Review Questions Chapter 14

1) A decrease in the reserve requirement ________ bank reserves and ________ the money supply.
A) increases; increases B) decreases; decreases
C) increases; decreases D) decreases; increases
2) The three main monetary policy tools used by the Federal Reserve to manage the money supply are
A) open market operations, discount policy, and reserve requirements.
B) interest rates, tax rates, and government spending.
C) tax rates, government purchases, and government transfer payments.
D) open market operations, the exchange rate of the dollar against foreign currencies, and government purchases.
3) A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately
to the change in the rate.
A) increases; decreases B) increases; increases
C) decreases; increases D) decreases; decreases
4) A central bank like the Federal Reserve in the United States can help banks survive a bank run by
A) increasing the required reserve ratio. B) printing money.
C) raising the discount rate.
D) acting as a lender of last resort.
5) Which of the following determines the amount of money the banking system as a whole can create?
A) the quantity of bank reserves
B) the limit on profits by banks imposed by the U.S. Congress
C) the gold reserves held by the Federal Reserve
D) the quantity of vault cash held by banks
6) If households and firms decide to hold less of their money in checking account deposits and more in currency, then the
money supply
A) will increase. B) will decrease.
C) may increase or decrease.
D) will not change.
7) Hyperinflation can be caused by
A) the central bank selling bonds to the public.
B) the government selling bonds to the central bank.
C) the government selling bonds to the public.
D) the central bank selling bonds to the government.
8) Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is
10 percent. If the Federal Reserve reduces the required reserve ratio to 8 percent, then the bank can make a maximum
loan of
A) $0. B) $2 million. C) $8 million. D) $10 million.
9) To increase the money supply, the Federal Reserve could
A) lower transfer payments.
B) decrease income taxes.
C) raise the discount rate.
D) raise the required reserve ratio.
E) conduct an open market purchase of Treasury securities.

10) The main tool that the Federal Reserve uses to conduct monetary policy is
A) discount policy.
B) check clearing.
C) open market operations.
D) setting reserve requirements.
E) acting as the lender of last resort.
11) The Federal Reserve was established in 1913 to
A) stimulate the economy by increasing bank reserves.
B) prevent inflation by decreasing the money supply.
C) stop bank panics by acting as a lender of last resort.
D) prevent bad loans by requiring banks to hold reserves.
12) Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your
bank can made as a direct result of your deposit is
A) $200.
B) $1,800.
C) $2,000.
D) $20,000.
13) A bank will consider a car loan to a customer ________ and a customer's checking account to be ________.
A) a liability; a liability
B) an asset; an asset
C) an asset; net worth
D) a liability; an asset
E) an asset; a liability
14) Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of
goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse
off because
A) the purchasing power of people's incomes would increase.
B) borrowers will have to pay increasing amounts in real terms over time.
C) the purchasing power of the currency would decrease.
D) the value of the real interest rate will drop below the nominal interest rate.
15) Banks can continue to make loans until their
A) excess reserves equal their required reserves.
B) actual reserves equal their required reserves.
C) actual reserves equal their excess reserves.
D) actual reserves equal their checking account balances.
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required
reserve ratio is 20%.
16) Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's excess reserves increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
17) Which of the following best describes how banks create money?
A) Banks create checking account deposits when making loans from excess reserves.
B) Banks make loans from reserves.
C) Banks charge fees for providing financial advice.
D) Banks charge higher interest rates on loans than they pay on deposits.

18) Silver is an example of a

A) barter money.
B) fiat money.
C) commodity money. D) representative money.
19) Dollar bills in the modern economy serve as money because
A) they have value as a commodity independent of their use as money.
B) people have confidence that others will accept them as money.
C) they are backed by the gold stored in Fort Knox.
D) they can be redeemed for gold by the central bank.
20) Money's most narrow definition is based on its function as a
A) unit of account.
B) medium of exchange.
C) standard of deferred payment.
D) standard of barter.
E) store of value.
21) The major shortcoming of a barter economy is
A) the requirement of a double coincidence of wants.
B) that money loses value from inflation.
C) the requirement of specialization and exchange.
D) that goods and services are not traded.
22) To offset the effect of households and firms deciding to hold more of their money in checking account deposits and
less in currency, the Federal Reserve could
A) raise government spending. B) sell Treasury securities.
C) lower the required reserve ratio.
D) raise bank taxes.
23) Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and
real GDP grows at 4 percent, then the inflation rate will be
A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent.
24) Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the
required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a
maximum of
A) $0. B) $50. C) $500. D) $5,000.
25) If the central bank can act as a lender of last resort during a banking panic, banks can
A) satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
B) encourage the public to borrow directly from the central bank, and this will worsen the banking panic.
C) call in their loans to their customers and eventually restore the public's faith in the banking system.
D) borrow more and more money from the central bank, and this will lower its reserves and decrease the public's faith in
the banking system.
26) In economics, money is defined as
A) the total amount of salary, interest, and rental income earned during a year.
B) the total value of one's assets in current prices.
C) any asset people generally accept in exchange for goods and services.
D) the total value of one's assets minus the total value of one's debts, in current prices.

27) Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the required reserve ratio is
10 percent, what is the maximum change in money supply?
A) -$200 million
B) -$180 million
C) $2 million
D) $180 million
E) $200 million
28) The quantity equation states that the
A) money supply times the velocity of money equals the price level times real output.
B) money supply divided by the velocity of money equals the price level divided by real output.
C) money supply times the price level equals real output divided by the velocity of money.
D) money supply times the price level equals real output times the velocity of money.
29) Open market operations refer to the purchase or sale of ________ to control the money supply.
A) U.S. Treasury securities by the U.S. Treasury
B) corporate bonds and stocks by the U.S. Treasury
C) U.S. Treasury securities by the Federal Reserve
D) corporate bonds and stocks by the Federal Reserve
Scenario 14-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required
reserve ratio is 20%.
30) Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole
(including the original deposit) could eventually increase up to a maximum of
A) $8,000.
B) $10,000.
C) $50,000.
D) $100,000.
31) Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic?
A) The economy would likely enter into a recession.
B) Bank total reserves would decrease.
C) Bank checking account balances would decrease.
D) Required reserves would increase.
E) Individual banks would have to shrink the value of loans they made.
32) Economies where goods and services are traded directly for other goods and services are called ________ economies.
A) barter
B) trade C) direct
D) seigniorage
33) The sale of Treasury securities by the Federal Reserve will, in general,
A) increase the quantity of reserves held by banks.
B) decrease the quantity of reserves held by banks.
C) not change the quantity of reserves held by banks.
D) not change the money supply.
34) The most liquid measure of money supply is
A) M0. B) M1. C) M2. D) M3.

35) Which of the following is not a consequence of the Fed changing the reserve requirement?
A) Decreasing the ratio will increase excess reserves.
B) Changes in the ratio effectively places a tax on banks' deposit taking and lending activities.
C) Increasing the ratio will decrease the amount of reserves banks have to loan.
D) Changes in the ratio are easily incorporated into banks' routine management.
36) According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent,
then the inflation rate will be
A) 15 percent. B) 20 percent. C) 25 percent. D) 100 percent.
37) If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will ________ and M2 will
________.
A) not change; increase
B) decrease; increase
C) decrease: decrease
D) not change; not change
E) increase; decrease
38) Which of the following information about fiat money is false? Fiat money
A) is authorized by a central bank or governmental body.
B) serves as a medium of exchange.
C) is backed by gold.
D) has little to no value except as money.
39) Which of the following is one of the most important benefits of money in an economy?
A) Money encourages people to produce all of their own goods (self-sufficiency) and therefore increases economic
stability.
B) Money allows for the accumulation of wealth.
C) Money makes exchange easier, leading to more specialization and higher productivity.
D) Money allows for the exchange of goods and services.
40) The required reserves of a bank equal its ________ the required reserve ratio.
A) loans divided by
B) deposits divided by
C) deposits multiplied by
D) loans multiplied by
41) In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made
a large amount of new funds available to financial markets. The Fed expected this to increase in the money supply and
the total amount of lending because of the multiplier effect, in which a given amount of new reserves results in a multiple
increase in
A) long-term debt.
B) stockholder's equity.
C) required reserves.
D) bank deposits.
42) The statement, "My iPhone is worth $300" represents money's function as
A) a standard of deferred payment.
B) a store of value.
C) a medium of exchange.
D) a unit of account.
43) The purchase of Treasury securities by the Federal Reserve will, in general,
A) not change the money supply.
B) increase the quantity of reserves held by banks.
C) decrease the quantity of reserves held by banks.
D) not change the quantity of reserves held by banks.

44) The M1 measure of the money supply equals

A) currency plus checking account balances plus traveler's checks plus savings account balances.
B) currency plus checking account balances.
C) paper money plus coins in circulation.
D) currency plus checking account balances plus traveler's checks.
45) People hold money as opposed to financial assets because money
A) is perfectly liquid. B) earns a higher return than other financial assets.
C) earns no interest.
D) earns interest.
46) If a bank receives a $1 million discount loan from the Federal Reserve, then the bank's reserves will
A) increase by less than $1 million.
B) not change.
C) increase by $1 million.
D) increase by more than $1 million.