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100. Refer to Scenario 29-2. Suppose that the Bank of Tazi changes the reserve requirement to 3
percent. Assuming that the banks still want to hold the same percentage of excess reserves what
is the value of the money supply after the change in the reserve requirement?
a. 9,375 million tazes
b. 10,000 million tazes
c. 12,500 million tazes
d. None of the above is correct to the nearest million tazes.
101. Which of the following is not a tool of monetary policy?
a. open market operations
b. reserve requirements
c. changing the discount rate
d. increasing the government budget deficit
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102. To increase the money supply, the Fed could
a. sell government bonds.
b. increase the discount rate.
c. decrease the reserve requirement.
d. None of the above is correct.
103. To increase the money supply, the Fed could
a. sell government bonds.
b. decrease the discount rate.
c. increase the reserve requirement.
d. None of the above is correct.
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104. To increase the money supply, the Fed could
a. sell government bonds.
b. auction more loans to banks.
c. increase the reserve requirement.
d. None of the above is correct.
105. To decrease the money supply, the Fed could
a. sell government bonds.
b. increase the discount rate.
c. increase the reserve requirement.
d. All of the above are correct.
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106. Bank runs
a. will affect neither the money supply nor the money multiplier.
b. increase the money supply.
c. can be neither prevented nor mitigated by the Federal Reserve.
d. are a problem because banks only hold a fraction of deposits as reserves.
107. During a bank run, depositors decide to hold more currency relative to deposits and banks decide
to hold more excess reserves relative to deposits.
a. Both the decision to hold relatively more currency and the decision to hold relatively more
excess reserves would make the money supply increase.
b. Both the decision to hold relatively more currency and the decision to hold relatively more
excess reserves would make the money supply decrease.
c. The decision to hold relatively more currency would make the money supply increase. The
decision to hold relatively more excess reserves would make the money supply decrease.
d. The decision to hold relatively more currency would make the money supply increase. The
decision to hold relatively more excess reserves would make the money supply decrease.
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108. The Fed can directly protect a bank during a bank run by
a. increasing reserve requirements.
b. selling government bonds to the bank.
c. lending reserves to the bank.
d. doing any of the above.
109. Which of the following will not help to prevent bank runs?
a. government insurance of deposits
b. fractional reserve banking
c. 100% reserve banking
d. All of the above prevent bank runs.
110. During the Great Depression in the early 1930s,
a. bank runs closed many banks.
b. the money supply rose sharply.
c. the Fed decreased reserve requirements.
d. both a and b are correct.
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111. Today, bank runs are
a. uncommon because of the high reserve requirement.
b. uncommon because of FDIC deposit insurance.
c. common because of the low reserve requirement.
d. common because the FDIC is nearly bankrupt.
112. Today, bank runs are not a major problem for the U.S. banking system because
a. bank runs are now illegal.
b. banks now hold 100 percent of their deposits in reserve.
c. banks are now all government-operated.
d. the federal government now guarantees the safety of deposits at most banks.
113. The Federal Deposit Insurance Corporation
a. protects depositors in the event of bank failures.
b. has become insolvent in recent years due to a large number of bank failures.
c. is part of the Federal Reserve System.
d. in practice has seldom been of much use.
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114. The federal funds rate is the
a. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities.
b. percentage of deposits that banks must hold as reserves.
c. interest rate at which the Federal Reserve makes short-term loans to banks.
d. interest rate at which banks lend reserves to each other overnight.
115. The federal funds rate is the interest rate
a. the Federal Reserve charges for loans it makes to the federal government.
b. the Federal Reserve charges banks for short-term loans.
c. banks charge each other for short-term loans of reserves.
d. on newly issued one-year Treasury bonds.
116. The federal funds rate is the interest rate that
a. banks charge one another for loans.
b. banks charge the Fed for loans.
c. the Fed charges banks for loans.
d. the Fed charges Congress for loans.
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117. In recent years the Federal Open Market Committee has focused on a target for
a. M1 growth.
b. the federal funds rate.
c. the number of Treasury Securities issued by the federal government.
d. total reserves of banks.
118. When the Fed sells government bonds,
a. the money supply increases and the federal funds rate increases.
b. the money supply increases and the federal funds rate decreases.
c. the money supply decreases and the federal funds rate increases.
d. the money supply decreases and the federal funds rate decreases.
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119. When the Fed buys government bonds,
a. the money supply increases and the federal funds rate increases.
b. the money supply increases and the federal funds rate decreases.
c. the money supply decreases and the federal funds rate increases.
d. the money supply decreases and the federal funds rate decreases.
120. If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could
move the rate back towards its target by
a. buying bonds. This buying would reduce reserves.
b. buying bonds. This buying would increase reserves.
c. selling bonds. This selling would reduce reserves.
d. selling bonds. This selling would increase reserves.
