Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 13: Money, Banking, and Monetary Policy
1) Which of the following represents the basic functions of money?
A) standard of value, source of status, and medium of exchange
B) source of status, unit of barter, and medium of exchange
C) unit of barter, standard of value, and store of value
D) medium of exchange, store of value, and source of status
E) standard of value, store of value, and medium of exchange
2) The existence of money enables us to avoid barter. In this capacity, money is functioning as a
A) standard of value.
B) source of status.
C) medium of exchange.
D) store of value.
E) unit of barter.
3) Money makes it possible to easily compare the prices of different products with one another.
In this capacity, money is functioning as a
A) standard of value.
B) source of status.
C) medium of exchange.
D) store of value.
E) unit of barter.
4) Which of the following is a function of money that is not performed by a passbook savings
account?
A) medium of exchange
B) source of status
C) standard of value
D) store of value
E) unit of barter
5) One difference between demand deposit accounts and a NOW account is that
A) it is possible to write checks on demand deposit accounts but not on NOW accounts.
B) NOW accounts earn interest, while demand deposit accounts do not.
C) demand deposits are included in M-1, but NOW accounts are not.
D) demand deposits function as a medium of exchange, but NOW accounts do not.
E) demand deposits function as a unit of barter, but NOW accounts do not.
6) A NOW account is
A) another name for a passbook savings account.
B) a savings account on which you can write checks.
C) identical to a demand deposit account.
D) included in M-2 but not in M-1.
E) not included in M-1.
7) Household (passbook) savings accounts are
A) checkable deposits.
B) included in M-1.
C) near money.
D) identical to NOW accounts.
E) counted as “currency.”
8) The M-1 definition of money includes all of the following EXCEPT
A) demand deposits.
B) NOW accounts.
C) savings deposits.
D) paper currency.
E) coins.
9) Household (passbook) savings deposits are excluded from the M-1 money supply because
they
A) do not function as well as checkable deposits as a store of value.
B) are not accepted as a medium of exchange.
C) are not as good a hedge against inflation as checkable deposits.
D) cannot easily be measured by the Federal Reserve.
E) are not a unit of barter.
10) Which of the following correctly defines the M-1 money supply?
A) currency, checkable deposits, and savings deposits
B) checkable deposits, coins, and paper currency
C) coins plus paper currency
D) demand deposits, NOW accounts, and savings deposits
E) NOW accounts, coins, and paper currency
11) Which of the following is the largest component of the M-1 money supply?
A) currency
B) checkable deposits
C) savings deposits
D) NOW accounts
E) demand deposits
12) Which of the following does not appear as an asset on the balance sheet of a commercial
bank?
A) reserves
B) checkable deposit balances
C) loans to customers
D) property
E) securities owned by the bank
13) In banking, the term “owners equity” means
A) a bank’s assets plus its liabilities.
B) the debts of the bank.
C) the assets of the bank.
D) the excess reserves of the bank.
E) the difference between the bank’s assets and its liabilities.
14) “Bank capital” is also known as
A) debt.
B) equity capital.
C) owners’ equity.
D) all of the above
E) B and C
15) Bank reserves include
A) vault cash plus securities.
B) vault cash.
C) vault cash plus funds on deposit with the Fed.
D) vault cash, securities, plus property.
E) checkable deposits of bank customers.
16) According to the fractional reserve principle
A) a bank needs only a fraction of a dollar in reserves for each dollar of checkable deposits.
B) a bank can make only a fraction of a dollar in loans for each dollar of excess reserves.
C) banks can only expect to be repaid a fraction of what they are owed.
D) the deposit multiplier will always be less than 1.
E) bank presidents work only a fraction of the day and reserve the rest for the golf course.
17) A bank’s excess reserves are defined as
A) total reserves minus checkable deposits.
B) total bank assets minus bank liabilities.
C) total reserves minus required reserves.
D) total reserves minus loans.
E) property plus securities owned by the bank.
18) Banks “create” money by
A) printing paper currency.
B) accepting deposits.
C) creating checkable deposits.
D) selling securities.
E) charging interest on loans.
Answer the following question(s) on the basis of the following balance sheet for the Humansville
National Bank. Assume the reserve requirement is 20 percent.
19) Based on the table above, this bank must maintain required reserves of
A) $20,000.
B) $13,000.
C) $50,000.
D) $30,000.
E) $57,000.
