115) The Citizens First Bank sells $100,000 of government securities to the Fed. This sale
immediately
A) decreases the quantity of money.
B) decreases the bank’s checkable deposits.
C) increases the bank’s reserves.
D) decreases the bank’s assets.
E) increases the bank’s required reserves.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
116) When the Fed conducts an open market purchase, the irst round changes in the
money creation process are that excess reserves ________, bank deposits ________, and the
quantity of money ________.
A) decrease; decrease; decreases
B) increase; do not change; increases
C) decrease; increase; does not change
D) do not change; increase; increases
E) increase; increase; increases
Skill: Level 2: Using deinitions
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
117) A currency drain is cash ________ and has ________ efect on the money multiplier.
A) draining into the banks; no
B) draining into the banks; an
C) held outside the banks; an
D) held at the Fed; an
E) held as reserves; no
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
101
118) The money multiplier is used to determine how much the
A) monetary base increases when the Fed purchases government securities.
B) quantity of money increases when the monetary base increases.
C) monetary base increases when the quantity of money increases.
D) quantity of money increases when the required reserve ratio increases.
E) monetary base increases when the Fed sells government securities.
Skill: Level 1: Deinition
Section: Checkpoint 11.4
Status: Old
AACSB: Relective thinking
119) The Fed makes an open market operation purchase of $200,000. The currency drain
ratio is 33.33 percent and the desired reserve ratio is 10 percent. By how much does the
quantity of money increase?
A) $800,000
B) $333,333
C) $2,000,000
D) $615,416
E) $465,116
Skill: Level 5: Critical thinking
Section: Checkpoint 11.4
Status: Revised
AACSB: Analytical thinking
11.5 Integrative Questions
1) Money market mutual funds
A) are included in M2 but not M1.
B) are included in M1 but not M2.
C) are included in M1 and M2.
D) are the largest part of the monetary base.
E) None of the above is correct.
Skill: Level 1: Deinition
Section: Integrative
Status: Old
AACSB: Relective thinking
102
2) Which of the following inancial institutions does NOT have to meet minimum reserve
ratios?
i. the Fed
ii. commercial banks
iii. credit unions
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
Skill: Level 2: Using deinitions
Section: Integrative
Status: Old
AACSB: Relective thinking
3) If the desired reserve ratio increases, then
A) banks’ desired reserves increase and their excess reserves decrease.
B) bank customers become more willing to make deposits in banks.
C) banks are able to make more loans.
D) banks can buy more government securities.
E) the Fed has supplied banks with more reserves.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
4) If the desired reserve ratio decreases, then
A) banks’ desired reserves increase and their excess reserves decrease.
B) bank customers become more willing to make deposits in banks.
C) banks are able to make more loans.
D) banks are forced to buy fewer government securities.
E) banks’ desired reserves decrease and their excess reserves do not change.
Skill: Level 4: Applying models
Section: Integrative
Status: Old
AACSB: Relective thinking
103
5) If the Fed buys a $100,000 government security from a bank when the desired reserve
ratio is 20 percent and the currency drain ratio is 5 percent, the bank can loan a maximum
of
A) $75,000.
B) $80,000.
C) $100,000.
D) $95,000.
E) $85,000.
Skill: Level 1: Deinition
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) If the Fed buys a $100,000 government security from a bank when the desired reserve
ratio is 10 percent and the currency drain ratio is 50 percent, the bank can loan a
maximum of
A) $50,000.
B) $40,000.
C) $100,000.
D) $90,000.
E) $60,000.
Skill: Level 1: Deinition
Section: Integrative
Status: Old
AACSB: Analytical thinking
11.6 Essay: What Is Money?
1) Deine money and list its functions.
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Relective thinking
104
2) List and deine the three functions of money.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
3) What is barter? What is a double coincidence of wants? How does the existence of
money afect barter?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
4) Explain which of the following count as money.
a. a check in Ann’s checkbook
b. currency in Ann’s bank
c. currency in Ann’s purse
d. Ann’s checking deposit
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
105
5) What is iat money?
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
6) “Even though we can convert them into money, deposits at banks are not money.” Is the
previous statement correct or not?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Relective thinking
7) Are checks money?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Relective thinking
8) “Credit cards are considered money because they serve to purchase goods and services.”
Is the previous statement true or false?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Relective thinking
106
9) Are credit cards or debit cards money? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
10) What makes up M1? Is M1 larger or smaller than real GDP?
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
11) What assets are included in M1? In M2? Is all of M1 and M2 money? If some assets of
M1 or M2 are not money, why are they included in M1 or M2?
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
107
12) Explain what is included in M1 and M2. Is all of M1 money? Is all of M2 money?
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Written and oral communication
13) What is larger: M1 or M2? Why?
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Analytical thinking
14) “By deinition, all parts of M2 are money.” Is the previous statement correct or not?
Explain your answer.
Skill: Level 1: Deinition
Section: Checkpoint 11.1
Status: Old
AACSB: Relective thinking
15) If you have assets that include $50 in cash, a checking account with $135, a savings
account with $500, and a jar of coins for laundry of $15.75, how much M1 do you have?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Analytical thinking
108
16) If you hold $25 in cash, have $150 in a checking account, and have $250 in a savings
account, how much of M2 do you have?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.1
Status: Old
AACSB: Analytical thinking
11.7 Essay: The Banking System
1) What are the institutions that make up the nation’s banking system?
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
2) What are the three types of inancial institutions that accept deposits that are part of the
U.S. money supply? Briely describe each of the three types of inancial institutions.
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Written and oral communication
3) Explain what is meant by the phrase a bank’s “balancing act.”
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Written and oral communication
4) “Banks make a proit by paying depositors a high rate to attract funds and making loans
at a low rate to encourage borrowing.” Is the previous statement correct or not?
the loans they make exceeds the interest rate they must pay on the deposits they attract.
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
5) “Banks hold about 50 percent of their assets as reserves.” Is the previous statement
correct or not?
Skill: Level 2: Using deinitions
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
6) “To count as required reserves, the reserves must be on deposit at the bank’s district
Federal Reserve Bank.” Is the previous statement correct or incorrect?
Skill: Level 1: Deinition
Section: Checkpoint 11.2
Status: Old
AACSB: Relective thinking
7) The First National Bank of Townville has $125,000 in U.S. government securities,
$200,000 in savings accounts, $300,000 in checking accounts, $50,000 in its reserve
account at the Fed, $10,000 of currency in its vault, and loans of $250,000. What is the
amount of its reserves?
Skill: Level 3: Using models
Section: Checkpoint 11.2
Status: Old
AACSB: Analytical thinking
110