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Multiple ChoiceEdit

1. Which of the following is (are) part of the definition of money?

  1. store of value
  2. medium of exchange
  3. unit of account
  4. backed by gold
  • a. 1 and 2 only
  • b. 1, 2, and 3 only
  • c. 1, 2, 3, and 4
  • d. 2 and 3 only
  • e. 3 and 4 only

2. The measure of the money stock called M1 includes

  • a. wealth held by people in their checking accounts.
  • b. wealth held by people in their savings accounts.
  • c. wealth held by people in money market mutual funds.
  • d. everything that is included in M2 plus some additional items.
  • e. credit cards.

3. Demand deposits are a type of

  • a. checking account.
  • b. time deposit.
  • c. money market mutual fund.
  • d. savings deposit.
  • e. debit card balance.

4. The Federal Reserve does all EXCEPT which of the following?

  • a. It controls the supply of money.
  • b. It acts as a lender of last resort to banks.
  • c. It makes loans to large business firms.
  • d. It tries to ensure the health of the banking system.
  • e. Influences interest rates in the economy.

5. If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve

  • a. creates dollars and uses them to purchase government bonds from the public.
  • b. sells government bonds from its portfolio to the public.
  • c. creates dollars and uses them to purchase various types of stocks and bonds from
  • the public.
  • d. sells various types of stocks and bonds from its portfolio to the public.
  • e. increases its sales of bonds to the government.

6. The Fed can increase the price level by conducting open-market

  • a. sales and raising the discount rate.
  • b. sales and lowering the reserve requirement.
  • c. purchases and raising the discount rate.
  • d. purchases and lowering the discount rate.
  • e. purchases and raising the reserve requirement.

7. In 1991, the Federal Reserve lowered the reserve requirement ratio from 12 percent to 10 percent. Other things the same, this should have

  • a. increased both the money multiplier and the money supply.
  • b. decreased both the money multiplier and the money supply.
  • c. increased the money multiplier and decreased the money supply.
  • d. decreased the money multiplier and increased the money supply.
  • e. increased the money supply but not have changed the money multiplier.

8. Imagine that the federal funds rate was not at the level the Federal Reserve had targeted. To move the rate back toward its target, the Federal Reserve could

  1. buy bonds, thus reducing reserves
  2. sell bonds, thus reducing reserves
  3. buy bonds, thus increasing reserves
  4. sell bonds, thus increasing reserves
  • a. 1 only
  • b. 2 only
  • c. 3 only
  • d. 1 and 4 only
  • e. 2 and 3 only

9. The federal funds rate is the interest rate

  • a. the Federal Reserves 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.
  • e. on member bank deposits at the Federal Reserve.

10. When the Fed decreases the discount rate, banks will

  • a. borrow more from the Fed and lend more to the public. The money supply increases.
  • b. borrow more from the Fed and lend less to the public. The money supply decreases.
  • c. borrow less from the Fed and lend more to the public. The money supply increases.
  • d. borrow less from the Fed and lend less to the public. The money supply decreases.
  • e. borrow more from the Fed and lend less to the public. The money supply increases.

11. If the reserve ratio is 10 percent, banks do not hold excess reserves, and people hold only deposits and no currency. When the Fed sells $10 million dollars of bonds to the public, bank reserves

  • a. increase by $1 million and the money supply eventually increases by $10 million.
  • b. increase by $10 million and the money supply eventually increases by $100 million.
  • c. decrease by $1 million and the money supply eventually increases by $10 million.
  • d. decrease by $10 million and the money supply eventually decreases by $100 million.
  • e. decrease by $10 million and the money supply eventually decreases by $90 million.

12. Other things the same, if reserve requirements are decreased,

  • a. the money multiplier increases, the money supply decreases, and interest rates fall.
  • b. the money multiplier increases, the money supply increases, and interest rates rise.
  • c. the money multiplier increases, the money supply increases, and interest rates fall.
  • d. the money multiplier increases, the money supply decreases, and interest rates rise.
  • e. the money multiplier increases, the money supply increases, and interest rates rise.

AnswersEdit

  1. B
  2. A
  3. A
  4. C
  5. C
  6. D
  7. A
  8. E
  9. C
  10. A
  11. D
  12. C

Free ResponseEdit

1. Explain how each of the following changes the money supply.

  • a. the Fed buys bonds
  • b. the Fed raises the discount rate
  • c. the Fed raises the reserve requirement

2. If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? How much of the change that you identified was created by the banking system?

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