Deck 4: The Monetary System: What It Is and How It Works

Question 1

Money's liquidity refers to the ease with which:

A) coins can be melted down.
B) illegally obtained money can be laundered.
C) loans can be floated.
D) money can be converted into goods and services.

Answer 1

money can be converted into goods and services.

Question 2

In prisoner of war camps during World War II, the "currency" used was:

A) chocolates.
B) cigarettes.
C) gold.
D) IOUs.

Answer 2

cigarettes.

Question 3

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a:

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

Answer 3

unit of account.

Question 4

People use money as a store of value when they:

A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.

Question 5

People use money as a medium of exchange when they:

A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.

Question 6

The central bank in the United States is the:

A) Bank of America.
B) U.S. Treasury.
C) U.S. National Bank.
D) Federal Reserve.

Question 7

An important factor in the evolution of commodity money to fiat money is:

A) a desire to reduce transaction costs.
B) a desire to increase transaction costs.
C) the fact that gold is no longer highly valued.
D) a desire to use gold for jewelry.

Question 8

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because:

A) only fei physically in the possession of the owner is accepted in transactions.
B) legal claim to a fei never seen by current generations was accepted in transactions.
C) the central bank of Yap accepts fei in exchange for paper certificates.
D) the government of Yap verifies the authenticity of fei used for transactions.

Question 9

A country that is on a gold standard primarily uses:

A) commodity money.
B) fiat money.
C) credit money.
D) the barter system.

Question 10

To increase the money supply, the Federal Reserve:

A) buys government bonds.
B) sells government bonds.
C) buys corporate stocks.
D) sells corporate stocks.

Question 11

Macroeconomists call assets used to make transactions:

A) real income.
B) nominal income.
C) money.
D) consumption.

Question 12

In the United States, monetary policy is controlled by:

A) the President.
B) the Congress.
C) the Federal Reserve.
D) the Treasury Department.

Question 13

People use money as a unit of account when they:

A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.

Question 14

To reduce the money supply, the Federal Reserve:

A) buys government bonds.
B) sells government bonds.
C) creates demand deposits.
D) destroys demand deposits.

Question 15

Economists use the term money to refer to:

A) income.
B) profits.
C) assets used for transactions.
D) earnings from labor.

Question 16

Money that has no value other than as money is called ______ money.

A) fiat
B) intrinsic
C) commodity
D) government

Question 17

To make a trade in a barter economy requires:

A) currency.
B) a check.
C) scrip.
D) a double coincidence of wants.

Question 18

In a country on a gold standard, the quantity of money is determined by the:

A) government.
B) central bank.
C) amount of gold.
D) buying and selling of government securities.

Question 19

The quantity of money in the United States is essentially controlled by the:

A) President of the United States.
B) Department of the Treasury.
C) Federal Reserve.
D) system of commercial banks.

Question 20

All of the following are considered major functions of money except as a:

A) medium of exchange.
B) way to display wealth.
C) unit of account.
D) store of value.

Question 21

Currency equals:

A) M1.
B) the sum of funds in checking accounts.
C) the sum of checking accounts and paper money.
D) the sum of coins and paper money.

Question 22

Demand deposits are funds held in:

A) currency.
B) certificates of deposit.
C) checking accounts.
D) money markets.

Question 23

Payment is deferred by using _______, but immediate access to funds occurs when using ______.

A) currency; demand deposits
B) credit cards; debit cards
C) demand deposits; savings deposits
D) debit cards; credit cards

Question 24

In the United States, the money supply is determined:

A) only by the Fed.
B) only by the behavior of individuals who hold money and of banks in which money is held.
C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held.
D) according to a constant-growth-rate rule.

Question 25

Banks create money in:

A) a 100-percent-reserve banking system but not in a fractional-reserve banking system.
B) a fractional-reserve banking system but not in a 100-percent-reserve banking system.
C) both a 100-percent-reserve banking system and a fractional-reserve banking system.
D) neither a 100-percent-reserve banking system nor a fractional-reserve banking system.

Question 26

In the United States, bank reserves consist of:

A) currency and demand deposits.
B) vault cash and deposits at the Federal Reserve.
C) gold deposits at the Federal Reserve.
D) the money supply.

Question 27

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply:

A) increases by $100.
B) decreases by $100.
C) increases by more than $100.
D) remains the same.

Question 28

Open-market operations are:

A) Commerce Department efforts to open foreign markets to international trade.
B) Federal Reserve purchases and sales of government bonds.
C) Securities and Exchange Commission rules requiring open disclosure of market trades.
D) Treasury Department purchases and sales of the U.S. gold stock.

