Deck 4: Money and Interest

Question 1

Which of the following elements of the money supply, as defined by the Federal Reserve, can be spent immediately?

A)M1
B)M2
C) Reserves
D) MZM

Answer 1

A

Question 2

Which of the following assets is the most liquid?

A)the money in your savings account
B)100 shares of stock in a Fortune 500 company
C) the money in your wallet
D) a certificate of deposit that comes due in six months

Answer 2

C

Question 3

The official currency of the United States can properly be classified as

A)conventional money.
B)fiat money.
C) commodity money.
D) product money.

Answer 3

B

Question 4

Which of the following is NOT considered a factor in money creation?

A)the Federal Reserve's supply and control of money
B)banks' use of money
C) the demand for money
D) the printing of currency by the Bureau of Engraving and Printing

Question 5

The flow of money has a direct effect on how the economy performs.

Question 6

Banks can loan customers the money they have on deposit, minus the reserve requirement.

Question 7

Generally speaking, when interest rates are high more credit is accessible and the economy tends to grow quickly.

Question 8

Most large money transactions involve ledger entries rather than the movement of physical currency.

Question 9

If there is too much money moving in the economy

A)unemployment will probably rise.
B)prices may rise, causing inflation.
C) prices will fall, causing widespread business failure.
D) both a and b, but not c

Question 10

Which of the following would be considered a secondary reserve for a bank?

A)cash the bank has on hand
B)securities the bank has purchased from the federal government
C) deposits that may be due from other banks
D) the reserve percentage required by the Federal Reserve System

Question 11

MZM is sometimes referred to as the "base" money supply.

Question 12

A dollar bill represents an obligation of the government to provide something of value to you.

Question 13

A bank may not use secondary reserves to give depositors their money back if they demand it.

Question 14

Money on deposit, minus ____________________, can be loaned by banks to customers.

A)excess reserves
B)cash on hand
C) primary reserves
D) the reserve requirement

Question 15

The agreed-upon value of money in the United States today is based on the government's supply of gold at Fort Knox, Kentucky.

Question 16

If banks must hold more money in reserve,

A)the money supply will expand.
B)there is more money available to lend.
C)
C) there is less money available to lend.
D) both a and b, but not

Question 17

The interest rate the Federal Reserve charges for loans to member banks is called the

A)prime rate.
B)discount rate.
C) market rate.
D) treasury rate.

Question 18

The Federal Reserve influences the federal funds rate by

A)buying and selling government securities.
B)adjusting the reserve requirement.
C) lowering the discount rate.
D) all of the above.

Question 19

Liquidity is variable, depending on the nature of the asset.

Question 20

The prime rate is usually the same among major banks.

Question 21

The ____________________ effect is a phenomenon that creates new deposits from lending.

Question 22

The federal ____________________ rate is the amount of interest charged for short-term, interbank loans.

Question 23

The ____________________ supply is defined as the liquid assets held by banks and individuals.

Question 24

____________________ money is money that is deemed legal tender by a government.

Question 25

Suppose the Fed requires all banks to hold a reserve of 4 percent on the first $45 million of customer deposits, and 10 percent on all deposits above that. If a bank has $100 million on deposit, what is the amount of the reserve requirement?

Question 26

Resources a bank uses to create money through its business transactions are called ____________________ reserves.

Question 27

What types of money and circumstances of liquidity are defined by the M2 element of the money supply?

Question 28

Calculate the total amount of money "created" from a deposit of $5,000 as it moves through four cycles of deposit. Assume a reserve rate of 15 percent. (Round answer to nearest two decimal places.)

Question 29

____________________ was a measure of the money supply in use from 1971 until 2006.

Question 30

The measure of how quickly things may be converted to something of value is called ____________________.

Question 31

____________________ money is based on some item of value, such as gold or precious stones.

Question 32

You cannot take a Federal Reserve note to a bank and exchange it for gold or silver. Why not?

Question 33

The ____________________ rate is the interest rate the Federal Reserve sets and charges for loans to member banks.

Question 34

Calculate the total amount of money "created" from a deposit of $10,000 as it moves through four cycles of deposit. Assume a reserve rate of 12 percent. (Round answer to nearest two decimal places.)

Question 35

Suppose the Fed requires all banks to hold a reserve of 5 percent on the first $60 million of customer deposits, and 12 percent on all deposits above that. If a bank has $125 million on deposit, what is the amount of the reserve requirement?

Question 36

____________________ measures are tools used to estimate the size of the money supply.

Question 37

Why does the Federal Reserve require banks to hold money in reserve?

Question 38

What happens to the money supply if the Fed lowers reserve requirements? Why?

Question 39

Barry earns a monthly income of $2,500. He receives a 12 percent raise. What is his monthly income now?

Question 40

Suppose the total amount of currency (i.e., Federal Reserve notes and coins) in circulation today is $713 billion. If 95 percent of this amount consists of Federal Reserve notes, what amount of currency in circulation consists of coins?

Question 41

What "thing of value" does the government provide those who hold United States currency?

Question 42

Why did the Fed lower the federal funds rate seven times between 2006 and 2008?​

Question 43

Name and distinguish between the three types of reserves held by banks.

Question 44

How does the discount rate differ from the prime rate?

Question 45

Briefly describe the main factors affecting interest rates other than the actions of the Federal Reserve.

Question 46

What is a fractional-reserve system? What is its relationship to the money supply in the United States?

Question 47

Name the goals of the Federal Reserve's monetary policy and the tools it uses to achieve its goals.​

Question 48

Explain how the Federal Reserve affects the federal funds rate.

Question 49

What is the prime rate?

Question 50

Why might extra money in the economy cause inflation?