Econ

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To say money is socially defined means that:
A) money has been defined in a Constitutional amendment.
B) whatever performs the functions of money extremely well is considered to be money. C) the money supply includes all public and private securities purchased by society.
D) society, acting through Congress, specifies what shall be included in the money supply.

B) whatever performs the functions of money extremely well is considered to be money.

Money functions as:
A) a store of value. B) a unit of account. C) a medium of exchange. D) all of the above.

D) all of the above.

If you are estimating your total expenses for school next semester, you are using money primarily as:
A) a medium of exchange. B) a store of value. C) a unit of account. D) an economic investment.

C) a unit of account.

If you place a part of your summer earnings in a savings account, you are using money primarily as a:
A) medium of exchange. B) store of value. C) unit of account. D) standard of value.

B) store of value.

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as:
A) a medium of exchange. B) a store of value. C) a unit of account. D) an economic investment.

A) a medium of exchange.

A $70 price tag on a sweater in a department store window is an example of money functioning as a:
A) unit of account. B) standard of deferred payments. C) store of value. D) medium of exchange.

A) unit of account.

Stock market price quotations best exemplify money serving as a:
A) store of value. B) unit of account. C) medium of exchange. D) index of satisfaction.

B) unit of account.

Purchasing common stock by writing a check best exemplifies money serving as a:
A) store of value. B) unit of account. C) medium of exchange. D) index of satisfaction.

C) medium of exchange.

When economists say that money serves as a medium of exchange, they mean that it is:
A) a way to keep wealth in a readily spendable form for future use.
B) a means of payment.
C) a monetary unit for measuring and comparing the relative values of goods.
D) declared as legal tender by the government.

B) a means of payment.

When economists say that money serves as a unit of account, they mean that it is:
A) a way to keep wealth in a readily spendable form for future use.
B) a means of payment.
C) a monetary unit for measuring and comparing the relative values of goods.
D) declared as legal tender by the government.

C) a monetary unit for measuring and comparing the relative values of goods.

When economists say that money serves as a store of value, they mean that it is:
A) a way to keep wealth in a readily spendable form for future use.
B) a means of payment.
C) a monetary unit for measuring and comparing the relative values of goods.
D) declared as legal tender by the government.

A) a way to keep wealth in a readily spendable form for future use.

The paper money used in the United States is:
A) National Bank Notes. B) Treasury Notes. C) United States Notes. D) Federal Reserve Notes.

D) Federal Reserve Notes.

The largest component of the money supply (M1) is:
A) gold certificates. B) checkable deposits. C) paper money in circulation. D) coins.

C) paper money in circulation.

In the United States, the money supply (M1) is comprised of:
A) coins, paper currency, and checkable deposits.
B) currency, checkable deposits, and Series E bonds.
C) coins, paper currency, checkable deposits, and credit balances with brokers.
D) paper currency, coins,gold certificates,and time deposits.

A) coins, paper currency, and checkable deposits.

Fiat money is:
A) composed only of checkable deposits.
B) money because the government asserts that it is.
C) money that is in a commercial bank vault.
D) money that can be redeemed for a valuable commodity such as gold.

B) money because the government asserts that it is.

The purchasing power of the dollar:
A) has been increasing in recent years because of economic growth.
B) varies directly with the cost-of-living index.
C) is inversely related to the level of aggregate demand.
D) is the reciprocal of the price level.

D) is the reciprocal of the price level.

The money supply is backed:
A) by the government’s ability to control the supply of money and therefore to keep its value relatively stable.
B) by government bonds.
C) dollar-for-dollar with gold and silver.
D) dollar-for-dollarwithgoldbullion.

A) by the government’s ability to control the supply of money and therefore to keep its value relatively stable.

Checkable deposits are classified as money because:
A) they can be readily used in purchasing goods and paying debts.
B) banks hold currency equal to the value of their checkable deposits.
C) they are ultimately the obligations of the Treasury.
D) they earn interest income for the depositor.

A) they can be readily used in purchasing goods and paying debts.

The value of money varies:
A) inversely with the price level.
B) directly with the volume of employment.
C)directly with the price level.
D) directly with the interest rate.

A) inversely with the price level.

Currency (paper money plus coins) constitutes about:
A) 81 percent of the U.S. Ml money supply.
B) 52 percent of the U.S. M1 money supply.
C) 92 percent of the U.S. M1 money supply.
D) 11 percent of the U.S. M1 money supply.

B) 52 percent of the U.S. M1 money supply.

In 2002, the supply of money (M1) in the United States was about:
A) $247 billion. B) $1600 billion. C) $203 billion. D) $1236 billion.

D) $1236 billion.

Nearly one-half the money in the U.S. economy is created by:
A) the
receipt of gold bullion through international trade and finance.
B) commercial banks and thrift institutions.
C) the Federal mint.
D) theFederalTreasury.

B) commercial banks and thrift institutions.

In defining money as M1, economists exclude time deposits because:
A) theintrinsicvalueoftimedepositsisnil.
B) the purchasing power of time deposits is much less stable than that of checkable deposits and currency.
C) they are not directly or immediately a medium of exchange.
D) they are not recognized by the Federal government as legal tender.

C) they are not directly or immediately a medium of exchange.

The purchasing power of money and the price level vary:
A) inversely.
B) directly during recessions, but inversely during inflations.
C) directly, but not proportionately.
D) directlyandproportionately.

A) inversely.

If the price index rises from 100 to 120, the purchasing power value of the dollar:
A) may either rise or fall.
B) will rise by one-sixth.
C) will fall by one-sixth.
D) will rise by 20 percent.

C) will fall by one-sixth.

Other things equal, an excessive increase in the money supply will :
A) increasethepurchasingpowerofeachdollar.
B) decrease the purchasing power of each dollar.
C) have no impact on the purchasing power of the dollar.
D) reducethepricelevel.

B) decrease the purchasing power of each dollar.

If P equals the price level expressed as an index number and D equals the value of the dollar, then:
A) P=D-1.
B) D=1/P.
C) 1=D/P.
D) D=P-1.

B) D=1/P.

Which of the following is not part of the M2 money supply?
A) money market mutual fund balances
B) money market deposit accounts
C) currency
D) large ($100,000 or more) time deposits

D) large ($100,000 or more) time deposits

The M2 money supply includes:
A) stock certificates.
B) corporate bond certificates.
C) the cash value of life insurance policies.
D) individual shares in money market mutual funds.

