MQ7 13 B Answers

Mock Quiz #7
Chapter 29 - The Monetary System
Multiple Choice
1. Which of the following is an example of barter?

a. A parent gives a teenager a $10 bill in exchange for her babysitting services.
b. A homeowner gives an exterminator a check for $50 in exchange for extermination services.
c. A barber gives a plumber a haircut in exchange for the plumber fixing the barber’s leaky
faucet.
d. All of the above are examples of barter.
ANSWER: c
2. Consider five individuals with different occupations.
Allen prepares taxes wants ribs

Betty does dry cleaning wants computer fixed
Calvin fixes computers wants bread
Diedre bakes bread wants taxes prepared
Eric barbecues ribs wants dry cleaning
In a barter system which of the following pairs has a double coincidence of wants?
a. Allen and Eric
b. Diedre and Calvin
c. Both A and B are correct.
d. None of the above are correct.
ANSWER: d
3. Consider five individuals with different occupations.
Allen prepares taxes wants ribs

Betty does dry cleaning wants computer fixed
Calvin fixes computers wants bread
Diedre bakes bread wants taxes prepared
Eric barbecues ribs wants dry cleaning
If this economy has money

a. Allen will buy from Betty
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The Monetary System
b. Betty will buy from Calvin

c. Eric will buy from Allen
d. None of the above are correct.
ANSWER: b
4. Money
a. is more efficient than barter.
b. makes trades easier.
c. allows greater specialization.
d. All of the above are correct.
ANSWER: d
5. In an economy that relies upon barter,

a. trade does not require a double coincidence of wants.
b. scarce resources are allocated just as easily as they are in economies that do not rely upon
barter.
c. there is no item in the economy that is widely accepted in exchange for goods and services.
ANSWER: c
6. Economists use the term “money” to refer to

a. all wealth.
b. all assets, including real assets and financial assets.
c. all financial assets, but not real assets.
d. those types of wealth that are regularly accepted by sellers in exchange for goods and services.
ANSWER: d
7. Economists equate money with

a. individual wealth.
b. income regularly earned.
c. assets people use regularly to buy goods and services.
d. individual saving.
ANSWER: c
8. You pay for cheese and bread from the deli with currency. Which function of money does this
best illustrate?
a. medium of exchange
b. unit of account
The Monetary System
c. store of value
d. liquidity
ANSWER: a
9. Which of the following best illustrates the medium of exchange function of money?
a. You keep some money hidden in your shoe.
b. You keep track of the value of your assets in terms of currency.
c. You pay for your oil change using currency.
d. None of the above is correct.
ANSWER: c
10. Which of the following is a store of value?

a. cash and stocks
b. cash but not stocks
c. stocks but not cash
d. neither cash nor stocks
ANSWER: a
11. Which list ranks assets from most to least liquid?

e. currency, fine art, stocks
f. currency, stocks, fine art
g. fine art, currency, stocks
h. fine art, stocks, currency
ANSWER: b
12. Money
a. is a perfect store of value.
b. is the most liquid asset.
c. has intrinsic value, regardless of which form it takes.
ANSWER: b
13. Treasury Bonds are

a. both a store of value and a medium of exchange.
b. a store of value, but not a medium of exchange
c. a medium of exchange, but not a store of value.
d. neither a store of value nor a medium of exchange.
The Monetary System
ANSWER: b
14. Which of the following is both a store of value and regularly used as a medium of exchange?
a. cash and stocks
b. cash but not stocks
c. stocks but not cash
d. neither cash nor stocks
ANSWER: b
15. When in Thailand, you notice that prices are posted in baht, this best illustrates money’s function
as
a. a store of value.
b. a medium of exchange.
c. a unit of account.
d. a method of barter.
ANSWER: c
16. The “yardstick” people use to post prices and record debts is called
a. a medium of exchange.
b. a unit of account.
c. a store of value.
d. liquidity.
ANSWER: b
17. You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in
your piggy bank illustrates money’s function as a . The laptop’s price is posted as $500. The
$500 price illustrates money’s function as a . You use the $500 to purchase the laptop. This
transaction illustrates money’s function as a ______.
a. store of value, medium of exchange, unit of account
b. store of value, unit of account, medium of exchange
c. medium of exchange, unit of account, store of value
d. medium of exchange, store of value, unit of account
ANSWER: b
18. When colonists in Virginia used tobacco as money, their money

