Chapter 16

Which of the following best defines liquidity?
a.The ease with which an asset is converted to the medium of exchange.
b.The purchasing power of an asset in the domestic country relative to a foreign country.
c.The official government measurement of scarcity of an asset relative to other assets.
d.How well an asset holds its value over time.

a.The ease with which an asset is converted to the medium of exchange.

Stocks and bonds a.are forms of money, according to economists. b.are examples of stores of value and units of account, but do not function as medium of exchange. c.have all the same functions as money, but are not considered money by economists. d.are examples of stores of value, but not units of account nor medium of exchange.d.are examples of stores of value, but not units of account nor medium of exchange.The government of fictional country of Dobar has decided to use paper currency, known as Dobar dollars, as money. Which of the following best describes Dobar dollars? a.Dobar dollars are fiat money with no intrinsic value. b.Dobar dollars are commodity money with intrinsic value. c.Dobar dollars are both fiat money and commodity money. d.Dobar dollars are neither commodity money nor fiat money.a.Dobar dollars are fiat money with no intrinsic value.Which of the following is not a function of money? a.A unit of account b.Medium of exchange c.A store of value d.A tool to increase barterd.A tool to increase barterYou purchase a beer at a bar using cash. The fact that the bar accepts your cash for the beer but illustrates which function of money? a. Medium of exchange b. Store of debt c. Unit of account d. Liquiditya. Medium of exchangeAshley owns a home worth $500,000 and owes $100,000 in student loans. If you asked an economist, she would say Ashley has $400,000 worth of money. True FalsefalseWhich of the following best defines commodity money? a. Money that must be backed by a precious metal, such as silver b. Money that takes the form of a commodity with intrinsic value c. Money without intrinsic value that is used because of government decree d. Money that does not allow prices to adjust to supply and demandb. Money that takes the form of a commodity with intrinsic valueWhich of the following lists accurately describes M1? a. Demand deposits, traveler's checks, other checkable deposits and currency b. Only currency c. Savings deposits, small time deposits, money market mutual funds and other minor categories d. Savings deposits, checking deposits, and currencya. Demand deposits, traveler's checks, other checkable deposits and currencyWhich type of money has no intrinsic value? a. Commodity money b. Gold c. Fiat money d. Neither commodity money nor fiat money has intrinsic value.c. Fiat moneyWhich of the following is the best example of the medium of exchange function of money? a. The money in your savings account can be used for future purchases b. You give a maid money to clean your house c. In your job as an accountant, you record the assets and liabilities of your employer in terms of dollar amounts d. Your loan repayments are measured in dollarsb. You give a maid money to clean your houseWhich of the following scenarios does not involve the use of commodity money? a. Colonists in Virginia used tobacco as money. b. The fictional country of Feles uses silver as money. c. Prisoners use cigarettes or some other good as money. d. The government of the fictional country of Owana orders the use of paper dollars as money.d. The government of the fictional country of Owana orders the use of paper dollars as money.Which of the following best illustrates the concept of a store of value? a. At any point in time, you can check the price of a U.S. dollar in terms of Japanese yen. b. You purchase a home in anticipation of selling it in 2 years when the real estate market "heats up." c. You sell an old desk online and list the price in terms of dollars. d. Everyone in your town has agreed to accept eggs as payment for goods and services.b. You purchase a home in anticipation of selling it in 2 years when the real estate market "heats up."U.S. dollars are an example of fiat money and alcohol used to make trades is an example of commodity money. True FalsetrueWhich scenario is the best example of the unit of account function of money? a. You have a yard sale, and you put a price tag of $50 on your old television and $10 for your old pots. b. The money you have now can be used towards the purchase of a car today, or a new model of car next year. c. The grocery store you shop at accepts money in exchange for their food. d. Selling your house for cash requires a long and complicated process, while your video games can be sold for cash quickly and easily.a. You have a yard