D) individual shares in money market mutual funds.

A checking account entry is money because it:
C) currency
D) large ($100,000 or more) time deposits
Chapter 13: Money and Banking
A) is ensured by the Federal Deposit Insurance Corporation.
B) has been declared as such by the Federal government.
C) performs the functions of money.
D) canbesoldforcurrency.

C) performs the functions of money.

Currency in circulation is part of:
A) M1 only.
B) M2 only.
C) M3 only.
D) M1, M2, and M3.

D) M1, M2, and M3.

Money market deposit accounts are included in:
A) M1 only.
B) both M1 and M2.
C) both M2 and M3.
D) M3 only.

C) both M2 and M3.

Checkable deposits are:
A) included in M1.
B) not included in either Ml or M2.
C) considered to be a near money.
D) also called time deposits.

A) included in M1.

Checkable deposits are:
A) included in M1 but not in M2.
B) considered to be a near-money.
C) included in M1 and in M2.
D) also called time deposits.

C) included in M1 and in M2.

The amount of money reported as M2:
A) is smaller than the amount reported as M1.
B) is larger than the amount reported as M1.
C) excludes coins and currency.
D) includes large ($100,000 or more) certificates of deposit.

B) is larger than the amount reported as M1.

The largest component of the money supply is:
A) coins.
B) paper money.
C) checkable deposits.
D) stock certificates.

B) paper money.

Paper money (currency) in the United States is issued by the:
A) United States Mint.
B) Federal Reserve Banks.
C) United States Treasury.
D) national banks.

B) Federal Reserve Banks.

A$20billisa:
A) gold certificate.
B) Treasury note.
C) Treasury bill.
D) Federal Reserve Note.

D) Federal Reserve Note

Coins in people’s pockets and purses are:
A) included in M1, but not in M2.
B) included in both M1 and in M2.
C) included in M2, but not in M1.
D) excludedfromM1andM2becausepeoplecanexchangethemforFederalReservenotes.

B) included in both M1 and in M2.

Coins held in commercial banks are:
A) included in M1, but not in M2.
B) included both in M1 and in M2.
C) included in M2, but not in M1.
D) not part of the nation’s money supply.

D) not part of the nation’s money supply.

Checkable deposits include:
A) both large and small time deposits.
B) the deposits of banks and thrifts on which checks can be written.
C) only the checkable deposits of commercial banks.
D) onlythecheckabledepositsofthriftinstitutions.

B) the deposits of banks and thrifts on which checks can be written.

The difference between M1 and M2 is that:
A) the former includes time deposits.
B) the latter includes small time deposits, noncheckable savings accounts, money market deposit accounts,
and money market mutual fund balances.
C) the latter includes negotiable government bonds.
D) thelatterincludescashheldbycommercialbanksandtheU.S.Treasury.

B) the latter includes small time deposits, non-checkable savings accounts, money market deposit accounts, and money market mutual fund balances.

Assuming no other changes, if checkable deposits increase by $40 billion and currency and coins in
circulation decrease by $40 billion, the:
A) M1 money supply will decline. C) M2 money supply will decline.
B) M1 money supply will not change.
D) M3 money supply will increase.

B) M1 money supply will not change.

Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market
mutual funds increase by $40 billion, the:
A) M1 money supply will decline and M2 money supply will remain unchanged.
B) M1 and M2 money supplies will not change.
C) M2 and M3 money supplies will increase.
D) M1,M2,and M3 money supplies will decline.

A) M1 money supply will decline and M2 money supply will remain unchanged.

Assuming no other changes, if balances in money market mutual funds increase by $40 billion and large
time deposits decrease by $40 billion, the:
A) M1 and M2 money supplies will not change.
B) M2 and M3 money supplies will increase.
C) M1, M2, and M3 money supplies will decline.
D) M2 money supply will increase and M3 money supply will remain unchanged.

D) M2 money supply will increase and M3 money supply will remain unchanged.

Large time deposits of $100,000 or more are:
A) a component of M1.
B) a component of M2 but not of M1.
C) a component of M3 but not of M2.
D) not a component of M1, M2, or M3.

C) a component of M3 but not of M2.

A basic argument for using the M1 concept of money is that:
A) itincludesalloftheimportantfinancialassetsthathaveanydegreeofliquidity.
B) the government collects data for the components of M1, but does not do so for M2 and M3.
C) its components are superior to other financial assets as a store of value.
D) its components are directly and immediately spendable.

D) its components are directly and immediately spendable.

Currency and coins held within banks are part of:
A) theM3definitionofthemoneysupply.
B) the M2 definition of the money supply.
C) the M1 definition of the money supply.
D) none of the above definitions of the money supply.

D) none of the above definitions of the money supply.

The transactions demand for money is most closely related to money functioning as a:
A) unit of account.
B) medium of exchange.
C) store of value.
D) measure of value.

B) medium of exchange.

The asset demand for money is most closely related to money functioning as a:
A) unit of account.
B) medium of exchange.
C) store of value.
D) measure of value.

C) store of value.

The asset demand for money:
A) is unrelated to both the interest rate and the level of GDP.
B) varies inversely with the rate of interest.
C) varies inversely with the level of real GDP.
D) variesdirectlywiththelevelofnominalGDP.

B) varies inversely with the rate of interest.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and
horizontal axes respectively, the transactions demand for money can be represented by:
A) a line parallel to the horizontal axis.
B) a vertical line.
C) a downsloping line or curve from left to right.
D) an upsloping line or curve from left to right.

B) a vertical line.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and
horizontal axes respectively, the asset demand for money can be represented by:
A) a line parallel to the horizontal axis.
C) a downsloping line or curve from left to right.
B) a vertical line.
D) an upsloping line or curve from left to right.

C) a downsloping line or curve from left to right.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and
horizontal axes respectively, the total demand for money can be found by:
A) horizontally adding the transactions and the asset demand for money.
B) vertically subtracting the transactions demand from the asset demand for money.
C) horizontally subtracting the asset demand from the transactions demand for money.
D) verticallyaddingthetransactionsandtheassetdemandformoney.

A) horizontally adding the transactions and the asset demand for money.

The total demand for money curve will shift to the right as a result of:
A) an increase in nominal GDP. C) a decline in the interest rate.
B) an increase in the interest rate.
D) a decline in nominal GDP.

