60)
The purchase of $1 million of Treasury securities by the Federal Reserve, if there is no change in the
quantity of currency, will cause reserves at banks to
60)
A)
increase by less than $1 million.
B)
decrease by $1 million.
C)
decrease by less than $1 million.
D)
increase by $1 million.
61)
The required reserves of a bank equal its ________ the required reserve ratio.
61)
A)
loans divided by
B)
deposits multiplied by
C)
loans multiplied by
D)
deposits divided by
62)
In response to the destructive banking panics of the Great Depression, future panics are designed to
be prevented by
62)
A)
the establishment of the Federal Deposit Insurance Corporation.
B)
forcing banks to keep 100 percent of their demand deposits as reserves.
C)
closely examining commercial banks’ balance sheets.
D)
the Federal Reserve System urging banks to avoid making risky loans.
63)
Suppose a bank has $100 million in checking account deposits with no excess reserves and the
required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 8
percent, then the bank can make a maximum loan of
63)
A)
$2 million.
B)
$8 million.
C)
$10 million.
D)
$0.
64)
To offset the effect of households and firms deciding to hold less of their money in checking
account deposits and more in currency, the Federal Reserve could
64)
A)
raise the required reserve ratio.
B)
raise the discount rate.
C)
buy Treasury securities.
D)
lower bank taxes.
65)
If credit card balances rise in the economy, then M1 will ________ and M2 will ________.
65)
A)
decrease; increase
B)
increase; increase
C)
not change; increase
D)
increase; decrease
E)
not change; not change
66)
The purchase of Treasury securities by the Federal Reserve will
66)
A)
increase the quantity of reserves held by banks.
B)
not change the money supply.
C)
decrease the quantity of reserves held by banks.
D)
not change the quantity of reserves held by banks.
67)
In 2007, the amount of seigniorage on a U.S. penny is ________ and on the total amount of U.S. fiat
money is ________.
67)
A)
positive; negative
B)
zero; positive
C)
negative; zero
D)
negative; positive
68)
If the current penny was made worth five cents rather than its current value one cent, what would
be the effect on M1?
68)
A)
It would rise.
B)
M1 would rise, and M2 would remain constant.
C)
It would fall.
D)
It would only affect M2.
69)
The sale of Treasury securities by the Federal Reserve will
69)
A)
increase the quantity of reserves held by banks.
B)
not change the quantity of reserves held by banks.
C)
not change the money supply.
D)
decrease the quantity of reserves held by banks.
70)
Money’s most narrow definition is based on its function as a
70)
A)
medium of exchange.
B)
unit of account.
C)
store of value.
D)
standard of deferred payment.
E)
standard of barter.
71)
Commodity money
71)
A)
has little to no value independent of its use as money.
B)
can be used to purchase commodities, but not services.
C)
is backed by a valuable commodity such as gold.
D)
has value independent of its use as money.
72)
The quantity equation states that the
72)
A)
money supply times the velocity of money equals the price level times real output.
B)
money supply times the price level equals real output divided by the velocity of money.
C)
money supply divided by the velocity of money equals the price level divided by real output.
D)
money supply times the price level equals real output times the velocity of money.
73)
The quantity theory of money predicts that, in the long run, inflation results from the
73)
A)
velocity of money growing at a lower rate than real GDP.
B)
money supply growing at a lower rate than real GDP.
C)
money supply growing at a faster rate than real GDP.
D)
velocity of money growing at a faster rate than real GDP.
74)
The major assets on a bank’s balance sheet are its
74)
A)
reserves, loans, and checking account deposits.
B)
reserves, checking and savings account deposits.
C)
checking and savings account deposits.
D)
loans, and checking and savings account deposits.
E)
reserves, loans, and holdings of securities.
75)
The seven members of the Board of Governors of the Federal Reserve are appointed by
75)
A)
the Treasury Department.
B)
a vote of state governors.
C)
leaders in the banking industry.
D)
the Congress.
E)
the president.
76)
Open market operations refer to the purchase or sale of ________ to control the money supply.
76)
A)
discount and advances by the Federal Reserve
B)
corporate bonds and stocks by the Federal Reserve
C)
corporate bonds and stocks by the U.S. Treasury
D)
U.S. Treasury securities by the U.S. Treasury
E)
U.S. Treasury securities by the Federal Reserve
77)
If households and firms decide to hold less of their money in checking account deposits and more
in currency, then the money supply
77)
A)
will increase.
B)
will decrease.
C)
will not change.
D)
may increase or decrease.
78)
If a bank receives a $1 million discount loan from the Federal Reserve, then the bank’s reserves will
78)
A)
increase by less than $1 million.
B)
increase by more than $1 million.
C)
increase by $1 million.
D)
not change.
Scenario 15–2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%.
