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Macroeconomics Chapter 13 A—Money and the Banking System
MULTIPLE CHOICE
1. Money is
a. valuable because it is backed by gold.
b. whatever is generally accepted in exchange for goods and services.
c. anything that is a liability of a commercial bank
d. an object to be consumed.
ANS: B PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
STA: DISC: The role of money TOP: What is Money?
KEY: Bloom's: Knowledge MSC: Suggested Quiz
2. In the United States, the purchasing power of money is determined by

a. the underlying precious metals that back each unit of currency.
b. the value of U.S. treasury bonds that back each unit of currency.
c. Federal Reserve policy, which controls the money supply.
d. Congress, which controls the money supply.
ANS: C PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
3. Which of the following is not a component of the M1 money supply?

a. demand deposits
b. large-denomination (more than $100) bills
c. interest-earning checking deposits
d. outstanding balances on credit cards
ANS: D PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: The role of money TOP: How is the Money Supply Measured?
4. Ordinary commercial banks can expand the supply of money by

a. printing up currency when they need it.
b. buying and selling government bonds to the general public.
c. using a portion of their deposits to extend additional loans.
d. reducing their vault cash and increasing their deposits with the Fed.
KEY: Bloom's: Comprehension MSC: Suggested Quiz
5. Which of the following compose the reserves of a commercial bank?

a. demand deposits and time deposits
b. vault cash and deposits of the bank with the Federal Reserve
c. U.S. securities and stock equity
d. cash and U.S. securities
ANS: B PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
STA: DISC: Monetary and fiscal policy TOP: The Business of Banking
6. If the Fed wanted to use all four of its major monetary control tools to decrease the money supply, it
would
a. buy bonds, reduce the discount rate, reduce reserve requirements, and reduce the interest
rate paid on excess reserves.
b. sell bonds, reduce the discount rate, reduce reserve requirements, and reduce the interest
rate paid on excess reserves.
c. sell bonds, increase the discount rate, increase reserve requirements, and increase the
interest rate paid on excess reserves.
d. buy bonds, increase the discount rate, increase reserve requirements, and increase the
interest rate paid on excess reserves.
STA: DISC: Monetary and fiscal policy TOP: The Federal Reserve System
7. When the Federal Reserve sells government bonds to the public, it directly
a. increases the M1 money supply and increases the reserves of the commercial banking
system.
b. increases the M1 money supply, while reducing the reserves of the commercial banking
system.
c. reduces the M1 money supply, while increasing the reserves of the commercial banking
system.
d. reduces the M1 money supply and decreases the reserves of the commercial banking
system.
8. What restricts the Fed's ability to write checks and purchase U.S. securities?
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.
9. Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve requirement
is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves
both before and after the transaction, the total impact on the money supply will be a
a. $100 million decrease in the money supply.
b. $100 million increase in the money supply.
c. $200 million increase in the money supply.
d. $500 million increase in the money supply.
KEY: Bloom's: Application MSC: Suggested Quiz
10. Why did the monetary base increase rapidly during the economic crisis of 2008?
a. The Fed sold financial assets and extended fewer loans.
b. The Fed increased both its purchase of assets and quantity of loans extended.
c. The Fed increased its purchases of assets, but offset this with an increase in the reserve
requirement.
d. The Fed sold financial assets, but offset this with a reduction in the reserve requirement.
11. One advantage of a money system compared to a barter system is that

a. barter never works.
b. money creates the need for banks.
c. money is more efficient.
d. everyone has money.
ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
KEY: Bloom's: Knowledge
12. In order for barter trades to occur, there must be a

a. singularity of interests.
b. bargaining intermediary.
c. double coincidence of wants.
d. sufficient supply of cash.
KEY: Bloom's: Comprehension
13. The primary benefit of a monetary system of exchange compared to a barter system is the increased
a. ability to record transactions.
b. time necessary to find trading partners.
c. time devoted to shopping.
d. efficiency in arranging transactions.
STA: DISC: Monetary and fiscal policy TOP: What is Money?
14. In the modern U.S. economy, most transactions are made with
a. cash.
b. gold and silver.
c. credit cards.
d. checking deposits.
15. As the number of goods and services increases, barter becomes

a. easier because the chance of there being a double coincidence of wants increases.
b. harder because the chance of there being a double coincidence of wants increases.
c. easier because the chance of there being a double coincidence of wants decreases.
d. harder because the chance of there being a double coincidence of wants decreases.
e. easier because people have more choice.
16. Stores need not accept your check but must accept currency because
a. currency is backed by gold.
b. checks are not money but currency is.
c. currency is legal tender; checks are not.
d. currency is easier to handle.
e. currency is a medium of exchange; checks are not.
STA: DISC: The role of money TOP: How the Supply of Money Affects Its Value
17. In order for barter to occur, traders must have a

a. unit of account.
b. coincidence of wants.
c. medium of exchange.
d. central banking facility.
18. Comparing how many dollars it takes you to run your car each year to annual earnings on a job instead
of keeping track of costs in terms of gallons of gasoline and quarts of oil represents the use of money
as
a. means of payment.
b. unit of account.
c. store of purchasing power.
d. form of plastic money.
19. Money is
a. whatever is generally accepted in exchange for goods and services.
b. an object to be consumed.
c. a highly illiquid asset.
d. widely used in a barter economy.
ANS: A PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
20. Which of the following is the best definition of money?

a. anything generally accepted as a payment for goods or repayment of debt
b. anything that is a liability of the federal government
c. anything that is a liability of a commercial bank
d. the outstanding balances of households on credit cards
21. If money were not used as a medium of exchange,

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.
ANS: A PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
22. A barter economy is one in which

a. money serves as a medium of exchange.
b. only precious metals are accepted as money.
c. goods are traded directly for other goods.
d. paper money is backed by gold.
ANS: C PTS: 1 DIF: Easy NAT: BUSPROG: Analytic
23. Compared to a barter economy, using money increases efficiency by reducing

a. transaction costs.
b. the need to exchange goods.
c. the need to specialize.
d. inflation.
24. Though many assets can be used as a store of value, money is a particularly attractive method to store
value because
a. it increases in value as prices rise.
b. its purchasing power does not decline when prices rise.
c. it is the most liquid of all assets.
d. it is backed by gold.
25. Which of the following assets is most liquid?

a. funds in a checking account
b. a car
c. a home
d. a municipal bond
26. Fiat money is money

a. that has little intrinsic value and is not backed by a commodity.
b. that is not included as part of the M1 money supply.
c. that is backed by gold or silver held on reserve by the government.
d. such as coins that are made from metal.
27. Money is used as a unit of account. This means

a. money cannot store value for use in the future.
b. money is used to measure the exchange value and costs of goods, services, assets and
resources.
c. money has little or no intrinsic value.
d. money is dependent on the quantity of gold held by the Federal Reserve.
28. When the interest rate decreases, the opportunity cost of holding money
a. increases, so the quantity of money demanded increases.
b. increases, so the quantity of money demanded decreases.
c. decreases, so the quantity of money demanded increases.
d. decreases, so the quantity of money demanded decreases.
29. People are likely to want to hold more money if the interest rate
a. increases making the opportunity cost of holding money rise.
b. increases making the opportunity cost of holding money fall.
c. decreases making the opportunity cost of holding money rise.
d. decreases making the opportunity cost of holding money fall.
30. The demand for money varies

a. directly with both the price level and the level of real GDP.
b. inversely with both the price level and the level of real GDP.
c. inversely with the price level and directly with the level of real GDP.
d. directly with the price level and inversely with the level of real GDP.
e. inversely with the level of nominal GDP.
31. Other things being equal, an increase in the rate of interest causes
a. an upward movement along the demand for money curve.
b. a downward movement along the demand for money curve.
c. a rightward shift of the demand for money curve.
d. a leftward shift of the demand for money curve.
32. A decrease in the interest rate, other things being equal, causes
a. an upward movement along the demand curve for money.
b. a downward movement along the demand curve for money.
c. a rightward shift of the demand curve for money.
d. a leftward shift of the demand curve for money.
33. Which of the following provides the best explanation of why money is valuable?
a. Money is valuable because it is declared legal tender by the government issuing it.
b. Money is valuable because it is scarce relative to the demand for the services it provides.
c. Money is valuable because it is backed by precious metals, primarily gold and silver.
d. Money is valuable because it has intrinsic value, independent of its use as a means of
exchange.
34. The value (purchasing power) of each unit of money

