Chapter 16

The Monetary System

MULTIPLE CHOICE

1. Money
a. is more efficient than barter.
b. makes trades easier.
c. allows greater specialization.
d. All of the above are correct.

2. Paper money
a. has a high intrinsic value.
b. is used in a barter economy.
c. is valuable because it is generally accepted in trade.
d. is valuable only because of the legal tender requirement.

3. Barter
a. requires a double-coincidence of wants.
b. is less efficient than money.
c. is the trading of goods for goods.
d. All of the above are correct.

4. When Arnold use dollars to record his income and expenses, he is using money as a
a. unit of account.
b. means of payment.
c. store of value.
d. medium of exchange.

5. Which of the following is a store of value?

a. currency
b. U.S. government bonds
c. fine art
d. All of the above are correct.

6. Which of the following best illustrates the unit of account function of money?
a. You list prices for candy sold on your Web site, www.sweettooth.com, in dollars.
b. You pay for your WNBA tickets with dollars.
c. You keep $10 in your backpack for emergencies.
d. None of the above is correct.

7. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?
a. store of value
b. medium of exchange
c. unit of account
d. None of the above is correct.

8. Which of the following best illustrates the medium of exchange function of money?
a. You keep some money hidden in your shoe.
b. You keep track of the value of your assets in terms of currency.
c. You pay for your double latte using currency.
d. None of the above is correct.

9. Economists use the word “money” to refer to

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 a. income generated by the production of goods and services.
b. those assets regularly used to buy goods and services.
c. the value of a person’s assets.
d. the value of stocks and bonds.

10. Liquidity refers to

a. the ease with which an asset is converted to the medium of exchange.
b. a measurement of the intrinsic value of commodity money.
c. the suitability of an asset to serve as a store of value.
d. how many time a dollar circulates in a given year.

11. Which list ranks assets from most to least liquid?

a. currency, fine art, stocks
b. currency, stocks, fine art
c. fine art, currency, stocks
d. fine art, stocks, currency

12. Current U.S. currency is

a. fiat money with intrinsic value.
b. fiat money with no intrinsic value.
c. commodity money with intrinsic value.
d. commodity money with no intrinsic value.

13. Fiat currency

a. has no intrinsic value.
b. is backed by gold.
c. has intrinsic value equal to its value in exchange.
d. is any close substitute for currency such as checkable deposits.

14. Commodity money is

a. backed by gold.
b. the principal type of money in use today.
c. money with intrinsic value.
d. receipts created in international trade that are used as a medium of exchange.

18. M1 includes
a. currency.
b. demand deposits.
c. travelers’ checks.
d. All of the above are correct.

19. Which of the following is not included in M1?

a. currency
b. demand deposits
c. savings deposits
d. travelers’ checks

20. Which of the following is included in M2 but not in M1?

a. currency
b. demand deposits
c. savings deposits
d. All of the above are included in both M1 and M2

21. Which of the following is included in M2 but not in M1?

a. demand deposits
b. corporate bonds
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 c. large time deposits
d. money market mutual funds

22. Which of the following is included in the M2 definition of the money supply?
a. credit cards
b. money market mutual funds
c. corporate bonds
d. large time deposits

23. Money market mutual funds are included in

a. M1 but not M2.
b. M1 and M2.
c. M2 but not M1.
d. neither M1 or M2.

24. Demand deposits are included in

a. M1 but not M2.
b. M2 but not M1.
c. M1 and M2.
d. neither M1 nor M2.

25. Credit card balances are included in

a. M1 but not M2.
b. M2 but not M1.
c. M1 and M2.
d. neither M1 nor M2.

26. M1 is
a. smaller and less liquid than M2.
b. smaller but more liquid than M2.
c. larger than and less liquid than M2.
d. larger than but more liquid than M2.

27. Savings deposits are included in

a. M1 but not M2.
b. M2 but not M1.
c. M1 and M2.
d. neither M1 nor M2.

28. Credit cards are

a. used as a method of payment.
b. part of the M1 money supply.
c. a method of deferring payment.
d. a unit of account.

29. Credit cards

a. defer payments.
b. are a store of value.
c. have led to wider use of currency.
d. are part of the money supply.

30. Debit cards

a. defer payments.
b. are equivalent to credit cards.
c. are included in M2.
d. are used as a method of payment.
38. The Federal Reserve does all except which of the following?
a. control the supply of money
b. control the value of money
c. make loans to individuals
d. regulate the banking system

52. When the Fed wants to change the money supply, it most frequently
a. changes the discount rate.
b. changes the reserve requirement.
c. conducts open market operations.
d. issues Federal Reserve notes.

