Question

1. An open market sale is:

   	A.	The Fed buys Treasury securities from banks, causing the money supply to rise.
   	B.	The Fed buys Treasury securities from banks, causing the money supply to fall.
   	C.	Banks buy Treasury securities from the Fed, causing the money supply to rise.
   	D.	Banks buy Treasury securities from the Fed, causing the money supply to fall.

2. When you go to a store, you assume the seller will accept your cash because US dollars:

   	A.	are used as a unit of account
   	B.	are used as a medium of exchange
   	C.	store value
   	D.	have intrinsic value

3. In a fractional reserve banking system, banks:

   	A.	hold more reserves than deposits
   	B.	typically lend out more than they hold in reserves
   	C.	cause the money supply to fall by lending
   	D.	do all of A-C

Answer 1

1. Option D.

• An open market sale refers to the sale of securities done by the Federal Government.
• That is, the federal government sells government securities to the bank's.
• This will cause the money supply to decrease and the interest rates to fall.
• Hence an open market sale is the purchase of treasury securities from the Fed which causes the money supply to fall.

2. Option B.

• When you assume that the seller will accept your cash, this is because the US dollar acts as a medium of exchange.
• The medium of exchange function of money shows that money can be used to purchase various goods and services.

3. Option B.

• Fractional reserve system is a system in which banks are required to hold only a fraction of money as reserve's and are required to lend out the remaining amount of money.
• Hence, they typically lend out more than they hold in reserve's.