MACRO CHAPTER 13

Suppose Richard wins $2,000 in a lottery and decides to deposit the money in a bank. If the required reserve ratio is 25 percent, the amount of excess reserves held by the bank is: $1,800. $1,000. $2,000. $1,500.

$1,500.

Ross receives a reward of $30,000 for being the best employee at his workplace. He makes a savings deposit of $20,000 in a commercial bank. The bank is required to maintain a reserve ratio of 20 percent. From this deposit of $20,000, the bank can now extend a loan of: $18,000. $14,000. $20,000. $16,000.

$16,000.

Kate made a profit of $30,000 from her business last year. She opens a checking account in the Bank of Vanadia and deposits the $30,000 in it. The bank has to maintain a required reserve of 10 percent. The bank decides to use the excess reserves to give loans to local citizens. Peter takes a car loan of an amount that equals the excess reserves held by the Bank of Vanadia. When Peter buys a car using the full amount of the loan, the seller accepts a check and deposits it in First Citizen Bank. Suppose the First Citizen Bank has to keep a required reserve of 20 percent. Then, the excess reserves of the First Citizen Bank is: $21,000. $21,600. $22,000. $20,500.

$21,600.

If the potential deposit expansion multiplier is 8, the required reserve ratio must be: 10 percent. 12.5 percent. 15 percent. 25 percent.

12.5 percent.

Suppose a national bank is required to keep $300 of every $1,000 it receives as a deposit with the Federal Reserve. The required reserve ratio of the national bank is: 15 percent. 3 percent. 5 percent. 30 percent.

30 percent.

If the required reserve ratio is 25 percent, the potential deposit expansion multiplier is: 6. 5. 3. 4.

4.

Which of the following is not a tool that the Fed uses to control the money supply in the U.S. economy? A change in income tax rates The establishment of reserve requirements for banks A change in the discount rate The buying and selling of U.S. government securities and other financial assets in the open market

A change in income tax rates

Which of the following is likely to cause a decrease in the demand for money in an economy? A decrease in the opportunity cost of holding money An increase in the level of employment A decrease in interest rates An increase in the cost of exchange of goods

An increase in the cost of exchange of goods

Which of the following comprises a major share of the M1 money supply in the United States? Traveler's checks and money market mutual funds Demand deposits and checkable deposits Money market mutual funds and savings deposits Savings and small time deposits

Demand deposits and checkable deposits

Identify the correct statement. Depository institutions can regulate the money supply in an economy. M2 is the narrowest definition of money. Demand deposits are available for withdrawal after a given period of time. Depositors can write checks against money market mutual funds.

Depositors can write checks against money market mutual funds.

Which of the following is a feature of a barter economy? The costs of transaction are very low. Goods are directly traded for other goods. Precious metals are used as mediums of exchange. Money is used as a medium of exchange.

Goods are directly traded for other goods.

Identify the correct statement about the supply of money in an economy. If the supply of money increases rapidly, the inflation rate increases. If the supply of money increases rapidly, the value of money increases. If the supply of money increases rapidly, the unemployment rate decreases. If the supply of money decreases rapidly, the purchasing power of money decreases.

If the supply of money increases rapidly, the inflation rate increases.

Which of the following is true of the Federal Reserve? It conducts monetary policy in a manner that promotes both full employment and price stability. It balances the budget of the federal government. It controls the number of credit and debit cards that can be issued by commercial banks in a financial year. It controls the demand for money in an economy.

It conducts monetary policy in a manner that promotes both full employment and price stability.

Which of the following is true of the Board of Governors of the Fed? It establishes the rules and regulations for the tax structure of an economy. It establishes the rules and regulations that apply to all depository institutions in the United States. It consists of members from the Federal Reserve District Banks. It consists of 8 members, each appointed for a 10-year term.

It establishes the rules and regulations that apply to all depository institutions in the United States.

Which of the following is true of money? It is non-durable and non-portable in nature. It cannot be transformed into other forms of assets without a loss of value. There is no opportunity cost of holding money. It is a liquid asset.

It is a liquid asset.

Identify the correct statement about the M2 money supply. It is equal to the sum of the M1 money supply, savings deposits, small time deposits, and money market mutual funds. It includes time deposits that are greater than $100,000. It is equal to the difference between the M1 money supply and the sum of savings deposits, small time deposits, and money market mutual funds. It excludes small time deposits.

It is equal to the sum of the M1 money supply, savings deposits, small time deposits, and money market mutual funds.

Which of the following is true of the M1 money supply? It is the sum of savings deposits, small time deposits, and traveler's checks. It is the sum of currency in circulation and small time deposits. It is the sum of currency in circulation, checkable deposits, and traveler's checks. It is the sum of savings deposits and small time deposits.

