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Chapter 21

The Monetary System
MULTIPLE CHOICE
1. Money
a. is more efficient than barter.
b. makes trades easier.
c. allows greater specialization.
d. All of the above are correct.
ANSWER: d. All of the above are correct.
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2. Paper money
a. has a high intrinsic value.
b. is used in a barter economy.
c. is valuable because it is generally accepted in trade.
d. is valuable only because of the legal tender requirement.
ANSWER: c. is valuable because it is generally accepted in trade.
TYPE: M DIFFICULTY: 1 SECTION: 21.1
3. Barter
a. requires a double-coincidence of wants.
b. is less efficient than money.
c. is the trading of goods for goods.
d. All of the above are correct.
ANSWER: d. All of the above are correct.
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4. When Arnold use dollars to record his income and expenses, he is using money as a
a. unit of account.
b. means of payment.
c. store of value.
d. medium of exchange.
ANSWER: a. unit of account.
TYPE: M DIFFICULTY: 1 SECTION: 21.1
5. Which of the following is a store of value?
a. currency
b. U.S. government bonds
c. fine art
d. All of the above are correct.
ANSWER: d. All of the above are correct.
TYPE: M DIFFICULTY: 1 SECTION: 21.1
6. 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.
ANSWER: a. You list prices for candy sold on your Web site, www.sweettooth.com, in dollars.
TYPE: M DIFFICULTY: 1 SECTION: 21.1
7. Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?
a. store of value
b. medium of exchange
c. unit of account
d. None of the above is correct.
ANSWER: a. store of value
TYPE: M DIFFICULTY: 1 SECTION: 21.1

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stocks. b. ANSWER: c. TYPE: M DIFFICULTY: 1 SECTION: 21. fine art. Which of the following best illustrates the medium of exchange function of money? a. a measurement of the intrinsic value of commodity money. b. d. money with intrinsic value. stocks.1 14. fine art TYPE: M DIFFICULTY: 1 SECTION: 21. You pay for your double latte using currency. currency. is any close substitute for currency such as checkable deposits. You keep some money hidden in your shoe. c. the suitability of an asset to serve as a store of value. currency. d. has no intrinsic value. You keep track of the value of your assets in terms of currency. fine art. is backed by gold. ANSWER: c. may be used as a medium of exchange. Fiat money a. ANSWER: b. Liquidity refers to a. commodity money with no intrinsic value. TYPE: M DIFFICULTY: 1 SECTION: 21. Commodity money is a.1 9. None of the above is correct. TYPE: M DIFFICULTY: 1 SECTION: 21. Current U. currency is a. has no intrinsic value. TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: a. You pay for your double latte using currency. fiat money with no intrinsic value. d. stocks. the ease with which an asset is converted to the medium of exchange. stocks d. c. currency ANSWER: b. commodity money with intrinsic value.S. d. how many time a dollar circulates in a given year. TYPE: M DIFFICULTY: 1 SECTION: 21. the value of stocks and bonds. c. Fiat currency a. has no intrinsic value. d. Economists use the word “money” to refer to a. c. TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: b. is worthless. ANSWER: a.1 10. those assets regularly used to buy goods and services. fiat money with intrinsic value. Which list ranks assets from most to least liquid? a. has intrinsic value equal to its value in exchange. fine art. currency. c. performs all the functions of money except providing a unit of account. stocks b. b.1 . the value of a person’s assets. fiat money with no intrinsic value. those assets regularly used to buy goods and services.1 15. d. has no intrinsic value.1 11. d. c.1 12. fine art c. ANSWER: b. money with intrinsic value.594  Chapter 21/The Monetary System 8. c. b. the principal type of money in use today. b. the ease with which an asset is converted to the medium of exchange. but is not legal tender. income generated by the production of goods and services. b. currency. b. backed by gold.1 13. TYPE: M DIFFICULTY: 1 SECTION: 21. receipts created in international trade that are used as a medium of exchange.