sale, and you put a price tag of $50 on your old television and $10 for your old pots.Raymond works as a valuation expert. His job is to look at companies, assess how much their assets and liabilities are worth, and place a dollar valuation on the company that other companies must pay in an acquisition. Raymond's company valuations are an example of the unit of account function of money. True FalsetrueWhich of the following most closely fits an economist's definition of "money"? a. Goods or services that can be consumed b. Any asset that stores value c. Total assets minus total liabilities d. The set of assets in an economy that people regularly use to buy goods and servicesd. The set of assets in an economy that people regularly use to buy goods and servicesA store of value is a. an item people use to post prices and record debts. b. the item that can be converted into currency with ease. c. an item that buyers give to sellers when they want to purchase goods and services. d. an item that people can use to transfer purchasing power from the present to the future.d. an item that people can use to transfer purchasing power from the present to the future.Which of the following would fit an economist's definition of "money"? a. A $20 bill b. A municipal bond from the state of California. c. A 10 bedroom and 12 bathroom mansion d. A share of stock in Ford Motor Companya. A $20 billWhich of the following is not correct about the Fed? a. The Federal Reserve Chair is appointed by the speaker of the house to a four-year term. b. Members of the Board of Governors serve 14-year terms. c. The Board of Governors has 7 members. d. The Federal Reserve has 12 regional banks.a. The Federal Reserve Chair is appointed by the speaker of the house to a four-year term.The members of the Federal Reserve's Board of Governors a. are appointed by the president of the U.S. and confirmed by the U.S. Senate. b. serve 16-year terms to get insulated from political pressures. c. are required to have been economics professors at elite universities. d. have 10 members in total.a. are appointed by the president of the U.S. and confirmed by the U.S. Senate.When it sells government bonds to decrease the money supply, the Fed is a. conducting an open-market sale. b. conducting an open-market purchase. c. regulating a bank. d. enacting fiscal policy.a. conducting an open-market sale.Which of the following does the Federal Reserve do? a. Controls fiscal policy in the United States b. Act as a lender of last resort to banks c. Convert Federal Reserve Notes into gold d. It makes loans to any qualified business that requests oneb. Act as a lender of last resort to banksThe two primary tasks of the Federal Reserve are a. monetary policy and bank regulation. b. fiscal policy and bank regulation. c. monetary policy and national security. d. monetary policy and tax collection.a. monetary policy and bank regulation.Which of the following is not true regarding the Federal Reserve? a. The Fed was created in 1913. b. The Fed is the U.S.'s central bank. c. The Fed has other duties in addition to controlling the money supply. d. The Fed was created to facilitate the federal government's collection of taxes as well as its expenditures.d. The Fed was created to facilitate the federal government's collection of taxes as well as its expenditures.The New York Federal Reserve Bank a. president always gets to vote at the FOMC meetings. b. president always gets appointed as the Fed chairman by the president of the United States. c. is not represented at FOMC meetings. d. is the only regional bank that has, by default, two voting members in the FOMC.a. president always gets to vote at the FOMC meetings.The agency responsible for regulating the money supply in the United States is U.S. Treasury. True FalsefalseJerome Powell was a. reappointed Chair of the Board of Governors in 2009 by President Barack Obama. b. appointed Chair of the Board of Governors in 1995 by President Bill Clinton. c. appointed Chair of the Board of Governors in 1991 by President George H.W. Bush. d. appointed Chair of the Board of Governors in 2017 by President Donald Trump.d.appointed Chair of the Board of Governors in 2017 by President Donald Trump.When it buys government bonds to increase the money supply, the Fed is a. conducting an open-market sale. b. conducting an open-market purchase. c. regulating a bank. d. enacting fiscal policy.b. conducting an open-market purchase.The Federal Open Market Committee (FOMC) is responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system. True FalsefalseCentral banks are institutions a. designed to oversee the banking system and regulate the quantity of money in the economy. b. tasked with creating fiscal policy in an