Weeks 8, 9, and 10 Practice quiz #1

The M1 money supply is composed of currency, checkable deposits and time deposits

False

The value of money in the United States is based on the stocks of precious metals held by the United States

False

Commercial banks create money when they make loans from their excess reserves.

True

Modern banking systems are based on a fractional reserve system of banking

True

The legal reserve is an amount of funds equal to a specified percentage of its own deposits which a member bank must keep on deposit with the federal reserve bank in its district or as cash in vault

True

An increase in GDP will: a) Increase the transaction demand and thereby the total demand for money b) Decrease the transaction demand and theeby the total demand for money c) Increase the transaction demand for money but decrease the total demand d) Decrease the transaction demand for money but increase the total demand

a) Increase the transaction demand and thereby the total demand for money

A single commercial bank must meet a 25% reserve requirement. If it initially has no excess reserves and then $2,000 in cash is deposited into the bank, that bank can increase its loans by: a) $2,000 b) $1,500 c) $1,250 d) $1,000

b) $1,500

The total quantity of money demanded is determined by: a) Subtracting the asset demand for money from the transaction demand for money b) Adding the transaction demand for money to the asset demand for money c) Subtracting the transaction demand for money from the nominal GDP d) Adding the asset demand for money to the nominal GDP

b) Adding the transaction demand for money to the asset demand for money

Cathy Rogers deposits $200 in currency into her checking account at her bank. This deposit is treated as: a) A subtraction of $200 from the money supply because the $200 in currency is no longer in circulation b) An addition of $200 to the money supply because of the creatioin of a checkable deposit of $200 c) An addition of $400 to the money supply because the bank holds $200 in currency and the checking account has been increased by $200 d) No change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits

b) An addition of $200 to the money supply because of the creatioin of a checkable deposit of $200

The major component of the M1 supply of money is: a) Federal reserve notes b) Checkable deposits aka demand deposits c) Small time deposits d) Large time deposits

b) Checkable deposits aka demand deposits

If the Federal Reserve System sells $5 billion of government securities to the commercial banking system, the deposit reserves of the commercial banks would: a) Increase by $5 billion b) Decrease by $5 billion c) Be added to net worth d) Remain the same

b) Decrease by $5 billion

Which best describes the backing for money in the United States? a) The gold stored in the federal reserve bank of New York b) The promise of the united States government to be here tomorrow c) The willingness of foreign government to hold U.S. dollars d) The size of the budget surplus in the U.S. government

b) The promise of the united States government to be here tomorrow

The functions of money are to serve as a: a) Resource allocator, method of accounting, and means of income distribution b) Unit of account, store of value, and medium of exchange c) Determinant of consumption, investment and government spending d) Factor of production, exchange, and aggregate supply

b) Unit of account, store of value, and medium of exchange

What is one significant characteristic of fractional reserve banking? a) Banks are not subject to "panics" or "runs" b) Banks use deposit insurance for loans to customers c) Bank loans will be equal to the amount of gold on deposit d) Banks can create money through lending their reserves

d) Banks can create money through lending their reserves

A decrease in the interest rate will cause a(n): a) Increase in the transaction demand for money b) Decrease in the transaction demand for money c) Decrease in the amount of money held as an asset d) Increase in the amount of money held as an asset

d) Increase in the amount of money held as an asset

The fractional reserve system of banking started when goldsmiths began: a) Accepting deposits of gold for safe keeping b) Charging people who deposited their gold c) Using deposited gold to produce products for sale to others d) Issuing paper receipts in excess of the amount of gold held

d) Issuing paper receipts in excess of the amount of gold held

A bank is in the position to make loans when required reserves: a) Equal actual reserves b) Equal excess reserves c) Are less than actual reserves d) Are greater than actual reserves

c) Are less than actual reserves

One major advantage of the medium of exchange function of money is that it allows society to: a) Transfer purchasing power from the present into the future b) Measure the relative worth of products c) Escape the complications of barter d) Use credit cards instead of currency

c) Escape the complications of barter

The multiple by which the commercial banking system can expand the supply of money is equal to: a) Its excess reserves b) The reciprocal of the discount rate c) The reciprocal of the reserve ratio d) The ratio of fixed to liquid assets

c) The reciprocal of the reserve ratio

A consumer holds money to meet spending needs. This would be an example of the : a) Use of money as a measure of value b) Use of money as legal tender c) Transaction demand for money d) Asset demand for money

c) Transaction demand for money