a. is largely independent of the money supply.
b. tends to increase as the money supply expands.
c. increases as the general level of prices rise.
d. is inversely related to the general level of prices.
35. If the prices of goods and services fall, the value of money (its purchasing power)
a. increases.
b. decreases.
c. stays the same.
d. can either increase or decrease.
36. When the monetary authorities expand the supply of money rapidly,
a. its purchasing power tends to increase.
b. holding money is a poor method of storing value.
c. the long-run sustainable real growth rate of the economy will tend to increase.
d. the prices of goods and services will generally decline.
37. What is meant by the expression, "There is too much money chasing too few goods"?
a. People spend too much time chasing after money.
b. An expansion in the supply of money relative to the availability of goods and services is
causing an increase in the general level of prices.
c. The value of money will tend to decline when the supply of gold increases.
d. People would be better off if the monetary authorities increased the supply of money more
rapidly.
38. Are funds available on a credit card included in a definition of the money supply?
a. Yes, because these funds can be used to pay for goods and services.
b. Yes, because these funds are included in M2.
c. No, because these funds are hard to measure total credit card spending.
d. No, because these funds are not a store of value.
39. Are "smart cards" or E-cash cards part of the money supply?
a. Yes, because they can be given away to make a payment.
b. Yes, because they will soon completely replace cash.
c. No, because they are not issued by banks.
d. No, because they are merely means to transfer checking deposits.
40. Suppose you transfer $1,000 from your checking account to your savings account. How does this
action affect the M1 and M2 money supplies?
a. M1 and M2 are both unchanged.
b. M1 falls by $1,000, and M2 rises by $1,000.
c. M1 is unchanged, and M2 rises by $1,000.
d. M1 falls by $1,000, and M2 is unchanged.
41. In the United States, the money supply (M1) consists of

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.
42. Which one of the following is the largest component of the money supply (M1) in the United States?
a. demand and other checking deposits
b. gold certificates
c. credit cards and traveler's checks
d. Federal Reserve notes
43. In defining the money supply (M1), economists exclude savings deposits on the grounds that
a. the purchasing power of savings deposits is much less stable than that of checkable
deposits and currency.
b. savings deposits are a form of investment and, thus, a better store of value than money.
c. savings deposits are liabilities of commercial banks, whereas checkable deposits are
assets of the banks.
d. savings deposits are not generally used as a means of payment.
44. The M1 money supply

a. is composed of assets that reflect the medium of exchange function of money.
b. is larger than the M2 money supply.
c. includes credit card balances since they are used to purchase things.
d. is composed of only currency.
45. Demand deposits are

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.
46. Checking account deposits are counted as part of the M1 money supply because
a. they earn interest income for the depositor.
b. they are widely used as a means of making payment.
c. banks hold currency equal to the value of their outstanding checking account deposits.
d. they are ultimately the obligations of the Treasury.
47. Which of the following compose the M2 money supply?

a. currency only
b. currency, demand deposits, other checkable deposits, and traveler's checks
c. M1 plus large denomination time deposits and Eurodollar deposits
d. M1 plus savings deposits, small-denomination time deposits, and money market mutual
funds (retail)
48. Economists who stress the store of value function of money generally
a. argue that M1 is the best measure of the money supply.
b. prefer the M2 measure of the money supply to the M1 measure.
c. argue that M1 is too broad a definition of the money supply.
d. prefer the M1 measure of the money supply to the M2 measure.
49. Are outstanding credit card balances counted as part of the money supply?
a. Yes; they are used to purchase things, and therefore, they are included in the money
supply figures.
b. No; money is an asset, while the credit card balances are a liability. Thus, they are not
included in the money supply figures.
c. Partly; credit card balances of $100 or less are included in the M1 money supply, but the
money supply figures do not include balances in excess of $100.
d. Partly; credit card balances are included in the M1 money supply, but not the M2 money
supply.
50. Widespread use of credit cards

a. will increase the M1 money supply figures.
b. will increase the M2 money supply figures but not those for M1.
c. tends to reduce the average quantity of money that people will choose to hold.
d. tends to increase the average quantity of money that people will choose to hold.
51. If you have a checking account at a local bank, your bank account there is
a. an asset to the bank and an asset to you.
b. a liability of the bank and a liability of yours.
c. a liability of the bank and an asset to you.
d. an asset to the bank and a liability of yours.
STA: DISC: The role of money TOP: The Business of Banking
52. If you deposit $100 of currency into a demand deposit at a bank, this action by itself
a. does not change the money supply.
b. increases the money supply.
c. decreases the money supply.
d. has an indeterminate effect on the money supply.
STA: DISC: The role of money TOP: The Business of Banking
Table 13-1
First Bank of Mason City

Assets Liabilities
Required Reserves $20.00
Deposits $100.00
Loans $80.00
53. Refer to Table 13-1. The reserve ratio is

a. 0 percent.
b. 20 percent.
c. 80 percent.
d. 100 percent.
STA: DISC: Monetary and fiscal policy TOP: How Banks Create Money by Extending Loans
KEY: Bloom's: Analysis
54. Refer to Table 13-1. If $1,000 is deposited into the First Bank of Mason City, and the bank takes no
other actions, it's
a. total reserves will increase by $200.
b. liabilities will decrease by $1,000.
c. assets will increase by $1,000.
d. required reserves will increase by $800.
55. Refer to Table 13-1. If someone deposits $400 into the First Bank of Mason City,
a. the bank will be able to make additional loans totaling $320.
b. excess reserves initially increase by $320.
c. required reserves initially increase by $80.
d. all of the above are correct.
Table 13-2
Last Bank of Cedar Bend

Assets Liabilities
Reserves $25,000 Deposits $150,000
Loans $125,000
56. Refer to Table 13-2. If the reserve requirement is 10 percent, then this bank
a. is in a position to make a new loan of $15,000.
b. has less reserves than required.
c. has excess reserves of less than $15,000.
d. none of the above is correct.
57. Refer to Table 13-2. The reserve requirement is 10 percent and then someone deposits an additional
$50,000 into the bank, then if the bank takes no other action it will
a. have $65,000 in excess reserves.
b. have $55,000 in excess reserves.
c. need to raise an additional $5,000 of reserves to meet the reserve requirement
d. none of the above is correct.
58. Refer to Table 13-2. If the reserve requirement is 20 percent, this bank
a. has $10,000 of excess reserves.
b. needs $10,000 more reserves to meet its reserve requirements.
c. needs $5,000 more reserves to meet its reserve requirements.
d. just meets its reserve requirement.
59. Refer to Table 13-2. If the Last Bank of Cedar Bend is holding $10,000 in excess reserves, then the
reserve requirement is
a. 2 percent.
b. 5 percent.
c. 7 percent.
d. 10 percent.
60. The main source of profit for financial institutions is

a. their ownership of stocks in commercial corporations.
b. their ownership of real assets received in foreclosures on loans to households.
c. the fees charged for holding and servicing checking accounts.
d. the difference between interest paid on deposits and interest received on loans.
e. the difference between the cost of creating new money and the interest paid on loans.
61. If a customer deposits $1,000 cash into her checking account, the bank's
a. assets rise by $1,000 and liabilities fall by $1,000.
b. assets fall by $1,000 and liabilities rise by $1,000.
c. assets and liabilities both fall by $1,000.
d. assets and liabilities both rise by $1,000.
e. profits rise by $1,000.
62. When a customer deposits $100 into a checking account, the effect is to
a. increase the bank's liabilities.
b. decrease the bank's liabilities.
c. increase the bank's assets.
d. decrease the bank's assets.
e. increase both the bank's liabilities and its assets.
ANS: E PTS: 1 DIF: Moderate NAT: BUSPROG: Analytic
63. Which of the following is not a depository institution?

