Deck 9: Money, Prices, and the Financial System

Question 1

If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Answer 1

a unit of account.

Question 2

If you use $1,000 to purchase silver bullion, which you plan to keep in a safe, you are using money as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Answer 2

a medium of exchange.

Question 3

When your grandfather keeps a bundle of $100 dollar bills behind a brick in the basement, this is an example of dollars serving as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Answer 3

a store of value.

Question 4

Money serves as a medium of exchange when:

A)it is used to purchase goods and services.
B)there is direct trade of goods and services.
C)it is a basic measure of economic value.
D)it is a means of holding wealth.

Question 5

The specialized information-gathering activities that banks use to evaluate borrowers are an example of the:

A)cost-benefit principle.
B)principle of comparative advantage.
C)scarcity principle.
D)principle of increasing opportunity cost.

Question 6

When a baker exchanges a pie for dollars, this is an example of dollars serving as:

A)barter.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Question 7

Double coincidence of wants is avoided if money is used as a:

A)medium of exchange.
B)measure of value.
C)standard of deferred payment.
D)store of value

Question 8

Financial intermediaries, such as commercial banks, help borrowers, particularly small borrowers, by:

A)providing information to evaluate financial investments.
B)offering tax-preferred borrowing opportunities.
C)eliminating the risk of borrowing.
D)providing credit that might otherwise not be available.

Question 9

Privately-owned firms that accept deposits from individuals and businesses and use those deposits to make loans are called:

A)mortgage banks.
B)brokerage firms.
C)commercial banks.
D)investment banks.

Question 10

Finding both parties to a trade who have something the other party wishes to trade for is called a:

A)unit of account.
B)store of value.
C)medium of exchange.
D)double coincidence of wants.

Question 11

The direct trade of goods and services for other goods and services is called:

A)financial intermediation.
B)diversification.
C)barter.
D)using a medium of exchange.

Question 12

Banks help savers find productive uses for their funds because banks are specialized in:

A)gathering information about and evaluating potential borrowers.
B)obtaining preferential tax treatment for savers.
C)securing government guarantees for loans.
D)evaluating the riskiness of stocks.

Question 13

In the United States saving is allocated to its most productive use by:

A)the Federal Reserve.
B)the federal, state, and local governments.
C)regulations and laws designed to improve productivity.
D)a decentralized, market-oriented financial system.

Question 14

The financial system consists of financial _____, such as commercial banks, and financial markets, such as the stock market.

A)corporations
B)allocations
C)intermediaries
D)brokers

Question 15

Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries:

A)reduce the cost of gathering information about borrowers.
B)have a monopoly on lending.
C)increase the risk of lending.
D)offer higher rates of return than available elsewhere.

Question 16

Money is:

A)the same as income.
B)all financial assets.
C)any asset used to make purchases.
D)the sum of assets minus debts.

Question 17

Decentralized market-based financial systems improve the allocation of saving by:

A)ensuring capital gains exceed dividend payments.
B)eliminating the need for commercial banks or other financial intermediaries.
C)matching net capital inflows to net capital outflows.
D)providing information and risk-sharing services.

Question 18

Firms that extend credit to borrowers using funds from raised from savers are called:

A)bond dealers.
B)stock brokers.
C)central banks.
D)financial intermediaries.

Question 19

Two reasons savers keep deposits at banks are to:

A)secure mortgages and to purchase stocks.
B)earn a return on their savings and to facilitate making payments.
C)lower interest rates and to increase the money supply.
D)equalize loan supply and demand and to earn interest.

Question 20

If you put a $20 bill in the pocket of your winter coat at the beginning of spring so that you will be surprised when you find it again next winter, you are using money as:

A)bank reserves.
B)a medium of exchange.
C)a unit of account.
D)a store of value.

Question 21

The amount of money in the United States is determined by:

A)the Federal Reserve.
B)the combined behavior of commercial banks and the public, as well as actions of the Federal Reserve.
C)the public
D)the combined behavior of commercial banks and the public.

Question 22

The main disadvantage of using money as a store of value is that:

A)other assets provide greater anonymity than cash.
B)barter is a more efficient way to conduct transactions than using money.
C)unlike other assets, money serves as a medium of exchange.
D)other assets pay relatively higher rates of interest than money.

Question 23

The M2 measure of money consists of the sum of:

A)savings deposits, small time deposits, and money market mutual funds.
B)currency, checking and savings deposits, and small time deposits.
C)currency, checking and savings deposits.
D)M1, savings deposits, small time deposits, and money market mutual funds.