A) an increase in nominal GDP.

Which of the following statements is correct? Other things equal:
A) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right.
B) a decline in the interest rate will shift the asset demand curve for money to the right, but leave the total money demand curve unchanged.
C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left.
D) inflationwillshiftthetransactionsdemandcurveformoneytotheright,butleavethetotalmoney demand curve unchanged.

C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left.

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the
amount of money demanded for transactions purposes will be:
A) $1800 billion.
B) $600 billion.
C) $200 billion.
D) $1200 billion.

C) $200 billion.

In which of the following situations is it certain that the quantity of money demanded by the public will
decrease?
A) nominal GDP decreases and the interest rate decreases
B) nominal GDP increases and the interest rate decreases
C) nominal GDP decreases and the interest rate increases
D)nominal GDP increases and the interest rate increases

C) nominal GDP decreases and the interest rate increases

It is costly to hold money because:
A) deflation may reduce its purchasing power.
B) in doing so one sacrifices interest income.
C) bond prices are highly variable.
D) the velocity of money may decline.

B) in doing so one sacrifices interest income.

An increase in nominal GDP increases the demand for money because:
A) interest rates will rise.
B) more money is needed to finance a larger volume of transactions.
C) bond prices will fall.
D)theopportunitycostofholdingmoneywilldecline.

B) more money is needed to finance a larger volume of transactions.

Which of the following is correct?
A) The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises.
B) The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.
C) The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate.
D) Theassetdemandformoneyisdownslopingbecausebondpricesandtheinterestratearedirectly related.

B) The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.

The transactions demand for money will shift to the:
A) right when the interest rate increases.
B) left when the interest rate decreases.
C) right when aggregate income increases.
D) right when aggregate income decreases.

C) right when aggregate income increases.

The opportunity cost of holding money:
A) is zero because money is not an economic resource.
B) varies inversely with the interest rate.
C) varies directly with the interest rate.
D) variesinverselywiththelevelofeconomicactivity.

C) varies directly with the interest rate.

The total demand for money will shift to the left as a result of:
A) a decline in nominal GDP.
C) a change in the interest rate.
B) an increase in the price level. D) an increase in nominal GDP.

A) a decline in nominal GDP.

The asset demand for money is downsloping because:
A) the opportunity cost of holding money increases as the interest rate rises.
B) it is more attractive to hold money at high interest rates than at low interest rates.
C) bond prices rise as interest rates rise.
D)theopportunitycostofholdingmoneydeclinesastheinterestraterises.

A) the opportunity cost of holding money increases as the interest rate rises.

(Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 – 4 i, where L is
the amount of money demanded, Y is gross domestic product, and i is the interest rate. If gross domestic product is $200 and the interest rate is 10 (percent), what amount of money will society want to hold? A) $200
B) $120
C) $320
D) $160

B) $120

If the quantity of money demanded exceeds the quantity supplied:
A) the supply-of-money curve will shift to the left.
B) the demand-for-money curve will shift to the right.
C) the interest rate will rise.
D) theinterestratewillfall.

C) the interest rate will rise.

The equilibrium rate of interest in the money market is determined by the intersection of the:
A) supply of money curve and the asset demand for money curve.
B) supply of money curve and the transactions demand for money curve.
C) supply of money curve and the total demand for money curve.
D) investmentdemandcurveandtotaldemandformoneycurve.

C) supply of money curve and the total demand for money curve.

If the demand for money and the supply of money both decrease, the equilibrium:
A) interest rate will decline, but we cannot predict the change in the equilibrium quantity of money.
B) quantity of money and the equilibrium interest rate will both increase.
C) quantity of money will increase, but we cannot predict the change in the equilibrium interest rate.
D) quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

D) quantity of money will decline, but we cannot predict the change in the equilibrium interest rate.

If in the money market the quantity of money demanded exceeds the money supply, the interest rate will:
A) fall, causing households and businesses to hold less money.
B) rise, causing households and businesses to hold less money.
C) rise, causing households and businesses to hold more money.
D) fall,causinghouseholdsandbusinessestoholdmoremoney.

B) rise, causing households and businesses to hold less money.

If in the money market the amount of money supplied exceeds the amount of money households and
businesses want to hold, the interest rate will:
A) fall, causing households and businesses to hold less money.
B) rise, causing households and businesses to hold less money.
C) rise, causing households and businesses to hold more money.
D) fall, causing households and businesses to hold more money.

D) fall, causing households and businesses to hold more money.

Which of the following statements is correct?
A) Interest rates and bond prices vary directly.
B) Interest rates and bond prices vary inversely.
C) Interest rates and bond prices are unrelated.
D) Interestratesandbondpricesvarydirectlyduringinflationsandinverselyduringrecessions.

B) Interest rates and bond prices vary inversely.

Suppose the demand for money and the supply of money increase simultaneously. We can:
A) expect the interest rate to rise and bond prices to fall.
B) expect the interest rate to fall and bond prices to rise.
C) the nominal GDP to expand.
D) not predict what will happen to interest rates or bond prices.

D) not predict what will happen to interest rates or bond prices.

When the money market is in equilibrium:
A) the quantity of money demanded equals the quantity of money supplied.
B) the interest rate is increasing.
C) bond prices are falling.
D) theinterestrateisdeclining.

A) the quantity of money demanded equals the quantity of money supplied.

Other things equal, if there is an increase in nominal GDP:
A) the demand for money will decrease.
B) the interest rate will rise.
C) bond prices will rise.
D) consumption spending will fall.

B) the interest rate will rise.

Other things equal, if the supply of money is reduced:
A) the demand for money will increase.
B) the interest rates will fall.
C) bond prices will fall.
D) investment spending will increase.

C) bond prices will fall.

Which of the following statements is correct?
A)Theactualreservesofacommercialbankequalitsexcessreservesminusitsrequiredreserves.
B) A bank’s liabilities plus its net worth equal its assets.
C) When borrowers repay bank loans, the supply of money increases.
D) Asinglecommercialbankcansafelylendamultipleamountofitsexcessreserves.

B) A bank’s liabilities plus its net worth equal its assets.

A bank that has assets of $85 billion and a net worth of $10 billion must have:
A) liabilities of $75 billion.
C) liabilities of $10 billion.
B) excess reserves of $10 billion. D) excess reserves of $75 billion.