a. commercial bank
b. credit union
c. finance company
d. savings and loan association
64. Which of the following will be classified as a liability on the balance sheet of a commercial bank?
a. vault cash
b. loans extended to customers
c. checking deposits of customers
d. deposits held at a Federal Reserve bank
65. Which of the following would appear on the liability side of the balance sheet of a commercial bank?
a. demand and other transaction deposits
b. loans outstanding
c. U.S. government securities
d. vault cash
66. The primary source of earnings of commercial banks is income derived from
a. the checking account services provided to customers.
b. the use of deposits to extend loans and undertake investments.
c. vault cash and deposits held with the Fed.
d. services provided to the U.S. Treasury.
67. Modern bankers

a. expand the money supply by printing currency when they need it.
b. decrease the supply of money when they extend additional loans.
c. hold only a fraction of their assets in the form of reserves against their deposits.
d. can increase their profits by increasing their holdings of excess reserves.
68. Which of the following assets can a commercial bank count as reserves?
a. its holdings of U.S. Treasury bills
b. its vault cash and deposits with the Fed
c. its outstanding loans
d. the savings accounts of its depositors
69. A system that permits banks to hold less than 100 percent of their deposits as reserves is called a
a. federal reserve system.
b. fractional reserve banking system.
c. partially funded deposit insurance system.
d. gold standard banking system.
70. When commercial banks extend loans, they are able to expand the supply of money in the United
States because the U.S. has
a. a fiat supply of money.
b. money that is backed by gold.
c. a fractional reserve banking system.
d. a system of federal deposit insurance.
71. The funds that banks are required by law to hold in the form of either vault cash or deposits with the
Fed are called
a. excess reserves.
b. fractional reserves.
c. required reserves.
d. certificates of deposit.
72. The legal requirement that commercial banks hold reserves equal to some fraction of their deposits
a. limits the ability of banks to expand the money supply by extending additional loans.
b. prevents the Fed from controlling the money supply since commercial banks can always
offset the actions of the Fed.
c. prevents runs on banks by depositors who fear that banks have insufficient assets to meet
the claims of their depositors.
d. limits the ability of the Treasury to expand the national debt.
73. The fraction that banks must, by law, hold as reserves against the checking deposits of their customers
is called the
a. federal deposit insurance premium.
b. vault cash quota.
c. excess reserve requirement.
d. required reserve ratio.
74. Banks are considered a safer place to deposit money now than they were prior to 1933 because
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.
75. Which of the following guarantees the deposits in almost all banks up to a $250,000 limit per account?
a. the Federal Reserve
b. the FDIC
c. the U.S. Treasury
d. Bank of America Corporation
76. Which of the following is true?

a. The FDIC sets the reserve requirements for commercial banks.
b. The Federal Reserve System guarantees the deposits in almost all banks up to a $250,000
limit per account.
c. Since the Federal Reserve System was established in 1913, bank failures due to panic
withdrawals have been virtually eliminated.
d. If a bank should fail, the FDIC guarantees that depositors can get their funds up to a
$250,000 limit per account.
77. A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and increases its
excess reserves by $300. What is the legal reserve requirement?
a. 10 percent
b. 20 percent
c. 30 percent
d. 60 percent
78. When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then
makes a loan of $800 to a new borrower, this set of transactions
a. decreases the money supply by $1,000.
b. decreases the money supply by $200.
c. does not change the money supply.
d. increases the money supply by $200.
e. increases the money supply by $800.
79. If the banking system has $50 billion in excess reserves, and the required reserve ratio is 25 percent,
what is the maximum amount by which the money supply can be increased?
a. $250 billion
b. $200 billion
c. $50 billion
d. $25 billion
80. Which of the following will limit the money creation process to an amount less than the potential
amount?
a. bank pursuit of profits
b. increase in currency holdings by the public
c. business demand for loans
d. increased use of credit cards
81. If the public decides to hold more currency and fewer deposits in banks, bank reserves
a. decrease and the money supply eventually decreases.
b. decrease but the money supply does not change.
c. increase and the money supply eventually increases.
d. increase but the money supply does not change.
STA: DISC: The role of money TOP: How Banks Create Money by Extending Loans
82. If the public decides to hold less currency and more deposits in banks, bank reserves
a. decrease and the money supply eventually decreases.
b. decrease but the money supply does not change.
c. increase and the money supply eventually increases.
d. increase but the money supply does not change.
83. Suppose that in a country people gain more confidence in the banking system and so hold relatively
less currency and more deposits, then bank reserves will
a. decrease and the money supply will eventually decrease.
b. decrease and the money supply will eventually increase.
c. increase and the money supply will eventually decrease.
d. increase and the money supply will eventually increase.
84. The immediate effect of a member bank's sale of U.S. government securities to the Fed is
a. an increase in that bank's required reserves.
b. a decrease in that bank's required reserves.
c. an increase in that bank's excess reserves.
d. a decrease in that bank's excess reserves.
85. In order to increase the money supply, the banking system must have
a. required reserves.
b. the authority to buy corporate stocks.
c. the authority to print U.S. currency.
d. excess reserves.
e. the authority to engage in interstate banking.
86. The money multiplier will be

a. larger if banks hold on to excess reserves but smaller if private citizens hold on to cash.
b. smaller if banks hold on to excess reserves but larger if private citizens hold on to cash.
c. smaller if either banks hold on to excess reserves or private citizens hold on to cash.
d. larger if either banks hold on to excess reserves or private citizens hold on to cash.
e. constant whether or not banks and citizens try to alter their holdings of excess reserves
and cash.
87. An individual bank can lend out at most its
a. actual reserves.
b. fractional reserves.
c. legal reserves.
d. checkable deposits.
e. excess reserves.
88. A bank that has $10,000 in excess reserves can extend new loans up to a maximum of
a. $1,000.
b. $9,000.
c. $10,000.
d. $100,000.
KEY: Bloom's: Application
89. Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new
checkable deposit of $1,000, it could make new loans of
a. $100.
b. $900.
c. $1,000.
d. $10,000.
90. If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum
amount of checkable deposits the bank can have if excess reserves are zero is
a. $100,000.
b. $80,000.
c. $300,000.
d. $20,000.
e. $200,000.
91. Jeff Kaufman decides to bank with Paris First National Bank (PFN). He opens a checking account by
depositing $1,000. According to the PFN balance sheet, after this initial $1,000 checkable deposit,
there are $1,000 in
a. reserves and $1,000 in checkable deposits.
b. liabilities and $2,000 in checkable deposits.
c. checkable deposits and $0 in assets.
d. assets and $0 in liabilities.
e. reserves and $0 in liabilities.
92. Which of the following most clearly limits the ability of the commercial banking industry to expand
the money supply?
a. the reserve requirements mandated by the Fed
b. the number of commercial bank charters issued by the Fed
c. the dollar value of the bonds issued by the U.S. Treasury
d. the federal funds interest rate that commercial banks pay (and receive) for short-term
loanable funds
93. Assuming a 20 percent legal reserve requirement, a new deposit of $10,000 in a commercial bank will
place that bank in a position to lend out an additional
a. $2,000.
b. $8,000.
c. $10,000.
d. $50,000.
94. Excess reserves are

a. checking deposits that are included in the M1 money supply but not the M2.
b. savings deposits that are included in the M2 money supply but not the M1.
c. actual reserves held by banks that exceed the legal requirement.
d. the portion of deposits that banks are required by the Fed to hold as reserves against their
deposits.
95. Excess reserves of banks equal

