Deck 29: The Monetary System

Question 1

Roundabout trade decreases production.

Answer 1

False

Question 2

Gary's wealth is $1 million. Economists would say that Gary has $1 million worth of money.

Answer 2

False

Question 3

Sam wants to trade eggs for sausage. Sally wants to trade sausage for eggs. Sam and Sally have a double-coincidence of wants.

Answer 3

True

Question 4

The use of money allows trade to be roundabout.

Question 5

One plausible explanation for the large amount of U.S. currency outstanding is that many dollars are held abroad.

Question 6

Money allows people to specialize in what they do best, thereby raising everyone's standard of living.

Question 7

U.S. dollars are an example of commodity money and hides used to make trades are an example of fiat money.

Question 8

In order for currency to be widely used as a medium of exchange, it is sufficient for the government to designate it as legal tender.

Question 9

M2 is both larger and less liquid than M1.

Question 10

Commodity money cannot be used as a unit of account.

Question 11

In an economy that relies on barter, trade requires a double-coincidence of wants.

Question 12

When you purchase school supplies at the book store using cash, you are using money as a medium of exchange.

Question 13

Sandra routinely uses currency to purchase her groceries. She is using money as a medium of exchange.

Question 14

When the Soviet Union began breaking up in the late 1980s, cigarettes began replacing the ruble as the medium of exchange even though the ruble was legal tender. The cigarettes provide an example of commodity money.

Question 15

M1 includes savings deposits.

Question 16

Demand deposits are balances in bank accounts that depositors can access by writing a check or using a debit card.

Question 17

Bottles of very fine wine are less liquid than demand deposits.

Question 18

Money is the only asset that functions as a store of value.

Question 19

According to economists, "money" means the same thing as "wealth".

Question 20

Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as a unit of account.

Question 21

If banks hold any amount of their deposits in reserve, then they do not have the ability to influence the money supply.

Question 22

Other things the same, if banks decide to hold a smaller part of their deposits as excess reserves, the money supply will fall.

Question 23

Assume that when $100 of new reserves enter the banking system, the money supply ultimately increases by $800. Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits. If, at a point in time, reserves for all banks amount to $750, then at that same point in time, loans for all banks amount to $6,000.

Question 24

Members of the Board of Governors are appointed by the president of the U.S. and confirmed by the U.S. Senate.

Question 25

The chair of the Board of Governors regularly testifies to Congress about Fed policy.

Question 26

Members of the Board of Governors of the Federal Reserve System are appointed for life.

Question 27

The Federal Reserve primarily uses open-market operations to change the money supply.

Question 28

Assume that when $100 of new reserves enter the banking system, the money supply ultimately increases by $625. Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits. If, at a point in time, reserves for all banks amount to $500, then at that same point in time, loans for all banks amount to $2,625.

Question 29

Monetary policy is determined by a committee whose voting members include all the presidents of the regional Federal Reserve Banks.

Question 30

The Federal Reserve is a privately operated commercial bank.

Question 31

As banks create money, they create wealth.

Question 32

In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.

Question 33

The series of bank failures in 1907 occurred despite the creation of the Federal Reserve many years earlier.

Question 34

The money multiplier equals 1/(1 - R), where R represents the reserve ratio.

Question 35

Fractional reserve banking is a system where banks must hold an amount of cash based on a percentage of its loans.

Question 36

A debit card is more similar to a credit card than to a check.

Question 37

The Federal Reserve was created in 1913 after a series of bank failures in 1907.

Question 38

Federal Reserve governors are given long terms to insulate them from politics.

Question 39

Credit cards are a medium of exchange.

Question 40

Banks cannot influence the money supply if they are required to hold all deposits in reserve.

Question 41

Banks can hold deposits at the Federal Reserve. Balances in these accounts can be used by banks to meet their reserve requirements, but the Fed pays no interest on these deposits.

Question 42

The existence of money makes trade easier. How is it that money can also increase the standard of living?

Question 43

​Bank runs are only a concern under a fractional-reserve banking system.

Question 44

The ease with which an asset can be converted into the economy's medium of exchange is known as _____.

Question 45

What does the "double coincidence of wants" refer to?

Question 46

If the Fed buys bonds in the open market, the money supply decreases.

Question 47

The money multiplier is higher when bankers are more cautious and hold excess reserves.

Question 48

Bank runs and the accompanying increase in the money multiplier caused the U.S. money supply to rise by 28 percent from 1929 to 1933.

Question 49

​Under a fractional-reserve banking system, the money supply cannot change without any action from the Federal Reserve.

Question 50

​In a system of 100-percent-reserve banking, changes in the money supply depend on the decisions of the Fed as well as the behavior of depositors and bankers.

Question 51

​Under a 100-percent-reserve banking system, banks do not influence the supply of money.

Question 52

An increase in the reserve requirement increases reserves and decreases the money supply.

Question 53

The money supply of Granov is $10,000 in a 100-percent-reserve banking system. If the Central Bank of Granov decreases the reserve requirement ratio to 10 percent, the money supply could increase by no more than $9,000.

Question 54

Because of the multiple tools at its disposal, the Fed can control the money supply very precisely.

Question 55

The discount rate is the rate the Federal Reserve charges banks for loans. By lowering this rate, the Fed provides banks with a greater incentive to borrow from it.

Question 56

The federal funds rate is a long-term interest rate banks charge one another for loans.

Question 57

The Federal Reserve can alter the size of the money supply by changing reserves or changing reserve requirements.

Question 58

If the Fed decreases reserve requirements, the money supply will increase.

Question 59

Currently, bank runs are a major problem for the U.S. banking system and the Fed.

Question 60

Just after the terrorist attack on September 11, 2001, the Fed stood ready to lend financial institutions funds. When the Fed did this, it was acting in its role of lender of last resort.

Question 61

List the two main functions performed by the Fed?

Question 62

Why is the president of the New York Fed always a voting member of the FOMC?

Question 63

The Fed ____ bonds when it conducts an open-market purchase. This action _____ the money supply.

Question 64

List two examples of commodity money.

Question 65

Monetary policy has an important influence on _____ and _____ in the short run.

Question 66

The primary tool used by the Federal Reserve to change the money supply is _____.

Question 67

What are the functions of money?

Question 68

In many circumstances, prisoners are not allowed to possess cash. Does this mean there is no money in prison? Explain.

Question 69

The prices of goods at a grocery store are listed in dollars. Which function of money does this illustrate?

Question 70

If you withdraw $500 from your savings account and deposit it in your checking account, then M1 will change by _____ and M2 will change by _____.

Question 71

Monetary policy is made by the ______.

Question 72

One of the features of money is its store of value. However, most people do not hold their wealth as currency. Given that currency is the most liquid type of asset, why don't people hold all their wealth as currency?

Question 73

Why do Federal Reserve Board of Governors have long (14 year) terms?

Question 74

What is the change in the money supply when the Fed purchases $100 worth of bonds in a 100-percent-reserve banking system?

Question 75

Money, such as gold, with some intrinsic value is called _____. Money with no intrinsic value is called _____.

Question 76

How does the Fed Open Market Committee increase the money supply?

Question 77

What does it mean for the Fed to be the "lender of last resort?"

Question 78

Why is the Chairman of the Federal Reserve often referred to as the "second most powerful person in the United States?"

Question 79

You believe the dollars you have today will be accepted in the future in exchange for goods and services. Which function of money does this illustrate?

Question 80

How are Federal Reserve Board Governors selected?