SOL CHAP 29

MONETARY SYSTEM
PART 1: Multiple choices:
1. Paper money
a.has a high intrinsic value.
b.is the primary medium of exchange in a barter economy.
c.is valuable because it is generally accepted in trade.
d.is valuable only because of the legal tender requirement.
ANS: C PTS: 1 DIF: 1 REF: 29-1
TOP: Money MSC: Definitional

2. Consider the following traders who meet.

Bob has an apple wants an orange
Ted has an orange wants a peach
Mary has a pear wants an apple
Alice has a peach wants an orange

Which if any pairs have a double coincidence of wants?

a.Bob with Alice
b.Ted with Alice
c.Bob with Mary, Ted with Bob, and Ted with Alice
d.None of the pairs above have a coincidence of wants with each other
ANS: B PTS: 1 DIF: 1 REF: 29-1
TOP: Double-coincidence of wants MSC: Applicative
3.The existence of money leads to
a.greater specialization in production, but not a higher standard of living.
b.a higher standard of living, but not greater specialization.
c.greater specialization and a higher standard of living.
d.neither greater specialization or a higher standard of living.
ANS: C PTS: 1 DIF: 1 REF: 29-1
TOP: Money MSC: Definitional
4. Changes in the quantity of money affect
a.interest rates
b.prices
c.production
d.All of the above are correct
ANS: D PTS: 1 DIF: 1 REF: 29-1
TOP: Monetary policy MSC: Definitional
5. Which of the following best illustrates the unit of account function of money?
a.You list prices for candy sold on your Web site, www.sweettooth.com, in dollars.
b.You pay for your WNBA tickets with dollars.
c.You keep $10 in your backpack for emergencies.
d.None of the above is correct.
ANS: A PTS: 1 DIF: 1 REF: 29-1
TOP: Unit of account MSC: Interpretive
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 double latte using currency.
d.None of the above is correct.
ANS: C PTS: 1 DIF: 1 REF: 29-1
TOP: Medium of exchange MSC: Interpretive
7.Which of the following is a function of money?
a.a unit of account
b.a store of value
c.medium of exchange
d.All of the above is correct.
ANS: D PTS: 1 DIF: 1 REF: 29-1
TOP: Money MSC: Definitional
8. Treasury Bonds are
a.liquid, but not a store of value.
b.a store of value, but not liquid.
c.both liquid and a store of value.
d.neither liquid nor a store of value
ANS: C PTS: 1 DIF: 1 REF: 29-1
TOP: Liquidity | Store of value MSC: Interpretive
9. Economists use the word "money" to refer to
a.income generated by the production of goods and services.
b.those assets regularly used to buy goods and services.
c.the value of a person's assets.
d.the value of stocks and bonds.
ANS: B PTS: 1 DIF: 1 REF: 29-1
TOP: Money MSC: Definitional
10. Liquidity refers to
a.the ease with which an asset is converted to the medium of exchange.
b.a measurement of the intrinsic value of commodity money.
c.the suitability of an asset to serve as a store of value.
d.how many time a dollar circulates in a given year.
ANS: A PTS: 1 DIF: 1 REF: 29-1
TOP: Liquidity MSC: Definitional
11. Which list ranks assets from most to least liquid?
a.currency, fine art, stocks
b.currency, stocks, fine art
c.fine art, currency, stocks
d.fine art, stocks, currency
ANS: B PTS: 1 DIF: 1 REF: 29-1
TOP: Liquidity MSC: Definitional
12. Current 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.
ANS: B PTS: 1 DIF: 1 REF: 29-1
TOP: Commodity money | Fiat money MSC: Definitional
13. If an economy used gold as money, its money would be
a.commodity money, but not fiat money.
b.fiat money, but not commodity money.
c.both fiat and commodity money.
d.neither fiat nor commodity money.
ANS: A PTS: 1 DIF: 1 REF: 29-1
TOP: Fiat money | Commodity money MSC: Definitional
14. M1 equals currency + demand deposits +
a.nothing else.
b.other checkable deposits.
c.traveler's checks + other checkable deposits.
d.traveler's checks + other checkable deposits + savings deposits.
ANS: C PTS: 1 DIF: 1 REF: 29-1
TOP: M1 MSC: Definitional
15. Which of the following is not included in M1?
a.currency
b.demand deposits
c.savings deposits
d.travelers' checks
ANS: C PTS: 1 DIF: 1 REF: 29-1
TOP: M1 MSC: Definitional
16. Which of the following is included in M2 but not in M1?
a.currency
b.demand deposits
c.savings deposits
d.All of the above are included in both M1 and M2
ANS: C PTS: 1 DIF: 1 REF: 29-1
TOP: M2 | M1MSC: Definitional
