Chapter 25 Exam

Which of the following best describes how banks create​ money?

Banks create checking account deposits when making loans from excess reserves.

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's required reserves increase by

$2,000.

Suppose a bank has​ $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15​ percent, then the bank will now have excess reserves of

$5 million.

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, checking account deposits in the banking system as a whole​ (including the original​ deposit) could eventually increase up to a maximum of

$50,000.

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank A can make a maximum loan of

$8,000.

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's excess reserves increase by

$8,000.

The Federal Open Market Committee consists of the seven members of the​ ________, the president of the Federal Reserve Bank of New​ York, and​ ________.

Federal​ Reserve's Board of​ Governors; four presidents from the other 11 Federal Reserve banks

The M2 measure of the money supply equals

M1 plus savings account balances plus small-denomination time deposits plus non institutional money market fund shares.

The most liquid measure of money supply is

M1.

Which of the following is one of the most important benefits of money in an​ economy?

Money makes exchange​ easier, leading to more specialization and higher productivity.

The purchase of Treasury securities by the Federal Reserve​ will, in​ general,

increase the quantity of reserves held by banks.

A decrease in the discount rate​ ________ bank reserves and​ ________ the money supply if banks respond appropriately to the change in the rate.

increases; increases

A decrease in the reserve requirement​ ________ bank reserves and​ ________ the money supply.

increases; increases

Banks can make additional loans when required reserves are

less than total reserves.

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

A balance sheet

measures​ assets, liabilities, and net worth at a giving instance in time.

Of the three primary tools the Federal Reserve uses to conduct monetary​ policy, the tool used most often is

open market operations.

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market​ operations, discount​ policy, and reserve requirements.

If the central bank can act as a lender of last resort during a banking​ panic, banks can

satisfy customer withdrawal needs and eventually restore the​ public's faith in the banking system.

Which of the following is not a major function of the Federal Reserve​ System?

setting income tax rates

The seven members of the Board of Governors of the Federal Reserve are appointed by

the President.

The discount rate is

the interest rate the Fed charges to banks for loans from the Fed.

A bank holds its reserves as​ ________ and​ ________.

vault​ cash; deposits at the Federal Reserve

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's reserves immediately increase by

​$10,000.

f a person withdraws​ $500 from​ his/her savings account and puts it in​ his/her checking​ account, then M1 will​ ________ and M2 will​ ________.

​increase; not change

The major assets on a​ bank's balance sheet are its

​reserves, loans, and holdings of securities.

If the required reserve ratio is 5​ percent, then the simple deposit multiplier is

20.

To decrease the money​ supply, the Federal Reserve could

conduct an open market sale of Treasury securities.

Which of the following is not counted in​ M1?

credit card balances

The M1 measure of the money supply equals

currency plus checking account balances plus​ traveler's checks.

A fractional reserve banking system is one in which banks hold less than 100 percent of​ ________ as reserves.

deposits

The required reserves of a bank equal its​ ________ the required reserve ratio.

deposits multiplied by

A​ person's wealth

equals the value of the​ person's assets minus his or her liabilities.

Open market operations refer to the purchase or sale of​ ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

The largest liability on the balance sheet of most banks is its

checking account and savings account deposits of its customers.

The​ statement, "My iPhone is worth​ $700" represents​ money's function as

a unit of account.

Banks can continue to make loans until their

actual reserves equal their required reserves.