Transcript Multiple Choice Tutorial Chapter 13 Money and the

Tutorial
Chapter 5
Money and Banking
1
1. Barter works best
a. in the absence of a double coincidence
of wants.
b. when many different product are
available in the economy.
c. when money is relatively available to
establish relative prices.
d. when each trader has what the other
wants and wants what the other has.
D. Barter requires a coincidence of
wants; each person has to have
exactly what the other wants.
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2. A coincidence of wants happens exists when
a. two people want the same thing at the
same time.
b. one person wants to but two different
things at the same time.
c. the individual who has what I want, also
wants what I have.
C. A problem with barter is how the alternate goods
or services can be divided. If one person wants
eggs and the other wants a pound of beef, but the
second person still has cattle, what to do? If the
cow is killed, there will be a lot of meat left over.
3
3. The essential characteristic required before any
substance can function as money is that
a. it be issued by the government.
b. it be backed by a precious metal.
c. the supply of it be unlimited and uncontrolled.
d. people accept it as money.
D. Money can take just about any form as long as it is
accepted by everyone and is easily exchanged. Money
can even be an electronic impulse on a computer. All
that is necessary is to keep track of someone’s debit
and someone else's credit in a financial transaction.
4
4. To say that money functions as a medium of
exchange is to say that
a. it is the preferred form of compensation for
fortune-tellers, mediums, and those.
through whom the spirit world is contacted
b. it is the generally accepted form of
payment for goods and services.
c. it is the common unit of expressing the
value of goods and services.
d. it is bought and sold on the stock exchange.
B. Money has several purposes, one is that it is used
by consumers to buy and sell in the market place.
This is using money as a medium of exchange.
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5. School administrators announce the following
schedule of fees for the next academic year: In-state
tuition, $175 per credit hour; Out-of-state tuition,
$400 per credit hour; Room-and-board, $3,000 per
semester. This is an example of money functioning as
a. a medium of exchange.
b. a store of value.
c. fiat money.
d. a unit of account.
D. Money is being used to measure
the cost of education in the case.
6
6. Mary Ellen deposits $100 into her savings account each
month. Her daughter Carolyn keeps all her pennies in a
piggy bank. These are examples of money functioning as
a. a store of value.
b. commodity money.
c. a medium of exchange.
d. a standard of deferred payments.
A. Another purpose of money is that it can be used as a
store of value. Money put into savings to be available at
a later point in time is using money as a store of value.
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7. All of the following are examples of
commodity money except
a. cattle.
b. gold.
c. tobacco.
d. $10 Federal Reserve notes.
D. Commodity money is money that has some
intrinsic value other than money. Cattle, gold,
and tobacco have value other than being used
as money. Federal Reserve notes (dollar bills)
do not have value except as money.
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8. All of the following are functions of money except
a. medium of exchange.
b. unit of account.
c. index of prices.
d. standard of deferred payment.
C. Money is used as a medium of exchange, a unit of
account, and a standard of deferred payment.
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9. All of the following are problems with
commodity money except
a. often commodity money deteriorates in
storage.
b. often commodity money is too bulky for
major transactions.
c. often commodity money is not divisible into
small and uniform units.
d. often commodity money is viewed as an
unfair competitor by suppliers of fiat money.
D. Different forms of money always compete,
this is not a problem; in such a case a good
form of money will drive out a bad form.
10
10. Whatever functions as money must be
a. authorized by the government.
b. accepted for deposit by banks.
c. backed by precious metals like gold or silver.
d. limited in supply.
D. Because money can be just about anything, it does not
have to be sanctioned by the government or backed up
by anything. It does not have to be in a form that can
be deposited in a bank. It does, however, have to be
limited in supply to have any value.
11
11. In the United States economy which one
of the following is not money?
a. A Susan B. Anthony $1 coin.
b. A checking account at a bank.
c. A 25-cent piece (i.e., a quarter).
d. A $100 U.S. Government savings bond.
D. U.S Government savings bonds are not
transferable in terms of ownership.
