ECON 1500 BOWLES EXAM 2 QUESTIONS
COMPLETE WITH 100% VERIFIED ANSWERS
1. Which of the following is the correct historical order of monetary systems?
A. Barter, fiat money, commodity money, hard money
B. Fractional reserve banking, commodity money, fiat money
C. Barter, commodity money, hard money, fiat money (Correct)
D. Medium of exchange, commodity money, hard money, fiat money
Explanation: Barter (direct exchange) came first, then commodity money (e.g.,
cattle, grain), then hard money (precious metal coins redeemable for value), then
fiat money (government-issued currency not backed by physical commodity).
2. If the reserve ratio is 20 percent, a new deposit of freshly printed $2,000 will
add _________ to the money supply.**
A. $2,000
B. $40,000
**C. $10,000 (Correct)
D. $200
*Explanation: Money multiplier = 1 / reserve ratio = .20 = 5. New deposit of
$2,000 × 5 = $10,000 total money supply increase.*
3. Which of the following is most closely associated with the Classical growth
model?
A. The Industrial Revolution (Correct)
B. The development of integration
,C. The invention of diesel engines
D. Plato
Explanation: The Classical growth model (Smith, Ricardo, Malthus) focused on
land, labor, and capital during the Industrial Revolution era.
4. Funds in your checking account:
A. Are not part of M1
B. Are a medium of exchange, part of M1, and an asset to you (Correct)
C. Are a liability when owned by a college student
D. Are not a medium of exchange
Explanation: Checking account funds are included in M1, serve as a medium of
exchange, and are your asset (the bank's liability).
5. If the Federal Reserve raises the interest rate it pays on reserves, banks:
A. Will want to hold fewer reserves and lend more
B. Will want to hold more reserves and reduce lending (Correct)
C. Will see no change in behavior
D. Will increase the money supply
Explanation: Higher interest on reserves makes holding reserves more attractive,
so banks reduce lending, decreasing money supply.
6. Which of the following is a typical bank asset?
A. Checking deposits of customers
B. Reserves and loans to customers (Correct)
C. Shareholder equity
D. Mortgage-backed liabilities
Explanation: Bank assets include reserves (cash at Fed/vault) and loans to
customers (mortgages, commercial loans).
,7. According to T. Bowles, which of the following should be included in the list of
great intellectual achievements of humans?
A. Barter
B. Fractional Reserve Banking (Correct)
C. Fiat money
D. Commodity money
Explanation: Fractional reserve banking is highlighted as a key innovation because
it allows money supply expansion beyond physical reserves.
8. If one U.S. dollar could be exchanged for a fixed amount of gold, the dollar
would be:
A. Fiat money
B. Hard money (Correct)
C. Commodity money
D. Barter money
Explanation: Hard money is convertible into a fixed amount of a precious metal
(e.g., gold) at a guaranteed rate.
9. Assume Olga has 10 pounds of gold and issues 10 one-pound notes, each
redeemable for a pound of gold. Olga is:
A. Issuing hard money (Correct)
B. Practicing fractional reserve banking
C. Creating fiat money
D. Engaging in a barter system
Explanation: She has 100% reserves backing her notes → hard money, not
fractional reserve banking.
, 10. Which institutions can create money?
A. Only the U.S. Treasury
B. Only commercial banks
C. The Fed with an assist from banks (Correct)
D. Only the Federal Reserve alone
Explanation: The Fed creates base reserves; banks create money through lending
via the money multiplier process.
**11. Assume Trump Bank has a reserve ratio of 20 percent. If a new customer, K.
Harris, deposits $10 million, Trump Bank can make a maximum new loan of:**
A. $10 million
**B. $8 million** (Correct)
C. $2 million
D. $5 million
*Explanation: Required reserves = 20% of $10M = $2M. Excess reserves = $10M -
$2M = $8M available to lend.*
12. Better technology would:
A. Shift the PPC inward
B. Lead to economic growth and shift the LAS to the right (Correct)
C. Only shift the PPC, not LAS
D. Decrease potential output
Explanation: Better technology increases productivity, shifting both PPC and Long-
Run Aggregate Supply outward.
