$$1/R \times 100 = 10 \times 100 = 1000$$

Question 1

Which of the following best describes the 'double coincidence of wants' problem in a barter economy?

Accepted Answer

It refers to the need for two parties to have exactly what the other wants in order to trade.

Question 2

Which of the following is NOT one of the three functions of money?

Accepted Answer

Source of income

Question 3

Commodity money differs from fiat money in that:

Accepted Answer

Commodity money has intrinsic value, while fiat money does not.

Question 4

Which asset is NOT included in the calculation of M1 in the U.S. money supply?

Accepted Answer

Retail money market mutual funds

Question 5

Suppose the reserve ratio $$R is 20$$%. What is the money multiplier?

Accepted Answer

$$1/R = 1/0.2 = 5$$

Question 6

If you deposit $50 in your checking account and the reserve requirement is 20%, what is the maximum increase in the money supply?

Accepted Answer

$$200$$

Question 7

Which of the following actions by the Federal Reserve would decrease the money supply?

Accepted Answer

Selling government bonds in open-market operations

Question 8

In a fractional reserve banking system, when a bank makes a loan, what happens to the money supply?

Accepted Answer

The money supply increases because new money is created.

Question 9

If the Fed raises the interest rate paid on reserves, what is the likely effect on the money multiplier?

Accepted Answer

The money multiplier decreases.

Question 10

Which of the following is a direct consequence of banks holding more reserves than required?

Accepted Answer

The money supply falls because fewer loans are made.

Question 11

If the reserve ratio $$R is 10$$%, and the total reserves in the banking system are $$100$$, what is the maximum amount of money that can be created?

Accepted Answer

$$1/R 	imes 100 = 10 	imes 100 = 1000$$

Question 12

Which of the following is NOT a tool the Fed uses to influence the money supply?

Accepted Answer

Setting the federal income tax rate

Question 13

A bank’s T-account shows $$10 in reserves and 100 in $$deposits. What is the reserve ratio $$R$$?

Accepted Answer

$$R = 10/100 = 0.1 = 10\%$$

Question 14

Which of the following would cause the money supply to fall?

Accepted Answer

Households holding more of their money as currency

Question 15

If a borrower receives $90 in currency from a bank loan, what is the effect on the money supply?

Accepted Answer

The money supply increases by $90.

Question 16

Which of the following best explains why a fractional reserve banking system creates money but not wealth?

Accepted Answer

Loans increase the money supply, but the corresponding debt offsets any increase in wealth.

Question 17

If the Fed wants to increase the money supply, which of the following actions would be most effective?

Accepted Answer

Buying government bonds from banks

Question 18

Which of the following is considered part of the money supply?

Accepted Answer

Demand deposits

Question 19

If the reserve requirement is lowered, what is the expected effect on the money multiplier and the money supply?

Accepted Answer

The money multiplier increases, leading to a higher money supply.

Question 20

Which of the following is a reason the Fed may have difficulty controlling the money supply?

Accepted Answer

Households and banks may change their behavior, affecting reserves and loans.

The Monetary System: Structure, Functions, and Policy Tools

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