Therefore, they could not be used as money.
12
12. The difference between bank notes, Federal
Reserve notes, and fiat money is that
a. fiat money is redeemable for gold or silver,
but the others are not.
b. bank notes are redeemable for gold or silver
but the others are not.
c. fiat money derives its acceptability as money
from the precious metal which “back” it.
B. Bank notes are papers promising a specific amount
of gold or silver to bearers who presented them to
issuing banks for redemption; an early type of money.
13
13. Money is legal tender if
a. people willing accept it in payment of debts.
b. it is backed by gold or silver.
c. it is commodity money.
d. the government says it is.
D. Legal tender is when the legal courts of the land
recognize certain pieces of paper as payment of personal
and public debt (public debt is tax money owed to the
government). This is why is says on each of our dollars,
“this note is legal tender for all debts public and private.”
14
14. An important function of commercial banks, in
addition to storing money and keeping it safe, is to
a. print new currency.
b. issue fiat money.
c. mint coins.
d. make loans.
D. We have what is called a partial reserve banking system.
Banks only keep a part of their assets in reserve, the rest
is free to lend out; the interest earned on the money that
is lent out is how banks make a profit.
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15. The first bankers were probably
a. carpenters.
b. stock brokers.
c. goldsmiths.
d. sea captains.
C. In the very early days of capitalism, gold and silver
were the primary forms of money. When a person had
a lot of gold he would want to keep his gold safely
somewhere. So he would give his money to a goldsmith.
These goldsmiths, in turn, discovered that they could
lend a portion of their gold holdings out to make
interest income. Thus they became our first banks.
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16. In the world of banking, checks are
a. written instructions from a depositor to the bank.
b. written instruction from one depositor to another.
c. a form of commodity money.
d. token money.
A. A check is simply instructions to a bank to
free the funds in a person’s bank account.
17
17. Fractional reserve banking occurs when
a. a bank has reserves which exceed it deposits.
b. a bank has reserves which are equal to its deposits.
c. a bank has reserves which are less than its deposits.
d. some depositors lose their deposits through poor
banking management.
C. A fractional reserve banking system is a
system that allows its banks to lend out a
portion of every dollar deposited in the bank.
This is what allows a bank to make a profit.
18
18. When prices rise
a. the purchasing power of money rises.
b. the purchasing power of money falls.
c. the purchasing power of money remains unchanged.
d. the purchasing power of money either rises or falls,
depending upon the size of the national debt.
B. As prices rise it takes more money to buy the
same amount of goods and services as used to
be the case. This is what we call inflation.
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19. Which of the following is most critical for the
maintenance of an efficient, productive economy?
a. Money backed by gold or silver.
b. Steadily rising prices.
c. An unlimited and unregulated supply of money.
d. A properly functioning monetary system.
D. A stable and properly functional monetary system
is a pillar which any economy is built upon.
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20. The United States is said to have a dual banking
system because
a. some banks make mortgage loans and some
banks do not.
b. some banks have state charters and some have
national charters.
c. two different types of banks are authorized to
issue bank notes.
B. If you wanted to start a bank, you would need a
license. You could get a license either from the federal
government or the state banking commission which
the bank would reside. If you got your license from
the federal government you would be a national bank
and would have the word national in your name.
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21. All of the following are powers of the Federal
Reserve System except
a. the ability to buy and sell government securities.
b. the authority to issue Federal Reserve notes.
c. the responsibility to clear checks.
d. the obligation to make loans to the general public.
D. The Federal Reserve is known as a banker’s bank.
It only does business with other financial
institutions and not the general public or businesses.
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22. Which one of the following is not a function of the
Federal Reserve banks? The banks serve as
a. lenders to major corporations.
b. lenders to banks.
c. lenders to the federal government.
d. banks to bankers.
A. A Federal Reserve bank is what is called
a “bankers bank,” it only does business
with financial institutions. It does not do
business with consumers or businesses.