53. When the Federal Reserve conducts open market transactions, it

a. issues Federal Reserve notes.
b. buys or sells government bonds from the public.
c. lowers the discount rate.
d. increases its lending to member banks.

54. When the Fed conducts open market purchases,

a. it buys Treasury securities, which increases the money supply.
b. it buys Treasury securities, which decreases the money supply.
c. it borrows from member banks, which increases the money supply.
d. it lends money to member banks, which decreases the money supply.

55. When the Fed conducts open market sales,

a. it sells Treasury securities, which increases the money supply.
b. it sells Treasury securities, which decreases the money supply.
c. it borrows from member banks, which increases the money supply.
d. it lends money to member banks, which decreases the money supply.

56. When the Fed conducts open market purchases,

a. it buys Treasury securities, which increases the money supply.
b. it buys Treasury securities, which decreases the money supply.
c. it sells Treasury securities, which increases the money supply.
d. it sells Treasury securities, which decreases the money supply.

57. The Fed can increase the money supply by conducting open market
a. sales and raising the discount rate.
b. sales and lowering the discount rate.
c. purchases and raising the discount rate.
d. purchases and lowering the discount rate.

58. The Fed can increase the price level by conducting open market
a. sales and raising the discount rate.
b. sales and lowering the discount rate.
c. purchases and raising the discount rate.
d. purchases and lowering the discount rate.

59. The Fed can influence unemployment in

a. the short and long run.
b. the short run, but not the long run.
c. the long run, but not the short run.
d. neither the short nor long run.

60. There is a
a. short-run tradeoff between inflation and unemployment.
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 b. short-run tradeoff between an increase in the money supply and inflation.
c. long-run tradeoff between inflation and unemployment.
d. long-run tradeoff between an increase in the money supply and inflation.

61. In a 100-percent-reserve banking system,

a. banks can create money by issuing currency.
b. banks can create money by lending out reserves.
c. the Fed can increase the money supply with open market sales.
d. banks hold as many reserves as they hold deposits.

62. On a bank’s T-account,

a. both deposits and reserves are assets.
b. both deposits and reserves are liabilities.
c. deposits are assets, reserves are liabilities.
d. reserves are assets, deposits are liabilities.

63. Suppose that the reserve ratio is 5 percent and that a bank has $1,000 in deposits. Its required reserves are
a. $5.
b. $50.
c. $95.
d. $950.

64. Suppose that the reserve ratio is 10 percent and that a bank has $2,000 in deposits. Its required reserves are
a. $20.
b. $200.
c. $1,880.
d. $1,800.

65. Suppose a bank has a 10 percent reserve ratio, $5,000 in deposits, and it loans out all it can given the reserve ratio.
a. It has $50 in reserves and $4,950 in loans.
b. It has $500 in reserves and $4,500 in loans.
c. It has $555 in reserves and $4,445 in loans.
d. None of the above is correct.

66. Suppose a bank has a 10 percent reserve ratio, $4,000 in deposits, and it loans out all it can given the reserve ratio.
a. It has $40 in reserves and $3,960 in loans.
b. It has $400 in reserves and $3,600 in loans.
c. It has $444 in reserves and $3,556 in loans.
d. None of the above is correct.

67. Suppose a bank has $10,000 in deposits and $8,000 in loans. It has a reserve ratio of
a. 2 percent.
b. 12.5 percent
c. 20 percent.
d. 80 percent.

68. Suppose a bank has $200,000 in deposits and $190,000 in loans. It has a reserve ratio of
a. 5 percent
b. 9.5 percent
c. 10 percent
d. None of the above is correct.

69. If you deposit $100 into a demand deposit at a bank, this action by itself
a. does not change the money supply.
b. increases the money supply.
c. decreases the money supply.
d. has an indeterminate effect on the money supply.
70. When a bank loans out $1,000, the money supply
a. does not change.
b. decreases.
c. increases.
d. may do any of the above.

71. Under a fractional reserve banking system, banks

a. hold more reserves than deposits.
b. generally lend out a majority of the funds deposited.
c. cause the money supply to fall by lending out reserves.
d. All of the above are correct.

72. If the reserve ratio is 5 percent and a bank receives a new deposit of $500, this bank
a. must increase its required reserves by $25.
b. will initially see its total reserves increase by $500.
c. will be able to make a new loan of $475.
d. All of the above are true.

