Self-Study Quizzes

Multiple Choice
1. Which of the following terms is more closely associated with the word
"money"?
Income

Means of payment.

Wealth

All of the above.

2. Which of the following statements is/are true about money?

Money is a better store of value than bonds.

Money is more liquid than interest-bearing assets.

Money is a good store of value, especially when prices are rising.

A monetary economy relies on a double coincidence of wants.

All of the above.

3. Which of the following types of money has intrinsic value?

Legal tender.

Token money.

Fiat money.

Commodity money.

All of the above.

4. The decrease in the value of money that occurs when its supply is
increased rapidly is called:
Debasement.
 Deflation.

Devaluation.

Inflation.

Seignorage

5. Which of the following terms better applies to M1?

Transactions money.

Legal tender.

Near money

Broad money.

6. Which of the following is/are part of M2?

M1--or transactions--money.

Near monies--or close substitutes--for transactions money.

Savings and money market accounts.

All of the above.

7. Select the best answer. In what respect were goldsmiths different from
modern-day banks?
Safekeeping.

Reserves backed by gold.

Likelihood of a bank run.

None of the above. The same characterisitics apply to both.

8. On the T-account of a bank:
Deposits are the most important asset.

Loans are the most important asset.

Reserves are on the liability side.

Assets are usually greater than liabilities plus net worth.

Assets plus net worth equal liabilities.

9. Which of the following statements is/are true?

A bank makes loans up to the point where its excess reserves are zero.

When a bank makes loans, the creation of demand deposits causes

excess reserves to fall.
A bank makes loans until it can no longer do so because of the reserve
requirement restriction.
All of the above.

10 . Assuming there are no leakages out of the banking system, a money

multiplier equal to 10 means that:
The reserve ratio equals 10.

An additional $10 of reserves create one dollar of deposits.

Each additional dollar of deposits creates $10 of reserves.

Each additional dollar of reserves creates $10 of additional deposits.

11 . Which body of the Federal Reserve System sets the majority of U.S.
monetary policy?
The Board of Governors.

The Open Market Desk.

The Federal Open Market Committee.

 The twelve Federal Reserve Banks in each district.

12 . How many divisions corresponding to each of the Fed's districts are

there in this map?
 1
2
1
0
2
5
5
0
1
3

13 . When we say that one of the functions of the Fed is to be a lender of

last resort, we meant that:
The Fed serves as a clearinghouse for interbank payments.

The Fed controls mergers between banks.

The Fed sets reserve requirements.

The Fed ensures that banks are financially sound.

The Fed tries to make bank panics less likely.

14 . Which of the following is the largest asset in the Fed's balance sheet?
Holdings of gold.

Holdings of U.S. treasury securities.

Loans to banks.

Federal Reserve Notes.

All of the above.

15 . If the Fed wants to increase the money supply, it will:

Increase the reserve requirement.

Sell gold.

Print money.

Increase the discount rate.

Buy government securities in the open market.

16 . The preferred tool of the Federal Reserve for conducting monetary

policy involves changes in:
Moral suasion.

Government spending and taxation.

The discount rate.

The reserve requirement.

Open market operations.

17 . Assume that banks are always fully loaned and people hold no cash. If
the required reserve ratio of 20%, an infusion of $100 billion in reserves
will result in a maximum of:
$500 billion in deposits.
$20 billion in deposits.

Another $100 billion worth of reserves.

$120 billion in deposits.

$100 billion in deposits.

18 . If government spending exceeds tax receipts, then (G - T) < 0. Which

of the following strategies is allowed by law in order to finance the
deficit?
The Treasury can print money in order to finance the deficit.

The Fed can issue new U.S. government securities and sell them in the
open market.
The Fed buys and sells only new, not preexisting, U.S. government
securities in the open market.

The Treasury can issue bills, bonds, and notes that pay interest.

All of the above.

19 . An open market sale of securities by the Fed results in:

A decrease in bank reserves and an increase in the money supply.

An increase in bank reserves and an increase in the money supply.

A decrease in bank reserves and a decrease in the money supply.

An increase in bank reserves and a decrease in the money supply.

20 . Refer to the graph below. The vertical money supply curve can be interpreted
 as follows:
The Fed can control the discount rate but cannot influcence the market
rate of interest.
The money supply and the interest rate are inversely related.

The money supply and the interest rate are directly related.

The Fed can have the money supply be whatever value it wants.

Short Answers

1.If the Fed wanted to contract the money supply, what could it do to each of the
following values to accomplish this goal? Explain.

a. Required reserve ratio? Banks would be required to hold a higher proportion of their total
assets (liquid cash) which reduces the availability of funds for loan.

b. Discount rate?

c. Fed holdings of government securities?

d. Which of the tools does the Fed use most often? Why?

2. Suppose that the required reserve ratio is 20 percent and the Fed increases reserves
by $5 billion.

a. What is the value of the money multiplier? 0.25

b. Does the money stock go up or down, and by how much?

Now suppose the bank does not actually loan out all the excess reserves. Suppose the
banks are afraid of a run on the banking system, so they keep twice as much in reserve
as is required by law.

c. What is the new value of the multiplier? Twice as much as before

d. What is the new change in the money stock?

e. Suppose instead that people are afraid of bank instability. They keep 100 percent of
the new reserves in their pockets. Would the money stock change at all? Explain.

3. What are the three functions of money? Which is the most important function?

The three functions are, Medium of Exchange, Store of Value and Unit of Account. Medium of
Exchange is the most important, because it is needed to facilitate transactions. Without
money, there would be a barter system, which is like trading directly an object for another
object of equal value the supplier desires, just like trading in the old days. Money eliminates
that, serving as a medium of exchange, and is accepted by all transactions.