a. was commodity money.
b. had no intrinsic value.
c. was fiat money.
d. had no store of value.
The Monetary System
ANSWER: a
19. Currently, Philippine currency is

a. fiat money with intrinsic value.
b. fiat money with no intrinsic value.
c. commodity money with intrinsic value.
d. commodity money with no intrinsic value.
ANSWER: b
20. All Philippines paper Pesos read “Ang salaping ito ay bayarin ng Bangko Sentral at Pinananagutan
ng Republika ng Pilipinas.” This statement represents which characteristic of Philippine currency?
a. The Philippines operates under the gold standard.
b. Philippines paper money is commodity money.
c. Philippines paper money is fiat money.
d. Philippines paper money is a convenient store of wealth.
ANSWER: c
21. For purposes of analyzing the money stock and its relationship to relevant economic variables,
money is best thought of as
a. those items that can be readily accessed and used to buy goods and services.
b. currency only.
c. currency plus all bank accounts.
d. currency plus all bank accounts plus bonds.
ANSWER: a
22. Currency includes

a. paper bills and coins.
b. demand deposits.
c. credit cards.
d. Both (a) and (b) are correct.
ANSWER: a
23. Demand deposits are a type of

a. checking account.
b. time deposit.
c. money market mutual fund.
d. savings deposit.
The Monetary System
ANSWER: a
24. People can write checks against

a. demand deposits and money market mutual funds
b. demand deposits but not money market mutual funds
c. money market mutual funds but not demand deposits
d. neither demand deposits nor money market mutual funds
ANSWER: a
A money market fund's purpose is to provide investors with a safe place to invest easily accessible,
cash-equivalent assets. Some money market funds also come with limited check-writing privileges.
25. M1 includes
a. small time deposits.
b. savings deposits.
c. other checkable deposits.
d. money market mutual funds.
ANSWER: c
26. Which of the following is not included in M1?

a. currency
b. demand deposits
c. traveler’s checks
d. credit cards
ANSWER: d
27. Which of the following is included in both M1 and M2?

a. savings deposits
b. demand deposits
c. small time deposits
d. money market mutual funds
ANSWER: b
28. Money market mutual funds are included in

a. M1 but not M2.
b. M1 and M2.
c. M2 but not M1.
d. neither M1 nor M2.
The Monetary System
ANSWER: c
29. Credit cards

a. represent the largest component of M1.
b. are not included in M1 but are included in M2.
c. are a form of money unique to the U.S.
d. are not considered money.
ANSWER: d
Table 29-1.
The information in the table pertains to an imaginary economy.
Asset Amount
Small time deposits $750 billion
Large time deposits $1,500 billion
Demand deposits $480 billion
Other checkable deposits $350 billion
Savings deposits $4,700 billion
Traveler's checks $15 billion
Money market mutual funds $910 billion
Currency $1,070 billion
Minor categories of M2 $40 billion
30. Refer to Table 29-1. What is the value of M1 in billions of dollars?

a. $1,915 billion
b. $1,900 billion
c. $2,665 billion
d. $2,825 billion
ANSWER: a
31. Refer to Table 29-1. What is the value of M2 in billions of dollars?

a. $9,815 billion
b. $8,315 billion
c. $7,565 billion
d. $7,405 billion
ANSWER: b
32. Economists call an institution designed to oversee the banking system and regulate the quantity of
money in the economy
a. a central bank.
The Monetary System
b. a charter bank.
c. a national bank.
d. a state bank.
ANSWER: a
33. When conducting an open-market purchase, the BSP

a. buys government bonds, and in so doing increases the money supply.
b. buys government bonds, and in so doing decreases the money supply.
c. sells government bonds, and in so doing increases the money supply.
d. sells government bonds, and in so doing decreases the money supply.
ANSWER: a
34. When the BSP sells assets from its portfolio to the public with the intent of changing the money
supply,
a. those assets are government bonds and the BSP’s reason for selling them is to increase the
money supply.
b. those assets are government bonds and the BSP’s reason for selling them is to decrease the
money supply.
c. those assets are items that are included in M2 and the Fed’s reason for selling them is to
increase the money supply.
d. those assets are items that are included in M2 and the Fed’s reason for selling them is to
decrease the money supply.
ANSWER: b
35. In a system of 100-percent-reserve banking,