Question 29

Checking account balances that are linked to debit cards are included in:

A) M1.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

Question 30

In a system with fractional-reserve banking:

A) all banks must hold reserves equal to a fraction of their loans.
B) no banks can make loans.
C) the banking system completely controls the size of the money supply.
D) all banks must hold reserves equal to a fraction of their deposits.

Question 31

Money market mutual fund shares are included in:

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

Question 32

In a system with 100-percent-reserve banking:

A) all banks must hold reserves equal to 100 percent of their loans.
B) no banks can make loans.
C) the banking system completely controls the size of the money supply.
D) no banks can accept deposits.

Question 33

All of the following assets are included in M1 except:

A) currency.
B) demand deposits.
C) traveler's checks.
D) money market deposit accounts.

Question 34

Credit card balances are included in:

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

Question 35

Bank reserves equal:

A) gold kept in bank vaults.
B) gold kept at the central bank.
C) currency plus demand deposits.
D) deposits that banks have received but have not lent out.

Question 36

The money supply consists of:

A) currency plus reserves.
B) currency plus the monetary base.
C) currency plus demand deposits.
D) the monetary base plus demand deposits.

Question 37

Assets of banks include:

A) money market mutual funds.
B) currency in the hands of the public.
C) loans to customers.
D) demand deposits.

Question 38

Liabilities of banks include:

A) reserves.
B) currency in the hands of the public.
C) loans to customers.
D) demand deposits.

Question 39

Credit cards:

A) are part of the M1 money supply.
B) are part of the M2 money supply.
C) are part of both the M1 and M2 money supply.
D) do not affect the money supply.

Question 40

In a 100-percent-reserve banking system, banks:

A) can increase the money supply.
B) can decrease the money supply.
C) can either increase or decrease the money supply.
D) cannot affect the money supply.

Question 41

The currency-deposit ratio is determined by:

A) the Federal Reserve.
B) business policies of banks and the laws regulating banks.
C) preferences of households about the form of money they wish to hold.
D) the Federal Deposit Insurance Corporation (FDIC).

Question 42

In a fractional-reserve banking system, banks create money because:

A) each dollar of reserves generates many dollars of demand deposits.
B) banks have the legal authority to issue new currency.
C) funds are transferred from households wishing to save to firms wishing to borrow.
D) the wealth of the economy expands when borrowers undertake new debt obligations.

Question 43

The value of banks' owners' equity is called bank:

A) deposits.
B) reserves.
C) capital.
D) liquidity.

Question 44

The use of borrowed funds to supplement existing funds for purposes of investment is called:

A) arbitrage.
B) leverage.
C) convergence.
D) intermediation.

Question 45

The preferences of households determine the:

A) reserve-deposit ratio.
B) currency-deposit ratio.
C) size of the monetary base.
D) loan-deposit ratio.

Question 46

The monetary base consists of:

A) currency held by the public, plus reserves held by banks.
B) all outstanding currency, plus reserves held by banks.
C) all outstanding currency, plus demand deposits.
D) all bank reserves.

Question 47

(Table: Bank Balance Sheet) Based on the table, what is the reserve-deposit ratio at the bank?

A) 3 percent
B) 5 percent
C) 10 percent
D) 15 percent

Question 48

(Table: Bank Balance Sheet) Based on the table, owners' equity will fall to zero if loan defaults reduce the value of total assets by _____ percent.

A) 10
B) 20
C) 30
D) 40

Question 49

The banking system creates:

A) liquidity.
B) wealth.
C) reserves.
D) currency.

Question 50

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals:

A) $100 billion.
B) $150 billion.
C) $600 billion.
D) $650 billion.

Question 51

The reserve-deposit ratio is determined by:

A) the Federal Reserve.
B) business policies of banks and the laws regulating banks.
C) preferences of households about the form of money they wish to hold.
D) the Federal Deposit Insurance Corporation (FDIC).

Question 52

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve-deposit ratio, then the total money supply is:

A) reserves divided by rr.
B) 1/rr.
C) reserves times rr.
D) reserves divided by (1 - rr).

Question 53

The size of monetary base is determined by:

A) the Federal Reserve.
B) the Federal Reserve and banks.
C) preferences of households about the form of money they wish to hold.
D) business policies of banks and the laws regulating banks.

Question 54

The amount of capital that banks are required to hold depends on the:

A) amount of deposits held at a bank.
B) riskiness of the bank's assets.
C) reserve requirements set by the Fed.
D) level of deposit insurance coverage.

Question 55

A bank balance sheet consists of only the following items: What is the value of bank capital?