23
23. The discount rate is
a. the interest rate charge to commercial banks
for loans from the Federal Reserve bank.
b. the rate or percent of deposits which banks
are required to hold on reserve.
c. the rate of interest paid on government bonds.
d. the charge for cashing a check at a Federal
Reserve bank.
A. Only financial institutions can borrow money
from the Fed. The interest rate they pay to
borrow this money is called the discount rate.
24
24. Between 1930 and 1933 many banks in the U.S.
failed because
a. the FDIC moved too slowly to prevent the bank
failures.
b. most bankers were either corrupt or incompetent.
c. of excessive regulation by the federal government.
d. people lost confidence in them.
D. Our banking system works because we believe it works.
Because we have a partial reserve banking system, if
enough depositors lose faith and withdraw their money
from banks, the whole banking system would fail.
25
25.The Federal Reserve banks probably could have prevented
many of the bank failures in the early 1930’s by
a. raising the reserve requirements of the commercial banks.
b. lending large sums of money to the commercial banks.
c. improving the system whereby checks are cleared.
B. Incredibly as it is, the Fed actually tightened the money
supply in the early years of the Great Depression. The
proper policy would have been to loosen the money
supply to get more money in circulation in order to
encourage an increase in spending.
26
26. Because Federal Reserve banks have unlimited
power to create money,
a. they are more likely to fail than other banks.
b. they are the cause of most inflation in the U.S.
c. they cannot fail.
d. FDIC insurance against bank failure is
unnecessary.
C. Technically the Fed cannot fail because it can always
meet its commitments by creating new money. However,
if it does this too much, the result would be inflation.
27
27. Which of the following was not an action taken to
end the financial crisis of the 1930’s?
a. Creation of the Federal Reserve System.
b. Creation of the Federal Deposit Insurance Corp.
c. A one week “bank holiday.”
d. Revision of the banking laws.
A. The Federal Reserve System was established in 1913,
the same year that the income tax became law.
Woodrow Wilson was the President at that time.
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28. The Fed’s Board of Governors are
a. elected by the member banks.
b. chosen by the state Governors.
c. elected for seven year terms.
d. selected by the President with approval by the Senate.
D. All presidential appointments have to be approved by
the Senate according to our Constitution. There are
seven members of the Board of Governors. There terms
are for 14 years after which they cannot be
reappointed, except for the chairman who serves for
four years, but he can be reappointed by the President.
29
29. The Federal Open Market Committee of the Fed
a. is responsible for regulation of commodity
markets.
b. is responsible for regulation of the New York
Stock Exchange.
c. uses the buying and selling of U.S. government
securities to accomplish its objectives.
C. The main function of the Open Market Committee
is to decide when and how much to buy or sell
government securities. During periods of inflation,
more securities would be sold; during periods of
unemployment, more securities would be bought.
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30. The number of Federal Reserve banks is
a. seven.
b. twelve.
c. fourteen.
d. about 10,000.
B. The United States is divided into 12 federal reserve
districts. Each district has a Federal Reserve bank.
31
31. The job of the Federal Deposit Insurance
Corporation is to
a. guarantee that investors will not lose money by
investing in government bonds.
b. insure U.S. Treasury deposits in the Federal
Reserve banks.
c. insure commercial banks against the possibility
of losing money.
d. insure the deposits in commercial banks and
savings banks.
D. The Federal Deposit Insurance Corporation
(FDIC) was established by the U.S. Congress. Each
bank account of participating banks is insured.
32
32. One of the purposes of the banking reforms of the
1930’s was to
a. require banks to invest in more stocks.
b. require banks to invest in more corporate
bonds.
c. discourage the public from putting so much
faith in the banking system.
d. restrict banks’ assets primarily to loans and
government securities.
D. Before this banks held their assets in many
different ways. Many of these forms became
worthless as a result of the stock market crash in
October of 1929 and the ensuing Great Depression.
33
33.The U.S. has more banks per capita than most
other countries primarily because it
a. has more people.
b. has a more prosperous economy.
c. has restricted branch banking.
d. continues to prohibit bank holding companies.
