Chapter 13

Question 1

1. The supply of money in the economy is determined primarily by:

Answer 1

a. the banking system.

b. the actions of the Federal Reserve.

Question 2

2. In the _______ increases in the supply of money will __________.

Answer 2

a. short run, raise total demand and output

d. long run, lead to higher prices

Question 3

4. Barter transactions will occur only when:

Answer 3

c. there exists a double coincidence of wants.

Question 4

When money is used to express the value of goods and services, it is
functioning as a:

Answer 4

c. unit of account.

Question 5

7. As inflation rates increase, money becomes less useful as a:

Answer 5

store of value

Question 6

9. Checking account balances are included in:

Answer 6

c. both M1 and M2.

Question 7

11. Checking accounts that pay interest are included in the:

Answer 7

b. “other checkable deposits” part of M1.

Question 8

12. Which of the following is included in M2?
    a. commercial paper
    b. U.S. Treasury bonds
    c. savings accounts
    d. AT&T bonds
    e. stocks

Answer 8

c. savings accounts

Question 9

13. Which of the following appears in M2 and not M1?
    a. currency.
    b. checking account balances.
    c. money market mutual funds.
    d. travelers’ checks.
    e. None of the above.

Answer 9

c. money market mutual funds.

Question 10

14. Economists keep an eye on both M2 and M1 because:

Answer 10

c. it is not clear how citizens use money market accounts.

Question 11

17. Which of the following is a bank liability?
    a. reserve deposits held at the Fed
    b. reserve deposits held at the bank
    c. loans made to customers
    d. securities the bank has p

Answer 11

E

Question 12

18. The fraction of deposits that banks are required by law to hold and not
    lend out are called its:

Answer 12

required reserves

Question 13

19. Suppose that while vacationing in Monaco, you won 25,000 French francs
    which is the equivalent of $5,000. When you return to the U.S., you
    deposit the $5,000 into your checking account. The effect is to
    (assuming the required reserve ratio is 20%):
    a. increase your bank’s liabilities by $5,000.
    b. increase your bank’s excess reserves by $4,000.
    c. lead to a multiple expansion in the money supply (checking account
    balances) by $25,000.
    d. increase your bank’s required reserves by $1,000.
    e. All of the above.

Answer 13

E

Question 14

24. Suppose Barry deposits $10,000 in his bank. If the reserve ratio is 20%,
    this will lead to an increase of ________ in checking account balances.

Answer 14

50,000

Question 15

Suppose Kirk deposits $5,000 in his bank. If the reserve ratio is 25%,
this will lead to an increase of ______ in M1.

Answer 15

d. $15,000

Question 16

26. If the banking system has a required reserve ratio of 5 percent, then
    the money multiplier is:

Answer 16

e. 20.

Question 17

28. The money multiplier tends to be greater when:

Answer 17

b. banks hold few excess reserves.

Question 18

29. The money multiplier will be smaller when:

Answer 18

a. bank customers prefer to hold a bigger amount of their money as cash
(instead of in their checking account).
b. banks prefer to lend out 95% of their excess reserves instead of
100%.

Question 19

Which of the following is responsible for buying government securities
in order to influence monetary policy?

Answer 19

d. The Federal Reserve

Question 20

31. An open market purchase occurs when:

Answer 20

e. the Federal Reserve purchases Treasury bonds.

Question 21

32. An open market sale by the Fed:

Answer 21

b. decreases the total amount of reserves in the banking system.

Question 22

If the Fed buys $60,000 of U.S. bonds and the reserve requirement is
10%, M1 will eventually:

Answer 22

d. increase by $600,000.

Question 23

35. Changing the reserve requirement is:

Answer 23

c. disruptive to the banking system.

Question 24

37. An increase in the discount rate:

Answer 24

d. increases the cost of reserves borrowed from the Fed.

Question 25

38. A decrease in the discount rate will:

Answer 25

c. increase the money supply.

Question 26

. In practice, the Federal Reserve keeps the discount rate close to the
______ rate in order to avoid large swings in borrowed reserves by
banks.

Answer 26

c. federal funds

Question 27

41. Which of the following is responsible for decisions on monetary policy?

Answer 27

c. The Federal Open Market Committee.

Question 28

The president of the _______ Federal Reserve Bank is always a member of
the FOMC.

Answer 28

d. New York