economy. c. that do not exist in the United States today. d. that exist today, but only in the United States.a. designed to oversee the banking system and regulate the quantity of money in the economy.If the reserve ratio is 20 percent, the money multiplier is a.5. b.20. c.1/20. d.8/10.a. 5The manager of the bank where you work tells you that your bank has $10 million in excess reserves. She also tells you that the bank has $200 million in deposits and $165 million in loans. Given this information you find that the reserve requirement must be a.25/200. b.10/200. c.15/200. d.35/200.a.25/200.In order to ensure banks can pay back depositors, Bank regulators impose a. leverage. b. capital requirements. c. short-term securities. d. loans.b. capital requirements.First Bank of Zogua, a fictional bank, has made a $1 million loan. This loan appears on what part of T-account of the First Bank of Zogua? a. liabilities. b. assets. c. reserves. d. contingent considerations.b. assets.In response to the credit crunch in 2008 and 2009, the U.S. Treasury ____ a. took operating control of all of the U.S. banks. b. put public funds into the banking system to increase the amount of bank capital. c. decided not to act, instead allowing the market to correct the credit crunch. d. put public funds into the banking system to decrease the amount of bank capital.b. put public funds into the banking system to increase the amount of bank capital.If the reserve ratio is 20 percent, then $150 of new reserves can generate a.$170 of new money in the economy. b.$750 of new money in the economy. c.$3,000 of new money in the economy. d.$75 of new money in the economy.b.$750 of new money in the economy.One of the key differences between a fractional-reserve banking system and a 100-percent-reserve banking system is that a. in a 100-percent-reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a fractional reserve banking system keep all deposits as reserves. b. in a fractional reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a 100-percent-reserve banking system keep all deposits as reserves. c. there are no important differences between the two banking systems. d. in a fractional reserve banking system banks are prohibited from loaning reserves, while banks in a 100-percent-reserve banking system are required to loan reserves.b. in a fractional reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a 100-percent-reserve banking system keep all deposits as reserves.Suppose a bank has total assets of $1,000, capital of $50, and liabilities of $950; the leverage ratio for this bank is ____. a.0.95 b.20 c.1.053 d.0.05b.20Which of the following is not true in a system of 100-percent-reserve banking? a. Banks influence the supply of money. b. Banks accept deposits. c. Banks hold all deposits in reserves until the depositor withdraws the funds. d. Banks do not make loans.a. Banks influence the supply of money.Bank assets divided by bank capital is known as a. the leverage coefficient b. the leverage ratio c. the money multiplier d. required reserve ratiob. the leverage ratioIf R represents the reserve ratio for all banks in the economy, then the money multiplier must be equal to 1 divided by what? a.(1-R) b. R c.(1+R) d.R2B. RAs the reserve ratio increases, the money multiplier a. does not change. b. increases. c. increases, then decreases, then increases again. d. decreases.d. decreases.As a result of sizable losses in 2008 and 2009, banks experienced a shortage of capital, which induced them to ____ a. increase lending because capital requirements made it easier to lend. b. decrease lending because they had to meet capital requirements. c. increase profits. d. increase lending because they had to meet capital requirements.b. decrease lending because they had to meet capital requirements.Suppose the money multiplier is equal to 1 in the economy of the fictional country of Opria. What does this indicate about the type of banking system in Opria? a. Opria uses a 100-percent reserve system and banks create money. b. Opria uses a fractional reserve banking system and banks create money. c. Opria uses a 100-percent reserve system and banks do not create money. d. Opria uses a fractional reserve banking system and banks do not create money.c. Opria uses a 100-percent reserve system and banks do not create money.If 1/R is the money multiplier in an economy, what must R represent? a. the assets of all banks in the economy b. the reserve ratio for all banks in the economy c. the loans of all banks in the economy. d. the liabilities of all banks in the economyb. the reserve ratio for all banks in the economyIn a 100-percent-reserve banking system, if an individual deposits money in their checking account, currency would