Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Money
A) is necessary to conduct economic transactions.
B) facilitates specialization in production.
C) is anything that is regularly used and generally accepted in economic transactions or
exchanges.
D) is anything the government declares to have value.

1)

Answer: C
2) A barter transaction involves exchanging
A) one good for another good.
B) money for a service.
C) a service for a promise of a future monetary payment.
D) one good for money.

2)

Answer: A
3) Brad details cars and Angelina babysits. Angelina agrees to babysit for Brad's kids if he details her
minivan. This is an example of
A) commodity money.
B) barter.
C) fiat money.
D) legal tender.

3)

Answer: B
4) In order for a barter transaction to be successful, there must be a
A) market for the goods.
B) high demand for a certain item.
C) federal tax law in effect.
D) double coincidence of wants.

4)

Answer: D
5) Kyle wants to trade scuba lessons for surfing lessons. Ike wants to trade surfing lessons for scuba
lessons. Kyle and Ike have
A) a double coincidence of wants.
B) the basis for a double fiat exchange.
C) a double incidence of demand.
D) the basis for a liquidity exchange.

5)

Answer: A
6) Because money eliminates the "double coincidence of wants" problem, the development of money
as a ________ has facilitated the expansion of trade.
A) store of value
B) unit of account
C) measure of value
D) medium of exchange

6)

Answer: D
7) The need for a barter system diminishes when money is used as a
A) measure of value.
B) unit of account.
C) store of value.
D) medium of exchange.
Answer: D

7)

8) Aster won $5,000 on a slot machine. She deposits her $5,000 winnings into a money market fund so
that she can use the money next year to help her pay for a new boat. This is an example of money
serving as a(n)
A) .investment good.
B) medium of exchange.
C) unit of account.
D) store of value

8)

Answer: D
9) When you pay $6 for breakfast burritos for your drive to work, you are using money as a(n)
A) investment good.
B) unit of account.
C) store of value.
D) medium of exchange.

9)

Answer: D
10) Tippi received a rebate of $2,000 for a hybrid car she purchased in May 2011. Tippi put this money
in a saving account so that she could spend it when she went on safari in September 2011. This is an
example of money serving as a(n)
A) medium of exchange.
B) investment good.
C) unit of account.
D) store of value.

10)

Answer: D
11) When you keep your savings in a safety deposit box, you are using money as a(n)
A) store of value.
B) medium of exchange.
C) investment good.
D) unit of account.

11)

Answer: A
12) When the prices of goods and services rise
A) the value of money falls.
C) imports decrease.

B) exports increase.
D) the value of money rises.

12)

Answer: A
13) The property that makes money a good medium of exchange and a good store of value is the
A) unlimited supply of money.
B) transactions demand for money.
C) liquidity property of money.
D) asset demand for money.

13)

Answer: C
14) When a car dealer attaches price stickers to his products, he is using money as a
A) unit of transfer.
B) unit of account.
C) medium of exchange.
D) store of value.

14)

Answer: B
15) Abercrombie and Fitch, a clothing retailer, has 250 different products in inventory. Abercrombie
and Fitch reports its inventory is worth $600,000. This is an example of using money as a
A) unit of account.
B) standard of deferred payment.
C) store of value.
D) medium of exchange.

15)

Answer: A
16) Subway quotes the price of a foot long tuna sub at $5. This is an example of money serving as a(n)
A) store of value.
B) unit of account.
C) investment good.
D) medium of exchange.
Answer: B

16)

17) When Argentina experiences a period of high inflation and Argentineans lose confidence in their
peso as a store of value, which of the following would be least likely to occur?
A) Argentineans would use a different currency as a medium of exchange.
B) The demand for pesos would decrease.
C) The buying power of the peso would decrease.
D) The value of foreign currencies would depreciate relative to the peso.

17)

Answer: D
18) What gives money value under a fiat system?
A) Fiat money is also a commodity.
B) Fiat money is the same as Treasury bonds.
C) The supply of fiat money is controlled by the government.
D) Fiat money is backed by gold.

18)

Answer: C
19) Cowrie shells have been used as money is West Africa. This is an example of
A) token money.
B) commodity money.
C) fiat money.
D) legal money.

