Macroeconomics [ch 16]
Money and prices in the long run
- 1.
Which of the following is not a function of money
- A.
Unit of account
- B.
Store of value
- C.
Hedge against inflation
- D.
Medium of exchange
Correct Answer
C. Hedge against inflationExplanation
Money serves as a unit of account, allowing individuals to measure and compare the value of goods and services. It also acts as a store of value, enabling people to save and accumulate wealth over time. Additionally, money functions as a medium of exchange, facilitating transactions and trade. However, money is not specifically designed as a hedge against inflation. While some individuals may choose to invest in assets that can potentially outpace inflation, such as stocks or real estate, money itself does not inherently provide protection against inflation.Rate this question:
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- 2.
Required reserves of banks are a fixed percentage of their
- A.
Loans
- B.
Assets
- C.
Deposits
- D.
Government bonds
Correct Answer
C. DepositsExplanation
The required reserves of banks are a fixed percentage of their deposits. This means that banks are required to hold a certain amount of their deposits as reserves, which cannot be lent out or invested. This is a regulatory measure implemented by central banks to ensure the stability and liquidity of the banking system. By holding reserves, banks can meet withdrawal demands from depositors and maintain confidence in the banking system. The percentage of required reserves may vary depending on the central bank's monetary policy objectives.Rate this question:
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- 3.
The M1 money supply is composed of
- A.
Currency, demand deposits, traveler's checks, and other checkable accounts
- B.
Currency, demand deposits, savings deposits, money market mututal funds, and small time deposits.
- C.
Currency, government bonds, gold certificates, and coins.
- D.
Currency, NOW accounts, savings accounts, and government bonds.
- E.
None of the above
Correct Answer
A. Currency, demand deposits, traveler's checks, and other checkable accountsExplanation
The M1 money supply includes currency, which refers to physical money such as coins and bills. It also includes demand deposits, which are funds held in checking accounts that can be accessed on demand by the account holder. Additionally, traveler's checks are included in the M1 money supply as they can be easily converted into cash or used for purchases. Lastly, other checkable accounts, such as negotiable order of withdrawal (NOW) accounts, are also part of the M1 money supply as they allow for easy access to funds through checks or debit cards.Rate this question:
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- 4.
If the reserve requirement is 25 percent, the value of the money multiplier is
- A.
0.25
- B.
4
- C.
25
- D.
None of the above
Correct Answer
B. 4Explanation
The correct answer is 4 because the money multiplier is calculated by dividing 1 by the reserve requirement. In this case, since the reserve requirement is 25 percent (or 0.25), dividing 1 by 0.25 gives us a money multiplier of 4. This means that for every $1 of reserves held in the banking system, the money supply can increase by $4 through the process of lending and creating new deposits.Rate this question:
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- 5.
An example of fiat money is
- A.
Gold
- B.
Paper dollars
- C.
Coins
- D.
Cigarettes in a prisoner-of-war camp
Correct Answer
B. Paper dollarsExplanation
Fiat money is a type of currency that is not backed by a physical commodity like gold, but is declared as legal tender by a government. Paper dollars are an example of fiat money because their value is not based on the material they are made of, but rather on the trust and confidence people have in the government that issues them. Unlike gold or other commodities, the value of paper dollars is not intrinsically tied to their physical properties, making them a prime example of fiat money.Rate this question:
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- 6.
Which of the following policy actions by the Fed is likely to increase the money supply?
- A.
Reducing reserve requirements
- B.
Selling government bonds
- C.
Increasing the discount rate
- D.
All of these will increase the money supply
Correct Answer
A. Reducing reserve requirementsExplanation
Reducing reserve requirements by the Fed is likely to increase the money supply. Reserve requirements refer to the percentage of deposits that banks are required to hold as reserves. When the reserve requirements are reduced, banks are allowed to hold fewer reserves and can lend out more money. This increases the amount of money in circulation, leading to an increase in the money supply.Rate this question:
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- 7.
The Board of Governors of the Federal Reserve System consists of
- A.
7 members appointed by Congress and 7 appointed by the president
- B.
7 members elected by the Federal Reserve Banks
- C.
12 members appointed by Congress
- D.
7 members appointed by the president
- E.