A) -$1,000
B) +$500
C) +$1,000
D) +$1,500

Question 56

The difference between banks and other financial intermediaries is that only banks have the legal authority to:

A) transfer funds from savers to borrowers.
B) pay interest on debt obligations.
C) manage portfolios of assets.
D) create assets that are part of the money supply.

Question 57

The minimum amount of owners' equity in a bank mandated by regulators is called a _____ requirement.

A) reserve
B) margin
C) liquidity
D) capital

Question 58

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:

A) $50 billion.
B) $100 billion.
C) $150 billion.
D) $600 billion.

Question 59

In a fractional-reserve banking system, banks create money when they:

A) accept deposits.
B) make loans.
C) hold reserves.
D) exchange currency for deposits.

Question 60

Financial intermediation is the process of:

A) settling disputes between borrowers and lenders.
B) advising corporations on whether to expand using debt or equity.
C) transferring funds from savers to borrowers.
D) converting from a barter economy to a money economy.

Question 61

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the money supply does not change.

Question 62

When the Federal Reserve conducts an open-market purchase, it buys bonds from the:

A) public.
B) U.S. Treasury.
C) Internal Revenue Service.
D) International Monetary Fund.

Question 63

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase.

A) reserve requirements
B) the discount rate
C) the money supply
D) the reserve-deposit ratio

Question 64

The ratio of the money supply to the monetary base is called:

A) the currency-deposit ratio.
B) the reserve-deposit ratio.
C) high-powered money.
D) the money multiplier.

Question 65

For borrowing from the discount window, the Fed sets the _____ of borrowing, compared to borrowing using the Term Auction Facility, where the Fed sets the _____ of borrowing.

A) maximum quantity; minimum quantity
B) minimum price; maximum price
C) quantity; price
D) price; quantity

Question 66

When the Fed decreases the interest rate paid on reserves, if the ratio of currency to deposits decreases also while the monetary base is constant, then:

A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the two changes exactly offset each other.

Question 67

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ______ divided by ______ multiplied by B.

A) (rr + 1); (rr + cr)
B) (cr + 1); (cr + rr)
C) (rr + cr); (rr + 1)
D) (rr + cr); (cr + 1)

Question 68

When the Fed decreases the interest rate paid on reserves, it:

A) increases the reserve-deposit ratio (rr).
B) decreases the reserve-deposit ratio (rr).
C) increases the monetary base (B).
D) decreases the monetary base (B).

Question 69

The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the _____ the monetary base and the _____ the money supply.

A) smaller; smaller
B) smaller; greater
C) greater; greater
D) greater; smaller

Question 70

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals:

A) $200 billion.
B) $400 billion.
C) $800 billion.
D) $1,000 billion.

Question 71

When the Fed increases the discount rate, it:

A) increases the reserve to deposit ratio (rr).
B) decreases the reserve to deposit ratio (rr).
C) is likely to increase the monetary base (B)
D) is likely to decrease the monetary base (B).

Question 72

The interest rate charged on loans by the Federal Reserve to banks is called the:

A) federal funds rate.
B) prime rate.
C) discount rate.
D) Treasury bill rate.

Question 73

The money supply will decrease if the:

A) monetary base increases.
B) currency-deposit ratio increases.
C) discount rate decreases.
D) reserve-deposit ratio decreases.

Question 74

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then:

A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the money supply does not change.

Question 75

When banks borrow through the Term Auction Facility, the price of borrowing is determined by:

A) the Federal Reserve.
B) a competitive bidding process.
C) the difference between the discount rate and the interest rate on three-month Treasury securities.
D) open-market operations.

Question 76

The money supply will increase if the:

A) currency-deposit ratio increases.
B) reserve-deposit ratio increases.
C) monetary base increases.
D) discount rate increases.

Question 77

Two ways for banks to borrow reserves from the Federal Reserve are through:

A) the discount window and the Term Auction Facility.
B) open-market operations and excess reserve swaps.
C) decreasing the reserve-deposit ratio and decreasing the currency-deposit ratio.
D) fractional-reserve banking and financial intermediation.

Question 78

High-powered money is another name for:

A) currency.
B) demand deposits.
C) the monetary base.
D) M2.

Question 79

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:

A) increase by $1 million.
B) decrease by $1 million.
C) increase by more than $1 million.
D) decrease by more than $1 million.

Question 80

When the Fed makes an open-market sale, it:

A) increases the money multiplier (m).
B) increases the currency-deposit ratio (cr).
C) increases the monetary base (B).
D) decreases the monetary base (B).