Name: __________________________ Date: _____________

1.Economists use the term money to refer to:

A) income.
B) profits.
C) assets used for transactions.
D) earnings from labor.

2.Macroeconomists call assets used to make transactions:

A) real income.
B) nominal income.
C) money.
D) consumption.

3.All of the following are considered major functions of money except as a:

A) medium of exchange.
B) way to display wealth.
C) unit of account.
D) store of value.

4.People use money as a store of value when they:

A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.

5.People use money as a unit of account when they:

A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.

6.People use money as a medium of exchange when they:

A) hold money to transfer purchasing power into the future.
B) use money as a measure of economic transactions.
C) use money to buy goods and services.
D) hold money to gain power and esteem.

7.When a pizza maker lists the price of a pizza as $10, this is an example of using money as
a:
A) store of value.
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B) unit of account.
C) medium of exchange.
D) flow of value.

8.Money's liquidity refers to the ease with which:

A) coins can be melted down.
B) illegally obtained money can be laundered.
C) loans can be floated.
D) money can be converted into goods and services.

9.To make a trade in a barter economy requires:

A) currency.
B) a check.
C) scrip.
D) a double coincidence of wants.

10.Money that has no value other than as money is called ______ money.
A) fiat
B) intrinsic
C) commodity
D) government

11.A country that is on a gold standard primarily uses:

A) commodity money.
B) fiat money.
C) credit money.
D) the barter system.

12.In prisoner of war camps during World War II, the currency used was:
A) chocolates.
B) cigarettes.
C) gold.
D) IOUs.

13.An important factor in the evolution of commodity money to fiat money is:
A) a desire to reduce transaction costs.
B) a desire to increase transaction costs.
C) the fact that gold is no longer highly valued.
D) a desire to use gold for jewelry.

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 14.The use of fei as money on the island of Yap illustrates the idea of money as a social
convention because:
A) only fei physically in the possession of the owner is accepted in transactions.
B) legal claim to a fei never seen by current generations was accepted in transactions.
C) the central bank of Yap accepts fei in exchange for paper certificates.
D) the government of Yap verifies the authenticity of fei used for transactions.

15.In a country on a gold standard, the quantity of money is determined by the:

A) government.
B) central bank.
C) amount of gold.
D) buying and selling of government securities.

16.The quantity of money in the United States is essentially controlled by the:

A) President of the United States.
B) Department of the Treasury.
C) Federal Reserve.
D) system of commercial banks.

17.The central bank in the United States is the:

A) Bank of America.
B) U.S. Treasury.
C) U.S. National Bank.
D) Federal Reserve.

18.In the United States, monetary policy is controlled by:

A) the President.
B) the Congress.
C) the Federal Reserve.
D) the Treasury Department.

19.To increase the money supply, the Federal Reserve:

A) buys government bonds.
B) sells government bonds.
C) buys corporate stocks.
D) sells corporate stocks.

20.To reduce the money supply, the Federal Reserve:

A) buys government bonds.

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B) sells government bonds.
C) creates demand deposits.
D) destroys demand deposits.

21.Open-market operations are:

A) Commerce Department efforts to open foreign markets to international trade.
B) Federal Reserve purchases and sales of government bonds.
C) Securities and Exchange Commission rules requiring open disclosure of market
trades.
D) Treasury Department purchases and sales of the U.S. gold stock.

22.Currency equals:
A) M1.
B) the sum of funds in checking accounts.
C) the sum of checking accounts and paper money.
D) the sum of coins and paper money.

23.Demand deposits are funds held in:

A) currency.
B) certificates of deposit.
C) checking accounts.
D) money markets.

24.All of the following assets are included in M1 except:

A) currency.
B) demand deposits.
C) traveler's checks.
D) money market deposit accounts.

25.Money market mutual fund shares are included in:

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

26.Credit card balances are included in:

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

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 27.Checking account balances that are linked to debit cards are included in:
A) M1.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

28.Credit cards:
A) are part of the M1 money supply.
B) are part of the M2 money supply.
C) are part of both the M1 and M2 money supply.
D) do not affect the money supply.

