Quiz 1 - Chapter 13 Money and Banking 1. Which of the following is not part of the U.S. money supply (M1)? a. coins b. paper currency c. checkable deposits d. time deposits (“CDs”) Answer: d Feedback: Because of restrictions imposed on converting time deposits into currency, such deposits are far less liquid than coins, currency, or checkable deposits. They are included in M2, but not M1. 2. In which country is the U.S. dollar the official currency? a. Liberia b. Brazil c. Argentina d. Vietnam Answer: a Feedback: While the dollar is used to some extent in all these countries, it is the official currency in Liberia, Panama, and Equador. 3. The group responsible for setting policy on buying and selling government securities (bills, notes, and bonds) is the: a. Securities and Exchange Commission b. U.S. Treasury Board c. Federal Open Market Committee d. 12 Federal Reserve Bank presidents Answer: c Feedback: The FOMC, which consists of the Board of Governors and a rotating group of Fed bank presidents, is responsible for this task. 4. Other things equal, a dramatic decrease in the money supply would: a. increase the price level b. reduce the purchasing power of each dollar c. increase the purchasing power of each dollar d. have an ambiguous impact on the purchasing power of each dollar Answer: c Feedback: With fewer dollars available, the price level would drop. Lower prices mean that each dollar can be exchanged for a greater number of goods and services. 5. Which of the following is a true statement? Since 1980: a. the share of financial assets held by banks and thrift institutions has dramatically increased b. the share of financial assets held by pension funds, insurance and mutual fund companies, and securities firms has dramatically increased c. the share of financial assets held directly by households has dramatically increased d. consolidation among thrift institutions makes any statements about financial asset shares meaningless Answer: b Feedback: Since 1980, households have redirected assets away from banks and thrifts toward other financial institutions. 6. If the current interest rate is below the equilibrium rate: a. the money supply exceeds the quantity of money demanded b. the money supply will increase and the interest rate will rise c. the money supply will decrease and the interest rate will rise d. the interest rate will rise and the quantity of money demanded will decrease Answer: d Feedback: If the interest rate is below its equilibrium value, the quantity of money demanded exceeds the money supply. The shortage of money will cause the interest rate to rise, causing households and businesses to reduce their desired money holdings. 7. In the U.S. Federal Reserve System: a. members of the Board of Governors also sit on the Federal Open Market Committee b. there is a Federal Reserve branch bank located in each state c. there are 14 regional Federal Reserve banks d. the vice-chair of the Board of Governors chairs the Federal Open Market Committee Answer: a Feedback: The FOMC consists of the Board members plus a rotating group of 5 regional Federal Reserve Bank presidents. 8. Which of the following most accurately describes the status of the U.S. Federal Reserve System? a. It is a publicly owned and managed agency of the federal government b. It is privately owned but publicly managed c. It is owned by a group of large private banks and managed for their profit d. It is a publicly owned agency of the federal government, managed for profit by private banks Answer: b Feedback: Each regional Federal Reserve bank is owned by the private commercial banks in its district. However, its governing body, appointed directly by the president, manages the system to promote the well-being of the economy as a whole. 9. Which of the following is a part of the M3 money supply? a. Credit card balances b. Currency and coins held within commercial banks c. Large ($100,000 and over) time deposits d. Stock certificates Answer: c Feedback: Including currency and coins held within banks would amount to double-counting, as it is already included as deposits. Stock certificates and credit card balances are not part of the money supply. 10. The Federal Reserve System was created in: a. 1789 with the adoption of the U.S. Constitution b. 1926 by an executive order of the president c. 1913 through an act of Congress d. 1873 following a meeting of several private bankers Answer: c Feedback: Following a severe banking crisis in 1907, Congress appointed a National Monetary Commission to study the banking system. In 1913, the Federal Reserve Act authorized creation of the Federal Reserve System.