5 members appointd by the president and 7 rotating presidents of the Federal Reserve Banks
Correct Answer
D. 7 members appointed by the presidentExplanation
The correct answer is 7 members appointed by the president. This means that the president of the United States appoints 7 members to the Board of Governors of the Federal Reserve System. This is an important fact because it highlights the role of the president in shaping the composition of the Board and influencing monetary policy decisions. The other options mentioned in the question, such as members appointed by Congress or elected by the Federal Reserve Banks, are incorrect and do not accurately reflect the composition of the Board.Rate this question:
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- 8.
Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?
- A.
$1,000
- B.
9,000
- C.
10,000
- D.
$0
Correct Answer
D. $0Explanation
When Joe changes his $1,000 demand deposit from Bank A to Bank B, there is no potential change in demand deposits. This is because the reserve requirement is 10 percent, meaning that banks are required to keep 10 percent of their deposits as reserves and can only lend out the remaining 90 percent. Therefore, Joe's action does not affect the overall amount of demand deposits in the banking system.Rate this question:
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- 9.
Commodity money
- A.
Has no intrinsic value
- B.
Has intrinsic value
- C.
Is used exclusively in the United States
- D.
Is used as reserves to back fiat money
Correct Answer
B. Has intrinsic valueExplanation
Commodity money refers to a type of currency that has intrinsic value, meaning it is valuable in and of itself. Unlike fiat money, which has value because it is declared by the government to be legal tender, commodity money is backed by a physical commodity such as gold or silver. This means that the currency itself holds value because it can be exchanged for the underlying commodity. Therefore, the correct answer is "has intrinsic value."Rate this question:
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- 10.
A decrease in the reserve requirement causes
- A.
Reserves to rise
- B.
Reserves to fall
- C.
The money multiplier to rise
- D.
The money multiplier to fall
- E.
None of the above
Correct Answer
C. The money multiplier to riseExplanation
When the reserve requirement decreases, banks are required to hold less money in reserves and can lend out more money. This leads to an increase in the money supply as more loans are made and more money is created through the process of fractional reserve banking. As a result, the money multiplier, which measures the amount of money created by each dollar of reserves, increases. Therefore, the correct answer is that a decrease in the reserve requirement causes the money multiplier to rise.Rate this question:
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- 11.
To insulate the Federal Reserve from political pressure,
- A.
The Board of Governors are elected by the public
- B.
The Board of Governors have lifetime tenure
- C.
The Board of Governors are supervised by the House Banking Committee
- D.
The Board of Governors are appointed to 14-year terms
Correct Answer
D. The Board of Governors are appointed to 14-year termsExplanation
The correct answer is that the Board of Governors are appointed to 14-year terms. This helps to insulate the Federal Reserve from political pressure because it ensures that the members of the Board have a long-term perspective and are not subject to immediate political changes. By having fixed terms, the Board can make decisions based on economic considerations rather than short-term political interests. This helps to maintain the independence and credibility of the Federal Reserve as a central bank.Rate this question:
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- 12.
Which of the following statements is true?
- A.
The FOMC meets once per year to discuss monetary policy
- B.
The Federal Reserve was created in 1871 in response to the Civil War
- C.
When the Fed sells government bonds, the money supply decreases
- D.
The primary tool of monetary policy is the reserve requirement
Correct Answer
C. When the Fed sells government bonds, the money supply decreasesExplanation
When the Federal Reserve sells government bonds, it reduces the amount of money in circulation. This is because when the Fed sells bonds, it takes money out of the economy in exchange for the bonds. As a result, there is less money available for lending and spending, which leads to a decrease in the money supply. This action is often used by the Fed as a way to control inflation and tighten monetary policy.Rate this question:
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- 13.
The discount rate is
- A.
The interest rate the Fed pays on reserves
- B.
The interest rate the Fed charges on loans to banks
- C.
The interest rate banks pay on the public's deposits
- D.
The interest rate the public pays when borrowing from banks
Correct Answer
B. The interest rate the Fed charges on loans to banksExplanation
The discount rate is the interest rate the Fed charges on loans to banks. This rate is set by the Federal Reserve and serves as a tool to control the money supply and influence the overall economy. By adjusting the discount rate, the Fed can encourage or discourage banks from borrowing money, which in turn affects the amount of money available for lending to individuals and businesses. Therefore, the discount rate plays a crucial role in monetary policy and the functioning of the banking system.Rate this question:
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- 14.