C. Where one bank may be more efficient,
government rules prohibit certain types of
banking practices, thus branch banking is
somewhat restricted, especially across state lines.
This, however, is in the process of changing.
34
34. All of the following are goals of the Fed except
a. a high level of employment in the U.S.
b. stability in interest rates.
c. rising prices (to encourage production).
d. stability in financial markets.
C. The primary goal of the Fed is price stability. With a
threat of inflation, the Fed will decrease the money
supply in order to bring down prices. If
unemployment and falling prices is a problem, the Fed
will take steps to increase the nation’s money supply.
35
35. Deregulation of banks and other depository
institutions did all of the following except
a. allow all depository institutions to offer checking
accounts.
b. allow all depository institutions to offer money
market accounts.
c. allow thrift institutions more latitude in
investing their assets.
d. allow the FDIC to open branch banks of its own.
D. The FDIC is what it has always been; an
institution that insures bank deposits.
36
36. Deregulation in the 1970’s, it is now
recognized, produced a disaster resulting in a
financial bailout. This is an example of
a. moral hazard.
b. the Laffer Curve.
c. Classical economics.
A. This is a typical case of “moral hazard.” Moral hazard
takes place when the risks of investments are eliminated
by promise of a bail out if anything goes wrong. Generous
depository insurance provided this protection. This
encouraged banks to make risky investments hoping to
make big gains with no fear of loss. The resultant collapse
in banking led to the huge $200 billion bailout of 1989.
37
37. Insurance protecting individuals from the loss of their
bank deposits
a. makes bank officials especially careful about the
loans and investments they make.
b. makes it virtually impossible for a bank to fail.
c. is so costly that few banks can afford it.
d. makes depositors less concerned about the safety of
their money than the interest rate it is earning.
D. The purpose of the insurance, like the FDIC, is to shore
up citizen’s confidence in the banking system. As long
as people believe that the system will work, it will work.
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38. When many depository institutions - especially
thrifts - failed in the 1970’s and 1980’s,
a. most depositors got their money back.
b. most depositors lost everything.
c. most of the losses to depositors were paid out of
the pockets of the owners of these institutions.
A. The government was involved in a multi billion dollar
bailout of many thrift institutions. This along with the
FSLIC, which no longer exists, protected most depositors.
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39. Cleaning up the mess created by the failure
of so many thrift institutions in the 1980’s
has involved all of the following except
a. increasing deposit insurance premiums.
b. asking the American taxpayer to pay
nearly $125 billion to cover losses.
c. shutting down weak and failing thrifts.
d. creating a new super-agency with great
new powers to oversee the day-to-day
operations of thrifts.
D. The result of the bail out was a restoration of
confidence and the survival of many savings and loans.
However, the distinction between savings and loans and
banks was obliterated; today there is little difference.
40
40. Banks are referred to as financial
intermediaries because they
a. receive new Federal Reserve notes from the
Fed and put them into circulation.
b. bring together the two sides of the marketsavers and borrowers.
c. bring different savers into contact with each
other.
d. bring about the merger of smaller banks to
make larger ones.
B. The purpose of banks is to take in money from savers,
to keep a small portion of this money to meet day to
day transactions, and then to lend out the rest of it.
41
41. When liquidity refers to the ease with which
an asset can be converted into the medium of
exchange without a significant loss of value,
the least liquid of the assets below is
a. real estate.
b. currency.
c. a traveler’s check.
d. oil.
A. Of the options listed above, real estate would be the
most difficult to convert to a medium of exchange.
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42. Immediately after it accepts its first deposit the day it
opens its doors, the balance sheet of the Brand New
National Bank will likely contain all of the following except
a. net worth.
b. checkable deposits.
c. stock in the district Federal Reserve bank.
d. loans.
D. A bank has to attract money before it has any to lend.
Every dollar in a bank comes from someone’s deposit.
