Macro_C29

1. Which of the following is NOT one of the three main functions of money?

• A) Medium of exchange

• B) Unit of account

• C) Means of production

• D) Store of value

2. 2. What distinguishes commodity money from fiat money?

• A) Commodity money has intrinsic value, while fiat money does not.

• B) Commodity money is only used in modern economies.

• C) Fiat money is backed by physical assets like gold.

• D) Both have no intrinsic value and are solely based on trust.

Answer explanation

Commodity money (e.g., gold, silver, or cigarettes in prison) has value beyond its use as money. Fiat money (e.g., the U.S. dollar) has no intrinsic value and is valuable only because the government declares it as legal tender and people accept it in transactions.

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

• A) Currency and demand deposits

• B) Savings accounts and money market mutual funds

• C) Large time deposits

• D) Stocks and bonds

Answer explanation

• M1 includes highly liquid assets like currency and demand deposits (checking accounts).

• M2 includes everything in M1 plus less liquid assets like savings accounts and money market mutual funds.

• Large time deposits and stocks/bonds are NOT part of M1 or M2.

4. 4. If the Fed wants to increase the money supply, it can
   

• 4. a. raise income tax rates.

• 4. b. reduce income tax rates.

• 4. c. buy bonds in open-market operations.

• 4. d. sell bonds in open-market operations.

5. 5. Isabella takes $100 of currency from her wallet and deposits it into her checking account. if the bank adds the entire $100 to reserves, the money supply _________, but if the bank lends out some of the $100, the money supply _________.

• a. increases; increases even more

• b. increases; increases by less

• c. decreases; decreases by less

• d. is unchanged; increases

5. 6. What is the money multiplier formula in terms of the reserve ratio (R)?

• A) 1 / R

• B) R × 100

• C) (1 + R) / 2

• D) R / 1

6. 7. If the reserve ratio is 1 4 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by

• A) $90

• B) $150

• C) $160

• D) $480

8. Which of the following actions by the Fed would tend to increase the money supply?

• A) an open-market sale of government bonds

• B) a decrease in reserve requirements

• C) an increase in the interest rate paid on reserves

• D) an increase in the discount rate on Fed lending

Answer explanation

• A decrease in reserve requirements allows banks to hold less in reserves and lend more, which increases the money supply through the money multiplier effect.

9. If the Fed raises the interest rate it pays on reserves, it will _________ the money supply by increasing _________.

• A) decrease; the money multiplier

• B) decrease; excess reserves

• C) increase; the money multiplier

• D) increase; excess reserves

Answer explanation

• If the Fed raises the interest rate on reserves, banks have an incentive to hold more reserves instead of lending them out.

• This reduces the amount of money being loaned, leading to a lower money supply.

• The money multiplier also decreases because fewer loans are made from each deposit.

10. In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold _________ currency or if banks choose to hold _________ excess reserves.

• A) more; more

• B) more; less

• C) less; more

• D) less; less

Answer explanation

• If households hold more currency, less money is deposited into banks, reducing reserves and limiting how much banks can lend.

• If banks hold more excess reserves, they lend out less, reducing the money supply.

• Both actions shrink the money multiplier effect, decreasing the total money supply.