20) Based on the table above, this bank has excess reserves of
A) $7,000.
B) $37,000.
C) $44,000.
D) $12,000.
E) $27,000.
21) Based on the table above, this bank can expand loans by a maximum of
A) $7,000.
B) $27,000.
C) $32,000.
D) $44,000.
E) more than $50,0000.
22) Based on the table above, if the reserve requirement was 30 percent instead of 20 percent,
this bank
A) could expand loans by a maximum of $27,000.
B) could expand loans by a maximum of $37,500.
C) could expand loans by a maximum of $12,000.
D) could expand loans by a maximum of $22,000.
E) would be forced to contract loans.
23) Assume a new bank has $100,000 in checkable deposits and an equal amount in reserves. If
the reserve requirement is 30 percent, the most the bank can lend is
A) $100,000.
B) $30,000.
C) $70,000.
D) $130,000.
E) less than $30,000.
24) Assume that the reserve requirement is 25 percent. If a single bank has excess reserves of
$500,000, that individual bank can expand loans by a maximum of
A) $125,000.
B) $500,000.
C) $2,000,000.
D) $375,000.
E) more than $2,000,000.
25) Assume that the reserve requirement is 20 percent. If the Windsor bank initially has no
excess reserves, how much can it expand loans if one of its customers deposits $1,000 in
currency in a checking account?
A) $1,000
B) $200
C) $1,200
D) $800
E) more than $1,200
26) Suppose a company uses $50,000 in cash to open a checking account at a bank. If the bank
faces a reserve requirement of 30 percent and had no excess reserves prior to the deposit, it could
expand the money supply by a maximum of
A) $30,000.
B) $50,000.
C) $15,000.
D) $35,000.
E) more than $100,000.
27) If the reserve requirement is 25 percent (0.25), the deposit multiplier is equal to
A) 4.
B) 3.
C) 0.75.
D) 2.
E) 1.333.
28) Suppose the banking system has checkable deposits of $100 million and total reserves of $30
million. If the reserve requirement is 20 percent, the banking system can expand the money
supply by a maximum of
A) $6 million.
B) $70 million.
C) $50 million.
D) $10 million.
E) $100 million.
29) Assume that the reserve requirement is 20 percent and that all banks in the system are
“loaned-up” (have no excess reserves). If an individual deposits $10,000 in currency in a
checking account at Bank A, the banking system has excess reserves of
A) $10,000.
B) $8,000.
C) $2,000.
D) $50,000.
E) $12,000.
30) Assume that the reserve requirement is 25 percent and that all banks in the system are
“loaned-up” (have no excess reserves). If an individual deposits $1,000 in currency in a checking
account at Bank A, the banking system can expand loans by a maximum of
A) $1,000.
B) $750.
C) $4,000.
D) $3,000.
E) $25,000.
31) Assume that the reserve requirement is 20 percent and that all banks in the system are
“loaned-up” (have no excess reserves). If an individual deposits $20,000 in currency in a
checking account at the Harper Valley Bank, which of the following would be true?
A) The Harper Valley Bank would be able to expand loans by a maximum of $20,000.
B) The banking system would be able to expand loans by a maximum of $100,000.
C) The Harper Valley Bank would be able to expand loans by a maximum of $16,000.
D) The banking system would be able to expand loans by a maximum of $60,000.
E) The banking system would be able to expand loans by a maximum of $40,000.
32) Each bank must limit its loans to the amount of its excess reserves because
A) loans are less profitable than other investments, such as government securities.
B) additional transactions would tend to reduce the money supply.
C) additional loans would be likely to antagonize rival banks, leading to competition on loan
rates.
D) when customers spend the money they have borrowed, the bank is likely to lose reserves to
other banks.
E) this limits the possibility of making “bad” loans that will not be repaid.
33) Although individual banks must limit their loans to the amount of their excess reserves, the
banking system can make loans equal to a multiple of its excess reserves. The basic reason for
this difference is that
A) an individual bank can lose reserves and not get them back, but reserves lost from the banking
system are restored by the Federal Reserve.
B) the Federal Reserve will provide additional reserves to the banking system but not to
individual banks.
C) reserves lost by an individual bank are gained by other banks in the system.
D) individual banks must conform to a higher reserve requirement than that imposed on the
banking system.
E) individual banks do not print paper currency, but the banking system does.
