Friday Quiz 3-15

If the public decides to hold more currency and fewer deposits in banks, bank reserves

decrease and the money supply eventually decreases.

Which of the following will cause the U.S. money supply to expand?

A commercial bank uses excess reserves to extend a loan to a customer.

What is meant by the expression, "There is too much money chasing too few goods"?

An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.

If the Fed lends to member banks, what happens to reserves and the money supply?

Both increase.

Which of the following is the primary tool the Fed uses to control the supply of money?

Open market operations.

Which of the following lists two things that both increase the money supply?

The Fed buys bonds and lowers the discount rate.

If a customer deposits $1,000 cash into her checking account, the bank's

assets and liabilities both rise by $1,000.

When the Fed lowers the discount rate, it makes it

cheaper for banks to obtain additional reserves by borrowing from the Fed.

In order for barter trades to occur, there must be a

double coincidence of wants.

The primary benefit of a monetary system of exchange compared to a barter system is the increased

efficiency in arranging transactions.

When reserve requirements are increased, the

excess reserves of commercial banks will decrease.

When a customer deposits $100 into a checking account, the effect is to

increase both the bank's liabilities and its assets.

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could

increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions

increases the money supply by $800.

Though many assets can be used as a store of value, money is a particularly attractive method to store value because

it is the most liquid of all assets.

If the Federal Reserve wants to increase the availability of money and credit, it can

lower the discount rate.

Suppose Laqueta deposits $10,000 of cash into a checking account at a commercial bank. The immediate effect is

no change in the M1 money supply, but in the future, the M1 money supply will tend to expand because the bank now has excess reserves.

If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will

reduce the size of the deposit expansion multiplier.

The value (purchasing power) of each unit of money

tends to decline as the money supply expands in relation to the availability of goods and services.

If money were not used as a medium of exchange,

the gains from trade would be severely limited.

The primary source of earnings of commercial banks is income derived from

the use of deposits to extend loans and undertake investments.

If the banking system has $50 billion in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?

$200 billion

Suppose the Fed sells $100 million of U.S. securities to the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a

$500 million decrease.

If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?

Loans and investments generally earn more interest income for the banks than excess reserves.

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?

The reserve requirements mandated by the Fed.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

buy U.S. securities on the open market.

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably

buying government securities from the public.