19)

Answer: B
20) Money that has no intrinsic value and is created by a government decree is called
A) commodity money.
B) fiat money.
C) asset money.
D) barter money.

20)

Answer: B
21) Which of the following is NOT a form of commodity money?
A) checks
B) precious stones
C) cigarettes

D) all of the above

21)

Answer: A
22) Legal tender is
A) money that a government has required to be accepted in settlement of debts.
B) money that cannot be counterfeited.
C) money that must be backed by gold.
D) money that has a value other than as a currency.

22)

Answer: A
23) To ensure that ________ will be accepted, the U.S. government implicitly promises the public that it
will not print money so fast that it loses its value.
A) commodity money
B) exchange rates
C) barter cash
D) paper money

23)

Answer: D
24) When the value of money falls as a result of a rapid increase in its supply, ________ occurs.
A) deflation
B) negative exchange
C) currency debasement
D) all of the above
Answer: C

24)

25) In the country of Kaboom, the government doubled the money supply overnight. As a result of this
action, the price of a gallon of milk increased from 3 Kaboomian dollars to 200 Kaboomian dollars.
This is an example of
A) deflation.
B) currency debasement.
C) a change from commodity money to fiat money.
D) a change in the legal tender.

25)

Answer: B
26) M1
A) includes small time deposits.
B) includes credit cards.
C) is the narrowest definition of the money supply.
D) is the sum of currency plus travelers checks.

26)

Answer: C
27) M1 is a
A) near money.
C) commodity money.

27)
B) stock variable.
D) flow variable.

Answer: B
28) Checking account balances are included in
A) M1 only.
C) neither M1 nor M2 .

B) M2 only.
D) both M1 and M2.

28)

Answer: D
29) Which of the following is included in M1, but not included in M2 ?
A) currency held outside banks
B) demand deposits
C) travelers checks
D) none of the above

29)

Answer: D
30) Serena transfers $8,000 from her checking account to her savings account. This transaction will
A) decrease M1 and not change M2 .
B) decrease both M1 and M2 .
C) increase both M1 and M2 .
D) not change M1 and decrease M2 .

30)

Answer: A
31) Sarafina transfers $450 from her saving account to her checking account. This transaction will
A) increase M1 and not change M2.
B) not change M1 and decrease M2 .
C) increase both M1 and M2 .
D) decrease both M1 and M2 .

31)

Answer: A
32) Otis transfers $200 from his money market fund to his checking account. This transaction will
A) decrease both M1 and M2 .
B) decrease M2 and increase M1.
C) increase M1 , but leave M2 unchanged.
D) decrease M1 and increase M2.
Answer: C

32)

33) Which of the following would be counted as part of M1 ?

A) money market accounts
B) small time deposits
C) large time deposits
D) demand deposits

33)

Answer: D
34) Demand deposits are included in
A) M1.
C) neither M1 nor M2 .

B) M2.
D) both M1 and M2.

34)

Answer: D
35) Which of the following would be included in M2, but not included in M1?
A) checking accounts
B) demand deposits
C) money market accounts
D) none of the above

35)

Answer: C
36) Which of the following is included in M2?
A) U.S. Treasury bonds
C) savings accounts

36)
B) stocks
D) commercial paper

Answer: C
37) Which of the following is not included in M1 or M2?
A) currency in circulation outside of commercial banks
B) credit card balances
C) checking account balances
D) traveler's checks

37)

Answer: B
38) Currency is included in
A) M1 only.
C) both M1 and M2.

B) M2 only.
D) neither M1 nor M2 .

38)

Answer: C
39) Near monies are close substitutes for
A) token monies.
C) fiat monies.

B) transactions monies.
D) commodity monies.

39)

Answer: B
40) Which of the following is the best example of a broad money?
A) a money market account
B) a Treasury bond
C) a valuable painting
D) all of the above

40)

Answer: A
41) M1 is equal to
A) M2 + savings accounts - currency held outside banks + other near monies.
B) M2 + near monies.
C) M2 - savings accounts - money market accounts - other near monies.
D) money market accounts + automatic-transfer savings accounts.
Answer: C

41)

42) Financial monetary assets which often cannot be readily used in commercial exchanges are
included in
A) M1.
B) credit cards.
C) M2.
D) prepaid accounts.

