Deck 32: Inflation and the Quantity Theory of Money

Question 1

Demand deposits are

A) small-time deposits.
B) savings deposits.
C) checkable deposits.
D) money market deposits.

Answer 1

C

Question 2

The Federal Reserve can influence the economy by shifting

A) the AD curve.
B) the SRAS curve.
C) the Solow growth curve.
D) Each of these answers is correct.

Answer 2

A

Question 3

Why does so much U.S. currency circulate in other countries?

A) Several countries use the U.S. dollar as their official currency.
B) The U.S. dollar is frequently used in drug trafficking.
C) Dollars hold their value in unstable countries.
D) Each of these answers is correct.

Answer 3

D

Question 4

The world's largest bank customer is

A) the Federal Reserve.
B) the U.S. Treasury.
C) the FDIC.
D) the SEC.

Question 5

Why are debit cards not listed as money?

A) Because they perform the same function as checks, and checks are counted as money.
B) Debit cards cannot be used for payments at most stores.
C) Debit cards draw on checkable deposits, which are already counted as money.
D) Not all banks issue debit cards.

Question 6

The Federal Reserve I. clears all checks. II. makes monetary policy. III. supervises the banking sector.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 7

Which of the following assets would you classify as being most liquid?

A) demand deposits
B) small-time deposits
C) a home
D) gold bullion

Question 8

The Federal Reserve is the

A) government's bank.
B) regulator of bank safety.
C) central bank for the United States.
D) Each of these answers is correct.

Question 9

The Federal Reserve acquires its exclusive powers through its ability to

A) tax individuals and firms.
B) stop economic recessions.
C) issue money.
D) All of the answers are correct.

Question 10

Which of the following assets would you classify as being most liquid?

A) small-time deposits
B) small-cut diamonds
C) an oil painting by Claude Monet
D) money market mutual funds

Question 11

In the United States, the amount of cash per capita is about $3,000. This figure

A) shows how much currency each American holds in their checking accounts.
B) misrepresents actual currency holdings in the United States because a lot of dollars are held outside the country.
C) accurately represents the size of the underground economy in the United States.
D) shows how much the world depends on the U.S. monetary system.

Question 12

Bank notes are issued by

A) the leading financial institutions of the United States.
B) investment houses and banks.
C) the Federal Reserve only.
D) private banks and the Federal Reserve.

Question 13

When the U.S. Treasury borrows, the borrowing is managed by the

A) Treasury itself.
B) Senate Banking Committee.
C) Comptroller of the Currency.
D) Federal Reserve.

Question 14

The Federal Reserve is the

A) federal government's bank.
B) U.S. central bank.
C) banker's bank in the United States
D) Each of these answers is correct.

Question 15

Which of the following is NOT a function of the Federal Reserve?

A) serving as the lender of last resort
B) regulating the U.S. financial system
C) regulating the U.S. money supply
D) providing loans to small businesses

Question 16

Who is Ben Bernanke?

A) the Secretary of the U.S. Treasury
B) the Chairman of the President's Council of Economic Advisors
C) the Vice President of the United States
D) the Chairman of the Federal Reserve

Question 17

Reference: Ref 15-1 (Table: Statistics for a Small Economy) The table shows some statistics for a small economy. Using only the information provided, the monetary base amounts to

A) $149 million.
B) $71 million.
C) $19 million.
D) $12 million.

Question 18

Reference: Ref 15-1 (Table: Statistics for a Small Economy) The table shows some statistics for a small economy. Using only the information provided, M1 in this country amounts to

A) $69 million.
B) $57 million.
C) $43 million.
D) $50 million.

Question 19

Rank the major means of payment from the largest to the smallest amount of dollars.