79)
Refer to Scenario 15–2. As a result of Kristy’s deposit, Bank A’s reserves immediately increase by
79)
A)
$10,000.
B)
$50,000.
C)
$2,000.
D)
$8,000.
80)
To offset the effect of households and firms deciding to hold more of their money in checking
account deposits and less in currency, the Federal Reserve could
80)
A)
raise bank taxes.
B)
raise government spending.
C)
lower the required reserve ratio.
D)
sell Treasury securities.
81)
Silver is an example of a
81)
A)
representative money.
B)
fiat money.
C)
barter money.
D)
commodity money.
82)
Which of the following assets is most liquid?
82)
A)
bond
B)
savings account
C)
stock
D)
money
83)
According to the quantity theory of money, deflation will occur if the
83)
A)
money supply is less than real GDP.
B)
money supply grows at a faster rate than real GDP.
C)
money supply is more than real GDP.
D)
money supply grows at a slower rate than real GDP.
D)
Table 15–2
Assets Liabilities
Reserves
+$8,000 Deposits +$8,000
84)
Refer to Table 15–2. Suppose a transaction changes a bank‘s balance sheet as indicated in the
following T–account, and the required reserve ratio is 10 percent. As a result of the transaction, the
bank can make a maximum loan of
84)
A)
$7,200.
B)
$8,000.
C)
$0.
D)
$800.
D)
85)
The largest proportion of M1 is made up of
85)
A)
savings account deposits.
B)
traveler’s checks.
C)
checking account deposits.
D)
time deposits.
E)
currency.
D)
D)
86)
To increase the money supply, the Federal Reserve could
86)
A)
conduct an open market purchase of Treasury securities.
B)
lower transfer payments.
C)
raise the discount rate.
D)
decrease income taxes.
E)
raise the required reserve ratio.
87)
The impact of the Chinese government’s reserve requirement policy has not slowed the growth of
the money supply because
87)
A)
Chinese banks hold more than the minimum amount of required reserves.
B)
the fixing of the value of the yuan to the dollar has flooded banks with reserves.
C)
the Chinese central bank has not been very aggressive in raising the reserve requirement.
D)
A and B
E)
B and C
88)
Suppose there is a bank panic. Which of the following is not a consequence of this banking panic?
88)
A)
Bank customers would want to convert their demand deposits into cash.
B)
Individual banks would have to shrink the value of loans they made.
C)
Bank total reserves would decrease.
D)
Bank checking account balances would decrease.
E)
Required reserves would increase.
89)
Hyperinflation can be caused by
89)
A)
the government selling bonds to the public.
B)
the government selling bonds to the central bank.
C)
the central bank selling bonds to the government.
D)
the central bank selling bonds to the public.
90)
Suppose Steve Jobs deposits $20 million into his checking account at Wells Fargo Bank. If the
reserve requirement ratio is 0.1 what is the maximum change in money supply?
90)
A)
$180 million
B)
–$180 million
C)
$2 million
D)
–$200 million
E)
$200 million
91)
A decrease in the discount rate ________ bank reserves and ________ the money supply if banks
respond to the change in the rate.
91)
A)
decreases; decreases
B)
increases; increases
C)
increases; decreases
D)
decreases; increases
92)
In economics, money is defined as
92)
A)
the total amount of salary, interest, and rental income earned during a year.
B)
the total value of one’s assets minus the total value of one’s debts, in current prices.
C)
the total value of one’s assets in current prices.
D)
any asset people are generally willing to accept in exchange for goods and services.
Scenario 15–2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%.
93)
If the reserve requirement ratio (RR) is .20, the simple deposit multiplier is
93)
A)
5.
B)
10.
C)
20.
D)
2.
94)
Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your
backyard. If the required reserve ratio is 10 percent, checking account deposits in the banking
system as a whole could drop up to a maximum of
94)
A)
$500.
B)
$0.
C)
$50.
D)
$5,000.
95)
Banks can continue to make loans until their
95)
A)
actual reserves equal their required reserves.
B)
actual reserves equal their checking account balances.
C)
excess reserves equal their required reserves.
D)
actual reserves equal their excess reserves.
96)
Banks keep ________ of checking deposits as reserves because on a typical day withdrawals
________ deposits.
96)
A)
exactly 100%; are much greater than
B)
less than 100%; are about the same as
C)
exactly 100%; are about the same as
D)
less than 100%; are much greater than
E)
more than 100%; are much greater than
97)
Your roommate argues that he can think of no better situation than living in a deflationary
economy, as prices of goods and services would continuously fall. You disagree and argue that
during a deflation people can be made worse off because
97)
A)
the purchasing power of the currency would decrease.
B)
the purchasing power of peoples’ incomes would increase.
C)
the value of the real interest rate will drop below the nominal interest rate.
D)
borrowers will have to pay increasing amounts in real terms over time.
98)
Which of the following functions of money would be most violated if inflation were high?