42)

Answer: C
43) Along with currency not in banks and deposits in checking accounts, what is another component of
the M1 measure of money?
A) traveler's checks
B) prepaid accounts
C) credit cards
D) debit cards

43)

Answer: A
44) Loans are a(n) ________ of a commercial bank.
A) retained earning
C) asset

44)

B) liability
D) all of the above

Answer: C
45) Demand deposits are a(n) ________ of a commercial bank.
A) retained earning
B) liability
C) asset
D) all of the above

45)

Answer: B
46) Assets minus liabilities is equal to
A) M1.
B) net capital.

C) net worth.

D) M2.

46)

Answer: C
47) Related to the Economics in Practice on p. 503: In the Solomon Islands, dolphin teeth are used as
currency. The governor of the Central Bank of the Solomon Islands has purchased a "huge amount "
of these teeth as an investment. In this instance, dolphin teeth are being held as a(n)
A) unit of account.
B) store of value.
C) legal tender.
D) medium of exchange.

47)

Answer: B
48) Related to the Economics in Practice on p. 503: In the Solomon Islands, dolphin teeth are used as
currency. The value of one pig is 50 dolphin teeth. In this instance, dolphin teeth would be
considered a(n)
A) medium of exchange.
B) unit of account.
C) legal tender.
D) store of value.

48)

Answer: B
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
49) When you use money to fill your car with gas every week, you are using money as a store of value.
Answer:

True

False

50) Money is anything that generally is accepted as a store of value.

Answer:

True

True

50)

False

51) In an economy that uses commodity money, there is no need for double coincidence of wants.
Answer:

49)

False
6

51)

52) When you take $500 from your saving account and deposit it in your checking account, M2
increases.
Answer:

True

False

53) Fiat money refers to a monetary system in which gold backs up paper money.
Answer:

True

True

True

True

55)

False

56) The M2 definition of money includes traveler's checks.

Answer:

54)

False

55) The M2 definition of money includes money market accounts.

Answer:

53)

False

54) Commodity money is money the government says is money.

Answer:

52)

56)

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
57) Futura Bank has liabilities of $8 million and net worth of $1,200,000. Futura Bank's assets are
A) $1.2 million.
B) $6.8 million.
C) $8 million.
D) $9.2 million.

57)

Answer: D
58) Cold Creek Credit Union has liabilities of $450,000 and net worth of $175,000. Cold Creek Credit
Union's assets are
A) $175,000.
B) $275,000.
C) $450,000.
D) $625,000.

58)

Answer: D
59) Asiago National Bank has assets of $900,000 and liabilities of $300,000. Asiago National Bank's net
worth is
A) $300,000.
B) $600,000.
C) $900,000.
D) $1,200,000.

59)

Answer: B
60) A commercial bank lists deposits as
A) liabilities.
C) excess reserves.

B) assets.
D) retained earnings.

60)

Answer: A
61) Things that a firm owns that have ________ are classified as assets.
A) no value
B) negative value
C) worth
D) any of the above

61)

Answer: C
62) Time deposits are considered a(n) ________ of a bank.
A) required reserve
B) loan
C) asset
D) liability
Answer: D

62)

63) The Federal Reserve System

A) is the central bank of the United States.
C) is a branch of the Commerce Department.

B) controls the Treasury Department.

D) oversees the Congress and Senate.

63)

Answer: A
64) A ________ is considered an asset of that bank.
A) bank loan
C) bank deposit

64)

B) demand deposit
D) bank liability

Answer: A
65) ________ in a bank is considered a liability of that bank.
A) Required reserves
B) Excess reserves
C) A checking deposit
D) A bank loan

65)

Answer: C
Refer to the information provided in Table 10.1 below to answer the questions that follow.
Table 10.1
First Charter Bank
Assets
Liabilities
Reserves
$1,200
Deposits
Loans
$500
Net Worth
Total
$1,700
Total

66) Refer to Table 10.1. The required reserve ratio is 10%. If the First Charter Bank is meeting its reserve
requirement and has no excess reserves, its reserves equal
A) $50.
B) $70.
C) $120.
D) $170.