Question 24

When a bank makes a loan by crediting the borrower's checking account balance with an amount equal to the loan:

A)money is created.
B)the bank gains new reserves.
C)the bank immediately loses reserves.
D)the Fed has made an open-market purchase.

Question 25

Bank reserves are:

A)currency and customer checking deposits.
B)currency, customer checking and savings deposits.
C)any asset used to purchase goods and services.
D)cash and similar assets held to meet depositor withdrawals or payments.This is the definition of "bank reserves."

Question 26

Liabilities of the commercial banking system include:

A)reserves and loans.
B)deposits.
C)reserves and deposits.
D)loans and deposits.

Question 27

In a fractional-reserve banking system the reserve/deposit ratio equals:

A)more than 100 percent.
B)currency held by the public divided by deposits.
C)100 percent.
D)less than 100 percent.

Question 28

One hundred percent reserve banking refers to a situation in which banks'reserves equal 100 percent of their:

A)loans.
B)deposits.
C)profits.
D)income.

Question 29

The components of M2 that are not also in M1:

A)sum to an amount that is smaller than the sum of the components of M1.
B)pay lower rates of interest than do the components of M1.
C)are not usable for making payments.
D)are usable for making payments, but at a greater cost or inconvenience than currency or checks.M2 is a broader measure of money than M1, thus it contains assets that are less liquid than M1.

Question 30

Banks hold reserves:

A)to earn interest.
B)to increase profits.
C)only because the government requires them to hold reserves.
D)to meet depositor withdrawals and payments.

Question 31

M1 differs from M2 in that:

A)M1 includes currency and balances held in checking accounts, which are not included in M2.
B)M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.
C)M1 is a broader measure of the money supply than M2.
D)the assets in M2 are more liquid than the assets in M1.

Question 32

Savings deposits are ______ the M1 measure of money and ______ the M2 measure of money.

A)included in; excluded from
B)included in; included in
C)excluded from; excluded from
D)excluded from; included in

Question 33

Money market mutual funds are ______ the M1 measure of money and ______ the M2 measure of money.

A)included in; excluded from
B)included in; included in
C)excluded from; excluded from
D)excluded from; included in

Question 34

The M1 measure of money consists of the sum of:

A)currency, checking deposits, and travelers'checks.
B)currency and travelers'checks.
C)currency, checking deposits, and savings deposits.
D)checking deposits and travelers'checks.

Question 35

Commercial banks create new money:

A)when they increase their desired reserve/deposit ratio.
B)by issuing checks.
C)through multiple rounds of lending.
D)when they buy government bonds from the Federal Reserve.

Question 36

Money serves as a basic yardstick for measuring economic value (a unit of account), allowing:

A)people to hold their wealth in a liquid form.
B)governments to restrict the issuance of private monies.
C)easy comparison of the relative prices of goods and services.
D)goods and services to be exchanged with a double coincidence of wants.

Question 37

Based on the following information, the value of the M1 measure of the money supply is ______ and the value of the M2 measure of the money supply is ______.

A)$530 billion; $3,700 billion
B)$330 billion; $4,230 billion
C)$520 billion; $4,320 billion
D)$530 billion; $4,230 billion

Question 38

Assets of the commercial banking system include:

A)reserves and loans.
B)deposits.
C)reserves and deposits.
D)loans and deposits.

Question 39

Credit card balances are not considered to be money primarily because they:

A)are rarely used to make purchases.
B)are not part of people's wealth.
C)are an asset used in making transactions.
D)do not represent an obligation to pay someone else.

Question 40

The three functions of money are:

A)spending for consumption, investment, and government purchases.
B)measuring balance of payments, exchange rates, and interest rates.
C)implementing monetary policy, fiscal policy, and structural policy.
D)serving as a medium of exchange, unit of account, and store of value.

Question 41

In Macroland there is $1,000,000 in currency that can either be held by the public as currency or deposited into banks.Banks'desired reserve/deposit ratio is 10%.If the public of Macroland decides to hold more currency, increasing the proportion they hold from 50% to 75%, the money supply in Macroland will ______.

A)increase.
B)decrease.
C)remain the same.
D)either increase or decrease.

Question 42

The money supply will increase by a multiple of the increase in bank reserves created by the central bank unless:

A)there is fractional reserve banking.
B)there is 100 percent reserve banking.
C)the public holds no currency.
D)banks'desired reserve/deposit ratio is 0.20.

