bridge and practice problems exam 3
If the exchange rate between the Russian ruble and the U.S. dollar is 33.3 rubles for $1, then how much is each ruble worth in U.S. dollars? a) $0.03 b) $0.30 c) $0.33 d) $33.3
a) $0.03
If the exchange rate between the Chinese yuan and the U.S. dollar is 5 yuan for $1, then how much is each yuan worth in U.S. dollars? a) $0.20 b) $1.50 c) $2 d) $5
a) $0.20
If the exchange rate between the Argentine peso and the U.S. dollar is 4 pesos for $1, how much is each peso worth in U.S. dollars? a) $0.25 b) $0.50 c) $0.75 d) $1.25
a) $0.25
Which of the following factors will result in the greatest amount of money being created? a) A $1,000 cash deposit into a checking account. b) A $1,000 transfer from a checking account to a savings account. c) $1,000 in coins that is converted into $1,000 in bills. d) A $1,000 bond that matures which is used to buy another $1,000 bond.
a) A $1,000 cash deposit into a checking account.
In which situation is the real value of 1 unit of currency the highest? a) A Big Mac that costs 4 pounds in London. b) A Big Mac that costs 450 yen in Tokyo. c) A Big Mac that costs $4.75 in New York City. d) A Big Mac that costs 7 Swiss Francs in Zurich.
a) A Big Mac that costs 4 pounds in London.
What is the money multiplier? a) A measure of the potential or maximum amount the money supply can increase when new deposits enter the system. b) A measure of the amount of excess reserves banks hold. c) A measure of the amount of total reserves banks hold. d) A measure of the maximum amount of savings that can happen when account holders deposit money in a bank account.
a) A measure of the potential or maximum amount the money supply can increase when new deposits enter the system.
Which of the following assets has the greatest liquidity? a) Checking account b) Share of stock c) Savings bond d) Real estate
a) Checking account
In which situation would contractionary monetary policy be most effective? a) Consumer confidence is very strong, leading to a record holiday shopping season despite fewer discounts being offered. b) Businesses worry that shoppers are being very cautious about their spending because they are concerned about job safety. c) A crisis overseas has led to a spike in oil prices, causing the price of gasoline and other goods to increase. d) The economy has been in a long recession but signs of improvement are starting to appear.
a) Consumer confidence is very strong, leading to a record holiday shopping season despite fewer discounts being offered.
Which of the following is a monetary policy tool that is meant to reduce interest rates and stimulate the economy? a) Easy money b) Tight money c) Restrictive monetary policy d) Contractionary monetary policy
a) Easy money
Which of the following will cause the supply curve of loanable funds to shift? a) Incentives to save. b) Business expectations. c) Product demand. d) Investment tax incentives.
a) Incentives to save.
During the Great Recession that began in 2007, the Fed lowered interest rates to almost 0%. What did it do to accomplish this policy? a) Increased the money supply. b) Decreased the money supply. c) Sold bonds on the open market. d) Both choices 'a' and 'c'. Submit
a) Increased the money supply.
Which of the following is a reason people choose to hold more cash? a) Interest rates paid on savings and checking accounts at the bank rise dramatically. b) Consumers have more faith in the stability and safety of the financial system. c) Interest rates paid on savings and checking accounts at the bank are near zero. d) Holding cash becomes less convenient.
a) Interest rates paid on savings and checking accounts at the bank rise dramatically.
Which of the following is not a major role of financial institutions? a) It seeks to minimize interest rates that it pays to savers. b) It seeks to diversify assets to reduce risk. c) It seeks to minimize transaction costs. d) It seeks to minimize information costs.
a) It seeks to minimize interest rates that it pays to savers.
Suppose that after five solid years of economic growth, Eurekaland begins to experience inflationary pressures due to strong consumer and investor confidence. If Eurekaland's Central Bank wants to prevent inflation from becoming a major problem, which of the following actions should it take? a) It should reduce the money supply to push interest rates higher. b) It should increase the money supply to push interest rates higher. c) It should reduce the money supply to push interest rates lower. d) It should increase the money supply to push interest rates lower.
a) It should reduce the money supply to push interest rates higher.
Which of the following must be true of a commodity for it to be used as money? a) Its value must be easy to determine. b) It must not be divisible. c) It must not be durable. d) It must not be readily accepted by many people.
a) Its value must be easy to determine.