66)

Answer: C
67) Refer to Table 10.1. The required reserve ratio is 10%. If the First Charter Bank is meeting its reserve
requirement and has no excess reserves, its loans equal
A) $1,080.
B) $1,530.
C) $1,580.
D) $1,700.

67)

Answer: C
68) Refer to Table 10.1. First Charter Bank's total assets are
A) $500.
B) $1,200.
C) $1,700.
Answer: C

D) $3,400.

68)

Refer to the information provided in Table 10.2 below to answer the questions that follow.
Table 10.2
First Commercial Bank
Assets
Liabilities + Net Worth
Reserves:
$2 million
$4 million
Deposits
Required
$800,000
$500,000
Net Worth
Excess
Loans
Total
$4.5 million
$4.5 million Total

69) Refer to Table 10.2. First Commercial Bank's excess reserves equal $________.
A) 1,200,000
B) 2,000,000
C) 2,800,000

D) 4,500,000

69)

Answer: A
70) Refer to Table 10.2. The required reserve ratio is
A) 10%.
B) 12.5%.

C) 15%.

D) 20%.

70)

Answer: D
71) Refer to Table 10.2. First Commercial Bank's total loans equal $________.
A) 1,200,000
B) 2,500,000
C) 2,800,000

D) 4,500,000

71)

Answer: B
Refer to the information provided in Table 10.3 below to answer the questions that follow.
Table 10.3
People's Bank
Assets
Liabilities + Net Worth
Reserves:
$200,000
$400,000
Deposits
Required
$100,000
Net Worth
Excess
Loans
Total
$500,000
$500,000
Total

72) Refer to Table 10.3. The net worth of People's Bank is $________.
A) 100,000
B) 300,000
C) 500,000

D) 900,000

72)

Answer: A
73) Refer to Table 10.3. The required reserve ratio is
A) 8%.
B) 15%.

C) 20%.

D) 25%.

73)

Answer: D
74) Refer to Table 10.3. People's Bank excess reserves are $________.
A) 100,000
B) 200,000
C) 300,000

D) 700,000

74)

Answer: A
75) Refer to Table 10.3. Total loans of People's Bank equal $________.
A) 100,000
B) 300,000
C) 500,000
Answer: B

D) 800,000

75)

76) Bank of Mt. Etna has $500 million in deposits. Bank of Mt. Etna is meeting its reserve requirement
and has no excess reserves. It has $75 million in reserves. Bank of Mt. Etna faces a required reserve
ratio of
A) 15%.
B) 25.5%.
C) 45%.
D) 47.2%.

76)

Answer: A
77) Acropolis Bank has $600 million in deposits. The required reserve ratio is 25%. Acropolis Bank
must keep ________ in reserves.
A) $125 million
B) $150 million
C) $240 million
D) $250 million

77)

Answer: B
78) Bank of Roseland has $700 million in deposits. The required reserve ratio is 15%. Bank of Roseland
must keep ________ in reserves.
A) $55 million
B) $85 million
C) $105 million
D) $140 million

78)

Answer: C
79) The Argon Bank has $8 million in deposits and $1,600,000 in reserves. If the required reserve ratio
is 20%, excess reserves are equal to
A) zero.
B) $80,000.
C) $320,000.
D) $640,000.

79)

Answer: A
80) The Bank of Biscayne has $12 million in deposits and $800,000 in reserves. If the required reserve
ratio is 5%, excess reserves are equal to
A) $720,000.
B) $600,000.
C) $200,000.
D) $40,000.

80)

Answer: C
81) The Bank of Mesquite has $2 million in deposits and $550,000 in reserves. If excess reserves are
equal to $150,000, the required reserve ratio is
A) 15%.
B) 20%.
C) 35%.
D) 65%.