43
43. All of the following might be assets of a bank except
a. building.
b. furniture.
c. outstanding loans.
d. checkable deposits.
D. Checkable deposits are not assets of a
bank because they are liabilities. This is
money that the bank owes depositors.
44
44. University Center National Bank has checkable deposits
of $800,000, outstanding loans and other securities
valued at $550,000 and $250,000 of cash in its vault.
When the reserve requirement is 20%, the bank has
a. total reserves of $160,000.
b. total reserves of $300,00.
c. excess reserves of $90,000.
d. excess reserves of $250,00.
C. The bank’s assets equal $800,000. Of this it can legally
lend out .80 x $800,000 or $640,000. Because it has already
lent out $550,000 it has $90,000 it can still lend out.
45
45. The requirement that banks hold required
reserves comes from the
a. Federal Reserve.
b. stockholders of the bank
c. depositors of the bank.
d. Federal Deposit Insurance Corporation.
A. The Federal Reserve is our central bank.
It has a certain amount of authority over
all financial institutions.
46
46. Liquidity contributes to the bank’s achievement of
all of the following except
a. confidence of the depositors.
b. income of the bank.
c. ability to pay funds out to depositors on demand.
d. flexibility to make an immediate loan to a valued
customer.
B. A bank’s assets are not dependent on the form in
which a bank holds those assets. Liquidity, therefore,
does not determine the income of a bank.
47
47. The federal funds rate is the rate of interest paid when
a. the Federal Reserve makes loans to member banks.
b. taxpayers pay overdue taxes.
c. one bank briefly borrows reserves from another bank.
d. banks make loans to the federal government.
C. Banks can borrow money from depositors, the
Fed, or other banks. When it borrows from
other banks short term, one day, the interest
paid is determined by the federal funds rate.
48
48. The Fed performs all of the following
functions except
a. makes loans to banks.
b. clears checks for banks.
c. holds deposits of banks.
d. mints U.S. coins.
D. The minting of U.S. coins is a
function of the U.S. Treasury.
49
49. Most of the assets of the Fed are held in the form of
a. gold.
b. U.S. government securities.
c. loans to member banks.
d. U.S. Treasury deposits.
B. A U.S. government security is a bond that
the federal government has sold; this is how
the federal government borrows money. The
Fed is a major purchaser of these securities.
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50. Most of the liabilities of the Fed are in the form of
a. Federal Reserve notes.
b. checkable deposits.
c. U.S. Treasury deposits.
d. loans to member banks.
A. Federal Reserve notes are the dollar bills we use in the
market place. These bills are IOUs of the Federal
Reserve. Therefore, they are considered liabilities of the
Federal Reserve because they represent what is owed.
51
51. Which of the following statements is
incorrect?
a. There are twelve regional banks in the
Federal Reserve System.
b. The Fed tries to maintain stability in
financial markets.
c. The coins and currency in circulation in
the U.S. are produced by the Fed.
C. Coins and currency are produced by the
U.S Treasury and not the Federal Reserve.
52
52. The Fed can increase the amount of
excess reserves in banks by
a. selling U.S. government securities.
b. raising the discount rate.
c. borrowing from member banks.
d. reducing the required reserve ratio.
D. Excess reserves is cash on hand above a bank’s
required reserves. The three main ways the Fed can
increase banks excess reserves is to buy
government securities, lower the discount rate, and
to reduce the required reserves imposed on banks.
53
53. By far the most important (i.e., most
frequently used) mechanism by the Fed for
increasing excess reserves in the banks is
a. selling U.S. government securities.
b. buying U.S. government securities.
c. raising the required reserve ratio.
d. reducing the required reserve ratio.
B. When the Fed buys government securities
from banks the securities are exchanged for
cash, therefore the bank’s reserves increase.
Only cash can be held in reserves by banks.
54
54. Assuming that a bank is exactly meeting its reserve
requirement, the sale by Academy National Bank to the
Fed of $10,000 in U.S. government securities
immediately increases the excess reserves of the bank by
a. $2000.
b. $8000.
c. $10,000.
d. $20,000.
