Monetary System And The Federal Reserve

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  • 1/20 Questions

    Writing a check to purchase a new computer is an example of using money primarily as a:

    • Unit of account
    • Standard of value
    • Unit of account
    • Medium of exchange
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Monetary System And The Federal Reserve - Quiz
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Complete 10 questions. Your initial score will be the only score counted. Complete this quiz before class on Monday.

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  • 2. 

    A T-Chart (T-Account) includes the following areas EXCEPT

    • Assets

    • Reserves

    • Loans

    • Interest

    Correct Answer
    A. Interest
    Explanation
    A T-Chart (T-Account) is a visual representation of accounts used in accounting. It includes areas for recording and tracking various financial transactions. Assets, reserves, and loans are all common areas that are typically included in a T-Chart. However, interest is not typically included as a separate area in a T-Chart. Interest is usually recorded as a part of the loans or as a separate line item in the financial statements. Therefore, interest is the correct answer as it is not included in a T-Chart.

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  • 3. 

    Refer to the T-account provided.  What is the reserve requirement ratio for Bank Z? Bank Z Assets Liabilities Reserves: $55,000 Deposits: 275,000 Loans: $220,000  

    • 10%

    • 15%

    • 20%

    • 25%

    • 30%

    Correct Answer
    A. 20%
    Explanation
    Bank Z has reserves of $55,000 and deposits of $275,000. The reserve requirement ratio is calculated by dividing the reserves by the deposits and multiplying by 100. In this case, the calculation would be (55,000 / 275,000) * 100 = 20%. Therefore, the reserve requirement ratio for Bank Z is 20%.

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  • 4. 

    Money velocity is

    • The speed in which M0 reaches the bank from

    • Average frequency with which a unit of money is spent in a specific period of time

    • Strongly correlated to the real GDP

    • A statistic heavily observed by the judicial branch

    Correct Answer
    A. Average frequency with which a unit of money is spent in a specific period of time
    Explanation
    Money velocity refers to the average frequency at which a unit of money is spent within a specific period of time. It measures how quickly money circulates within an economy. A higher money velocity indicates that money is being spent more frequently, stimulating economic activity and potentially leading to higher economic growth. Therefore, money velocity is strongly correlated to the real GDP, as increased spending contributes to economic expansion. The statement about the judicial branch is unrelated and does not provide any relevant information about money velocity.

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  • 5. 

    The monetary multiplier is equal to:

    • One

    • The inverse of actual reserves minus required reserves

    • The inverse of one minus the required reserve ratio

    • The inverse of the required reserve ratio

    Correct Answer
    A. The inverse of the required reserve ratio
    Explanation
    The monetary multiplier is a concept that measures the potential increase in the money supply resulting from a change in reserves. It is calculated by dividing the total money supply by the amount of reserves held by banks. The correct answer states that the monetary multiplier is equal to the inverse of the required reserve ratio. This means that as the required reserve ratio decreases, the monetary multiplier increases, indicating a larger potential increase in the money supply. Conversely, as the required reserve ratio increases, the monetary multiplier decreases, indicating a smaller potential increase in the money supply.

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  • 6. 

    Hassan deposits $50,000 in a commercial bank that is required to retain 20% in reserve. The deposit increases the lending capacity of the bank by:

    • $5,000

    • $10,000

    • $40,000

    • $50,000

    Correct Answer
    A. $40,000
    Explanation
    When Hassan deposits $50,000 in the commercial bank, the bank is required to retain 20% of that amount as a reserve. Therefore, the bank retains $10,000 (20% of $50,000) and is left with $40,000 ($50,000 - $10,000) to increase its lending capacity. Therefore, the deposit increases the lending capacity of the bank by $40,000.

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  • 7. 

    Suppose a bank has checkable deposits of $1,000,000 and the legal reserve ratio is 5 percent. If the institution has excess reserves of $5,000, then its actual reserves are:

    • $45,000

    • $50,000

    • $55,000

    • $5,000

    Correct Answer
    A. $55,000
    Explanation
    If the legal reserve ratio is 5 percent, it means that the bank is required to hold 5 percent of its checkable deposits as reserves. In this case, the checkable deposits are $1,000,000, so the required reserves would be $1,000,000 * 0.05 = $50,000. Since the bank has excess reserves of $5,000, its actual reserves would be the sum of the required reserves and the excess reserves, which is $50,000 + $5,000 = $55,000.

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  • 8. 