José is putting money for college in a savings account. The bank then makes this money available to business borrowers. In essence: a) José is supplying loanable funds for business investment. b) José is demanding loanable funds. c) The interest rates that businesses pay are independent of the actions of suppliers of funds, such as José. d) Financial markets are not performing the role of an intermediary. Submit
a) José is supplying loanable funds for business investment.
There is much debate about whether the U.S. government should eliminate the penny from circulation and instead round all prices to the nearest 5 cents for everyday cash transactions. Which function of money does a penny not serve well? a) Medium of exchange b) Unit of account c) Store of value d) The penny does not serve any of the functions of money well.
a) Medium of exchange
Which of the following is a financial intermediary that serves as a bridge between savers and borrowers in the loanable funds market model? a) Mutual funds b) Corporations c) Government d) Stock market
a) Mutual funds
Suppose the Federal Reserve decides to increase the proportion of deposits that banks must hold from 1% to 3%. Which monetary policy tool is it using? a) Reserve requirements b) Discount rate c) Open market operations d) Infrastructure spending
a) Reserve requirements
Which of the following would likely cause the dollar to appreciate? a) Rising interest rates in the United States. b) An increase in United States citizens' preference for foreign goods. c) Income growth of the United States exceeding that of other countries. d) Rising inflation in the United States.
a) Rising interest rates in the United States.
Which of the following is a way banks reduce information costs? a) Screening firms. b) Disciplining firms. c) Providing standardized products. d) Pooling money into portfolios.
a) Screening firms.
In which of the following pairs of countries is purchasing power parity more likely occur? a) Thailand and Malaysia b) China and France c) The United States and Thailand d) The United States and China
a) Thailand and Malaysia
Which school of economic thought is most closely associated with calls for monetary rules to guide monetary policy decisions? a) The Monetarist school b) The Classical school c) The Keynesian school d) The Austrian school
a) The Monetarist school
In the long-run, what happens to the aggregate price level when the Federal Reserve decreases the money supply? a) The aggregate price level falls. b) The aggregate price level rises. c) The aggregate price level rises and then falls. d) The aggregate price level does not change.
a) The aggregate price level falls.
What happens to the amount of funds supplied to the loanable funds market when the interest rate decreases? a) The amount of loanable funds supplied decreases. b) The amount of loanable funds supplied increases. c) The amount of loanable funds supplied stays the same. d) The amount of loanable funds supplied falls to zero when the interest rate decreases.
a) The amount of loanable funds supplied decreases.
If the value of the euro falls from $1.45 to $1.42, how would this change be described? a) The euro depreciated against the dollar. b) The euro appreciated against the dollar. c) The dollar depreciated against the euro. d) The purchasing power parity between the two currencies increased.
a) The euro depreciated against the dollar.
If you exchanged $1,000 for 90,000 yen at your local bank in preparation for an upcoming trip to Tokyo, and notice after your arrival that the current exchange rate is 100 yen per dollar, how will the value of the yen you brought to Tokyo change relative to the dollar? a) The value of the yen fell in value relative to the dollar. b) The value of the yen rose in value relative to the dollar. c) The value of the yen stayed the same relative to the dollar. d) There is not enough information to answer this question.
a) The value of the yen fell in value relative to the dollar.
What happens to bond prices when the interest rate increases? a) They would decrease. b) They would increase. c) They would stay the same. d) They would fluctuate based on the quantity of money.
a) They would decrease.
Which of the following is a function that is performed by the Federal Reserve? a) To clear checks. b) To keep inflation high. c) To keep employment high. d) To keep interest rates low.
a) To clear checks.
The Federal Reserve Act of 1913 tasked the central bank with which of the following purposes? a) To establish more effective supervision of the banking system in the United States. b) To keep inflation high. c) To keep employment low. d) To provide employment in the federal government.
a) To establish more effective supervision of the banking system in the United States.
Money is ________ because goods and services are sold for money, then the money is used to purchase other goods and services. a) a medium of exchange b) a unit of account c) a store of value d) fiat money
a) a medium of exchange
Suppose one U.S. dollar can purchase a half pound of strawberries in the United States. After converting dollar to pesos, one U.S. dollar can now purchase a full pound of strawberries in Mexico. These values represent: a) a real exchange rate. b) a nominal exchange rate. c) a purchasing power parity rate. d) a transaction rate.
a) a real exchange rate.
