CHAPTER 29-REVIEW

1. Which of the following is an example of barter?

a. A parent gives a teenager a $10 bill in exchange for her babysitting services.
b. A homeowner gives an exterminator a check for $50 in exchange for extermination
services.
c. A barber gives a plumber a haircut in exchange for the plumber fixing the barber's leaky
faucet.
d. A doctor performs surgery on a patient whose insurance pays 100% of the bill.

Table 29-1
The following table describes what traders in a small economy want versus what they have.

Trader Has Wants

Alexis an apple a grapefruit
Jelani a carrot a banana
Kacey a grapefruit an apple
Malika a zucchini a carrot

2. Refer to Table 29-1. Which, if any, pairs of traders has a double coincidence of wants?
a. Only Jelani with Malika
b. Only Alexis with Kacey
c. Jelani with Malika, and Alexis with Kacey
d. Jelani with Alexis, and Malika with Kacey

3. The existence of money leads to

a. greater specialization in production, but not to a higher standard of living.
b. a higher standard of living, but not to greater specialization.
c. greater specialization and to a higher standard of living.
d. neither greater specialization nor to a higher standard of living.

4. Joshua and Ryzard buy the same pair of flip flops, but each in the wrong size. Joshua proposes a
size swap with Ryzard. This is an example of
a. barter, since the flip flops in the correct size represent a medium of exchange.
b. barter, since the flip flops in the correct size have intrinsic value to both Joshua and
Ryzard.
c. money, since the flip flops in the correct size do not have any intrinsic value.
d. money, since the flip flops in the correct size represent a medium of exchange.

5. Which of the following lists is included in what economists’ call "money"?

a. Cash
b. Cash and stocks and bonds
c. Cash and stocks and bonds and real estate
d. Cash and stocks and bonds and real estate and all other
assets
6. Which of the following is not a function of money?
a. Unit of account
b. Store of value
c. Medium of exchange
d. Protection against
inflation

7. You pay for cheese and bread from the deli with currency. Which function of money does this best
illustrate?
a. Medium of exchange
b. Unit of account
c. Store of value
d. Liquidity

8. U.S. government bonds, fine art, and silver are all

a. media of exchange.
b. units of account.
c. stores of value.
d. extremely liquid assets.

9. Which list ranks assets from least to most liquid?

a. Currency, fine art,
stocks
b. Fine art, stocks, currency
c. Fine art, currency, stocks
d. Currency, stocks, fine ar
t

10. Money is
a. the most liquid asset and a perfect store of value.
b. the most liquid asset but an imperfect store of value.
c. not the most liquid asset but a perfect store of value.
d. neither the most liquid asset and nor a perfect store of
value.

11. Which of the following functions as both a store of value and a medium of exchange?
a. Cash and stocks
b. Cash but not stocks
c. Stocks but not cash
d. Neither cash nor stocks

12. When you list prices for necklaces sold on your website, [Link], in dollars, this
best illustrates money's function as
a. a store of value.
b. a medium of exchange.
c. a unit of account.
 d. a method of barter.

13. You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in
your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The
$500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This
transaction illustrates money's function as a ______.
a. store of value, medium of exchange, unit of
account
b. store of value, unit of account, medium of
exchange
c. medium of exchange, unit of account, store of
value
d. medium of exchange, store of value, unit of
account

14. If an economy uses diamonds as money, then that economy's money

a. was commodity money.
b. had no intrinsic value.
c. was fiat money.
d. had no store of value.

15. Which of the following best represents fiat money?

a. The euro
b. A gold bar
c. Monopoly money
d. Baseball cards
a

16. The set of items that serve as media of exchange includes

a. demand deposits.
b. short-term bonds.
c. credit cards.
d. savings accounts.