d.1 22. M2 but not M1. TYPE: M DIFFICULTY: 1 SECTION: 21. b. neither commodity money nor fiat money ANSWER: a. travelers’ checks ANSWER: c.1 23. All of the above are correct. c. d. commodity money b. b. the government must hold enough gold to redeem all currency. both commodity money and fiat money d. travelers’ checks. currency. money market mutual funds TYPE: M DIFFICULTY: 1 SECTION: 21.1 18. corporate bonds d. people are more likely to accept the dollar as a medium of exchange. c. Which type of currency has intrinsic value? a. people are more likely to accept the dollar as a medium of exchange.1 . Which of the following is included in the M2 definition of the money supply? a. ANSWER: c.1 17. All of the above are correct. credit cards b. savings deposits d. All of the above are correct. demand deposits. Which of the following is included in M2 but not in M1? a. currency b. Which of the following is not included in M1? a. ANSWER: a. corporate bonds c.1 19. b. currency b. demand deposits c. savings deposits d.1 20. c. TYPE: M DIFFICULTY: 1 SECTION: 21. All of the above are included in both M1 and M2 ANSWER: c. commodity money TYPE: M DIFFICULTY: 1 SECTION: 21. M1 includes a. TYPE: M DIFFICULTY: 1 SECTION: 21. savings deposits TYPE: M DIFFICULTY: 1 SECTION: 21. money market mutual funds TYPE: M DIFFICULTY: 2 SECTION: 21. demand deposits b. large time deposits ANSWER: b. ANSWER: d. Which of the following is included in M2 but not in M1? a. demand deposits c. Money market mutual funds are included in a. Chapter 21/The Monetary System  595 16. people may not make trades with anything else. The legal tender requirement means that a. M1 and M2. neither M1 or M2. money market mutual funds c. M2 but not M1. large time deposits d. M1 but not M2. savings deposits TYPE: M DIFFICULTY: 1 SECTION: 21. d. money market mutual funds ANSWER: d.1 21. fiat money c.

c. neither M1 nor M2. M2 but not M1. d. ANSWER: d. d. ANSWER: d. ANSWER: c. c. are a store of value. smaller and less liquid than M2. b. M1 and M2.1 30. c. M2 but not M1.1 27. Debit cards a. TYPE: M DIFFICULTY: 1 SECTION: 21. have led to wider use of currency. neither M1 nor M2. M1 but not M2.1 . ANSWER: a. d. M1 and M2. Credit cards are a. ANSWER: c. larger than but more liquid than M2. are included in M2. a method of deferring payment. a method of deferring payment. Demand deposits are included in a. M1 is a. M1 and M2. larger than and less liquid than M2. M1 but not M2. defer payments. part of the M1 money supply. a unit of account. neither M1 nor M2. are part of the money supply. are used as a method of payment. ANSWER: b. used as a method of payment. M1 but not M2. b. defer payments.1 26. are used as a method of payment.1 29. M1 and M2. are equivalent to credit cards. TYPE: M DIFFICULTY: 1 SECTION: 21. M2 but not M1. d. defer payments. TYPE: M DIFFICULTY: 2 SECTION: 21. c. Credit cards a. d. b. ANSWER: b.1 28.596  Chapter 21/The Monetary System 24. TYPE: M DIFFICULTY: 1 SECTION: 21. d. smaller but more liquid than M2. smaller but more liquid than M2. b. d. TYPE: M DIFFICULTY: 1 SECTION: 21. neither M1 nor M2. Credit card balances are included in a. c. c. Savings deposits are included in a. TYPE: M DIFFICULTY: 1 SECTION: 21. c. TYPE: M DIFFICULTY: 1 SECTION: 21.1 25. b. b. b. M2 but not M1.

Currency may be a preferable store of wealth for criminals. citizens are holding a lot of foreign currency. citizens hold a lot of foreign currency.1 34.S. In the United States. d. Which of the following might explain why the United States has so much currency per person? a.1 . $431 billion ANSWER: b.600. TYPE: M DIFFICULTY: 1 SECTION: 21. All of the above help explain the abundance of currency. $125 billion b. per person a. $341 billion TYPE: M DIFFICULTY: 2 SECTION: 21.800. $2. $301 billion ANSWER: b. b. c. average currency holdings are about $800. d.1 35. $800. One explanation for this relatively large average is that U. c. One explanation for this relatively large amount is that criminals may prefer currency as a medium of exchange. One explanation for this relatively small average is that money people use credit and debit cards to make transactions.S. TYPE: M DIFFICULTY 1 SECTION 29. ANSWER: c. $421 billion d. $1. average holdings of currency are about $2. $216 billion c. ANSWER: b. $215 billion b. citizens hold a lot of foreign currency. b. d. ANSWER: d.S. $2. TYPE: M DIFFICULTY: 1 SECTION: 21. Type of Money Amount Large time deposits $80 billion Small time deposits $75 billion Demand deposits $75 billion Other checkable deposits $40 billion Savings deposits $10 billion Travelers’ checks $1 billion Money market mutual funds $15 billion Currency $100 billion SDRs $10 billion Miscellaneous categories of M2 $25 billion 31. b. $341 billion c. What is the M1 money supply? a. average holdings are about $2.1 32. One explanation for this relatively small average is that U. $200. Currency may be a preferable store of wealth for criminals. U.800. What is the M2 money supply? a.800.800. $226 billion d. average holdings of currency are about $2. c. The amount of currency per person in the United States is about a. One explanation for this relatively large amount is that criminals may prefer currency as a medium of exchange.800. $216 billion TYPE: M DIFFICULTY: 2 SECTION: 21. Chapter 21/The Monetary System  597 Use the (hypothetical) information in the following table to answer the following two questions.1 33. average currency holdings are about $800. People use credit and debit cards more frequently.