81)

Answer: B
Refer to the information provided in Table 10.4 below to answer the questions that follow.
Table 10.4
First Charter Bank

Assets
Reserves
$1.2 million
Loans
$4.8 million
Total
$6 million

Liabilities
$6 million Deposits
$6 million

Total

82) Refer to Table 10.4. If the required reserve ratio is 20%, First Charter Bank
A) is loaned up.
B) has too few reserves on hand.
C) has unloaned excess reserves of $100,000.
D) is meeting its required reserve ratio and has no excess reserves.

82)

Answer: A
83) Refer to Table 10.4. First Charter Bank could make additional loans of $750,000, if the required
reserve ratio were
A) 12.5%.
B) 10%.
C) 7.5%.
D) 2.5%.
Answer: C
10

83)

84) Refer to Table 10.4. If the required reserve ratio were changed to 10% and First Charter Bank
continues to hold $1,200,000 in reserves, its excess reserves will be
A) $150,000.
B) $300,000.
C) $600,000.
D) $900,000.

84)

Answer: C
85) Dollar Bank is currently loaned up. If the required reserve ratio is raised
A) Dollar Bank's net worth will increase.
B) Dollar Bank's actual reserves will increase, but it will still be loaned up.
C) Dollar Bank will have excess reserves that it can lend out.
D) Dollar Bank will still be loaned up because it did not receive any additional deposits.

85)

Answer: A
86) If a bank is "loaned up," it has no ________ and thus can make no ________.
A) excess reserves; more loans
B) required reserves; deposits
C) assets; liabilities
D) demand deposits; withdrawals

86)

Answer: A
87) Commercial banks ________ through making loans.
A) create money
C) change the reserve requirement

B) conduct open market operations

D) decrease M1

87)

Answer: A
88) The multiple by which total deposits can increase for every dollar increase in ________ is the
money multiplier.
A) reserves
B) liabilities
C) M1
D) loans

88)

Answer: A
89) Suppose the required reserve ratio is 10%. A $75 million cash deposit will allow commercial banks
to create at most
A) $750,000.
B) $7.5 million.
C) $75 million.
D) $750 million.

89)

Answer: D
90) Suppose the required reserve ratio is 25%. A $10 million deposit allows commercial banks to create
at most
A) $2.5 million.
B) $4 million.
C) $40 million.
D) $250 million.

90)

Answer: C
91) The required reserve ratio is 12.5%. The money multiplier is
A) 2.5.
B) 6.
C) 7.5.

D) 8.

91)

Answer: D
92) The required reserve ratio is 20%. The money multiplier is
A) 2.
B) 4.
C) 5.

D) 10.

92)

Answer: C
93) If the money multiplier is 4, the required reserve ratio is
A) 4%.
B) 20%.
C) 25%.
Answer: C

11

D) 50%.

93)

94) Assume that banks become less conservative in their lending policies and start holding no excess
reserves. Compared to a situation in which banks are holding excess reserves, the size of the money
supply will be
A) larger.
B) zero.
C) the same.
D) smaller.

94)

Answer: A
95) As commercial banks keep fewer excess reserves, money creation
A) decreases.
B) increases.
C) remains the same, as long as banks hold no excess reserves.
D) could either increase or decrease.

95)

Answer: B
Refer to the information provided in Scenario 10.1 below to answer the questions that follow.
SCENARIO 10.1: The following table shows the changes in deposits, reserves, and loans of 4 banks as a result of a $100,000
initial deposit in Bank No. 1. Assume all banks are loaned up.

96) Refer to Scenario 10.1. What is the required reserve ratio?

A) 4%
B) 5%
C) 8%

D) 10%

96)

Answer: D
97) Refer to Scenario 10.1. What is the money multiplier in this economy?
A) 10
B) 16.67
C) 20

D) 50

97)

Answer: A
98) Refer to Scenario 10.1. How much money will be created based on the initial $100,000 deposit?
A) $1 million
B) $2 million
C) $16.67 million
D) $50 million

98)

Answer: A
99) Refer to Scenario 10.1. If the required reserve ratio were changed to 20%, total loans of Bank No. 2
will change to
A) $64,000.
B) $72,000.
C) $74,250.
D) $80,000.

