$$\500 - (0.10$$ \times \$$500) = \450$

Question 1

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

Accepted Answer

It is the requirement that two parties each have a good or service that the other wants in order to trade.

Question 2

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

Accepted Answer

Source of production

Question 3

Which of the following assets is considered the most liquid?

Accepted Answer

Currency in circulation

Question 4

Which of the following is an example of commodity money?

Accepted Answer

Gold coins

Question 5

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

Accepted Answer

$$\frac{1}{0.2} = 5$$

Question 6

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

Accepted Answer

Buy government bonds in open-market operations

Question 7

Which of the following is included in both M1 and M2 measures of the US money supply?

Accepted Answer

Demand deposits

Question 8

A bank receives a new deposit of $$\500$ and the reserve ratio is 10%. What is the maximum amount this bank can loan out from this deposit?

Accepted Answer

$$\500 - (0.10$$ 	imes \$$500) = \450$

Question 9

In a fractional reserve banking system, when banks make loans, what is the effect on the money supply?

Accepted Answer

The money supply increases because new deposits are created.

Question 10

If the public decides to hold more of its money as currency rather than deposits, what is the likely effect on the money supply, all else equal?

Accepted Answer

The money supply will decrease because banks have fewer reserves to make loans.

Question 11

Which of the following best describes fiat money?

Accepted Answer

Money without intrinsic value that is used as money because of government decree.

Question 12

Suppose the Fed lowers the reserve requirement from 12% to 10%. What is the effect on the money multiplier?

Accepted Answer

It increases from $$\frac{1}{0.12} \approx 8.33 to$$ $$\frac{1}{0.10} = 10$$

Question 13

A bank's T-account shows $$\1$$,000$$ in deposits and $$\$$100 in $$reserves. What is the bank's reserve ratio?

Accepted Answer

$$\frac{100}{1000} = 0.10 or 10$$%

Question 14

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

Accepted Answer

The money supply will decrease because banks will hold more reserves and make fewer loans.

Question 15

Which of the following is a direct tool the Fed uses to influence the amount of reserves in the banking system?

Accepted Answer

Open-market operations

Question 16

If banks choose to hold excess reserves above the required minimum, what is the effect on the money multiplier?

Accepted Answer

The money multiplier decreases because fewer loans are made.

Question 17

Suppose the Fed sells $$\1$ billion in government bonds to the public. What is the immediate effect on bank reserves and the money supply?

Accepted Answer

Bank reserves decrease, leading to a decrease in the money supply.

Question 18

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

Accepted Answer

Loans create new deposits, increasing the money supply, but the total wealth in the economy does not change.

Question 19

If the money supply is $$\2$$,000$ and the reserve ratio is 5%, what are total bank reserves in the system?

Accepted Answer

$$\2$$,000 	imes 0.05 = \$$100$$

Question 20

Which of the following would cause the Fed to lose some control over the money supply?

Accepted Answer

Households holding more currency and banks holding excess reserves

The Monetary System: Money, Banking, and the Federal Reserve

Study Guide - Practice Questions