29.Payment is deferred by using _______, but immediate access to funds occurs when using
______.
A) currency; demand deposits
B) credit cards; debit cards
C) demand deposits; savings deposits
D) debit cards; credit cards

30.In the United States, the money supply is determined:

A) only by the Fed.
B) only by the behavior of individuals who hold money and of banks in which money is
held.
C) jointly by the Fed and by the behavior of individuals who hold money and of banks
in which money is held.
D) according to a constant-growth-rate rule.

31.The money supply consists of:

A) currency plus reserves.
B) currency plus the monetary base.
C) currency plus demand deposits.
D) the monetary base plus demand deposits.

32.Bank reserves equal:

A) gold kept in bank vaults.
B) gold kept at the central bank.
C) currency plus demand deposits.
D) deposits that banks have received but have not lent out.

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 33.In the United States, bank reserves consist of:
A) currency and demand deposits.
B) vault cash and deposits at the Federal Reserve.
C) gold deposits at the Federal Reserve.
D) the money supply.

34.Assets of banks include:

A) money market mutual funds.
B) currency in the hands of the public.
C) loans to customers.
D) demand deposits.

35.Liabilities of banks include:

A) reserves.
B) currency in the hands of the public.
C) loans to customers.
D) demand deposits.

36.In a system with 100-percent-reserve banking:

A) all banks must hold reserves equal to 100 percent of their loans.
B) no banks can make loans.
C) the banking system completely controls the size of the money supply.
D) no banks can accept deposits.

37.In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a

bank, then the money supply:
A) increases by $100.
B) decreases by $100.
C) increases by more than $100.
D) remains the same.

38.In a 100-percent-reserve banking system, banks:

A) can increase the money supply.
B) can decrease the money supply.
C) can either increase or decrease the money supply.
D) cannot affect the money supply.

39.In a system with fractional-reserve banking:

A) all banks must hold reserves equal to a fraction of their loans.

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B) no banks can make loans.
C) the banking system completely controls the size of the money supply.
D) all banks must hold reserves equal to a fraction of their deposits.

40.Banks create money in:

A) a 100-percent-reserve banking system but not in a fractional-reserve banking
system.
B) a fractional-reserve banking system but not in a 100-percent-reserve banking
system.
C) both a 100-percent-reserve banking system and a fractional-reserve banking system.
D) neither a 100-percent-reserve banking system nor a fractional-reserve banking
system.

41.If there is no currency and the proceeds of all loans are deposited somewhere in the
banking system and if rr denotes the reservedeposit ratio, then the total money supply
is:
A) reserves divided by rr.
B) 1/rr.
C) reserves times rr.
D) reserves divided by (1 rr).

42.In a fractional-reserve banking system, banks create money when they:

A) accept deposits.
B) make loans.
C) hold reserves.
D) exchange currency for deposits.

43.In a fractional-reserve banking system, banks create money because:

A) each dollar of reserves generates many dollars of demand deposits.
B) banks have the legal authority to issue new currency.
C) funds are transferred from households wishing to save to firms wishing to borrow.
D) the wealth of the economy expands when borrowers undertake new debt obligations.

44.The difference between banks and other financial intermediaries is that only banks have
the legal authority to:
A) transfer funds from savers to borrowers.
B) pay interest on debt obligations.
C) manage portfolios of assets.
D) create assets that are part of the money supply.

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 45.Financial intermediation is the process of:
A) settling disputes between borrowers and lenders.
B) advising corporations on whether to expand using debt or equity.
C) transferring funds from savers to borrowers.
D) converting from a barter economy to a money economy.

46.The banking system creates:

A) liquidity.
B) wealth.
C) reserves.
D) currency.

47.The value of banks' owners' equity is called bank:

A) deposits.
B) reserves.
C) capital.
D) liquidity.

48.A bank balance sheet consists of only the following items:

Deposits $1,000
Reserves $100
Securities $400
Debt $500
Loans $2,000
What is the value of bank capital?
A) $1,000
B) +$500
C) +$1,000
D) +$1,500

49.The minimum amount of owners' equity in a bank mandated by regulators is called a

_____ requirement.
A) reserve
B) margin
C) liquidity
D) capital

50.The use of borrowed funds to supplement existing funds for purposes of investment is
called:
A) arbitrage.
B) leverage.

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 C) convergence.
D) intermediation.