17. The measure of the money stock called M1 includes

a. wealth held by people in currency.
b. wealth held by people in their savings accounts.
c. wealth held by people in money market mutual funds.
d. everything that is included in M2 plus some additional items.
a

18. Which of the following is not included in M1?

a. Currency
b. Demand deposits
c. Savings deposits
d. Traveler's checks
19. Which of the following is included in M2?
a. Credit cards
b. Money market mutual
funds
c. Corporate bonds
d. Large time deposits

20. Which of the following is not included in either M1 or M2?

a. U.S. Treasury bills
b. Small time deposits
c. Demand deposits
d. Money market mutual
funds

21. Which of the following is included in both M1 and M2?

a. Traveler's checks, demand deposits, and savings deposits
b. Currency and money market mutual funds
c. Currency, demand deposits, and savings deposits
d. Currency, demand deposits, and other checkable
deposits

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

a. Currency
b. Demand deposits
c. Savings deposits
d. Traveler's checks

23. If traveler's checks were $1000 higher and saving deposits were $500 higher, M1 would be
a. $500 higher and M2 would be $1,500 higher.
b. $1,000 higher and M2 would be $1,500 higher.
c. M2 and M1 would be $1,500 higher.
d. $1,000 high and M2 would be $500 higher.

24. Hideo and Hannah decide to go on a vacation. As a result, they withdraw $5,000 from their
savings account to purchase $5,000 worth of traveler's checks. As a result of these changes,
a. M1 increases by $5,000 and M2 decreases by $5,000.
b. M1 increases by $5,000 and M2 stays the same.
c. M1 and M2 stay the same.
d. M1 decreases by $5,000 and M2 increases by $5,000.

Table 29-2
The information in the following table pertains to the hypothetical economy of Florencial.

Type of Money Amount

 (Billions of dollars)
Large time deposits 120
Small time deposits 80
Demand deposits 300
Other checkable deposits 50
Savings deposits 65
Traveler's checks 5
Money market mutual funds 200
Currency 150
Credit card balances 300
Miscellaneous categories of M2 30

25. Refer to Table 29-2. What is the M1 money supply in Florencial?

a. $705 billion
b. $570 billion
c. $505 billion
d. $585 billion

26. Refer to Table 29-2. What is the M2 money supply in Florencial?

a. $1,300 billion
b. $580 billion
c. $880 billion
d. $1,000 billion

27. The Federal Reserve

a. is part of the executive branch of government.
b. is only responsible for controlling the money supply.
c. is the central bank of Canada.
d. was created in 1913.

28. Which of the following is correct?

a. The Federal Reserve has 14 regional banks. The Board of Governors has up to 12 members
who serve 7-year terms.
b. The Federal Reserve has 14 regional banks. The Board of Governors has up to 7 members
who serve 14-year terms.
c. The Federal Reserve has 12 regional banks. The Board of Governors has up to 12 members
who serve 7-year terms.
d. The Federal Reserve has 12 regional banks. The Board of Governors has up to 7 members
who serve 14-year terms.

29. Which of the following does the Federal Reserve not do?
a. Conduct monetary policy
b. Act as a lender of last
resort
c. Conduct fiscal policy
d. Serve as a bank regulator
30. Which government body is primarily responsible for regulating banks and ensuring the health of th
e banking system?
a. The U.S. Treasury
b. The regional Federal Reserve Banks
c. Federal Deposit Insurance Corporatio
n
d. The Federal Reserve Board

31. Which of the following statements regarding the Federal Open Market Committee is correct?
a. Only the five voting regional Fed presidents attend the meetings.
b. All regional Fed presidents attend and vote at the meetings.
c. All regional Fed presidents attend the meetings, but only five get to vote.
d. Regional Fed presidents may neither attend nor vote the meetings.

32. When the Fed conducts open-market sales,

a. it sells Treasury securities, which increases the money supply.
b. it auctions term loans, which increases the money supply.
c. it auctions term loans, which decreases the money supply.
d. it sells Treasury securities, which decreases the money supply.

