Explain the three functions of money

Question

Question 1: A financial intermediary is an institution that

• Conducts monetary policy
• Creates and controls aggregate price levels and real gdp
• Collects funds from lenders and distributes these funds to borrowers
• Controls international exchange rates

Question 2: A ___________ is a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investments or investment spending needs of borrowers

• Bank
• Mutual fund
• Pension fund
• Life insurance company

Question 3: A pension fund

• Is a financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors
• Sells policies that guarantee a payment to a policy-holder’s beneficiaries when the policy holder dies
• Is a type of mutual fund that holds assets in order to provide retirement income to its members
• Is a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the liquid investments or investment spending needs of borrowers

Question 4: Money is best defined as

• Anything you can trade in exchange for other goods and services
• Any asset that can be easily used to purchase goods and services
• An asset that is always the best store value over time
• A double coincidence

Question 5: A liquid asset

• Can be quickly converted into currency
• Cannot be exchanged for goods and services
• Is a corporate stock or bond
• Has no value to consumers

Question 6: Money that has value apart from its use as money is

• Convertible paper money
• Private debt money
• Fiat money
• Currency
• Commodity money

Question 7: Fiat money is

• A medium of exchange with some intrinsic value
• Equivalent to commodity money
• A medium of exchange whose value derives entirely from its official government status as a means of payment
• None of the above

Question 8: Which of the following is not a role of money

• Store of value
• Medium of exchange
• Liquid reserve
• Unit of account

Question 9: The medium of exchange function means money is used

• As a consistent means of measuring the value of things
• As the common denominator of future payments
• To pay for goods and services
• To accumulate purchasing power

Question 10: When the economy experiences inflation, money may not be the best

• Store of value
• Medium of exchange
• Liquid reserve
• Unit of account

Question 11: The largest component of M1 is

• Currency
• Treasury bonds
• Checkable deposits
• Savings deposits
• Time deposits

Question 12: __________ is the narrowest and most liquid measure of money

• M1
• M2
• M3
• L

Question 13: A fractional reserve banking system is one in which banks are required to hold

• A multiple of total deposits on reserve
• A fraction of total deposits on reserve
• The amount of reserves that the bank feels is appropriate
• Enough reserves to back every dollar of deposits

Question 14: Which of the following are bank reserves

• Demand deposits with other banks
• Deposits with the federal reserve
• Treasury bonds and bills
• State bonds of any and all states in the united states

Question 15: Excess reserves are

• A bank’s reserves that is required to hold by law
• Rules set by the federal reserve that determine the minimum reserve ratio for a bank
• The sum of currency in circulation and bank reserve
• A bank’s reserves over and above its required reserves

Question 16: Banks create money when they

• Take deposits
• Loan money
• Hold excess reserves
• Pay withdrawals to depositors

Question 17: Suppose the required reserve ratio is 0.25. If james deposits $5,000 of cash into his checking account and his bank lends $3,250 to sara the money supply

• Does not change
• Increases by $3,250
• Decreases by $3,250
• Increases by $5,000

Question 18: Assume that all banks in the banking system are fully loaned up and the required reserve ratio is 25%. If one bank obtains excess reserve of $50,000 then checkable deposits could ultimately increase by

• $50,000
• $200,000
• $750,000
• $1,250,000

Question 19: There is a _________ relationship between interest rate and bonds.

• Vertical
• Positive
• Negative
• Horizontal

Question 20: An increase in the demand for bonds generates ____________ in the interest rate and _____________ in aggregate demand

• An increase; an increase
• An increase; a decrease
• A decrease; an increase
• A decrease; a decrease

Question 21: People wish to hold money in order to

• Earn interest
• Reduce transaction cost
• Increase transaction cost
• Eliminate uncertainty

Question 22: The relative price of currencies between countries is the

• International interest rate
• Exchange rate
• Rate of international purchase
• Efficient market rate

Question 23: The money supply curve is __________ and the money demand curve is ____________

• Upward sloping; downward sloping
• Vertical; downward sloping
• Horizontal; downward sloping
• Vertical; upward sloping

Question 24: A decrease in the supply of money, with no change in the demand for money, will lead to ___________ in the equilibrium quantity of money and _________ in the equilibrium interest rate

• Decrease; increase
• Decrease; decrease
• Increase; increase
• Increase; decrease

Question 25: If the money market is initially in equilibrium and the central bank buys bonds, then the money supply curve will shift to the _____________ and the equilibrium interest rate will__________

• Left; decrease
• Left; increase
• Right; increase
• Right; decrease

Question 26: All other things equal, if there is a decrease in the interest rate, investment and consumer spending will

• Increase
• Not change
• Decrease
• Experience unknown changes

Question 27: An institution that oversees and regulates the banking system, controls the monetary base and sets monetary policy is

• The treasury department
• A mutual fund
• The central bank
• The federal deposit insurance corporation

Question 28: The federal reserve is

• The central bank of the united states
• Composed of the board of governors and 12 regional federal reserve district banks
• Responsible for conducting u.s. monetary policy
• All of the above
• Only a and c

Question 29: The members of the board of governors of the federal reserve are elected to a 14-year term in order to

• Ensure that their policies are implemented
• Reduce their exposure to political influence
• Allow them greater flexibility in setting monetary policy
• None of the above

Question 30: The three monetary policy tools used by the fed are

• The discount rate, reserve requirements, and open- market operations
• Reserve requirements, taxes, and open-market operations
• The discount rate, reserve requirements, and the deposit multiplier
• The discount rate, the money multiplier, and open-market operations

Question 31: The discount rate is

• The amount the fed charges for government bonds
• The rate of interest that banks charge on loans to other banks
• Determined in the federal funds market
• The rate of interest the fed charges on loans to banks

Question 32: Expansionary monetary policy

• Increase aggregate demand
• Decrease the interest rate
• Shifts the money supply curve to the right
• Does all the above

Question 33: The __________ is responsible for setting policy on and conducting open-market operations

• U.S. treasury
• Board of governors
• Federal open market committee
• Chairman of the board of governors

Question 34: Which of the following monetary policy actions could be taken by the central bank to implement contractionary monetary policy

• Increase the required reserve ratio
• Sell government bonds on the open market
• Decrease the discount rate
• All the above
• Only a and b

Question 35: The delay between the time at which an even occurs and the time policymakers become aware of it is the

• Impact lag
• Implementation lag
• Government lag
• Political lag
• Recognition lag

Question 36: The legislative lag is the

• Time it takes a policy change to go through the legislative process
• Time it takes for the multiplied process of fiscal or monetary policy to work its way through the system
• Time it takes for policymakers to become aware of the problem
• None of the above

Question 37: Which of the following is the quantity equation?

    M x R = P x Y
    R x V = M x P
    M x V = P x Y
    M x Y = P x V

 Question 38: If  M = $500, and P = $10, and Y = 800 then V = ____________

• 6.25
• 9.0
• 11.75
• 16.0

Question 39: The use of all available information to forecast future levels of economic activity and adjust behavior accordingly is

• Liquidity
• Implementation lag
• Intelligent policy
• Rational expectations
• Monetary theory

Each question should be answered in 1-3 paragraphs

Question 40: Describe and explain the three functions of money. Give an example of each function

Question 41: Describe the three major tools of monetary policy. Discuss the advantages and disadvantages of each monetary policy tool. Explain how each tool would be used to pursue an expansionary monetary policy.