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1 1 of 12 11/12/ :37 AM The direct exchange of one good for another Is barter. Is most efficient for an economy. Facilitates specialization in production. Facilitates market exchanges. Barter involves trade of one good for another without the use of money. Money is functioning as a store of value when you Use it to compare the cost of tuition 10 years ago to the cost today. Take out a student loan to buy books. Save your cash to pay for tuition next semester. Pay your tuition in installments rather than all at one time. Saving involves holding the money and potentially earning interest for use at a later date. Which of the following statements is not correct about the U.S. monetary system? The federal government did not print paper money until the Civil War. Between 1789 and 1865, paper money was issued by hundreds of state-chartered banks. Credit cards are the most common form of money today. Early in U.S. history, the money supply consisted of items such as tobacco and bullets. Credit cards are a means of payment, but they do not count as money because they are not a store of value.

2 2 of 12 11/12/ :37 AM Which of the following is not included in the narrowest definition of the money supply or M1? Currency in circulation. Transactions account balances. Credit card balances. Traveler's checks. The narrowest definition of money includes currency in circulation, traveler's checks, and checking and other transactions account balances. The basic money supply or M1 includes Currency in circulation, transactions accounts, and traveler's checks. Currency in circulation, transactions accounts, and savings accounts. Currency in circulation, transactions accounts, traveler's checks, and money market mutual funds. Currency in circulation, savings accounts, and credit card balances. Currency in circulation, transactions accounts, and traveler's checks make up the M1 money supply, which are the most basic types of money. Transactions account balances are included in M1 only. M2 only. Both M1 and M2. None of the choices are correct. Transactions accounts are the most basic form of money, and as such are included in M1 and therefore M2.

3 3 of 12 11/12/ :37 AM Savings accounts are included in M1 only. M2 only. M1 and M2. None of the choices are correct. Savings accounts are less liquid than transactions accounts and therefore are included in M2 but not M1. Which of the following is not included in M1? Credit union share drafts. Transactions account balances at mutual savings banks. Currency in circulation outside of commercial banks. Savings account balances at a federal savings bank. Savings accounts are less liquid and are counted in M2 but not M1. Which of the following is not included in transactions accounts? A checking account at a commercial bank. A money market mutual fund. A credit union share draft. A demand deposit account at a mutual savings bank. Money in a money market mutual fund is a form of savings account and counts in the M2 money supply.

4 4 of 12 11/12/ :37 AM Suppose Jared takes $200 from his savings account and holds it as cash. The immediate result of this transaction is that M2 Increases by $200 and M1 remains the same. Decreases by $200 and M1 remains the same. And M1 do not change. Remains the same and M1 increases by $200. Savings count only in M2, but currency in circulation counts in both M1 and M2. A withdrawal from savings held in cash causes M1 to rise. Difficulty: 3 Hard The various money supply measures (M1 and M2) are used to distinguish the Rate at which money flows through the economy. Liquidity and accessibility of assets. Speed with which banks transfer funds between savings and checking accounts. Speed with which banks transfer funds between themselves. M1 involves only the most liquid forms of money, while M2 includes M1 along with less liquid assets that are near money. One of the main functions of banks is Borrowing money and lending to savers. Creating money. Ownership of projects in which they invest. Maintaining a constant money supply. Banks create money by making loans to businesses and individuals.

5 5 of 12 11/12/ :37 AM The term fractional reserves refers to The fact that reserves are split among many banks. Reserves being a small fraction of total transactions account balances. The ratio of required reserves to total loans. The ratio of excess reserves to total loans. Banks retain only a fraction of total deposits, lending out the remainder. The minimum amount of reserves a bank is required to hold is known as The money multiplier. Total reserves. Excess reserves. Required reserves. The required reserve ratio is set and regulated by the Federal Reserve. When the reserve requirement changes, which of the following will change for an individual bank? Transactions account balances and lending capacity. Transactions account balances, total reserves, and excess reserves. Total reserves, required reserves, and excess reserves. Required reserves, excess reserves, and lending capacity. Changing the reserve requirement either makes excess reserves available to banks to make new loans or restricts their lending.

6 6 of 12 11/12/ :37 AM Banks are required to keep a minimum amount of funds in reserve because Depositors may decide to withdraw funds at any time. The Fed may decide to withdraw funds at any time. The bank may decide to increase aggregate demand at any time. Borrowers may decide to repay loans ahead of schedule. Depositors may need to withdraw some of their funds for purchases, so banks need to have reserves to meet those types of day-to-day transactions. Which of the following sets the legal minimum reserve ratio? The commercial banks. The U.S. Treasury. The Federal Reserve. Congress. The Federal Reserve regulates the banking system, including setting the required reserve ratio. Suppose University Bank has zero excess reserves. If the required reserve ratio decreases, the Bank's assets will increase. Bank will not have enough required reserves. Bank will be able to make more loans. Money multiplier will decrease. Banks are able to make more loans when the required reserve ratio decreases because some of what the bank had been holding as reserves becomes available for new loans.