Required reserves of banks are a fixed percentage of their
- A.
Loans
- B.
Assets
- C.
Deposits
- D.
Government bonds
Correct Answer
C. DepositsExplanation
Banks are required to hold a certain percentage of their deposits as reserves. These reserves act as a buffer to ensure that banks have enough funds to meet withdrawal demands from depositors and to maintain stability in the banking system. Therefore, the correct answer is "deposits".Rate this question:
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- 15.
Which of the following policy combinations would consistently work to increase the money supply?
- A.
Sell government bonds, decrease reserve requirements, decrease the discount rate
- B.
Sell government bonds, increase reserve requirements, increase the discount rate
- C.
Buy government bonds, increase reserve requirements, decrease the discount rate
- D.
Buy government bonds, decrease reserve requirements, decrease the discount rate
- E.
None of the above
Correct Answer
D. Buy government bonds, decrease reserve requirements, decrease the discount rateExplanation
Buying government bonds increases the money supply as it injects money into the economy. Decreasing reserve requirements also increases the money supply as it allows banks to lend out more money. Decreasing the discount rate encourages banks to borrow more money from the central bank, which also increases the money supply. Therefore, the combination of buying government bonds, decreasing reserve requirements, and decreasing the discount rate consistently works to increase the money supply.Rate this question:
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- 16.
If the reserve requirement is 25 percent, the value of the money multiplier is
- A.
0.25
- B.
4
- C.
25
- D.
None of the above
Correct Answer
B. 4Explanation
The correct answer is 4 because the money multiplier is calculated by dividing 1 by the reserve requirement. In this case, if the reserve requirement is 25 percent, the calculation would be 1 divided by 0.25 which equals 4. This means that for every dollar held in reserves, the banking system can create up to four dollars of new money through the lending process.Rate this question:
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- 17.
Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?
- A.
$1,000
- B.
$4,000
- C.
$5,000
- D.
$0
Correct Answer
C. $5,000Explanation
When the Fed purchases a $1,000 government bond from you and you deposit the entire amount in your bank, the potential change in the money supply is determined by the reserve requirements. In this case, the reserve requirement is stated as 20 percent. This means that the bank is required to hold 20 percent of the deposit as reserves and can lend out the remaining 80 percent. Given that the entire $1,000 is deposited, the bank can lend out $800. This $800 loan can then be deposited in another bank, which can in turn lend out $640. This process continues with each bank lending out 80 percent of the previous deposit until the total potential change in the money supply reaches $5,000. Therefore, the correct answer is $5,000.Rate this question:
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- 18.
Which of the following policy actions by the Fed is likely to increase the money supply?
- A.
Reducing reserve requirements
- B.
Selling government bonds
- C.
Increasing the discount rate
- D.
All of these will increase the money supply
Correct Answer
A. Reducing reserve requirementsExplanation
Reducing reserve requirements by the Fed is likely to increase the money supply because it lowers the amount of reserves that banks are required to hold, allowing them to lend out more money. When banks have more money available to lend, it increases the overall money supply in the economy. This policy action encourages banks to provide more loans, which stimulates economic activity and boosts the money supply.Rate this question:
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- 19.
Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank,
- A.
The money supply is unaffected
- B.
The money supply increases by more than $1,000
- C.
The money supply increases by less than $1,000
- D.
The money supply decreases by more than $1,000
- E.
The money supply decreases by less tahn $1,000
Correct Answer
A. The money supply is unaffectedExplanation
When all banks maintain a 100 percent reserve ratio, it means that they are required to keep all deposits as reserves and cannot lend out any money. Therefore, when an individual deposits $1,000 of currency in a bank, the money supply is unaffected because the bank cannot use that deposit to create new loans or increase the amount of money in circulation. The money simply moves from the individual's hands to the bank's reserves, without changing the overall money supply in the economy.Rate this question:
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- 20.
Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?
- A.
$1,000
- B.
9,000
- C.
10,000
- D.
$0
Correct Answer
D. $0Explanation
When Joe changes his $1,000 demand deposit from Bank A to Bank B, there is no change in the total amount of demand deposits in the banking system. The reserve requirement is the percentage of deposits that banks are required to hold as reserves and not lend out. Since Joe is simply transferring his deposit from one bank to another, the total amount of demand deposits remains the same. Therefore, there is no potential change in demand deposits as a result of Joe's action, and the answer is $0.Rate this question:
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- 21.
