econ chap 16

Fiat money is ___________.

• a. any asset used as the medium of exchange

  
  

• b. a type of money with intrinsic value

  
  

• c. a type of money set by government decree

  
  

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  d. any asset used as the unit of account

  
  

The money stock includes all of the following except ___________.

• a. bank balances accessible with debit cards

  
  

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  b. metal coins

• c. paper currency

  
  

• d. lines of credit accessible with credit cards

  
  

Which of the following is not true about the Federal Reserve?

• 
  a. It regulates the banking system

• 
  b. It lends to banks.

  
  

• c. It was established by the U.S. Constitution.

  
  

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  d. It can own government bonds

Answer explanation

The Federal Reserve was established by Congress

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

• 
  a. buy bonds in open-market operations

  
  

• b. reduce income tax rates

  
  

• c. sell bonds in open-market operations

  
  

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  d. raise income tax rates

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. decreases; decreases by less

  
  

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  b. is unchanged; increases

• c. increases; increases by less

  
  

• d. increases; increases even more

  
  

If the reserve ratio is ¼ 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

  
  

Answer explanation

Change in money supply = money multiplier x increase in reserves = 1/0.25 x 120 = 480

A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10 percent, then its capital will be reduced to __________.

• 
  a. $100

• b. $150

• c. $180

• d. $185

Answer explanation

• - leverage ratio = assets/capital

• -> assets = 5 x 200 = 1000

• - liabilities = assets - capital = 1000 - 200 = 800

• - new assets = 1000 - (10% x 1000) = 900

• - capital = assets - liabilities = 900 - 800 = 100

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

• a. A decrease in reserve requirements

• b. An open-market sale of government bonds

  
  

• c. An increase in the discount rate on Fed lending

• d. An increase in the interest rate paid on reserves

Answer explanation

=> Lower reserve requirements mean banks are allowed to keep less money in reserve

b. Open-market sale of government bonds

• The Fed sells bonds → buyers pay the Fed → money leaves the banking system → money supply decreases.

c. Increase in the discount rate

• Higher discount rate makes borrowing from the Fed more expensive → banks borrow less → lend less → money supply decreases.

d. Increase in interest paid on reserves

• Banks are encouraged to hold more reserves instead of lending → fewer loans → money supply decreases.

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

• a. decrease; excess reserves

• b. increase; excess reserves

  
  

• c. increase; the money multiplier

  
  

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  d. decrease; the money multiplier

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. less; more

• b. less; less

• 
  c. more; more

• 
  d. more; less