Chapter 4 The Monetary System: What It Is and How It Works

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ______ divided by ______ multiplied by B.

(cr + 1); (cr + rr)

In the United States, the money supply is determined :

Jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

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An important factor in the evolution of commodity money to fiat money is:

a desire to reduce transaction cost

Checking account balances that are linked to debit cards are included in:

both M1 and M2

The reserve-deposit ratio is determined by:

business policies of banks and the laws regulating banks.

To increase the money supply, the Federal Reserve:

buys government bonds

In a 100-percent-reserve banking system, banks:

cannot affect the money supply

The value of banks' owners' equity is called bank:

capital

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

$800 Billion

Demand deposits are funds held in:

checking accounts

In prisoner of war camps durring World War II, the "currency" used was:

cigarettes

Money that has no value than as money is called _____________ money

intrinsic

Credit cards:

may affect the demand for money

In a system with 100-percent-reserve banking:

no banks can make loans

The central bank in the United States is the:

Federal Reserve

The quantity of money in the United States is essentially controlled by the:

Federal Reserve

open market operations are:

Federal Reserve purchases and sales of government bonds.

Payment is deferred by using _______, but immediate access to funds occurs when using ______.

credit cards; debit cards

The money supply will increase if the:

monetary base increases

The ratio of the money supply to the monetary base is called:

the money multiplier

When a pizza maker list the price of pizza as $10, this is an example of using money as a:

unit of account

People use money as a unit of account when they:

use money as a measure of economic transactions

People use money as a medium of exchange when they:

use money to buy goods and services

In the United States, bank reserves consist of:

vault cash and deposits at the Federal Reserve

All of the following are considered major functions of money except as a:

way to display wealth

Money market mutual fund shares are included in:

M2 only

The minimum amount of owners' equity in a bank mandated by regulators is called a ___________ requirement.

capital

A country that is on gold standard primarily uses

commodity money

The difference between banks and other financial intermediaries is that only banks have the legal authority to:

create assets that are part of the money supply

Liabilities of banks include:

demand deposits

Bank reserves equal:

deposits that banks have received but have not lent out

To make a trade in a barter economy requires:

double coincidence of wants

In a fractional-reserve banking system, banks create money because

each dollar of reserves generates many dollars of demand deposits.

The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the ____________ the monetary base and the ___________ the money supply

greater; greater

People use money as a store of value when they:

hold money to transfer purchasing power into the future

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

increase by more than $1 million

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because

legal claim to a fei never seen by current generations was accepted in transactions

The use of borrowed funds to supplement existing funds for purposes of investment is called:

leverage

The banking system creates:

liquidity

Assets of banks include

loans to customers

In a fractional-reserve banking system, banks create money when they:

make loans

Macroeconomist call assets used to make transactions

money

Money's liquidity refers to the ease with which:

money can be converted into goods and services

All of the following assets are included in M1 except:

money market deposit accounts

Credit card balances are included in

neither M1 nor M2

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve-deposit ratio, then the total money supply is:

reserves divided by rr

The amount of capital that banks are required to hold depends on the:

riskiness of the bank's assets

To reduce the money supply, the Federal Reserve:

sells government bonds

The size of monetary base is determined by:

the Federal Reserve

Two ways for banks to borrow reserves from the Federal Reserve are through:

the discount window and the Term Auction Facility

In the United States, monetary policy is controlled by:

the federal reserve

High-powered money is another name for:

the monetary base

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect _______________ to increase.

the money supply

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then:

the money supply decreases

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases

Financial intermediation is the process of

transferring funds from savers to borrowers

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals:

2.5

Banks create money in

a fractional-reserve banking system but not in a 100-percent-reserve banking system.

In a system with fractional-reserve banking:

all banks must hold reserves equal to a fraction of their deposits

In a country on a gold standard, the quantity of money is determined by the:

amount of gold

Economist use the term money to refer to:

assets used for transactions

The monetary base consists of:

currency held by the public, plus reserves held by banks.

The money supply consists of:

currency plus demand deposits

The preferences of households determine the:

currency-deposit ratio

The money supply will decrease if the

currency-deposit ratio increases

When the Fed makes an open-market sale, it:

decreases the monetary base (B)

When the Fed decreases the interest rate paid on reserves, it:

decreases the reserve-deposit ratio

The currency-deposit ratio is determined by:

preferences of households about the form of money they wish to hold

When the Federal Reserve conducts open-market purchase, it buys bonds from the:**

public

In a 100-percent- reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply:

remains the same

Currency equals:

the sum of coins and paper money

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:

$150 Billion

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals:If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals:

$600 billion

For borrowing from the discount window, the Fed sets the _____________ of borrowing, compared to borrowing using the term Auction Facility, where the Fed sets the ___________ of borrowing.

Price; Quantity

When banks borrow through the Term Auction Facility, the price of borrowing is determined by:

a competitive bidding process