Chapter 16

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 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change? a. It falls by $12 billion. b. It falls by $19 billion. c. It falls by $21 billion. d. None of the above is correct.

a

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.

c

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

c

Which of the following is correct? a. A bank's deposits at the Federal Reserve counts as part of the bank's reserves. The Federal Reserve pays interest on these deposits. b. A bank's deposits at the Federal Reserve counts as part of the bank's reserves. The Federal Reserve does not pay interest on these deposits. c. A bank's deposits at the Federal Reserve does not count as part of the bank's reserves. The Federal Reserve pays interest on these deposits. d. A bank's deposits at the Federal Reserve does not count as part of the bank's reserves. The Federal Reserve does not pay interest on these deposits.

a

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.

c

Many societies used gold as money, because a. it is relatively rare. b. it is durable. c. it has a relatively low melting point. d. All of the above are correct.

d

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.

a

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.

b

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.

c

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.

a

People can write checks against a. demand deposits and money market mutual funds b. demand deposits but not money market mutual funds c. money market mutual funds but not demand deposits d. neither demand deposits nor money market mutual funds

a

Prisoners sometimes determine a single good to be used as money. This good becomes a. a medium of exchange and a unit of account. b. a medium of exchange, but not a unit of account. c. a unit of account, but not a medium of exchange. d. neither a unit of account nor a medium of exchange.

a

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.

a

When the Fed purchases $1000 worth of government bonds from the public, the U.S. money supply eventually increases by a. more than $1000. b. exactly $1000. c. less than $1000. d. None of the above are correct.

a

Which of the following can the Fed do to change the money supply? a. change reserves or change the reserve ratio b. change reserves but not change the reserve ratio c. change the reserve ratio but not change the reserve ratio d. neither change reserves nor change the reserve ratio

a

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

a

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply a. increased. The central bank could have reduced the size of this increase by buying bonds. b. increased. The central bank could have reduced the size of this increase by selling bonds. c. decreased. The central bank could have reduced the size of this decrease by buying bonds. d. decreased. The central bank could have reduced the size of this decrease by selling bonds.

b

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.

b

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

b

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.

b

In a fractional-reserve banking system, an increase in reserve requirements a. increases both the money multiplier and the money supply. b. decreases both the money multiplier and the money supply. c. increases the money multiplier, but decreases the money supply. d. decreases the money multiplier, but increases the money supply.

b

Reserves decrease if the Federal Reserve a. raises the discount rate or auctions more credit. b. raises the discount rate but not if it auctions more credit. c. lowers the discount rate or auctions more credit. d. lowers the discount rate but not if it auctions more credit.

b

The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank holding in excess reserves? a. $15 million b. $19.5 million c. $25.5 million d. $0 million

b

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

b

The money supply decreases if the Fed a. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be. b. sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be. c. buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be. d. buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

b

To increase the money supply, the Fed could a. sell government bonds. b. auction more loans to banks. c. increase the reserve requirement. d. None of the above is correct.

b

Which of the following will not help to prevent bank runs? a. government insurance of deposits b. fractional reserve banking c. 100% reserve banking d. All of the above prevent bank runs.

b

You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency a. has no intrinsic value. The exchange is an example of barter. b. has no intrinsic value. The exchange is not an example of barter. c. has intrinsic value. The exchange is not an example of barter. d. has intrinsic value. The exchange is not an example of barter.

b

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold a. fewer reserves, so the money multiplier will fall. b. fewer reserves, so the money multiplier will rise. c. more reserves, so the money multiplier will fall. d. more reserves, so the money multiplier will rise.

c

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.

c

If the public decides to hold less currency and more deposits in banks, bank reserves a. decrease and the money supply eventually decreases. b. decrease but the money supply does not change. c. increase and the money supply eventually increases. d. increase but the money supply does not change.

c

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

c

Reserves increase if the Federal Reserve a. raises the discount rate or auctions more credit. b. raises the discount rate but not if it auctions more credit. c. lowers the discount rate or auctions more credit. d. lowers the discount rate but not if it auctions more credit.

c

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

c

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.

c

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

c

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.

d

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold a. fewer reserves, so the reserve ratio will fall. b. fewer reserves, so the reserve ratio will rise. c. more reserves, so the reserve ratio will fall. d. more reserves, so the reserve ratio will rise.

d

The set of items that serve as media of exchange clearly includes a. balances that lie behind debit cards. b. demand deposits. c. other checkable deposits. d. All of the above are correct.

d

Which of the following both increase the money supply? a. an increase in the discount rate and an increase in the interest rate on reserves b. an increase in the discount rate and a decrease in the interest rate on reserves c. a decrease in the discount rate and an increase in the interest rate on reserves d. a decrease in the discount rate and a decrease in the interest rate on reserves

d

Which of the following is not included in M1? a. currency b. demand deposits c. traveler's checks d. credit cards

d