    The group responsible for setting policy on buying and selling government securities (bills, notes, and bonds) is the:

    • Securities and Exchange Commission

    • U.S. Treasury Board

    • Federal Open Market Committee

    • 12 Federal Reserve Bank presidents

    Correct Answer
    A. Federal Open Market Committee
    Explanation
    The Federal Open Market Committee (FOMC) is responsible for setting policy on buying and selling government securities. The FOMC consists of members from the Federal Reserve System, including the 7 members of the Board of Governors and the presidents of the 12 regional Federal Reserve Banks. They meet regularly to discuss and make decisions on monetary policy, including the buying and selling of government securities, in order to achieve the Federal Reserve's objectives of maximum employment, stable prices, and moderate long-term interest rates.

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  • 9. 

    Other things equal, a dramatic decrease in the money supply would:

    • Increase the price level

    • Reduce the purchasing power of each dollar

    • Increase the purchasing power of each dollar

    • Have an ambiguous impact on the purchasing power of each dollar

    Correct Answer
    A. Increase the purchasing power of each dollar
    Explanation
    A dramatic decrease in the money supply would increase the purchasing power of each dollar. When the money supply decreases, there is less money available in the economy. This leads to a scarcity of money, making each dollar more valuable. As a result, individuals will be able to purchase more goods and services with the same amount of money, increasing the purchasing power of each dollar.

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  • 10. 

    Assume the banking system has no excess reserves with a reserve requirement of 20%. The reserve requirement is then dropped to 10%. As a result of this reduction:

    • The money multiplier will decrease

    • Bank profitability will likely decrease

    • Banks will be forced to accumulate reserves by reducing their lending activity

    • The money supply will likely increase

    Correct Answer
    A. The money supply will likely increase
    Explanation
    When the reserve requirement is dropped from 20% to 10%, banks are required to hold fewer reserves against their deposits. This means that they have more funds available to lend out to borrowers. As a result, the lending activity of banks is likely to increase, leading to an expansion of credit and an increase in the money supply. This is because the money multiplier, which determines how much money can be created through the lending process, will increase. Therefore, the correct answer is that the money supply will likely increase.

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  • 11. 

    Which of the following is included in M2 but not M1?

    • Currency held by banks

    • Small time deposits (less than $100,000)

    • Credit card balances

    • Large time deposits (at least $100,000)

    Correct Answer
    A. Small time deposits (less than $100,000)
    Explanation
    Small time deposits (less than $100,000) are included in M2 but not in M1. M1 includes currency, demand deposits, and traveler's checks, which are all highly liquid forms of money. However, small time deposits are less liquid because they have a fixed term and cannot be withdrawn on demand. Therefore, they are included in the broader measure of money supply, M2, which includes M1 plus additional less liquid assets such as savings deposits and small time deposits.

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  • 12. 

    Money is created when:

    • Loans are repaid

    • The net worth of the banking system is increased

    • Banks exchange some of the state and local bonds in their portfolio for federal government bonds

    • Banks make additional loans

    Correct Answer
    A. Banks make additional loans
    Explanation
    When banks make additional loans, they are essentially creating new money. This is because when a bank grants a loan, it credits the borrower's account with the loan amount. This increases the money supply in the economy as the borrower can now spend the newly created money. Therefore, the correct answer is that money is created when banks make additional loans.

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  • 13. 

    Sam draws a $100 check on his account at Bank A which is then deposited in Bank B. When this check is cleared:

    • Neither Bank A's nor Bank B's deposits or reserves are affected

    • Bank A gains reserves equal to $100 and Bank B gains deposits equal to $100

    • Bank A loses reserves and deposits equal to $100

    • Bank B loses reserves and deposits equal to $100

    Correct Answer
    A. Bank A loses reserves and deposits equal to $100
    Explanation
    When Sam's $100 check is cleared, Bank A loses reserves and deposits equal to $100. This means that the amount of money in Bank A's reserves decreases by $100, as well as the amount of deposits that Bank A holds. This could happen because the check that Sam wrote on his Bank A account is being transferred to Bank B, so Bank A no longer holds the funds.

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  • 14. 

    The U.S. money supply is "backed" by:

    • Gold

    • Silver

    • A joint committee of the Federal Deposit Insurance Corporation and the National Credit Union Administration

    • The ability of the government to maintain its value

    Correct Answer
    A. The ability of the government to maintain its value
    Explanation
    The U.S. money supply is "backed" by the ability of the government to maintain its value. This means that the value of the U.S. currency is supported by the trust and confidence people have in the government's ability to ensure its stability. Unlike in the past, where money was backed by physical assets like gold or silver, modern currency is based on the faith in the government's ability to manage the economy effectively and prevent excessive inflation or deflation.