If the exchange rate changes from $1 = 1.2 euros to $1 = 1.4 euros, then the U.S. dollar _____ and the euro _____. a) appreciated; depreciated b) depreciated; appreciated c) depreciated; depreciated d) appreciated; appreciated Submit
a) appreciated; depreciated
In the loanable funds market model, the demand curve represents: a) borrowers. b) taxes. c) savers. d) the budget balance.
a) borrowers.
Financial intermediaries that primarily accept savings and make loans are known as: a) commercial banks. b) credit cards. c) federal financial regulators. d) securities firms.
a) commercial banks.
The paradox of thrift suggests that when households intend to save more, they will ________ consumption, which will ultimately lead to ____________ aggregate saving. a) decrease; lower b) decrease; higher c) increase; lower d) increase; higher
a) decrease; lower
Expansionary monetary policy _____ interest rates and _____ aggregate demand. a) decreases; increases b) decreases; decreases c) increases; increases d) increases; decreases
a) decreases; increases
The buying and selling of foreign currency is known as: a) foreign exchange. b) foreign trade. c) the balance of payments. d) the capital account.
a) foreign exchange.
The Federal Open Market Committee oversees the buying and selling of: a) government securities. b) foreign currencies. c) imports. d) corporate debt.
a) government securities.
Economists at the Bureau of Economic Analysis are collecting data for the quarterly GDP reporting, which will indicate the health of the economy. The time the Federal Reserve must wait for economic data to be collected, processed, and reported is known as the: a) information lag. b) recognition lag. c) decision lag. d) implementation lag.
a) information lag.
An investment that provides a high average annual return is one that: a) is generally more risky. b) has no risk. c) is generally very safe. d) has an unknown level of risk.
a) is generally more risky.
If a customer deposits $300 cash in a checking account, the bank's: a) liabilities increase by $300. b) assets decrease by $300. c) liabilities decrease by $300. d) liabilities stay the same.
a) liabilities increase by $300.
A fixed exchange rate is: a) set by the government. b) also called a floating exchange rate. c) determined in international currency exchange markets. d) set equal to the prime rate.
a) set by the government.
Contractionary monetary policy: a) shifts the aggregate demand curve to the left. b) shifts the aggregate demand curve to the right. c) does not shift the aggregate demand curve. d) shifts the aggregate demand curve to the left and then back to the right. Submit
a) shifts the aggregate demand curve to the left.
The nominal exchange rate is: a) the rate at which one currency can be exchanged for another. b) the price of one country's currency for another's when the price levels of both countries are taken into account. c) the rate of exchange that allows a specific amount of currency in one country to purchase the same quantity of goods in another. d) the value of a currency rising relative to other currencies.
a) the rate at which one currency can be exchanged for another.
The percentage of a bank's total deposits held in reserves, either as cash in the vault or as deposits at the local Federal Reserve bank, is: a) the reserve ratio. b) the reserve requirement. c) excess reserves. d) the money ratio.
a) the reserve ratio.
Which of the following is a role of financial institutions? a) Increasing product demand. b) Diversifying assets to reduce risk. c) Establishing marginal tax rates. d) Controlling inflation.
b) Diversifying assets to reduce risk.
In order to maintain a fixed exchange rate when demand for a domestic currency falls, the government must: a) use its foreign currency reserves to buy domestic currency. b) use domestic currency to buy more foreign currency. c) print more money to boost the money supply. d) reduce interest rates to attract more demand for domestic currency.
a) use its foreign currency reserves to buy domestic currency.
Using the equation of exchange, what is nominal GDP if the money supply is $5 trillion and the velocity of money is 4? a) $10 trillion b) $20 trillion c) $30 trillion d) $40 trillion
b) $20 trillion
How much money can a bank loan if it receives an initial deposit of $4,000 and the required reserve ratio is 20%? a) $800 b) $3,200 c) $4,000 d) $20,000
b) $3,200
Suppose an MP3 player sells for $75 in the United States and 50 pounds in Britain. Which exchange rate is consistent with purchasing power parity? a) 1.50 pounds for $1. b) 1 pound for $1.50. c) 3 pounds for $1. d) 1 pound for $1.
b) 1 pound for $1.50.