13. Robert Lucas would label as poisonous:
A. Focus on growth rather than equity
B. Focus on equity rather than growth (Correct)
COMPLETE WITH 100% VERIFIED ANSWERS
1. Which of the following is the correct historical order of monetary systems?
A. Barter, fiat money, commodity money, hard money
B. Fractional reserve banking, commodity money, fiat money
C. Barter, commodity money, hard money, fiat money (Correct)
D. Medium of exchange, commodity money, hard money, fiat money
Explanation: Barter (direct exchange) came first, then commodity money (e.g.,
cattle, grain), then hard money (precious metal coins redeemable for value), then
fiat money (government-issued currency not backed by physical commodity).
2. If the reserve ratio is 20 percent, a new deposit of freshly printed $2,000 will
add _________ to the money supply.**
A. $2,000
B. $40,000
**C. $10,000 (Correct)
D. $200
*Explanation: Money multiplier = 1 / reserve ratio = .20 = 5. New deposit of
$2,000 × 5 = $10,000 total money supply increase.*
3. Which of the following is most closely associated with the Classical growth
model?
A. The Industrial Revolution (Correct)
B. The development of integration
,C. The invention of diesel engines
D. Plato
Explanation: The Classical growth model (Smith, Ricardo, Malthus) focused on
land, labor, and capital during the Industrial Revolution era.
4. Funds in your checking account:
A. Are not part of M1
B. Are a medium of exchange, part of M1, and an asset to you (Correct)
C. Are a liability when owned by a college student
D. Are not a medium of exchange
Explanation: Checking account funds are included in M1, serve as a medium of
exchange, and are your asset (the bank's liability).
5. If the Federal Reserve raises the interest rate it pays on reserves, banks:
A. Will want to hold fewer reserves and lend more
B. Will want to hold more reserves and reduce lending (Correct)
C. Will see no change in behavior
D. Will increase the money supply
Explanation: Higher interest on reserves makes holding reserves more attractive,
so banks reduce lending, decreasing money supply.
6. Which of the following is a typical bank asset?
A. Checking deposits of customers
B. Reserves and loans to customers (Correct)
C. Shareholder equity
D. Mortgage-backed liabilities
Explanation: Bank assets include reserves (cash at Fed/vault) and loans to
customers (mortgages, commercial loans).
,7. According to T. Bowles, which of the following should be included in the list of
great intellectual achievements of humans?
A. Barter
B. Fractional Reserve Banking (Correct)
C. Fiat money
D. Commodity money
Explanation: Fractional reserve banking is highlighted as a key innovation because
it allows money supply expansion beyond physical reserves.
8. If one U.S. dollar could be exchanged for a fixed amount of gold, the dollar
would be:
A. Fiat money
B. Hard money (Correct)
C. Commodity money
D. Barter money
Explanation: Hard money is convertible into a fixed amount of a precious metal
(e.g., gold) at a guaranteed rate.
9. Assume Olga has 10 pounds of gold and issues 10 one-pound notes, each
redeemable for a pound of gold. Olga is:
A. Issuing hard money (Correct)
B. Practicing fractional reserve banking
C. Creating fiat money
D. Engaging in a barter system
Explanation: She has 100% reserves backing her notes → hard money, not
fractional reserve banking.
, 10. Which institutions can create money?
A. Only the U.S. Treasury
B. Only commercial banks
C. The Fed with an assist from banks (Correct)
D. Only the Federal Reserve alone
Explanation: The Fed creates base reserves; banks create money through lending
via the money multiplier process.
**11. Assume Trump Bank has a reserve ratio of 20 percent. If a new customer, K.
Harris, deposits $10 million, Trump Bank can make a maximum new loan of:**
A. $10 million
**B. $8 million** (Correct)
C. $2 million
D. $5 million
*Explanation: Required reserves = 20% of $10M = $2M. Excess reserves = $10M -
$2M = $8M available to lend.*
12. Better technology would:
A. Shift the PPC inward
B. Lead to economic growth and shift the LAS to the right (Correct)
C. Only shift the PPC, not LAS
D. Decrease potential output
Explanation: Better technology increases productivity, shifting both PPC and Long-
Run Aggregate Supply outward.
13. Robert Lucas would label as poisonous:
A. Focus on growth rather than equity
B. Focus on equity rather than growth (Correct)