A) liabilities of $75 billion.

A bank that has liabilities of $150 billion and a net worth of $20 billion must have:
A) excess reserves of $130 billion.
C) excess reserves of $150 billion.
B) assets of $150 billion.
D) assets of $170 billion.

D) assets of $170 billion.

If a bank has liabilities that exceed its net worth it:
A) willnotbeabletomeetthelegalreserveratio.
B) is considered to be insolvent.
C) most likely is a heavy borrower from its district Federal Reserve Bank.
D) may or may not be a profitable firm.

D) may or may not be a profitable firm.

The claims of the owners of a firm against the firm’s assets are called:
A) working capital.
B) assets.
C) net worth.
D) liabilities.

C) net worth.

Which of the following are all assets to a commercial bank?
A) demand deposits, capital stock, and reserves
B) vault cash, property, and reserves
C) vault cash, property, and capital stock
D) vault cash, capital stock, and demand deposits

B) vault cash, property, and reserves

The reserves of a commercial bank consist of:
A)theamountofmoneymarketfundsitholds.
B) deposits at the Federal Reserve Bank and vault cash.
C) government securities that the bank holds.
D) thebank’snetworth.

B) deposits at the Federal Reserve Bank and vault cash.

A commercial bank’s reserves are:
A) liabilitiestoboththecommercialbankandtheFederalReserveBankholdingthem.
B) liabilities to the commercial bank and assets to the Federal Reserve Bank holding them.
C) assets to both the commercial bank and the Federal Reserve Bank holding them.
D) assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.

D) assets to the commercial bank and liabilities to the Federal Reserve Bank holding them

The goldsmith’s ability to create money was based on the fact that:
A) withdrawalsofgoldtendedtoexceeddepositsofgoldinanygiventimeperiod.
B) consumers and merchants preferred to use gold for transactions, rather than paper money.
C) the goldsmith was required to keep 100 percent gold reserves.
D) paper money in the form of gold receipts was rarely redeemed for gold.

D) paper money in the form of gold receipts was rarely redeemed for gold.

When the receipts given by goldsmiths to depositors were used to make purchases:
A) thegoldstandardwascreated.
B) existing banking laws were violated.
C) the receipts became in effect paper money.
D) afractionalreservebankingsystemwascreated.

C) the receipts became in effect paper money.

The primary purpose of the legal reserve requirement is to:
A) preventbanksfromhoardingtoomuchvaultcash.
B) provide a means by which the monetary authorities can influence the lending ability of commercial
banks.
C) prevent commercial banks from earning excess profits.
D) provideadependablesourceofinterestincomeforcommercialbanks.

B) provide a means by which the monetary authorities can influence the lending ability of commercial banks.

The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. The bank
must have:
A) $90,000inoutstandingloansand$35,000inreserves.
B) $90,000 in checkable deposit liabilities and $32,000 in reserves.
C) $20,000 in checkable deposit liabilities and $10,000 in reserves.
D) $90,000incheckabledepositliabilitiesand$35,000inreserves.

B) $90,000 in checkable deposit liabilities and $32,000 in reserves.

Which one of the following is presently a major deterrent to bank panics in the United States?
A) the legal reserve requirement C) the gold standard
B) the fractional reserve system D) deposit insurance

D) deposit insurance

Commercial banks monetize claims when they:
A) collectchecksthroughtheFederalReserveSystem.
B) make loans to the public.
C) accept repayment of outstanding loans.
D) borrowfromtheFederalReserveBanks.

B) make loans to the public.

Most modern banking systems are based on:
A) money of intrinsic value.
B) commodity money.
C) 100 percent reserves.
D) fractional reserves.

D) fractional reserves.

Money is destroyed when:
A) loansaremade.
B) checks written on one bank are deposited in another bank.
C) loans are repaid.
D) thenetworthofthebankingsystemdeclines.

C) loans are repaid.

Checkable deposits are also called:
A) checking accounts.
B) high-powered money.
C) savings balances.
D) Federal Reserve Notes.

A) checking accounts.

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If
the bank’s required and excess reserves are equal, then its actual reserves:
A) are$30,000.
B) are $10,000.
C) are $20,000.
D) cannotbedeterminedfromthegiveninformation.

C) are $20,000.

Banks create money when they:
A) addtotheirreservesintheFederalReserveBank.
B) accept deposits of cash.
C) sell government bonds.
D) exchange checkable deposits for the IOU’s of businesses and individuals.

D) exchange checkable deposits for the IOU’s of businesses and individuals.

When a check is drawn and cleared, the
A) reserves and deposits of both the bank against which the check is cleared and the bank receiving the
check are unchanged by this transaction.
B) bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
C) bank receiving the check loses reserves and deposits equal to the amount of the check.
D) bankagainstwhichthecheckisclearedacquiresreservesanddepositsequaltotheamountofthe
check.

B) bank against which the check is cleared loses reserves and deposits equal to the amount of the check.

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank’s actual reserves?
A) $16,000
B) $84,000
C) $24,000
D) $20,000

C) $24,000

Excess reserves refer to the:
A) difference between a bank’s vault cash and its reserves deposited at the Federal Reserve Bank.
B) minimum amount of actual reserves a bank must keep on hand to back up its customers deposits.
C) difference between actual reserves and loans.
D) difference between actual reserves and required reserves.

D) difference between actual reserves and required reserves.

Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual
reserves of $500,000, the bank:
A) can safely lend out $500,000. C) can safely lend out $50,000
B) can safely lend out $5 million. D) cannot safely lend out more money

A reserve requirement of 20 percent means a bank must have $1000 of reserves if its checkable deposits
are:
A) $100.
B) $1,000.
C) $5,000.
D) $12,000.

C) $5,000.

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the
bank finds that it can safely lend out $4,500, the reserve requirement must be:
A) zero.
B) 10 percent.
C) 20 percent.
D) 25 percent

B) 10 percent.

Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual
reserves of $1 million, it can safely lend out:
A) $1 million.
B) $1.2 million.
C) $200,000.
D) $800,000.

C) $200,000.

Suppose that a bank’s actual reserves are $5 million, its checkable deposits are $5 million, and its excess
reserves are $3 million. The reserve requirement must be:
A) 40 percent.
B) 20 percent.
C) 10 percent.
D) 5 percent.