income tax policy—Board of Governors b. the FOMC c. president. lender of last resort—The FOMC d. All of the above are correct. c. What part of the Fed meets every six weeks to discuss changes in the economy and determine monetary policy? a.598  Chapter 21/The Monetary System 36.2 40. while presidents of the Federal Reserve regional banks are appointed by the banks’ boards of directors. are appointed by the U. money stock. ANSWER: c. president.2 41. d. the Federal Reserve. while presidents of the Federal Reserve regional banks are appointed by the banks’ boards of directors. banks hold so much currency relative to the public. ANSWER: a. b. The agency responsible for regulating the money supply in the United States is a. president. ANSWER: b. the FOMC TYPE: M DIFFICULTY: 1 SECTION: 21. Treasury.S. c. Members of the Board of Governors a. b. the regional Federal Reserve Bank presidents d. make loans to individuals d. The New York Federal Reserve Bank a. the U. ANSWER: d. None of the above is correct. the Central Bank Policy Commission. conduct open market operations—New York Federal Reserve Bank TYPE: M DIFFICULTY: 1 SECTION: 21. d. there is so much currency per person. TYPE: M DIFFICULTY: 1 SECTION: 21. make loans to individuals TYPE: M DIFFICULTY: 1 SECTION: 21.2 . Which of the following pairs correctly lists a function of the Fed and the part of the Fed directly responsible for that action? a. d. b. there is so much currency per person. b.1 37. president always gets to vote at the FOMC meetings.S. president. the U.S. TYPE: M DIFFICULTY: 1 SECTION: 21. are appointed by the U.2 38. and the presidents of the Federal Reserve regional banks are appointed by the U. The Federal Reserve does all except which of the following? a. Given the size of the U.2 39. is located in the traditional financial center of the United States. c. conducts open market transactions.S. the Comptroller of the Currency. TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: b. and the presidents of the Federal Reserve regional banks are appointed by the banks’ boards of directors.S. All of the above are correct. the Board of Governors b.S. control the supply of money b. Bank. are appointed by the banks’ boards of directors while the presidents of the Federal Reserve regional banks are appointed by the U. ANSWER: d. control the value of money c. d. regulate the banking system ANSWER: c. the public holds so much currency relative to banks. conduct open market operations—New York Federal Reserve Bank c. TYPE: M DIFFICULTY: 1 SECTION: 21. c. it is puzzling that a. the Federal Reserve. there is so little currency per person.2 42.S.

