Question 1

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially

Accepted Answer

A)   decrease M1 and increase M2.
B)   decrease M1 and decrease M2.
C)   decrease M1 and not change M2.
D)   increase M1 and decrease M2. C

Question 2

Scenario 25-1

-Refer to Scenario 25-1. M2 in this simple economy equals

Accepted Answer

A)   $3,000.
B)   $8,000.
C)   $14,000.
D)   $21,000. D

Question 3

Money market mutual funds sell shares to investors and use the money to buy

Accepted Answer

A)   mortgage-backed securities.
B)   foreign currency.
C)   short-term securities.
D)   overseas assets through foreign direct investment. C

Question 4

Paper currency is a

Accepted Answer

A)   commodity money.
B)   fiat money.
C)   barter money.
D)   bond.

Question 5

How effective is discount policy as compared to open market operations in managing the money supply? Explain how The Federal Reserve uses discount policy today.

Accepted Answer

The answer of How effective is discount policy as compared...

Question 6

You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. Using the M1 measure of money, you have

Accepted Answer

A)   money = $2,300, annual income = $6,000, and wealth = $5,000.
B)   money = $300, annual income = $6,000, and wealth = $4,300.
C)   money = $200, annual income = $500, and wealth = $4,300.
D)   money = $300, annual income = $6,000, and wealth = $5,000.

Question 7

A barter economy is an economy where

Accepted Answer

A)   goods and services are exchanged for money.
B)   money is exchanged for goods and services.
C)   goods and services are exchanged for other goods and services.
D)   goods and services are exchanged for liabilities.

Question 8

Which of the following is not a tool the Fed uses to manage the money supply?

Accepted Answer

A)   open market operations
B)   setting the discount rate
C)   expanding and contracting deposit insurance
D)   setting reserve requirements for deposits in the banking system

Question 9

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

Accepted Answer

A)   $0.
B)   $50.
C)   $500.
D)   $5,000.

Question 10

Table 25-1
 
-Refer to Table 25-1. Suppose a transaction changes a bank's balance sheet as indicated in the T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of

Accepted Answer

A)   $0.
B)   $400.
C)   $3,600.
D)   $4,000.

Question 11

Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account.  At this point, what percentage of the new deposits does Wells Fargo hold in reserves?

Accepted Answer

A)   100 percent
B)   10 percent
C)   5 percent
D)   1 percent

Question 12

A major source of inefficiency in barter economies is that they require

Accepted Answer

A)   a standard of deferred payment to make trade possible.
B)   a double coincidence of wants in exchange.
C)   more liquid stores of value than do monetary economies.
D)   All of the above are correct.

Question 13

A series of bank runs in a country should have no effect on M1 as money simply moves from checking deposits to currency.

Accepted Answer

A) True 
 B)False

Question 14

Suppose a bank has the following balance sheet:
  If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?

Accepted Answer

The answer of Suppose a bank has the following balance...

Question 15

Fiat money

Accepted Answer

A)   has no or very little value except as money.
B)   is rarely used in modern economies.
C)   functions well only if can be redeemed for gold or other precious metals.
D)   serves well as a medium of exchange, but not as a store of value.

Question 16

Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 5 percent. If the Federal Reserve lowers the required reserve ratio to 3 percent, then the bank will now have excess reserves of

Accepted Answer

A)   $0.
B)   $2,000.
C)   $3,000.
D)   $5,000.

Question 17

Suppose you withdraw $1,000 from your savings account and put it under your mattress. Briefly explain how this will affect M1 and M2.

Accepted Answer

The answer of Suppose you withdraw $1,000 from your savings...

Question 18

Hyperinflation can be caused by

Accepted Answer

A)   the government selling bonds to the central bank.
B)   the central bank selling bonds to the public.
C)   the government selling bonds to the public.
D)   the central bank selling bonds to the government.

Question 19

If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is

Accepted Answer

A)   2.
B)   5.
C)   10.
D)   20.

Question 20

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

Accepted Answer

The answer of How is the quantity theory of money...

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