a. banks do not accept deposits.
b. banks do not influence the supply of money.
c. loans are the only asset item for banks.
ANSWER: b
36. In a 100-percent-reserve banking system, if people decided to decrease the amount of currency
they held by increasing the amount they held in checkable deposits, then
a. M1 would increase.
b. M1 would decrease.
c. M1 would not change.
d. M1 might rise or fall.
ANSWER: c
The Monetary System
37. Banks are able to create money only when

a. interest rates are above 2%.
b. the BSP sells Philippine government bonds.
c. the reserve ratio is 100%.
d. only a fraction of deposits are held in reserve.
ANSWER: d
38. Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8
percent, and excess reserves amount to $5 billion. What is the level of deposits?
a. $5,000 billion
b. $4,937.5 billion
c. $5,062.5 billion
d. $4,995 billion
ANSWER: b
39. Which of the following is an asset of a bank and a liability for its customers?
a. deposits of its customers and loans to its customers
b. deposits of its customers but not loans to its customers
c. loans to its customers but not the deposits of its customers
d. neither the deposits of its customers nor the loans to its customers
ANSWER: c
40. A bank’s assets equal its liabilities under

a. both 100-percent-reserve banking and fractional-reserve banking.
b. 100-percent-reserve banking but not under fractional-reserve banking.
c. fractional-reserve banking but not under 100-percent-reserve banking.
d. neither 100-percent-reserve banking nor fractional-reserve banking.
ANSWER: a
41. A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new
store. On their respective balance sheets, this loan is
a. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money supply.
b. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the money
supply.
c. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money supply.
d. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the money
supply.
ANSWER: a
The Monetary System
42. A bank has a 5 percent reserve requirement, $5,000 in deposits, and has loaned out all it can,
given the reserve requirement.
a. It has $25 in reserves and $4,975 in loans.
b. It has $250 in reserves and $4,750 in loans.
c. It has $1,000 in reserves and $4,000 in loans.
ANSWER: b
43. The manager of the bank where you work tells you that your bank has $10 million in excess
reserves. She also tells you that the bank has $400 million in deposits and $375 million dollars in
loans. Given this information you find that the reserve requirement must be
a. 10/400.
b. 25/400.
c. 35/400.
d. 15/400.
ANSWER: d
44. The reserve requirement is 12 percent. Lucy deposits $600 into a bank. By how much do excess
reserves change?
a. $600
b. $528
c. $72
d. $12
ANSWER: b
45. Suppose the BSP’s requires banks to hold 9 percent of their deposits as reserves. A bank has
$18,000 of excess reserves and then sells the BSP a Treasury bill for $9,000. How much does this
bank now have to lend out if it decides to hold only required reserves?
a. $27,000
b. $27,190
c. $26,190
d. $9,000
ANSWER: a
46. When a bank loans out $1,000, the money supply

a. does not change.
b. decreases.
c. increases.
d. may do any of the above.
ANSWER: c
The Monetary System
47. If a bank uses $200 of excess reserves to make a new loan when the reserve ratio is 15 percent,
this action by itself initially makes the money supply
a. and wealth increase by $200.
b. and wealth decrease by $200.
c. increase by $200 while wealth does not change.
d. decrease by $200 while wealth decreases by $200.
ANSWER: c
48. If a bank uses $500 of excess reserves to make a new loan when the reserve ratio is 8 percent,
this action by itself initially makes the money supply
a. and wealth increase by $500.
b. and wealth decrease by $500.
c. increase by $500 while wealth does not change.
d. decrease by $500 while wealth decreases by $500.
ANSWER: c
49. As the reserve ratio decreases, the money multiplier

a. increases.
b. does not change.
c. decreases.
d. could do any of the above.
ANSWER: a
50. If the central bank in some country raised the reserve requirement, then the money multiplier for
that country
a. would increase.
b. would not change.
c. would decrease.
d. could do any of the above.
ANSWER: c
51. In the special case of the 100 percent-reserve banking, the money multiplier is
a. 1 and banks create money.
b. 1 and banks do not create money.
c. 2 and banks create money
d. 2 and banks do not create money.
ANSWER: b
The Monetary System
52. If the reserve ratio is 100-percent, then a new deposit of $1000 into a bank account
a. eventually increases the money supply by $1000.
b. leaves the size of the money supply unchanged.
c. eventually decreases the size of the money supply by $1000.
d. eventually increases the money supply by $2000.
ANSWER: b
53. 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.
ANSWER: a
Table 29-3. An economy starts with $50,000 in currency. All of this currency is deposited into a
single bank, and the bank then makes loans totaling $45,750. The T-account of the bank is shown
below.
Assets Liabilities
Reserves $4,250 Deposits $50,000
Loans 45,750
54. Refer to Table 29-3. The bank’s reserve ratio is