A) 40 percent.

The reserve ratio refers to the ratio of a bank’s:
A) reserves to its liabilities and net worth.
B) capital stock to its total assets.
C) checkable deposits to its total liabilities.
D)reserves and vault cash to its checkable deposits.

D) reserves and vault cash to its checkable deposits.

The amount that a commercial bank can lend is determined by its:
A) required reserves.
B) excess reserves.
C) outstanding loans.
D) outstanding checkable deposits.

B) excess reserves.

A commercial bank can expand its excess reserves by:
A) demanding and receiving payment on an overdue loan.
B) buying bonds from a Federal Reserve Bank.
C) buying bonds from the public.
D) payingbackmoneyborrowedfromaFederalReserveBank.

A) demanding and receiving payment on an overdue loan.

Commercial banks create money when they:
A) accept cash deposits from the public.
B) purchase government securities from the central banks.
C) create checkable deposits in exchange for IOUs.
D) raisetheirinterestrates.

C) create checkable deposits in exchange for IOUs.

Banks destroy money when they:

A) buy government bonds.
C) fail to reissue loans that are paid off.
B) accept deposits of cash into checkable accounts.
D) clear checks against another bank.

C) fail to reissue loans that are paid off.

Individual commercial banks are limited in their ability to create money by lending because:
A) lending is likely to result in the loss of reserves to other banks.
B) only the Treasury and the Federal Reserve Banks are authorized to create new money.
C) the Board of Governors prohibits bank lending when the result is an expansion of the money supply.
D) bankingisahighlycompetitiveindustry.

A) lending is likely to result in the loss of reserves to other banks.

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the
time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of:
A) $50,000.
B) $180,000.
C) $80,000.
D) $500,000.

C) $80,000.

Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same
day Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed?
A) decreased by $600
B) increased by $1,800
C) increased by $600
D) increased by $1,200

D) increased by $1,200

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and
receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction:
A) the supply of money is increased by $5,000.
B) the supply of money declines by the amount of the loan.
C) a claim has been "demonetized."
D) the MetroBankacquiresreservesfromotherbanks.

A) the supply of money is increased by $5,000.

A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves
initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of:
A) $1,250.
B) $120,000.
C) $5,000.
D) $3,750.

D) $3,750.

When a bank loan is repaid the supply of money:
A) is constant, but its composition will have changed.
B) is decreased.
C) is increased.
D) mayeitherincreaseordecrease.

B) is decreased.

If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement the bank will:
A) have $45 of additional excess reserves.
C) be capable of lending an additional $50.
B) be capable of lending an additional $500.
D) have $50 of required reserves.

A) have $45 of additional excess reserves.

When a commercial bank has excess reserves:
A) it is in a position to make additional loans.
B) its actual reserves are less than its required reserves.
C) it is charging too high an interest rate on its loans.
D) itsreservesexceeditsassets.

A) it is in a position to make additional loans.

If we both have checking accounts in the same commercial bank and I write a check in your favor for $200,
the bank’s:
A) balance sheet will be unchanged.
B) reserves and checkable deposits will both decline by $200.
C) liabilities will decline by $200, but its net worth will increase by $200.
D) assetsandliabilitieswillbothdeclineby$200.

A) balance sheet will be unchanged.

Which of the following is correct?
A) Both the granting and repaying of bank loans expand the aggregate money supply.
B) Granting and repaying bank loans do not affect the money supply.
C) Granting a bank loan destroys money; repaying a bank loan creates money.
D) Granting a bank loan creates money; repaying a bank loan destroys money.

D) Granting a bank loan creates money; repaying a bank loan destroys money.

If the reserve requirement is 10 percent, how much excess reserves does a bank acquire when a business
deposits a $500 check drawn on another bank?
A) $450
B) $550
C) $5000
D) $500

A) $450

The amount of reserves that a commercial bank is required to hold is equal to:
A) the amount of its checkable deposits.
B) the sum of its checkable deposits and time deposits.
C) its checkable deposits multiplied by the reserve requirement.
D) itscheckabledepositsdividedbyitstotalassets.

C) its checkable deposits multiplied by the reserve requirement.

Banks create money when they:
A) allow loans to mature.
B) accept deposits of cash.
C) buy government bonds from households.
D) sell government bonds from households.

C) buy government bonds from households.

In prosperous times banks are likely to hold very small amounts of excess reserves because:
A) the Fed wants commercial banks to increase the money supply during economic expansions.
B) it is very costly to transfer funds between commercial banks and the central banks.
C) the Federal Reserve Banks do not pay interest on bank reserves.
D) theFederalReserveBankswanttominimizetheirinterestpaymentsonsuchdeposits.

C) the Federal Reserve Banks do not pay interest on bank reserves.

Which of the following is correct?
A) Required reserves minus actual reserves equal excess reserves.
B) Required reserves equal excess reserves minus actual reserves.
C) Required reserves equal actual reserves plus excess reserves.
D) Actual reserves minus required reserves equal excess reserves.

D) Actual reserves minus required reserves equal excess reserves.

When a bank has a check drawn and cleared against it:
A) excess reserves in the banking system decline.
B) the nation’s total money supply falls.
C) the bank’s balance sheet does not change.
D) the amount of required reserves the bank must have will fall.

D) the amount of required reserves the bank must have will fall.

A bank’s actual reserves can be found by:
A) adding its required and excess reserves.
B) subtracting its required reserves from its excess reserves.
C) multiplying its excess reserves by the reserve ratio.
D) multiplyingitscheckabledepositsbythereserveratio.

A) adding its required and excess reserves.

Suppose a savings and loan association has checkable deposits of $500,000 and the legal reserve ratio is 10
percent. If the institution has excess reserves of $4,000, then its actual reserves are:
A) $46,000.
B) $50,000.
C) $54,000.
D) $4,000.

C) $54,000.

The legal reserve ratio applies to checkable deposits at:
A) national banks.
B) credit unions.
C) savings and loans.
D) institutions of all of the above types.

D) institutions of all of the above types.

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves
of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of:
A) $122,000.
B) $175,000.
C) $300,000.
D) $75,000.

D) $75,000.

If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits,
the maximum money-creating potential of the commercial banking system will:
A) be equal to twice the reciprocal of the reserve ratio.
B) be unaffected.
C) increase.
D) decrease.

