Question 1

If money were not used as a medium of exchange,

Accepted Answer

A)   the gains from trade would be severely limited.
B)   our standard of living would probably improve.
C)   the transaction costs of exchange would be lower.
D)   economic efficiency would increase.

Question 2

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.

Question 3

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.

Question 4

Which of the following correctly indicates how the Fed could use the interest rate it pays commercial banks on their excess reserves to influence the money supply?

Accepted Answer

A)   If the Fed wanted to increase the money supply, it could increase the interest rate it pays banks on their excess reserves.
B)   When the Fed reduces the interest rate paid on excess reserves, it increases the incentive of commercial banks to hold excess reserves.
C)   If the Fed wanted to decrease the money supply, it could increase the interest rate paid on excess reserves.
D)   When the Fed increases the interest rate it pays on excess reserves, this encourages banks to extend more loans and thereby increase the money supply.

Question 5

Reserves that banks are required by law to keep on hand to back up their deposits are called:

Accepted Answer

A)   required reserves.
B)   borrowed reserves.
C)   actual reserves.
D)   excess reserves.

Question 6

Banks are considered a safer place to deposit money now than they were prior to 1933 because

Accepted Answer

A)   gold reserves have increased.
B)   reserve requirements are higher.
C)   the creation of the FDIC reduced the likelihood of bank runs.
D)   the commercial banks are no longer permitted to extend loans to the Federal Government.

Question 7

What restricts the Fed's ability to write checks and purchase U.S. securities?

Accepted Answer

A)   Congress; the Fed must receive a budget allocation from Congress before it can write a check.
B)   The gold requirement; the Fed cannot write a check unless it has a sufficient amount of gold to back the expenditure.
C)   Reserve requirements; the Fed must maintain 20 percent of its assets in the form of cash against the deposits that it is holding for commercial banks.
D)   Nothing; the Fed can create money simply by writing a check on itself.

Question 8

Which of the following is the primary tool the Fed uses to control the supply of money?

Accepted Answer

A)   the discount rate
B)   the reserve requirements
C)   open market operations
D)   the 30-year home-mortgage interest rate

Question 9

During the period following 1995, many individuals shifted funds from interest-earning checking accounts to money market deposit accounts. How did these shifts impact the M1 and M2 money supply figures?

Accepted Answer

A)   They reduced the growth rate of M1 but exerted little impact on M2.
B)   They reduced the growth rate of M2 but exerted little impact on M1.
C)   They reduced the growth rate of both M1 and M2.
D)   They did not affect the growth rate of either M1 or M2.

Question 10

Demand deposits are

Accepted Answer

A)   deposits held by individuals at one of the twelve Federal Reserve District Banks.
B)   interest-earning savings deposits held by individuals at a banking institution.
C)   deposits of commercial banks at one of the twelve Federal Reserve District Banks.
D)   deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check.

Question 11

Which of the following would lead to a rapid growth of the money supply in the future?

Accepted Answer

A)   the use of large excess reserves by banks to extend additional loans
B)   a reduction in government expenditures to reduce the size of the federal deficit
C)   an increase in government expenditures financed by taxes
D)   an increase in the interest rate the Fed pays banks holding excess reserves

Question 12

The sale of government securities by the Fed will cause

Accepted Answer

A)   a decrease in both the monetary base and the money supply.
B)   an increase in both the monetary base and the money supply.
C)   an increase in the monetary base but no change in the money supply.
D)   a decrease in the monetary base but no change in the money supply.

Question 13

Which of the following is not a depository institution?

Accepted Answer

A)   commercial bank
B)   credit union
C)   finance company
D)   savings and loan association

Question 14

The Fed's use of the interest rate it pays banks on their excess reserves

Accepted Answer

A)   is a tool the Fed has used effectively over the past several decades to control the money supply.
B)   is a tool that can be used to reduce the supply of money, but it cannot be used to expand it.
C)   is a monetary tool that the Fed introduced in 2008.
D)   is a tool that could be used to expand the money supply, but it could not be used to reduce it.

Question 15

If the Fed wants to use "open market operations" to decrease the money supply, it would

Accepted Answer

A)   increase the federal funds rate.
B)   issue more federal government debt.
C)   sell U.S. government securities (bonds)  to the general public.
D)   increase the required reserve ratio.

Question 16

One advantage of a money system compared to a barter system is that

Accepted Answer

A)   barter never works.
B)   money creates the need for banks.
C)   money is more efficient.
D)   everyone has money.

Question 17

Which of the following is not part of the M1 money supply?

Accepted Answer

A)   paper bills (currency) 
B)   travelers' checks
C)   savings deposits
D)   coins

Question 18

Suppose the Treasury sells $10 billion of newly issued Treasury bills to the Fed and uses the proceeds to increase government spending by $10 billion. How will this affect the money supply and the national debt?

Accepted Answer

A)   The money supply will increase; the national debt will decline.
B)   The money supply will decline; the national debt will increase.
C)   The money supply will be unaffected; the national debt will increase.
D)   Both the money supply and the national debt will increase.

Question 19

In the United States, the money supply (M1)  consists of

Accepted Answer

A)   paper currency and coins.
B)   coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.
C)   paper currency, coins, demand deposits, and savings deposits.
D)   government bonds, currency, demand deposits, other checkable deposits, and traveler's checks.

Question 20

When the actual reserves held by a bank exceed the legal requirement, the bank

Accepted Answer

A)   will have to borrow from the Fed.
B)   has excess reserves, which can be used to extend additional loans.
C)   cannot extend additional loans.
D)   will have to reduce its outstanding loans.

Exam 13: A : Money and the Banking System

The Fed's use of the interest rate it pays banks on their excess reserves

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Which of the following would lead to a rapid growth of the money supply in the future?

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During the period following 1995, many individuals shifted funds from interest-earning checking accounts to money market deposit accounts. How did these shifts impact the M1 and M2 money supply figures?

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The federal funds rate is the interest rate paid when

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Suppose the Treasury sells $10 billion of newly issued Treasury bills to the Fed and uses the proceeds to increase government spending by $10 billion. How will this affect the money supply and the national debt?

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In the United States, the money supply (M1) consists of

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If the Fed wants to use "open market operations" to decrease the money supply, it would

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The sale of government securities by the Fed will cause

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

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Which of the following correctly indicates how the Fed could use the interest rate it pays commercial banks on their excess reserves to influence the money supply?

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One advantage of a money system compared to a barter system is that

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Which of the following is the primary tool the Fed uses to control the supply of money?

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Demand deposits are

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Which of the following is not part of the M1 money supply?

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Which of the following is not a depository institution?

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Reserves that banks are required by law to keep on hand to back up their deposits are called:

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What restricts the Fed's ability to write checks and purchase U.S. securities?

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When the actual reserves held by a bank exceed the legal requirement, the bank

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If money were not used as a medium of exchange,

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Banks are considered a safer place to deposit money now than they were prior to 1933 because

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