a. actual reserves minus required reserves.
b. actual reserves minus demand deposits.
c. assets minus the liabilities of the banks.
d. required reserves minus actual reserves.
96. When the actual reserves held by a bank exceed the legal requirement, the bank
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.
97. If the Fed injects additional reserves into the banking system, why will banks generally want to expand
their loans and investments?
a. Banks are legally required to expand loans when the Fed creates excess reserves.
b. Maintaining reserves in excess of demand deposits is against the law.
c. Banks fear the Fed will remove the excess reserves.
d. Loans and investments generally earn more interest income for the banks than excess
reserves.
98. Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First
National Bank has no excess reserves. If a new customer deposits $50,000, the bank could extend new
loans up to a maximum of
a. $10,000.
b. $40,000.
c. $50,000.
d. $250,000.
99. If First Guarantee Bank confronts a 10 percent reserve requirement and has excess reserves of
$2,000,000, what is the maximum amount of additional loans that the bank can extend?
a. $200,000
b. $1,800,000
c. $2,000,000
d. $20,000,000
100. Suppose the Fed purchases $40,000 of U.S. Treasury bonds from Donald Trump, who deposits the
money with First National Bank. If the required reserve ratio is 20 percent, this transaction will
increase the excess reserves of First National Bank by
a. $8,000.
b. $32,000.
c. $40,000.
d. $200,000.
101. Which of the following will cause the U.S. money supply to expand?
a. a commercial bank uses excess reserves to extend a loan to a customer
b. a commercial bank purchases U.S. securities from the Fed as an investment
c. an increase in reserve requirements
d. an increase in the discount rate
102. If uncertainty causes commercial banks to increase their holdings of excess reserves, other things
constant, this will
a. reduce the money supply during a period of inflation and increase it during a recession.
b. reduce the size of the deposit expansion multiplier.
c. increase the size of deposit expansion multiplier.
d. reduce the size of the deposit expansion multiplier during a period of inflation and
increase it during a recession.
103. If people decide to hold less money as currency and more as checking deposits, this will most likely
cause a(n)
a. decrease in bank reserves.
b. decrease in required reserves.
c. increase in the discount rate.
d. increase in the money supply.
104. If many people were to suddenly deposit into their checking accounts large sums of cash previously
held in their homes and/or wallets, and there were no offsetting actions by the Fed or change in
institutional policies, this would
a. decrease the M1 money supply but increase the M2 money supply.
b. increase the excess reserves of banks and expand the money supply if these reserves are
used to make additional loans.
c. reduce the excess reserves of banks and indirectly decrease the M1 money supply.
d. reduce the excess reserves of banks and indirectly increase the M1 money supply.
105. Drawing on her account at First Guarantee Bank, Susan writes a check to Valerie, who deposits the
check in her account at Citizens Bank. Once the check has cleared, which of the following will occur
to the reserves of the banking system and the M1 money supply?
a. Bank reserves will increase; M1 will increase.
b. Bank reserves will increase; there will be no change in M1.
c. There will be no change in bank reserves; M1 will increase.
d. There will be no changes in either bank reserves or M1.
106. Suppose Simona deposits $10,000 of cash into a checking account at a commercial bank. The
immediate effect is
a. a $10,000 decrease in the M1 money supply.
b. no change in the M1 money supply, but in the future, the M1 money supply will tend to
decrease because the bank now has excess reserves.
c. no change in the M1 money supply, but in the future, the M1 money supply will tend to
expand because the bank now has excess reserves.
d. a $10,000 increase in the M1 money supply.
107. Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent,
how does this transaction affect the supply of money and the excess reserves of your bank?
a. There is no change in the supply of money; your bank's excess reserves are reduced by
$800.
b. There is no change in the supply of money; your bank's excess reserves are reduced by
$200.
c. The money supply increases by $1,000, and the excess reserves of your bank are reduced
by $800.
d. The money supply increases by $1,000, and the excess reserves of your bank are reduced
by $200.
108. Mr. Brown deposits $1,000 of currency at First National Bank. Later that same day, Ms. Harris
negotiates a loan for $800 at the same bank. As the result of these transactions, the money supply has
a. increased by $200
b. increased by $800.
c. increased by $1,000
d. decreased by $800
109. You withdraw $100 from your checking account. How does this affect the money supply and the
reserves of your bank?
a. The money supply increases, and the reserves of your bank decline.
b. Both money supply and the reserves of your bank increase.
c. There is no change in the money supply, and the reserves of your bank decline.
d. The money supply decreases, and the reserves of your bank increase.
110. Suppose the Fed buys $100,000 of U.S. Treasury bonds from Bill Gates. If the reserve requirement is
10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves
both before and after the transaction, the total impact on the money supply will be
a. an increase by $100,000.
b. an increase by $1,000,000.
c. a decrease by $100,000.
d. a decrease by $1,000,000.
111. On a certain date, the banking system had $40 billion in excess reserves. The legally required reserve
ratio was 20 percent. Potentially, if these funds were loaned and eventually the entire amount re-
deposited with a bank, the banking system as a whole could increase the money supply by
a. a maximum of $40 billion.
b. a maximum of $160 billion.
c. a maximum of $200 billion.
d. more than $200 billion.
112. Assume the reserve requirement is 10 percent. First National Bank has vault cash and deposits with the
Fed of $30 million, loans and securities of $60 million, and checking deposits of $300 million. First
National is in a position to make
a. no additional loans.
b. $5 million of additional loans.
c. $10 million of additional loans.
d. $15 million of additional loans.
113. A commercial bank has $1,000,000 of customer checking deposits and actual reserves of $300,000. If
the reserve ratio is 20 percent, what is the maximum amount of new loans the bank can extend?
a. zero
b. $100,000
c. $300,000
d. $500,000
114. A reserve requirement of 20 percent implies a potential money deposit multiplier of

a. 4.
b. 5.
c. 20.
d. 25.

a. 5.
b. 10.
c. 20.
d. 25.
116. A reserve requirement of 10 percent implies a potential money deposit expansion multiplier of
a. 5.
b. 10.
c. 20.
d. 100.
117. Which of the following would cause the actual deposit expansion multiplier to be less than its
potential?
a. the general public holding of funds in the form of currency rather than bank deposits
b. the holding of excess reserves by commercial banks
c. the general public holding of funds in the form of coins rather than bills
d. both a and b
118. Suppose the Fed buys $5,000 of U.S. Treasury bonds from Donald Trump. If the reserve requirement
is 25 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves
both before and after the transaction, the total impact on the money supply will be a
a. increase by $5,000.
b. increase by $20,000.
c. decrease by $5,000.
d. decrease by $20,000.
119. If the Fed wanted to expand the money supply as part of an antirecession strategy, it could
a. increase the reserve requirements imposed on commercial banks.
b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
c. sell U.S. government securities and other financial assets that it is currently holding.
d. raise the interest rate on loans extended to banks and other financial institutions.
120. In practice, money supply and short-term interest rates are determined by the
a. Treasury and Commerce departments.
b. Federal Open Market Committee.
c. Board of Governors.
d. House and Senate.
121. The Fed is institutionally independent. A major advantage of this is that monetary policy
a. is subject to regular congressional scrutiny.
b. will often offset fiscal policy.
c. is not controlled by politicians.
d. is usually coordinated with fiscal policy.
122. Which of the following is primarily responsible for controlling the money supply in the United States?
a. the U.S. Congress
b. the Board of Governors of the Federal Reserve System
c. the U.S. Treasury
d. the Council of Economic Advisors
123. Open-market purchases by the Fed make the money supply

a. increase, which tends to increase the value of money.
b. increase, which tends to decrease the value of money.
c. decrease, which tends to decrease the value of money.
d. decrease, which tends to increase the value of money.
124. A bank finds itself short of required reserves and therefore borrows from another commercial bank.
The interest rate on this loan is
a. zero.
b. the prime rate.
c. the discount rate.
d. the federal funds rate.
e. the required reserve ratio.
125. The federal funds rate is the interest rate paid when
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.
126. Who owns the Fed?

a. the federal government
b. the states
c. he District Federal Reserve Banks
d. all banks
e. member banks
127. The main purpose of the Fed is to

a. serve as the bankers' bank for member banks.
b. regulate interest rates.
c. print Federal Reserve Notes.
d. regulate financial institutions.
e. maintain the proper functioning of our money system.
128. The Federal Reserve System is owned by

a. federal government agencies such as the Treasury.
b. the Congress of the United States.
c. the banks that are members of the Federal Reserve System.
d. anyone who buys stock over the counter.
e. people who have deposits in member banks.
129. The major overall purpose of the Federal Reserve System is to

a. keep the discount rate flexible.
b. insure the deposits of persons holding funds with banking institutions.
c. regulate the money supply and, thereby, provide a monetary climate that is in the best
interest of the economy.
d. regulate the levels of excess reserves held by member banking institutions.
130. The conduct of monetary policy is the responsibility of

a. commercial banks.
b. the U.S. Treasury.
c. the Federal Reserve System.
d. the Congress and the president.
131. Which of the following is correct?

