Chapter 4

The central bank in the United States is the: Bank of America. U.S. Treasury. U.S. National Bank. Federal Reserve.

Federal Reserve.

The quantity of money in the United States is essentially controlled by the: President of the United States. Department of the Treasury. Federal Reserve. system of commercial banks.

Federal Reserve.

Money market mutual fund shares are included in: MI only. M2 only. both MI and M2. neither MI nor M2.

M2 only.

When banks borrow through the Term Auction Facility, the price of borrowing is determined by: the Federal Reserve. a competitive bidding process. the difference between the discount rate and the interest rate on three-month Treasury securities. open-market operations.

a competitive bidding process.

An important factor in the evolution of commodity money to fiat money is: a desire to reduce transaction costs. a desire to increase transaction costs. the fact that gold is no longer highly valued. a desire to use gold for jewelry.

a desire to reduce transaction costs.

To make a trade in a barter economy requires: currency. a check. scrip. a double coincidence of wants.

a double coincidence of wants.

Checking account balances that are linked to debit cards are included in: MI. M2 only. both MI and M2. neither M1 nor M2.

both MI and M2.

The currency-deposit ratio is determined by: the Federal Reserve. business policies of banks and the laws regulating banks. preferences of households about the form of money they wish to hold. the Federal Deposit Insurance Corporation (FDIC).

business policies of banks and the laws regulating banks.

The reserve- deposit ratio is determined by: the Federal Reserve. business policies of banks and the laws regulating banks. preferences of households about the form of money they wish to hold. the Federal Deposit Insurance Corporation (FDIC).

business policies of banks and the laws regulating banks.

To increase the money supply, the Federal Reserve: buys government bonds. sells government bonds. buys corporate stocks. sells corporate stocks.

buys government bonds.

In a 100-percent-reserve banking system, banks: can increase the money supply. can decrease the money supply. can either increase or decrease the money supply. cannot affect the money supply.

cannot affect the money supply.

The minimum amount of owners' equity in a bank mandated by regulators is called a ______ requirement. reserve margin liquidity capital

capital

The value of banks' owners' equity is called bank: deposits. reserves. capital. liquidity.

capital.

If many banks fail, this is likely to: cause surviving banks to lower their ratios of reserves to deposits. cause surviving banks to raise their ratios of reserves to deposits. have no effect on the ratio of reserves to deposits in surviving banks. cause surviving banks to hold less currency.

cause surviving banks to raise their ratios of reserves to deposits.

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to divided by multiplied by B. (rr + 1); (rr + cr) (cr + 1); (cr + rr) (rr + cr); (rr + 1) (rr + cr); (cr + 1)

(cr + 1); (cr + rr)

Demand deposits are funds held in: currency. certificates of deposit. checking accounts. money markets.

checking accounts.

In prisoner of war camps during World War II, the "currency" used was: chocolates. cigarettes. gold. IOUs.

cigarettes.

A country that is on a gold standard primarily uses: commodity money. fiat money. credit money. the barter system.

commodity money.

To increase the monetary base, the Fed can: conduct open-market purchases. conduct open-market sales. raise the interest rate paid on reserves. lower the required reserve ratio.

conduct open-market purchases.

The difference between banks and other financial intermediaries is that only banks have the legal authority to: transfer funds from savers to borrowers. pay interest on debt obligations. manage portfolios of assets. create assets that are part of the money supply

create assets that are part of the money supply

Payment is deferred by using ____ but immediate access to funds occurs when using currency; demand deposits credit cards; debit cards demand deposits; savings deposits debit cards; credit cards

credit cards; debit cards

Liabilities of banks include: reserves. currency in the hands of the public. loans to customers. demand deposits.

demand deposits.

Bank reserves equal: gold kept in bank vaults. gold kept at the central bank. currency plus demand deposits. deposits that banks have received but have not lent out.

deposits that banks have received but have not lent out.

The interest rate charged on loans by the Federal Reserve to banks is called the: federal funds rate. prime rate. discount rate. Treasury bill rate.

discount rate.

Credit cards: are part of the M1 money supply. are part of the M2 money supply. are part of both the M1 and M2 money supply. do not affect the money supply.

do not affect the money supply.

In a fractional-reserve banking system, banks create money because: each dollar of reserves generates many dollars of demand deposits. banks have the legal authority to issue new currency. funds are transferred from households wishing to save to firms wishing to borrow. the wealth of the economy expands when borrowers undertake new debt obligations.

each dollar of reserves generates many dollars of demand deposits.

Money that has no value other than as money is called money. fiat intrinsic commodity government

fiat

The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the the monetary base and the the money supply. smaller; smaller smaller; greater greater; greater greater; smaller

greater; greater

People use money as a store of value when they: hold money to transfer purchasing power into the future. use money as a measure of economic transactions. use money to buy goods and services. hold money to gain power and esteem.

hold money to transfer purchasing power into the future.

If the reserve deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will: increase by $1 million. decrease by $1 million. increase by more than $1 million. decrease by more than $1 million.

increase by more than $1 million.