Suppose that a bank has $250 in vault cash, $750 in deposits at the Federal Reserve, $9,000 of loans, and deposits of $10,000. What is the bank's reserve ratio? a) 2.5% b) 10% c) 33% d) 90% Submit
b) 10%
How many regional Federal Reserve Banks are there in the United States? a) 8 b) 12 c) 16 d) 30
b) 12
Which of the following would cause the demand for loanable funds to increase? a) A reduction in consumer confidence that causes people to save more. b) A new investment tax credit for businesses to expand. c) A major sporting event in town that causes people to withdrawal money from their bank accounts. d) A reduction in government spending.
b) A new investment tax credit for businesses to expand.
Which of the following would likely cause the dollar to depreciate? a) Rising interest rates in the United States. b) An increase in United State citizens' preference for foreign goods. c) Income growth of the United States lagging behind that of other countries. d) Lower inflation in the United States.
b) An increase in United State citizens' preference for foreign goods.
Which exchange rate is determined in international currency exchange markets? a) Fixed exchange rate b) Floating or flexible exchange rate c) Pegged exchange rate d) Prime exchange rate
b) Floating or flexible exchange rate
After an economy begins to recover, suppose that the Fed quickly raises interest rates back to the level seen before the recession in order to prevent inflation from occurring. Which type of Fed policymaker would be more likely to have taken this action? a) Doves b) Hawks c) Both doves and hawks. d) Neither doves nor hawks.
b) Hawks
Which of the following policies should a country implement in an economic downturn to avoid a Paradox of Thrift? a) Implement policies to encourage saving. b) Implement policies to encourage greater consumption. c) Raise taxes to ensure the government remains funded. d) Reduce overall government spending. Submit
b) Implement policies to encourage greater consumption.
According to monetarists, when will the economy move back to the natural rate of unemployment after a change in output? a) In the short-run. b) In the long-run. c) Immediately after a decrease in the money supply. d) Immediately after an increase in the money supply.
b) In the long-run.
If interest rates are rising in an economy, what might the relationship be between savings and investment that is causing this to happen? a) Savings is greater than investment demand. b) Investment demand is greater than savings. c) Savings and investment are both rising rapidly. d) Savings and investment are both falling rapidly.
b) Investment demand is greater than savings.
Which of the following is TRUE of the Federal Reserve System? a) It is controlled by the executive branch of the federal government. b) It is subject to oversight from Congress. c) It is not the central bank of the United States. d) It was established as part of the U.S. Constitution.
b) It is subject to oversight from Congress.
Which of the following must be true of a commodity for it to be used as money? a) Its value must not be easy to determine. b) It must be divisible. c) It must not be durable. d) It must not be readily accepted by many people.
b) It must be divisible.
In the old Chesapeake colonies, tobacco leaves were used to make payments and to pay fines and taxes. Which of the following problems would it be most likely to have had as a form commodity money? a) Its value was not easy to determine. b) It was not durable. c) It was not divisible. d) It was not readily accepted by many people.
b) It was not durable.
If the economy is experiencing high rates of inflation due to a new housing bubble, what effects would expansionary monetary policy have on the economy? a) It would reduce inflation as well as unemployment. b) It would reduce inflation but cause unemployment to rise. c) It would raise inflation as well as unemployment. d) It would raise inflation but would cause unemployment to fall.
b) It would reduce inflation but cause unemployment to rise.
Which economists believe that fiscal policy is effective, while monetary policy may be ineffective? a) Monetarists b) Keynesians c) Classical economists d) Fisherites
b) Keynesians
Barbara just purchased a television using cash. This is an example of which function of money? a) Barter b) Medium of exchange c) Unit of account d) Store of value
b) Medium of exchange
Which of the following statements about the loanable funds market is correct? a) The actions of investors affect the supply curve in the market. b) The actions of investors affect the demand curve in the market. c) The actions of savers affect the demand curve in the market. d) The actions of investors affect both the demand curve and the supply curve in the market.
b) The actions of investors affect the demand curve in the market.
According to Keynesians and monetarists, in the short-run, what happens to the aggregate price level when the money supply increases? a) The aggregate price level falls. b) The aggregate price level rises. c) The aggregate price level falls and then rises. d) The aggregate price level does not change.
b) The aggregate price level rises.
Financial intermediaries in the financial system acquire funds from ________ and lend funds to ________. a) savers; other savers b) savers; borrowers c) borrowers; savers d) borrowers; other borrowers
b) savers; borrowers
Demand deposits are included as part of: a) only M1. b) only M2. c) neither M1 nor M2. d) M1 and M2.
d) M1 and M2.