Question 43

If banks'desired reserve ratio increases from 0.10 to 0.15, the public still desires to hold the same amount of currency, and the Fed takes no actions, the money supply will:

A)increase.
B)decrease.
C)not change.
D)either increase or decrease.

Question 44

After the Federal Reserve increases reserves in the banking system, banks create new deposits through multiple rounds of lending and accepting deposits until the:

A)Federal Reserve requires them to stop.
B)deposit insurance limit is reached.
C)actual reserve/deposit ratio is greater than the desired reserve/deposit ratio.
D)actual reserve/deposit ratio is equal to the desired reserve/deposit ratio.

Question 45

In Macroland there is $12,000,000 in currency.The public holds half of the currency and banks hold the rest as reserves.If banks'desired reserve/deposit ratio is 12.5%, deposits in Macroland equal ______ and the money supply equals _______.

A)$48,000,000; $75,000,000
B)$54,000,000; $54,000,000
C)$48,000,000; $54,000,000
D)$96,000,000; $96,000,000

Question 46

If the Central Bank of Macroland puts an additional 1,000 dollars of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ______ and the money supply will increase by _______.

A)$1,000; $1,000
B)$9,000; $9,000
C)$9,000; $10,000
D)$1,000; $9,000

Question 47

If the desired reserve/deposit ratio is 0.25 and the banking system receives an additional $10 million in reserves, bank deposits will increase by:

A)$10 million.
B)$250 million.
C)$40 million.
D)$4 million.

Question 48

If bank reserves are 200, the public holds 400 in currency, and the desired reserve/deposit ratio is 0.25, the deposits are ______ and the money supply is _____.

A)200; 600
B)400; 800
C)600; 1,000
D)800; 1,200

Question 49

The central bank of the United States is:

A)Bank of America.
B)Bank of the United States.
C)the U.S.Treasury.
D)the Federal Reserve System.

Question 50

In Macroland there is $10,000,000 in currency.The public holds half of the currency and banks hold the rest as reserves.If banks'desired reserve/deposit ratio is 10%, deposits in Macroland equal ______ and the money supply equals _______.

A)$50,000,000; $60,000,000
B)$55,000,000; $55,000,000
C)$50,000,000; $55,000,000
D)$100,000,000; $100,000,000

Question 51

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

A)conducting open-market operations.
B)changing the Federal Reserve discount rate.
C)changing bank reserve requirement ratios.
D)changing interest rates.

Question 52

The money supply in Econland is 1,000, and currency held by the public equals bank reserves.The desired reserve/deposit ratio is 0.25.Bank reserves equal _____.

A)200
B)250
C)500
D)800

Question 53

There is $5,000,000 of currency in Econland, all held by banks as reserves.The public does not hold any currency.If the banks'desired reserve/deposit ratio is 0.25, then the money supply equals:

A)$5,000,000
B)$6,250,000
C)$10,000,000
D)$20,000,000

Question 54

If a bank's desired reserve/deposit ratio is 0.33 and it has deposit liabilities of $100 million and reserves of $50 million, it:

A)has too few reserves and will reduce its lending.
B)has too many reserves and will increase its lending.
C)has the correct amount of reserves and outstanding loans.
D)should increase the amount of its reserves.

Question 55

When an individual deposits currency into a checking account:

A)bank reserves increase, which allows banks to lend more and increases the money supply.
B)bank reserves decrease, which reduces the amount banks can lend and reduces the growth of the money supply.
C)bank reserves are unchanged.
D)bank liabilities increase, which reduces the amount banks can lend and reduces the growth of the money supply.

Question 56

If the desired reserve/deposit ratio equals 0.10, then every dollar of currency in bank reserves supports ______ of deposits and the money supply, while every dollar of currency held by the public contributes ______ to the money supply.

A)$1; $10
B)$0.10; $1
C)$1; $0.10
D)$10; $1

Question 57

The two main responsibilities of the Federal Reserve System are to ______ and to ______.

A)apprehend counterfeiters; regulate the stock market
B)enable banks to make affordable mortgages; control the exchange rate of the U.S.dollar
C)insure bank deposits; print currency
D)conduct monetary policy; oversee financial markets

Question 58

If the public switches from using cash for most transactions to using checks instead, then all else equal, the money supply will:

A)increase.
B)decrease.
C)not change.
D)either increase or decrease.

Question 59

The most important tool of monetary policy is:

A)reserve requirement ratios.
B)the discount rate.
C)open-market operations.
D)market interest rates.

Question 60

When the actual reserve/deposit ratio exceeds the desired reserve/deposit ratio banks:

A)do nothing because this is a profitable situation.
B)stop making loans.
C)send the extra reserves to the central bank.
D)make more loans.