Use the following to answer questions 51-53:

Bank Balance Sheet

Assets Liabilities & Net Worth
Reserves $ 10,000 Deposits $100,000
Loans 100,000 Debt 20,000
Securities 40,000 Equity 30,000

51.(Table: Bank Balance Sheet) Based on the table, what is the leverage ratio at the bank?
A) 3
B) 4.67
C) 5
D) 10

52.(Table: Bank Balance Sheet) Based on the table, what is the reserve-deposit ratio at the
bank?
A) 3 percent
B) 5 percent
C) 10 percent
D) 15 percent

53.(Table: Bank Balance Sheet) Based on the table, owners' equity will fall to zero if loan
defaults reduce the value of total assets by _____ percent.
A) 10
B) 20
C) 30
D) 40

54.The amount of capital that banks are required to hold depends on the:
A) amount of deposits held at a bank.
B) riskiness of the bank's assets.
C) reserve requirements set by the Fed.
D) level of deposit insurance coverage.

55.The monetary base consists of:

A) currency held by the public, plus reserves held by banks.

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B) all outstanding currency, plus reserves held by banks.
C) all outstanding currency, plus demand deposits.
D) all bank reserves.

56.The size of monetary base is determined by:

A) the Federal Reserve.
B) the Federal Reserve and banks.
C) preferences of households about the form of money they wish to hold.
D) business policies of banks and the laws regulating banks.

57.If currency held by the public equals $100 billion, reserves held by banks equal $50
billion, and bank deposits equal $500 billion, then the monetary base equals:
A) $50 billion.
B) $100 billion.
C) $150 billion.
D) $600 billion.

58.If currency held by the public equals $100 billion, reserves held by banks equal $50
billion, and bank deposits equal $500 billion, then the money supply equals:
A) $100 billion.
B) $150 billion.
C) $600 billion.
D) $650 billion.

59.The reservedeposit ratio is determined by:

A) the Federal Reserve.
B) business policies of banks and the laws regulating banks.
C) preferences of households about the form of money they wish to hold.
D) the Federal Deposit Insurance Corporation (FDIC).

60.The currencydeposit ratio is determined by:

A) the Federal Reserve.
B) business policies of banks and the laws regulating banks.
C) preferences of households about the form of money they wish to hold.
D) the Federal Deposit Insurance Corporation (FDIC).

61.The preferences of households determine the:

A) reservedeposit ratio.
B) currencydeposit ratio.
C) size of the monetary base.

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D) loandeposit ratio.

62.If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the
ratio of currency to deposits, then the money supply is equal to ______ divided by
______ multiplied by B.
A) (rr + 1); (rr + cr)
B) (cr + 1); (cr + rr)
C) (rr + cr); (rr + 1)
D) (rr + cr); (cr + 1)

63.The ratio of the money supply to the monetary base is called:

A) the currencydeposit ratio.
B) the reservedeposit ratio.
C) high-powered money.
D) the money multiplier.

64.High-powered money is another name for:

A) currency.
B) demand deposits.
C) the monetary base.
D) M2.

65.If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits
(cr) is constant and the monetary base (B) is constant, then:
A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the money supply does not change.

66.If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits
(rr) is constant and the monetary base (B) is constant, then:
A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the money supply does not change.

67.The money supply will increase if the:

A) currencydeposit ratio increases.
B) reservedeposit ratio increases.
C) monetary base increases.

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D) discount rate increases.

68.The money supply will decrease if the:

A) monetary base increases.
B) currencydeposit ratio increases.
C) discount rate decreases.
D) reservedeposit ratio decreases.

69.If the reservedeposit ratio is less than one, and the monetary base increases by $1
million, then the money supply will:
A) increase by $1 million.
B) decrease by $1 million.
C) increase by more than $1 million.
D) decrease by more than $1 million.

70.If the currencydeposit ratio equals 0.5 and the reservedeposit ratio equals 0.1, then the
money multiplier equals:
A) 0.6.
B) 1.67.
C) 2.0.
D) 2.5.

71.If the monetary base equals $400 billion and the money multiplier equals 2, then the
money supply equals:
A) $200 billion.
B) $400 billion.
C) $800 billion.
D) $1,000 billion.

72.When the Fed makes an open-market sale, it:

A) increases the money multiplier (m).
B) increases the currencydeposit ratio (cr).
C) increases the monetary base (B).
D) decreases the monetary base (B).

