Exercises-Part 3 Money market and money policy

1) Betty won $500 in a poker tournament. She deposits her $500 winnings into a
money market fund so that she can use the money next year to help her pay for a trip
to Las Vegas. This is an example of money serving as a(n)
A) unit of account.
B) medium of exchange.
C) store of value.
D) investment good.
Answer: C

2) Electro City, a retailer of electronics, has 2,000 different products in inventory.

Electro City reports its inventory is worth $12 million. This is an example of using
money as a
A) medium of exchange.
B) unit of account.
C) standard of deferred payment.
D) store of value.
Answer: B

3) When Mexico experiences a period of high inflation and Mexicans lose confidence
in their peso as a store of value, which of the following would be most likely to
occur?
A) The demand for pesos would increase.
B) The buying power of the peso would increase.
C) The value of foreign currencies would depreciate relative to the peso.
D) Mexicans would use a different currency as a medium of exchange.
Answer: D

4) Currency held outside banks + demand deposits + travelers checks + other

checkable deposits =
A) M3.
B) M2 - M1.
C) M3 - M1.
D) M1.
Answer: D

5) Jaime transfers $2,500 from his checking account to his savings account. This
transaction will
A) decrease both M1 and M2.
B) not change M1 and decrease M2.
C) decrease M1 and not change M2.
D) increase both M1 and M2.
Answer: C

6) When Argentina experiences a period of high inflation and Argentineans lose

confidence in their peso as a store of value, which of the following would be least
likely to occur?
A) The demand for pesos would decrease.
B) The buying power of the peso would decrease.
C) The value of foreign currencies would depreciate relative to the peso.
D) Argentineans would use a different currency as a medium of exchange.
Answer: C

7) Currency is included in
A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.
Answer: C

8) (Currency held outside banks + demand deposits + other checkable deposits +

traveler's checks + savings accounts + money market accounts + other near monies) =
A) M1.
B) M2.
C) M1 + M2.
D) M2 - M1.
Answer: B

9) Napoli National Bank has liabilities of $3 million and net worth of $200,000.
Napoli National Bank's assets are
A) $200,000.
B) $2.8 million
C) $3.0 million.
D) $3.2 million.
Answer: D

Refer to the information provided in Table 1. below to answer the question(s) that
follow.

Table 1.
10) Refer to Table 1. First Commercial Bank's excess reserves equal $________.
A) 200,000
B) 600,000
C) 1,000,000
D) 1,500,000
Answer: B

11) Refer to Table 1. The required reserve ratio

A) is 5%.
B) is 10%.
C) is 20%.
D) cannot be determined from the given information.
Answer: B

12) Refer to Table 25.2. First Commercial Bank's total loans equal $________.
A) 1,000,000
B) 1,700,000
C) 2,500,000
D) 5,000,000
Answer: B

13) Narnia National Bank has $750 million in deposits. The required reserve ratio is
30%. Narnia National Bank must keep ________ in reserves.
A) $125 million
B) $150 million
C) $225 million
D) $250 million
Answer: C

14) The Bank of Red Oak has $2 million in deposits and $400,000 in reserves. If
excess reserves are equal to $100,000, the required reserve ratio is
A) 5%.
B) 10%.
C) 15%.
D) 20%.
Answer: C
15) The required reserve ratio is 50%. The money multiplier is
A) 10.
B) 5.
C) 2.5.
D) 2.
Answer: D

Refer to the information provided in Table 2. below to answer the question(s) that
follow.

Table 2.

16) Refer to Table 25.8. If the required reserve ratio is 20%, Alamo Bank
A) is loaned up.
B) has too few reserves on hand.
C) is meeting its required reserve ratio and has no excess reserves.
D) has unloaned excess reserves of $100,000.
Answer: A

17) Refer to Table 25.8. Alamo Bank could make additional loans of $750,000, if the
required reserve ratio were
A) 12.5%.
B) 10%.
C) 7.5%.
D) 2.5%.
Answer: C

18) Refer to Table 25.8. If the required reserve ratio were changed to 10% and Alamo
Bank continues to hold $1,200,000 in reserves, its excess reserves will be
A) $150,000.
B) $300,000.
C) $600,000.
D) $900,000.
Answer: C

19) Suppose the required reserve ratio is 10%. A $75 million cash deposit will allow
commercial banks to create at most
A) $750,000.
B) $7.5 million.
C) $75 million.
D) $750 million.
Answer: D

20) Assume that banks become less conservative in their lending policies and start
holding no excess reserves. Compared to a situation in which banks are holding
excess reserves, the size of the money supply will be
A) zero.
B) larger.
C) the same.
D) smaller.
Answer: B

21) When checks are exchanged between banks, the Fed oversees the banks to ensure
the appropriate funds have been transferred. This is known as
A) check kiting.
B) check clearing.
C) check floating.
D) check balancing.
Answer: B

22) As the interest rate falls, people hold ________ money in non-interest-bearing
checking accounts instead of savings accounts because the opportunity cost of holding
money has ________.
A) more; fallen
B) less; fallen
C) less; risen
D) more; risen
Answer: A

Refer to the information provided in Figure 3. below to answer the question(s) that
follow.
Figure 3.