Question 61

When the central bank sells $1,000,000 worth of government bonds to the public, the money supply:

A)decreases by more than $1,000,000.
B)decreases by $1,000,000.
C)decreases by less than $1,000,000.
D)increases by $1,000,000.

Question 62

An open-market purchase of government securities by the Fed will:

A)increase bank reserves, and the money supply will increase.
B)decrease bank reserves, and the money supply will increase.
C)increase bank reserves, and the money supply will decrease.
D)decrease bank reserves, and the money supply will decrease.

Question 63

Velocity is determined by:

A)the Federal Reserve.
B)the size of the government budget deficit.
C)average labor productivity times the population growth rate.
D)payments methods and technology.

Question 64

The speed at which money circulates is called:

A)the multiplier
B)acceleration.
C)velocity.
D)the pace of money.

Question 65

Two countries, Alpha and Beta, have the same levels of nominal and real GDP.Each dollar in Alpha is used more frequently than each dollar in Beta.Therefore, it must be the case that ______ in Alpha than in Beta.

A)the rate of inflation is greater
B)the money stock is smaller
C)the price level is greater
D)the velocity is lower

Question 66

Nominal GDP divided by the money stock equals:

A)real GDP.
B)the value of transactions.
C)the price level.
D)velocity.

Question 67

The link between the money supply and prices is strongest in:

A)the long run.
B)the short run.
C)a recession.
D)a boom.

Question 68

When the central bank buys $1,000,000 worth of government bonds from the public, the money supply:

A)increases by more than $1,000,000.
B)increases by $1,000,000.
C)increases by less than $1,000,000.
D)decreases by $1,000,000.

Question 69

If the money supply equals 1,000, velocity equals 5, and real GDP equals 2,500, then the price level equals:

A)2.
B)2.5.
C)5.
D)5,000.

Question 70

The introduction of credit cards and debit cards has ______ velocity.

A)increased
B)decreased
C)had no impact on
D)eliminated

Question 71

In an open-market sale the Federal Reserve ______ government bonds and the supply of bank reserves ____.

A)buys; increases
B)buys; decreases
C)sells; increases
D)sells; decreases

Question 72

A rapidly growing supply of money will lead to:

A)rising real GDP.
B)rising velocity.
C)unemployment.
D)inflation.

Question 73

If the money supply equals 2,000, velocity equals 3, and real GDP equals 4,000, then the price level equals:

A)1.5.
B)2.
C)3.
D)6,000.

Question 74

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10%.If the Central Bank prints an additional 200 econs and uses this new currency to buy government bonds from the public, the money supply in Macroland will increase from ______ econs to ______ econs, assuming that the public does not wish to change the amount of currency it holds.

A)20,000; 22,000
B)5,000; 2,000
C)3,000; 5,000
D)5,000; 7,000

Question 75

The quantity equation states that:

A)money times velocity equals nominal GDP.
B)money times velocity equals real GDP.
C)money times the average price level equals nominal GDP.
D)money times the average price level equals real GDP.the Quantity Equation which says: PY = MV.

Question 76

The quantity equation is always true because it:

A)is the definition of velocity rewritten.
B)is a law of economics.
C)has been empirically tested.
D)has been historically verifieD.The quantity equation is true by definition.

Question 77

In an open-market purchase the Federal Reserve ______ government bonds from the public and the supply of bank reserves ______.

A)buys; increases
B)buys; decreases
C)sells; decreases
D)sells; increases

Question 78

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks'desired reserve/deposit ratio is 0.10.Assuming the values of the currency held by the public and the desired reserve/deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ______ government bonds.

A)purchase of 50
B)purchase of 250
C)sale of 500
D)sale of 50

Question 79

When the Fed sells government securities, the banks':

A)reserves will increase and lending will expand, causing an increase in the money supply.
B)reserves will decrease and lending will contract, causing a decrease in the money supply.
C)reserve requirements will increase and lending will contract, causing a decrease in the money supply.
D)reserves/deposit ratio will increase and lending will expand, causing an increase in the money supply.When the Fed sells government securities in the open market, there is less currency in the hands of the banking community, as some money must be used buy these bonds.As a consequence the amount of bank reserves decreases, which contracts bank lending and causes a decrease in the money supply.

Question 80

If real GDP equals 5,000, nominal GDP equals 10,000, and the price level equals 2, then what is velocity if the money stock equals 2,000?

A)2
B)2.5
C)5
D)10