73.If you hear in the news that the Federal Reserve conducted open-market purchases, then
you should expect ______ to increase.
A) reserve requirements
B) the discount rate
C) the money supply

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D) the reservedeposit ratio

74.When the Federal Reserve conducts an open-market purchase, it buys bonds from the:
A) public.
B) U.S. Treasury.
C) Internal Revenue Service.
D) International Monetary Fund.

75.For borrowing from the discount window, the Fed sets the _____ of borrowing, compared
to borrowing using the Term Auction Facility, where the Fed sets the _____ of borrowing.
A) maximum quantity; minimum quantity
B) minimum price; maximum price
C) quantity; price
D) price; quantity

76.When banks borrow through the Term Auction Facility, the price of borrowing is
determined by:
A) the Federal Reserve.
B) a competitive bidding process.
C) the difference between the discount rate and the interest rate on three-month
Treasury securities.
D) open-market operations.

77.The more funds that the Federal Reserve makes available for banks to borrow through the
Term Auction Facility, the _____ the monetary base and the _____ the money supply.
A) smaller; smaller
B) smaller; greater
C) greater; greater
D) greater; smaller

78.Two ways for banks to borrow reserves from the Federal Reserve are through:
A) the discount window and the Term Auction Facility.
B) open-market operations and excess reserve swaps.
C) decreasing the reservedeposit ratio and decreasing the currencydeposit ratio.
D) fractional-reserve banking and financial intermediation.

79.When the Fed decreases the interest rate paid on reserves, it:
A) increases the reservedeposit ratio (rr).
B) decreases the reservedeposit ratio (rr).
C) increases the monetary base (B).

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D) decreases the monetary base (B).

80.When the Fed decreases the interest rate paid on reserves, if the ratio of currency to
deposits decreases also while the monetary base is constant, then:
A) it cannot be determined whether the money supply increases or decreases.
B) the money supply increases.
C) the money supply decreases.
D) the two changes exactly offset each other.

81.When the Fed increases the discount rate, it:

A) increases the reserve to deposit ratio (rr).
B) decreases the reserve to deposit ratio (rr).
C) is likely to increase the monetary base (B)
D) is likely to decrease the monetary base (B).

82.The interest rate charged on loans by the Federal Reserve to banks is called the:
A) federal funds rate.
B) prime rate.
C) discount rate.
D) Treasury bill rate.

83.When the Fed increases the interest rate paid on reserves, it:
A) increases the reservedeposit ratio (rr).
B) decreases the reservedeposit ratio (rr).
C) increases the monetary base (B).
D) decreases the monetary base (B).

84.If the Federal Reserve wishes to increase the money supply, it should:
A) decrease the discount rate.
B) increase interest paid on reserves.
C) sell government bonds.
D) decrease the monetary base.

85.The most frequently used tool of monetary policy is:

A) open-market operations.
B) changes in the discount rate.
C) changes in reserve requirements.
D) changes in interest rate paid on reserves

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 86.To increase the monetary base, the Fed can:
A) conduct open-market purchases.
B) conduct open-market sales.
C) raise the interest rate paid on reserves.
D) lower the required reserve ratio.

87.To increase the money multiplier, the Fed can:

A) conduct open-market purchases.
B) conduct open-market sales.
C) raise the interest rate paid on reserves.
D) lower the interest rate paid on reserves.

88.If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold
_____ excess reserves, which will _____ the money multiplier.
A) more; increase
B) more; decrease
C) fewer; increase
D) fewer; decrease

89.Open-market operations change the ______; changes in interest rate paid on reserves
change the ______; and changes in the discount rate change the ______.
A) monetary base; monetary base; monetary base
B) money multiplier; money multiplier; money multiplier
C) monetary base; money multiplier; monetary base
D) money multiplier; monetary base; money multiplier

90.Excess reserves are reserves that banks keep:

A) in their vaults.
B) at the central bank.
C) to meet legal reserve requirements.
D) above the legally required amount.

91.Quantitative easing is most closely akin to:

A) discount lending.
B) open-market operations.
C) fractional-reserve banking.
D) capital requirements.

92.Compared to typical open-market operations, when pursuing quantitative easing, Federal

Reserve purchases tended to be _____ securities.