a. increase, but demand deposits would decrease by the same amount and M1 would not change. b. decrease, but demand deposits would increase by the same amount and M1 would not change. c. increase, while demand deposits would decrease by less and M1 would increase. d. decrease, while demand deposits would increase by less and M1 would decrease.b. decrease, but demand deposits would increase by the same amount and M1 would not change.First Bank of Zogua, a fictional bank, has just received a $100 deposit from an individual. This deposit appears on what part of T-account of the First Bank of Zogua? a. liabilities. b. assets. c. reserves. d. contingent considerations.a. liabilities.Suppose the money multiplier has increased. Which of the following is the most likely cause? a. the reserve ratio does not change. b. the reserve ratio increases. c. the money multiplier cannot increase. d. the reserve ratio decreases.d. the reserve ratio decreases.Under what reserve ratio is a bank unable to create money? a.5% b.8% c.100% d.90%C. 100%In a 100-percent-reserve banking system, if an individual withdraws money from their checking account, currency would a. increase, but demand deposits would decrease by the same amount and M1 would not change. b. decrease, but demand deposits would increase by the same amount and M1 would not change. c. increase, while demand deposits would decrease by less and M1 would increase. d. decrease, while demand deposits would increase by less and M1 would decrease.a. increase, but demand deposits would decrease by the same amount and M1 would not change.If the reserve ratio is 5 percent, then $500 of new reserves can generate a.$2,500 of new money in the economy. b.$10,000 of new money in the economy. c.$1,000 of new money in the economy. d.$25 of new money in the economy.b.$10,000 of new money in the economy.Suppose a bank is operating with a leverage rate of 20. A 4 percent increase in the value of assets a. will result in an 80 percent increase in owner's equity. b. will reduce liabilities by 4 percent. c. will reduce liabilities by 20 percent. d. will result in an 80 percent decrease in owner's equity.a. will result in an 80 percent increase in owner's equity.A bank which must hold 100 percent reserves opens in an economy that had no banks and a total initial money supply (currency) of $1,000. If customers deposit $87 into the bank, what is the value of the money supply? a.$1,087 b.$1,000 c.$87 d.$913b.$1,000Under what system do banks generally lend out the majority of the funds deposited? a.100-percent-reserve banking b. Fractional reserve banking c. No such banking system exists d. Demand deposit bankingb. Fractional reserve bankingIf $200 of new reserves generates $1,000 of new money in the economy, then the reserve ratio is a.12.5 percent. b.20 percent. c.5 percent. d.100 percent.b.20 percent.Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits? a.$105 billion b.$950 billion c.$5 billion d.$500 billionb.$950 billionA bank's reserve ratio is 20 percent and the bank has $1,000 in deposits. Its reserves amount to a.$200. b.$50. c.$20. d.$2,000.a.$200.If a bank has just enough reserves to meet the required reserve ratio of 25 percent, and receives a deposit of $800, it has initially experienced a a.$800 increase in required reserves and no increase in excess reserves. b.$800 increase in excess reserves and no increase in required reserves. c.$200 increase in excess reserves and a $600 increase in required reserves. d.$600 increase in excess reserves and a $200 increase in required reserves.d.$600 increase in excess reserves and a $200 increase in required reserves.Which of the following best describes what occurs under the Fed's Term Auction Facility? a. The Fed auctions a set amount of funds, and the bank that offers to pay the highest rate for the funds will get to borrow from the Fed. b. The Fed competes with other foreign central banks in an auction to borrow from major U.S. commercial banks. c. The Fed auctions off items repossessed from individuals who have evaded taxes. d. The Fed auctions funds at a set interest rate, and the bank that offers to borrow the most funds will get to borrow from the Fed.a. The Fed auctions a set amount of funds, and the bank that offers to pay the highest rate for the funds will get to borrow from the Fed.If the money multiplier is 5 and the Fed wants to increase the money supply by $100,000, it could a. buy $20,000 worth of bonds. b. sell $20,000 worth of bonds. c. sell $100,000 worth of bonds. d. buy $100,000 worth of bonds.a. buy $20,000 worth of bonds.The manager of the bank where you work tells you that the bank has $500 million in deposits and $350 million dollars in loans. If the reserve requirement is 5 percent, how much is the bank holding in excess reserves? a.