a. 17.5 percent.
b. 8.5 percent.
c. 91.5 percent.
d. 100 percent.
ANSWER: b
55. Refer to Table 29-3. If all banks in the economy have the same reserve ratio as this bank, then
the value of the economy’s money multiplier is
a. 9.33.
b. 1.09.
c. 10.76.
d. 11.76.
ANSWER: d
56. Refer to Table 29-3. If all banks in the economy have the same reserve ratio as this bank, then
The Monetary System
an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
a. $287.25.
b. $1,614.71.
c. $1,764.71.
d. $2,000 or more.
ANSWER: c
57. Bank capital is

a. the machinery, structures, and equipment of the bank.
b. the resources that owners have put into the bank.
c. the reserves of the bank.
d. the bank’s total assets.
ANSWER: b
58. The leverage ratio is calculated as

a. assets minus liabilities.
b. assets divided by bank capital
c. the reciprocal of the required reserve ratio
d. the required reserve ratio multiplied by bank capital.
ANSWER: b
59. Suppose a bank is operating with a leverage rate of 10. A 6 percent increase in the value of assets
a. will reduce liabilities by 6 percent.
b. will result in a 60 percent increase in owner’s equity.
c. will result in a 60percent decrease in owner’s equity.
d. will reduce liabilities by 10 percent.
ANSWER: b
60. The banking system currently has PhP100 billion of reserves, none of which are excess. People
hold only deposits and no currency, and the reserve requirement is 10 percent. If the BSP lowers
the reserve requirement to 5 percent and at the same time buys PhP10 billion worth of bonds, then
by how much does the money supply change?
a. It rises by PhP200 billion.
b. It rises by PhP800 billion.
c. It rises by PhP1,200 billion.
ANSWER: c
61. If the public decides to hold more currency and fewer deposits in banks, bank reserves
The Monetary System
e. decrease and the money supply eventually decreases.

f. decrease but the money supply does not change.
g. increase and the money supply eventually increases.
h. increase but the money supply does not change.
ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
LEARNING OBJECTIVES: ECON.MANK.15.146 - LO: 29-4
NATIONAL STANDARDS: United States - BUSPROG: Analytic
TOPICS: DISC: Financial Institutions and Central Banks
KEYWORDS: BLOOM'S: Application
62. Suppose that in a country people gain more confidence in the banking system and so hold
relatively less currency and more deposits. As a result, 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.
ANSWER: d

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Mock Quiz #7

Chapter 29 - The Monetary System

1. Which of the following is an example of barter?

2. Consider five individuals with different occupations.

Allen prepares taxes wants ribs

3. Consider five individuals with different occupations.

Allen prepares taxes wants ribs

If this economy has money

b. Betty will buy from Calvin

5. In an economy that relies upon barter,

6. Economists use the term “money” to refer to

7. Economists equate money with

10. Which of the following is a store of value?

11. Which list ranks assets from most to least liquid?

13. Treasury Bonds are

18. When colonists in Virginia used tobacco as money, their money

19. Currently, Philippine currency is

22. Currency includes

23. Demand deposits are a type of

24. People can write checks against

26. Which of the following is not included in M1?

27. Which of the following is included in both M1 and M2?

28. Money market mutual funds are included in

29. Credit cards

30. Refer to Table 29-1. What is the value of M1 in billions of dollars?

31. Refer to Table 29-1. What is the value of M2 in billions of dollars?

33. When conducting an open-market purchase, the BSP

35. In a system of 100-percent-reserve banking,

37. Banks are able to create money only when

40. A bank’s assets equal its liabilities under

46. When a bank loans out $1,000, the money supply

49. As the reserve ratio decreases, the money multiplier

54. Refer to Table 29-3. The bank’s reserve ratio is

57. Bank capital is

58. The leverage ratio is calculated as

e. decrease and the money supply eventually decreases.

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