33. When conducting an open-market purchase, the Fed

a. buys government bonds, and in so doing increases the money supply.
b. sells government bonds, and in so doing decreases the money supply.
c. buys government bonds, and in so doing decreases the money supply
.
d. sells government bonds, and in so doing increases the money supply.

34. Which of the following is not an example of monetary policy?

a. The Federal Open Market Committee decides to sell bonds.
b. The Federal Open Market Committee decides to buy bonds.
c. The Federal Reserve reduces the reserve requirement.
d. The Federal Reserve facilitates bank transactions by clearing
checks.

35. In a system of 100-percent-reserve banking,

a. banks do not accept deposits.
b. banks do not influence the supply of money.
c. loans are the only asset item for banks.
d. banks can increase the money supply.

36. A bank which must hold 100 percent reserves opens in an economy that had no banks and a
currency of $150. If customers deposit $50 into the bank, what is the value of the money supply?
a. $50
b. $100
 c. $150
d. $200

37. A bank's reserve ratio is 7 percent and the bank has $1,000 in deposits. Its reserves amount to
a. $930.
b. $70.
c. $7.
d. $93.

38. Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8
percent, and excess reserves amount to $5 billion. What is the level of deposits?
a. $5,000 billion
b. $4,937.5 billion
c. $5,062.5 billion
d. $4,995 billion

39. If a bank with a required reserve ratio of 15 percent receives a deposit of $600, it now has a
a. $600 increase in excess reserves and no increase in required reserves.
b. $600 increase in required reserves and no increase in excess reserves.
c. $510 increase in excess reserves and a $90 increase in required reserves.
d. $90 increase in excess reserves and a $510 increase in required reserves.

40. A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can,
given the reserve requirement.
a. It has $80 in reserves and $9,920 in loans.
b. It has $800 in reserves and $9,200 in loans.
c. It has $1,250 in reserves and $8,750 in loans.
d. It has $8,000 in reserves and $2,000 in loans.

41. A bank loans Benjamin's Print Shop $130,000 to remodel a building near campus to use as a new
store. On their respective balance sheets, this loan is
a. an asset for the bank and a liability for Benjamin's Print Shop. The loan increases the
money supply.
b. an asset for the bank and a liability for Benjamin's Print Shop. The loan does not increase
the money supply.
c. a liability for the bank and an asset for Benjamin's Print Shop. The loan increases the
money supply.
d. a liability for the bank and an asset for Benjamin's Print Shop. The loan does not increase
the money supply.

42. A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can, given the reserve
requirement. It follows that the reserve requirement is
a. 2.5 percent.
b. 33.3 percent.
c. 25 percent.
 d. 75 percent.

43. The manager of the bank where you work tells you that your bank has $6 million in excess
reserves. She also tells you that the bank has $800 million in deposits and $738 million in loans. Given
this information you find that the reserve requirement must be
a. 7.8 percent.
b. 0.8 percent.
c. 10.8 percent.
d. 7.0 percent.

44. A bank has a 10 percent reserve requirement, $36,000 in loans, and has loaned out all it can, given
the reserve requirement.
a. It has $3,600 in deposits.
b. It has $32,400 in
deposits.
c. It has $39,600 in
deposits.
d. It has $40,000 in
deposits.

45. Suppose the banking system currently has $300 billion in reserves, the reserve requirement is 5
percent, and excess reserves are $30 billion. What is the level of loans?
a. $270 billion
b. $5,400 billion
c. $6,000 billion
d. $5,100 billion

46. If the reserve requirement is 7 percent, a bank desires to hold no excess reserves, and it receives a
new deposit of $300, it
a. must increase required reserves by $42.
b. will initially see reserves decrease by $300.
c. will be able to use this deposit to make new loans amounting to
$300.
d. must increase required reserves by $21.

47. Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000
of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now
have available to lend out if it decides to hold only required reserves?
a. $27,000
b. $27,190
c. $26,190
d. $9,000

48. In the special case of the 100-percent-reserve banking, the money multiplier is
a. 1 and banks create money.
b. 1 and banks do not create money.
 c. 2 and banks create money
d. 2 and banks do not create money.

