Chapter 16

A bank's reserve ratio is 6.5 percent and the bank has $1,950 in reserve. Its deposits amount to

$30,000.00.

Which of the following is an example of barter?

A barber gives a plumber a haircut in exchange for the plumber fixing the barber's leaky faucet.

One plausible explanation for the large amount of U.S. currency outstanding is that many dollars are held abroad.

True

If the Fed buys bonds in the open market, the money supply decreases.

false

In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.

false

The money supply decreases if the Fed

sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.

Dollar bills, rare paintings, and emerald necklaces are all

stores of value

If the reserve ratio is 12.5 percent, the money multiplier is

8

An increase in the reserve requirement ratio increases reserves and decreases the money supply.

False

Gary's wealth is $1 million. Economists would say that Gary has $1 million worth of money.

False

The series of bank failures in 1907 occurred despite the creation of the Federal Reserve many years earlier.

False

In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then

M1 would not change.

Money market mutual funds are included in

M2 but not M1.

Which of the following is not correct?

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.

Which of the following is correct?

The amount of money in the economy depends in part on the behavior of banks.

Assume that when $100 of new reserves enter the banking system, the money supply ultimately increases by $625. Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits. If, at a point in time, reserves for all banks amount to $500, then at that same point in time, loans for all banks amount to $2,625.

True

In an economy that relies on barter, trade requires a double-coincidence of wants.

True

Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as a unit of account.

True

When in France you notice that prices are posted in euros, this best illustrates money's function as

a unit of account

Paper dollars

are fiat money and gold coins are commodity money.

Treasury Bonds are

both liquid and a store of value.

When the Federal Reserve conducts open-market operations to increase the money supply, it

buys government bonds from the public.

Which of the following lists is included in what economists call "money"?

cash

When the Federal Reserve sells assets from its portfolio to the public with the intent of changing the money supply,

chose assets are government bonds and the Fed's reason for selling them is to decrease the money supply

The ease with which an asset can be

converted into the economy's medium of exchange determines the liquidity of that asset.

Which list ranks assets from most to least liquid?

currency, demand deposits, money market mutual funds

To increase the money supply, the Fed could

decrease the discount rate.

Commodity money cannot be used as a unit of account

false

Members of the Board of Governors of the Federal Reserve System are appointed for life.

false

Other things the same, if banks decide to hold a smaller part of their deposits as excess reserves, the money supply will fall.

false

Under a fractional-reserve banking system, banks

generally lend out a majority of the funds deposited.

The Fed can decrease the money supply by conducting open-market

sales or by raising the discount rate.

Which of the following is included in M2 but not in M1?

savings deposits

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

selling bonds. This selling would reduce the money supply.

If the money multiplier decreased from 20 to 12.5, then

the Fed increased the reserve ratio from 5 percent to 8 percent.

The agency responsible for regulating the money supply in the United States is

the Federal Reserve.

Bottles of very fine wine are less liquid than demand deposits.

true

Federal Reserve governors are given long terms to insulate them from politics.

true

If the reserve ratio is 10 percent, $1,000 of additional reserves can create up to

$10,000 of new money.

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 10 percent, how much is the bank holding in excess reserves?

$15 million

If a bank desires to hold no excess reserves, the reserve requirement is 5 percent, and it receives a new deposit of $1,000

All of the above are correct.

Demand deposits are included in

M1 and M2.

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

does not change the money supply.

Bank runs and the accompanying increase in the money multiplier caused the U.S. money supply to rise by 28 percent from 1929 to 1933.

false

In a system of 100-percent-reserve banking, the purpose of a bank is to

give depositors a safe place to keep their money.

The existence of money leads to

greater specialization and to a higher standard of living.

Fiat money

has no intrinsic value.

An open-market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

If the reserve requirement is 10 percent and banks desire to hold no excess reserves, when a bank receives a new deposit of $100

it must increase its required reserves by $10.

As opposed to a payments system based on barter, a payments system based on money

makes trades less costly.

Monetary policy affects employment

only in the short run.

If the Fed decreases reserve requirements, the money supply will increase.

true

M2 is both larger and less liquid than M1.

true

Money allows people to specialize in what they do best, thereby raising everyone's standard of living.

true

Sam wants to trade eggs for sausage. Sally wants to trade sausage for eggs. Sam and Sally have a double-coincidence of wants.

true

Today, bank runs are

uncommon because of FDIC deposit insurance.