73. If the reserve ratio is 10 percent and a bank receives a new deposit of $10, this bank
a. must increase required reserves by $1.
b. will initially see its total reserves increase by $1.
c. will be able to make new loans up to a maximum of $1.
d. All of the above are true.

74. If the reserve ratio is 5 percent and a bank receives a new deposit of $200, it
a. must increase required reserves by $190.
b. will initially see reserves increase by $190.
c. will be able to make new loans up to a maximum of $190.
d. None of the above is true.

75. If you deposit $3,000 into First Hawkeye Bank, the

a. bank’s required reserves increase by the reserve ratio times $3,000.
b. bank will be able to lend out $3,000 times the reserve ratio.
c. bank initially sees reserves increase by $0.
d. All of the above are correct.

76. In 1991 the Federal Reserve lowered the reserve requirement ratio from 12 percent to 10 percent. Other things the
same this should have
a. increased both the money multiplier and the money supply.
b. decreased both the money multiplier and the money supply.
c. increased the money multiplier and decreased the money supply.
d. decreased the money multiplier and increased the money supply.

Use the balance sheet for the following three questions.

First Bank of Mason City

Assets Liabilities
Required Reserves $20.00 Deposits $100.00
Loans $80.00

77. The reserve ratio is

a. 0 percent.
b. 20 percent.
c. 80 percent.

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 d. 100 percent.

78. If $1,000 is deposited into the First Bank of Mason City,

a. total reserves will initially increase by $200.
b. liabilities will decrease by $1,000.
c. assets will increase by $1,000.
d. required reserves will increase by $800.

79. If $400 is deposited into the First Bank of Mason City,

a. the bank will be able to make additional loans totaling $320.
b. excess reserves initially increase by $320.
c. required reserves initially increase by $80.
d. All of the above are true.

84. If a bank uses $80 of reserves to make a new loan when the reserve ratio is 25 percent,
a. the money supply initially decreases by $80.
b. the money supply initially increases by $20.
c. the money supply will eventually increase by more than $20 but less than $80.
d. the level of wealth in the economy will not change.

85. If a bank uses $100 of reserves to make a new loan when the reserve ratio is 20 percent, this action by itself initially
makes the money supply
a. and wealth increase by $100.
b. and wealth decrease by $100.
c. increase by $100 while wealth does not change.
d. decrease by $100 while wealth decreases by $100.

86. As the reserve ratio increases, the money multiplier

a. increases.
b. does not change.
c. decreases.
d. could do any of the above.

87. If the central bank in some country lowered the reserve ratio, the money multiplier
a. would increase.
b. would not change.
c. would decrease.
d. could do any of the above.

88. If the reserve ratio is 10 percent, the money multiplier is

a. 100.
b. 10.
c. 9/10.
d. 1/10.

89. If the reserve ratio is 20 percent, the money multiplier is

a. 2.
b. 4.
c. 5.
d. 8.

90. If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would
a. rise from10 to 20.
b. rise from 5 to 10.
c. fall from 10 to 5.
d. not change.
95. Which list contains only actions that increase the money supply?
a. lower the discount rate, raise the reserve requirement ratio
b. lower the discount rate, lower the reserve requirement ratio
c. raise the discount rate, raise the reserve requirement ratio
d. raise the discount rate, lower the reserve requirement ratio

96. Which list contains only actions that increase the money supply?
a. raise the discount rate, make open market purchases
b. raise the discount rate, make open market sales
c. lower the discount rate, make open market purchases
d. lower the discount rate, make open market sales

97. Which list contains only actions that increase the money supply?
a. make open market purchases, raise the reserve requirement ratio
b. make open market purchases, lower the reserve requirement ratio
c. make open market sales, raise the reserve requirement ratio
d. make open market sales, lower the reserve requirement ratio

98. Which list contains only actions that decrease the money supply?
a. lower the discount rate, raise the reserve requirement ratio
b. lower the discount rate, lower the reserve requirement ratio
c. raise the discount rate, raise the reserve requirement ratio
d. raise the discount rate, lower the reserve requirement ratio

99. Which list contains only actions that decrease the money supply?
a. raise the discount rate, make open market purchases
b. raise the discount rate, make open market sales
c. lower the discount rate, make open market purchases
d. lower the discount rate, make open market sales

100. Which list contains only actions that decrease the money supply?
a. make open market purchases, raise the reserve requirement ratio
b. make open market purchases, lower the reserve requirement ratio
c. make open market sales, raise the reserve requirement ratio
d. make open market sales, lower the reserve requirement ratio

101. Which of the following lists ranks the Fed’s monetary policy tools from most to least frequently used?
a. discount rate changes, reserve requirement changes, open market transactions
b. reserve requirement changes, open market transactions, discount rate changes
c. open market transactions, discount rate changes, reserve requirement changes
d. None of the above lists ranks the tools correctly.

