Ch. 16 Review Questions ECON

b

As the reserve ratio increases, the money multiplier a. increases. b. decreases. c. does not change. d. increases, then decreases, then increases again.

F

Ashley owns a home worth $500,000 and owes $100,000 in student loans. If you asked an economist, she would say Ashley has $400,000 worth of money. True False

d

To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can a. stop lending money to banks. b. not change the discount rate. c. increase the discount rate. d. decrease the discount rate.

c

Under what system do banks generally lend out the majority of the funds deposited? a. 100-percent-reserve banking b. Demand deposit banking c. Fractional reserve banking d. No such banking system exists

b

The two primary tasks of the Federal Reserve are a. monetary policy and tax collection. b. monetary policy and bank regulation. c. fiscal policy and bank regulation. d. monetary policy and national security.

c

Fiat money is a. a type of money with intrinsic value. b. any asset used as the medium of exchange. c. a type of money set by government decree. d. any asset used as the unit of account.

a

First Bank of Zogua, a fictional bank, has made a $1 million loan. This loan appears on what part of T-account of the First Bank of Zogua? a. assets. b. contingent considerations. c. liabilities. d. reserves.

M2

Gilberto has $2,000 in a savings account. M1 or M2?

d

If a bank has just enough reserves to meet the required reserve ratio of 25 percent, and receives a deposit of $800, it has initially experienced a a.$800 increase in excess reserves and no increase in required reserves. b.$800 increase in required reserves and no increase in excess reserves. c.$200 increase in excess reserves and a $600 increase in required reserves. d.$600 increase in excess reserves and a $200 increase in required reserves.

d

If the Fed raises the interest rate it pays on reserves, it will ________ the money supply by increasing ________. a. decrease, the money multiplier b. increase, the money multiplier c. increase, excess reserves d. decrease, excess reserves

b

If the Fed wants to increase the money supply, it can a. reduce income tax rates. b. buy bonds in open-market operations. c. raise income tax rates. d. sell bonds in open-market operations.

c

If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $50 million worth of government bonds, bank reserves a. decrease by $50 million and the money supply eventually decreases by $100 million. b. increase by $50 million and the money supply eventually increases by $100 million. c. increase by $50 million and the money supply eventually increases by $500 million. d. decrease by $50 million and the money supply eventually decreases by $500 million.

a

If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by a. $480. b. $90. c. $160. d. $150.

b

If you want to measure and record economic value, you will primarily use which function of money? a. Money as a store of value b. Money as a unit of account c. Money as a means of barter d. Money as a medium of exchange

b

In a 100-percent-reserve banking system, if an individual withdraws money from their checking account, currency would a. decrease, but demand deposits would increase by the same amount and M1 would not change. b. increase, but demand deposits would decrease by the same amount and M1 would not change. c. increase, while demand deposits would decrease by less and M1 would increase. d. decrease, while demand deposits would increase by less and M1 would decrease.

d

In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold ________ currency or if banks choose to hold ________ excess reserves. a. less, less b. less, more c. more, less d. more, more

b

A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10 percent, then its capital will be reduced to a. $180. b. $100. c. $150. d. $185.

a

A bank's reserve ratio is 20 percent and the bank has $1,000 in deposits. Its reserves amount to a.$200. b.$2,000. c.$50. d.$20.

b

A store of value is a. an item that buyers give to sellers when they want to purchase goods and services. b. an item that people can use to transfer purchasing power from the present to the future. c. the item that can be converted into currency with ease. d. an item people use to post prices and record debts.

d

All else equal, which of the following will cause the money supply to fall? a. banks make more loans. b. banks decide to hold less excess reserves relative to deposits c. banks decide to hold the same amount of excess reserves relative to deposits. d. banks decide to hold more excess reserves relative to deposits.

b

Carlos can easily determine that the Panaview model has a lower price than the Zony model. a. store of value b. unit of account c. medium of exchange

c

Carlos pays $140 for the Blu-Ray player. a. store of value b. unit of account c medium of exchange

a

Carlos saved $30 per week. a. store of value b. unit of account c medium of exchange

m1 and m2

Charles has a roll of quarters that he just withdrew from the bank to do laundry. M1 or M2?