$125 million b.$25 million c.$50 million d.$150 milliona.$125 millionWhich of the following will make banks want to hold more reserves at the Fed, causing the money multiplier to decrease? a. The Fed increases the interest rate on bank deposits held at the Fed. b. The Fed keeps the interest rate on bank deposits held at the Fed constant. c. The Fed does not allow banks to keep reserves at the Fed. d. The Fed decreases the interest rate on bank deposits held at the Fed.a. The Fed increases the interest rate on bank deposits held at the Fed.Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will a. increase by more than $50,000. b. increase by less than $50,000. c. decrease by less than $50,000. d. increase by exactly $50,000.a. increase by more than $50,000.The Fed conducts open market operations that cause bank withdrawals and lending to decrease. The Fed has a. conducted open market sales. b. decreased taxes. c. increased taxes. d. conducted open market purchases.a. conducted open market sales.To decrease the money supply the Fed can conduct open-market sales. Alternatively, the Fed can a. increase the discount rate. b. not change the discount rate. c. stop lending money to banks. d. decrease the discount rate.a. increase the discount rate.Assume banks hold no excess reserves. If the Fed decreases the reserve ratio from 20 percent to 10 percent, then the money multiplier a. decreases from 5 to 10. b. increases from 10 to 20. c. increases from 5 to 10. d. decreases from 20 to 10.c. increases from 5 to 10.Assume banks hold no excess reserves. If the Fed increases the reserve ratio from 5 percent to 10 percent, then the money multiplier a. decreases from 20 to 10. b. increases from 10 to 20. c. increases from 5 to 10. d. decreases from 10 to 5.a. decreases from 20 to 10.All else equal, which of the following will cause the money supply to fall? a. banks decide to hold more excess reserves relative to deposits. b. banks decide to hold the same amount of excess reserves relative to deposits. c. banks make more loans. d. banks decide to hold less excess reserves relative to depositsa. banks decide to hold more excess reserves relative to deposits.When the Fed buys U.S. government bonds, it has conducted a. open market purchases, which increase the money supply. b. open market sales, which increase the money supply. c. open market sales, which decrease the money supply. d. open market purchases, which decrease the money supply.a. open market purchases, which increase the money supply.Which of the following decrease when the Fed makes open market purchases? a. currency and reserves b. reserves but not currency. c. neither currency nor reserves d. currency but not reservesc. neither currency nor reservesOne reason that the Fed's control of the money supply is not precise is because ____ a. the Fed has only one monetary tool. b. none of the Fed's tools are powerful. c. the Fed does not control the amount that banks choose to lend. d. the Fed cannot provide incentives for banks.c. the Fed does not control the amount that banks choose to lend.The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 20 percent. If the Fed lowers the reserve requirement to 10 percent and at the same time buys $20 billion worth of bonds, then by how much does the money supply change? a. It rises by $110 billion. b. It rises by $1,200 billion. c. It decreases by $100 billion. d. It rises by $2,400 billion.b. It rises by $1,200 billion.To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can a. increase the discount rate. b. not change the discount rate. c. stop lending money to banks. d. decrease the discount rate.d. decrease the discount rate.The Fed changes the discount rate and, as a direct result, reserves have increased. The Fed has most likely a. increased the discount rate. b. not changed the discount rate. c. stopped lending money to banks. d. decreased the discount rate.d. decreased the discount rate.Suppose the Fed wishes to decrease the money supply, which of the following open market operations will the Fed conduct to accomplish this goal? a. Sells bonds to the public. b. Lowers the discount rate. c. Increases lending to member banks. d. Purchases bonds from the public.a. Sells bonds to the public.When the Fed sells U.S. government bonds, it has conducted a. open market purchases, which increase the money supply. b. open market sales, which increase the money supply. c. open market sales, which decrease the money supply. d. open market purchases, which decrease the money supply.c. open market sales, which decrease the money supply.The amount of reserves banks must hold against deposits is known as a. reserve requirement. b. discount rate. c. term auction