Monetary System And The Federal Reserve
Complete 10 questions. Your initial score will be the only score counted. Complete this quiz before class on Monday.
- 1.
The group responsible for setting policy on buying and selling government securities (bills, notes, and bonds) is the:
- A.
Securities and Exchange Commission
- B.
U.S. Treasury Board
- C.
Federal Open Market Committee
- D.
12 Federal Reserve Bank presidents
Correct Answer
C. Federal Open Market CommitteeExplanation
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.Rate this question:
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- 2.
Which of the following most accurately describes the status of the U.S. Federal Reserve System?
- A.
It is a publicly owned and managed agency of the federal government
- B.
It is privately owned but publicly managed
- C.
It is owned by a group of large private banks and managed for their profit
- D.
It is a publicly owned agency of the federal government, managed for profit by private banks
Correct Answer
B. It is privately owned but publicly managedExplanation
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.Rate this question:
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- 3.
Which of the following is included in M2 but not M1?
- A.
Currency held by banks
- B.
Small time deposits (less than $100,000)
- C.
Credit card balances
- D.
Large time deposits (at least $100,000)
Correct Answer
B. 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.Rate this question:
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- 4.
Writing a check to purchase a new computer is an example of using money primarily as a:
- A.
Unit of account
- B.
Standard of value
- C.
Unit of account
- D.
Medium of exchange
Correct Answer
D. Medium of exchangeExplanation
Writing a check to purchase a new computer is an example of using money primarily as a medium of exchange. A medium of exchange is a function of money that allows it to be used to facilitate transactions and exchange goods and services. In this case, the check is being used as a form of payment to exchange money for the computer. The check serves as a convenient and commonly accepted medium to transfer value between the buyer and the seller.Rate this question:
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- 5.
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:
- A.
$2,950 billion
- B.
$4,850 billion
- C.
$4, 875 billion
- D.
$6,275 billion
Correct Answer
B. $4,850 billionExplanation
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.Rate this question:
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- 6.
The U.S. money supply is "backed" by:
- A.
Gold
- B.
Silver
- C.
A joint committee of the Federal Deposit Insurance Corporation and the National Credit Union Administration
- D.
The ability of the government to maintain its value
Correct Answer
D. The ability of the government to maintain its valueExplanation
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.Rate this question:
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- 7.
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:
- A.
$2 billion
- B.
$18 billion
- C.
$20 billion
- D.
$200 billion
Correct Answer
B. $18 billionExplanation
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.Rate this question:
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- 8.
Sam draws a $100 check on his account at Bank A which is then deposited in Bank B. When this check is cleared:
- A.
Neither Bank A's nor Bank B's deposits or reserves are affected
- B.
Bank A gains reserves equal to $100 and Bank B gains deposits equal to $100
- C.
Bank A loses reserves and deposits equal to $100
- D.
Bank B loses reserves and deposits equal to $100
Correct Answer
C. Bank A loses reserves and deposits equal to $100Explanation
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.Rate this question:
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- 9.
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:
- A.
$45,000
- B.
$50,000
- C.
$55,000
- D.
$5,000
Correct Answer
C. $55,000Explanation
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.Rate this question:
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- 10.
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:
- A.
The money supply declines by $50,000
- B.
The money supply increases by $50,000
- C.
The bank's excess reserves will decrease by $50,000
- D.
The bank's required reserves will increase by $50,000
Correct Answer
A. The money supply declines by $50,000Explanation
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.Rate this question:
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- 11.
Money is created when:
- A.
Loans are repaid
- B.
The net worth of the banking system is increased
- C.
Banks exchange some of the state and local bonds in their portfolio for federal government bonds
- D.
Banks make additional loans
Correct Answer
D. Banks make additional loansExplanation
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.Rate this question:
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- 12.
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:
- A.
The money multiplier will decrease
- B.
Bank profitability will likely decrease
- C.
Banks will be forced to accumulate reserves by reducing their lending activity
- D.
The money supply will likely increase
Correct Answer
D. The money supply will likely increaseExplanation
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.Rate this question:
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- 13.
The monetary multiplier is equal to:
- A.
One
- B.
The inverse of actual reserves minus required reserves
- C.
The inverse of one minus the required reserve ratio
- D.
The inverse of the required reserve ratio
Correct Answer
D. The inverse of the required reserve ratioExplanation
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.Rate this question:
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- 14.
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:
- A.
$5,000
- B.
$10,000
- C.
$40,000
- D.
$50,000
Correct Answer
C. $40,000Explanation
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.Rate this question:
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- 15.
The purchasing power of the dollar:
- A.
Increases with the rate of inflation
- B.
Is inversely related to the price level
- C.
Is directly related to the supply of money
- D.
Is directly related to the price level
Correct Answer
B. Is inversely related to the price levelExplanation
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.Rate this question:
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- 16.
Other things equal, a dramatic decrease in the money supply would:
- A.
Increase the price level
- B.
Reduce the purchasing power of each dollar
- C.
Increase the purchasing power of each dollar
- D.
Have an ambiguous impact on the purchasing power of each dollar
Correct Answer
C. Increase the purchasing power of each dollarExplanation
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.Rate this question:
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- 17.
Money velocity is
- A.
The speed in which M0 reaches the bank from
- B.
Average frequency with which a unit of money is spent in a specific period of time
- C.
Strongly correlated to the real GDP
- D.
A statistic heavily observed by the judicial branch
Correct Answer
B. Average frequency with which a unit of money is spent in a specific period of timeExplanation
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.Rate this question:
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- 18.
The significance of MV=PQ is that
- A.
It shows the total final goods and services produced in a country
- B.
It shows an identity correlation to the money supply times velocity and the real GDP
- C.
It shows an identity correlation to the money supply times velocity and the nominal GDP
- D.
It shows an increase in the overall money supply when there are excess reserves in banks
Correct Answer
B. It shows an identity correlation to the money supply times velocity and the real GDPExplanation
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.Rate this question:
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- 19.
A T-Chart (T-Account) includes the following areas EXCEPT
- A.
Assets
- B.
Reserves
- C.
Loans
- D.
Interest
Correct Answer
D. InterestExplanation
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.Rate this question:
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- 20.
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
- A.
10%
- B.
15%
- C.
20%
- D.
25%
- E.
30%
Correct Answer
C. 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%.Rate this question:
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Mar 15, 2023Quiz Edited by
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Mar 17, 2010Quiz Created by
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