It is the sum of currency in circulation, checkable deposits, and traveler's checks.

Which of the following is true of money? It is used to measure the opportunity cost of producing a good. It provides a means of storing value for future use. It is used as a medium of exchange in a barter economy. It has a high intrinsic value.

It provides a means of storing value for future use.

Identify the correct statement. An increase in the use of credit cards increases the average quantity of money held by people. Money is a financial asset that has purchasing power. An increase in the supply of money increases the purchasing power of money. Money does not provide a holder with future purchasing power.

Money is a financial asset that has purchasing power.

Which of the following is a banking asset? Outstanding interest-earning loans Savings deposits Traveler's checks Time deposits

Outstanding interest-earning loans

Which of the following is an example of fiat money? Cowrie shells Gold coins Checks Paper money

Paper money

Which of the following is a difference between money and credit cards? Credit cards are included in the M1 money supply, while currencies in circulation are included in the M2 money supply. Purchases made with money create liabilities, while those made with credit cards create assets. Credit cards are included in the M2 money supply, while currencies in circulation are included in the M1 money supply. Purchases made with credit cards create liabilities, while those made with money create assets.

Purchases made with credit cards create liabilities, while those made with money create assets.

Which of the following is an expansionary monetary policy adopted by the Fed? Increasing the interest rate paid on the excess reserves held by commercial banks Increasing the reserve requirements of commercial banks Extending fewer loans to commercial banks Purchasing additional U.S. securities and other assets

Purchasing additional U.S. securities and other assets

Which of the following is a restrictive monetary policy adopted by the Fed? Reducing the interest paid on the excess reserves of commercial banks Decreasing the reserve requirements of commercial banks Extending fewer loans to commercial banks Selling U.S. securities and other assets

Selling U.S. securities and other assets

Which of the following is true of the deposit expansion multiplier? The deposit expansion multiplier is positively related to the required reserve ratio. The deposit expansion multiplier measures the multiple by which an increase in reserves will increase the money supply. The deposit expansion multiplier is negatively related to the discount rate. The deposit expansion multiplier measures the multiple by which a decrease in reserves will increase the money supply.

The deposit expansion multiplier measures the multiple by which an increase in reserves will increase the money supply.

Which of the following is true of the potential deposit expansion multiplier? The potential deposit expansion multiplier is inversely related to the required reserve ratio. The potential deposit expansion multiplier is directly related to the monetary base. The potential deposit expansion multiplier is directly related to the discount rate. The potential deposit expansion multiplier is directly related to the cash reserve ratio.

The potential deposit expansion multiplier is inversely related to the required reserve ratio.

Identify the correct statement regarding commercial banks. They have to maintain a certain amount of gold reserves with the Federal Reserve as required reserves. The primary source of revenue for these banks is the income they derive from their loans and investments. The changes in the tax structures in an economy are decided by these banks. They are responsible for changes in the money supply.

The primary source of revenue for these banks is the income they derive from their loans and investments.

Which of the following decreases the reliability of money supply growth figures as a gauge of monetary policy? Increased use of cash to make transactions The widespread use of domestic currency abroad Decreased use of money market mutual funds Changes in the interest rates of checkable deposits

The widespread use of domestic currency abroad

Which of the following is true of checkable deposits other than demand deposits? There is a limit on the number of checks a depositor can write each month. These are non-interest-earning deposits. These cannot be used as a medium of exchange. A depositor does not have to maintain a minimum balance in the bank.

There is a limit on the number of checks a depositor can write each month.

Which of the following is true of money market mutual funds? Depositors cannot write checks against these accounts. These are non-interest-earning accounts offered by banks. These securities cannot be quickly converted into cash. These accounts pool depositors' funds and invest them in highly liquid short-term securities.

These accounts pool depositors' funds and invest them in highly liquid short-term securities.

Which of the following is not included in the M2 money supply? Demand deposits of $300,000 Time deposits of $200,000 Time deposits of less than $50,000 Money market mutual funds of $25,000

Time deposits of $200,000

Which of the following is a component of the M1 money supply? Traveler's checks Savings deposits Money market mutual funds Small time deposits

Traveler's checks

Which of the following statements is true of the Federal Deposit Insurance Corporation (FDIC)? The FDIC provides loans to banks that are unable to pay their customers their deposits. When a bank fails, FDIC guarantees the deposits of banking customers up to some limit. The FDIC is a financial institution that is owned by the stockholders. The FDIC collects an insurance premium from customers for each dollar deposited in a bank.