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A) safer and shorter-term
B) tax-favored and foreign
C) smaller-denomination and higher-grade
D) riskier and longer-term

93.The quantitative easing operations conducted by the Federal Reserve between 2007 and
2011 resulted in _____ increases in the monetary base and _____ increases in money
supply.
A) no; no
B) large; larger
C) large; smaller
D) small; smaller

94.The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011
resulted in a large increase in the monetary base that was partially offset by:
A) a significant increase in the reservedeposit ratio.
B) a significant decrease in the reservedeposit ratio.
C) open-market purchases.
D) open-market sales.

95.To prevent banks from using excess reserves to make loans that would increase the
money supply, the Federal Reserve could conduct open-market ______ and _____ the
interest rate paid on bank reserves.
A) purchases; raise
B) purchases; lower
C) sales; raise
D) sales; lower

96.Between August 1929 and March 1933, the money supply fell 28 percent. At that time the
monetary base ______ and the currencydeposit and reservedeposit ratios both ______.
A) fell; fell
B) fell; rose
C) rose; fell
D) rose; rose

97.If many banks fail, this is likely to:

A) increase the ratio of currency to deposits.
B) decrease the ratio of currency to deposits.
C) have no effect on the ratio of currency to deposits.
D) decrease the amount of currency in circulation, if the Fed takes no action.

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 98.If many banks fail, this is likely to:
A) cause surviving banks to lower their ratios of reserves to deposits.
B) cause surviving banks to raise their ratios of reserves to deposits.
C) have no effect on the ratio of reserves to deposits in surviving banks.
D) cause surviving banks to hold less currency.

99.In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in
bank accounts. This action would be expected to ______ the currencydeposit ratio and
______ the money supply.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

100.If the monetary base fell and the currencydeposit ratio rose but the reservedeposit ratio
remained the same, then:
A) the money supply would fall, but not by as much as it would have fallen if the
reservedeposit ratio had risen.
B) the money supply would fall, but not by as much as it would have fallen if the
reservedeposit ratio had fallen.
C) the money supply would fall more than it would have fallen if the reservedeposit
ratio had risen.
D) it is impossible to be certain whether the money supply would fall or rise in this
case.

101.Assume that the monetary base (B) is $100 billion, the reservedeposit ratio (rr) is 0.1,
and the currencydeposit ratio (cr) is 0.1.
a. What is the money supply?
b. If rr changes to 0.2, but cr is 0.1 and B is unchanged, what is the money supply?
c. If rr is 0.1 and cr is 0.2, but B is unchanged, what is the money supply?

102.As the U.S. economy approached the millennium, January 1, 2000, many people
cautiously began to hold larger than normal quantities of currency as protection against a
possible disruption of banking services that could result from computer glitches.
a. How did this greater preference for currency affect the money supply?
b. How could the Federal Reserve offset such an increase in currency preferences?

103.The Federal Reserve's tools to control the money supply include: open-market operations,
the discount rate, and interest payments on reserves.
a. How should each instrument be changed if the Fed wishes to decrease the money supply?

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 b. Will the change affect the monetary base and/or the money multiplier?

104.Some economists have advocated replacing government deposit insurance with 100-
percent- reserve banking. Under this plan, banks would hold all deposits as reserves.
Deposit insurance would no longer be necessary, because banks would always have the
reserves to meet customer withdrawals.
a. What would happen to the money supply (defined as currency and bank deposits) in the
transition from fractional-reserve to 100-percent-reserve, if this plan were implemented,
holding other factors constant?
b. What will be the value of the money multiplier?

105.Why does the Federal Reserve not have complete control over the size of the money
supply? Give at least two reasons.

106.Construct a bank balance sheet with the following items: reserves, deposits, loans,
securities, capital, and debt. Choose values so that the reservedeposit ratio is 10 percent
and the leverage ratio is 10. Give an example of a change in asset values that would push
bank capital to zero. What happens when bank capital is gone?

107.As the 20082009 financial crisis unfolded, one major U.S. bank had a leverage ratio of
54. In Canada regulators put a ceiling on bank leverage ratios of 20. Compare the change
in asset values that would push the capital in the U.S. bank to zero with the change
required to eliminate capital in a Canadian bank at the ceiling-leverage ratio. What is the
implication of the differences in maximum leverage ratios for the stability of the banking
system?