49. If the reserve ratio is 4 percent, then the money multiplier is

a. 0.04.
b. 25.
c. 2.5.
d. 4.

50. If the reserve ratio is 5 percent, then $500 of additional reserves would ultimately generate
a. $10,500 of money.
b. $10,000 of money.
c. $9,500 of money.
d. $2,500 of money.

51. In the nation of Wiknam, the money supply is $80,000 and reserves are $19,000. Assuming that
people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve
requirement is
a. 25.7 percent.
b. 23.8 percent.
c. 22.7 percent.
d. 26.5 percent.

Table 29-3
The First Bank of Roswell
Assets Liabilities
Reserves $30,000 Deposits $200,000
Loans 170,000

52. Refer to Table 29-3. If the bank faces a reserve requirement of 6 percent, then the bank
a. is in a position to make new loans equal to a maximum of
$12,000.
b. is in a position to make new loans equal to a maximum of
$18,000.
c. has excess reserves of $12,000.
d. has excess reserves of $30,000.

53. Refer to Table 29-3. Suppose the bank faces a reserve requirement of 10 percent. Starting from
the situation as depicted by the T-account, a customer deposits an additional $60,000 into his account
at the bank. If the bank takes no other action it will
a. have $64,000 in excess reserves.
b. have $4,000 in excess reserves.
c. be in a position to make new loans equal to a maximum of $6,000.
 d. be unable to make any new loans.

Table 29-4
Bank of Cheerton
Assets Liabilities
Reserves $7,200 Deposits $90,000
Loans 82,800

54. Refer to Table 29-4. The Bank of Cheerton's reserve ratio is

a. 8.7 percent.
b. 11.3 percent.
c. 8.0 percent.
d. 14.3 percent.

55. Refer to Table 29-4. Assume there is a reserve requirement and the Bank of Cheerton is exactly in
compliance with that requirement. Assume the same is true for all other banks. Lastly, assume people
hold only deposits and no currency. What is the money multiplier?
a. 11.5
b. 12.5
c. 9.1
d. 8.1

56. Refer to Table 29-4. If the Fed's reserve requirement is 6 percent, then what quantity of excess
reserves does the Bank of Cheerton now hold?
a. $1,800
b. $900
c. $2,890
d. $5,400

57. Refer to Table 29-4. Assume the Fed's reserve requirement is 6 percent and all banks besides the
Bank of Cheerton are exactly in compliance with the 6 percent requirement. Further assume that
people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if
the Bank of Cheerton decides to make new loans so as to end up with no excess reserves, then by how
much does the money supply eventually increase?
a. $22,500.00
b. $30,572.69
c. $32,526.93
d. $30,000.00

Table 29-5
First National Bank
Assets Liabilities and Owners' Equity
Reserves $1,200 Deposits $9,000
Loans 8,000 Debt 800
Short-term securities 800 Capital (owners' equity) 200
58. Refer to Table 29-5. This bank's leverage ratio is
a. 2.
b. 50.
c. 13.3.
d. 7.5.

59. Bank capital is

a. the machinery, structures, and equipment of the bank.
b. the resources that owners have put into the bank.
c. the reserves of the bank.
d. the bank's total assets.

60. The leverage ratio is calculated as

a. assets minus liabilities.
b. assets divided by bank capital.
c. the reciprocal of the required reserve ratio.
d. the required reserve ratio multiplied by bank capital.

61. When the Fed makes open-market purchases bank

a. deposits and lending increase.
b. withdrawals and lending increase.
c. withdrawals increase and lending decreases.
d. deposits increase and lending decreases.

62. If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money
supply?
a. It increases by $100,000.
b. It increases by $150,000.
c. It decreases by $100,000.
d. It decreases by $200,000.

63. If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, it could
a. buy $300,000 worth of bonds.
b. buy $225,000 worth of bonds.
c. sell $300,000 worth of bonds.
d. sell $225,000 worth of bonds.

