Chapter 16 practice

In an open-market operation, the Fed buys $20 million of government bonds from individual investors. If the required reserve ratio is 12.5 percent, the largest possible increase in the money supply that could result is million, and the smallest possible increase is million.

160 20 20 *1/0.125 = 160

M1/ M2 Clancy has $3,000 in a savings account. Alex has a $10 bill in his wallet. Eileen has $8,000 in a six-month certificate of deposit (CD).

Clancy has $3,000 in a savings account. -> M2 Alex has a $10 bill in his wallet.-> M1 &M2 Eileen has $8,000 in a six-month certificate of deposit (CD). -> M2

Functions of these assets in the US economy Plastic credit card Diamond British pound U.S. penny

Plastic credit card: nothing Diamond: store of value British pound: store of value bc can be exchanged into dollars later U.S. penny: all 3 functions

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

U.S. banks that cannot borrow elsewhere

Which of the following statements is true? a. When the Fed sells government bonds, the money supply decreases. b. The Federal Reserve was created in 1871 in response to the Civil War. c. The primary tool of monetary policy is the reserve requirement. d. The FOMC meets once per year to discuss monetary policy.

a. When the Fed sells government bonds, the money supply decreases.

The M1 money supply is composed of a. currency, demand deposits, traveler's checks, and other checkable accounts. b. currency, demand deposits, savings deposits, money market mutual funds, and small time deposits. c. currency, government bonds, gold certificates, and coins. d. currency, NOW accounts, savings accounts, and government bonds. e. none of the above.

a. currency, demand deposits, traveler's checks, and other checkable accounts.

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

a. decrease, excess reserves

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

a. lines of credit accessible with credit cards.

Which of the following policy actions by the Fed is likely to increase the money supply? a. reducing reserve requirements b. selling government bonds c. increasing the discount rate d. increasing interest on reserves e. All of these will increase the money supply.

a. reducing reserve requirements

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

b. a type of money set by government decree.

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

b. buy bonds in open-market operations.

Required reserves of banks are a fixed percentage of their a. government bonds. b. deposits. c. loans. d. assets.

b. deposits.

To insulate the Federal Reserve from political pressure, a. the Board of Governors have lifetime tenure. b. the Board of Governors are supervised by the House Banking Committee. c. the Board of Governors are appointed to fourteen-year terms. d. the Board of Governors are elected by the public.

c. the Board of Governors are appointed to fourteen-year terms.

Suppose a period of continuous political instability leads people to believe that the economy will slide into a deep recession. As a result, people become more likely to accept commodity/ fiat money in exchange for goods and services.

commodity In times of extreme political instability, people become more likely to turn to commodity money, which is more likely to be accepted by others as currency in the future.

Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank, a. the money supply increases by less than $1,000. b. the money supply increases by more than $1,000. c. the money supply decreases by less than $1,000. d. the money supply decreases by more than $1,000. e. the money supply is unaffected.

e. the money supply is unaffected.

The Board of Governors of the Federal Reserve System consists of a. seven members elected by the Federal Reserve Banks. b. five members appointed by the president and seven rotating presidents of the Federal Reserve Banks. c. seven members appointed by Congress and seven appointed by the president. d. twelve members appointed by Congress. e. up to seven members appointed by the president.

e. up to seven members appointed by the president.

Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action? a. $0 b. $9,000 c. $1,000 d. $10,000

a. $0 potential change in demand deposits = change in M 1000*1/0.1 -1000 =0

Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent? a. $5,000 b. $1,000 c. $4,000 d. $0

a. $5,000

The discount rate is a. the interest rate the Fed charges on loans to banks. b. the interest rate the Fed pays on reserves. c. the interest rate paid by banks at the Term Auction Facility. d. the interest rate banks pay on the public's deposits. e. the interest rate the public pays when borrowing from banks.

a. the interest rate the Fed charges on loans to banks.

If the reserve ratio is 25 percent, the value of the money multiplier is a. 0.25. b. 4. c. 5. d. 25. e. none of the above.

b. 4.

Which of the following statements about a bank's balance sheet is true? a. An increase in a bank's capital increases its leverage ratio. b. Assets minus liabilities equals owner's equity or capital. c. The largest liability on the bank's balance sheet is its loans. d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital. e. None of the above is correct.

b. Assets minus liabilities equals owner's equity or capital.

The Fed's tools of monetary control are a. fiat, commodity, and deposit money. b. coin, currency, demand deposits, and commodity money. c. open-market operations, lending to banks, reserve requirements, and paying interest on reserves. d. the money supply, government purchases, and taxation. e. government expenditures, taxation, reserve requirements, and interest rates.

c. open-market operations, lending to banks, reserve requirements, and paying interest on reserves.

If banks increase their holdings of excess reserves a. the money multiplier increases and the money supply decreases. b. the money multiplier decreases and the money supply increases. c. the money multiplier and the money supply decrease. d. the money multiplier and the money supply increase.

c. the money multiplier and the money supply decrease.

A decrease in the reserve requirement causes a. reserves to rise. b. reserves to fall. c. the money multiplier to rise. d. the money multiplier to fall. e. none of the above.

c. the money multiplier to rise.

If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements, a. the money supply should remain unchanged. b. the money supply should rise. c. we cannot be certain what will happen to the money supply. d. the money supply should fall.

c. we cannot be certain what will happen to the money supply.

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

d. It was established by the U.S. Constitution. -> established by Congress in 1913 and started operating in 1914

Which of the following is not a function of money? a. Unit of account b. Medium of exchange c. Store of value d. Protection against inflation

d. Protection against inflation

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

d. a decrease in reserve requirements

Which of the following policy combinations would consistently work to increase the money supply? a. sell government bonds, decrease reserve requirements, decrease the discount rate b. sell government bonds, increase reserve requirements, increase the discount rate c. buy government bonds, increase reserve requirements, decrease the discount rate d. buy government bonds, decrease reserve requirements, decrease the discount rate e. none of the above

d. buy government bonds, decrease reserve requirements, decrease the discount rate

Commodity money a. is used exclusively in the United States. b. has no intrinsic value. c. is used as reserves to back fiat money. d. has intrinsic value.

d. has intrinsic value.

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. increases, increases even more b. decreases, decreases by less c. increases, increases by less d. is unchanged, increases

d. is unchanged, increases

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

d. more, more

An example of fiat money is a. gold. b. cigarettes in a prisoner-of-war camp. c. solid silver coins. d. paper dollars.

d. paper dollars.