A) savings deposits, money market mutual funds, total reserves
B) money market mutual funds, total reserves, savings deposits
C) money market mutual funds, savings deposits, total reserves
D) total reserves, money market mutual funds, savings deposits

Question 20

Reference: Ref 15-1 (Table: Statistics for a Small Economy) The table shows some statistics for a small economy. Using only the information provided, M2 in this country amounts to

A) $105 million.
B) $121 million.
C) $137 million.
D) $129 million.

Question 21

The main difference between M1 and M2 is that

A) M1 includes some less liquid assets in addition to the assets in M2.
B) M1 includes more liquid assets in addition to the assets in M2.
C) M2 includes some less liquid assets in addition to the assets in M1.
D) M2 includes more liquid assets in addition to the assets in M1.

Question 22

All of the following are means of payment in the United States EXCEPT

A) Federal Reserve notes.
B) checkable deposits.
C) savings deposits.
D) stock options.

Question 23

The narrowest measure of the U.S. money supply is

A) the monetary base.
B) M1.
C) M2.
D) M3.

Question 24

To be considered money, an asset must be

A) backed by gold or other precious metals.
B) widely accepted as a means of payment.
C) currency.
D) Each of these answers is correct.

Question 25

M2 refers to

A) currency.
B) currency plus total reserves held at the Fed.
C) currency plus checkable deposits.
D) currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits.

Question 26

The Fed has the most control over

A) the monetary base.
B) M1.
C) M2.
D) money market mutual funds.

Question 27

M1 refers to

A) currency.
B) currency plus total reserves held at the Fed.
C) currency plus checkable deposits.
D) currency, checkable deposits, savings deposits, money market mutual funds, and small-time deposits.

Question 28

Which of the following is included in M2?

A) currency
B) checkable deposits
C) savings deposits
D) All three of these items are included in M2.

Question 29

Which of the following is most liquid?

A) a mortgage loan
B) checkable deposits in a bank
C) a new truck
D) a diamond

Question 30

In the United States, the largest category of means of payment is

A) currency.
B) checkable deposits.
C) savings accounts.
D) Each of these answers is correct.

Question 31

The U.S. money supplies, M1 and M2, include I. currency in circulation. II. checkable deposits. III. bond mutual funds.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 32

The monetary base (MB) refers to

A) currency.
B) currency plus total reserves held at the Fed.
C) currency plus checkable deposits.
D) currency, savings deposits, money market mutual funds, and small time deposits.

Question 33

Money is best defined as

A) anything that has a high nominal value.
B) anything that is a widely accepted means of payment.
C) only the amount we spend in a given period.
D) the total amount of fixed assets we own.

Question 34

Reserves held by banks are mainly held in the form of

A) currency.
B) checkable deposits.
C) electronic claims.
D) savings accounts.

Question 35

According to the data in the money supply components table, the total amount of M1 equals

A) $920 billion.
B) $1,450 billion.
C) $3,268 billion.
D) $3,388 billion.

Question 36

Which of the following serve as a means of payment in the United States?

A) currency
B) checkable deposits
C) savings deposits
D) Each of these answers is correct.

Question 37

Which of the following are the least liquid assets?

A) currencies
B) checkable deposits
C) small-time deposits
D) savings deposits

Question 38

Which definition of money has the greatest value in the money pyramid?

A) the monetary base
B) M1
C) the monetary base plus M1
D) M2

Question 39

Which of the following is the most liquid asset?

A) currency
B) checkable deposits
C) savings deposits
D) money market mutual funds

Question 40

What part of the money pyramid does the Fed have direct control over?

A) the monetary base
B) M1
C) the monetary base plus M1
D) M2

Question 41

Holding reserves is costly for banks because

A) it forces banks to pay for ATMs.
B) it leads to the risk of bank robberies.
C) it leads to fewer profits.
D) the Fed charges banks interest on required reserves.

Question 42

Reference: Ref 15-2 (Table: Multiple Deposit Expansion) For the multiple deposit expansion process described in this table, what is the maximum amount of loans that the Third National Bank can make if it decides to hold 1 percent of deposits as excess reserves?