If many banks fail, this is likely to: increase the ratio of currency to deposits. decrease the ratio of currency to deposits. have no effect on the ratio of currency to deposits. decrease the amount of currency in circulation, if the Fed takes no action.

increase the ratio of currency to deposits.

When the Fed increases the interest rate paid on reserves, it: increases the reserve deposit ratio (rr). decreases the reserve deposit ratio (rr). increases the monetary base (B). decreases the monetary base (B).

increases the reserve deposit ratio (rr).

When the Fed increases the discount rate, it: increases the reserve to deposit ratio (rr). decreases the reserve to deposit ratio (rr). is likely to increase the monetary base (B) is likely to decrease the monetary base (B).

is likely to decrease the monetary base (B).

In the United States, the money supply is determined: only by the Fed. only by the behavior of individuals who hold money and of banks in which money is held. jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. according to a constant-growth-rate rule.

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held.

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because: only fei physically in the possession of the owner is accepted in transactions. legal claim to a fei never seen by current generations was accepted in transactions. the central bank of Yap accepts fei in exchange for paper certificates. the government of Yap verifies the authenticity of fei used for transactions.

legal claim to a fei never seen by current generations was accepted in transactions.

The use of borrowed funds to supplement existing funds for purposes of investment is called: arbitrage. leverage. convergence. intermediation.

leverage.

The banking system creates: liquidity. wealth. reserves. currency.

liquidity.

Assets of banks include: money market mutual funds. currency in the hands of the public. loans to customers. demand deposits.

loans to customers.

In a fractional-reserve banking system, banks create money when they: accept deposits. make loans. hold reserves. exchange currency for deposits.

make loans.

The money supply will increase if the: currency deposit ratio increases. reserve deposit ratio increases. monetary base increases. discount rate increases.

monetary base increases.

Open-market operations change the ; changes in interest rate paid on reserves change the ; and changes in the discount rate change the monetary base; monetary base; monetary base money multiplier; money multiplier; money multiplier monetary base; money multiplier; monetary base money multiplier; monetary base; money multiplier

monetary base; money multiplier; monetary base

Macroeconomists call assets used to make transactions: real income. nominal income. money consumption.

money

Money's liquidity refers to the ease with which: coins can be melted down. illegally obtained money can be laundered. loans can be floated. money can be converted into goods and services.

money can be converted into goods and services.

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold excess reserves, which will the money multiplier. more; increase more; decrease fewer; increase fewer; decrease

more; decrease

Credit card balances are included in: M1 only. M2 only. both M1 and M2. neither M1 nor M2.

neither M1 nor M2.

In a system with 100-percent-reserve banking: all banks must hold reserves equal to 100 percent of their loans. no banks can make loans. the banking system completely controls the size of the money supply. no banks can accept deposits.

no banks can make loans.

To reduce the money supply, the Federal Reserve: buys government bonds. sells government bonds. creates demand deposits. destroys demand deposits.

sells government bonds.

In the United States, monetary policy is controlled by: the President. the Congress. the Federal Reserve. the Treasury Department.

the Federal Reserve.

The size of monetary base is determined by: the Federal Reserve. the Federal Reserve and banks. preferences of households about the form of money they wish to hold. business policies of banks and the laws regulating banks.

the Federal Reserve.

Two ways for banks to borrow reserves from the Federal Reserve are through: the discount window and the Term Auction Facility. open-market operations and excess reserve swaps. decreasing the reserve deposit ratio and decreasing the currency deposit ratio. fractional-reserve banking and financial intermediation.

the discount window and the Term Auction Facility.

High-powered money is another name for: currency. demand deposits. the monetary base. M2.

the monetary base.

The ratio of the money supply to the monetary base is called: the currency deposit ratio. the reserve deposit ratio. high-powered money. the money multiplier.

the money multiplier.

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect to increase. reserve requirements the discount rate the money supply the reserve deposit ratio

the money supply

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then: it cannot be determined whether the money supply increases or decreases. the money supply increases. the money supply decreases. the money supply does not change.

the money supply decreases.

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: it cannot be determined whether the money supply increases or decreases. the money supply increases. the money supply decreases. the money supply does not change

the money supply decreases.

When the Fed decreases the interest rate paid on reserves, if the ratio of currency to deposits decreases also while the monetary base is constant, then: it cannot be determined whether the money supply increases or decreases. the money supply increases. the money supply decreases. the two changes exactly offset each other.

the money supply increases.

Economists use the term money to refer to: income. profits. assets used for transactions. earnings from labor.

assets used for transactions.

Open-market operations are: Commerce Department efforts to open foreign markets to international trade. Federal Reserve purchases and sales of government bonds. Securities and Exchange Commission rules requiring open disclosure of market trades. Treasury Department purchases and sales of the U.S. gold stock.

Federal Reserve purchases and sales of government bonds.

Banks create money in: a 100-percent-reserve banking system but not in a fractional-reserve banking system. a fractional-reserve banking system but not in a 100-percent-reserve banking system. both a 100-percent-reserve banking system and a fractional-reserve banking system. neither a 100-percent-reserve banking system nor a fractional-reserve banking system.

a fractional-reserve banking system but not in a 100-percent-reserve banking system.

