Question

Consider the cash people carry in their wallets. This cash is part of the M1 money supply but not part of the M2 money supply.

True

False

When the bank makes a loan to a business, where does it get the money from?

from the purchase of government bonds

the bank's required reserves

the bank's excess reserves

the deposits held at the bank

When you compare the prices of two goods, you are using money as a medium of exchange.

True

False

If banks decide to hold a larger percentage of deposits on reserve then the money multiplier will increase.

True

False

Answer 1

1. Consider the cash people carry in their wallets. This cash is part of the M1 money supply but not part of the M2 money supply.

False

reason: M1 is the most liquid money. For example, cash in the wallet. M2 includes M1 and other less liquid forms of money like deposit certificate, mutual fund balances, etc. Since M2 includes M1, the given statement is false.

2. When the bank makes a loan to a business, where does it get the money from?

the bank's excess reserves

reason: Excess reserves are held by a bank over and above the required reserves specified by the central bank. These excess reserves are very important to the banks as they can be used to lend out loans.

3. When you compare the prices of two goods, you are using money as a medium of exchange.

True

reson: When we attach a price to a good, it means that the value of that good is stated in terms of money. Otherwise we would express it in terms of some other good (for example, 1 chair = 3 clay pots). So when we compare the price of two goods, we are talking about them in terms of money. In other words, we are using money as medium of exchange.

4. If banks decide to hold a larger percentage of deposits on reserve then the money multiplier will increase.

False

reason: Money multiplier is the ratio of the change in money supply to the initial change in bank reserves. It tells us how many times a loan will be multiplied by lending the money in demand deposits. If the bank holds a larger percentage of deposits on reserve, it means that it is lending out less. Therefore, less money goes out every time the bank re-lends the loan money deposited in the bank.

Money multiplier = 1/(required reserve ratio) When the reserve ratio increases, the multiplier decreases. Hence the given statement is false.