7 7 of 12 11/12/ :37 AM Initially a bank has a required reserve ratio of 10 percent and no excess reserves. If $1,000 is deposited into the bank, then, ceteris paribus, This bank can increase its loans by $900. This bank can increase its loans by $1,000. Total reserves will increase by $900. Required reserves will increase by $1,000. The bank must only hold 10 percent or $100. So $900 of the $1,000 deposit is available to lend out. Difficulty: 3 Hard Excess reserves are Total reserves less required reserves. Total reserves less transactions account balances. Required reserves less demand deposits. Bank reserves in excess of vault cash. Excess reserves are reserves held above and beyond what is required by the Federal Reserve. Suppose a bank has $600,000 in deposits, a required reserve ratio of 5 percent, and bank reserves of $90,000. Then the bank can make new loans in the amount of $5,400. $30,000. $60,000. $90,000. The bank is required to hold $30,000. So its excess reserves of $60,000 can be converted into new loans.

8 8 of 12 11/12/ :37 AM Refer to Table With a required reserve ratio of 20 percent, XYZ Bank could support maximum transactions account balances of $20,000. $80,000. $300,000. $500,000. This bank is holding $20,000 in excess reserves that could be lent out, creating $100,000 more in deposits; added to the $400,000 in deposits, these new deposits would total $500,000; 20 percent of $500,000 is $100,000, which is the maximum value of loans this bank could make. Another way to look at it is that with a reserve ratio of 20 percent, the money multiplier is 5. This means that $100,000 in total reserves will support $500,000 in total transactions deposits. Refer to Table With a required reserve ratio of 12 percent, XYZ Bank would have excess reserves of $100,000. $48,000. $52,000. $12,000. The bank is required to hold $48,000. So the bank is holding $52,000 in excess reserves.

9 9 of 12 11/12/ :37 AM If the banking system has a required reserve ratio of 10 percent, the money multiplier is The money multiplier is equal to 1 required reserve ratio, which is 1.1 or 10. Learning Objective: How the money multiplier works. If the banking system has a required reserve ratio of 25 percent, the money multiplier is The money multiplier is equal to 1 required reserve ratio, which is 1.25 or 4. Learning Objective: How the money multiplier works. If total reserves for a bank are $25,000, excess reserves are $5,000, and demand deposits are $100,000, the money multiplier must be The bank is holding $20,000 in required reserves. So the required reserve ratio must be 20 percent (20, ,000); the money multiplier must be 1.2 or 5. Difficulty: 3 Hard Learning Objective: How the money multiplier works.

10 10 of 12 11/12/ :37 AM Suppose a banking system has a required reserve ratio of 10 percent. What is the maximum possible increase in the money supply in response to a $2 billion increase in excess reserves for the whole banking system? $20 billion. $2 billion. $200 million. $210 billion. The money multiplier is 1 required reserve ratio or 10. So a $2 billion increase in reserves leads to a $20 billion increase in new loans. Difficulty: 3 Hard Learning Objective: How the money multiplier works. Suppose a banking system has $100,000 in deposits, a required reserve ratio of 25 percent, and total bank reserves for the whole system of $25,000. Then the potential increase in deposit creation for the whole system is equal to $0. $25,000. $50,000. $100,000. There can be no potential deposit creation because the banking system has lent out all excess reserves. Difficulty: 3 Hard Learning Objective: How the money multiplier works. Suppose a banking system has $200 million in deposits, a required reserve ratio of 10 percent, and total bank reserves of $35 million. Then the potential increase in deposit creation for the whole banking system is equal to $3 million. $15 million. $150 million. $0. The banking system in this scenario is required to hold $20 million in required reserves; it is currently holding $35 million. So it could create an additional $150 million through the money multiplier process. Difficulty: 3 Hard Learning Objective: How the money multiplier works.

11 11 of 12 11/12/ :37 AM Students Bank and Trust has zero excess reserves. Ceteris paribus, if the required reserve ratio decreases. Required reserves will increase. Bank assets will decrease. The bank will be able to make additional loans. The money multiplier will decrease. A decrease in the required reserve ratio will instantly create excess reserves, thereby allowing for more loans. Federal deposit insurance was established by The Constitution of the United States in The National Banking Act of The creation of the FDIC and FSLIC in 1933 and The Monetary Control Act of The FDIC was created to restore the public's confidence in the banking system, which had been shattered by many bank runs during the Great Depression. The primary purpose of both the FDIC and the Savings Association Insurance Fund (SAIF) is to Increase depositor confidence in the banking system. Control the nation's money supply. Set reserve requirements for the banking system. Provide funds for home mortgages. With greater depositor confidence, banks will be able to receive more deposits and therefore lend more.

12 12 of 12 11/12/ :37 AM According to a World View article titled "The Cashless Society," the Russian economy's turn to a barter system caused a Movement inside (or further inside) the Russian production possibilities curve. Movement beyond the production possibilities curve. Shift of the production possibilities curve outward because the economy's production potential increased. None of the choices are correct. All of Russia's resources were not being used to their potential because citizens had to use large amounts of their limited time to barter when the time could have been used to produce more goods and therefore achieve higher living standards. One In the News article titled "CD Yields Stay Unchanged" suggests that Two-year CDs earn less than five-year CDs. Two-year CDs earn more than five-year CDs. The length of the contracted time of a CD does not affect the interest rate. None of the choices are correct. Interests rates earned on CDs rise as the size of the principal of the CD rises. Also, interest rates rise as the length of time that the CD must be held increases. The required reserve ratio is the Fraction of loans to shareholders equity. Highest level of interest rates that can legally be charged to borrowers. Fraction of deposits that banks can lend out. Fraction of total deposits banks must hold. Each bank is required by the Fed to hold a minimum fraction of its total deposits.