requirement. d. critical reserve ratio. Feedback: Correct. Reserve requirea. reserve requirement.The Fed has decreased the money supply through open market operations. Which of the following has occurred? a. open market sales, and bank reserves increase. b. open market sales, and bank reserves decrease. c. open market purchases and bank reserves decrease. d. open market purchases, and bank reserves increase.b. open market sales, and bank reserves decrease.Suppose that in a country people lose confidence in the banking system and so hold relatively more currency and less deposits. As a result, bank reserves will a. decrease and the money supply will eventually decrease. b. increase and the money supply will eventually decrease. c. increase and the money supply will eventually increase. d. decrease and the money supply will eventually increase.a. decrease and the money supply will eventually decrease.When the Fed sells government bonds the money supply increases and the federal funds rate decreases. True FalsefalseThe Fed changes the discount rate and, as a direct result, reserves have decreased. The Fed has most likely a. decreased the discount rate. b. not changed the discount rate. c. stopped lending money to banks. d. increased the discount rate.d. increased the discount rate.The interest rate at which banks lend reserves to each other overnight is known as a. the prime rate. b. the discount rate. c. the LIBOR. d. the federal funds rate.d. the federal funds rate.The Fed most often influences the money supply by changing reserve requirements for banks. True FalsefalseWhen the Fed purchases government bonds the money supply increases and the federal funds rate decreases. True FalsetrueBanks can borrow money from the Fed's discount window. Alternatively banks can a. borrow money from the Fed's Term Auction Facility. b. participate in auctions at the Fed's discount window. c. borrow money from foreign governments at the Fed's Term Auction Facility. d. borrow money from commercial banks at the Fed's Term Auction Facilitya. borrow money from the Fed's Term Auction Facility.In a system of fractional-reserve banking, the amount of money in the economy depends on the behavior of ____ a. only bankers. b. depositors and bankers but does not prevent the Fed from perfectly controlling the money supply. c. depositors and bankers, which prevents the Fed from perfectly controlling the money supply. d. only depositors.c. depositors and bankers, which prevents the Fed from perfectly controlling the money supply.The rate charged at the Fed's "discount window" is known as the a. depreciation rate. b. the federal funds rate. c. the discount rate. d. weighted average cost of capital.c. the discount rate.One reason that the Fed's control of the money supply is not precise is because ____ a. the Fed has only one monetary tool. b. none of the Fed's tools are powerful. c. households' decisions, which are out of the Fed's control, impact the money supply. d. the Fed cannot provide incentives for banks.c. households' decisions, which are out of the Fed's control, impact the money supply.If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $50 million worth of government bonds, bank reserves a. increase by $50 million and the money supply eventually increases by $500 million. b. increase by $50 million and the money supply eventually increases by $100 million. c. decrease by $50 million and the money supply eventually decreases by $100 million. d. decrease by $50 million and the money supply eventually decreases by $500 million.a. increase by $50 million and the money supply eventually increases by $500 millionThe money supply increases if a. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans. b. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans. c. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans. d. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans.c. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans.Which of the following is not a function of money? a. Store of value b. Medium of exchange c. Unit of account d. Protection against inflationd. Protection against inflationThe M1 money supply is composed of a. currency, demand deposits, traveler's checks, and other checkable accounts. b. currency, demand deposits, savings deposits, money market mutual funds, and small time deposits. c. currency, government bonds, gold certificates, and coins. d. currency, NOW accounts, savings accounts, and government bonds.a. currency, demand deposits, traveler's checks, and other checkable accounts.An example of fiat money is a. cigarettes in a prisoner-of-war camp. b. paper dollars. c. gold.b. paper dollars.The Board of Governors of the Federal Reserve System consists of a. seven members