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The Monetary System
Barter exchange tends to be inefficient because
a. gold is difficult to transport.
b. it limits the time and effort required for trade.
c. it can be a very timeconsuming process to find a double coincidence of wants.
d. a standardized unit of value can be difficult to find in a primitive economy.
In order for something to function well as a medium of exchange, it must be
a. issued by a central government.
b. readily and widely accepted in trade.
c. backed by a valuable commodity.
d. All of the above are correct.
If a society chooses fiat money as its money form, it
a. must guarantee its convertibility into gold.
b. must worry about its liquidity.
c. cannot make use of a banking system.
d. must worry about controlling its quantity.
Which of the following is the most liquid category of assets?
a. large time deposits
b. money market mutual fund balances
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c. small time deposits
d. demand deposits
Fred Jones won a lottery prize of $1 million. He put the money in the bank to save it for his
daughter’s college education. For him, money was functioning primarily as a
a. unit of account.
b. store of value.
c. means of payment.
d. type of shortterm loan.
Which of the following is not included in the M1 money stock?
a. small time deposits.
b. demand deposits.
c. travelers’ checks.
d. cash in the hands of the public.
Given the following information, what would be the values of M1 and M2?
Small time deposits
Money market mutual funds
$ 25 billion
Large time deposits
Cash in hand
a. M1 = $400 billion, M2 = $2,450 billion.
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b. M1 = $100 billion, M2 = $1,075 billion.
c. M1 = $425 billion, M2 = $2, 425 billion.
d. M1 = $425 billion, M2 = $1,850 billion.
Credit cards are
a. included in M2 but not in M1.
b. not considered money.
c. included in M3 but not in M2 or M1.
d. considered money only when they are in the hands of the public.
The Federal Reserve is
a. part of the executive branch of the government.
b. not part of any branch of the government.
c. part of the judicial branch of the government.
d. included in all three branches of government.
Which of the following would not be used by the Fed to influence interest rates?
a. selling securities
b. buying stocks
c. setting reserve requirements
d. changing the discount rate
The interest rate that the Fed charges banks that borrow reserves from it is the
a. federal funds rate.
b. discount rate.
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c. reserve requirement.
d. prime rate.
Which of the following can banks count as reserves?
a. coins in the bank vaults
b. paper currency in bank vaults
c. deposits at the Federal Reserve banks
d. All of the above are correct.
The most effective and frequently used tool the Fed has at its disposal to change the economy’s
money supply is
a. open market operations.
b. the discount rate.
c. the reserve requirement.
d. the federal funds rate.
The Federal Open Market Committee is composed of
a. 12 Federal Reserve bank presidents and presidents of the seven largest commercial banks in the
b. the Board of Governors and the 12 Federal Reserve bank presidents.
c. the Board of Governors, the Secretary of the Treasury, and the President of the FDIC.
d. the Board of Governors and presidents of five Federal Reserve Banks.
An open market purchase occurs when
a. the Fed buys government securities from a bank.
b. a bank buys government securities from the Fed.
c. a securities dealer buys shards of stock from the Fed.
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d. the Treasury buys government securities from the Fed.
The legal reserve requirement is
a. the minimum amount of reserves the Fed requires a bank to hold.
b. the interest rate that the Fed charges banks who borrow from it.
c. the interest rate on loans made by banks to other banks.
d. an appeal by the Fed to banks, asking for voluntary compliance with the Fed’s 100% reserves
Given an initial deposit of $5,000 and a legal reserve requirement of 25%, the amount of money
potentially created by the banking system is
When the potential money multiplier is 7, a $3,000 increase in demand deposits could support the
creation of __________ additional new demand deposits.
If a bank receives a new demand deposit of $10,000, and the legal reserve requirement is 20
percent, then the bank can lend out
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If the legal reserve requirement decreases, the
a. money multiplier increases.
b. money multiplier decreases.
c. amount of excess reserves the bank has decreases.
d. money multiplier is unaffected.
Given the information in the table, if the legal reserve requirement is 20 percent, this bank has
excess reserves of
Given the information in the table, if the legal reserve requirement is 20 percent, this bank can
expand its loans by as much as
If a bank keeps some of its excess reserves, the actual money multiplier
b. stays the same.
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c. goes to zero.
If the Fed reduces the money supply, banks will often initially have
a. more reserves than they are required to hold.
b. excess reserves.
c. increases demand deposits.
d. deficient reserves.
If the Fed decides to sell $10 million in securities and the Paris National Bank writes out a $10
million check to purchase these securities, then the
a. Paris National Bank now has $10 million more of excess reserves at the Fed.
b. Paris National Bank now has $10 million fewer reserves at the Fed.
c. Fed has increased its asset position by $20 million.
d. money supply has increased.
When the Fed decreases the discount rates, it makes it easier for banks to
a. decrease their reserves by borrowing from the Fed, causing the money supply to shrink.
b. increase their reserves by borrowing from the Fed, causing the money supply to grow.
c. protect against the inevitable accompanying increase in the legal reserve requirement.
d. convert its loans into deposits.
The Fed loses some control over the interest rate once it targets the money supply,
a. but the interest rate does not move in an inappropriate direction with respect to the Fed’s
b. and the interest rate often moves in the opposite direction of the Fed’s target.
c. but it can still dictate what the interest rate will be.
d. and also loses some control over open market operations, which are linked to the interest rate.
If there is a recession, the Fed would most likely
a. encourage banks to provide loans by lowering the discount rate.
b. encourage banks to provide loans by raising the discount rate.
c. restrict bank lending by lowering the discount rate.
d. restrict bank lending by raising the discount rate.