What is the discount rate? a) The ratio of funds commercial banks and other depository institutions must hold in reserves against deposits. b) The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank. c) The interest rate financial institutions charge each other for overnight loans used as reserves. d) The lowest rate that the most credit-worthy businesses are charged when borrowing from commercial banks.
b) The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank.
Yesterday, one could get £2 for $1. Today, however, one can only get £1.5 for $1. Which of the following best describes this scenario? a) The pound depreciated against the dollar. b) The pound appreciated against the dollar. c) The dollar appreciated against the pound. d) The purchasing power parity increased between the two currencies.
b) The pound appreciated against the dollar.
How did Milton Friedman define permanent income? a) The present value of an individual's past incomes. b) The present value of an individual's future stream of income. c) The future value of an individual's past incomes. d) The future value of an individual's future stream of income.
b) The present value of an individual's future stream of income.
If consumer confidence rises because of strong job growth in an economy, what is likely to happen to the rate of savings? a) The savings rate will likely rise. b) The savings rate will likely fall. c) The savings rate will likely fall to zero. d) The savings rate will turn negative.
b) The savings rate will likely fall.
When the Federal Reserve sells bonds, what is likely to happen to interest rates? a) They will decrease. b) They will increase. c) They will not change. d) They will fall to zero.
b) They will increase.
What happens to bond prices when the interest rate decreases? a) They would decrease. b) They would increase. c) They would stay the same. d) They would fluctuate based on the quantity of money.
b) They would increase.
Which function of money allows consumers who are searching for a new car to compare the costs of different optional features of different cars in order to determine if they want the features or not? a) Medium of exchange b) Unit of account c) Store of value d) Barter
b) Unit of account
Money is the most liquid asset, because as _______ it requires no conversion. a) a unit of account b) a medium of exchange c) a store of value d) fiat money
b) a medium of exchange
Banks are able to create money: a) with a printing press. b) by issuing loans. c) by selling bonds. d) by charging interest.
b) by issuing loans.
According to monetarists, an increase in the money supply: a) in the short-run will only increase prices. b) in the long-run will only increase prices. c) in the long-run can increase prices or output. d) in the long-run will only increase output.
b) in the long-run will only increase prices.
When the interest rate decreases, the amount of loanable funds demanded in the market: a) decreases; this causes a movement up and to the left along the demand curve. b) increases; this causes a movement down and to the right along the demand curve. c) decreases; the entire demand curve shifts left. d) increases; the entire demand curve shifts right.
b) increases; this causes a movement down and to the right along the demand curve.
When an economic event takes place, changes may ripple throughout the economy for months before monetary authorities begin to see changes in the data. This is known as the: a) recognition lag. b) information lag. c) decision lag. d) implementation lag.
b) information lag.
All else remaining equal, if the amount of money market deposit accounts increase, this will increase the size of: a) only M1. b) only M2. c) M1 and M2. d) neither M1 nor M2.
b) only M2.
If the Federal Reserve increases the supply of money in the market, then bond prices will _____ and interest rates will _____. a) fall; rise b) rise; fall c) rise; rise d) fall; fall
b) rise; fall
Increases in leakages cause the money multiplier to: a) stay the same. b) increase. c) decrease. d) fall to zero.
c) decrease.
If the Federal Reserve decides to increase the money supply: a) the federal funds rate will rise. b) the federal funds rate will fall. c) the federal funds rate will be unaffected. d) deflation will occur.
b) the federal funds rate will fall.
The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called: a) the horizontality of demand. b) the liquidity trap. c) the sterilization of money. d) monetary incapacitation.
b) the liquidity trap.
An exchange rate of $1 = 0.89 euro means that: a) it takes 89 euros to buy $1. b) 1 euro will buy $0.89. c) $1 can buy 0.89 euros. d) $0.89 exchanges for 1 euro.
c) $1 can buy 0.89 euros.