. c. b. The Federal Reserve has 12 regional banks. The members of the Board of Governors are also presidents of the Federal Reserve’s regional banks. TYPE: M DIFFICULTY: 2 SECTION: 21. The Board of Governors has 12 members who serve 7-year terms. d. d. The Federal Reserve regulates banks. the Chair of the Board of Governors c. The Fed does all of the above. ANSWER: b. The Board of Governors has 7 members who serve 14-year terms. regulate banks in their districts. is currently chaired by Paul Volcker. Which of the following is correct? a. d. are appointed by the president and confirmed by the Senate. b. ANSWER: b.2 49. and the 5 members of the Board of Governors. the Chair of the Board of Governors TYPE: M DIFFICULTY: 1 SECTION: 21. b. the 12 presidents of the Federal Reserve Regional banks.2 48. and the 7 members of the Board of Governors. 5 of the 12 presidents of the Federal Reserve Regional banks. The 12 regional Federal Reserve Banks a. ANSWER: b. TYPE: M DIFFICULTY: 1 SECTION: 21. the 12 presidents of the Federal Reserve Regional banks. d. The Board of Governors has 7 members who serve 14-year terms. all vote on policy directives. Chapter 21/The Monetary System  599 43.2 . All of the above are correct. c. Which of the following has a four-year term? a. convert Federal Reserve Notes into gold TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: a. The members of the Board of Governors are also presidents of the Federal Reserve’s regional banks. 5 of the 12 presidents of the Federal Reserve Regional banks.2 46. TYPE: M DIFFICULTY: 1 SECTION: 21. and the 7 members of the Board of Governors. b.2 47. regulate banks in their districts. send representatives to the FOMC and have a majority vote. All members of the Board of Governors sit on the Federal Open Market Committee. c. The Federal Reserve has 14 regional banks. Which of the following statements about the Federal Reserve is incorrect? a.2 44. c. are appointed by the president and confirmed by the Senate. may not make loans to banks in their districts. TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: a. d. 7 of the 12 presidents of the Federal Reserve Regional banks. and the Chair of the Board of Governors. the members of the Board of Governors b. the members of the FOMC d. The Board of Governors has 14 members who serve 7-year terms. The Federal Open Market Committee makes monetary policy. The Federal Reserve has 12 regional banks. The Federal Open Market Committee is made up of a.2 45. All of the above are correct. b. conduct monetary policy b. ANSWER: b. The Board of Governors a. The Fed does all except which of the following? a. act as a lender of last resort c. and the 7 members of the Board of Governors. None of the above is correct. ANSWER: c. The Federal Reserve has 12 regional banks. TYPE: M DIFFICULTY: 1 SECTION: 21. has twelve members. convert Federal Reserve Notes into gold d. c.

b. purchases and lowering the discount rate. buys or sells government bonds from the public. issues Federal Reserve notes. which increases the money supply. the newest member of the Board of Governors d. which decreases the money supply. the rate of inflation in the long run and the level of employment in the short run. a.2 51. a. it sells Treasury securities. it buys Treasury securities. c. which increases the money supply. When the Fed conducts open market purchases. d. it buys Treasury securities. it sells Treasury securities. which increases the money supply. d. which increases the money supply. sales and lowering the discount rate. Which of the following is not always a voting member of the FOMC? a. TYPE: M DIFFICULTY: 2 SECTION: 21. c. ANSWER: d. When the Fed conducts open market sales. c. c. ANSWER: b. sales and raising the discount rate. TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: b. TYPE: M DIFFICULTY: 1 SECTION: 21. which increases the money supply. ANSWER: d. the rate of inflation in the long run and the level of employment in the short run. which decreases the money supply. it lends money to member banks. conducts open market operations. d. ANSWER: a. c. Fed policy decisions have an important influence on a. both the rate of inflation and the level of employment in the short run b. ANSWER: c. d. it borrows from member banks. purchases and raising the discount rate. b. changes the reserve requirement. The Fed can increase the money supply by conducting open market a. which decreases the money supply. it lends money to member banks. When the Federal Reserve conducts open market transactions. lowers the discount rate. it sells Treasury securities. When the Fed conducts open market purchases. which increases the money supply. which decreases the money supply.1 57. When the Fed wants to change the money supply. TYPE: M DIFFICULTY: 1 SECTION: 21. it a. b. b. increases its lending to member banks. ANSWER: a. which decreases the money supply. which increases the money supply. which decreases the money supply. changes the discount rate.2 52.1 56. buys or sells government bonds from the public. it buys Treasury securities. issues Federal Reserve notes. the president of the New York Federal Reserve District Bank b. it buys Treasury securities. ANSWER: b. the president of the Boston Federal Reserve District Bank. it sells Treasury securities.1 55. b. it buys Treasury securities. b. d. it sells Treasury securities. c. TYPE: M DIFFICULTY: 1 SECTION: 21. it buys Treasury securities. c. which decreases the money supply. d.600  Chapter 21/The Monetary System 50. it borrows from member banks. conducts open market operations. the president of the Boston Federal Reserve District Bank. both the rate of inflation and the level of employment in both the short run and the long run.2 53. TYPE: M DIFFICULTY: 1 SECTION: 21. TYPE: M DIFFICULTY: 2 SECTION: 21.1 54. the Chairman of the Board of Governors c. the rate of inflation in the short run and the level of employment in the long run. TYPE: M DIFFICULTY: 1 SECTION: 21. it most frequently a. d. purchases and lowering the discount rate. a. which increases the money supply.1 .