64. The discount rate is

a. the interest rate the Fed charges banks.
b. one divided by the difference between one and the reserve ratio.
c. the interest rate banks receive on reserve deposits with the Fed.
d. the interest rate that banks charge on overnight loans to other banks.
65. When the Fed decreases the discount rate, banks will
a. borrow more from the Fed and lend more to the public. The money supply
increases.
b. borrow more from the Fed and lend less to the public. The money supply decreases.
c. borrow less from the Fed and lend more to the public. The money supply increases.
d. borrow less from the Fed and lend less to the public. The money supply decreases.

66. Which of the following both decrease the money supply?

a. A decrease in the discount rate and a decrease in the interest rate on reserves
b. An increase in the discount rate and a decrease in the interest rate on reserves
c. A decrease in the discount rate and an increase in the interest rate on reserves
d. An increase in the discount rate and an increase in the interest rate on reserve
s

67. If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to
hold
a. fewer reserves, so the reserve ratio will fall.
b. fewer reserves, so the reserve ratio will
rise.
c. more reserves, so the reserve ratio will fall.
d. more reserves, so the reserve ratio will rise.

68. Other things the same, if reserve requirements are decreased, the reserve ratio
a. increases, the money multiplier increases, and the money supply increases.
b. decreases, the money multiplier increases, and the money supply increases.
c. increases, the money multiplier decreases, and the money supply decreases
.
d. decreases, the money multiplier decreases, and the money supply
increases.

69. The manager of the bank where you work tells you that the bank has $200 million in deposits and
$24.5 million dollars in loans. If the reserve requirement is 6 percent, how much is the bank holding in
excess reserves?
a. $9.5 million
b. $12.5 million
c. $12 million
d. $0 million

70. If the reserve requirement is 10 percent, which of the following pairs of changes would both allow
a bank to lend out an additional $10,000?
a. The Fed buys a $10,000 bond from the bank or someone deposits $10,000 in the bank.
b. The Fed buys a $10,000 bond from the bank or the Fed lends the bank $10,000.
c. The Fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank.
d. The Fed sells a $10,000 bond to the bank or the Fed lends the bank $10,000.
71. The money supply decreases when the Fed
a. sells Treasury bonds. The smaller the reserve requirement, the larger the decrease will be.
b. sells Treasury bonds. The larger the reserve requirement, the larger the decrease will be.
c. buys Treasury bonds. The smaller the reserve requirement, the larger the decrease will be
.
d. buys Treasury bonds. The larger the reserve requirement, the larger the decrease will be.

72. If the reserve ratio is 5 percent, banks do not hold excess reserves, and people do not hold
currency, then when the Fed sells $30 million worth of government bonds, bank reserves
a. decrease by $30 million and the money supply eventually decreases by $600
million.
b. increase by $30 million and the money supply eventually increases by $600 million.
c. decrease by $30 million and the money supply eventually decreases by $150
million.
d. increase by $30 million and the money supply eventually increases by $150 million.

73. The banking system currently has $10 billion of reserves, none of which are excess. People hold
only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve
requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much
does the money supply change?
a. It falls by $12 billion.
b. It falls by $19 billion.
c. It falls by $21 billion.
d. It rises by $19 billion.

74. If the public decides to hold more currency and fewer deposits in banks, bank reserves
a. decrease and the money supply eventually decreases.
b. decrease but the money supply does not change.
c. increase and the money supply eventually increases.
d. increase but the money supply does not change.

75. Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this
action will cause the money supply to
a. fall. To reduce the impact of this the Fed could sell Treasury bonds.
b. fall. To reduce the impact of this the Fed could buy Treasury bonds.
c. rise. To reduce the impact of this the Fed could sell Treasury bonds.
d. rise. To reduce the impact of this the Fed could buy Treasury
bonds.