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121. If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could
move the rate back towards its target by
a. buying bonds. This buying would reduce reserves.
b. buying bonds. This buying would increase reserves.
c. selling bonds. This selling would reduce reserves.
d. selling bonds. This selling would increase reserves.
122. If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could
move the rate back towards its target by
a. buying bonds. This buying would increase the money supply.
b. buying bonds. This buying would reduce the money supply.
c. selling bonds. This selling would increase the money supply.
d. selling bonds. This selling would reduce the money supply.
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123. An increase in the money supply might indicate that the Fed had
a. purchased bonds to increase banks reserves.
b. purchased bonds to decrease banks reserves.
c. sold bonds to increase banks reserves.
d. sold bonds to decrease banks reserves.
124. If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could
move the rate back towards its target by
a. buying bonds. This buying would increase the money supply.
b. buying bonds. This buying would reduce the money supply.
c. selling bonds. This selling would increase the money supply.
d. selling bonds. This selling would reduce the money supply.
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125. A decrease in the money supply might indicate that the Fed had
a. purchased bonds to increase banks reserves.
b. purchased bonds to decrease banks reserves.
c. sold bonds to increase banks reserves.
d. sold bonds to decrease banks reserves.
126. An increase in the money supply might indicate that the Fed had
a. purchased bonds in an attempt to increase the federal funds rate.
b. purchased bonds in an attempt to reduce the federal funds rate.
c. sold bonds in an attempt to increase the federal funds rate.
d. sold bonds in an attempt to reduce the federal funds rate.
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127. A decrease in the money supply might indicate that the Fed had
a. purchased bonds in an attempt to increase the federal funds rate.
b. purchased bonds in an attempt to reduce the federal funds rate.
c. sold bonds in an attempt to increase the federal funds rate.
d. sold bonds in an attempt to reduce the federal funds rate.
128. If the Fed raised the reserve requirement, the demand for reserves would
a. increase, so the federal funds rate would fall.
b. increase, so the federal funds rate would rise.
c. decrease, so the federal funds rate would fall.
d. decrease, so the federal funds rate would rise.
129. The Fed can reduce the federal funds rate by
a. decreasing the money supply. To decrease the money supply it could sell bonds.
b. decreasing the money supply. To decrease the money supply it could buy bonds.
c. increasing the money supply. To increase the money supply it could sell bonds.
d. increasing the money supply. To increase the money supply it could buy bonds.
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130. When the Fed buys government bonds,
a. the money supply increases and the federal funds rate increases.
b. the money supply increases and the federal funds rate decreases.
c. the money supply decreases and the federal funds rate increases.
d. the money supply decreases and the federal funds rate decreases.
True/False and Short Answer
1. In an economy that relies on barter, trade requires a double-coincidence of wants.
a. True
b. False
2. Sam wants to trade eggs for sausage. Sally wants to trade sausage for eggs. Sam and Sally have a
double- coincidence of wants.
a. True
b. False
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3. The use of money allows trade to be roundabout.
a. True
b. False
4. Roundabout trade decreases production.
a. True
b. False
5. Money allows people to specialize in what they do best, thereby raising everyone’s standard of
living.
a. True
b. False
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6. According to economists, “money” means the same thing as “wealth”.
a. True
b. False
7. Gary’s wealth is $1 million. Economists would say that Gary has $1 million worth of money.
a. True
b. False
8. Commodity money cannot be used as a unit of account.
a. True
b. False
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9. Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as
a unit of account.
a. True
b. False
10. When you purchase school supplies at the book store using cash, you are using money as a
medium of exchange.
a. True
b. False
11. Sandra routinely uses currency to purchase her groceries. She is using money as a medium of
exchange.
a. True
b. False
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12. Money is the only asset that functions as a store of value.
a. True
b. False
13. Bottles of very fine wine are less liquid than demand deposits.
a. True
b. False
14. U.S. dollars are an example of commodity money and hides used to make trades are an example
of fiat money.
a. True
b. False
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15. When the Soviet Union began breaking up in the late 1980s, cigarettes began replacing the ruble
as the medium of exchange even though the ruble was legal tender. The cigarettes provide an
example of commodity money.
a. True
b. False
16. In order for currency to be widely used as a medium of exchange, it is sufficient for the
government to designate it as legal tender.
a. True
b. False
17. Demand deposits are balances in bank accounts that depositors can access by writing a check or
using a debit card.
a. True
b. False
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18. M1 includes savings deposits.
a. True
b. False
19. M2 is both larger and less liquid than M1.
a. True
b. False
20. One plausible explanation for the large amount of U.S. currency outstanding is that many dollars
are held abroad.
a. True
b. False