ECON1040 Chapter 11 – Flashcards

1. The confidence you have that a retailer will accept dollars in exchange for goods is based primarily on money a. being a unit of account. b. being a medium of exchange. c. serving as a store of value. d. having intrinsic value.

2. Liquidity refers to a. the ease with which an asset is converted to the medium of exchange. b. the measurement of the intrinsic value of commodity money. c. the measurement of the durability of a good. d. how many time a dollar circulates in a given year.

3. Which of the following is not included in M1? a. currency b. demand deposits c. traveler's checks d. credit cards

4. Which of the following statements is correct? a. All items that are included in M1 are included also in M2. b. All items that are included in M2 are included also in M1. c. Credit cards are included in both M1 and M2. d. Savings deposits are included in both M1 and M2.

5. Credit cards a. defer payments. b. are a store of value. c. have led to wider use of currency. d. are part of the money supply.

6. When conducting an open-market purchase, the Fed a. buys government bonds, and in so doing increases the money supply. b. buys government bonds, and in so doing decreases the money supply. c. sells government bonds, and in so doing increases the money supply. d. sells government bonds, and in so doing decreases the money supply.

7. The Fed's policy decisions have an important influence on a. inflation in the long run and employment and production in the short run. b. inflation in the long run and employment and production in the long run. c. inflation in the short run and employment and production in the short run. d. inflation in the short run and employment and production in the long run.

8. In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then a. M1 would increase. b. M1 would decrease. c. M1 would not change. d. M1 might rise or fall.

9. In a fractional-reserve banking system, a bank a. does not make loans. b. does not accept deposits. c. keeps only a fraction of its deposits in reserve. d. None of the above is correct

10. A bank's reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to a. $8. b. $80. c. $92. d. $920

11. A bank has a 5 percent reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement. a. It has $25 in reserves and $4,975 in loans. b. It has $250 in reserves and $4,750 in loans. c. It has $1,000 in reserves and $4,000 in loans. d. None of the above is correct.

12. A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the reserve requirement. It follows that the reserve requirement is a. 2.5 percent. b. 33.3 percent. c. 25 percent. d. 75 percent.

13. If the reserve ratio is 4 percent, then the money multiplier is a. 24. b. 25. c. 26. d. 4

14. If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is a. 2.7 percent. b. 12.5 percent. c. 37.5 percent. d. 40 percent

19. Which tool of monetary policy does the Federal Reserve use most often? a. term auctions b. open-market operations c. changes in reserve requirements d. changes in the discount rate

20. When the Fed conducts open-market purchases, a. it buys Treasury securities, which increases the money supply. b. it buys Treasury securities, which decreases the money supply. c. it borrows money from member banks, which increases the money supply. d. it lends money to member banks, which decreases the money supply

21. The rate at which the Fed lends money to banks is a. the prime rate. b. fixed at 4%. c. the federal funds rate. d. the discount rate.

22. If the discount rate is raised then banks borrow a. more from the Fed so reserves increase. b. more from the Fed so reserves decrease. c. less from the Fed so reserves increase. d. less from the Fed so reserves decrease

23. To decrease the money supply, the Fed can a. buy government bonds or increase the discount rate. b. buy government bonds or decrease the discount rate. c. sell government bonds or increase the discount rate. d. sell government bonds or decrease the discount rate.

24. Reserves increase if the Federal Reserve a. raises the discount rate or auctions more credit. b. raises the discount rate but not if it auctions more credit. c. lowers the discount rate or auctions more credit. d. lowers the discount rate but not if it auctions more credit

25. Which of the following both increase the money supply? a. an increase in the discount rate and an increase in the interest rate on reserves b. an increase in the discount rate and a decrease in the interest rate on reserves c. a decrease in the discount rate and an increase in the interest rate on reserves d. a decrease in the discount rate and a decrease in the interest rate on reserves

26. The Fed's control of the money supply is not precise because a. Congress can also make changes to the money supply. b. there are not always government bonds available for purchase when the Fed wants to perform open-market operations. c. the Fed does not know where all U.S. currency is located. d. the amount of money in the economy depends in part on the behavior of depositors and bankers.

27. A problem that the Fed faces when it attempts to control the money supply is that a. the 100-percent-reserve banking system in the U.S. makes it difficult for the Fed to carry out its monetary policy. b. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools. c. the Fed does not have a tool that it can use to change the money supply by either a small amount or a large amount. d. the Fed does not control the amount of money that households choose to hold as deposits in banks.