Suppose that a bank has $250 in vault cash, $750 in deposits at the Federal Reserve, $9,000 of loans, and deposits of $10,000. How much does this bank have in reserves? a) $250 b) $750 c) $1,000 d) $9,000
c) $1,000
What would be the price of a perpetuity bond that has a $100 interest payment and a 4% yield? a) $1,000 b) $2,000 c) $2,500 d) $4,000
c) $2,500
If a bank receives a $7,500 deposit and the required reserve ratio is 20%, how much of this deposit can be loaned out? a) $1,500 b) $2,000 c) $6,000 d) $7,500
c) $6,000
If a car costs $44,000 in the U.S. and 40,000 euros in Germany, what does the exchange rate need to be for purchasing power parity to exist? a) 1 euro = $0.91 b) 1 euro = $1 c) 1 euro = $1.10 d) 1 euro = $1.76
c) 1 euro = $1.10
Suppose the exchange rate for 1 euro is $1.40. Purchasing power parity exists if a fast-food meal in the United States costs $5 and in Paris, that same fast-food meal costs: a) 2.59 euros. b) 3.43 euros. c) 3.57 euros. d) 7 euros.
c) 3.57 euros.
Which of the following forms of money would best represent fiat money? a) Silver quarters made prior to 1965. b) An hour-long golf lesson given in exchange for an hour of tutoring in economics. c) A $20 bill printed in 2015. d) A rare baseball card given to a landlord in place of rent.
c) A $20 bill printed in 2015.
Which of the following situations would be considered a money leakage? a) A bank holding only the minimum required reserves. b) A business that refuses to accept cash and handles all transactions using credit cards. c) A senior citizen who keeps her retirement savings in a shoe box underneath her bed. d) A college student who never carries any cash.
c) A senior citizen who keeps her retirement savings in a shoe box underneath her bed.
Which of the following scenarios would make monetary policy the most difficult to address? a) A reduction in business confidence that leads to a reduction in investments. b) A booming housing market that causes inflation to rise. c) A worldwide spike in oil prices resulting in higher production costs. d) A rise in unemployment that causes consumers to spend less.
c) A worldwide spike in oil prices resulting in higher production costs.
Which of the following assets will likely show the greatest increase in value over time? a) Savings accounts b) Treasury bonds c) Blue-chip stocks d) Low-risk corporate bonds
c) Blue-chip stocks
Which of the following statements about fiat money is correct? a) Fiat money has intrinsic value. b) Fiat money is not accepted as money. c) Fiat money is legal tender by government decree. d) Fiat money can only be electronic.
c) Fiat money is legal tender by government decree.
Which of the following would likely cause the dollar to appreciate? a) Lower interest rates in the United States. b) An increase in United States citizens' preference for foreign goods. c) Income growth of the United States lagging behind that of other countries. d) Rising inflation in the United States. Submit
c) Income growth of the United States lagging behind that of other countries.
Which of the following would cause a currency to depreciate in a flexible exchange rate market? a) Rising domestic interest rates. b) Reduced demand for imported goods. c) Increased investment abroad. d) A surge in foreign demand for a country's goods.
c) Increased investment abroad.
If an economy's investment outlook improves, leading to increased borrowing to finance new building projects, what is likely to happen to interest rates? a) Interest rates will fall to 0%. b) Interest rates will fall. c) Interest rates will rise. d) Interest rates will stay the same.
c) Interest rates will rise.
Martha needs to acquire funds in order to expand her bakery. She does not want to give up control of her business, but her credit score is weak due to the recent foreclosure of her house. What should Martha do to acquire these funds? a) Issue stock to willing investors. b) Borrow money from her local bank. c) Issue bonds to willing investors. d) She should do all of the above.
c) Issue bonds to willing investors.
What happens to the money multiplier when the reserve requirement increases from 20% to 25%? a) It stays the same. b) It increases from 20 to 25. c) It decreases from 5 to 4. d) It falls to zero.
c) It decreases from 5 to 4.
Which of the following is TRUE of the Federal Reserve System? a) It is controlled by the executive branch of the federal government. b) Its decisions must be approved by a majority vote by Congress. c) It has the power to increase the money supply. d) It does not influence interest rates.
c) It has the power to increase the money supply.
What happens to long-run aggregate supply when there is an increase in the money supply? a) It increases. b) It decreases. c) It stays the same. d) It fluctuates based on the changes in price levels.
c) It stays the same.
What are the twin goals of the Federal Reserve Bank? a) Low unemployment and zero inflation. b) No unemployment and stable prices. c) Low unemployment and stable prices. d) No unemployment and zero inflation.
c) Low unemployment and stable prices.
All else remaining equal, if the amount of checkable deposits increase, this will increase the size of: a) only M1. b) only M2. c) M1 and M2. d) neither M1 nor M2.
c) M1 and M2.