When a bank fails, FDIC guarantees the deposits of banking customers up to some limit.

Which of the following is true of the deposit expansion multiplier? When the interest rate on excess reserves increases, the size of the deposit expansion multiplier increases. When people decide to hold currency rather than deposit it in a bank, the size of the deposit expansion multiplier decreases. When the central bank of a country sells bonds, the size of the deposit expansion multiplier decreases. When the use of credit and debit cards falls, the size of the deposit expansion multiplier increases.

When people decide to hold currency rather than deposit it in a bank, the size of the deposit expansion multiplier decreases.

Depository institutions: control the money supply in an economy. accept checking and savings deposits. accept deposits in exchange for shares that pay dividends. control the market interest rate.

accept checking and savings deposits.

A liquid asset refers to an asset that: cannot be converted to money without a loss of value. can be easily and quickly converted to money without any loss of value. cannot be used as a medium of exchange after a certain period of time. can be converted to money only after a given time period.

can be easily and quickly converted to money without any loss of value.

If the use of credit cards declines in the near future, then there will be a(n): increase in the average quantity of money held by people. increase in the M1 money supply. decrease in the average quantity of money held by people. decrease in the M2 money supply.

increase in the average quantity of money held by people.

Suppose the hypothetical country of Agraria faced a debt crisis when the government borrowed money from international financial institutions. In order to repay the debt, the government decided to increase the money supply. This caused a(n): increase in the inflation rate in the country. increase in the value of money in the country. decrease in the level of employment in the country. decrease in the demand for money in the country.

increase in the inflation rate in the country.

The purchasing power of money is: directly related to interest rates in an economy. inversely related to the supply of money in an economy. inversely related to the level of private investment in an economy. directly related to the general price level in an economy.

inversely related to the supply of money in an economy.

When people use money to buy and sell goods and services, money serves as a: measure of social benefits received from a transaction. means of storing value for future use. measure of the opportunity cost of buying and selling goods and services. medium of exchange.

medium of exchange.

Required reserves are the: reserves that commercial banks are required to maintain in the form of gold. minimum amount that the Federal Reserve needs to keep on hand to meet the needs of the commercial banks. minimum amount that the Federal Reserve needs to invest in stocks and bonds. minimum amount of reserves that a bank is required by law to keep on hand to back up its deposits.

minimum amount of reserves that a bank is required by law to keep on hand to back up its deposits.

The Federal Reserve System regulates the: government spending in the U.S. economy. tax rate in the U.S. economy. revenue earned by the federal government in the U.S. economy. money supply in the U.S. economy.

money supply in the U.S. economy.

Demand deposits are: mediums of exchange made of metal or paper. interest-earning deposits that are also available for checking. interest-earning accounts that pool depositors' funds and invest them in highly liquid short-term securities. non-interest-earning checking deposits that can be either withdrawn or made payable on demand to a third party.

non-interest-earning checking deposits that can be either withdrawn or made payable on demand to a third party.

Using money as a medium of exchange: reduces the profits of firms. increases the opportunity costs of producing goods. reduces transaction costs. reduces a country's gains from trade.

reduces transaction costs.

As a unit of account, money: measures the implicit costs of producing goods. serves as a common denominator for the expression of both the costs of and the benefits from goods. serves as a means to measure the marginal social benefit from the production and consumption of goods. allows people to transfer purchasing power from one period to the next.

serves as a common denominator for the expression of both the costs of and the benefits from goods.

Bank reserves are the: ratio of vault cash to the deposits of banks with Federal Reserve banks. difference between vault cash and the deposits of banks with Federal Reserve banks. percentage difference between vault cash and the deposits of banks with Federal Reserve banks. sum of vault cash and the deposits of banks with Federal Reserve banks.

sum of vault cash and the deposits of banks with Federal Reserve banks.

If savings deposits increase by $2,000, then: the M2 money supply decreases. the M1 money supply increases. the M2 money supply remains constant. the M2 money supply increases.

the M2 money supply increases.

If a bank accepts a time deposit of $50,000, then: the M2 money supply will increase. the M1 money supply will increase. the bank reserves will decrease. the required reserve ratio will increase.

the M2 money supply will increase.

If there is an increase in the supply of money in an economy relative to its demand, then the: purchasing power of money will increase. prices of all goods and services will decrease in the economy. level of unemployment in the economy will increase. value of money will fall.

value of money will fall.

The required reserve ratio that banks are required to maintain is the ratio of: vault cash to savings deposits. vault cash relative to a specified liability category. savings deposits to demand deposits. small time deposits to savings deposits.

vault cash relative to a specified liability category.