a

Isabella takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply ________, but if the bank lends out some of the $100, the money supply ________. a. is unchanged, increases b. decreases, decreases by less c. increases, increases by less d. increases, increases even more

a

Jerome Powell was a. appointed Chair of the Board of Governors in 2017 by President Donald Trump. b. reappointed Chair of the Board of Governors in 2009 by President Barack Obama. c. appointed Chair of the Board of Governors in 1995 by President Bill Clinton. d. appointed Chair of the Board of Governors in 1991 by President George H.W. Bush.

M2

Juanita has $6,000 in a six-month certificate of deposit (CD). M1 or M2?

a

The Federal Reserve's role as a lender of last resort involves lending to which of the following financially troubled institutions? a. U.S. banks that cannot borrow elsewhere b. Governments in developing countries during currency crises c. U.S. state governments when they run short on tax revenues

d

The amount of reserves banks must hold against deposits is known as a. term auction requirement. b. critical reserve ratio. c. discount rate. d. reserve requirement.

d

The government of fictional country of Dobar has decided to use paper currency, known as Dobar dollars, as money. Which of the following best describes Dobar dollars? a. Dobar dollars are both fiat money and commodity money. b. Dobar dollars are neither commodity money nor fiat money. c. Dobar dollars are commodity money with intrinsic value. d. Dobar dollars are fiat money with no intrinsic value.

b

The money stock includes all of the following EXCEPT a. bank balances accessible with debit cards. b. lines of credit accessible with credit cards. c. metal coins. d. paper currency.

a

When it buys government bonds to increase the money supply, the Fed is a. conducting an open-market purchase. b. conducting an open-market sale. c. enacting fiscal policy. d. regulating a bank.

c

When the Fed sells U.S. government bonds, it has conducted a. open market sales, which increase the money supply. b. open market purchases, which decrease the money supply. c. open market sales, which decrease the money supply. d. open market purchases, which increase the money supply.

b

Which of the following actions by the Fed would tend to increase the money supply? a. an open-market sale of government bonds b. a decrease in reserve requirements c. an increase in the interest rate paid on reserves d. an increase in the discount rate on Fed lending

d

Which of the following best defines commodity money? a. Money without intrinsic value that is used because of government decree b. Money that must be backed by a precious metal, such as silver c. Money that does not allow prices to adjust to supply and demand d. Money that takes the form of a commodity with intrinsic value

c

Which of the following does the Federal Reserve do? a. It makes loans to any qualified business that requests one b. Controls fiscal policy in the United States c. Act as a lender of last resort to banks d. Convert Federal Reserve Notes into gold

a

Which of the following is NOT TRUE regarding the Federal Reserve? a. The Fed was created to facilitate the federal government's collection of taxes as well as its expenditures. b. The Fed is the U.S.'s central bank. c. The Fed has other duties in addition to controlling the money supply. d. The Fed was created in 1913.

b

Which of the following is NOT true about the Federal Reserve? a. It regulates the banking system. b. It was established by the U.S. Constitution. c. It lends to banks. d. It conducts open-market operations.

b

Which of the following is not correct about the Fed? a. Members of the Board of Governors serve 14-year terms. b. The Federal Reserve Chair is appointed by the speaker of the house to a four-year term. c. The Federal Reserve has 12 regional banks. d. The Board of Governors has 7 members.

b

Which of the following is not true in a system of 100-percent-reserve banking? a. Banks accept deposits. b. Banks influence the supply of money. c. Banks hold all deposits in reserves until the depositor withdraws the funds. d. Banks do not make loans.

d

Which of the following lists all items included in M2 but not in M1? a. None, M1 and M2 are essentially the same. b. Currency c. Demand deposits and savings deposits d. Savings deposits, small time deposits, money market mutual funds and other minor categories