Chapter 9 Terms

5. M1 is defined as a measure of the money supply that includes, mainly:

A. Checking accounts and currency in the hands of the people.

8. The money supply is defined as:

A. The amount of money that people can access.

22. The reason the money multiplier exists is that:

A. When a borrower spends the money, it becomes someone else's deposit.

27. When the Fed buys U. S. government securities in the open market:

A. bank deposits increase and the money supply expands.

21. The money multiplier is _______ if the required reserve ratio is _______.

B. 20; 5 percent (or 1/20).

7. Money is:

B. Anything that is generally accepted as payment for goods and services.

26. IF the Fed increases the discount rate:

B. Banks will borrow fewer reserves, make fewer loans, and the money supply will grow slower or decrease.

11. Which of the following statements about commercial banks is correct?

B. Commercial banks are privately owned and profit seeking.

2. A "double coincidence of wants" is:

B. Eliminated with the use of money.

4. A credit card is:

B. Not money, but it is a loan.

23. A new deposit triggers the ability of a bank to make a loan, which will generate a series of more, but ever smaller, loans. This is the basis of:

B. The money multiplier process.

19. Fractional reserve banking requires:

C. All banks set aside a fixed portion of each deposit and not loan that amount out.

1. A medium of exchange is defined as:

C. Anything that is readily accepted in return for goods and services.

12. Regarding the money supply, money is "created" when:

C. Banks make loans.

3. The store of value function is defined as:

C. Delaying the use of money earned until a later date.

16. The interest rate charged by the Fed when a bank borrows reserves from the Fed is called the:

C. Discount rate.

14. The three policy tools that the Fed can use to carry out monetary policy are setting the:

C. Discount rate; open market operations; and setting the required reserve ratio.

15. The required reserve ratio is 10 percent. You deposit $1000 in your checking account. The bank must immediately:

C. Increase required reserves by $100.

20. In any bank, a bank's reserves:

C. Must be partitioned into required reserves and excess reserves.

29. Which of the following would not be part of the Fed's "easy" money policy?

C. Sell securities in the open market.

9. As it pertains to money, liquidity can be defined as:

C. The ease with which an asset can be spent.

24. If the required reserve ratio is 10 percent, or 1/10, a $10,000 new deposit can trigger a maximum increase in the money supply of:

D. $100,000.

28. When the Fed sells U. S. government securities in the open market:

D. Bank deposits decrease and the money supply contracts.

30. Which of the following would not be part of the Fed's "tight" money policy?

D. Buy securities in the open market.

10. Of the following assets, which is the most liquid?

D. Checking accounts.

17. The interest rate charged by one bank when another bank borrows reserves from that bank is called the:

D. Federal funds rate.

6. M2 is defined as a measure of the money supply that includes, mainly:

D. M1 plus savings accounts.

13. The Federal Reserve conducts monetary policy, which is best defined as:

D. Manipulating the size and growth of the money supply to improve economic performance.

25. If the required reserve ratio is decreased from 10 percent to 8 percent and there is a $10,000 new deposit, the maximum increase in the money supply will be:

D. More than $100,000.

18. When the Fed conducts open market operations, it is buying or selling:

D. Previously issued government securities that circulate in publicly traded bond markets.