13-1. Money is functioning as a standard of value when
you:
→ Use it to compare two houses that are different
prices.
Buy jeans at the mall.
Buy a rare baseball card that you expect will
increase in value.
Trade a cup of sugar for two eggs.
13-2. Money is functioning as a store of value when
you:
Use it to compare the cost of tuition ten 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.
13-3. Which of the following is not included in the
narrowest definition of the money supply?
Currency in circulation
Transactions account balances
→ Credit card balances
Traveler's checks
13-4. Which of the following is true about the quantity
of money in the U.S. economy?
It is equal to the amount of currency in circulation
→ It is much greater than the amount of currency in
circulation
It is equal to the value of the government's gold
reserves
It is equal to the total amount of income
13-5. Which of the following is not included in any of
the measures of the money supply?
Credit-union share drafts
→ Cash in the vault of a commercial bank
Currency in circulation outside of commercial
banks
X Transactions account balances at mutual savings
banks
13-6. Suppose Oscar withdraws $100 from his
checking account and deposits it into his savings
account. This transaction causes M1 to:
Increase by $100 and M2 to remain the same.
→ Decrease by $100 and M2 to remain the same.
X Decrease by $100 and M2 to increase by $100.
Remain the same and M2 to increase by $100.
13-7. Suppose Jason takes $150 he had in his wallet
and deposits it into his checking account. The
immediate result of this transaction is that M1:
Increases by $150 and M2 remains the same.
Decreases by $150 and M2 remains the same.
→ And M2 do not change.
Remains the same and M2 increases by $150.
13-8. One of the essential functions a bank performs is
that of:
Creating money by lending required reserves.
Participating in the stock market.
→ Transferring money from savers to spenders.
Purchasing government bonds.
13-9. The ratio of a bank's reserves to its total
transactions deposits is known as the:
X Required reserves.
→ Reserve ratio.
Excess reserves.
Deposit ratio.
13-10. The minimum amount of reserves a bank is
required to hold is known as:
The money multiplier.
Total reserves.
Excess reserves.
→ Required reserves.
13-2. Saving involves holding the money and
potentially earning interest for use at a later date.
13-1. The standard of value function allows you to
make a valid comparison of the relative values of two
different goods.
13-4. The amount of money in circulation represents
only a fraction of the M1 money supply.
13-3. The narrowest definition of money includes
currency, traveler's checks, checking and other
transactions account balances.
13-6. M2 remains the same, because M2 includes M1
plus money in savings accounts.
13-5. Cash in the vault of a bank backs deposits and
counts as reserves.
13-8. Transferring funds from savers to borrowers is
the most important function financial institutions
perform and is critical to the economy's growth
prospects.
13-7. Currency and balances in transaction accounts
both count in M1 and M2.
13-10. The required reserve ratio is set and regulated
by the Federal Reserve.
13-9. Each bank must hold only a fraction of their
deposit; the ratio of reserves to deposits is the reserve
ratio.
13-11. Suppose a bank has $500,000 in deposits and a
required reserve ratio of 10 percent. Then required
reserves are:
$5,000,000.
$500,000.
→ $50,000.
$10,000.
13-12. A single bank with $10,000 of reserves and a
reserve ratio of 25 percent could support total
transactions account balances of at most:
$10,000.
$5,000.
→ $40,000.
$25,000.
13-13. 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.
13-14. Initially a bank has a required reserve ratio of
20 percent and no excess reserves. If $5,000 is
deposited into the bank, then ceteris paribus:
This bank can increase its loans by $5,000.
→ This bank can increase its loans by $4,000.
Total reserves will increase by $4,000.
Required reserves will increase by $5,000.
13-15. 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.
13-17. Suppose a bank has $200,000 in deposits, a
required reserve ratio of 25 percent, and bank reserves
of $100,000. Then this bank can make new loans in the
amount of:
$100,000.
→ $50,000.
$25,000.
$20,000.
13-16. Suppose a bank has $2 million in deposits, a
required reserve ratio of 10 percent, and total reserves
of $500,000. Then it has excess reserves of:
$50,000.
$200,000.
$500,000.
→ $300,000.
13-12. The money multiplier allows $10,000 in
reserves to let banks create 1 ÷ rrr; which is $10,000 ×
1 ÷ .25, or $40,000.
13-11. The bank has to hold the fraction set by the
Federal Reserve; in this case 10 percent of $500,000 is
$50,000 which is not available for loans.
13-14. The bank must only hold 20 percent or $1000,
so $4000 of the $5000 deposit is available to lend out.
13-13. 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.
13-16. The bank is required to hold $200,000 so the
extra $300,000 count as excess reserves.
13-15. Excess reserves are reserves held above and
beyond what is required by the Federal Reserve.
13-17. The bank is required to hold $50,000, so its
excess reserves of $50,000 can be converted into new
loans.
13-18. Refer to Table 13.1. If XYZ Bank has a required
reserve ratio of 10 percent, it can legally increase its
loans by:
→ $60,000.
$40,000.
$20,000.
$10,000.
13-19. Refer to Table 13.1. With a required reserve
ratio of 12 percent, XYZ Bank would have excess
reserves of:
$100,000.
$48,000.
→ $52,000.
$12,000.
13-20. If the banking system has a required reserve
ratio of 25 percent, then the money multiplier is:
→ 4.0.
1.25.
0.25.
0.2.
13-21. If the banking system has demand deposits of
$200,000, total reserves equal to $60,000, and a
required reserve ratio of 25 percent, then the banking
system can increase the volume of loans by:
→ $40,000.
$60,000.
$10,000.
$200,000.
13-19. The bank is required to hold $48,000 so the
bank is holding $52,000 in excess reserves.
13-21. The banking system has $10,000 in excess
reserves, so with a 25 percent required reserve ratio or
money multiplier of 4, the banking system can create
$40,000 in new loans.
13-18. The bank must hold 10 percent or $40,000 of its
deposits; it is holding $100,000 so it can lend out
$60,000 more than it is.
13-20. The money multiplier is equal to 1 ÷ required
reserve ratio, which is 1 ÷ .25 or 4.