23) Refer to Figure 3. Suppose money demand is currently at Point A. An increase

money demand could be caused by
A) an increase in the interest rate.
B) an increase in nominal income.
C) a decrease in the interest rate.
D) a decrease in nominal income.
Answer: B

24) Refer to Figure 3. Suppose money demand is currently at Point A. A decrease in

the interest rate to 5%, ceteris paribus, will likely
A) decrease the quantity of money demanded from $200 million to $100 million.
B) increase the quantity of money demanded from $100 million to $200 million.
C) increase the quantity of money demanded from $100 million to $150 million.
D) increase the quantity of money demanded from $150 million to $300 million.
Answer: C

25) Refer to Figure 3. Suppose the money demand is currently at Point D. A

movement to point C could be caused by
A) a decrease in the interest rate.
B) a decrease in nominal income.
C) an increase in the interest rate.
D) an increase in the price level.
Answer: B

26) Refer to Figure 3. Suppose that money demand is currently at Point B. A

movement to Point D could be caused by
A) an increase in nominal income, ceteris paribus.
B) an increase in the price level, ceteris paribus.
C) a decrease in the price level, ceteris paribus.
D) a decrease in the interest rate, ceteris paribus.
Answer: D

27) Refer to Figure 3. An increase in nominal income could be represented by a

movement from Point ________ to Point ________.
A) A; C
B) A; B
C) B; A
D) B; D
Answer: B

28) Refer to Figure 3. A decrease in the interest rate could be represented by a

movement from Point ________ to Point ________.
A) A; B
B) B; A
C) A; C
D) C; D
Answer: C

30) Refer to Figure 3. Suppose the money demand is currently at Point B. A

movement to Point A could be caused by
A) a decrease in the interest rate.
B) a decrease in nominal income.
C) an increase in the interest rate.
D) an increase in nominal income.
Answer: B

31) The demand for money and the interest rate are
A) positively related.
B) negatively related.
C) sometimes positively related and other times negatively related, depending on the
condition of the economy.
D) not related.
Answer: B

32) Which of the following instruments is not used by the Federal Reserve to change
the money supply?
A) the discount rate
B) the required reserve ratio
C) the federal tax code
D) open market operations
Answer: C
33) Which of the following represents an action by the Federal Reserve that is
designed to increase the money supply?
A) buying government securities in the open market
B) an increase in the required reserve ratio
C) a decrease in federal spending
D) an increase in the discount rate
Answer: A

34) When the Fed raises the required reserve ratio, the banks' excess reserves will
initially ________ and the money supply ________.
A) remain constant; decreases
B) decrease; decreases
C) increase; remain constant
D) increase; increases
Answer: B

35)Which of the following represents an action by the Federal Reserve that is

designed to decrease the money supply?
A) buying government securities in the open market
B) an increase in the required reserve ratio
C) an increase in federal spending
D) a decrease in the discount rate
Answer: B

36) Assume that all commercial banks are loaned up. Total deposits in the banking
system are $800 million. The required reserve ratio is decreased. The money supply
will
A) decrease.
B) increase.
C) not change because there was no change in deposits.
D) not change because the required reserve ratio has no impact on money supply.
Answer: B

37) The price of bonds and the interest rate are

A) positively related.
B) negatively related.
C) sometimes positively related and other times negatively related, depending on the
bond payments.
D) not related.
Answer: B

38) Nominal income is equal to

A) the aggregate money multiplier divided by the money supply.
B) the real aggregate price level divided by the nominal interest rate.
C) the aggregate price level multiplied by real aggregate income.
D) aggregate money demand multiplied by aggregate money supply.
Answer: C

39) An open-market purchase of securities by the Fed results in ________ in reserves

and ________ in the supply of money.
A) an increase; a decrease
B) a decrease; a decrease
C) an increase; an increase
D) a decrease; an increase
Answer: C

40) Assume there is no leakage from the banking system and that all commercial
banks are loaned up. The required reserve ratio is 16%. If the Fed sells $5 million
worth of government securities to the public, the change in the money supply will be
A) -$31.25 million.
B) -$21 million.
C) -$16 million.
D) -$11.75 million.
Answer: A