D) decrease.

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of
its excess reserves is that:
A) reserves lost by any particular bank will be gained by some other bank.
B) the central banks follow policies that prevent reserves from falling below the level required by law.
C) the MPC of borrowers is greater than zero, but less than 1.
D) thebankingsystemmustkeepreservesequalto100percentofitscheckable-depositliabilities.

A) reserves lost by any particular bank will be gained by some other bank.

If borrowers take a portion of their loans as currency rather than checkable deposits, the maximum amount by which the commercial banking system can increase the money supply by lending will:
A) decrease because the legal reserve ratio varies directly with the amount of currency in circulation.
B) increase because currency is the basis for all checkable-deposit creation.
C) decrease because the amount of reserves transferred to other banks will diminish.
D) increasebecausecommercialbankscanlendbythereciprocaloftheamountofcurrencyincirculation.

C) decrease because the amount of reserves transferred to other banks will diminish.

Given a 25 percent reserve ratio, assume the commercial banking system is loaned up. Now assume the reserve ratio is reduced to 20 percent. As a result of this reduction:
A) we can expect bank lending and bank profits to decline.
B) each dollar of bank reserves will now support a maximum of $5 of checkable deposits.
C) the banking system must now reduce outstanding loans by 5 percent.
D) thebankingsystemcannowincreaselendingby5percent.

B) each dollar of bank reserves will now support a maximum of $5 of checkable deposits.

When commercial banks use excess reserves to buy government securities from the public:
A) new money is created.
C) the money supply falls.
B) commercial bank reserves increase.
D) checkable deposits decline.

A) new money is created.

Which of the following would reduce the money supply?
A) Commercial banks use excess reserves to buy government bonds from the public.
B) Commercial banks loan out excess reserves.
C) Commercial banks sell government bonds to the public.
D) AcheckclearsfromBankAtoBankB.

C) Commercial banks sell government bonds to the public.

In an unregulated banking system there will be a tendency for:
A) interest rates to vary directly with the rate of increase in the money supply.
B) the money supply to grow at a constant rate through time.
C) the money supply to decrease during recession.
D) themoneysupplytoincreaseduringrecession.

C) the money supply to decrease during recession.

Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?
A) loans to commercial banks
C) Treasury deposits
B) Federal Reserve Notes in circulation
D) reserves of commercial banks

A) loans to commercial banks

Reserves must be deposited in the Federal Reserve Banks by:
A) onlycommercialbankswhicharemembersoftheFederalReserveSystem.
B) all depository institutions, that is, all commercial banks and thrift institutions.
C) state chartered commercial banks only.
D) federallycharteredcommercialbanksonly.

B) all depository institutions, that is, all commercial banks and thrift institutions.

The securities held as assets by the Federal Reserve Banks consist mainly of:
A) corporate bonds.
C) common stock.
B) Treasury bills and Treasury bonds.
D) certificates of deposit.

B) Treasury bills and Treasury bonds.

Federal Reserve Notes in circulation are:
A) anassetasviewedbytheFederalReserveBanks.
B) a liability as viewed by the Federal Reserve Banks.
C) neither an asset nor a liability as viewed by the Federal Reserve Banks.
D) partofM1,butnotofM2orM3.

B) a liability as viewed by the Federal Reserve Banks.

Which of the following will increase commercial bank reserves?
A) the purchase of government bonds in the open market by the Federal Reserve Banks
B) a decrease in the reserve ratio
C) an increase in the discount rate
D) thesaleofgovernmentbondsintheopenmarketbytheFederalReserveBanks

A) the purchase of government bonds in the open market by the Federal Reserve Banks

When a commercial bank borrows from a Federal Reserve Bank:
A) thesupplyofmoneyautomaticallyincreases.
B) it indicates that the commercial bank is unsound financially.
C) the commercial bank’s lending ability is increased.
D) thecommercialbank’sreservesarereduced

C) the commercial bank’s lending ability is increased.

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits:
A) ofcommercialbanksareunchanged,buttheirreservesincrease.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged, but their reserves decrease.
D) ofcommercialbanksarebothunchanged.

B) and reserves of commercial banks both decrease.

The Federal Reserve Banks buy government securities from commercial banks.
deposits:
A) of commercial banks are unchanged, but their reserves increase.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged, but their reserves decrease.
D) andreservesofcommercialbanksarebothunchanged.

A) of commercial banks are unchanged, but their reserves increase.

The commercial banking system borrows from the Federal Reserve Banks.
deposits:
A) ofcommercialbanksareunchanged,buttheirreservesincrease.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged, but their reserves decrease.
D) andreservesofcommercialbanksarebothunchanged.

A) of commercial banks are unchanged, but their reserves increase.

Which of the following is a tool of monetary policy?
A) open market operations
C) changes in tax rates
B) changes in banking laws D)changes in government spending

A) open market operations

Commercial banks and thrifts usually hold only small amounts of excess reserves because:
A) thepresenceofsuchreservestendstoboostinterestratesandreduceinvestment.
B) the Fed constantly uses open market operations to eliminate excess reserves.
C) the Fed does not pay interest on reserves.
D) theFeddoesnotwantcommercialbanksandthriftstobetooliquid.

C) the Fed does not pay interest on reserves.

In the United States monetary policy is the responsibility of the:
A) U.S.Treasury.
B) Department of Commerce.
C) Board of Governors of the Federal Reserve System.
D) U.S.Congress.

C) Board of Governors of the Federal Reserve System.

The three main tools of monetary policy are:
A) taxratechanges,thediscountrate,andopen-marketoperations.
B) tax rate changes, changes in government expenditures, and open-market operations.
C) the discount rate, the reserve ratio, and open-market operations.
D) changesingovernmentexpenditures,thereserveratio,andthediscountrate.

C) the discount rate, the reserve ratio, and open-market operations.

The Fed can change the money supply by:
A) changingbankreservesthroughthesaleorpurchaseofgovernmentsecurities.
B) changing the quantities of required and excess reserves by altering the legal reserve ratio.
C) changing the discount rate so as to encourage or discourage commercial banks in borrowing from the
central banks.
D) doing all of the above.

D) doing all of the above.