102. If the Fed wanted to increase the money supply, it would make open market
a. purchases and lower the discount rate.
b. sales and lower the discount rate.
c. purchases and raise the discount rate.
d. sales and raise the discount rate.

103. Which of the following is false?

a. The Fed indirectly controls the money supply.
b. Banks determine the reserve requirement.
c. Banks can create money in a fractional reserve banking system.
d. The Fed can control the level of reserves in the banking system.

104. Which of the following is not a tool of monetary policy?

a. open market operations
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 b. reserve requirements
c. changing the discount rate
d. increasing the deficit

105. To increase the money supply, the Fed could

a. sell government bonds.
b. increase the discount rate.
c. decrease the reserve requirement.
d. None of the above is correct.

106. To increase the money supply, the Fed could

a. sell government bonds.
b. decrease the discount rate.
c. increase the reserve requirement.
d. None of the above is correct.

107. To decrease the money supply, the Fed could

a. sell government bonds.
b. increase the discount rate.
c. increase the reserve requirement.
d. All of the above are correct.

108. When the Fed conducts open market purchases, bank reserves
a. increase and banks can increase lending.
b. increase and banks must decrease lending.
c. decrease and banks can increase lending.
d. decrease and banks must decrease lending.

109. If the Fed sells government bonds to the public, bank reserves tend to
a. increase and the money supply increases.
b. increase and the money supply decreases.
c. decrease and the money supply increases.
d. decrease and the money supply decreases.

110. In a fractional reserve banking system, an increase in reserve requirements

a. increases both the money multiplier and the money supply.
b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply.

111. In a fractional reserve banking system, a decrease in reserve requirements

a. increases both the money multiplier and the money supply.
b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply.

112. Reserve requirements are regulations concerning

a. the amount banks are allowed to borrow from the Fed.
b. the amount of reserves banks must hold against deposits.
c. reserves banks must hold based on the number and type of loans they make.
d. the interest rate at which banks can borrow from the Fed.

113. If reserve requirements are increased, the reserve ratio

a. increases, the money multiplier increases, and the money supply increases.
b. increases, the money multiplier decreases, and the money supply decreases.
c. decreases, the money multiplier increases, and the money supply increases.
d. decreases, the money multiplier decreases, and the money supply increases.
114. If reserve requirements are decreased, the reserve ratio
a. decreases, the money multiplier increases, and the money supply decreases.
b. increases, the money multiplier increases, and the money supply increases.
c. decreases, the money multiplier increases, and the money supply increases.
d. increases, the money multiplier increases, and the money supply decreases.

115. If the discount rate is lowered, banks choose to borrow

a. less from the Fed so reserves increase.
b. less from the Fed so reserves decrease.
c. more from the Fed so reserves increase.
d. more from the Fed so reserves decrease.

116. If the discount rate is raised, banks choose to borrow

a. more from the Fed so reserves increase.
b. more from the Fed so reserves decrease.
c. less from the Fed so reserves increase.
d. less from the Fed so reserves decrease.

117. When the Fed decreases the discount rate, banks will borrow more from the Fed, lend
a. more to the public, and so the money supply will decrease.
b. less to the public, and so the money supply will decrease.
c. more to the public, and so the money supply will increase.
d. less to the public, and so the money supply will increase.

118. The discount rate is

a. the interest rate the Fed charges banks.
b. one divided by the difference between one and the reserve ratio.
c. the interest rate banks receive on reserve deposits with the Fed.
d. the interest rate that banks charge on overnight loans to other banks.

119. The interest rate the Fed charges on loans it makes to banks is called
a. the prime rate.
b. the federal funds rate.
c. the discount rate.
d. the LIBOR.

127. Which of the following is correct?

a. The Fed can control the money supply precisely.
b. The amount of money in the economy does not depend on the behavior of depositors.
c. The amount of money in the economy depends in part on the behavior of banks.
d. None of the above is correct.

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