1. A problem that the Fed faces when it attempts to control the
money supply is that
Answer
a.
since the U.S. has a fractional-reserve banking system, the
amount of money in the economy depends in part on the
behavior of depositors and bankers.
b.
federal legislation in the 1950s stripped the Fed of its power to
act as a lender of last resort to banks.
c.
while the Fed has the ability to change the money supply by a
large amount, it does not have the ability to change it by a small
amount.
d.
the Fed has to get the approval of the U.S. Treasury Department
whenever it uses any of its monetary policy tools.
All Fed purchases and sales of
Answer
a.
corporate stocks and bonds are conducted at the New York
Fed’s trading desk.
b.
government bonds are conducted at the New York Fed’s trading
desk.
c.
real estate and other real assets are conducted by the Federal

2. Open Market Committee.
d.
All of the above are correct.
When the Fed conducts open-market purchases,
Answer
a.
it lends money to member banks, which decreases the money
supply.
b.
it buys Treasury securities, which increases the money supply.
c.
it buys Treasury securities, which decreases the money supply.
d.
it borrows money from member banks, which increases the
money supply.
If the reserve ratio is 12.5 percent, then $5,600 of money can be
generated by
Answer
a.
$64 of new reserves.
b.
$448 of new reserves.
c.
$700 of new reserves.

3. d.
$800 of new reserves.
If the reserve ratio is 5 percent, then $1,000 of additional
reserves can create up to
Answer
a.
$200 of new money.
b.
$2,000 of new money.
c.
$20,000 of new money.
d.
None of the above is correct.
Prisoners sometimes determine a single good to be used as
money. This good becomes
Answer
a.
a medium of exchange, but not a unit of account.
b.
a medium of exchange and a unit of account.
c.
a unit of account, but not a medium of exchange.
d.
neither a unit of account nor a medium of exchange.
Which of the following is a liability of a bank and an asset of

4. its customers?
Answer
a.
deposits of its customers but not loans to its customers
b.
loans of its customers but not the deposits of its customers
c.
neither the deposits of its customers nor the loans to its
customers
d.
deposits of its customers and loans to it customers
The set of items that serve as media of exchange clearly
includes
Answer
a.
demand deposits.
b.
short-term bonds.
c.
credit cards.
d.
All of the above are correct.
The existence of money leads to
Answer
a.

5. greater specialization and to a higher standard of living.
b.
neither greater specialization nor to a higher standard of living.
c.
greater specialization in production, but not to a higher standard
of living.
d.
a higher standard of living, but not to greater specialization.
Which of the following is not included in either M1 or M2?
Answer
a.
large time deposit
b.
demand deposits
c.
money market deposit accounts
d.
money market mutual funds
Bank runs
Answer
a.
can be neither prevented nor mitigated by the Federal Reserve.
b.
are a problem because banks only hold a fraction of deposits as
reserves.

6. c.
are only a problem for insolvent banks.
d.
will affect neither the money supply nor the money multiplier.
The Fed purchases $200 worth of government bonds from the
public. The reserve requirement is 8 percent, people hold no
currency, and the banking system keeps no excess reserves. The
U.S. money supply eventually increases by
Answer
a.
$16.
b.
$200.
c.
$1,600.
d.
$2,500.
Which of the following increases when the Fed makes open-
market sales?
Answer
a.
currency and reserves
b.
reserves but not currency
c.

7. currency but not reserves
d.
neither currency nor reserves
What does the Fed auction at the Term-Auction Facility?
Answer
a.
government bonds of a quantity it sets
b.
loans of a quantity it sets
c.
loans with the quantity determined at the auction
d.
government bonds with the quantity determined at the auction
Demand deposits are included in
Answer
a.
M1 but not M2.
b.
M2 but not M1.
c.
M1 and M2.
d.
neither M1 nor M2.