Question 1

Money is

Accepted Answer

A)   whatever is generally accepted in exchange for goods and services.
B)   an object to be consumed.
C)   a highly illiquid asset.
D)   widely used in a barter economy.E) None of the above
F) B) and C)

Question 2

What is meant by the expression, "There is too much money chasing too few goods"?

Accepted Answer

A)   People spend too much time chasing after money.
B)   An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.
C)   The value of money will tend to decline when the supply of gold increases.
D)   People would be better off if the monetary authorities increased the supply of money more rapidly.E) B) and D)
F) None of the above

Question 3

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?

Accepted Answer

If a bank must keep all of its deposits ...

Question 4

The primary source of revenue for the Federal Reserve is

Accepted Answer

A)   the interest earned on the bonds held by the Fed.
B)   its annual appropriation from Congress.
C)   the interest earned on discount loans to banks.
D)   the dividends earned on the stocks held by the Fed.E) A) and B)
F) All of the above

Question 5

Which one of the following is the largest component of the money supply (M1)  in the United States?

Accepted Answer

A)   demand and other checking deposits
B)   gold certificates
C)   credit cards and traveler's checks
D)   Federal Reserve notesE) None of the above
F) B) and D)

Question 6

In order to increase the money supply, the banking system must have

Accepted Answer

A)   required reserves.
B)   the authority to buy corporate stocks.
C)   the authority to print U.S. currency.
D)   excess reserves.
E)   the authority to engage in interstate banking.F) A) and B)
G) A) and D)

Question 7

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.

Accepted Answer

Once the $1,000 is deposited, the bank i...

Question 8

Under the Term Auction Facility (TAF) , the rate that a depository institution pays on a loan from the Fed is determined by

Accepted Answer

A)   the federal funds rate.
B)   the discount rate.
C)   the real rate of interest.
D)   a bidding process allocating the funds to those willing to pay the highest rates.E) None of the above
F) C) and D)

Question 9

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably

Accepted Answer

A)   selling government securities to banks.
B)   selling government securities to the public.
C)   buying government securities from the public.
D)   encouraging banks to exchange their Fed deposits for currency.E) A) and B)
F) A) and C)

Question 10

Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies?

Accepted Answer

A)   M1 and M2 are both unchanged.
B)   M1 falls by $1,000, and M2 rises by $1,000.
C)   M1 is unchanged, and M2 rises by $1,000.
D)   M1 falls by $1,000, and M2 is unchanged.E) A) and B)
F) C) and D)

Question 11

The main source of profit for financial institutions is

Accepted Answer

A)   their ownership of stocks in commercial corporations.
B)   their ownership of real assets received in foreclosures on loans to households.
C)   the fees charged for holding and servicing checking accounts.
D)   the difference between interest paid on deposits and interest received on loans.
E)   the difference between the cost of creating new money and the interest paid on loans.F) C) and D)
G) None of the above

Question 12

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

Accepted Answer

A)   a gold-backed banking system.
B)   a full reserve banking system.
C)   a fiat banking system.
D)   a fractional reserve banking system.E) A) and B)
F) All of the above

Question 13

Which of the following actions of the Fed would increase the money supply?

Accepted Answer

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.E) B) and D)
F) A) and B)

Question 14

As debit cards become more popular, individuals will reduce their holdings of currency. Other things constant, how will this impact the money supply?

Accepted Answer

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.E) A) and C)
F) None of the above

Question 15

When commercial banks extend loans, they are able to expand the supply of money in the United States because the U.S. has

Accepted Answer

A)   a fiat supply of money.
B)   money that is backed by gold.
C)   a fractional reserve banking system.
D)   a system of federal deposit insurance.E) A) and B)
F) A) and D)

Question 16

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

Accepted Answer

A)   decline by $7,000.
B)   decline by $35,000.
C)   decline by $28,000.
D)   increase by $7,000.E) B) and D)
F) A) and B)

Question 17

Explain how the Fed would use its four tools to decrease and to increase the money supply.

Accepted Answer

The Fed would raise reserve requirements...

Question 18

During the second half of 2008, the Fed approximately doubled the reserves of the commercial banking system.  As a result, the M1 money supply

Accepted Answer

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.E) None of the above
F) B) and C)

Question 19

The federal funds rate is the interest rate paid when

Accepted Answer

A)   the Federal Reserve makes loans to member banks.
B)   taxpayers pay overdue taxes.
C)   one bank borrows reserves from another bank.
D)   banks make loans to the federal government.
E)   the federal debt is refinanced.F) A) and B)
G) B) and C)

Question 20

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?

Accepted Answer

A)   Sell some of its holdings of government bonds.
B)   Decrease government expenditures.
C)   Urge the Treasury to sell more U.S. securities.
D)   Reduce the reserve requirements.E) None of the above
F) All of the above

Exam 13: Money and the Banking System

Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following is the largest component of the money supply (M1) in the United States?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

As debit cards become more popular, individuals will reduce their holdings of currency. Other things constant, how will this impact the money supply?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedIf a bank must keep all of its deposits ...View AnswerShow Answer

During the second half of 2008, the Fed approximately doubled the reserves of the commercial banking system. As a result, the M1 money supply

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedOnce the $1,000 is deposited, the bank i...View AnswerShow Answer

Money is

Correct AnswerverifiedShow Answer

When commercial banks extend loans, they are able to expand the supply of money in the United States because the U.S. has

Correct AnswerverifiedShow Answer

Which of the following actions of the Fed would increase the money supply?

Correct AnswerverifiedShow Answer

The main source of profit for financial institutions is

Correct AnswerverifiedShow Answer

Under the Term Auction Facility (TAF) , the rate that a depository institution pays on a loan from the Fed is determined by

Correct AnswerverifiedShow Answer

In order to increase the money supply, the banking system must have

Correct AnswerverifiedShow Answer

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?

Correct AnswerverifiedShow Answer

The primary source of revenue for the Federal Reserve is

Correct AnswerverifiedShow Answer

The federal funds rate is the interest rate paid when

Correct AnswerverifiedShow Answer

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably

Correct AnswerverifiedShow Answer

Explain how the Fed would use its four tools to decrease and to increase the money supply.

Correct AnswerverifiedThe Fed would raise reserve requirements...View AnswerShow Answer

What is meant by the expression, "There is too much money chasing too few goods"?

Correct AnswerverifiedShow Answer

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If a bank must keep all of its deposits ...
View Answer

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Once the $1,000 is deposited, the bank i...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The Fed would raise reserve requirements...
View Answer

Correct Answer
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