Chapter 16 The Monetary System - Practice Questions

A collection of practice questions and answers from Chapter 16 on the Monetary System to aid students in exam preparation.

What is the most liquid form of asset?

Cash

What function of money allows it to be used for future purchases?

Store of value

What does M1 include?

Currency, demand deposits, and other checkable deposits

What does the Fed use open market operations for?

To increase or decrease the money supply

What happens when the Fed sells government bonds?

The money supply decreases

What is the discount rate?

The interest rate the Fed charges banks for short-term loans

What is fiat money?

Money without intrinsic value, declared legal tender by the government

How many regional Federal Reserve Banks are there?

12

What is the dual mandate of the Fed?

To maintain maximum employment and stable prices

What are demand deposits?

Bank account balances that can be accessed by checks or cards

What is the reserve requirement?

The minimum fraction of deposits banks must hold in reserve

What is the purpose of the Federal Open Market Committee?

To set monetary policy

How does lowering the reserve requirement affect the money supply?

It increases the money supply

Why is bartering inefficient?

It requires a double coincidence of wants

What happens when interest on reserves increases?

Banks are more likely to hold reserves and lend less

How is money created in the banking system?

Through fractional reserve lending

What is a central bank?

An institution that manages a nation's currency and monetary policy

Which policy tool is most often used by the Fed?

Open market operations

What is meant by 'money stock'?

The total quantity of money circulating in the economy

How do bonds relate to monetary policy?

The Fed buys/sells them to influence interest rates