Question 1

If banks desired a 100 percent reserve ratio,what would a decrease in banking reserves of $4 million do?

Accepted Answer

A 100 percent reserve ratio means banks hold all deposits as reserves and do not lend out any money. Therefore, a decrease in reserves by $4 million would directly decrease the money supply by $4 million.

Question 2

If a person buries his money in his backyard,he is using money as a medium of exchange.

Accepted Answer

Burying money in a backyard does not involve any exchange or transaction with another party and therefore is not using money as a medium of exchange.

Question 3

If banks desired a 100 percent reserve ratio,what would a $10 000 addition to banking reserves increase the money supply by?

Accepted Answer

A 100 percent reserve ratio means that banks must hold 100 percent of their deposits in reserves, which means they cannot lend out any of the $10 000 addition to banking reserves. Therefore, there would be no increase in the money supply.

Question 4

What information does the formula (1 / desired reserve ratio)give you?

Accepted Answer

The formula (1 / desired reserve ratio) gives the money multiplier, which is the amount by which the money supply is increased with each increase in the reserves held by banks.

Question 5

Under which of the following circumstances is the size of the effect of a given deposit of cash into a demand deposit account on the money supply smaller?

Accepted Answer

When people hold more money as currency and banks hold more deposits as reserves, less money is available for lending, reducing the money multiplier effect and thus the impact on the money supply.

Question 6

The existence of inflation and other possible uncertainties reduces the usefulness of money as a store of value.

Accepted Answer

Inflation causes the value of money to decrease over time, reducing its usefulness as a store of value. Other uncertainties, such as changes in economic or political conditions, can also impact the value of money and its ability to store value.

Question 7

Money is the standard object used in exchanging goods and services.It can,therefore,be called the medium of exchange.

Accepted Answer

Money serves as a medium of exchange, allowing individuals to trade goods and services more efficiently.

Question 8

Suppose the desired reserve ratio is 10 percent and you pay back a loan of $40 000.What is the impact of this on the bank's reserves and,once the banking system has completed its adjustments to the repayment,the money supply?

Accepted Answer

When you pay back a loan of $40,000, the bank's reserves increase by $40,000. With a reserve ratio of 10%, this repayment reduces the money supply by $400,000, as the bank can no longer lend out $360,000 (90% of $400,000) that would have been created through the money multiplier effect.

Question 9

If banks desired a 100 percent reserve ratio,how many times total reserves in the system equals the money supply?

Accepted Answer

If banks desired a 100 percent reserve ratio, it means that they would hold all deposits as reserves and no loans would be made. Therefore, the money supply would be equal to the total reserves in the system. Hence, the ratio of total reserves to money supply would be 1:1 or 1.

Question 10

If a bank has a reserve ratio of 50 percent,what is the money multiplier?

Accepted Answer

The money multiplier formula is 1/ reserve ratio. So in this case, the money multiplier would be 1/0.5 which equals 2. Therefore, the correct answer is B.

Question 11

What does a reserve ratio of 12.5 percent imply about a potential money deposit expansion multiplier?

Accepted Answer

The money deposit expansion multiplier is calculated as the reciprocal of the reserve ratio. Therefore, 1 / 0.125 = 8.

Question 12

If a bank has a reserve ratio of 20 percent,what is the money multiplier?

Accepted Answer

The money multiplier is calculated as the inverse of the reserve ratio. If the reserve ratio is 20%, the money multiplier is 1/0.20, which equals 5.

Question 13

Paper money is fiat money because it has been declared by government as a means of exchange.

Accepted Answer

Paper money is not backed by any commodity (such as gold) but rather by the government's declaration that it has value and can be used as a means of exchange. This is what makes it fiat money.

Question 14

People continue to value money because they have confidence in its convertibility into goods and services.

Accepted Answer

Money is valuable because people believe that they can exchange it for things they want or need. This confidence in its convertibility into goods and services is what gives money its value in the modern economic system.

Question 15

Money is a more efficient store of value than wheat.

Accepted Answer

Money doesn't spoil or deteriorate like wheat does, making it a more efficient store of value. Additionally, money is more portable and easy to exchange than a bulky commodity like wheat.

Question 16

If banks desired a 100 percent reserve ratio,what would the money multiplier be?

Accepted Answer

The money multiplier is the inverse of the reserve ratio. With a 100 percent reserve ratio, banks hold all deposits as reserves and do not lend out any money, resulting in a money multiplier of 1.

Question 17

If banks desired a 100 percent reserve ratio,what would a $10 000 reduction in banking reserves decrease the money supply by?

Accepted Answer

A $10 000 reduction in banking reserves would decrease the money supply by $10 000 because in a 100 percent reserve system, banks must hold reserves equal to 100 percent of deposits, meaning that every dollar deposited into a bank would have to be held in reserve. Therefore, a reduction in reserves would directly lead to a reduction in the amount of money that banks can lend out as loans.

Question 18

What would a desired reserve ratio of 25 percent indicate about each dollar of reserves?

Accepted Answer

A desired reserve ratio of 25 percent means that for every dollar of reserves, the bank can support $4.00 of demand deposits, as 1/0.25 equals 4.

Question 19

What would a desired reserve ratio of 40 percent indicate about each dollar of reserves?

Accepted Answer

A desired reserve ratio of 40 percent means that for every dollar of reserves, the bank can support $2.50 of demand deposits, as 1/0.40 equals 2.5.

Question 20

Under which of the following circumstances is the size of the effect of a given deposit of cash into a demand deposit account on the money supply greater?

Accepted Answer

The money supply effect is greater when people hold less currency and banks hold fewer reserves, allowing more money to be created through the lending process.

Quiz 11: Money and the Banking System