Question

Candace digs out $500 from her fire-proof safe and deposits it in her savings account at the bank. As a result of this transaction (and this transaction only), M1 has not changed and M2 has increased by $500.

Select one:

True

False

If you pay for your food at the college snack bar with currency then you are utilizing the medium of exchange function of money

Select one:

True

False

At the Federal Reserve, the nation’s monetary policy is made by the Federal Open Market Committee (FOMC), which meets about every six weeks to discuss changes in the economy.

Select one:

True

False

Suppose that a bank has $500,000 of deposits, $120,000 of reserves and loans of $380,000. If the reserve requirement is 20 percent, then the bank could increase its loans by $20,000 and still satisfy the reserve requirement.

Select one:

True

False

Although the Federal Reserve controls the value of money it does not control the supply of money

Select one:

True

False

Answer 1

Question 1

Candace has deposited $500 in currency into her saving account.

Currency is part of M1 while both currency and saving account deposit are part of M2.

So, with this transaction, M1 will decrease while there will be no change in M2.

Thus, the given statement is False.

Question 2

When currency is used as source of payment to purchase goods and services then it is said that currency is being used as a medium of exchange.

Thus, the given statement is True.

Question 3

Federal Open Market Committee held eight meetings in a year.

So, in a manner, one meeting of FOMC takes place every six week.

The nation's monetary policy is, indeed, made by the Federal Open Market Committee.

Thus, the given statement is True.

Question 4

Deposit = $500,000

Reserve requirement = 20%

Required reserves = $500,000 * 0.20 = $100,000

Total reserves = $120,000

Excess reserves = Total reserves - Required reserves = $120,000 - $100,000 = $20,000

A bank can lend an amount equal to excess reserves it held.

So, this bank can increase its loan by $20,000 and still satisfy the reserve requirement.

Thus, the given statement is True.

Question 5

Federal Reserve controls the money supply in the economy but it has no control over the value of money.

Thus, the given statement is False.