76. A problem that the Fed faces when it attempts to control the money supply is that
a. the 100-percent-reserve banking system in the United States makes it difficult for the Fed
to carry out its monetary policy.
b. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its
monetary policy tools.
c. the Fed does not have a tool that it can use to change the money supply by either a small
amount or a large amount.
 d. the Fed does not control the amount of money that households choose to hold as deposits
in banks.

Table 29-6

Metropolis National Bank

Assets Liabilities
Reserves $60,000 Deposits $500,000
Loans 440,000

77. Refer to Table 29-6. Metropolis National Bank is holding 2% of its deposits as excess reserves.
Assume that no banks in the economy want to maintain holdings of excess reserves and that people
only hold deposits and no currency. The Fed makes open market purchases of $10,000. The person
who sold bonds to the Fed deposits all the funds in Metropolis National Bank. If the bank now loans
out all its excess reserves, by how much will the money supply increase?
a. $190,000
b. $200,000
c. $240,000
d. $220,000

Scenario 29-1
The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi.
The local unit of currency is the Tazian dollar. Aggregate banking statistics show that collectively the
banks of Tazi hold $375 million of required reserves, $225 million of excess reserves, have issued
$7,500 million of deposits, and hold $750 million of Tazian Treasury bonds. Tazians prefer to use
only demand deposits and so all money is on deposit at the bank.
78. Refer to Scenario 29-1. Assume that banks desire to continue holding the same ratio of excess
reserves to deposits. What is the reserve requirement and the reserve ratio for Tazian Banks?
a. 8 percent, 10 percent
b. 5 percent, 10 percent
c. 5 percent, 8 percent
d. 8 percent, 5 percent

79. Refer to Scenario 29-1. Assuming the only other thing Tazian banks have on their balance sheets
is loans, what is the value of existing loans made by Tazian banks?
a. $6,150 million
b. $6,900 million
c. $7,200 million
d. $6,000 million

80. Refer to Scenario 29-1. Suppose the Bank of Tazi loaned the banks of Tazi $30 million. Suppose
also that both the reserve requirement and the percentage of deposits held as excess reserves stay the
same. By how much would the money supply change?
a. $425 million
b. $375 million
c. $220 million
 d. $30 million

81. Which of the following will help to prevent bank runs?

a. A 0% reserve requirement
b. 100% reserve banking
c. Lack of government insurance of deposits
d. Fractional reserve banking

Scenario 29-1
The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi.
The local unit of currency is the Tazian dollar. Aggregate banking statistics show that collectively the
banks of Tazi hold $375 million of required reserves, $225 million of excess reserves, have issued
$7,500 million of deposits, and hold $750 million of Tazian Treasury bonds. Tazians prefer to use
only demand deposits and so all money is on deposit at the bank.
82. Refer to Scenario 29-1. Suppose that the Bank of Tazi changes the reserve requirement to 2
percent. Assuming that the banks still want to hold the same percentage of excess reserves what is the
value of the money supply after banks adjust to the change in the reserve requirement?
a. $12,000 million
b. $4,500 million
c. $12,150 million
d. $12,725 million

83. The federal funds rate is the

a. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities.
b. percentage of deposits that banks must hold as reserves.
c. interest rate at which the Federal Reserve makes short-term loans to banks.
d. interest rate at which banks lend reserves to each other overnight.

84. If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move
the rate back towards its target by
a. buying bonds. This buying would reduce the money supply.
b. buying bonds. This buying would
increase the money supply.
c. selling bonds. This selling would reduce the money supply.
d. selling bonds. This selling would increase the money supply.

85. If the Fed raised the reserve requirement, the demand for reserves would
a. increase, so the federal funds rate would fall.
b. increase, so the federal funds rate would rise.
c. decrease, so the federal funds rate would fall.
d. decrease, so the federal funds rate would
rise.

86. Which of the following policies can the Fed follow to increase the money supply?
a. Reduce the interest rate on reserves
b. Increase reserve requirements for banks
c. Reduce the quantity of funds available through the Term Auction
Facility
d. Sell government bonds