a. The Federal Reserve is responsible for conducting monetary policy.
b. The U.S. Treasury controls the money supply through its buying and selling of U.S.
securities.
c. The Treasury is a monetary agency with responsibilities very similar to those of the Fed.
d. The Federal Reserve System issues U.S. securities.
132. What is the length of the term of the members of the Board of Governors of the Federal Reserve
System?
a. four years
b. six years
c. fourteen years
d. life or until the member resigns
133. Which of the following is responsible for decision making regarding the purchase and sale of bonds by
the Fed?
a. the chairman of the Board of Governors of the Federal Reserve System
b. the Federal Open Market Operations Committee
c. the U.S. Secretary of Treasury
d. the president, with the advice and consent of the chairman of the Council of Economic
Advisers.
134. Decisions to buy or sell securities at the Fed are made by

a. Congress.
b. the Federal Open Market Committee.
c. the Federal Deposit Insurance Corporation.
d. the President's Council of Economic Advisors.
135. The primary source of revenue for the Federal Reserve is

a. the interest earned on the bonds held by the Fed.
b. its annual appropriation from Congress.
c. the interest earned on discount loans to banks.
d. the dividends earned on the stocks held by the Fed.
136. Which of the following would cause the money supply in the United States to expand?
a. a decrease in reserve requirements
b. an increase in the discount rate
c. the sale of bonds by a Federal Reserve bank
d. an increase in the world supply of gold
137. Which of the following would cause the money supply in the United States to decrease?
a. an increase in reserve requirements
b. a decrease in the discount rate
c. a purchase of bonds by the Federal Reserve
d. an increase in the world supply of gold
138. When reserve requirements are increased, the

a. excess reserves of commercial banks will decrease.
b. excess reserves of commercial banks will increase.
c. U.S. Treasury will have to borrow additional funds.
d. money supply will rise.
139. If the required reserve ratio were decreased,

a. the money supply would tend to decrease, but the outstanding loans of banks would tend
to increase.
b. both the money supply and the outstanding loans of banks would tend to decrease.
c. the money supply would tend to increase, but the outstanding loans of banks would tend
to decrease.
d. both the money supply and the outstanding loans of banks would tend to increase.
140. Which of the following will increase the excess reserves of commercial banks?
a. a reduction in the reserve requirement ratio
b. an increase in the discount rate
c. the sale of government bonds by the Fed to the public
d. the sale of government bonds by the Treasury to the public
141. Suppose the Fed bought $150 million of U.S. securities from the public. The reserve requirement is 20
percent, and there are no initial excess reserves. A few weeks later, if the public's holdings of currency
are constant and the banks have loaned all excess reserves, the money supply will increase by
a. $150 million.
b. $300 million.
c. $600 million.
d. $750 million.
142. Suppose the Fed sells $100 million of U.S. securities to the public. If the reserve requirement is 20
percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both
before and after the transaction, the total impact on the money supply will be a
a. $100 million decrease.
b. $500 million increase.
c. $500 million decrease.
d. $100 million increase.
143. Which of the following is the primary tool the Fed uses to control the supply of money?
a. the discount rate
b. the reserve requirements
c. open market operations
d. the 30-year home-mortgage interest rate
144. Open market operations is the

a. tool most often used by the Fed to alter the money supply.
b. least effective tool the Fed has to alter the money supply.
c. tool used by the Treasury to raise tax revenues.
d. tool used by the Fed to regulate stock market activities.
145. If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
a. It will give the bank new reserves.
b. It will write the bank a check.
c. It will transfer cash to the bank's vault.
d. It will take reserves from another bank.
146. If the Fed lends to member banks, what happens to reserves and the money supply?
a. Reserves increase and the money supply decreases.
b. Both increase.
c. Reserves decrease and the money supply increases.
d. Both decrease.
147. If the Fed raises the discount rate, what happens to reserves and the money supply?
a. Reserves increase and the money supply decreases.
b. Both increase.
c. Reserves decrease and the money supply increases.
d. Both decrease.
148. When the required reserve ratio is lowered,

a. the money multiplier increases, and the amount of excess reserves increases in the
banking system.
b. the money multiplier decreases, and the amount of excess reserves increases in the
banking system.
c. the money multiplier decreases, and the amount of excess reserves decreases in the
banking system.
d. the money multiplier increases, and the amount of excess reserves decreases in the
banking system.
e. there is no change in either the money multiplier or the amount of excess reserves in the
banking system.
149. The term "open market operations" refers to the

a. loan-making activities of commercial banks.
b. effect of expansionary monetary policy on interest rates.
c. operation of competitive markets in the banking industry as the result of deregulation.
d. buying and selling of government securities by the Federal Reserve.
150. When the Federal Reserve System wants to increase the money supply, what does it typically do?
a. It purchases U.S. government securities.
b. It increases the discount rate.
c. It increases the required reserve ratio.
d. It sells bonds on the open market.
151. Which of the following indicates the primary mechanism by which the money supply expands?
a. The U.S. Treasury prints additional currency.
b. The Fed purchases additional bonds, which increases the reserves available to the banking
system.
c. The public decides to hold more currency rather than checking deposits.
d. The U.S. government purchases additional gold.
152. If the Federal Reserve is engaging in open market operations designed to expand the money supply, it
is probably
a. selling government securities to banks.
b. selling government securities to the public.
c. buying government securities from the public.
d. encouraging banks to exchange their Fed deposits for currency.
153. Which of the following is correct?

a. Federal Reserve purchases of securities will increase the reserves available to commercial
banks.
b. Federal Reserve purchases of securities exert upward pressure on interest rates in the short
run.
c. The Federal Reserve System determines the ratio of currency held by the public to the
money supply (M1).
d. Federal Reserve purchases of securities will decrease the reserves available to commercial
banks.
154. Suppose the Fed purchases $100 million of U.S. government securities from the public. How will this
affect the money supply and the national debt?
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 increase; the national debt will be unaffected.
d. The money supply will decrease; the national debt will be unaffected.
155. Which of the following actions would the Fed undertake if it wants to follow a more restrictive
monetary policy?
a. sell some of its holdings of government bonds
b. decrease government expenditures
c. urge the Treasury to sell more U.S. securities
d. reduce the reserve requirements
156. Which of the following would be most appropriate if the Federal Reserve wanted to increase the
money supply in order to stimulate the economy?
a. buy U.S. securities
b. force the Treasury to reduce the national debt
c. raise the discount rate
d. increase the reserve requirements
157. Suppose that during a period of inflation, the Fed reduced its holdings of U.S. securities from $600
billion to $580 billion. This indicates that the Fed was
a. seeking to reduce the money supply to decrease inflation.
b. trying to force Congress to decrease taxes.
c. expanding the money supply and stimulating employment.
d. expanding the money supply, even though the existing inflation suggested a restrictive
policy would be more appropriate.
158. If the Fed purchases government securities from the public, the
a. money supply will decrease.
b. reserves of commercial banks will decrease.
c. required reserves ratio will increase.
d. monetary base will increase.
159. The sale of government securities by the Fed will cause

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.
160. The discount rate is the interest rate

a. commercial banks charge their low-risk customers for a loan.
b. savings and loan associations pay for using savings deposit funds.
c. the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000
or more.
d. the Federal Reserve charges banking institutions for borrowing its funds.
161. Commercial banks can borrow reserves directly from the Fed at the
a. prime interest rate.
b. federal funds rate.
c. discount rate.
d. real interest rate.
162. When a commercial bank borrows from a Federal Reserve bank,

a. the commercial bank's reserves are reduced.
b. the commercial bank's lending ability is increased.
c. the money supply automatically declines.
d. the net worth of the bank will decline, indicating that the bank is having financial
difficulties.
163. If the Federal Reserve wants to increase the availability of money and credit, it can
a. lower the discount rate.
b. raise the reserve requirements.
c. sell government bonds to the public.
d. encourage banks to increase their prime lending rate.
164. When the Fed lowers the discount rate, it makes it

a. cheaper for banks to borrow from each other.
b. cheaper for banks to obtain additional reserves by borrowing from the Fed.
c. more difficult for banks to accept deposits.
d. more difficult for banks to extend loans.
165. Other things constant, if the Fed decreased the discount rate,
a. the earnings of the Fed would increase.
b. the incentive of commercial banks to borrow from the Fed would be reduced.
c. the prime interest rate would automatically decline.
d. commercial banks probably would reduce their excess reserves and be more willing to
extend additional loans.
166. In recent years, the Fed has generally set the discount rate
a. lower than the federal funds rate to help financially troubled banks get more solvent.
b. higher than the interest rate on 30-year fixed-rate mortgage loans.
c. higher than the federal funds rate for most banks.
d. equal to the rate of inflation.
167. Under current policy, the Fed ties the discount rate to the
a. prime rate.
b. AAA corporate bond rate.
c. federal funds rate.
d. long-term government bond rate.
168. An increase in the discount rate impacts the money supply because it
a. makes it more attractive for commercial banks to borrow from the Federal Reserve.
b. decreases the interest yield on new issues of U.S. securities.
c. reduces the incentive of commercial banks to borrow from the Federal Reserve.
d. increases the Federal Reserve's earnings and, thereby, expands the money supply.
169. The federal funds market is the market where

a. the federal government raises funds to cover its budget deficit.
b. the Federal Reserve System makes loans to commercial banks.
c. commercial banks with excess reserves make loans to commercial banks seeking reserves.
d. commercial banks make loans to the Federal Reserve.
170. The interest rate in the federal funds market