108.Economists occasionally speak of helicopter money as a short-hand approach to

explaining increases in the money supply. Suppose the Chairman of the Federal Reserve
flies over the country in a helicopter dropping 10,000,000 in newly printed $100 bills (a
total of $1 billion). By how much will the money supply increase if, holding everything
else constant:
a. all of the new bills are held by the public?
b. all of the new bills are deposited in banks that choose to hold 10 percent of their deposits as
reserves (and no one in the economy holds any currency)?
c. all of the new bills are deposited in banks that practice 100-percent-reserve banking?
d. people in the economy hold half of their money as currency and half as deposits, while banks
choose to hold 10 percent of their deposits as reserves?

109.A macroeconomist threatens to call the Secret Service to have Mr. Biggy Rich arrested
for counterfeiting because Mr. Rich claims he makes a lot of money.

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 a. Carefully explain why the macroeconomist is making this threat based on the
macroeconomic definition of money. Be sure to explain the macroeconomic functions of
money.
b. Suggest an alternative phrase that Mr. Rich can use that will not result in a charge of
counterfeiting.

110.Explain at least three factors that will affect the quantity of reserves that a bank wishes to
hold.

111.The development of fiat money is quite perplexing, as people began to value something
that is intrinsically useless. Explain why fiat money came into use.

112.John withdraws $100 from his checking account and deposits it in his saving account.
What will be the effect of this transaction on different measures of money, i.e. C, M1, and
M2?

113.How do credit card transactions affect the measurement of money?

114.The monetary base of Moneyland is $500 million. The current-deposit ratio (cr) is 0.2
and reserve-deposit ratio (rr) is 0.2. Calculate the money multiplier and money supply.

115.How much effect do the purchase and sale of bonds through open-market operations have
on the money supply?

116.Some economists believe that the large decline in the money supply was the primary
cause of the Great Depression of the 1930s. Explain how this can be the case.

117.Why can the Federal Reserve not control the money supply with complete accuracy?

118.What is the effect of the following on the money supply?

a. Increase in currency-deposit ratio, keeping all other things constant
b. Decrease in reserve-deposit ratio, keeping all other things constant

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119. The table below represents the balance sheet of a bank. What is the leverage ratio of the
bank, and what does it mean?

Assets Liabilities and Owners Equity

Reserves 500Deposits
Loans 1000Debt
Securities 500Owners' equity

120.The Federal Reserve wants to increase the money supply by printing and distributing 1
million dollars worth of currency notes. What will be the actual increase in money supply
if the public holds one fourth of the currency as cash, and deposits rest of the money in
banks that hold 5 percent of their deposits as reserves?

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Answer Key

1.C
2.C
3.B
4.A
5.B
6.C
7.B
8.D
9.D
10.A
11.A
12.B
13.A
14.B
15.C
16.C
17.D
18.C
19.A
20.B
21.B
22.D
23.C
24.D
25.B
26.D
27.C
28.D
29.B
30.C
31.C
32.D
33.B
34.C
35.D
36.B
37.D
38.D
39.D
40.B
41.A
42.B
43.A
44.D

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45.C
46.A
47.C
48.C
49.D
50.B
51.C
52.C
53.B
54.B
55.A
56.A
57.C
58.C
59.B
60.C
61.B
62.B
63.D
64.C
65.C
66.C
67.C
68.B
69.C
70.D
71.C
72.D
73.C
74.A
75.D
76.B
77.C
78.A
79.B
80.B
81.D
82.C
83.A
84.A
85.A
86.A
87.D
88.B
89.C
90.D

