: Analytic TOP: Discount rate DIF: 1 REF: 29-3 LOC: The Study of economics, and the definitions of economics MSC: Definitional Chapter 29 /The Monetary System  1956 51. To increase the money supply, the Fed can a. b. c. d. buy government bonds or increase the discount rate. buy government bonds or decrease the discount rate. sell government bonds or increase the discount rate. sell government bonds or decrease the discount rate. ANS: B DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Open-market operations | Discount rate MSC: Interpretive 53. The Fed’s control of the money supply is not precise because a. b. c. d. Congress can also make changes to the money supply. there are not always government bonds available for purchase when the Fed wants to perform openmarket operations. the Fed does not know where all U.S. currency is located. the amount of money in the economy depends in part on the behavior of depositors and bankers. ANS: D NAT: Analytic MSC: Interpretive DIF: 2 REF: 29-3 LOC: Monetary and fiscal policy TOP: Federal Reserve System 54. Today, bank runs are not a major problem for the U.S. banking system because a. b. c. d. bank runs are now illegal. banks now hold 100 percent of their deposits in reserve. banks are now all government-operated. the federal government now guarantees the safety of deposits at most banks. ANS: D NAT: Analytic MSC: Interpretive DIF: 2 REF: 29-3 LOC: The role of government TOP: Banks 55. In a 100-percent-reserve banking system, a. b. c. d. banks can create money by issuing currency. banks can create money by lending out reserves. the Fed can increase the money supply with open-market sales. banks hold as many reserves as they hold deposits. ANS: D NAT: Analytic MSC: Definitional DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Reserves 61. 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. b. c. d. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the money supply. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money supply. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the money supply. ANS: A NAT: Analytic MSC: Interpretive DIF: 2 REF: 29-3 LOC: Monetary and fiscal policy TOP: Banks | T-accounts 62. Suppose a bank’s reserve ratio is 5 percent and the bank has $1,000 in deposits. Its reserves amount to a. b. c. d. $5. $50. $95. $950. ANS: B NAT: Analytic MSC: Applicative DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Reserves 1957  Chapter 29 /The Monetary System 69. The manager of the bank where you work tells you that your bank has $5 million in excess reserves. She also tells you that the bank has $300 million in deposits and $255 million dollars in loans. Given this information you find that the reserve requirement must be a. b. c. d. 50/255. 40/255. 50/300. 40/300. ANS: D NAT: Analytic MSC: Applicative DIF: 3 REF: 29-3 LOC: Monetary and fiscal policy TOP: Reserves 71. If you deposit $100 of currency into a demand deposit at a bank, this action by itself a. b. c. d. does not change the money supply. increases the money supply. decreases the money supply. has an indeterminate effect on the money supply. ANS: A NAT: Analytic MSC: Applicative DIF: 2 REF: 29-3 LOC: Monetary and fiscal policy TOP: Banks | Money supply TOP: Banks | Money supply TOP: Fractional-reserve banking 72. When a bank loans out $1,000, the money supply a. b. c. d. does not change. decreases. increases. may do any of the above. ANS: C DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy MSC: Definitional 73. Under a fractional-reserve banking system, banks a. b. c. d. hold more reserves than deposits. generally lend out a majority of the funds deposited. cause the money supply to fall by lending out reserves. All of the above are correct. ANS: B NAT: Analytic MSC: Definitional DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy 74. If a bank uses $100 of excess reserves to make a new loan when the reserve ratio is 20 percent, this action by itself initially makes the money supply a. b. c. d. and wealth increase by $100. and wealth decrease by $100. increase by $100 while wealth does not change. decrease by $100 while wealth decreases by $100. ANS: C DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy MSC: Definitional TOP: Money multiplier TOP: Money multiplier 75. As the reserve ratio increases, the money multiplier a. b. c. d. increases. does not change. decreases. could do any of the above. ANS: C NAT: Analytic MSC: Applicative DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy Chapter 29 /The Monetary System  1958 111. The money supply increases when the Fed a. b. c. d. lowers the discount rate. The increase will be larger the smaller the reserve ratio is. lowers the discount rate. The increase will be larger the larger the reserve ratio is. raises the discount rate. The increase will be larger the smaller the reserve ratio is. raises the discount rate. The increase will be larger the larger the reserve ratio is. ANS: A DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply | Discount rate MSC: Applicative 112. If the Fed wanted to increase the money supply, it would make open market a. b. c. d. purchases or lower the discount rate. sales or lower the discount rate. purchases or raise the discount rate. sales or raise the discount rate. ANS: A DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply | Open-market operations | Discount rate MSC: Definitional 113. To increase the money supply, the Fed could a. b. c. d. sell government bonds. increase the discount rate. decrease the reserve requirement. None of the above is correct. ANS: C DIF: 1 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply | Reserve requirements MSC: Definitional 116. Which of the following is not a tool of monetary policy? a. b. c. d. open market operations reserve requirements changing the discount rate increasing the government budget deficit ANS: D NAT: Analytic MSC: Definitional DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Monetary policy 117. Which of the following lists two things that both increase the money supply? a. b. c. d. the Fed buys bonds and lowers the discount rate the Fed buys bonds and raises the discount rate the Fed sells bonds and lowers the discount rate the Fed sells bonds and raises the discount rate ANS: A DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply | Open-market operations | Discount rate MSC: Applicative 118. Which of the following lists two things that both increase the money supply? a. b. c. d. lower the discount rate, raise the reserve requirement lower the discount rate, lower the reserve requirement raise the discount rate, raise the reserve requirement raise the discount rate, lower the reserve requirement ANS: B DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply | Discount rate | Reserve requirements MSC: Definitional 1959  Chapter 29 /The Monetary System 119. Which of the following lists two things that both increase the money supply? a. b. c. d. raise the discount rate, make open market purchases raise the discount rate, make open market sales lower the discount rate, make open market purchases lower the discount rate, make open market sales ANS: C DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply | Discount rate | Open-market operations MSC: Definitional 126. When the Fed conducts open market purchases, reserves a. b. c. d. increase and banks can increase lending. increase and banks must decrease lending. decrease and banks can increase lending. decrease and banks must decrease lending. ANS: A DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Open-market operations | Reserves MSC: Interpretive 140. The discount rate is a. b. c. d. the rate at which public banks lend to other public banks. the rate at which the Fed lends to banks. the percentage difference between the face value of a Treasury bond and what the Fed pays for it. the percentage of deposits banks hold as excess reserves. ANS: B NAT: Analytic MSC: Definitional DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Discount rate 141. The interest rate that the Fed charges banks that borrow reserves from it is the a. b. c. d. federal funds rate. discount rate. reserve requirement. prime rate. ANS: B NAT: Analytic MSC: Definitional DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Discount rate TOP: Discount rate 142. If the discount rate is lowered, banks choose to borrow a. b. c. d. less from the Fed so reserves increase. less from the Fed so reserves decrease. more from the Fed so reserves increase. more from the Fed so reserves decrease. ANS: C DIF: 1 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy MSC: Definitional 146. The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 20 percent and at the same time buys $1 billion of bonds, then by how much does the money supply change? a. b. c. d. It falls by $45 billion. It falls by $52 billion. It falls by $55 billion. None of the above is correct. ANS: A DIF: 3 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money multiplier | Open-market operations MSC: Analytical Chapter 29 /The Monetary System  1960 150. If the public decides to hold more currency and fewer deposits in banks, bank reserves a. b. c. d. decrease and the money supply eventually decreases. decrease but the money supply does not change. increase and the money supply eventually increases. increase but the money supply does not change. ANS: A NAT: Analytic MSC: Applicative DIF: 2 REF: 29-3 LOC: Monetary and fiscal policy TOP: Currency | Money multiplier 162. During wars the public tends to hold relatively more currency and relatively fewer deposits. This decision makes reserves a. b. c. d. and the money supply increase. and the money supply decrease. increase, but leaves the money supply unchanged. decrease, but leaves the money supply unchanged. ANS: B NAT: Analytic MSC: Applicative DIF: 2 REF: 29-3 LOC: Monetary and fiscal policy TOP: Currency | Money multiplier 163. 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. b. c. d. 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. 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. 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. 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. ANS: D DIF: 3 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money multiplier | Open-market operations MSC: Analytical 164. In the 19th century, when crop failures often led to bank runs, banks would make relatively fewer loans and hold relatively more excess reserves. By itself, these actions by the banks should have a. b. c. d. increased the money multiplier and the money supply. decreased the money multiplier and increased the money supply. increased the money multiplier and decreased the money supply. decreased both the money multiplier and the money supply. ANS: D NAT: Analytic MSC: Applicative DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Banks | Money supply 167. Bank runs a. b. c. d. will affect neither the money supply nor the money multiplier. are only a problem for insolvent banks. can be neither prevented nor mitigated by the Federal Reserve. are a problem because banks only hold a fraction of deposits as reserves. ANS: D NAT: Analytic MSC: Definitional DIF: 1 REF: 29-3 LOC: Monetary and fiscal policy TOP: Banks | Reserves