elected by the Federal Reserve Banks. b. twelve members appointed by Congress. c. seven members appointed by Congress and seven appointed by the president. d. five members appointed by the president and seven rotating presidents of the Federal Reserve Banks. e. up to seven members appointed by the presidente. up to seven members appointed by the presidentCommodity money a. has no intrinsic value. b. is used as reserves to back fiat money. c. has intrinsic value. d. is used exclusively in the United States.c. has intrinsic value.To insulate the Federal Reserve from political pressure, a. the Board of Governors are appointed to fourteen-year terms. b. the Board of Governors are elected by the public. c. the Board of Governors have lifetime tenure. d. the Board of Governors are supervised by the House Banking Committeea. the Board of Governors are appointed to fourteen-year terms.Which of the following statements is true? a. The FOMC meets once per year to discuss monetary policy. b. When the Fed sells government bonds, the money supply decreases. c. The primary tool of monetary policy is the reserve requirement. d. The Federal Reserve was created in 1871 in response to the Civil War.b. When the Fed sells government bonds, the money supply decreases.Required reserves of banks are a fixed percentage of their a. government bonds. b. deposits. c. loans. d. assets.b. deposits.If the reserve ratio is 25 percent, the value of the money multiplier is a. 0.25. b. 4. c. 5. d. 25.b. 4.Which of the following policy actions by the Fed is likely to increase the money supply? a. reducing reserve requirements b. selling government bonds c. increasing the discount rate d. increasing interest on reservesa. reducing reserve requirementsSuppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action? a. $10,000 b. $9,000 c. $0c. $0A decrease in the reserve requirement causes a. reserves to rise. b. reserves to fall. c. the money multiplier to rise. d. the money multiplier to fall.c. the money multiplier to rise.The discount rate is a. the interest rate banks pay on the public's deposits. b. the interest rate the Fed charges on loans to banks. c. the interest rate paid by banks at the Term Auction Facility. d. the interest rate the public pays when borrowing from banks.b. the interest rate the Fed charges on loans to banks.Which of the following policy combinations would consistently work to increase the money supply? a. sell government bonds, decrease reserve requirements, decrease the discount rate b. sell government bonds, increase reserve requirements, increase the discount rate c. buy government bonds, increase reserve requirements, decrease the discount rate d. buy government bonds, decrease reserve requirements, decrease the discount rated. buy government bonds, decrease reserve requirements, decrease the discount rateSuppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent? a. $1,000 b. $0 c. $4,000 d. $5,000d. $5,000Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank, a. the money supply decreases by less than $1,000. b. the money supply increases by less than $1,000. c. the money supply increases by more than $1,000. d. the money supply is unaffectedd. the money supply is unaffectedIf the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements, a. we cannot be certain what will happen to the money supply. b. the money supply should fall. c. the money supply should remain unchanged.a. we cannot be certain what will happen to the money supply.Which of the following statements about a bank's balance sheet is true? a. An increase in a bank's capital increases its leverage ratio. b. Assets minus liabilities equals owner's equity or capital. c. The largest liability on the bank's balance sheet is its loans. d. Because a bank is highly leveraged, a large change in the value of its assets has little impact on its capital.b. Assets minus liabilities equals owner's equity or capital.The Fed's tools of monetary control are a. the money supply, government purchases, and taxation. b. government expenditures, taxation, reserve requirements, and interest rates. c. fiat, commodity, and deposit money. d. open-market operations, lending to banks, reserve requirements, and paying interest on reserves.d. open-market operations, lending to banks, reserve requirements, and paying interest on reserves.If banks increase their holdings of excess reserves a. the money multiplier and the money supply increase. b. the money multiplier and the money supply decrease. c. the money multiplier decreases and the money supply increases. d. the money multiplier increases and the money supply decreases.b. the money multiplier and the money supply decrease.

Chapter 16

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