98)
A)
certificate of gold
B)
store of value
C)
unit of account
D)
medium of exchange
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
99)
Suppose you withdraw $1,000 from your savings account and put it in your checking
account. Briefly explain how this will affect M1 and M2.
99)
100)
Why does the holding of excess reserves by banks and the holding of currency by
households and firms cause the real–world deposit multiplier to be less than the simple
deposit multiplier?
100)
101)
How is the quantity theory of money different from the quantity equation and why must
the quantity equation always be true?
101)
102)
Suppose you withdraw $1,000 from your savings account and put it under your mattress.
Briefly explain how this will affect M1 and M2.
102)
103)
In countries that have experienced hyperinflation, what role have large government
budget deficits played in causing the very high inflation rates?
103)
104)
Suppose the Federal Reserve purchases $10,000 of Treasury bonds from you and that you
deposit the $10,000 into your checking account at Bank Y. Assume that Bank Y has no
excess reserves at the time you make your deposit and that the required reserve ratio is 20
percent.
a. Use a T–account to show the initial effect of this transaction on Bank Y’s balance sheet.
b. Suppose that Bank Y makes the maximum loan they can from the funds you
deposited. Use a T–account to show the initial effect on Bank Y’s balance sheet from
granting the loan. Also include in this T–account the transaction from question (a.).
c. Now suppose that whoever took out the loan in question (b) writes a check for this
amount and that the person receiving the check deposits it in Bank Z. Show the effect of
these transactions on the balance sheet of Bank Y and Bank Z, after the check has been
cleared. On the T–account for Bank Y, include the transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits that can result from your
$10,000 deposit? What is the maximum increase in the money supply? Explain.
104)
105)
Would the invention of money, as opposed to barter, increase the growth rate of real GDP
in a country over time? Why or why not?
105)
106)
When a government has a budget deficit, it must sell government bonds to finance the
deficit. Does it matter for the rate of inflation if the government sells the government
bonds to the public or sells the government bonds to the central bank? Explain why it does
or does not matter.
106)
107)
Suppose the velocity of money is not constant, but stable at about 2 percent growth per
year. How could the quantity theory of money be modified to include a stable growth rate
of the velocity of money? In this modified quantity theory of money with velocity growing
at 2 percent per year, what would the growth rate of the other variables in the theory need
to be to cause inflation?
107)
108)
Why do banks create money? Do they create money to help the Federal Reserve control
the money supply or is there a more basic reason?
108)
109)
If the required reserve ratio is 100 percent, could the Federal Reserve still change the
money supply with open market operations? Explain whether they could or could not.
109)
110)
Suppose you deposit $4,000 in currency into your checking account at Bank of America.
Assume that Bank of America has no excess reserves at the time you make your deposit and
that the required reserve ratio is 10 percent.
a. Use a T–account to show the initial effect of this transaction on Bank of America’s
balance sheet.
b. Suppose that Bank of America makes the maximum loan they can from the funds you
deposited. Use a T–account to show the initial effect on Bank of America’s balance sheet
from granting the loan. Also include in this T–account the transaction from question (a.).
c. Now suppose that whoever took out the loan in question (b) writes a check for this
amount and that the person receiving the check deposits it in Bank of Boston. Show the
effect of these transactions on the balance sheet of Bank of America and Bank of Boston,
after the check has been cleared. On the T–account for Bank of America, include the
transactions from questions (a) and (b).
d. What is the maximum increase in checking account deposits that can result from your
$4,000 deposit? What is the maximum increase in the money supply? Explain.
110)
111)
How will the purchase of $100 million of government securities by the Federal Reserve
change bank reserves and total checking account deposits in the banking system as a
whole? Assume that banks do not hold any excess reserves, that households and firms do
not change the amount of currency they hold, and that the required reserve ratio is 20
percent.
111)
112)
Would the maximum loan that a bank can make be different when receiving a discount
loan from the Federal Reserve of $1 million versus receiving a checking account deposit of
$1 million? Explain why or why not.
112)
113)
Suppose you withdraw $1,000 in cash from your checking account. Draw a T–account to
show the effect of this transaction on your bank’s balance sheet.
113)
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
114)
The amount of national income in an economy equals the money supply in an economy.
114)
115)
The U.S. government makes a profit from issuing fiat money.
115)
116)
A series of bank runs in a country should have no effect on M1 as money simply moves from
checking deposits to currency.
116)
117)
The Fed has complete control over the money supply.
117)
118)
Banks hold 100 percent of their checking deposits as vault cash to ensure that bank runs do not
occur.
118)
119)
If gold is used as money in an economy, the money supply is easy to control.
119)
120)
If banks receive a greater amount of reserves, the money supply expands.
120)
121)
The Fed has more control over open market operations as compared to discount policy.
121)
122)
Economies cannot function without money.
122)