Question 1

When the Fed purchases $200 worth of government bonds from the public, the U.S. money supply eventually increases by

Accepted Answer

A)  more than $200.
B)  exactly $200.
C)  less than $200.
D)  None of the above are correct.E) B) and C)
F) A) and D)

Question 2

M2 is both larger and less liquid than M1.

Accepted Answer

A) True 
 B)False

Question 3

If the reserve ratio is 12.5 percent, then $2,000 of additional reserves can create up to

Accepted Answer

A)  $8,000 of new money.
B)  $16,000 of new money.
C)  $32,000 of new money.
D)  None of the above is correct.E) A) and B)
F) None of the above

Question 4

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

Accepted Answer

A)  buying bonds. This buying would increase the money supply.
B)  buying bonds. This buying would reduce the money supply.
C)  selling bonds. This selling would increase the money supply.
D)  selling bonds. This selling would reduce the money supply.E) A) and B)
F) A) and C)

Question 5

If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? Show your work.

Accepted Answer

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Question 6

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply

Accepted Answer

A)  increased. The central bank could have reduced the size of this increase by buying bonds.
B)  increased. The central bank could have reduced the size of this increase by selling bonds.
C)  decreased. The central bank could have reduced the size of this decrease by buying bonds.
D)  decreased. The central bank could have reduced the size of this decrease by selling bonds.E) None of the above
F) All of the above

Question 7

You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency

Accepted Answer

A)  Has no intrinsic value. The exchange is an example of barter.
B)  has no intrinsic value. The exchange is not an example of barter
C)  has intrinsic value. The exchange is not an example of barter.
D)  has intrinsic value. The exchange is not an example of barterE) None of the above
F) A) and D)

Question 8

Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the

Accepted Answer

A)  money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds.
B)  money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds.
C)  money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.
D)  money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.E) C) and D)
F) All of the above

Question 9

Sam wants to trade eggs for sausage. Sally wants to trade sausage for eggs. Sam and Sally have a double-coincidence of wants.

Accepted Answer

A) True 
 B)False

Question 10

To increase the money supply, the Fed could

Accepted Answer

A)  sell government bonds.
B)  auction more loans to banks.
C)  increase the reserve requirement.
D)  None of the above is correct.E) B) and D)
F) None of the above

Question 11

Bottles of very fine wine are less liquid than demand deposits.

Accepted Answer

A) True 
 B)False

Question 12

In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.

Accepted Answer

A) True 
 B)False

Question 13

Table 16-3. 
-Refer to Table 16-3. The reserve ratio for this bank is

Accepted Answer

A)  0 percent.
B)  20 percent.
C)  80 percent.
D)  100 percent.E) A) and D)
F) All of the above

Question 14

When the Federal Reserve conducts open-market operations to increase the money supply, it

Accepted Answer

A)  redeems Federal Reserve notes.
B)  buys government bonds from the public.
C)  raises the discount rate.
D)  decreases its lending to member banks.E) B) and C)
F) A) and B)

Question 15

Dollar bills, rare paintings, and emerald necklaces are all

Accepted Answer

A)  media of exchange.
B)  units of account.
C)  stores of value.
D)  All of the above are correct.E) B) and C)
F) A) and D)

Question 16

The interest rate the Fed charges on loans it makes to banks is called

Accepted Answer

A)  the prime rate.
B)  the federal funds rate.
C)  the discount rate.
D)  the LIBOR.E) None of the above
F) C) and D)

Question 17

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account. As a result of this transfer by itself

Accepted Answer

A)  M1 increases by $2,500 and M2 decreases by $2,500.
B)  M1 increases by $2,500 and M2 stays the same.
C)  M1 decreases by $2,500 and M2 stays the same.
D)  M1 decreases by $2,500 and M2 decreases by $2,500.E) A) and B)
F) All of the above

Question 18

Which of the following is a liability of a bank and an asset of its customers?

Accepted Answer

A)  deposits of its customers and loans to it customers
B)  deposits of its customers but not loans to its customers
C)  loans of its customers but not the deposits of its customers
D)  neither the deposits of its customers nor the loans to its customersE) B) and C)
F) B) and D)

Question 19

The money supply of Granov is $10,000 in a 100-percent-reserve banking system. If the Central Bank of Granov decreases the reserve requirement ratio to 10 percent, the money supply could increase by no more than $9,000.

Accepted Answer

A) True 
 B)False

Question 20

The president of each regional Federal Reserve Bank is appointed by

Accepted Answer

A)  the U.S. president with the approval of the Senate.
B)  the Board of Governors.
C)  the voting members of the Federal Open Market Committee.
D)  the board of directors of that regional Federal Reserve Bank.E) B) and D)
F) A) and D)

Exam 16: The Monetary System

If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? Show your work.

Correct Answerverified(1/.20) $...View AnswerShow Answer

Bottles of very fine wine are less liquid than demand deposits.

Correct AnswerverifiedShow Answer

Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the

Correct AnswerverifiedShow Answer

The president of each regional Federal Reserve Bank is appointed by

Correct AnswerverifiedShow Answer

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account. As a result of this transfer by itself

Correct AnswerverifiedShow Answer

Dollar bills, rare paintings, and emerald necklaces are all

Correct AnswerverifiedShow Answer

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply

Correct AnswerverifiedShow Answer

Table 16-3. -Refer to Table 16-3. The reserve ratio for this bank is

Correct AnswerverifiedShow Answer

The money supply of Granov is $10,000 in a 100-percent-reserve banking system. If the Central Bank of Granov decreases the reserve requirement ratio to 10 percent, the money supply could increase by no more than $9,000.

Correct AnswerverifiedShow Answer

You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency

Correct AnswerverifiedShow Answer

When the Fed purchases $200 worth of government bonds from the public, the U.S. money supply eventually increases by

Correct AnswerverifiedShow Answer

M2 is both larger and less liquid than M1.

Correct AnswerverifiedShow Answer

The interest rate the Fed charges on loans it makes to banks is called

Correct AnswerverifiedShow Answer

Which of the following is a liability of a bank and an asset of its customers?

Correct AnswerverifiedShow Answer

In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.

Correct AnswerverifiedShow Answer

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

Correct AnswerverifiedShow Answer

To increase the money supply, the Fed could

Correct AnswerverifiedShow Answer

When the Federal Reserve conducts open-market operations to increase the money supply, it

Correct AnswerverifiedShow Answer

Sam wants to trade eggs for sausage. Sally wants to trade sausage for eggs. Sam and Sally have a double-coincidence of wants.

Correct AnswerverifiedShow Answer

If the reserve ratio is 12.5 percent, then $2,000 of additional reserves can create up to

Correct AnswerverifiedShow Answer

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