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 91.B
92.D
93.C
94.A
95.C
96.D
97.A
98.B
99.B
100.A
101.a. The money supply is $550 billion.
b. The money supply is $366.67 billion.
c. The money supply is $400 billion.
102.a. The greater preference for currency increased the currencydeposit ratio, which reduced the
money multiplier and reduced the money supply for a given monetary base.
b. The Fed could engage in open-market purchases to increase the monetary base to offset the
decline in the money multiplier. (Reducing the discount rate and reducing reserve
requirements could theoretically achieve the same outcome but are not as practical).
103.a. The Fed would conduct open-market sales, raise the discount rate, and raise interest paid on
reserves.
b. Open-market operations and discount rate changes affect the monetary base. Changing
interest payments on reserves alters the money multiplier.
104.a. In the process of moving from fractional-reserve to 100-percent-reserve banking, the money
supply would have to contract if the monetary base remained unchanged. Deposits will have
to contract to equal the quantity of reserves.
b. The money multiplier equals 1= [(1 + cr)/(1 + cr)].
105.For a given monetary base, controlled by the Federal Reserve, the money supply also
depends on: (1) the amount of currency the public chooses to hold relative to deposits,
and (2) the amount of reserves that banks choose to hold relative to deposits. Therefore,
actions of both the public and banks influence the size of the money supply in addition to
the actions of the Fed.
106.Many values are possible in the balance sheet, but (1) assets should equal liabilities and
net worth, (2) items should be correctly categorized as assets or liabilities, (3) the ratio of
reserves to deposits should be 10 percent, and (4) the ratio of assets to capital should be
10, as in the example below. If asset values fall by 10 percent of total assets (for example,
if loans fall from 100,000 to 85,000 in the example below), then capital equals zero.
When capital is exhausted, the bank will not have sufficient resources to pay off
depositors or debt holders if there is a further decline in asset values.
Bank Balance Sheet
Assets Liabilities & Net Worth
Reserves $ 10,000 Deposits $100,000
Loans 100,000 Debt 35,000
Securities 40,000 Capital 15,000
107.With a leverage ratio of 54, a 1.85 percent fall in asset values wipes out capital, while
with a leverage ratio of 20, a 5 percent fall in asset values wipes out capital. The higher
leverage ratio of the U.S. bank makes it much more susceptible to losing capital and

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 being unable to pay off depositors. The higher leverage ratio puts the U.S. system at
greater risk for bank runs, bank failures, and greater instability.
108.a. $1 billion; b. $10 billion; c. $1 billion; d. $5.5 billion
109.a. Money consists of the assets used to make transactions. Money serves as a store of value,
unit of account, and medium of exchange. In most fiat money economies, the government
maintains a monopoly over the supply of money. If Mr. Rich is making money, i.e.,
increasing the supply of money, this is counterfeiting and is illegal.
b. Mr. Rich could say he earns a large income, or is very wealthy, or has a lot of money,
or makes big profits.
110.Banks' demand for reserves will be affected by: (1) legal reserve requirements, (2) the
size and regularity of customer deposits and withdrawals, (3) the interest rate paid on
reserves relative to alternative bank investments, and (4) the number of bank failures and
level of uncertainty in the economy.
111.Fiat money fulfills all the three purposes of money better than other types of money. Fiat
money provides a store of value, i.e. it can be stored to be used in future. It has a unit of
account, e.g., dollar, euro, etc. And it is a widely accepted medium of exchange.
112.Checking accounts are included in M1 and M2, but not in C. Saving accounts are
included only in M2. So this transaction will have no effect on C and M2, but M1 will be
reduced by $100.
113.When a credit card is used, there is no actual payment made by the credit card holder at
the moment, since this payment is deferred. So this transaction does not affect any
measure of money. Only when a credit card payment is made to the bank is the
transaction included in different measures of money.
114.Money multiplier = (1 + cr) / (rr + cr) = 1.2/0.4 = 3
Money supply = money multiplier x monetary base
Money supply = (3)(500) = $1500 million
115.When the Federal Reserve purchases bonds through open-market operations, it increases
the monetary base and the money supply, while the selling of the bonds to the public
decreases the monetary base and money supply.
116.Banks defaulted on their deposits. This caused current-deposit ratios to fall, and hence
there was a reduction in the money multiplier. So, despite the increase in the monetary
base, the money supply was reduced further, making the depression worse.
117.The Federal Reserve cannot completely control the money supply because it has no
control on how much money the public will hold as currency and not deposit in banks.
Another reason is that it cannot control how much reserve banks will keep against the
deposits they have.
118.a. This will decrease the money multiplier and so the money supply will also decrease.
b. This will increase the money multiplier and so the money supply will also increase.
119.Leverage ratio = Total assets / capital (owners equity) = 2000/200 = 10
This means that for the contribution of every dollar by the bank owner, nine dollars are
contributed through deposits and debts.
120.Money multiplier = 1 / reserve-deposit ratio = 1/.05 = 20. As 0.25 million will be held by
the public and 0.75 million will be deposited in the bank, the money deposited in banks
will increase the money supply by ((.75)(20))($5 million). The net increase in money
supply will be = .25 + 15 = $15.25 million.

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