Given the following T-account, what is the largest new loan this bank can prudently make if the reserve requirement is 10 percent? Test Bank Assets|LiabilitiesReserves $150 | Deposits $1,000Loans $850
- A.
$0
- B.
$50
- C.
$150
- D.
$1,000
- E.
None of the above is correct
Correct Answer
B. $50Explanation
The reserve requirement is the percentage of deposits that a bank is required to hold as reserves. In this case, the reserve requirement is 10 percent. The bank's total deposits are $1,000, so the required reserves would be 10% of $1,000, which is $100. The bank currently has $150 in reserves, which is $50 more than the required reserves. Therefore, the largest new loan the bank can prudently make would be $50.Rate this question:
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- 22.
A decrease in the reserve requirement causes
- A.
Reserves to rise
- B.
Reserves to fall
- C.
The money multiplier to rise
- D.
The money multiplier to fall
- E.
None of the above
Correct Answer
C. The money multiplier to riseExplanation
A decrease in the reserve requirement causes the money multiplier to rise. The reserve requirement is the percentage of deposits that banks must hold as reserves. When the reserve requirement is decreased, banks are required to hold fewer reserves, which means they have more funds available to lend out. This increases the amount of money that can be created through the lending process, leading to a higher money multiplier.Rate this question:
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- 23.
The three main tools of monetary policy are
- A.
Government expenditures, taxation, and reserve requirements
- B.
The money supply, government purchases, and taxation
- C.
Coin, currency, and demand deposits
- D.
Open-market operations, reserve requirements, and the discount rate
- E.
Fiat, commodity, and deposit money
Correct Answer
D. Open-market operations, reserve requirements, and the discount rateExplanation
This answer is correct because open-market operations, reserve requirements, and the discount rate are indeed the three main tools of monetary policy. Open-market operations involve the buying and selling of government securities to control the money supply. Reserve requirements refer to the amount of funds that banks are required to hold in reserve. And the discount rate is the interest rate at which banks can borrow funds from the central bank. These tools are used by central banks to influence the economy by controlling the availability and cost of money.Rate this question:
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- 24.
The discount rate is
- A.
The interest rate the Fed pays on reserves
- B.
The interest rate the Fed charges on loans to banks
- C.
The interest rate banks pay on the public's deposits
- D.
The interest rate the public pays when borrowing from banks
Correct Answer
B. The interest rate the Fed charges on loans to banksExplanation
The discount rate is the interest rate the Fed charges on loans to banks. This rate is set by the Federal Reserve and is used as a tool to control the money supply and stabilize the economy. By charging a higher discount rate, the Fed can discourage banks from borrowing and therefore reduce the amount of money in circulation. Conversely, lowering the discount rate encourages banks to borrow, increasing the money supply.Rate this question:
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- 25.
Which of the following policy combinations would consistently work to increase the money supply?
- A.
Sell government bonds, decrease reserve requirements, decrease the discount rate
- B.
Sell government bonds, increase reserve requirements, increase the discount rate
- C.
Buy government bonds, increase reserve requirements, decrease the discount rate
- D.
Buy government bonds, decrease reserve requirements, decrease the discount rate
- E.
None of the above
Correct Answer
D. Buy government bonds, decrease reserve requirements, decrease the discount rateExplanation
Buying government bonds, decreasing reserve requirements, and decreasing the discount rate would consistently work to increase the money supply. When the central bank buys government bonds, it injects money into the economy, increasing the money supply. Decreasing reserve requirements means that banks are required to hold less money in reserves, allowing them to lend out more money, which also increases the money supply. Lastly, decreasing the discount rate encourages banks to borrow more from the central bank, which further increases the money supply.Rate this question:
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- 26.
Suppose the Fed purchases a government bond from a person who deposits the entire amount fomr the sale in her bank. If the bank holds some of the deposit as excess reserves, the money supply will
- A.
Rise less than the money multiplier would suggest
- B.
Rise more than the money multiplier would suggest
- C.
Fall less than the money multiplier would suggest
- D.
