b.
approximately doubled the M1 money supply.
c.
approximately doubled the monetary base.
d.
maintained the monetary base at a constant level.
164. Which of the following would lead to a rapid growth of the money supply in the future?
a.
the use of large excess reserves by banks to extend additional loans
b.
a reduction in government expenditures to reduce the size of the federal deficit
c.
an increase in government expenditures financed by taxes
d.
an increase in the interest rate the Fed pays banks holding excess reserves
165. The large increase in the excess reserves held by the commercial banking system during the second
half of 2008,
a.
increases the likelihood of a sharp contraction in the money supply, which would increase
the length and severity of the recession.
b.
increases the likelihood of a rapid increase in the money supply, potentially leading to
future inflation.
c.
is merely a continuation of the trend present since 1990.
d.
reduces the ability of banks to extend additional loans.
166. Historically, the excess reserves of banks have been ________ relative to checkable deposits, but
during the crisis of 2008 the excess reserves of banks ________. (Fill in the blanks)
a.
large; declined sharply
b.
small; fell sharply
c.
small; increased sharply
d.
large; increased sharply
167. During the second half of 2008, the Fed approximately doubled the reserves of the commercial banking
system. As a result, the M1 money supply
a.
fell sharply, because the banks used the excess reserves to extend additional loans.
b.
also approximately doubled.
c.
was unchanged, because bank reserves will not affect the M1 money supply.
d.
increased, but by a much smaller amount, because the banks used only a small portion of
their excess reserves to extend additional loans.
168. Prior to 2008, the primary tool used by the Fed to control the money supply was
a.
the manipulation of the required reserve ratio banks must hold against their checking
deposits.
b.
the extension of loans to financial institutions.
c.
the buying and selling of stocks and corporate bonds.
d.
the buying and selling of U.S. Treasury securities.
169. Which of the following was true of the actions of the Federal Reserve in response to the recession of
2008?
a.
The Fed shifted toward a highly restrictive monetary policy in 2008, which was a major
cause of the recession.
b.
The Fed continued to focus only on price stability and therefore it expanded the money
supply at a slow and steady rate throughout the recession.
c.
The Fed introduced several new procedures for the conduct of monetary policy and it
increased the monetary base rapidly as the recession worsened.
d.
The Fed continued to purchase and sell only U.S. Treasury bonds when conducting open
market operations to control the money supply.
170. The Fed’s use of the interest rate it pays banks on their excess reserves
a.
is a tool the Fed has used effectively over the past several decades to control the money
supply.
b.
is a tool that can be used to reduce the supply of money, but it cannot be used to expand it.
c.
is a monetary tool that the Fed introduced in 2008.
d.
is a tool that could be used to expand the money supply, but it could not be used to reduce
it.
171. During the financial crisis of 2008-2010, the Fed
a.
increased its purchases of securities and other financial assets and extended more loans,
which expanded the monetary base.
b.
increased its purchases of securities and other financial assets and extended more loans,
which reduced the monetary base.
c.
reduced its purchases of securities and other financial assets and extended fewer loans,
which expanded the monetary base.
d.
reduced its purchases of securities and other financial assets and extended fewer loans,
which caused the monetary base to decline.
172. During the financial crisis of 2008-2010, the Fed increased its purchases of securities and extended
more loans, which caused the monetary base to
a.
increase rapidly, but the M1 money supply declined because the banks loaned out most
of the additional reserves to businesses.
b.
fall, but the M1 money supply still expanded rapidly because the banks increased their
loans to businesses.
c.
increase rapidly, but the M1 money supply expanded at a much slower rate because the
banks enlarged their excess reserves.
d.
fall, and this led to a sharp decline in the M1 money supply.
173. During the three years following the financial crisis of 2008,
a.
the monetary base more than doubled and the M1 money supply increased even more
rapidly.
b.
the monetary base more than doubled, but the M1 money supply increased much less
rapidly.
c.
the monetary base fell by almost 50 percent, but the M1 money supply continued to grow
at a steady rate.
d.
the monetary base fell by almost 50 percent, causing a sharp reduction in the M1 money
supply.
174. Other things constant, which of the following would cause the M1 money supply to decline?
a.
an increase in the quantity of U.S. currency held overseas
b.
a shift of funds from interest-earning checking deposits to money market mutual funds
c.
a reduction in the general public’s holdings of currency outside of banks because debit
cards have become more popular and widely accepted
d.
a shift of funds from money market mutual funds into stock and bond mutual funds
because the fees to invest in the latter have declined
175. If banks move a substantial portion of depositors’ money from interest-earning checking accounts into
money-market deposit accounts, how will the money supply measures be affected?
a.
M1 will become smaller, and M2 will become larger.
b.
Both M1 and M2 will increase in size.
c.
Both M1 and M2 will decrease in size.
d.
