Question 1

Which of the following best describes the primary function of money in an economy?

Accepted Answer

Money is a generally accepted medium of exchange that represents a temporary abode of purchasing power.

Question 2

Suppose the required reserve ratio is 10%. If a bank receives a new deposit of $2,000, what is the maximum potential increase in the money supply that can result from this deposit, assuming banks lend out all excess reserves?

Accepted Answer

$10,000

Question 3

Which of the following is included in the M1 measure of the money supply in the United States?

Accepted Answer

Currency in circulation and demand deposits

Question 4

Why are credit card balances not considered part of the money supply?

Accepted Answer

They represent a liability and a way to arrange a loan, not an asset.

Question 5

If the Federal Reserve wants to decrease the money supply, which of the following actions would it most likely take?

Accepted Answer

Sell government securities in the open market

Question 6

A bank has $10,000 in checkable deposits and a required reserve ratio of 20%. What is the minimum amount of reserves the bank must hold?

Accepted Answer

$2,000

Question 7

Which of the following best explains why the value of money falls when the supply of money increases rapidly?

Accepted Answer

The purchasing power of each unit of money declines as more money chases the same amount of goods and services.

Question 8

Which of the following is NOT a tool used by the Federal Reserve to control the money supply?

Accepted Answer

Changing the federal income tax rate

Question 9

If the reserve requirement is 20%, what is the deposit expansion multiplier?

Accepted Answer

$$\frac{1}{0.2}$$

Question 10

Which of the following statements about the Federal Reserve System is correct?

Accepted Answer

There are 12 Federal Reserve District Banks.

Question 11

During the 2008-2009 recession, the Federal Reserve implemented a policy known as quantitative easing. What was the main effect of this policy?

Accepted Answer

It vastly increased bank reserves and the monetary base.

Question 12

Which of the following would be considered a liability for a commercial bank?

Accepted Answer

Checkable deposits

Question 13

Suppose the Fed increases the interest rate paid on reserves held at the Fed. What is the likely effect on the money supply?

Accepted Answer

Banks will hold more reserves, decreasing the money supply expansion.

Question 14

Which of the following is a direct result of fractional reserve banking?

Accepted Answer

Banks can create money by making loans.

Question 15

If the Fed sells $1 billion in government securities to the public, what is the likely immediate effect on bank reserves and the money supply?

Accepted Answer

Bank reserves decrease and the money supply contracts.

Question 16

Which of the following best explains why the M1 money supply is typically smaller than the M2 money supply?

Accepted Answer

M1 includes only currency and checkable deposits, while M2 includes M1 plus savings deposits and money market mutual funds.

Question 17

A bank receives a $5,000 deposit. The required reserve ratio is 20%. What is the maximum amount this bank can lend out from this deposit?

Accepted Answer

$4,000

Question 18

Which of the following is a function of the Federal Open Market Committee (FOMC)?

Accepted Answer

Establishing Fed policy regarding the buying and selling of government securities

Question 19

If banks decide to hold more excess reserves rather than lend them out, what is the likely effect on the deposit expansion multiplier and the money supply?

Accepted Answer

The deposit expansion multiplier decreases and the money supply expands less than it otherwise would.

Question 20

Which of the following best describes the relationship between the monetary base and the M1 money supply after 2008, according to the provided data?

Accepted Answer

The monetary base grew much faster than M1 due to increased reserves held by banks.

Money and the Banking System: Structure, Functions, and Policy Tools

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