- Money functions as:
a.a store of value.
b.a unit of account.
c.a medium of exchange.
2.The paper money used in the United States is:
Federal Reserve Notes.
3.In the United States, the money supply (M1) is comprised of:
coins, paper currency, and checkable deposits.
4.Checkable deposits are classified as money because:
they can be readily used in purchasing goods and paying debts.
5.If the price index rises from 100 to 120, the purchasing power value of the dollar:
will fall by one-sixth.
6.Other things equal, an excessive increase in the money supply will :
decrease the purchasing power of each dollar.
7.The basic policy-making body in the U.S. banking system is the:
a.Federal Open Market Committee (FOMC).
B.Board of Governors of the Federal Reserve.
8.The group that sets the Federal Reserve Systems policy on buying and selling government securities (bills, notes, and bonds) is the:
Federal Open Market Committee (FOMC).
9.Which of the following is the basic economic policy function of the Federal Reserve Banks?
controlling the supply of money
10.The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $100,000 in:
commercial banks and thrifts.
11.Which one of the following is presently a major deterrent to bank panics in the United States?
deposit insurance
12.In a fractional reserve banking system:
banks can create money through the lending process.
13.The reserves of a commercial bank consist of:
deposits at the Federal Reserve Bank and vault cash.
14.The primary purpose of the legal reserve requirement is to:
provide a means by which the monetary authorities can influence the lending ability of commercial banks.
15.Excess reserves refer to the:
difference between actual reserves and required reserves.
16.Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of:
$80,000.
17.A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of:
$3,750.
18.If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement the bank will:
have $45 of additional excess reserves.
19.Overnight loans from one bank to another for reserve purposes entail an interest rate called the:
Federal funds rate.
20.A bank temporarily short of required reserves may be able to remedy this situation by:
borrowing funds in the Federal funds market.
21.If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system:
m = 1/R.
22.Other things equal, if the required reserve ratio was lowered:
the size of the monetary multiplier would increase.
Answer the next question(s) on the basis of the following table for a commercial bank or thrift:
23.Refer to the above table. If the legal reserve ratio falls from 25 percent to 10 percent, excess reserves of this single bank will:
rise by $6,000 and the monetary multiplier will increase from 4 to 10.
24.If the monetary authorities want to reduce the monetary multiplier, they should:
raise the legal reserve ratio.
25. Jay wants to buy a new drum set for his band. He goes to two music stores to compare prices. For Jay, money is functioning as
A unit of account
26. The best advantage in using money rather than a bartering system is its use as a
- Medium of exchange
27. Which of the following would be considered a major component of the money supply M1?
- Checkable deposits
28. If a loan is repaid to a commercial bank
- Money is destroyed
29. Two conflicting goals of commercial banks are
- Liquidity and profits
30. A valid reason for requiring US commercial banks to have reserve requirements is to
- Provide a system in which the transactions of banks may be monitored and controlled
31. Varying the money supply in an economy is beneficial because
- It will help during fluctuations in the business cycle
32. M1 money supply refers to
- Coins and paper money held by the public
33. M2 money supply refers to
- M1 money, savings accounts, and other short-time deposits
34. All of the following are ways the Federal Reserve can change the money supply EXCEPT
- Changing tax rates
35. If the Federal Reserve lowered the reserve ratio to 5%, what would be the new money multiplier?
- 20
Name PeriodDate
Part II: Free Response Questions
- Sewell Bank has the simplified balance sheet below.
Assets / Liabilities
Required reserves $2,000 / Demand deposits $10,000
Excess reserves $0
Customer loans $8,000
(a)Based on Sewell Bank’s balance sheet, calculate the required reserve ratio.
(b) Suppose that the Federal Reserve purchases $5,000 worth of bonds from Sewell Bank. What will be the
change in the dollar value of each of the following immediately after the purchase?
(i)Excess reserves
(ii)Demand deposit
(c) Calculate the maximum amount that the money supply can change as a result of the $5,000 purchase of
bonds by the Federal Reserve.
(d) Suppose that instead of the purchase of bonds by the Federal Reserve, an individual deposits $5,000 in
cash into her checking (demand deposit) account. What is the immediate effect of the cash deposit on the
M1 measure of the money supply?
- Banks play an important role in determining changes in the money supply.
(a)Assume that a bank receives a cash deposit of $9,000 from a customer. What is the immediate impact of this transaction on the money supply? Explain.
(b)Suppose that the reserve requirement is 10 percent and banks voluntarily keep an additional 10 percent in reserves. Calculate each of the following:
(i)The maximum amount by which this bank will increase its loans from the transaction in part (a)
(ii)The maximum increase in the money supply that will be generated from the transaction in part (a)