Chapter 10: The Money Supply and The Federal Reserve System
Multiple Choice

1.  

Which of the following statements is/are true about money?
A major advantage of using money is that it tends to hold its value even when prices are changing.
A monetary economy relies on a double coincidence of wants.
Money is unmatched by any other asset in terms of its liquidity.
Money is unmatched by any other asset as a store of value.
All of the above.

2.  

Which of the following statements is/are correct?
Commodity money can be used to buy commodities while fiat money cannot.
Money that is backed by gold is also known as fiat money.
If the price of gold is $35 per ounce, the government sells an ounce of gold for 35 dollar bills. That’s how the value of money is determined today.
The value of fiat money is determined only by the willingness of people to accept it as a medium of exchange.
All of the above.

3.  

Which of the following is/are part of M2?
Near monies--or close substitutes--for transactions money.
M1--or transactions--money.
Savings and money market accounts.
All of the above.
None of the above.

4.  

During the 15th and 16th centuries, goldsmiths ran gold warehouses that resembled today's banks. As this system of gold safekeeping evolved,
Goldsmiths gradually realized that they could lend out some of the "extra" gold sitting around.
There were more claims to gold than there were ounces of gold.
Goldsmiths increased the amount of money in circulation without adding any more real gold to the system.
Receipts for gold rather than gold itself began to be traded for goods and services.
All of the above.

5.  

On the T-account of a bank:
Reserves are on the liability side.
Loans are the most important asset.
Deposits are the most important asset.
Assets plus net worth equal liabilities.
Assets are usually greater than liabilities plus net worth.

6.  

Which of the following statements are true?
When a bank makes loans, the creation of demand deposits causes excess reserves to fall.
A bank makes loans until it can no longer do so because of the reserve requirement restriction.
A bank makes loans up to the point where its excess reserves are zero.
All of the above.

7.  

Assuming there are no leakages out of the banking system, a money multiplier equal to 10 means that:
The reserve ratio equals 10.
An additional $10 of reserves create one dollar of deposits.
Each additional dollar of deposits creates $10 of reserves.
Each additional dollar of reserves creates $10 of additional deposits.

8.  

Which body of the Federal Reserve System sets the majority of U.S. monetary policy?
The Board of Governors.
The Federal Open Market Committee.
The twelve Federal Reserve Banks in each district.
The Open Market Desk.

9.  

How many divisions, corresponding to each Fed's districts, are there in this map?

21a.jpg
50
25
13
12
10

10.  

When we say that one of the functions of the Fed is to be a lender of last resort, we meant that:
The Fed serves as a clearinghouse for interbank payments.
The Fed controls mergers between banks.
The Fed ensures that banks are financially sound.
The Fed sets reserve requirements.
The Fed tries to make bank panics less likely.

11.  

Which of the following statements is/are correct concerning the Fed's assets and liabilities?
Gold counts as an asset in the Fed's balance sheet because of its close relationship to the money supply.
The largest of the Fed's assets are loans to banks, or the loans the Fed makes to banks that are short of reserves.
The U.S. treasury securities found in the asset side of the Fed's balance sheet have nothing to do with the Fed's control of the money supply.
The bills of all denominations in circulation are liabilities of the Fed.
All of the above.

12.  

The preferred tool of the Federal Reserve for conducting monetary policy involves changes in:
The reserve requirement.
The discount rate.
Open market operations.
Government spending and taxation.
Moral suasion.

13.  

If the Fed wants to increase the money supply, it will:
Increase the discount rate.
Increase the reserve requirement.
Buy government securities in the open market.
Print money.
Sell gold.

14.  

Which of the following statements is/are correct?
The required reserve ratio establishes a link between the reserves of commercial banks and the deposits they are allowed to create.
The money supply equals bank reserves plus bank deposits.
The existence of reserves in the banking system prevents the Fed from having more control over the money supply.
To increase the money supply, the Fed must lower reserves.
All of the above.

15.  

Assuming that banks are always fully loaned and people hold no cash, and given a required reserve ratio of 20%, an infusion of $100 billion in reserves will result in a maximum of:
Another $100 billion worth of reserves.
$100 billion in deposits.
$20 billion in deposits.
$120 billion in deposits.
$500 billion in deposits.

16.  

Which of the following statements is/are correct?
Increases in the required reserve ratio allow banks to have more deposits with the existing volume of reserves.
When a bank creates more deposits, by making loans, the money supply decreases.
The reserve requirement suffers from a lag in effectiveness after implementation.
The reserve requirement is a good tool for controlling week-to-week changes in the money supply.
All of the above.

17.  

What are some of the characteristics of the discount rate?
In reality, the discount rate most often follows the other interest rates rather than leads them.
An attractive feature of the discount rate is that its effect on other interest rates can be easily predicted.
There is an exact proportionality between a change in the discount rate and a change in the banks' demand for reserves.
Movements in other interest rates in the economy tend to be proportional to, rather than offset by, movements in the discount rate.
All of the above.

18.  

What is moral suasion?
Moral suasion is a strategy used by the Fed to encourage banks to accept the government securities it wants to buy or sell.
Moral suasion explains how, for no apparent reason, people accept Federal Reserve notes which are just green pieces of paper that have no intrinsic value.
Moral suasion explains how, for no apparent reason, all interest rates in the economy tend to follow the direction of the Fed's interest rate--the discount rate.
Moral suasion refers to the fact that the Fed looks with a disapproving eye at banks that want to borrow too heavily from the Fed.
Moral suasion explains how, in the presence of imperfect information, a bank can end up with only the most dishonest set of borrowers as customers.

19.  

If government spending exceeds tax receipts, then (G - T) < 0. Which of the following strategies is allowed by law in order to finance the deficit?
The Treasury can issue bills, bonds, and notes that pay interest.
The Fed can issue new U.S. government securities and sell them in the open market.
The Treasury can print money in order to finance the deficit.
The Fed buys and sells only new, not preexisting, U.S. government securities in the open market.
All of the above.

20.  

An open market sale of securities by the Fed results in:
An increase in bank reserves and an increase in the money supply.
An increase in bank reserves, an increase in the money supply, and a higher money multiplier.
A decrease in bank reserves and a decrease in the money supply.
A decrease in bank reserves, a decrease in the money supply, and a lower multiplier.
A decrease in bank reserves and an increase in the money supply.


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