Fall more than the money multiplier would sugget
Correct Answer
A. Rise less than the money multiplier would suggestExplanation
When the Fed purchases a government bond from a person who deposits the entire amount in her bank, the bank will hold some of the deposit as excess reserves. Excess reserves are the reserves held by banks above the required reserve ratio. By holding excess reserves, the bank reduces the amount of money available for lending and creating new deposits. This means that the money supply will not increase as much as the money multiplier would suggest. Therefore, the correct answer is that the money supply will rise less than the money multiplier would suggest.Rate this question:
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- 27.
Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?
- A.
$1,000
- B.
$4,000
- C.
$5,000
- D.
$0
Correct Answer
C. $5,000Explanation
When the Fed purchases a $1,000 government bond from you and you deposit the entire $1,000 in your bank, the total potential change in the money supply is $5,000. This is because of the concept of fractional reserve banking, where banks are required to hold a certain percentage of deposits as reserves. In this case, with a reserve requirement of 20 percent, the bank is required to hold $200 (20% of $1,000) as reserves and can lend out the remaining $800. This $800 can then be deposited in another bank, which can lend out 80% of it, and so on. This process continues until the total potential change in the money supply is $5,000.Rate this question:
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- 28.
Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank,
- A.
The money supply is unaffected
- B.
The money supply increases by more than $1,000
- C.
The money supply increases by less than $1,000
- D.
The money supply decreases by more than $1,000
- E.
The money supply decreases by less tahn $1,000
Correct Answer
A. The money supply is unaffectedExplanation
In this scenario, all banks maintain a 100 percent reserve ratio, which means that they are required to hold onto all of the deposits made by individuals. Therefore, when an individual deposits $1,000 of currency in a bank, the bank is required to keep the entire $1,000 as reserves and cannot loan it out or create new money. As a result, the money supply remains unaffected and does not increase or decrease.Rate this question:
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- 29.
Given the following T-account, what is the largest new loan this bank can prudently make if the reserve requirement is 10 percent? Test Bank Assets|LiabilitiesReserves $150 | Deposits $1,000Loans $850
- A.
$0
- B.
$50
- C.
$150
- D.
$1,000
- E.
None of the above is correct
Correct Answer
B. $50Explanation
The largest new loan the bank can prudently make is $50. This is because the reserve requirement is 10 percent, which means the bank must hold 10 percent of its deposits as reserves. Currently, the bank has $1,000 in deposits, so it must hold $100 ($1,000 x 10%) as reserves. Since the bank already has $150 in reserves, it can make a new loan of up to $50 ($100 - $150) without violating the reserve requirement.Rate this question:
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- 30.
The three main tools of monetary policy are
- A.
Government expenditures, taxation, and reserve requirements
- B.
The money supply, government purchases, and taxation
- C.
Coin, currency, and demand deposits
- D.
Open-market operations, reserve requirements, and the discount rate
- E.
Fiat, commodity, and deposit money
Correct Answer
D. Open-market operations, reserve requirements, and the discount rateExplanation
The correct answer is "open-market operations, reserve requirements, and the discount rate." These three tools are commonly used by central banks to implement monetary policy. Open-market operations involve buying or selling government securities in the open market to control the money supply. Reserve requirements refer to the amount of funds that banks must hold in reserve, which affects the amount of money available for lending. The discount rate is the interest rate at which banks can borrow funds from the central bank, and it influences the cost of borrowing for banks and, in turn, affects lending and money supply.Rate this question:
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- 31.
Suppose the Fed purchases a government bond from a person who deposits the entire amount fomr the sale in her bank. If the bank holds some of the deposit as excess reserves, the money supply will
- A.
Rise less than the money multiplier would suggest
- B.
Rise more than the money multiplier would suggest
- C.
Fall less than the money multiplier would suggest
- D.
Fall more than the money multiplier would sugget
Correct Answer
A. Rise less than the money multiplier would suggestExplanation
When the Fed purchases a government bond from a person and they deposit the entire amount in their bank, the bank holds some of the deposit as excess reserves. Excess reserves are the reserves held by banks above the required reserve ratio. By holding excess reserves, the bank reduces the amount of money available for lending and therefore reduces the potential for money creation through the money multiplier process. As a result, the money supply will rise less than the money multiplier would suggest.Rate this question:
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