C. The securities were not counted as a part of a bank’s
reserves. But when the securities were exchanged for
cash, because cash is counted as a part of a bank’s
reserves, its excess reserves increases by the full $10,000.
55
55. Assume there are no excess reserves in the banking
system when the reserve requirement is 20%. The
purchase by the Fed of $10,000 in U.S government
securities from Academy National Bank has the potential
of ultimately increasing the money supply by a total of
a. $8,000.
b. $10,000
c. $50,000.
C. Since there was exactly zero excess reserves to begin
with, the infusion of $10,000 in cash means that the
bank now has exactly $10,000 in excess reserves,
which we assume it lends out. Because the multiplier is
1 divided by the reserve requirement or 1 divided by
1/5 equals 5, 5 times $10,000 = $50,000.
56
56. When a bank makes a loan of $5000 to a regular customer
the immediate effect is that
a. the banks’ assets and liabilities both increase by $5000.
b. the bank subtracts $5000 from the customer’s account.
c. total bank reserves decrease by $4000.
A. The loan is an asset because it is money that is owed
to the bank. Because two sides of a bank’s ledger
have to be equal, when the banks assets increase by
$5,000, so to its liabilities increase by $5,000; assets
must equal liabilities on a bank’s balance sheet.
57
57. An individual bank in a banking system can lend
no more than its excess reserves because
a. credit-worthy borrowers are hard to find.
b. of the required reserve ratio.
c. the bank risks the loss of reserves when
borrowers spend the money.
d. low interest rates make lending unprofitable.
C. A bank has to keep reserves in order to meet day to
day transactions. When depositors come to withdraw
their money, a bank has to make sure it has the
money on hand to give to these people. Therefore a
bank can only lend money out of its excess reserves.
58
58. If an initial increase in excess reserves of $20,000
can generate a maximum increase in the money
supply of $80,000, the required reserve ratio must be
a. 4%.
b. 10%.
c. 20%.
d. 25%.
D. The formula for the deposit multiplier is 1 divided
by the reserve ratio. 25% is equal to 1/4. One
divided by 1/4 is equal to 4. 25% is the answer
because 4 times $20,000 is equal to $80,000.
59
59. Assume the Fed initiates a money and credit expansion
process by purchasing $5000 in U.S. securities from banks.
Also, assume any expansion takes place to the greatest
extent possible. If the reserve requirement is 10%,
a. required reserves will have increased by $5000.
b. excess reserves will have increased by $5000.
c. loans will have increased by $5000.
A. The deposit multiplier in this case is 10. The total
amount of money generated will be $50,000. Of this
1/10, or $5,000, must be kept as required reserves.
60
60. A bank gains excess reserves in all of the
following cases except
a. the bank sell U.S. securities to the Fed.
b. the required reserve ratio is increased.
c. the bank sells U.S. securities to the public.
d. the bank borrows from the Fed.
B. When the required reserve ratio increases,
banks have to keep more of their assets in
reserve, therefore, a bank loses excess reserves.
61
61. In the money and credit expansion process, when r = the
required reserve ratio, the total change in checkable
deposits is equal to the initial change in excess reserves
a. multiplied by r.
b. plus the change in required reserves.
c. divided by 1/r.
d. multiplied by 1/r.
D. The deposit multiplier is one divided by the
reserve ratio. So one divided by 1/r times the
initial change in excess reserves will equal
the ultimate change in checkable deposits.
62
62. The potential expansion of the money supply when there
are excess reserves can only be realized when
a. people chose not to increase their cash holdings.
b. banks lend only a portion of their cash reserves.
c. borrowers set aside part of their loans for savings.
d. borrowers cut back on borrowing.
A. The multiplier process is dependent on people
spending their money. If people decide to save more
of their money, the multiplier process is limited.
63
63. If the banking system has no excess reserves, a
multiple contraction of money will necessarily occur if
a. the reserve requirement is reduced.
b. banks sell U.S. government securities to the Fed.
c. loans are repaid to the banks.