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  • 15. 

    Use the following to answer the next question:Item Billions of dollars Checkable deposits $2,500 Currency held by the public 50 Currency held by banks 25 Small time deposits 400 Savings deposits and money market deposit accounts 1,200 Money market mutual funds 700 Large time deposits 1,400 Refer to the table. The size of the M2 money supply is:

    • $2,950 billion

    • $4,850 billion

    • $4, 875 billion

    • $6,275 billion

    Correct Answer
    A. $4,850 billion
    Explanation
    The size of the M2 money supply can be calculated by summing up the values of checkable deposits, currency held by the public, savings deposits and money market deposit accounts, small time deposits, money market mutual funds, and large time deposits. In this case, the sum of these values is $4,850 billion.

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  • 16. 

    The purchasing power of the dollar:

    • Increases with the rate of inflation

    • Is inversely related to the price level

    • Is directly related to the supply of money

    • Is directly related to the price level

    Correct Answer
    A. Is inversely related to the price level
    Explanation
    The answer states that the purchasing power of the dollar is inversely related to the price level. This means that as the price level increases, the purchasing power of the dollar decreases. In other words, when prices rise, the same amount of money can buy fewer goods and services, resulting in a decrease in purchasing power. Conversely, when the price level decreases, the purchasing power of the dollar increases, allowing individuals to buy more with the same amount of money.

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  • 17. 

    The significance of MV=PQ is that

    • It shows the total final goods and services produced in a country

    • It shows an identity correlation to the money supply times velocity and the real GDP

    • It shows an identity correlation to the money supply times velocity and the nominal GDP

    • It shows an increase in the overall money supply when there are excess reserves in banks

    Correct Answer
    A. It shows an identity correlation to the money supply times velocity and the real GDP
    Explanation
    The correct answer is that MV=PQ shows an identity correlation to the money supply times velocity and the real GDP. This means that the equation represents the relationship between the money supply (M), the velocity of money (V), the price level (P), and the quantity of goods and services produced (Q). It highlights how changes in the money supply and velocity can impact the real GDP.

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  • 18. 

    Which of the following most accurately describes the status of the U.S. Federal Reserve System?

    • It is a publicly owned and managed agency of the federal government

    • It is privately owned but publicly managed

    • It is owned by a group of large private banks and managed for their profit

    • It is a publicly owned agency of the federal government, managed for profit by private banks

    Correct Answer
    A. It is privately owned but publicly managed
    Explanation
    The correct answer is "It is privately owned but publicly managed." This means that while the Federal Reserve System is not owned by the government, it is still managed and regulated by the government. The Federal Reserve System is made up of both public and private elements, with private banks owning shares in the system and having a say in its operations, but it ultimately operates under the oversight and control of the government.

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  • 19. 

    Suppose the required reserve ratio is 10% and the banking system initially has no excess reserves. If $20 billion in new currency is deposited into the system, these new deposits will initially create excess reserves of:

    • $2 billion

    • $18 billion

    • $20 billion

    • $200 billion

    Correct Answer
    A. $18 billion
    Explanation
    When $20 billion in new currency is deposited into the banking system, the required reserve ratio of 10% means that the banks are required to hold 10% of the deposits as reserves. Initially, the banking system has no excess reserves, so the entire $20 billion will be considered as deposits. Therefore, the initial excess reserves created will be 90% of the $20 billion, which is $18 billion.

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  • 20. 

    Assume that SIC, Inc. writes a $50,000 check on its account at Metro National Bank to repay the balance on a loan issued by this bank. As a result of this transaction:

    • The money supply declines by $50,000

    • The money supply increases by $50,000

    • The bank's excess reserves will decrease by $50,000

    • The bank's required reserves will increase by $50,000

    Correct Answer
    A. The money supply declines by $50,000
    Explanation
    When SIC, Inc. writes a $50,000 check to repay its loan, the money supply declines by $50,000. This is because the check represents a withdrawal of funds from the bank, reducing the amount of money available in circulation. As a result, there is less money in the economy, leading to a decrease in the money supply.

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  • Current Version
  • Mar 15, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Mar 17, 2010
    Quiz Created by
    Jeffusmc

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