Mankiw Chapter 16 The Monetary System quiz review questions

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1 Mankiw Chapter 16 The Monetary System quiz review questions 1. Money a. is more efficient than barter. b. makes trades easier. c. allows greater specialization. 2. 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. 3. 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 4. Economists use the term money to refer to a. all wealth. b. all assets, including real assets and financial assets. c. all financial assets, but not real assets. d. those types of wealth that are regularly accepted by sellers in exchange for goods and services. 5.Which of the following is a function of money? a. a unit of account b. a store of value c. medium of exchange 6. Which of the following best illustrates the medium of exchange function of money? a. You keep some money hidden in your shoe. b. You keep track of the value of your assets in terms of currency. c. You pay for your oil change using currency. d. None of the above is correct. 7. Any item that people can use to transfer purchasing power from the present to the future is called a. a medium of exchange. b. a unit of account. c. a store of value. d. None of the above is correct. 8.. Which of the following is a store of value? a. Currency (dollar bills) b. U.S. government bonds c. fine art 9. Liquidity refers to a. the ease with which an asset is converted to the medium of exchange. b. the measurement of the intrinsic value of commodity money. c. the measurment of the durability of a good. d. how many time a dollar circulates in a given year. 1

2 2 Chapter 16/The Monetary System 10. Which list ranks assets from most to least liquid? a. money, bonds, cars, houses b. money, cars, houses, bonds c. bonds, money, cars, houses d. bonds, cars, money, houses 11. 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. 12. Treasury Bonds are a. both a store of value and a medium of exchange. b. a store of value, but not a medium of exchange c. a medium of exchange, but not a store of value. d. neither a store of value nor a medium of exchange. 13. When in France you notice that prices are posted in euros, 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. 14. If an economy uses silver as money, then that economy s money a. serves as a store of value but not as a medium of exchange. b. serves as a medium of exchange but not as a unit of account. c. is commodity money. d. has no intrinsic value. 15. Currently, U.S. currency is a. fiat money with intrinsic value. b. fiat money with no intrinsic value. c. commodity money with intrinsic value. d. commodity money with no intrinsic value. 16. For purposes of analyzing the money stock and its relationship to relevant economic variables, money is best thought of as a. those items that can be readily accessed and used to buy goods and services. b. currency only. c. currency plus all bank accounts. d. currency plus all bank accounts plus bonds. 17. The set of items that serve as media of exchange clearly includes a. balances that lie behind debit cards. b. demand deposits. c. other checkable depositis. 19. The set of items that serve as media of exchange clearly includes a. demand deposits. b. short-term bonds. c. credit cards.

3 Chapter16/The Monetary System People can write checks against a. demand deposits and money market mutual funds b. demand deposits but not money market mutual funds c. money market mutual funds but not demand deposits d. neither demand deposits nor money market mutual funds 21. M1 equals currency plus demand deposits plus a. nothing else. b. other checkable deposits. c. traveler's checks plus other checkable deposits. d. traveler's checks plus other checkable deposits plus savings deposits. 22. Which of the following items is included in M2? a. credit cards b. money market mutual funds c. corporate bonds d. large time deposits 23. Which of the following statements is correct? a. All items that are included in M1 are included also in M2. b. All items that are included in M2 are included also in M1. c. Credit cards are included in both M1 and M2. d. Savings deposits are included in both M1 and M 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 25. Money market mutual funds are included in a. M1 but not M2. b. M1 and M2. c. M2 but not M1. d. neither M1 nor M Credit cards are a. a medium of exchange. b. counted as part of M2 but not as part of M1. c. important for analyzing the monetary system. 27. The amount of currency per person in the United States is about a. $125. b. $300. c. $2,500. d. $3, The Federal Reserve a. was created in b. is the U.S. s central bank. c. has other duties in addition to controlling the money supply. 29. Who was reappointed Chair of the Board of Governors in 2009 by President Barrack Obama? a. Ben Bernanke b.christina Romer c. Timothy Geithner d. Bernie Madoff

4 4 Chapter 16/The Monetary System 30. Which of the following is not correct? a. The president of the New York Federal Reserve bank is the only Federal Reserve Regional Bank President who gets to vote at every meeting of the Federal Open Market Committee. b. The Fed s policy decisions influence the economy s rate of inflation in the short run and the economy s employment and production in the long run. c. The Fed s primary monetary policy tool is open-market operations. 31. Which of the following entities actually executes open-market operations? a. the Board of Governors b. the New York Federal Reserve Bank c. the Federal Open Market Committee d. the Open Market Committees of the regional Federal Reserve Banks 32. When conducting an open-market purchase, the Fed a. buys government bonds, and in so doing increases the money supply. b. buys government bonds, and in so doing decreases the money supply. c. sells government bonds, and in so doing increases the money supply. d. sells government bonds, and in so doing decreases the money supply. 33. In a system of 100-percent-reserve banking, a. banks do not make loans. b. currency is the only form of money. c. deposits are banks only assets. 34. If R represents the reserve ratio for all banks in the economy, then the money multiplier is a. 1/(1-R). b. 1/R. c. 1/(1+R). d. (1+R)/R. 35. The Fed s primary tool to change the money supply is a. changing the interest rate on reserves. b. changing the reserve requirement. c. conducting open market operations. d. redeeming Federal Reserve notes. 36. The interest rate the Fed charges on loans it makes to banks is called a. the prime rate. b. the federal funds rate. c. the discount rate. d. the LIBOR. 37. The interest rate that the Fed charges banks that borrow reserves from it is the a. federal funds rate. b. discount rate. c. reserve requirement. d. prime rate. 38. If the Fed increases the reserve ratio from 4 percent to 10 percent, then the money multiplier a. decreases from 25 to 10. b. decreases from 20 to 10. c. increases from 10 to 25. d. increases from 10 to 20.

5 Chapter16/The Monetary System During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action a. increases the money multiplier and increases the money supply. b. decreases the money multiplier and decreases the money supply. c. does not change the money multiplier, but increases the money supply. d. does not change the money multiplier, but decreases the money supply. 40. Today, bank runs are not a major problem for the U.S. banking system because a. bank runs are now illegal. b. banks now hold 100 percent of their deposits in reserve. c. banks are now all government-operated. d. the federal government now guarantees the safety of deposits at most banks. 41. The Federal Deposit Insurance Corporation a. protects depositors in the event of bank failures. b. has become insolvent in recent years due to a large number of bank failures. c. is part of the Federal Reserve System. d. in practice has seldom been of much use. 42. (LATA) In recent years the Federal Open Market Committee has focused on a target for a. M1 growth. b. the federal funds rate. c. the number of Treasury Securities issued by the federal government. d. total reserves of banks. e. Inflation 43. If the federal funds rate were above 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 reserves. b. buying bonds. This buying would increase reserves. c. selling bonds. This selling would reduce reserves. d. selling bonds. This selling would increase reserves. True/False 44. The Federal Reserve was created in 1913 after a series of bank failures in Federal Reserve governors are given long terms to insulate them from politics. 46. The chair of the Board of Governors regularly testifies to Congress about Fed policy. 47. Members of the Board of Governors are appointed by the president of the U.S. and confirmed by the U.S. Senate. 48. Other things the same, if banks decide to hold a smaller part of their deposits as excess reserves, the money supply will fall. SHORT ANSWER 49. Draw a simple T-account for First National Bank which has $5,000 of deposits, a required reserve ratio of 10 percent, and excess reserves of 00. Make sure your balance shee t balances.