Question

Mutiple Choice

1. Credit card balances are included in: A. M1 only. B. M2 only. C. both M1 and M2. D. neither M1 nor M2.

.2. The money supply will increase if the: A. currency–deposit ratio increases. B. reserve–deposit ratio increases. C. monetary base increases. D. discount rate increases.

3.  In the United States, the money supply is determined: A. only by the Fed. B. only by the behavior of individuals who hold money and of banks in which money is held. C. jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. D. according to a constant-growth-rate rule.

Answer 1

1. Credit card balances are included in.

Option D) neither M1 nor M2.

M1=currency+demand deposits whereas M2=M1+money market deposits+savings deposits and since the credit card is a type of loan as it cannot be converted into a liquid form and counting it as money will be counting the same amount twice.

2. The money supply will increase if the

Option C) monetary base increases

All the other options such as raising the discount rate, raising the currency deposit ratio and raising the reserve deposit ratio will result in a decrease in the money supply.

3.  In the United States, the money supply is determined:

Option C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

As the Fed changes the various ratio and performs open market operations based on the demand for money by the people and the market condition.