a. is determined by the imposition of price controls imposed by the Fed.
b. will tend to rise when the quantity of funds demanded by banks seeking additional
reserves exceeds the quantity supplied by banks with excess reserves.
c. will tend to fall if the Fed sells bonds and, thereby, reduces the reserves available to
banks.
d. is an interest rate that is largely unaffected by the policies of the Fed.
a. increase the reserve requirements.
b. buy U.S. securities on the open market.
c. raise the discount rate.
d. sell U.S. securities on the open market.
172. If the Fed wants to shift toward a more expansionary policy, it often announces that it is going to
change the federal funds interest rate. The Fed controls the federal funds interest rate
a. by imposing legal restrictions that prohibit exchanges at interest rates other than the ones
designated by the Fed.
b. by having the U.S. Treasury fix this interest rate
c. through its policy of open market operations.
d. by altering the size of the federal budget deficit or surplus.
173. Which of the following lists two things that both increase the money supply?
a. the Fed buys bonds and lowers the discount rate.
b. the Fed buys bonds and raises the discount rate.
c. the Fed sells bonds and lowers the discount rate.
d. the Fed sells bonds and raises the discount rate.
a. raise the discount rate and make open market purchases
b. raise the discount rate and make open market sales
c. lower the discount rate and make open market purchases
d. lower the discount rate and make open market sales
a. make open market purchases and raise the reserve requirement ratio
b. make open market purchases and lower the reserve requirement ratio
c. make open market sales and raise the reserve requirement ratio
d. make open market sales and lower the reserve requirement ratio
176. Which of the following lists two things that both decrease the money supply?
a. lower the discount rate and raise the reserve requirement ratio
b. lower the discount rate and lower the reserve requirement ratio
c. raise the discount rate and raise the reserve requirement ratio
d. raise the discount rate and lower the reserve requirement ratio
a. raise the discount rate and make open market purchases
b. raise the discount rate and make open market sales
c. lower the discount rate and make open market purchases
d. lower the discount rate and make open market sales
a. make open market purchases and raise the reserve requirement ratio
b. make open market purchases and lower the reserve requirement ratio
c. make open market sales and raise the reserve requirement ratio
d. make open market sales and lower the reserve requirement ratio
179. 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?
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.
180. When the Fed sells Treasury Bonds on the open market, it will tend to
a. decrease the money supply and raise interest rates.
b. decrease the money supply and lower interest rates.
c. increase the money supply and raise interest rates.
d. increase the money supply and lower interest rates.
181. How did the Fed’s conduct of open market operations change during the economic crisis of 2008?
a. Open market operations are no longer the most common tool that the Fed utilizes.
b. The Fed now buys and sells a broader range of assets than only government securities.
c. The Federal Open Market Committee cannot act without the approval of the Treasury.
d. The Fed now must have adequate funds available before purchasing government
securities.
182. Under the Term Auction Facility (TAF), the rate that a depository institution pays on a loan from the
Fed is determined by
a. the federal funds rate.
b. the discount rate.
c. the real rate of interest.
d. a bidding process allocating the funds to those willing to pay the highest rates.
183. In its conduct of open market operations, the Fed now buys and sells
a. only U.S. government securities.
b. only mortgage-backed securities issued by large investment banks.
c. a wide range of assets including the stock shares of large banks, domestic automobile
manufacturers, and high-technology business firms.
d. a wide range of assets including corporate bonds and mortgage-backed securities.
184. During the economic crisis of 2008, the Fed acquired the authority to
a. pay interest to commercial banks on their reserves.
b. determine the size of the budget deficit or surplus of the Federal Government.
c. require the Treasury to print and issue additional currency.
d. purchase gold in sufficient amounts to back the U.S. dollar.
a. increase the interest rate paid on excess reserves encouraging banks to extend more loans.
c. decrease the interest rate paid on excess reserves encouraging banks to hold excess
reserves rather than extend more loans.
d. increase the interest rate paid on excess reserves encouraging banks to hold excess
186. If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could
a. increase the interest rate paid on excess reserves encouraging banks to extend more loans.
c. decrease the interest rate paid on excess reserves encouraging banks to hold excess
187. During the financial crisis of 2008, Fed policy

a. caused the monetary base to shrink significantly.
b. approximately doubled the M1 money supply.
c. approximately doubled the monetary base.
d. maintained the monetary base at a constant level.
188. Which of the following would lead to a rapid growth of the money supply in the future?
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
189. The large increase in the excess reserves held by the commercial banking system during the second
half of 2008,
a. increases the likelihood of a sharp contraction in the money supply, which would increase
the length and severity of the recession.
b. increases the likelihood of a rapid increase in the money supply, potentially leading to
future inflation.
c. is merely a continuation of the trend present since 1990.
d. reduces the ability of banks to extend additional loans.
190. Historically, the excess reserves of banks have been ________ relative to checkable deposits, but
during the crisis of 2008 the excess reserves of banks ________. (Fill in the blanks)
a. large; declined sharply
b. small; fell sharply
c. small; increased sharply
d. large; increased sharply
191. During the second half of 2008, the Fed approximately doubled the reserves of the commercial banking
system. As a result, the M1 money supply
a. fell sharply, because the banks used the excess reserves to extend additional loans.
b. also approximately doubled.
c. was unchanged, because bank reserves will not affect the M1 money supply.
d. increased, but by a much smaller amount, because the banks used only a small portion of
their excess reserves to extend additional loans.
192. Prior to 2008, the primary tool used by the Fed to control the money supply was
a. the manipulation of the required reserve ratio banks must hold against their checking
deposits.
b. the extension of loans to financial institutions.
c. the buying and selling of stocks and corporate bonds.
d. the buying and selling of U.S. Treasury securities.
193. Which of the following was true of the actions of the Federal Reserve in response to the recession of
2008?
a. The Fed shifted toward a highly restrictive monetary policy in 2008, which was a major
cause of the recession.
b. The Fed continued to focus only on price stability and therefore it expanded the money
supply at a slow and steady rate throughout the recession.
c. The Fed introduced several new procedures for the conduct of monetary policy and it
increased the monetary base rapidly as the recession worsened.
d. The Fed continued to purchase and sell only U.S. Treasury bonds when conducting open
market operations to control the money supply.
194. The Fed’s use of the interest rate it pays banks on their excess reserves
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.
195. During the financial crisis of 2008-2010, the Fed

a. increased its purchases of securities and other financial assets and extended more loans,
which expanded the monetary base.
b. increased its purchases of securities and other financial assets and extended more loans,
which reduced the monetary base.
c. reduced its purchases of securities and other financial assets and extended fewer loans,
which expanded the monetary base.
d. reduced its purchases of securities and other financial assets and extended fewer loans,
which caused the monetary base to decline.
196. During the financial crisis of 2008-2010, the Fed increased its purchases of securities and extended
more loans, which caused the monetary base to
a. increase rapidly, but the M1 money supply declined because the banks loaned out most of
the additional reserves to businesses.
b. fall, but the M1 money supply still expanded rapidly because the banks increased their
loans to businesses.
c. increase rapidly, but the M1 money supply expanded at a much slower rate because the
banks enlarged their excess reserves.
d. fall, and this led to a sharp decline in the M1 money supply.
197. During the three years following the financial crisis of 2008,
a. the monetary base more than doubled and the M1 money supply increased even more
rapidly.
b. the monetary base more than doubled, but the M1 money supply increased much less
rapidly.
c. the monetary base fell by almost 50 percent, but the M1 money supply continued to grow
at a steady rate.
d. the monetary base fell by almost 50 percent, causing a sharp reduction in the M1 money
supply.
198. Other things constant, which of the following would cause the M1 money supply to decline?
a. an increase in the quantity of U.S. currency held overseas
b. a shift of funds from interest-earning checking deposits to money market mutual funds
c. a reduction in the general public's holdings of currency outside of banks because debit
cards have become more popular and widely accepted
d. a shift of funds from money market mutual funds into stock and bond mutual funds
because the fees to invest in the latter have declined
STA: DISC: Monetary and fiscal policy
TOP: Ambiguities in the Meaning and Measurement of the Money Supply
199. 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?
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.
200. If banks move a substantial portion of depositors' money from interest-earning checking accounts into
money-market deposit accounts, how will the money supply measures be affected?
a. M1 will become smaller, and M2 will become larger.
b. Both M1 and M2 will increase in size.
c. Both M1 and M2 will decrease in size.
d. The size of M1 will be reduced, but M2 will be unchanged.
201. Which of the following items are counted in M2?

