ECO 285 – Money & Banking
Dr. D. Foster – Fall 2015
Homework #2 Quiz - This is an individual assignment
1. The money supply is determined exclusively by commercial banks.
2. The currency we use is considered a liability of our central bank (the Federal Reserve).
3. A central bank is quite profitable as its liabilities are virtually costless.
4. The monetary base includes the gold stock owned by the U.S. government.
5. The buying and selling of securities by the central bank is called an open market operation.
6. When bank reserves rise, this can lead to an increase in the money supply.
7. If banks are required to hold 10% of demand deposits in reserve, the simple deposit multiplier (or,
“maximum money multiplier”) is 100.
8. If the money supply is $10 million and the monetary base is $2 million then the money multiplier
must be 1/5 (i.e., 0.2).
9. The currency ratio is currency held by the public divided by the level of demand deposits.
10. The m2 multiplier will always be larger than the m1 multiplier.
11. The multiplier effects of savings deposits (or, “time deposits”) is less than for demand deposits
because the required reserve level is higher for savings.
12. If the currency ratio rises the money supply will fall.
13. If interest rates are very low, we may expect banks to hold a lot of excess reserves.
14. To illustrate the fractional reserve banking process, Murphy shows how money is created “out of
thin air.”
15. Selgin argues that fractional reserve banks are fraudulent since every country in the world has
governmentally-mandated deposit insurance.
16. Selgin agrees that shifting from a 100% reserve banking system to a fractional reserve system would
boost prices, but that it would be a one-time event.
17. Polleit characterizes Rothbard as favoring a fiat money system.
18. All money substitutes are fiduciary money, but not all fiduciary money is a money substitute.
19. Among the cures for market failure, Woods strongly supports more government regulation and a
greater money supply.
20. Woods’ purpose in writing “Meltdown” is, in part, to consider the ideas of Mises and Hayek in
explaining our economic problems.
Name:
ECO 473 – Money & Banking
Dr. D. Foster – Fall 2015
Homework #2
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Quiz #2
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Article summary (100 words) over Woods Chapter 1:
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Reaction essay (100-150 words) over fractional reserve banking controversy:
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