A) $338,560
B) $30,470.40
C) $308,089.60
D) $311,475.20

Question 43

Commercial banks make profits primarily through

A) the interest differential between deposits and loans.
B) interest paid on deposits.
C) interest paid on required reserves.
D) bailouts by the Fed.

Question 44

Bank A has $100 million in deposits, $15 million in required reserves, and $85 million in loans. Bank A's reserve ratio is

A) 10 percent.
B) 15 percent.
C) 20 percent.
D) 75 percent.

Question 45

The money multiplier is equal to

A) one minus the reserve ratio.
B) one plus the reserve ratio.
C) one times the reserve ratio.
D) one divided by the reserve ratio.

Question 46

Suppose the reserve ratio is 20 percent for all banks. If the Fed increases bank reserves by $200, then the money supply will

A) decrease by $400.
B) increase by $400.
C) decrease by $1,000.
D) increase by $1,000.

Question 47

Banks retain only a small portion of their deposits on reserve in

A) a partial demand deposit arrangement.
B) a fractional reserve banking system.
C) a banking and reserve lending system.
D) a replacement reserve agreement.

Question 48

If the required reserve ratio is 4 percent, the money multiplier is

A) 4.
B) 16.
C) 20.
D) 25.

Question 49

Suppose the Fed carries out an open market purchase and credits the account of a bank by $160,000. Further suppose that RR is 10 percent. By how much is the money supply expected to change?

A) $160,000
B) $1.6 million
C) $16 million
D) $1.76 million

Question 50

The reserve ratio is the ratio of bank reserves to

A) currency demand.
B) bank loans.
C) bank deposits.
D) the monetary base.

Question 51

The Federal Reserve has direct control over

A) the monetary base.
B) M1.
C) M2.
D) Each of these answers is correct.

Question 52

The amount by which the money supply expands with each additional dollar in reserves is the

A) reserve ratio.
B) discount rate.
C) fractional reserve.
D) money multiplier.

Question 53

The money multiplier equals

A) the amount of money supply divided by the amount of reserves.
B) one divided by the difference between the reserve ratio and the required reserve ratio.
C) one divided by the reserve ratio.
D) one divided by the discount rate.

Question 54

Reference: Ref 15-2 (Table: Multiple Deposit Expansion) For the multiple deposit expansion process described in this table, what is the required reserve ratio in this banking system?

A) 92 percent
B) 20 percent
C) 10 percent
D) 8 percent

Question 55

For this table, assume that all banks follow the same required reserve ratio requirement. Also assume that the banks are listed in sequential order (thus the loans from the First National Bank become the deposits for the Second National Bank, and the Reference: Ref 15-2 (Table: Multiple Deposit Expansion) For the multiple deposit expansion process described in this table, if all banks hold only the required reserves, what is the money multiplier in this country?

A) 8
B) 10
C) 12.5
D) 5

Question 56

M1 is equal to currency plus

A) checkable deposits.
B) total reserves held at the Federal Reserve.
C) savings deposits.
D) small-time deposits.

Question 57

Suppose you deposit $1,000 in your checking account. If the reserve ratio is 10 percent, how much of your deposit can the bank loan out?

A) $0.
B) $100.
C) $900.
D) $1,000.

Question 58

An increase in the reserve ratio leaves banks with a need and desire to

A) become more liquid.
B) make more loans.
C) purchase real estate.
D) borrow in the federal funds market.

Question 59

The monetary base is equal to currency plus

A) checkable deposits.
B) total reserves held at the Federal Reserve.
C) savings deposits.
D) small-time deposits.

Question 60

In a fractional reserve banking system, banks hold only a fraction of their

A) loans as reserves.
B) deposits as reserves.
C) currency as reserves.
D) monetary base.

Question 61

The Fed will be most effective at changing the money supply when

A) banks have low reserves and the money multiplier is small.
B) banks have low reserves and the money multiplier is large.
C) banks have high reserves and the money multiplier is small.
D) banks have high reserves and the money multiplier is large.