The size of M1 will be reduced, but M2 will be unchanged.
176. Which of the following items are counted in M2?
a.
stock mutual funds
b.
money-market mutual funds
c.
bond mutual funds
d.
all of the above
177. Other things constant, which of the following would cause the M2 money supply to decline?
a.
an increase in the quantity of U.S. currency held overseas
b.
a shift of funds from interest-earning checking accounts to money market mutual funds
c.
a reduction in the general public’s holdings of currency outside of banks because debit
cards have become more popular and widely accepted
d.
a shift of funds from money market mutual funds into stock and bond mutual funds
because the fees to invest in the latter have declined
178. When using the money supply figures to measure the direction of monetary policy during the last
several decades, it is better to look at changes in the M2 money supply rather than M1 because
a.
the increase in popularity of interest-earning checking accounts in the 1980s distorted the
M2 money supply but not the M1 money supply.
b.
the increase in popularity of interest-earning checking accounts in the 1980s distorted the
M1 money supply but not the M2 money supply.
c.
the decrease in popularity of interest-earning checking accounts in the 1980s distorted the
M1 money supply but not the M2 money supply.
d.
the decrease in popularity of interest-earning checking accounts in the 1980s distorted the
M2 money supply but not the M1 money supply.
179. The foreign holdings of U.S. dollars
a.
reduce the living standards of Americans.
b.
are not included in the M1 money supply.
c.
account for approximately half of all U.S. currency issued by the Fed.
d.
are hard to explain since the dollar is not legal tender outside the United States.
180. If a sizeable amount of U.S. currency is held outside of the United States,
a.
the accuracy of the M2 money supply figures will be improved, but there will be no
impact on M1.
b.
the accuracy of the M1 money supply figures will be improved, but there will be no
impact on M2.
c.
the money supply figures, particularly those for M1, will be less reliable.
d.
the money supply figures of the U.S. will not be affected because the funds are held
outside the U.S.
181. The foreign holdings of U.S. dollars
a.
are hard to explain since the dollar is not legal tender outside the United States.
b.
have decreased substantially during the last decade.
c.
indicate that foreigners have confidence in the monetary policy and economy of the United
States.
d.
are largely held in countries with a lengthy historical record of monetary and price
stability.
182. The introduction of no-load stock and bond mutual funds has made investing in stocks and bonds
increasingly attractive to even the small investor. If, as a result, a large amount of money were shifted
from money-market deposit funds to these stock and bond funds, how would the M1 and M2 money
supply figures be affected?
a.
The M2 money supply would decline; M1 would be unaffected.
b.
The M2 money supply would increase; M1 would be unaffected.
c.
The M2 money supply would increase; M1 would decline.
d.
Both the M1 and M2 money supply figures would increase.
183. When individuals shift funds from money market mutual funds to no-load stock and bond mutual
funds,
a.
the growth rate of M1 will decline but the growth of M2 will be unaffected.
b.
the growth rate of M2 will decline but the growth of M1 will be unaffected.
c.
the growth rate of both M1 and M2 will decline.
d.
the growth rate of both M1 and M2 will increase.
184. If debit cards become more widely used by consumers and businesses, which of the following is most
likely to happen?
a.
Currency holdings will remain the same, but the M1 money supply will fall.
b.
The amount of currency held by the public will increase.
c.
Less money will be held as currency and more money will be held in bank accounts,
which will increase the reserves of banks unless the Fed takes offsetting actions.
d.
The money supply will be unaffected because debit card expenditures are considered the
equivalent of cash.
185. As debit cards become more popular, individuals will reduce their holdings of currency. Other things
constant, how will this impact the money supply?
a.
Because more money is held as deposits at banks, the money supply will fall.
b.
Because more money is held as deposits at banks, the money supply will expand.
c.
Because debit card expenditures are counted in M2 but not M1, the M1 money supply will
fall.
d.
Because debit card expenditures are counted in M1 but not M2, the M2 money supply will
fall.
186. If debit cards become more widely used by consumers and businesses, which of the following is most
likely to happen?
a.
Currency holdings will remain the same, but the M1 money supply will fall.
b.
The amount of currency held by the public will increase.
c.
Less money will be held as currency and more money will be held in bank accounts,
which will increase the reserves of banks unless the Fed takes offsetting actions.
d.
The money supply will be unaffected because debit card expenditures are considered the
equivalent of cash.
187. Suppose the Fed purchases $10 million of U.S. securities from the public. If the reserve requirement is
10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves
both before and after the transaction, the total impact on the money supply will be a
a.
$10 million decrease in the money supply.
b.
$10 million increase in the money supply.
c.
$100 million decrease in the money supply.
d.
$100 million increase in the money supply.
188. The value (purchasing power) of each unit of money
a.
is largely independent of the money supply.
b.
tends to increase as the money supply expands.
c.
increases as prices rise.
d.
tends to decline as the money supply expands in relation to the availability of goods and
services.
