Multiple Choice Questions
1. Barter is
A. The exchange of money for goods and then the exchange of those goods for money.
B. The exchange of money for money, or the exchange of money for stocks and bonds.
C. The exchange of goods and services for goods and services without the use of money.
D. Any exchange, with or without the use of money, in which the participants negotiate (or barter) the price of the goods to be exchanged.

2. Which of the following statements is false?
A. Money is the only good that can (or does) serve as a store of value.
B. In a barter economy, there is no good that serves as a unit of account.
C. There are higher transaction costs of making exchanges in a barter economy than in a money economy.
D. Money functions as a medium of exchange, unit of account, and store of value.

3. A house is $100,000, a computer is $2,000, and a car is $20,000. In this context, money is principally functioning as a
A. Unit of account.
B. Store of value.
C. Medium of exchange.
D. None of the above

4. Which of the following statements is true?
A. Savings deposits are a part of M2, but not M1.
B. M1 is sometimes referred to as the “broad definition of the money supply”.
C. Time deposits are a part of M1, but not M2.
D. M1 is a larger dollar amount than M2.

5. M2 is comprised of
A. Small-denomination time deposits + savings deposits + money market accounts.
B. Small-denomination time deposits + credit cards + money market accounts + gold deposits.
C. M1 + small-denomination time deposits + savings deposits + retail money market mutual funds.
D. M1 + small denomination time deposits + credit cards + money market accounts.

6. Because money __________________, people are _________________ likely to specialize in their work in a money economy.
A. is a store of value; less
B. eliminates the double coincidence of wants; more
C. is a unit of account; more
D. eliminates the need for holdings of precious metals; more

7. Fractional reserve banking is a term used to describe a banking system whereby
A. Individual banks share a fraction of the total funds deposited in the whole banking system.
B. Banks are required to quote interest rates in fractions.
C. Banks hold reserves equal to only a fraction of their deposit liabilities.
D. Banks hold reserves equal to a multiple of their deposit liabilities; that is, fractional in this case really means multiple.

8. Total bank reserves equal
A. Checkable deposits + vault cash + traveler's checks.
B. Vault cash + currency in the hands of the nonbanking public.
C. Bank deposits at the Federal Reserve.
D. Bank deposits at the Federal Reserve + vault cash.

9. Ninth National Bank holds $200 million in checkable deposits and $18,000,000 in total reserves. With a required reserve ratio of 8 percent, how much in excess reserves is Ninth National holding?
A. $1,440,000
B. $218,000,000
C. $17,440,000
D. $2,000,000

10. When a bank makes a loan to one of its customers, to the bank the loan is classified as
A. An asset.
B. A liability.
C. Neither an asset nor a liability.
D. An asset in some cases and a liability in other cases, depending on the type of loan.

Balance Sheet
BANK A
($ millions)
Assets, Liabilities
Required Reserves $20 Checkable Deposits $ 100
Excess Reserves 0 Non-transaction Deposits 50
Loans 100 Borrowings 5
Securities 40 Bank Capital (A)

11. Refer to table above. The required reserve ratio is
A. 0.10.
B. 0.15.
C. 0.20.
D. 0.25.

12. The potential buyer of a house has less information about the house than the seller of the house. This is a case of
A. Externality information.
B. Free ridership.
C. Asymmetric information.
D. Biased information.

13. Which of the following is not a major responsibility of the Fed?
A. supplying the economy with paper money
B. providing check-clearing services
C. supervising member banks
D. serving as fiscal agent for the Treasury

14. When a check is written on an account at Bank A and deposited in Bank B, the reserve account of __________ will rise and reserves of the entire banking system will __________.
A. Bank A; rise
B. Bank A; remain constant
C. Bank B; rise
D. Bank B; remain constant

15. When the federal government incurs a budget deficit, it will
A. Mint more coins and spend them.
B. Create money out of thin air.
C. Borrow money from the Federal Reserve System by issuing securities.
D. Borrow money from the public by issuing government securities.

16. If the Fed wants to increase the money supply through open market operations, it will
A. Purchase government securities.
B. Sell government securities.
C. First purchase, then sell, government securities.
D. Lend more reserves to commercial banks.

17. Suppose the Fed forecasts a reduction in cash leakages. It might offset the effect of this on the money supply by
A. Buying government securities.
B. Selling government securities.
C. Lowering the required reserve ratio.
D. Lowering the discount rate.

18. The larger the simple deposit multiplier,
A. The higher the required reserve ratio.
B. The higher the discount rate.
C. The larger the change in the money supply for a given change in deposits.
D. The less likely the Fed will be to use its monetary policy tools.

19. Which of the following will increase the money supply?
A. an increase in the discount rate (relative to the federal funds rate)
B. a decrease in the required reserve ratio
C. an open market sale by the Fed
D. a and c

20. If the Fed were to increase the discount rate so that it was much higher than the federal funds rate, eventually
A. Reserves would decrease and the money supply would decrease.
B. Reserves would increase and the money supply would increase.
C. Reserves would decrease and the money supply would increase.
D. Reserves would increase and the money supply would decrease..

Short Answer Questions
Explain the difference between the discount rate and the federal funds rate. If the Fed wants to lower one of these rates, which one can the Fed change by issuing an order? Describe in detail how the Fed helps to lower the other rate.

Multiple Choice Questions 1. Barter is A. The exchange of money f...