a. stock mutual funds
b. money-market mutual funds
c. bond mutual funds
d. all of the above
202. Other things constant, which of the following would cause the M2 money supply to decline?
a. an increase in the quantity of U.S. currency held overseas
b. a shift of funds from interest-earning checking accounts to money market mutual funds
c. a reduction in the general public's holdings of currency outside of banks because debit
cards have become more popular and widely accepted
d. a shift of funds from money market mutual funds into stock and bond mutual funds
because the fees to invest in the latter have declined
203. When using the money supply figures to measure the direction of monetary policy during the last
several decades, it is better to look at changes in the M2 money supply rather than M1 because
a. the increase in popularity of interest-earning checking accounts in the 1980s distorted the
M2 money supply but not the M1 money supply.
b. the increase in popularity of interest-earning checking accounts in the 1980s distorted the
c. the decrease in popularity of interest-earning checking accounts in the 1980s distorted the
d. the decrease in popularity of interest-earning checking accounts in the 1980s distorted the
204. The foreign holdings of U.S. dollars

a. reduce the living standards of Americans.
b. are not included in the M1 money supply.
c. account for approximately half of all U.S. currency issued by the Fed.
d. are hard to explain since the dollar is not legal tender outside the United States.
205. If a sizeable amount of U.S. currency is held outside of the United States,
a. the accuracy of the M2 money supply figures will be improved, but there will be no
impact on M1.
b. the accuracy of the M1 money supply figures will be improved, but there will be no
impact on M2.
c. the money supply figures, particularly those for M1, will be less reliable.
d. the money supply figures of the U.S. will not be affected because the funds are held
outside the U.S.
206. The foreign holdings of U.S. dollars

a. are hard to explain since the dollar is not legal tender outside the United States.
b. have decreased substantially during the last decade.
c. indicate that foreigners have confidence in the monetary policy and economy of the
United States.
d. are largely held in countries with a lengthy historical record of monetary and price
stability.
207. The introduction of no-load stock and bond mutual funds has made investing in stocks and bonds
increasingly attractive to even the small investor. If, as a result, a large amount of money were shifted
from money-market deposit funds to these stock and bond funds, how would the M1 and M2 money
supply figures be affected?
a. The M2 money supply would decline; M1 would be unaffected.
b. The M2 money supply would increase; M1 would be unaffected.
c. The M2 money supply would increase; M1 would decline.
d. Both the M1 and M2 money supply figures would increase.
208. When individuals shift funds from money market mutual funds to no-load stock and bond mutual
funds,
a. the growth rate of M1 will decline but the growth of M2 will be unaffected.
b. the growth rate of M2 will decline but the growth of M1 will be unaffected.
c. the growth rate of both M1 and M2 will decline.
d. the growth rate of both M1 and M2 will increase.
209. If debit cards become more widely used by consumers and businesses, which of the following is most
likely to happen?
a. Currency holdings will remain the same, but the M1 money supply will fall.
b. The amount of currency held by the public will increase.
c. Less money will be held as currency and more money will be held in bank accounts,
which will increase the reserves of banks unless the Fed takes offsetting actions.
d. The money supply will be unaffected because debit card expenditures are considered the
equivalent of cash.
210. As debit cards become more popular, individuals will reduce their holdings of currency. Other things
constant, how will this impact the money supply?
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.
211. If debit cards become more widely used by consumers and businesses, which of the following is most
likely to happen?
a. Currency holdings will remain the same, but the M1 money supply will fall.
b. The amount of currency held by the public will increase.
c. Less money will be held as currency and more money will be held in bank accounts,
which will increase the reserves of banks unless the Fed takes offsetting actions.
d. The money supply will be unaffected because debit card expenditures are considered the
equivalent of cash.
212. If the Fed wants to use "open market operations" to decrease the money supply, it would
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.
KEY: Bloom's: Comprehension MSC: Coursebook
213. Suppose the Fed buys $10 million of U.S. securities from the public. Assume a reserve requirement of
5 percent and that all banks hold no excess reserves. The total impact of this action on the money
supply will be
a. an increase of $200 million.
b. a decrease of $200 million.
c. a decrease of $10 million.
d. an increase of $10 million.
214. In the United States, the control of the money supply is the responsibility of the
a. Federal Reserve System (the Fed).
b. the president.
c. the U.S. Treasury.
d. the U.S. Congress.
KEY: Bloom's: Knowledge MSC: Coursebook
215. The nature and measurement of the money supply has become more difficult in recent years because of
a. the reduced use of pennies in transactions.
b. actions of the U.S. Congress that have reduced the power of the Fed to control the money
supply.
c. legislation prohibiting the circulation of the dollar outside of the United States.
d. financial innovations, such as the introduction of interest-earning checking accounts and
money market mutual funds.
216. Suppose a bank receives a new deposit of $500. The bank extends a new loan of $400 because it is
required to hold the other $100 on reserve. What is the legal required reserve ratio?
a. 10 percent
b. 15 percent
c. 20 percent
d. 25 percent
KEY: Bloom's: Application MSC: Coursebook
217. Fiat money is defined as

a. the money of U.S. citizens deposited at banks and other financial institutions outside the
United States.
b. money spent on Italian sports cars.
c. money that has little intrinsic value; it is neither backed by nor convertible to a
commodity of value.
d. vault cash plus deposits at the Fed.
STA: DISC: Monetary and fiscal policy TOP: How the Supply of Money Affects Its Value
218. The tool used most frequently by the Fed to control the money supply is
a. changes in the premiums charged for FDIC deposit insurance.
b. open market operations.
c. changes in the discount rate.
d. changes in reserve requirements.
219. The federal funds rate is the interest rate

a. banks pay when they borrow money from each other for short periods of time.
b. the federal government pays on the national debt.
c. the Fed charges banks when banks need to borrow from the Fed.
d. the federal government charges foreign banks.
220. The three basic functions of money are

a. fiat, seigniorage, and debt.
b. a medium of exchange, a store of value, and a unit of account.
c. a standard of pay, a coincidence of wants, and a measure of the value of time.
d. demand deposits, other checkable deposits, and time deposits.
221. If the Federal Reserve wanted to expand the supply of money to head off a recession, it could
a. decrease the reserve requirements.
b. lower taxes.
c. sell U.S. securities in the open market.
d. increase the discount rate.
222. The larger the reserve requirement, the

a. larger the potential deposit multiplier.
b. smaller the potential deposit multiplier.
c. more profitable the banks will be.
d. larger the proportion of an additional deposit that is available to the bank for the extension
of additional loans.
223. The total expansion in the money supply can be less than is predicted by the deposit expansion
multiplier if
a. banks choose to hold some excess reserves rather than lending all excess reserves.
b. some individuals prefer to hold cash instead of depositing their money in banks.
c. instead of a monopoly banking system, there are many banks.
d. both a and b are correct.
224. When economists say that money serves as a unit of account, they mean that money
a. allows people to avoid barter (trading goods for other goods) by using money.
b. is always issued in fixed denominations (for example $1, $5, $10, $20 bills).
c. allows people to value all goods and services in terms of one commodity (money), rather
than in terms of several commodities.
d. makes it easier for people to maintain value across time by letting them save it in the form
of money, rather than in the form of physical goods that might depreciate over time.
225. The value (purchasing power) of each unit of money

a. does not depend on the amount of money in circulation.
c. increases as prices rise.
d. is inversely related to prices (in other words, money's value falls as prices rise and vice
versa).
226. Which of the following is not a component of the M1 money supply?

a. demand deposits
b. large-denomination (more than $100) bills
c. interest-earning checking deposits
d. outstanding balances on credit cards
STA: DISC: Monetary and fiscal policy TOP: How is the Money Supply Measured?
227. Which of the following compose the M2 money supply?

a. currency only
b. currency, demand deposits, other checkable deposits, and traveler's checks
c. M1 plus large denomination time deposits
d. M1 plus savings deposits, small-denomination time deposits, and money market mutual
funds (retail)
228. The difference between the total reserves that a bank holds and the amount that is required by law are
called
a. excess reserves.
b. nonborrowed reserves.
c. borrowed reserves.
d. actual reserves.

