Multiple Choice Questions:
1. An increase in demand deposits combined with an equal decrease in currency in circulation would?
a. Have no direct effect on M1 or M2.
b. Increase both M1 and M2.
c. Increase M1 and decrease M2.
d. Decrease M1 and increase M2.
2. Liquidity is defined as?
a. The cash value of fiat money.
b. The value of fiat money when used to buy a good or service.
c. The speed at which money is spent.
d. The ease with which money can be divided to make payments.
e. The ease with which an asset can be converted into cash.
3. Under fractional reserve banking, when a bank lends to a customer?
a. Bank credit decreases.
b. Reserves drain away from the system.
c. The bank is protected from a run.
d. Borrowers receive a newly created demand deposit; that is, money is created.
e. Bank profitability is decreased.
4. Required reserves of a bank are a specific percentage of their?
a. Loans.
b. Cash on hand.
c. Total assets.
d. Deposits.
5. Which of the following will lead to an increase in the money supply?
a. You pay back a $10,000 loan that you owe to your bank.
b. Your bank gives you a $10,000 loan by adding $10,000 to your checking account.
c. You pay $10,000 in cash for a new motorcycle.
d. You bury $10,000 in cash in your backyard.
6. If a banking transaction created new excess reserves in the banking system, the result would tend to be?
a. An increase in the amount of loans made by banks and an increase in the supply of money.
b. An increase in the amount of loans made by banks and a decrease in the supply of money.
c. A decrease in the amount of loans made by banks and an increase in the supply of money.
d. A decrease in the amount of loans made by banks and a decrease in the supply of money.
7. If many people were to suddenly deposit into their checking accounts large sums of cash previously kept in their wallets, and no offsetting actions were taken by the Fed, the result would be?
a. A reduction in the U.S. money supply.
b. A decrease in M1 but an increase in M2.
c. An increase in interest rates.
d. An increase in reserves of banks and therefore an increase in the money supply.
e. Both a and c.
8. A reserve requirement of 20 percent means a money multiplier of?
a. 1.25.
b. 2.
c. 5.
d. 20.
9. If the required reserve ratio were increased, then?
a. The money supply would tend to decrease, but the outstanding loans of banks would tend to increase.
b. Both the money supply and the outstanding loans of banks would tend to decrease.
c. The money supply would tend to increase, but the outstanding loans of banks would tend to decrease.
d. both the money supply and the outstanding loans of banks would tend to increase.