34) Which of the following is not an explanation for the fact that the amount of checkable
deposits created by the banking system may be less than the maximum amount predicted by the
deposit multiplier?
A) Borrowers may choose to take some portion of their loans in cash to hold for emergencies.
B) Bankers may be unable to find enough customers to loan out all of their excess reserves.
C) Some of the money borrowed from banks may not be redeposited in checking accounts.
D) Demand deposits created when a loan is made may be lost from the banking system when the
borrower spends the money.
E) Bankers may choose to maintain some reserves above the amount required by the Fed.
35) The Federal Reserve System was established in
A) 1776.
B) 1913.
C) 1936.
D) 1952.
E) 1929.
36) The original purpose of the Federal Reserve was to
A) control the money supply.
B) act as a lender of last resort.
C) collect the taxes.
D) mint coins.
E) sell lottery tickets.
37) Today, there are ________ regional Federal Reserve banks
A) 2
B) 12
C) 5
D) 4
E) 8
38) Fed policy decisions are made by
A) the board of governors and the Federal Open Market Committee.
B) the President’s Council.
C) the Bank Council.
D) the Council of Economic Advisors.
E) the Monetary Council.
39) The Fed’s board of governors consists of
A) 7 members appointed by the President of the United States.
B) the presidents of all the regional Federal Reserve banks.
C) the Vice President of the United States and 5 other members appointed by the President.
D) the President of the United States, the chair of the Federal Reserve, and the presidents of five
regional Federal Reserve banks.
E) Sneezy, Dopey, Grumpy, and Sleepy.
40) The Federal Open Market Committee (FOMC) consists of
A) 7 members of the Fed’s board of governors plus the President of the United States.
B) the presidents of all the regional Federal Reserve banks.
C) the President of the United States, the chair of the Federal Reserve, and the presidents of 5
regional Federal Reserve banks.
D) 7 members of the Fed’s board of governors plus the presidents of 5 regional Federal Reserve
banks.
E) 7 members appointed by the President of the United States.
41) Today, the primary function of the Federal Reserve is to
A) stabilize the economy by regulating the money supply.
B) supply the economy with paper money.
C) provide a check clearing system.
D) act as a lender of last resort.
E) collect taxes from the public.
42) When the Federal Reserve increases the reserve requirement,
A) required reserves are converted into excess reserves.
B) the lending ability of banks tends to contract.
C) it becomes more difficult for banks to borrow from the Fed.
D) the money supply will tend to expand.
E) it becomes easier for banks to make loans.
43) Open-market operations involve
A) the buying and selling of government securities by the Federal Reserve.
B) the manipulation of the federal funds rate by the Federal Reserve.
C) making it easier or more difficult to borrow from the Federal Reserve.
D) the buying and selling of gold on the open market.
E) bank promotions to acquire additional depositors.
44) If the Federal Reserve desired to increase the lending ability of banks, it would
A) increase the reserve requirement.
B) increase the discount rate.
C) buy government securities.
D) sell government securities.
E) print more paper currency.
45) The Federal Reserve controls the money supply primarily through
A) changes in the reserve requirement.
B) open-market operations.
C) changes in the discount rate.
D) the frequency at which it prints paper currency.
E) changes in the size of the federal deficit.
46) The rate at which banks can borrow money from the Fed is called
A) the federal funds rate.
B) the open-market rate.
C) the discount rate.
D) the commercial bank rate.
E) the institutional rate.
47) The rate banks pay to borrow reserves from one another is called
A) the federal funds rate.
B) the open-market rate.
C) the discount rate.
D) the commercial bank rate.
E) the institutional rate.
48) Changes in the discount rate
A) are the most powerful tool available to the Fed.
B) are generally regarded as relatively unimportant policy tool.
C) are the primary method by which the Fed controls the money supply.
D) convert required reserves into excess reserves or excess reserves into required reserves.
E) make it easier for banks to print currency.
49) According to economic theory, monetary policy affects the level of equilibrium output by
A) directly altering the level of government spending.
B) altering the rate of interest.
C) directly altering the levels of consumption and investment spending.
D) altering the size of the budget deficit.
E) putting more paper currency into the hands of the public.
50) Which of the following depicts the process by which an increase in the money supply will
lead to an increase in GDP?
A) The increase in the money supply will drive up the interest rate, which will lower government
spending and reduce the level of equilibrium GDP.
B) The increase in the money supply will directly increase consumption spending by households,
which will increase the level of equilibrium GDP.
