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21. Credit cards are a medium of exchange.
a. True
b. False
22. A debit card is more similar to a credit card than to a check.
a. True
b. False
23. The Federal Reserve was created in 1913 after a series of bank failures in 1907.
a. True
b. False
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24. The series of bank failures in 1907 occurred despite the creation of the Federal Reserve many
years earlier.
a. True
b. False
25. The Federal Reserve is a privately operated commercial bank.
a. True
b. False
26. Federal Reserve governors are given long terms to insulate them from politics.
a. True
b. False
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27. The chair of the Board of Governors regularly testifies to Congress about Fed policy.
a. True
b. False
28. Members of the Board of Governors are appointed by the president of the U.S. and confirmed by
the U.S. Senate.
a. True
b. False
29. Members of the Board of Governors of the Federal Reserve System are appointed for life.
a. True
b. False
7294 The Monetary System
30. Monetary policy is determined by a committee whose voting members include all the presidents of
the regional Federal Reserve Banks.
a. True
b. False
31. Fractional reserve banking is a system where banks must hold an amount of cash based on a
percentage of its loans.
a. True
b. False
32. If banks hold any amount of their deposits in reserve, then they do not have the ability to influence
the money supply.
a. True
b. False
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33. As banks create money, they create wealth.
a. True
b. False
34. The money multiplier equals 1/(1 – R), where R represents the reserve ratio.
a. True
b. False
35. Assume that when $100 of new reserves enter the banking system, the money supply ultimately
increases by $625. Assume also that no banks hold excess reserves and that the entire money
supply consists of bank deposits. If, at a point in time, reserves for all banks amount to $500, then
at that same point in time, loans for all banks amount to $2,625.
a. True
b. False
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36. Assume that when $100 of new reserves enter the banking system, the money supply ultimately
increases by $800. Assume also that no banks hold excess reserves and that the entire money
supply consists of bank deposits. If, at a point in time, reserves for all banks amount to $750, then
at that same point in time, loans for all banks amount to $6,000.
a. True
b. False
37. Banks cannot influence the money supply if they are required to hold all deposits in reserve.
a. True
b. False
38. In the months of November and December, people in the United States hold a larger part of their
money in the form of currency because they intend to shop and travel for the holidays. As a
result, other things the same, the money supply increases.
a. True
b. False
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39. Other things the same, if banks decide to hold a smaller part of their deposits as excess reserves,
the money supply will fall.
a. True
b. False
40. The Federal Reserve primarily uses open-market operations to change the money supply.
a. True
b. False
41. The Federal Reserve can alter the size of the money supply by changing reserves or changing
reserve requirements.
a. True
b. False
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42. If the Fed buys bonds in the open market, the money supply decreases.
a. True
b. False
43. The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate,
the Fed provides banks with a greater incentive to borrow from it.
a. True
b. False
44. Banks can hold deposits at the Federal Reserve. Balances in these accounts can be used by banks
to meet their reserve requirements, but the Fed pays no interest on these deposits.
a. True
b. False
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45. The money supply of Granov is $10,000 in a 100-percent-reserve banking system. If the Central
Bank of Granov decreases the reserve requirement ratio to 10 percent, the money supply could
increase by no more than $9,000.
a. True
b. False
46. If the Fed decreases reserve requirements, the money supply will increase.
a. True
b. False
47. An increase in the reserve requirement increases reserves and decreases the money supply.
a. True
b. False
7300 The Monetary System
48. Because of the multiple tools at its disposal, the Fed can control the money supply very precisely.
a. True
b. False
49. Bank runs and the accompanying increase in the money multiplier caused the U.S. money supply
to rise by 28 percent from 1929 to 1933.
a. True
b. False
50. Currently, bank runs are a major problem for the U.S. banking system and the Fed.
a. True
b. False
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51. Just after the terrorist attack on September 11, 2001, the Fed stood ready to lend financial
institutions funds. When the Fed did this, it was acting in its role of lender of last resort.
a. True
b. False
52. The federal funds rate is a long-term interest rate banks charge one another for loans.
a. True
b. False
53. Economists argue that the move from barter to money increased trade and production. How is this
possible?
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54. What is the difference between money and wealth?
55. Which of the three functions of money are commonly met by each of the following assets in the
U.S. economy?
a. paper dollar
b. precious metals
c. collectibles such as baseball cards, stamps, and antiques
56. Are credit cards and debit cards money? What’s the difference between credit and debit cards?
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57. What is the difference between commodity money and fiat money? Why do people accept fiat
money in trade for goods and services?
58. What does the text mean by the question, “Where Is All the Currency?” How does it answer the
question?
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59. What is meant by the term “lender of last resort?” In what circumstances might the Fed be a
lender of last resort?
60. Compare the Board of Governors and the Federal Open Market Committee.
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61. What makes the New York Federal Reserve regional bank so important?
62. Designers of the Federal Reserve System were concerned that the Fed might form policy
favorable to one part of the country or to a particular party. What are some ways that the
organization of the Fed reflects such concerns?
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63. Which two of the Ten Principles of Economics imply that the Fed can profoundly affect the
economy?
64. Explain why banks can influence the money supply if the required reserve ratio is less than 100
percent.
65. If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? Show
your work.
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66. Draw a simple T-account for First National Bank which has $5,000 of deposits, a required reserve
ratio of 10 percent, and excess reserves of $300. Make sure your balance sheet balances.
7308 The Monetary System
67. Suppose that in a country the total holdings of banks were as follows: required reserves = $45
million excess reserves = $15 million deposits = $750 million loans = $600 million
Treasury bonds = $90 million. Show that the balance sheet balances if these are the only assets
and liabilities. Assuming that people hold no currency, what happens to each of these values if
the central bank changes the reserve requirement ratio to 2%, banks still want to hold the same
percentage of excess reserves, and banks don’t change their holdings of Treasury bonds? How
much does the money supply change by?
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68. Explain how each of the following changes the money supply.
a. the Fed buys bonds
b. the Fed auctions credit
c. the Fed raises the discount rate
d. the Fed raises the reserve requirement
69. Describe the two things that limit the precision of the Fed’s control of the money supply and
explain how each limits that control.