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from
the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:
A) notdirectlyaffected,butthemoney-creatingpotentialofthecommercialbankingsystemisincreased
by $12 million.
B) directly increased by $4 million and the money-creating potential of the commercial banking system is
increased by $16 million.
C) directly reduced by $4 million and the money-creating potential of the commercial banking system is
decreased by $12 million.
D) directly increased by $4 million and the money-creating potential of the commercial banking system is
increased by $12 million.

D) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $12 million.

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the
Federal Reserve Bank in its district. As a result:
A) commercial bank reserves are increased by$10,000.
B) the supply of money automatically declines by $7,500.
C) commercial bank reserves are increased by $7,500.
D) thesupplyofmoneyisautomaticallyincreasedby$10,000.

A) commercial bank reserves are increased by$10,000.

Open-market operations refer to:
A) purchasesofstocksintheNewYorkStockExchange.
B) the purchase or sale of government securities by the Fed.
C) central bank lending to commercial banks.
D) thespecifyingofloanmaximumsonstockpurchases.

government securities by the Fed.

If the Federal Reserve System buys government securities from commercial banks and the public:
A) commercialbankreserveswilldecline.
B) commercial bank reserves will be unaffected.
C) it will be easier to obtain loans at commercial banks.
D) themoneysupplywillcontract.

C) it will be easier to obtain loans at commercial banks.

The purchase of government securities from the public by the Fed will cause:
A) commercial bank reserves to decrease.
C) demand deposits to decrease
B) the money supply to increase. D) the interest rate to increase.

B) the money supply to increase.

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this
bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of:
A) $1,000.
B) $2,000.
C) $800.
D) $5,000.

A) $1,000.

uppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for them
by drawing checks. As a result, commercial bank reserves will:
A) increase by $10 billion.
C) decrease by $2 billion.
B) remain unchanged.
D) increase by $2 billion.

C) decrease by $2 billion.

Which of the following statements is correct?
A) ThesupplyofmoneydecreaseswhentheFederalReserveBanksbuygovernmentsecuritiesfrom households or businesses.
B) Excess reserves are the amount by which actual reserves exceed required reserves.
C) Commercial banks decrease the supply of money when they purchase government bonds from
households or businesses.
D) CommercialbankreservesarealiabilitytocommercialbanksbutanassettotheFederalReserve
Banks.

B) Excess reserves are the amount by which actual reserves exceed required reserves.

The Federal Reserve System regulates the money supply primarily by:
A) controlling the production of coins at the United States mint.
B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.
C) altering the reserves of commercial banks, largely through sales and purchases of government bonds.
D) restrictingtheissuanceofFederalReserveNotesbecausepapermoneyisthelargestportionofthe
money supply.

C) altering the reserves of commercial banks, largely through sales and purchases of government bonds.

Assuming no currency drains, when the Federal Reserve Banks purchase government securities the
reserves of commercial banks are:
A) decreased by a multiple of the amount of the purchase.
B) decreased by the amount of the purchase.
C) increased by a multiple of the amount of the purchase.
D) increased by the amount of the purchase.

D) increased by the amount of the purchase.

Which of the following is correct? When the Federal Reserve buys government securities from the public,
the money supply:
A) contracts and commercial bank reserves increase.
B) expands and commercial bank reserves decrease.
C) contracts and commercial bank reserves decrease.
D) expands and commercial bank reserves increase.

D) expands and commercial bank reserves increase.

Which of the following will happen when the Federal Reserve buys bonds from the public in the open
market and cash in the hands of the public does not change?
A) the required reserve ratio will increase
C) the deposits of commercial banks will decline
B) the money supply will decrease
D) commercial bank reserves will increase

D) commercial bank reserves will increase

Open-market operations change:
A) the size of the monetary multiplier, but not commercial bank reserves.
B) commercial bank reserves, but not the size of the monetary multiplier.
C) neither commercial bank reserves nor the size of the monetary multiplier.
D) bothcommercialbankreservesandthesizeofthemonetarymultiplier.

B) commercial bank reserves, but not the size of the monetary multiplier.

If the Fed were to increase the legal reserve ratio, we would expect:
A) lower interest rates, an expanded GDP, and depreciation of the dollar.
B) lower interest rates, an expanded GDP, and appreciation of the dollar.
C) higher interest rates, a contracted GDP, and appreciation of the dollar.
D) higherinterestrates,acontractedGDP,anddepreciationofthedollar.

C) higher interest rates, a contracted GDP, and appreciation of the dollar.

An increase in the legal reserve ratio:
A) increases the money supply by increasing excess reserves and increasing the monetary multiplier.
B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
C) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
D) decreasesthemoneysupplybyincreasingexcessreservesanddecreasingthemonetarymultiplier.

B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

A) required reserves are changed into excess reserves.
B) the excess reserves of member banks are increased.
C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D) the excess reserves of member banks are reduced.

D) the excess reserves of member banks are reduced.

Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of
$1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has:
A) excess reserves of $2 billion. C) a deficiency of reserves of $.5 billion.
B) neither an excess nor a deficiency of reserves.
D) excess reserves of only $.5 billion.

B) neither an excess nor a deficiency of reserves.

When the required reserve ratio is increased, the excess reserves of member banks are:
A) reduced, but the multiple by which the commercial banking system can lend is unaffected.
B) reduced and the multiple by which the commercial banking system can lend is increased.
C) increased and the multiple by which the commercial banking system can lend is increased.
D) reduced and the multiple by which the commercial banking system can lend is reduced.

D) reduced and the multiple by which the commercial banking system can lend is reduced.

When the required reserve ratio is decreased, the excess reserves of member banks are:
A) reduced, but the multiple by which the commercial banking system can lend is unaffected.
B) reduced and the multiple by which the commercial banking system can lend is increased.
C) increased and the multiple by which the commercial banking system can lend is increased.
D) increasedandthemultiplebywhichthecommercialbankingsystemcanlendisreduced.

C) increased and the multiple by which the commercial banking system can lend is increased.

A decrease in the reserve ratio increases the:
A) amount of actual reserves in the banking system.
B) amount of excess reserves in the banking system.
C) number of government securities held by the Federal Reserve Banks.
D) ratioofcoinstopapercurrencyintheeconomy.

B) amount of excess reserves in the banking system.

An increase in the reserve ratio:
A) increases the size of the spending income multiplier.
B) decreases the size of the spending income multiplier.
C) increases the size of the monetary multiplier.
D) decreases the size of the monetary multiplier.

D) decreases the size of the monetary multiplier.

