Question 1

How is the quantity theory of money different from the quantity equation and why must the quantity equation always be true?

Accepted Answer

The quantity equation is that the money supply (M)times the velocity of money (V)equals the price level (P)times real output (Y),i.e. ,M × V = P × Y.The quantity equation must always be true,because of the definition of the velocity of money: V = $\frac { P \times Y } { M }$ .Substitute $\frac { P \times Y } { M }$ in for V,and the quantity equation yields P × Y = P × Y.The quantity theory of money is a theory derived from the quantity equation by asserting that the velocity of money is fixed,and can be true or not true.

Question 2

Suppose you withdraw $1,000 in cash from your checking account.Draw a T-account to show the effect of this transaction on your bank's balance sheet.

Accepted Answer

The withdrawal of $1,000 from your checking account will reduce the bank's checking account deposits and reserves by $1,000.
 $\begin{array}{|c|lc|}
\hline{\text { Assets }} & \text { Liabilities } \
\hline \text { Reserves }-\$ 1,000 & \text { Deposits } \quad \$ 1,000 \
\hline
\end{array}$

Question 3

One way investment banks differ from commercial banks is that investment banks

Accepted Answer

A) lend exclusively to households. 
B) do not take in deposits. 
C) only buy and sell mortgages. 
D) trade only in foreign exchange markets. 
A) lend exclusively to households. 
B) do not take in deposits. 
C) only buy and sell mortgages. 
D) trade only in foreign exchange markets. B

Question 4

The M2 measure of the money supply equals

Accepted Answer

A) savings account balances plus small-denomination time deposits plus traveler's checks. 
B) savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares. 
C) M1 plus savings account balances plus small-denomination time deposits. 
D) M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares. 
A) savings account balances plus small-denomination time deposits plus traveler's checks. 
B) savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares. 
C) M1 plus savings account balances plus small-denomination time deposits. 
D) M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.

Question 5

Table 25-2
 $\begin{array}{|c|c|c}
\hline \text { Assets } & \text { Liabilities } \
\hline \text { Reserves }+\$ 8,000 & \text { Deposits }+\$ 8,000 \
\hline
\end{array}$

-Refer to Table 25-2.Suppose a transaction changes a bank's balance sheet as indicated in the following T-account,and the required reserve ratio is 10 percent.As a result of the transaction,the bank can make a maximum loan of

Accepted Answer

A) $0. 
B) $800. 
C) $7,200. 
D) $8,000. 
A) $0. 
B) $800. 
C) $7,200. 
D) $8,000.

Question 6

The narrowest official definition of the money supply is

Accepted Answer

A) M1. 
B) M2. 
C) M3. 
D) L. 
A) M1. 
B) M2. 
C) M3. 
D) L.

Question 7

Which policy tool allows the Federal Reserve the greatest control over monetary policy?

Accepted Answer

A) the discount rate 
B) open market operations 
C) the reserve requirement 
D) lender of last resort 
A) the discount rate 
B) open market operations 
C) the reserve requirement 
D) lender of last resort

Question 8

The required reserves of a bank equal its ________ the required reserve ratio.

Accepted Answer

A) deposits divided by 
B) deposits multiplied by 
C) loans divided by 
D) loans multiplied by 
A) deposits divided by 
B) deposits multiplied by 
C) loans divided by 
D) loans multiplied by

Question 9

Liquidity is defined as

Accepted Answer

A) the ease with which a given asset can be converted to a store of value. 
B) the ease with which a given asset can be converted to a unit of account. 
C) the ease with which a given asset can be converted to a medium of exchange. 
D) the ease with which a given asset can be converted to a standard of deferred payment. 
A) the ease with which a given asset can be converted to a store of value. 
B) the ease with which a given asset can be converted to a unit of account. 
C) the ease with which a given asset can be converted to a medium of exchange. 
D) the ease with which a given asset can be converted to a standard of deferred payment.

Question 10

Which of the following is not a consequence of the Fed changing the reserve requirement?

Accepted Answer

A) Changes in the ratio are easily incorporated into banks' routine management. 
B) Decreasing the ratio will increase excess reserves. 
C) Increasing the ratio will decrease the amount of reserves banks have to loan. 
D) Changes in the ratio effectively places a tax on banks' deposit taking and lending activities. 
A) Changes in the ratio are easily incorporated into banks' routine management. 
B) Decreasing the ratio will increase excess reserves. 
C) Increasing the ratio will decrease the amount of reserves banks have to loan. 
D) Changes in the ratio effectively places a tax on banks' deposit taking and lending activities.