Excess reserves are reserves that banks keep: in their vaults. at the central bank. to meet legal reserve requirements. above the legally required amount.

above the legally required amount.

In a system with fractional-reserve banking: all banks must hold reserves equal to a fraction of their loans. no banks can make loans. the banking system completely controls the size of the money supply. all banks must hold reserves equal to a fraction of their deposits.

all banks must hold reserves equal to a fraction of their deposits.

In a country on a gold standard, the quantity of money is determined by the: government. central bank. amount of gold. buying and selling of government securities.

amount of gold.

The preferences of households determine the: reserve deposit ratio. currency deposit ratio. size of the monetary base. loan deposit ratio.

currency deposit ratio.

The monetary base consists of currency held by the public, plus reserves held by banks. all outstanding currency, plus reserves held by banks. all outstanding currency, plus demand deposits. all bank reserves.

currency held by the public, plus reserves held by banks.

The money supply consists of: currency plus reserves. currency plus the monetary base. currency plus demand deposits. the monetary base plus demand deposits.

currency plus demand deposits.

The money supply will decrease if the: monetary base increases. currency-deposit ratio increases. discount rate decreases. reserve deposit ratio decreases.

currency-deposit ratio increases.

If the Federal Reserve wishes to increase the money supply, it should: decrease the discount rate. increase interest paid on reserves. sell government bonds. decrease the monetary base.

decrease the discount rate.

When the Fed makes an open-market sale, it: increases the money multiplier (m). increases the currency -deposit ratio (cr). increases the monetary base (B). decreases the monetary base (B).

decreases the monetary base (B).

When the Fed decreases the interest rate paid on reserves, it: increases the reserve deposit ratio (rr). decreases the reserve deposit ratio (rr). increases the monetary base (B). decreases the monetary base (B).

decreases the reserve deposit ratio (rr).

Quantitative easing is most closely akin to: discount lending. open-market operations. fractional-reserve banking. capital requirements.

open-market operations.

The most frequently used tool of monetary policy is: open-market operations. changes in the discount rate. changes in reserve requirements. changes in interest rate paid on reserves

open-market operations.

For borrowing from the discount window, the Fed sets the of borrowing, compared to borrowing using the Term Auction Facility, where the Fed sets the of borrowing. maximum quantity; minimum quantity minimum price; maximum price quantity; price price; quantity

price; quantity

When the Federal Reserve conducts an open-market purchase, it buys bonds from the: public. U.S. Treasury. Internal Revenue Service. International Monetary Fund.

public.

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply: increases by $100. decreases by $100. increases by more than $100. remains the same.

remains the same.

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve deposit ratio, then the total money supply is: reserves divided by rr. 1/rr. reserves times rr. reserves divided by (1 - rr).

reserves divided by rr.

Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be securities. safer and shorter-term tax-favored and foreign smaller-denomination and higher-grade riskier and longer-term

riskier and longer-term

The amount of capital that banks are required to hold depends on the: amount of deposits held at a bank. riskiness of the bank's assets. reserve requirements set by the Fed. level of deposit insurance coverage.

riskiness of the bank's assets.

All of the following are considered major functions of money except as a medium of exchange. way to display wealth. unit of account. store of value.

way to display wealth.

If the monetary base fell and the currency deposit ratio rose but the reserve deposit ratio remained the same, then: the money supply would fall, but not by as much as it would have fallen if the reserve deposit ratio had risen. the money supply would fall, but not by as much as it would have fallen if the reserve deposit ratio had fallen. the money supply would fall more than it would have fallen if the reserve deposit ratio had risen. it is impossible to be certain whether the money supply would fall or rise in this case.

the money supply would fall, but not by as much as it would have fallen if the reserve deposit ratio had risen.

Currency equals: MI. the sum of funds in checking accounts. the sum of checking accounts and paper money. the sum of coins and paper money.

the sum of coins and paper money.

Financial intermediation is the process of: settling disputes between borrowers and lenders. advising corporations on whether to expand using debt or equity. transferring funds from savers to borrowers. converting from a barter economy to a money economy.

transferring funds from savers to borrowers.

All of the following assets are included in MI except: currency. demand deposits. traveler's checks. money market deposit accounts.

traveler's checks.

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: store of value. unit of account. medium of exchange. flow of value.

unit of account.

People use money as a unit of account when they: hold money to transfer purchasing power into the future. use money as a measure of economic transactions. use money to buy goods and services. hold money to gain power and esteem.

use money as a measure of economic transactions.

People use money as a medium of exchange when they: hold money to transfer purchasing power into the future. use money as a measure of economic transactions. use money to buy goods and services. hold money to gain power and esteem.

use money to buy goods and services.

In the United States, bank reserves consist of: currency and demand deposits. vault cash and deposits at the Federal Reserve. gold deposits at the Federal Reserve. the money supply.

vault cash and deposits at the Federal Reserve.