500 in loans. d. b. c. banks hold as many reserves as they hold deposits. short-run tradeoff between inflation and unemployment. TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: b. It has $50 in reserves and $4. c. TYPE: M DIFFICULTY: 2 SECTION: 21. $950. but not the short run. the short run. reserves are liabilities. Suppose a bank has a 10 percent reserve ratio. deposits are assets. $5. TYPE: M DIFFICULTY: 1 SECTION: 21.880. ANSWER: a. TYPE: M DIFFICULTY: 1 SECTION: 21. a. d. c.2 61. the long run. c. d. b. b. Chapter 21/The Monetary System  601 58.3 65. long-run tradeoff between an increase in the money supply and inflation. short-run tradeoff between inflation and unemployment. b. Suppose that the reserve ratio is 5 percent and that a bank has $1. ANSWER: d. both deposits and reserves are liabilities. TYPE: M DIFFICULTY: 1 SECTION: 21. ANSWER: b. but not the long run. Its required reserves are a. ANSWER: d. c.2 60.3 64. b.3 63. b. c. neither the short nor long run. sales and lowering the discount rate. Its required reserves are a. $1. ANSWER: d. ANSWER: b. TYPE: M DIFFICULTY: 3 SECTION: 21. a. It has $500 in reserves and $4. b. TYPE: M DIFFICULTY: 1 SECTION: 21.000 in deposits. purchases and lowering the discount rate. It has $500 in reserves and $4. Suppose that the reserve ratio is 10 percent and that a bank has $2. short-run tradeoff between an increase in the money supply and inflation. It has $555 in reserves and $4. b. $95. but not the long run.3 . The Fed can influence unemployment in a. purchases and lowering the discount rate.445 in loans. a. purchases and raising the discount rate. d. banks hold as many reserves as they hold deposits. ANSWER: b. reserves are assets. d. sales and raising the discount rate.800. banks can create money by issuing currency. $50.000 in deposits. In a 100-percent-reserve banking system. banks can create money by lending out reserves. On a bank’s T-account.950 in loans. the Fed can increase the money supply with open market sales. $1. $50.3 62.000 in deposits. d. d. reserves are assets. the short and long run. There is a a. long-run tradeoff between inflation and unemployment. TYPE: M DIFFICULTY: 1 SECTION: 21. The Fed can increase the price level by conducting open market a. c. d.2 59. $200. $5. and it loans out all it can given the reserve ratio. c. $200. None of the above is correct. $20. deposits are liabilities. both deposits and reserves are assets. deposits are liabilities. the short run.500 in loans.

10 percent d.000 in deposits and $190.000 in deposits and $8. this action by itself a. It has $40 in reserves and $3.5 percent c.3 68. 9. decreases the money supply. TYPE: M DIFFICULTY: 1 SECTION: 21. 2 percent. d. c. has an indeterminate effect on the money supply. TYPE: M DIFFICULTY: 1 SECTION: 21.5 percent c.3 67. does not change. may do any of the above.000.600 in loans. d. 12. c. ANSWER: c. c. It has a reserve ratio of a. It has $400 in reserves and $3. b. TYPE: M DIFFICULTY: 2 SECTION: 21.960 in loans.000 in loans.3 70. 5 percent b. ANSWER: a.000 in deposits. does not change the money supply. When a bank loans out $1. decreases. 5 percent TYPE: M DIFFICULTY: 1 SECTION: 21. d. a.602  Chapter 21/The Monetary System 66.3 . does not change the money supply. b. b.556 in loans. It has $400 in reserves and $3. If you deposit $100 into a demand deposit at a bank. 20 percent.3 69.600 in loans. TYPE: M DIFFICULTY: 2 SECTION: 21. None of the above is correct. Suppose a bank has $200. d. ANSWER: b. ANSWER: c. b. increases the money supply. It has $444 in reserves and $3. It has a reserve ratio of a. increases. 80 percent. ANSWER: a. Suppose a bank has a 10 percent reserve ratio. the money supply a. 20 percent.000 in loans. $4. Suppose a bank has $10. increases. and it loans out all it can given the reserve ratio. None of the above is correct.