189. Reserves that banks are required by law to keep on hand to back up their deposits are called
a.
required reserves.
b.
borrowed reserves.
c.
actual reserves.
d.
excess reserves.
190. Which of the following tends to reduce bank failures as the result of bank runs by depositors?
a.
The Federal Deposit Insurance Corporation
b.
The Federal Open Market Operations Committee
c.
The comptroller of the currency
d.
The Senate Banking Committee
191. Citizens Bank confronts a reserve requirement of 20 percent and currently holds millions of dollars in
excess reserves. If a depositor withdraws $35,000, the excess reserves of the bank will
a.
decline by $7,000.
b.
decline by $35,000.
c.
decline by $28,000.
d.
increase by $7,000.
192. Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the Union Bank
has no excess reserves. If a new customer deposits $50,000, the bank could extend new loans up to a
maximum of
a.
$10,000.
b.
$40,000.
c.
$50,000.
d.
$250,000.
193. The type of banking system under which banks are required to hold only a portion of their assets in
reserve against the checking deposits of their customers is called
a.
a gold-backed banking system.
b.
a full reserve banking system.
c.
a fiat banking system.
d.
a fractional reserve banking system.
194. Are outstanding credit card balances counted as part of the money supply?
a.
No; credit card balances reflect funds that have been borrowed. Unlike money, they cannot
be used as a means of payment.
b.
Yes; they are used to purchase things and therefore they are included in the money supply
figures.
c.
They are included in the M1 money supply, but not the M2 figures.
d.
They are included in the M2 money supply, but not the M1 figures.
195. Which of the following is the best definition of money?
a.
Anything generally accepted as payment for goods or repayment of debt
b.
Anything that can be converted to a liquid asset
c.
A national currency that is backed by gold or other precious metals
d.
Paper or coin currency that is produced by the Federal Reserve
196. If a number of people suddenly deposit into their checking accounts a great deal of cash previously
kept in their pockets or at home, other things constant, their actions will
a.
create excess reserves and place banks in a position to extend additional loans, which will
reduce the money supply.
b.
create excess reserves and place banks in a position to extend additional loans, which will
expand the money supply.
c.
lead to higher interest rates.
d.
force the Fed to reduce its discount rate.
197. Other things constant, if the Fed decreased the discount rate,
a.
the earnings of the Fed would increase.
b.
the incentive of commercial banks to borrow from the Fed would be reduced.
c.
borrowing from the Fed will tend to increase and the money supply will tend to expand.
d.
borrowing from the Fed will tend to decrease and the money supply will tend to decline.
198. In the United States, the money supply (M1) consists of
a.
paper currency, coins and traveler’s checks.
b.
government bonds, currency, demand deposits, other checkable deposits, and traveler’s
checks.
c.
paper currency, coins, demand deposits, and savings deposits.
d.
coins, paper currency, demand deposits, other checkable deposits, and traveler’s checks.
199. Which of the following actions of the Fed would increase the money supply?
a.
The purchase of U.S. government securities.
b.
A reduction in the discount rate.
c.
A reduction in the required reserve ratio.
d.
All of the above are correct.
200. If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could
a.
decrease the reserve requirements imposed on commercial banks.
b.
purchase U.S. government securities and other financial assets in the open market.
c.
decrease the interest rate on loans extended to banks and other financial institutions.
d.
increase the interest rate paid on excess reserves encouraging banks to hold excess reserves
rather than extend more loans.
201. Why did the monetary base increase rapidly during the economic crisis of 2008?
a.
The Fed purchased more assets and extended more loans.
b.
The Fed sold financial assets and extended fewer loans.
c.
The Fed purchased more assets, but extended fewer loans.
d.
The Fed sold financial assets, but extended more loans.
ESSAY
202. Briefly explain the three functions of money.
203. What advantages does a money economy have over a barter economy?
204. Why is there more than one definition of the money supply? What is the difference between them?
205. What are the advantages of a fractional reserve banking system compared to a system that requires 100
percent of deposits to be kept on reserve?
206. You deposit a $1,000 scholarship check in the bank. If the required reserve ratio is 10 percent, explain
how the banking system will create new money and how much money can potentially be created.
207. Does the Federal Reserve operate like an ordinary commercial bank? What is the Fed’s job?
208. Explain how the Fed would use its four tools to decrease and to increase the money supply.
209. How do changes in open market operations alter the monetary base, and how do changes in the
monetary base translate to changes in the money supply?
210. What is the difference between the Treasury and the Federal Reserve? Is there any difference in the
effect on the money supply between the sale of bonds by the Treasury and the sale of bonds by the
Fed?
211. Discuss the changes that have and will in the future affect the usefulness of the M1 and M2 money
supply figures as indicators of monetary policy.
ANS:
