Q: A bank has $$1,000,000 in deposits and wants to hold 10% as reserves. If it currently has 120$$,000 in reserves, what are its unplanned reserves?

$$120,000 - (0.10 \times 1,000,000) = 20$$,000$

Question 1

Which of the following best describes the function of money as a 'medium of exchange'?

Accepted Answer

Money is generally accepted in exchange for goods and services, facilitating transactions.

Question 2

Suppose the Federal Reserve conducts an open market purchase of $100 million in securities from a commercial bank. What is the immediate effect on the bank's balance sheet?

Accepted Answer

Assets: Reserves increase by $$100 million, Securities decrease by 100 $$million; Liabilities: No change.

Question 3

If the desired reserve ratio is 10% and the currency drain ratio is 50%, what is the money multiplier?

Accepted Answer

$$\frac{1 + 0.5}{0.5 + 0.1} = \frac{1.5}{0.6} = 2.5$$

Question 4

Which of the following is NOT a component of M1 in the United States?

Accepted Answer

Small-denomination time deposits

Question 5

A rise in the nominal interest rate will have what effect on the quantity of real money people plan to hold?

Accepted Answer

It will decrease the quantity of real money demanded.

Question 6

According to the quantity theory of money, if the money supply grows by 5% and real GDP grows by 2%, what is the expected inflation rate (assuming velocity is constant)?

Accepted Answer

$$5\% - 2\% = 3\%$$

Question 7

Which of the following best explains why barter is less efficient than using money?

Accepted Answer

Barter requires a double coincidence of wants, which is rare and costly.

Question 8

If the Federal Reserve sells $100 million in securities to a commercial bank, what happens to the monetary base?

Accepted Answer

The monetary base decreases by $100 million.

Question 9

Which of the following is a real-world example of financial innovation that could decrease the demand for real money?

Accepted Answer

Introduction of mobile banking apps that allow instant transfers between accounts.

Question 10

A bank has $$1,000,000 in deposits and wants to hold 10% as reserves. If it currently has 120$$,000 in reserves, what are its unplanned reserves?

Accepted Answer

$$120,000 - (0.10 	imes 1,000,000) = 20$$,000$

Question 11

If the price level doubles and the nominal money supply remains constant, what happens to the quantity of real money?

Accepted Answer

It is halved.

Question 12

Which of the following best describes the role of the central bank as 'lender of last resort'?

Accepted Answer

It provides funds to commercial banks facing liquidity crises.

Question 13

If the money multiplier is 2.5 and the monetary base increases by $100,000, what is the total increase in the money supply?

Accepted Answer

$$100,000 	imes 2.5 = 250$$,000$

Question 14

Which of the following would cause a leftward shift in the demand for money curve?

Accepted Answer

A financial innovation that lowers the cost of switching between money and assets

Question 15

In the money market, what happens when there is excess supply of money?

Accepted Answer

People buy bonds and the interest rate falls.

Question 16

Which equation represents the quantity theory of money?

Accepted Answer

$$MV = PY$$

Question 17

If banks increase their desired reserve ratio, what is the likely effect on the money multiplier?

Accepted Answer

The money multiplier will decrease.

Question 18

Which of the following is a direct result of an open market purchase by the central bank?

Accepted Answer

Bank reserves increase.

Question 19

If the velocity of money is constant and real GDP does not change, what happens to the price level when the money supply increases?

Accepted Answer

The price level increases proportionally to the increase in money supply.

Chapter 8: Money, the Banking System, and the Money Market

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