Question 62

For a given money multiplier, a decrease in the banking system's reserves will cause the money supply to

A) increase.
B) decrease.
C) remain constant.
D) become difficult to predict.

Question 63

To reduce the money supply in the economy, the Fed would

A) increase the discount rate and/or raise the reserve ratio.
B) carry out open market purchases and/or raise the reserve ratio.
C) carry out open market sales and/or lower the discount rate.
D) carry out open market purchases and/or lower the discount rate.

Question 64

When the Federal Reserve makes an open market purchase, the reserves of the banking system will

A) increase.
B) decrease.
C) remain constant.
D) become difficult to predict.

Question 65

If the Fed buys government bonds, then all of the following will likely increase EXCEPT

A) the monetary base.
B) M1.
C) the Federal Funds rate.
D) bank reserves.

Question 66

When the Federal Reserve buys bonds, the demand curve for bonds

A) does not shift.
B) shifts outward.
C) shifts inward.
D) sometimes shifts inward and sometimes shifts outward.

Question 67

For a given level of reserves, a decrease in the money multiplier will cause the money supply to

A) increase.
B) decrease.
C) remain constant.
D) become difficult to predict.

Question 68

When the Federal Reserve makes an open market purchase, the amount of money available for the banking system to loan

A) increases.
B) decreases.
C) remains constant.
D) becomes difficult to predict.

Question 69

The Federal Reserve's major tools to control the money supply are I. open market operations. II. discount rate lending and the term auction facility. III. required reserve ratio and payment of interest on reserves. IV. federal funds lending.

A) I and II only
B) III and IV only
C) I, II, and III only
D) I, II, III, and IV

Question 70

An increase in the banking system's willingness to lend will cause the money multiplier to

A) increase.
B) decrease.
C) remain unchanged.
D) become difficult to predict.

Question 71

When the Fed buys U.S. government bonds to affect the money supply, it is conducting

A) discount rate lending.
B) discount rate borrowing.
C) an open market sale.
D) an open market purchase.

Question 72

When the Fed wants to increase interest rates, it

A) instructs banks across the nation that they must raise their rates.
B) sells bonds in the open market.
C) buys bonds in the open market.
D) adjusts the fractional reserve ratio.

Question 73

If the Fed sells $200 million in government bonds, the total money supply will

A) decrease by more than $200 million.
B) decrease by less than $200 million but more than $0 million.
C) decrease by exactly $200 million.
D) not change.

Question 74

To increase the money supply in the economy, the Fed would

A) increase the discount rate and/or lower the reserve ratio.
B) carry out open market purchases and/or raise the reserve ratio.
C) carry out open market sales and/or lower the discount rate.
D) carry out open market purchases and/or lower the discount rate.

Question 75

When the Federal Reserve buys bonds, the supply curve for bonds

A) does not shift.
B) shifts outward.
C) shifts inward.
D) sometimes shifts inward and sometimes shifts outward.

Question 76

If the Fed wants short-term interest rates to rise, it could

A) carry out open market purchases.
B) engage in a monetary contraction.
C) buy T-bills.
D) issue a directive for banks to raise interest rates.

Question 77

The major tools that the Fed uses to control the money supply include I. controlling the amount of government spending. II. discount rate lending. III. open market operations.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 78

An open market operation occurs when

A) banks loan funds to each other.
B) banks increase the reserve ratio.
C) the Fed buys or sells government bonds.
D) the Fed enforces regulations on the banking industry.

Question 79

What is the overnight lending rate from one bank to another?

A) Federal Funds rate
B) Federal Reserve rate
C) money market rate
D) money multiplier rate

Question 80

The relationship between bond prices and interest rates is

A) neither positive nor negative.
B) positive.
C) negative.
D) sometimes positive and sometimes negative.