The discount rate is the interest:
A) rate at which the central banks lend to the U.S. Treasury.
B) rate at which the Federal Reserve Banks lend to commercial banks.
C) yield on long-term government bonds.
D) rateatwhichcommercialbankslendtothepublic.

B) rate at which the Federal Reserve Banks lend to commercial banks.

A commercial bank can add to its actual reserves by:
A) lending money to bank customers.
B) buying government securities from the public.
C) buying government securities from a Federal Reserve Bank.
D) borrowing from a Federal Reserve Bank.

D) borrowing from a Federal Reserve Bank.

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the:
A) prime rate.
B) short-term rate.
C) discount rate.
D) Federal funds rate.

C) discount rate.

The discount rate is the rate of interest at which:
A) Federal Reserve Banks lend to commercial banks.
B) savings and loan associations lend to some builders.
C) Federal Reserve Banks lend to large corporations.
D) commercialbankslendtolargecorporations.

A) Federal Reserve Banks lend to commercial banks.

Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of
Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called the:
A) prime rate.
B) Federal funds rate.
C) Treasury bill rate.
D) discount rate.

D) discount rate.

When the Fed lends money to a commercial bank, the bank:
A) increases its reserves and enhances its ability to extend credit to bank customers.
B) decreases its reserves and reduces its ability to extend credit to bank customers.
C) pays the Federal funds interest rate on the loan.
D) paystheprimerateinterestrateontheloan.

A) increases its reserves and enhances its ability to extend credit to bank customers.

Suppose that, for every 1-percentage point decline in the discount rate, commercial banks collectively
borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will:
A) increase by $1 billion and the money supply will increase by $5 billion.
B) decline by $1 billion and the money supply will decline by $10 billion.
C) increase by $1 billion and the money supply will increase by $10 billion.
D) increaseby$10billionandthemoneysupplywillincreaseby$100billion.

C) increase by $1 billion and the money supply will increase by $10 billion.

Suppose that, for every 1-percentage point decline of the discount rate, commercial banks collectively
borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to 4.25 percent, bank reserves will:
A) increase by $.5 billion and the money supply will increase by $2.5 billion.
B) decline by $.5 billion and the money supply will decline by $2.5 billion.
C) increase by $.75 billion and the money supply will increase by $3.75 billion.
D) increaseby$1billionandthemoneysupplywillincreaseby$5billion.

A) increase by $.5 billion and the money supply will increase by $2.5 billion.

Changes in the discount rate are:
A) the most powerful and useful tool of monetary policy.
B) less frequent than changes in the reserve requirement.
C) more important than open-market operations.
D) less important than open-market operations in implementing monetary policy.

D) less important than open-market operations in implementing monetary policy.

Which of the following best describes the cause-effect chain of an easy money policy?
A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D) An
increase in the money supply will lower the interest rate, increase investment spending,and increase aggregate demand and GDP.

D) An increase in the money supply will lower the interest rate, increase investment spending,and increase aggregate demand and GDP.

Upon which of the following industries is a tight money policy likely to be most effective?
A) furniture
B) clothing
C) food processing
D) residential construction

D) residential construction

Assuming government wishes to either increase or decrease the level of aggregate demand, which of the
following pairs are not consistent policy measures?
A) a tax increase and an increase in the money supply
B) a tax reduction and an increase in the money supply
C) a reduction in government expenditures and a decline in the money supply
D) ataxincreaseandanincreaseintheinterestrate

A) a tax increase and an increase in the money supply

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies
would be to:
A) sell government securities, raise reserve requirements, and raise the discount rate.
B) buy government securities, raise reserve requirements, and raise the discount rate.
C) sell government securities, lower reserve requirements, and lower the discount rate.
D) sellgovernmentsecurities,raisereserverequirements,andlowerthediscountrate.

A) sell government securities, raise reserve requirements, and raise the discount rate.

A contraction of the money supply:
A) increases the interest rate and decreases aggregate demand.
B) increases both the interest rate and aggregate demand.
C) lowers the interest rate and increases aggregate demand.
D) lowersboththeinterestrateandaggregatedemand.

A) increases the interest rate and decreases aggregate demand.

If the Fed were to purchase government securities in the open market, we would anticipate:
A) lower interest rates, an expanded GDP, and depreciation of the dollar.
B) lower interest rates, an expanded GDP, and appreciation of the dollar.
C) higher interest rates, a contracted GDP, and depreciation of the dollar.
D) lowerinterestrates,acontractedGDP,andappreciationofthedollar.

A) lower interest rates, an expanded GDP, and depreciation of the dollar.

The purpose of a tight money policy is to:
A) alleviate recessions.
B) raise interest rates and restrict the availability of bank credit.
C) increase aggregate demand and GDP.
D) increaseinvestmentspending.

B) raise interest rates and restrict the availability of bank credit.

Which of the following actions by the Fed would cause the money supply to increase?
A) purchases of government bonds from banks.
C) an increase in the discount rate.
B) an increase in the reserve requirement.
D) sales of government bonds to the public.

A) purchases of government bonds from banks.

Assume the economy is operating at less than full employment. An easy money policy will cause interest
rates to ________. which will ___________ investment spending.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease

B) decrease; increase

Which of the following best describes the cause-effect chain of a tight money policy?
A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
D) Anincreaseinthemoneysupplywilllowertheinterestrate,decreaseinvestmentspending,and increase aggregate demand and GDP.

B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:
A) selling government securities, raising the reserve ratio, lowering the discount rate, and a budgetary surplus.
B) buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.
C) buying government securities, raising the reserve ratio, raising the discount rate, and a budgetary surplus.
D) buyinggovernmentsecurities,reducingthereserveratio,raisingthediscountrate,andabudgetary deficit.

B) buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.

If severe demand-pull inflation was occurring in the economy, proper government policies would involve a
government:
A) deficit and the purchase of securities in the open market, a higher discount rate, and higher reserve
requirements.
B) deficit and the sale of securities in the open market, a higher discount rate, and lower reserve
requirements.
C) surplus and the sale of securities in the open market, a higher discount rate, and higher reserve
requirements.
D) surplusandthepurchaseofsecuritiesintheopenmarket,alowerdiscountrate,andlowerreserve
requirements.

C) surplus and the sale of securities in the open market, a higher discount rate, and higher reserve requirements.

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