question

A decrease in the reserve requirement ________ bank reserves and ________ the money supply.

answer

increases; increases

question

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

answer

open market operations, discount policy, and reserve requirements.

question

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate

answer

increases; increases

question

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

answer

acting as a lender of last resort.

question

Which of the following determines the amount of money the banking system as a whole can create?

answer

the quantity of bank reserves

question

If households and firms decide to hold less of their money in checking account deposits and more in currency, then the money supply

answer

will decrease.

question

Hyperinflation can be caused by

answer

the government selling bonds to the central bank.

question

Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 8 percent, then the bank can make a maximum loan of

answer

$2 million.

question

To increase the money supply, the Federal Reserve could

answer

conduct an open market purchase of Treasury securities.

question

The main tool that the Federal Reserve uses to conduct monetary policy is

answer

open market operations.

question

The Federal Reserve was established in 1913 to

answer

stop bank panics by acting as a lender of last resort.

question

Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

answer

$1,800.

question

A bank will consider a car loan to a customer ________ and a customer's checking account to be ________

answer

an asset; a liability

question

Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because

answer

borrowers will have to pay increasing amounts in real terms over time.

question

Banks can continue to make loans until their

answer

actual reserves equal their required reserves.

question

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's excess reserves increase by

answer

$8,000.

question

Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

answer

$50,000.

question

Refer to 14-2. As a result of Kristy's deposit, Bank A's reserves immediately increase by

answer

$10,000.

question

Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A can make a maximum loan of

answer

8,000

question

Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

answer

50,000

question

Soldiers in a World War II prisoner-of-war camp

answer

used gold as a fiat money.

question

Which of the following best describes how banks create money?

answer

Banks create checking account deposits when making loans from excess reserves.

question

Silver is an example of a

answer

commodity money.

question

M2 in this simple economy equals

answer

$21,000.

question

Dollar bills in the modern economy serve as money because

answer

people have confidence that others will accept them as money.

question

Suppose a transaction changes a bank's balance sheet as indicated in the following T - account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of

answer

$7,200.

question

Money's most narrow definition is based on its function as a

answer

medium of exchange.

question

The major shortcoming of a barter economy is

answer

the requirement of a double coincidence of wants.

question

To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could

answer

sell Treasury securities.

question

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

answer

11 percent.

question

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of

answer

$5,000.

question

If the central bank can act as a lender of last resort during a banking panic, banks can

answer

satisfy customer withdrawal needs and eventually restore the public's faith in the banking system

question

In economics, money is defined as

answer

any asset people generally accept in exchange for goods and services.

question

Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the required reserve ratio is 10 percent, what is the maximum change in money supply

answer

$180 million

question

The quantity equation states that the

answer

money supply times the velocity of money equals the price level times real output.

question

Open market operations refer to the purchase or sale of ________ to control the money supply.

answer

U.S. Treasury securities by the Federal Reserve

question

Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic

answer

Required reserves would increase.

question

Economies where goods and services are traded directly for other goods and services are called ________ economies

answer

barter

question

The sale of Treasury securities by the Federal Reserve will, in general,

answer

decrease the quantity of reserves held by banks.

question

The most liquid measure of money supply is

answer

M1.

question

Which of the following is not a consequence of the Fed changing the reserve requirement?

answer

Changes in the ratio are easily incorporated into banks' routine management.

question

According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be

answer

15 percent.

question

If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will ________ and M2 will ________

answer

increase; not change

question

Which of the following information about fiat money is false ? Fiat money

answer

is backed by gold.

question

Which of the following is one of the most important benefits of money in an economy?

answer

Money makes exchange easier, leading to more specialization and higher productivity.

question

The required reserves of a bank equal its ________ the required reserve ratio.

answer

deposits multiplied by

question

In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large amount of new funds available to financial markets. The Fed expected this to increase in the money supply and the total amount of lending because of the multiplier effect, in which a given amount of new reserves results in a multiple increase in

answer

bank deposits.

question

The statement, "My iPhone is worth $300" represents money's function as

answer

a unit of account.

question

The purchase of Treasury securities by the Federal Reserve will, in general,

answer

increase the quantity of reserves held by banks.

question

Which of the following is not counted in M1

answer

credit card balances

question

The M1 measure of the money supply equals

answer

currency plus checking account balances plus traveler's checks.

question

People hold money as opposed to financial assets because money

answer

is perfectly liquid.

question

If a bank receives a $1 million discount loan from the Federal Reserve, then the bank's reserves will

answer

increase by $1 million.

question

According to the U.S. Treasury,

answer

U.S. dollars must be accepted as payment for any good or service sold in the United States.

question

As was demonstrated in 2007, firms in the shadow banking system

answer

were very vulnerable to bank runs.

question

Bank reserves include

answer

vault cash and deposits with the Federal Reserve.

question

Commodity money

answer

has value independent of its use as money.

question

Economies where goods and services are traded directly for other goods and services are called ________ economies.

answer

barter

question

Economists estimate that ________ of U.S. currency is outside the United States and held primarily by ________.

answer

over half; households and firms in countries where there is little confidence in the local currency

question

Fiat money has

answer

little to no intrinsic value and is authorized by the central bank or governmental body.

question

In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience

answer

hyperinflation.

question

In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP) by

answer

providing funds to banks in exchange for stock.

question

In 2008, the inflation rate in Zimbabwe rose to almost 15 billion percent, and eventually foreigners and local residents refused to accept the Zimbabwean dollar for goods and services. In early 2009, the new Zimbabwean government decided to

answer

abandon its own currency and make the U.S. dollar the country's official currency.

question

In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by

answer

the establishment of the Federal Deposit Insurance Corporation.

question

Money market mutual funds sell shares to investors and use the money to buy

answer

short-term securities.

question

M1 equals

answer

sum of currency, value of all checking account deposits and the value of traveler checks

question

M2 equals

answer

sum of currency, value of all checking account deposits, the value of traveler checks, saving account balances, small denomination time deposits, balances in money market deposits, and noninstiutional money market fund shares.

question

The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.

answer

Federal Reserve's Board of Governors; four presidents

question

The largest liability on the balance sheet of most banks is its

answer

checking account and savings account deposits of its customers.

question

The largest proportion of M1 is made up of

answer

checking account deposits.

question

The main tool that the Federal Reserve uses to conduct monetary policy is

answer

open market operations.

question

The major assets on a bank's balance sheet are its

answer

reserves, loans, and checking account deposits.

question

The process of bundling loans together and buying and selling these bundles in a secondary financial market is called

answer

securitization.

question

The quantity theory of money predicts that, in the long run, inflation results from the

answer

money supply growing at a faster rate than real GDP.

question

The quantity theory of money was derived from the quantity equation by asserting that

answer

the velocity of money was fixed.

question

The seven members of the Board of Governors of the Federal Reserve are appointed by

answer

the President.

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