a. 1.
b. 5.
c. 20.
d. 80.
KEY: Bloom's: Application MSC: Coursebook
230. Suppose the Fed sells $100 million of U.S. government securities (bonds) to the public. How will this
affect the money supply and the national debt?
a. The money supply will increase; the national debt will decrease.
b. The money supply will decrease; the national debt will increase.
c. The money supply will increase; the national debt will be unaffected.
d. The money supply will decrease; the national debt will be unaffected.
231. Suppose the U.S. Treasury issues and sells $100 million of U.S. government securities (bonds) to the
public. How will this affect the money supply and the national debt?
a. The money supply will increase; the national debt will decrease.
b. The money supply will decrease; the national debt will increase.
c. The money supply will be unaffected; the national debt will increase.
d. The money supply will be unaffected; the national debt will decrease.
232. Which of the following is not part of the M1 money supply?

a. paper bills (currency)
b. travelers' checks
c. savings deposits
d. coins
233. As the Fed increased its asset holdings and the volume of loans to financial institutions during the latter
half of 2008, the result was
a. a vast increase in the monetary base and in the excess reserves of the commercial banking
system.
b. a substantial increase in short term interest rates.
c. a sharp decrease in the monetary base, as well as a depletion of the excess reserves of the
commercial banking system.
d. an increase in the volume of loans extended by commercial banks and a sharp increase in
the inflation rate.
234. 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?
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.
235. Rather than using the purchase and sale of only government bonds in the conduct of open market
operations, in 2008 the Fed also began buying and selling
a. stock options so it would be able to gain from the expected rebound in the stock market.
b. real estate in the Washington D.C. area.
c. corporate bonds, commercial paper, and mortgage-backed securities from commercial
banks and other financial institutions.
d. future contracts for goods like grains, metals, and crude oil, which could be expected to
increase in price substantially if the inflation rate rose rapidly in the future.
236. Suppose the Fed purchases $10 million of U.S. securities from the public. If the reserve requirement is
10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves
both before and after the transaction, the total impact on the money supply will be a:
a. $10 million decrease in the money supply.
b. $10 million increase in the money supply.
c. $100 million decrease in the money supply.
d. $100 million increase in the money supply.
KEY: Bloom's: Comprehension MSC: On-line Practice
237. The value (purchasing power) of each unit of money:

a. is largely independent of the money supply.
c. increases as prices rise.
d. tends to decline as the money supply expands in relation to the availability of goods and
services.
238. Reserves that banks are required by law to keep on hand to back up their deposits are called:
a. required reserves.
b. borrowed reserves.
c. actual reserves.
d. excess reserves.
KEY: Bloom's: Knowledge MSC: On-line Practice
239. Which of the following tends to reduce bank failures as the result of bank runs by depositors?
a. the Federal Deposit Insurance Corporation
b. the Federal Open Market Operations Committee
c. the comptroller of the currency
d. the Senate Banking Committee
240. Second National Bank confronts a reserve requirement of 20 percent and currently holds millions of
dollars in excess reserves. If a depositor withdraws $35,000, the excess reserves of the bank will
a. decline by $7,000.
b. decline by $35,000.
c. decline by $28,000.
d. increase by $7,000.
KEY: Bloom's: Application MSC: On-line Practice
241. Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the First
Guarantee Bank has no excess reserves. If a new customer deposits $50,000, the bank could extend
new loans up to a maximum of:
a. $10,000.
b. $40,000.
c. $50,000.
d. $250,000.
KEY: Bloom's: Application MSC: On-line Practice
242. The type of banking system under which banks are required to hold only a portion of their assets in
reserve against the checking deposits of their customers is called:
a. a gold-backed banking system.
b. a full reserve banking system.
c. a fiat banking system.
d. a fractional reserve banking system.
243. Are outstanding credit card balances counted as part of the money supply?
a. no; credit card balances reflect funds that have been borrowed. Unlike money, they cannot
be used as a means of payment.
b. yes; they are used to purchase things and therefore they are included in the money supply
figures.
c. they are included in the M1 money supply, but not the M2 figures.
d. they are included in the M2 money supply, but not the M1 figures.
244. Which of the following is the best definition of money?

a. anything generally accepted as payment for goods or repayment of debt
b. anything that can be converted to a liquid asset
c. a national currency that is backed by gold or other precious metals
d. paper or coin currency that is produced by the Federal Reserve
KEY: Bloom's: Knowledge MSC: On-line Practice
245. If a number of people suddenly deposit into their checking accounts a great deal of cash previously
kept in their pockets or at home, other things constant, their actions will
a. create excess reserves and place banks in a position to extend additional loans, which will
reduce the money supply.
b. create excess reserves and place banks in a position to extend additional loans, which will
expand the money supply.
c. lead to higher interest rates.
d. force the Fed to reduce its discount rate.
246. Other things constant, if the Fed decreased the discount rate,
a. the earnings of the Fed would increase.
b. the incentive of commercial banks to borrow from the Fed would be reduced.
c. borrowing from the Fed will tend to increase and the money supply will tend to expand.
d. borrowing from the Fed will tend to decrease and the money supply will tend to decline.
247. In the United States, the money supply (M1) consists of

a. paper currency, coins and traveler's checks.
b. government bonds, currency, demand deposits, other checkable deposits, and traveler's
checks.
c. paper currency, coins, demand deposits, and savings deposits.
d. coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.
248. Which of the following actions of the Fed would increase the money supply?
a. the purchase of U.S. government securities.
b. a reduction in the discount rate.
c. a reduction in the required reserve ratio.
d. all of the above are correct.
249. If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could
a. decrease the reserve requirements imposed on commercial banks.
b. purchase U.S. government securities and other financial assets in the open market.
c. decrease the interest rate on loans extended to banks and other financial institutions.
250. Why did the monetary base increase rapidly during the economic crisis of 2008?
a. The Fed purchased more assets and extended more loans.
b. The Fed sold financial assets and extended fewer loans.
c. The Fed purchased more assets, but extended fewer loans.
d. The Fed sold financial assets, but extended more loans.

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Macroeconomics Chapter 13 A—Money and the Banking System

2. In the United States, the purchasing power of money is determined by

3. Which of the following is not a component of the M1 money supply?

4. Ordinary commercial banks can expand the supply of money by

5. Which of the following compose the reserves of a commercial bank?

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

12. In order for barter trades to occur, there must be a

15. As the number of goods and services increases, barter becomes

17. In order for barter to occur, traders must have a

20. Which of the following is the best definition of money?

21. If money were not used as a medium of exchange,

22. A barter economy is one in which

23. Compared to a barter economy, using money increases efficiency by reducing

25. Which of the following assets is most liquid?

26. Fiat money is money

27. Money is used as a unit of account. This means

30. The demand for money varies

34. The value (purchasing power) of each unit of money

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

44. The M1 money supply

45. Demand deposits are

47. Which of the following compose the M2 money supply?

50. Widespread use of credit cards

First Bank of Mason City

53. Refer to Table 13-1. The reserve ratio is

Last Bank of Cedar Bend

60. The main source of profit for financial institutions is

63. Which of the following is not a depository institution?

67. Modern bankers

76. Which of the following is true?

86. The money multiplier will be

94. Excess reserves are

95. Excess reserves of banks equal

114. A reserve requirement of 20 percent implies a potential money deposit multiplier of

115. A reserve requirement of 5 percent implies a potential money deposit multiplier of

123. Open-market purchases by the Fed make the money supply

126. Who owns the Fed?

127. The main purpose of the Fed is to

128. The Federal Reserve System is owned by

129. The major overall purpose of the Federal Reserve System is to

130. The conduct of monetary policy is the responsibility of

131. Which of the following is correct?

134. Decisions to buy or sell securities at the Fed are made by

135. The primary source of revenue for the Federal Reserve is

138. When reserve requirements are increased, the

139. If the required reserve ratio were decreased,

144. Open market operations is the

148. When the required reserve ratio is lowered,

149. The term "open market operations" refers to the

153. Which of the following is correct?

159. The sale of government securities by the Fed will cause

160. The discount rate is the interest rate

162. When a commercial bank borrows from a Federal Reserve bank,

164. When the Fed lowers the discount rate, it makes it

169. The federal funds market is the market where

170. The interest rate in the federal funds market

187. During the financial crisis of 2008, Fed policy

195. During the financial crisis of 2008-2010, the Fed

201. Which of the following items are counted in M2?

204. The foreign holdings of U.S. dollars

206. The foreign holdings of U.S. dollars

217. Fiat money is defined as

219. The federal funds rate is the interest rate