Question 11

In economics,money is defined as

Accepted Answer

A) the total value of one's assets in current prices. 
B) the total value of one's assets minus the total value of one's debts,in current prices. 
C) the total amount of salary,interest,and rental income earned during a year. 
D) any asset people generally accept in exchange for goods and services. 
A) the total value of one's assets in current prices. 
B) the total value of one's assets minus the total value of one's debts,in current prices. 
C) the total amount of salary,interest,and rental income earned during a year. 
D) any asset people generally accept in exchange for goods and services.

Question 12

To increase the money supply,the Federal Reserve could

Accepted Answer

A) lower the discount rate. 
B) decrease income taxes. 
C) raise the required reserve ratio. 
D) conduct an open market sale of Treasury securities. 
A) lower the discount rate. 
B) decrease income taxes. 
C) raise the required reserve ratio. 
D) conduct an open market sale of Treasury securities.

Question 13

Suppose the velocity of money is not fixed,but stable at about two percent growth per year.How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified quantity theory of money with velocity growing at two percent per year,what would the growth rate of the other variables in the theory need to be to cause inflation?

Accepted Answer

The quantity theory of money would have

Question 14

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 4 percent,then the bank can make a maximum loan of

Accepted Answer

A) $0. 
B) $4 million. 
C) $6 million. 
D) $10 million. 
A) $0. 
B) $4 million. 
C) $6 million. 
D) $10 million.

Question 15

The statement "This Dell laptop costs $1,200" illustrates which function of money?

Accepted Answer

A) medium of exchange 
B) unit of account 
C) store of value 
D) standard of deferred payment 
A) medium of exchange 
B) unit of account 
C) store of value 
D) standard of deferred payment

Question 16

The quantity equation states that the

Accepted Answer

A) money supply divided by the velocity of money equals the price level divided by real output. 
B) money supply times the velocity of money equals the price level times 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. 
A) money supply divided by the velocity of money equals the price level divided by real output. 
B) money supply times the velocity of money equals the price level times 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.

Question 17

A person's wealth

Accepted Answer

A) is a measure of how much money the person has. 
B) equals the value the person's assets minus his or her liabilities. 
C) is measured independent of his or her current and expected future income. 
D) All of the above are correct. 
A) is a measure of how much money the person has. 
B) equals the value the person's assets minus his or her liabilities. 
C) is measured independent of his or her current and expected future income. 
D) All of the above are correct.

Question 18

Which of the following determines the amount of money the banking system as a whole can create?

Accepted Answer

A) the quantity of bank reserves 
B) the quantity of vault cash held by banks 
C) the gold reserves held by the Federal Reserve 
D) the limit on profits by banks imposed by the U.S.Congress 
A) the quantity of bank reserves 
B) the quantity of vault cash held by banks 
C) the gold reserves held by the Federal Reserve 
D) the limit on profits by banks imposed by the U.S.Congress

Question 19

If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits,the money multiplier will increase.

Accepted Answer

A) True 
 B)False

Question 20

In the United States,currency includes

Accepted Answer

A) gold,silver,and paper money. 
B) checking and savings account deposits. 
C) paper money and coins in circulation. 
D) traveler's checks. 
A) gold,silver,and paper money. 
B) checking and savings account deposits. 
C) paper money and coins in circulation. 
D) traveler's checks.

Exam 25: Money,banks,and the Federal Reserve System

How is the quantity theory of money different from the quantity equation and why must the quantity equation always be true?

Suppose you withdraw $1,000 in cash from your checking account.Draw a T-account to show the effect of this transaction on your bank's balance sheet.

One way investment banks differ from commercial banks is that investment banks

The M2 measure of the money supply equals

Table 25-2 Assets Liabilities Reserves +\ 8,000 Deposits +\ 8,000 -Refer to Table 25-2.Suppose a transaction changes a bank's balance sheet as indicated in the following T-account,and the required reserve ratio is 10 percent.As a result of the transaction,the bank can make a maximum loan of

The narrowest official definition of the money supply is

Which policy tool allows the Federal Reserve the greatest control over monetary policy?

The required reserves of a bank equal its ________ the required reserve ratio.

Liquidity is defined as

Which of the following is not a consequence of the Fed changing the reserve requirement?

In economics,money is defined as

To increase the money supply,the Federal Reserve could

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 4 percent,then the bank can make a maximum loan of

The statement "This Dell laptop costs $1,200" illustrates which function of money?

The quantity equation states that the

A person's wealth

Which of the following determines the amount of money the banking system as a whole can create?

If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits,the money multiplier will increase.

In the United States,currency includes

Economics: Foundations and Models

Trade-Offs, comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, government Price Setting, and Taxes

Externalities, environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms,the Stock Market,and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology,production,and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Monetary Policy

Fiscal Policy

Inflation, unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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