99)

Answer: A
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
100) Only the money multiplier determines how much money the Federal Reserve can create.
Answer:

True

False

101) Required reserves in a bank are the difference between excess reserves and the bank's total net
worth.
Answer:

True

100)

False
12

101)

102) Among the liabilities of commercial banks are demand deposits.

Answer:

True

102)

False

103) The amount of money banks can loan out is determined by the federal funds rate.
Answer:

True

False

104) Among the assets of commercial banks are excess reserves.

Answer:

True

104)

False

105) Since they must lend money to make money, all banks are necessarily solvent.
Answer:

True

103)

105)

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
106) The Federal Reserve was created in
A) 1893.
B) 1913.

C) 1921.

D) 1933.

106)

Answer: B
107) Which of the following serves as the central bank of the United States?
A) the Treasury Department
B) the Federal Deposit Insurance Corporation
C) the Congress
D) the Federal Reserve System

107)

Answer: D
108) The voting members of the Federal Open Market Committee are
A) the presidents of the 12 Federal Reserve banks and three members of the Board of Governors.
B) all of the members of the Board of Governors and five of the presidents of the 12 Federal
Reserve banks.
C) all of the members of the Board of Governors and all of the presidents of the 12 Federal
Reserve banks.
D) only the members of the Board of Governors.

108)

Answer: B
109) Members of the Federal Reserve Board of Governors
A) are appointed to 4 year terms.
B) are members of the Federal Open Market Committee.
C) are confirmed by the House of Representatives.
D) frequently need to deal with political pressure.

109)

Answer: B
110) When checks are exchanged between banks, the Fed oversees the banks to ensure the appropriate
funds have been transferred. This is known as
A) check floating.
B) check clearing.
C) check balancing.
D) check kiting.
Answer: B

13

110)

111) Of the over $2.3 billion in assets on the Fed's balance sheet in June 2010, almost half of this value
was in
A) federal agency debt securities.
B) U.S. Treasury securities.
C) mortgage-backed securities.
D) gold.

111)

Answer: C
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
112) The Federal Reserve System is the central bank of the United States.
Answer:

True

False

113) The Chairman of the Fed also serves on the Board of Governors.
Answer:

True

True

114)

False

115) The members of the Board of Governors of the Fed make up the entire Federal Open Market
Committee.
Answer:

True

True

True

116)

False

117) By value, a majority of the assets held by the Fed is in gold.

Answer:

115)

False

116) The Federal Reserve is a branch of the Treasury Department, and is therefore subject to significant
government control.
Answer:

113)

False

114) The Fed is also known as a "banker's bank."

Answer:

112)

117)

False

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
118) Which of the following instruments is most frequently used by the Federal Reserve to change the
money supply?
A) open market operations
B) the required reserve ratio
C) changing tax rates
D) the discount rate

118)

Answer: A
119) From time to time, the Federal Reserve buys back government bonds from the private sector
through a process called
A) backflip bond investments.
B) open market purchases.
C) bond recall procedures.
D) voluntary redemption procedures.

119)

Answer: B
120) Which set of actions could the Fed use to increase the money supply?
A) an open market sale and a reduction in the required reserve ratio
B) an open market purchase and a tax cut
C) discount rate cut and an open market sale
D) a reduction in the required reserve ratio and an open market purchase
Answer: D

14

120)

121) The interest rate the Fed charges commercial banks for borrowing funds is the
A) discount rate.
B) prime rate.
C) federal funds rate.
D) open market rate.

121)

Answer: A
122) An increase in the required reserve ratio
A) will decrease the discount rate.
C) will increase the money supply.

B) will decrease the money supply.

D) will not change the money supply.

122)

Answer: B
123) Assume that all commercial banks are loaned up. Total deposits in the banking system are $800
million. The required reserve ratio is decreased. The money supply will
A) decrease.
B) increase.
C) not change because there was no change in deposits.
D) not change because the required reserve ratio has no impact on money supply.

123)

Answer: B
124) A change in the reserve requirement is used infrequently by the Fed because it
A) does not affect bank reserves.
B) does not influence the money supply.
C) is a crude monetary policy tool.
D) does not affect the money multiplier.