17. Which of the following isn’t included in either M1 or M2?
a.U.S. Treasury bills
b.small time deposits
c.demand deposits
d.money market mutual funds
ANS: A PTS: 1 DIF: 2 REF: 29-1
TOP: M2 | M1MSC: Definitional
18. Demand deposits are a type of
a.checking account.
b.time deposit.
c.money market mutual fund.
d.savings deposit.
ANS: A PTS: 1 DIF: 1 REF: 29-1
TOP: Demand deposits MSC: Definitional
19. Which of the following is included in both M1 and M2?
a.savings deposits
b.demand deposits
c.small time deposits
d.money market mutual funds
ANS: B PTS: 1 DIF: 1 REF: 29-1
TOP: M1 | M2MSC: Definitional
20. Credit cards
a.are included in M1 but not M2.
b.are included in M1 and M2.
c.are included in M2 but not M1
d.are not included in any measure of the money supply.
ANS: D PTS: 1 DIF: 1 REF: 29-1
TOP: Credit cards MSC: Definitional
21. Debit cards
a.defer payments.
b.are equivalent to credit cards.
c.are included in M2.
d.are used as a method of payment.
ANS: D PTS: 1 DIF: 1 REF: 29-1
TOP: Debit cards MSC: Definitional
22. The agency responsible for regulating the money supply in the United States is
a.the Comptroller of the Currency.
b.the U.S. Treasury.
c.the Federal Reserve.
d.the U.S. Bank.
ANS: C PTS: 1 DIF: 1 REF: 29-2
TOP: Federal Reserve MSC: Definitional
23. Members of the Board of Governors
a.are appointed by the U.S. president, while presidents of the Federal Reserve
regional banks are appointed by the banks' boards of directors.
b.are appointed by the banks' boards of directors while the presidents of the Federal
Reserve regional banks are appointed by the U.S. president.
c.and the presidents of the Federal Reserve regional banks are appointed by the
U.S. president.
d.and the presidents of the Federal Reserve regional banks are appointed by the
banks' boards of directors.
ANS: A PTS: 1 DIF: 1 REF: 29-2
TOP: Federal Reserve MSC: Definitional
24. Which of the following executes open-market operations?
a.Board of Governors
b.New York Federal Reserve Bank
c.The FOMC
d.None of the above is correct.
ANS: B PTS: 1 DIF: 1 REF: 29-2
TOP: Federal Reserve MSC: Definitional
25. Monetary policy affects employment
a.only in the long run.
b.only in the short run.
c.in both the long run and the short run.
d.in neither the long run nor the short run.
ANS: B PTS: 1 DIF: 2 REF: 29-2
TOP: Monetary policy MSC: Applicative
26. The Fed’s primary tool to change the money supply is
a.changing the discount rate.
b.changing the reserve requirement.
c.conducting open market operations.
d.redeeming Federal Reserve notes.
ANS: C PTS: 1 DIF: 1 REF: 29-2
TOP: Monetary policy MSC: Definitional
27. The Fed can increase the price level by conducting open market
a.sales and raising the discount rate.
b.sales and lowering the discount rate.
c.purchases and raising the discount rate.
d.purchases and lowering the discount rate.
ANS: D PTS: 1 DIF: 3 REF: 29-2
TOP: Open-market operations MSC: Definitional
 28. On a bank's T-account,
a.both deposits and reserves are assets.
b.both deposits and reserves are liabilities.
c.deposits are assets, reserves are liabilities.
d.reserves are assets, deposits are liabilities.
ANS: D PTS: 1 DIF: 1 REF: 29-3
TOP: Bank balance sheet MSC: Definitional

PART 2:
Question 1:

Table 29-6
Balance Sheet of The Peoples' Bank of Madison, WI.
Assets Liabilities
Reserves $25 million Deposits $265 million
Loans $240 million
Refer to Table 29-6. If the reserve requirement is 10%, how People's bank adjust the
reserve?
Sol:
The reserve requirement= 10%
=> The amount of money that Bank should reserve is: 10%* 265 = $26.5 mil.
=> People's bank currently needs to increase its reserves by $1.5 million to meet the
reserve requirement (26.5 – 25 = 1.5).
2. Given the following information, what would be the values of M1 and M2?

Small time deposits $650 billion

Demand Deposits and other Checkable $300 billion
Deposits
Savings-type deposits $750 billion
Money market mutual funds $600 billion
Travelers' checks $25 billion
Large time deposits $600 billion
Currency $100 billion
Miscellaneous Categories in M2 $25 billion

Sol:
M1 = Demand Deposits and other Checkable Deposits + Travelers' checks + Currency
= $300 + $25+ $100
= $425 bil
M2 = M1+ Small time deposits+ Savings-type deposits+ Money market mutual funds+
Miscellaneous Categories in M2
= $425 + $650+ $750+ $600+ $25 = $2,450 bil