C. The multiplier process works in reverse. Let’s suppose
that the multiplier is 5. An increase of loans by $100
will result in $500 of checkable deposits. But if $100 is
paid back, the reverse of a loan, then $500 of potential
checkable deposits is taken out of the system.
64
64. Lowering the discount rate is a way to expand
the money supply because
a. it encourages banks to borrow from the Fed
so banks can more easily accommodate
their customers’ needs for loans.
b. in encourages business customers to borrow
directly from the Fed.
c. a lower discount rate reduces the amount of
reserves that banks are required to keep.
A. The discount rate is the interest rate that banks pay to
borrow money from the Fed. When this rate is lowered,
it becomes less expensive to borrow money from the
Fed, so banks will tend to increase their borrowing.
65
65. In order to increase the money supply
the banking system must have
a. required reserves.
b. the authority to but corporate checks.
c. the authority to print U.S. currency.
d. excess reserves.
D. Banks can only lend money
out from the excess reserves.
66
66. By reducing the required reserve ratio, the Fed
can not only create excess reserves, but also
a. increase mortgage interest rates.
b. reduce borrowing by corporations.
c. increase the safety of bank deposits.
d. increase the money multiplier.
D. The money multiplier is equal to the reciprocal of the
reserve requirement. So as the reserve requirement
decreases the value of the multiplier increases. In
other words, as the denominator of a fraction
increases, the value of the number increases.
67
67. The appropriate open market operation for
reducing the money supply is
a. buying U.S. government securities.
b. limiting the amount loaned to banks.
c. buying up Federal Reserve notes.
d. selling U.S. government securities.
D. When banks exchange cash for government
securities, their excess reserves decrease.
Therefore, the amount of money they have to lend
out decreases, thus decreasing the money supply.
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68. Which of the following statements is correct?
a. To control the money supply, the Fed relies
primarily on the reserve requirement.
b. The discount rate is the rate of interest which banks
charge to their best customers.
c. The Fed changes the reserve requirement frequently.
d. Banks can turn a borrower’s IOU into money, that
is, they can create money.
D. When people borrow money they will spend the
money. Anytime money is spent, there is a multiple
effect on the money as money changes hands and
people spend a percentage of any money they receive.
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69. Increasing the discount rate has the same
effect on the money supply as
a. reducing the reserve requirement.
b. discovering a large new deposit of gold.
c. selling (by the Fed) of U.S. government
securities.
C. When the Fed sells U.S. government securities to banks,
bank’s reserves diminish as the securities replace cash.
When the Fed increases the discount rate, banks will
borrow less money from the Fed and therefore lend out less
money. So the two actions have the same result, less lending
by banks and less money circulating in the economy.
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70. Required reserves must be held
a. either as vault cash or as a deposit at the Fed.
b. on both checkable deposits and savings accounts.
c. entirely at the Fed, for safety.
d. entirely in the bank’s vault, for availability.
A. Only cash can be used as reserves.
This cash can be kept at the bank, or
at the Fed, or some in both places.
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71. Money is created immediately when
a. the Fed reduces the reserve requirement.
b. the Fed reduces the discount rate.
c. banks make loans.
d. the Fed buys U.S. government securities from banks.
C. Money is not really created when banks lend
money, although we call it money creation.
What is really happening is that money is being
multiplied as it is goes from person to person.
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72. Banks earn interest on all of the following except
a. U.S. government securities.
b. loans to other banks.
c. mortgage loans.
d. reserves deposited at the Fed.
D. A bank does not earn interest on its
reserves. This is true even if those
reserves are kept at the Federal Reserve.
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73. When the reserve requirement is 10%,
each time an individual bank gains $1000 in
reserves, it is able to make loans totaling
a. $900.
b. $1000.
c. $100.
d. $9000.
A. The required reserve of $1000 with a reserve
requirement of 10% is equal to $100. Therefore,
a bank can lend out $900 of the $1000.
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END
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