124)

Answer: C
125) The rate of interest charged to commercial banks by the Fed for loans is called the ________ rate.
A) discount
B) commercial paper
C) prime lending
D) federal funds

125)

Answer: A
126) Which of the following represents an action by the Federal Reserve that is designed to decrease the
money supply?
A) a decrease in the required reserve ratio
B) an increase in federal tax rates
C) an increase in the discount rate
D) buying government securities in the open market

126)

Answer: C
127) Which of the following represents an action by the Federal Reserve that is designed to decrease the
money supply?
A) an increase in the required reserve ratio
B) buying government securities in the open market
C) an increase in federal spending
D) a decrease in the discount rate

127)

Answer: A
128) The most commonly used tool in monetary policy is
A) changes in the discount rate.
C) changes in the required reserve ratio.
Answer: D

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B) express lending transactions.

D) open market operations.

128)

129) If the Fed buys government securities, then there is

A) an increase in the required reserve ratio.
C) a decrease in the discount rate.

B) an increase in the supply of money.

D) a decrease in the supply of money.

129)

Answer: B
130) Which of the following represents an action by the Federal Reserve that is designed to decrease the
money supply?
A) buying government securities in the open market
B) a decrease in the required reserve ratio
C) an increase in the discount rate
D) a decrease in federal spending

130)

Answer: C
131) When the Fed lowers the required reserve ratio, the banks' excess reserves ________ and the money
supply ________.
A) remain constant; decreases
B) increase; increases
C) increase; remains constant
D) decrease; decreases

131)

Answer: B
132) A decrease in the discount rate will most likely
A) not effect the money supply.
B) decrease the money supply.
C) have an unclear affect on the money supply.
D) increase the money supply.

132)

Answer: D
133) Which of the following statements is TRUE?
A) Open-market operations can be used by the Federal Reserve with some precision.
B) The Federal Reserve undertakes open-market operations on an infrequent basis.
C) Open-market operations have a fairly unpredictable effect on the supply of money.
D) Open-market operations are extremely rigid.

133)

Answer: A
134) An open-market sale of securities by the Fed results in ________ in reserves and ________ in the
supply of money.
A) a decrease; an increase
B) an increase; an increase
C) a decrease; a decrease
D) an increase; a decrease

134)

Answer: C
135) An open-market purchase of securities by the Fed results in ________ in reserves and ________ in
the supply of money.
A) an increase; a decrease
B) a decrease; a decrease
C) a decrease; an increase
D) an increase; an increase

135)

Answer: D
136) Assume there is no leakage from the banking system and that all commercial banks are loaned up.
The required reserve ratio is 25%. If the Fed sells $5 million worth of government securities to the
public, the change in the money supply will be
A) $100 million.
B) $25 million.
C) -$5 million.
D) -$20 million.
Answer: D

16

136)

137) Assume there is no leakage from the banking system and that all commercial banks are loaned up.
The required reserve ratio is 12.5%. If the Fed buys $20 million worth of government securities
from the public, the change in the money supply will be
A) $20 million.
B) $125 million.
C) $160 million.
D) $250 million.

137)

Answer: C
138) The money supply has decreased from $2.75 trillion to $2.25 trillion. Which of the following could
have caused this increase?
A) Commercial banks decide to hold fewer excess reserves.
B) Consumers who were holding money within the banking system withdrew this money.
C) The Fed decreased the discount rate.
D) The Fed purchased government securities from the public.

138)

Answer: B
139) If the Fed sets the money supply ________ the interest rate, then the money supply curve is vertical.
A) identical to
B) as directly related to
C) as inversely related to
D) as independent of

139)

Answer: D
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
140) A decrease in the required reserve ratio decreases the money supply.
Answer:

True

False

141) A purchase of government securities from the public by the Federal Reserve will decrease the rate
of growth of the money supply.
Answer:

True

True

True

True

143)

False

144) If the Fed sells securities on the open market, it will decrease the money supply.
Answer:

142)

False

143) The Fed most frequently changes the discount rate to change the money supply.
Answer:

141)

False

142) The discount rate can be used to control the money supply with great precision because its effects
on banks' demand for reserves are quite certain.
Answer:

140)

False

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144)