C) The increase in the money supply will directly increase the level of government spending,
which will increase the level of equilibrium GDP.
D) The increase in the money supply will reduce the interest rate, which will increase the level of
consumption and investment spending and cause equilibrium GDP to rise.
E) The increase in the money supply will increase the amount of paper currency in circulation,
which will increase the rate at which people spend and cause equilibrium GDP to rise.
51) A reduction in the money supply will tend to
A) reduce the equilibrium interest rate.
B) increase the level of investment spending.
C) reduce the level of investment spending.
D) increase the level of consumption spending.
E) reduce the rate at which money circulates through the economy.
52) According to activists, which of the following would be an appropriate monetary policy
action for a period of unemployment?
A) a reduction in the tax rate on personal income
B) an increase in the reserve requirement
C) the purchase of government securities by the Fed
D) an increase in the discount rate
E) a reduction in government spending
53) According to activists, if the Fed wanted to reduce inflationary pressures, which of the
following combinations of policies should it pursue?
A) increase the reserve requirement, decrease the discount rate, and sell government securities
B) increase the reserve requirement, increase the discount rate, and sell government securities
C) increase the reserve requirement, increase the discount rate, and buy government securities
D) decrease the reserve requirement, decrease the discount rate, and buy government securities
E) reduce government spending and increases taxes
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54) Equilibrium GDP would tend to increase if
A) the discount rate was increased.
B) the Fed sold government securities on the open market.
C) the reserve requirement was lowered.
D) the money supply was reduced.
E) government spending was reduced.
55) According to activists, if the economy were in the midst of a severe recession, which of the
following would be appropriate?
A) an increase in the reserve requirement
B) the sale of government securities by the Fed
C) an increase in the discount rate
D) a reduction in the reserve requirement
E) a reduction in government spending
56) The policy actions of the Fed may sometimes have an unintended and inappropriate impact
on the economy. Which of the following is not an explanation for this problem?
A) It takes some time for policy to alter the level of spending.
B) Policymakers may be slow in identifying a problem.
C) It takes time for policymakers to agree on a course of action.
D) The economy does not always send clear signals about the future.
E) We do not know how to alter the lending ability of banks.
57) Monetary policy may be less effective in combating unemployment than it is in combating
inflation because
A) unemployment is an easier problem to recognize than inflation.
B) it is more politically acceptable to combat inflation than unemployment.
C) bankers may not use the additional reserves provided by the Fed to make loans.
D) the deposit multiplier is larger for reductions in reserves than for increases in reserves.
E) the deposit multiplier is smaller for reductions in reserves than for increases in reserves.
1) Which of the following is the largest component of the M-1 money supply?
A) currency
B) passbook savings accounts
C) checkable deposits
D) money-market accounts
2) Which of the following is not an example of near money?
A) a saving account.
B) a government bond.
C) a piece of prime real estate.
D) an account with a money market fund.
3) Which of the following appears as a liability on the balance sheet of a depository institution?
A) Loans
B) Reserves
C) Checkable deposits
D) Securities
Use the following information to answer the following question(s).
(All figures are in millions of dollars.)
4) Based on the table above, assuming that the reserve requirement is 30 percent, how much
additional money can this bank create?
A) $8 million
B) $12 million
C) $15 million
D) $25 million
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Use the following information to answer the following question(s).
(All figures are in millions.)
5) Based on the table above, assuming a reserve requirement of 25 percent, how much additional
money can the bank represented create?
A) $20 million
B) $15 million
C) $10 million
D) $ 5 million
6) Based on the table above, if the reserve requirement is 25 percent, the deposit multiplier
would be equal to
A) 4.
B) 5.
C) 1/4.
D) 10.
7) If the balance sheet represented above were for the banking system rather than for a single
bank, the system could expand the money supply by an additional
A) $15 million
B) $30 million
C) $60 million
D) $80 million
8) The Federal Open Market Committee is composed of
A) the presidents of the 12 district Federal Reserve banks.
B) the members of the Fed’s board of governors and the presidents of 5 district Federal Reserve
banks.
C) the chairman of the Fed’s board of governors and the presidents of the 12 district Federal
Reserve banks.
D) 5 members of the Fed’s board of governors and the presidents of 5 district Federal Reserve
banks.
9) If banks hold checkable deposits of $300 million and reserves of $80 million and if the reserve