The country of Eggville uses eggs as its official form of currency. All prices in Eggville are shown in terms of eggs, and residents carry around baskets of eggs to buy goods and services. Residents, however, cannot save eggs because they end up spoiling. Which functions of money do eggs serve? a) Medium of exchange and store of value. b) Unit of account and store of value. c) Medium of exchange and unit of account. d) Medium of exchange, unit of account, and store of value.
c) Medium of exchange and unit of account.
Which of the following is not a financial intermediary in the loanable funds market model? a) Banks b) Mutual funds c) Stock market d) Credit unions
c) Stock market
Lauren has a savings account into which she puts money every month so she will eventually have enough for a down payment on a house. This is an example of which function of money? a) Barter b) Medium of exchange c) Store of value d) Unit of account
c) Store of value
If the euro faces a currency crisis with its value falling from $1.40 per euro to $1.20 per euro, who would benefit the most? a) An American car manufacturer trying to export cars to Spain. b) Universal Studios Orlando, which wants more European tourists to visit its theme parks. c) The Brown family from Florida who plans to visit Paris next month. d) Jared, an American investor who purchased a 10,000 euro bond last year.
c) The Brown family from Florida who plans to visit Paris next month.
Which of the following statements is correct? a) The Federal Reserve's actions are subject to executive branch control. b) Politically controlled banks are better at fighting inflation than independent central banks. c) The Federal Reserve is considered to be an independent central bank. d) The Federal Reserve System is not subject to Congressional oversight.
c) The Federal Reserve is considered to be an independent central bank.
What does the real exchange rate take into account that the nominal exchange rate does not? a) The different tax rates between countries. b) The different tariffs between countries. c) The different price levels between countries. d) The different transaction costs between countries. Submit
c) The different price levels between countries.
Which of the following is true of the paradox of thrift? a) The paradox of thrift occurs when investment is not related to income. b) The paradox of thrift occurs when households intend to save less. c) The paradox of thrift causes consumers to save less. d) The paradox of thrift occurs when households intend to consume more.
c) The paradox of thrift causes consumers to save less.
According to classical economists, if there is a 12% increase in the money supply, what will happen to the price level? a) The price level will increase by 6%. b) The price level will decrease by 6%. c) The price level will increase by 12%. d) The price level will decrease by 12%.
c) The price level will increase by 12%.
Suppose that Cambodia becomes the next popular tourist destination. You notice that hotels, restaurants, and other services cost much less there than in the United States. From the perspective of the U.S. dollar, what would be the real exchange rate of the Cambodian riel? a) The real exchange rate would be 0. b) The real exchange rate would be 1. c) The real exchange rate would be greater than 1. d) The real exchange rate would be less than 1.
c) The real exchange rate would be greater than 1.
Suppose Congress enacts investment tax credits to spur more business investment. What impact would this have on the loanable funds market? a) There would be an increase in supply; the supply curve shifts right. b) There would be a decrease in supply; the supply curve shifts left. c) There would be an increase in demand; the demand curve shifts right. d) There would be a decrease in demand; the demand curve shifts left.
c) There would be an increase in demand; the demand curve shifts right.
The Federal Reserve Board meets roughly every 6 weeks to determine broad economic policy. It does not have to deal with the political process, which is a reason the _____ lag is shorter for monetary policy than it is for fiscal policy. a) information b) recognition c) decision d) implementation
c) decision
Higher interest rates: a) increase consumption and investment spending. b) decrease consumption and increase investment spending. c) decrease consumption and investment spending. d) increase consumption and decrease investment spending.
c) decrease consumption and investment spending.
Return on investment is calculated as: a) the amount invested divided by earnings. b) the amount invested divided by the interest rate. c) earnings divided by the amount invested. d) earnings divided by the interest rate.
c) earnings divided by the amount invested.
The Federal Reserve buying government bonds is considered: a) easy money. b) tight money. c) expansionary monetary policy. d) contractionary monetary policy.
c) expansionary monetary policy.
In a liquidity trap: a) monetary policy is very effective in changing income and output. b) fiscal policy is ineffective in changing income and output. c) monetary policy is ineffective in changing income and output. d) monetary policy is somewhat effective in changing income and output in the short-run.
c) monetary policy is ineffective in changing income and output.
The exchange rate is the: a) cost of borrowing money. b) interest rate that banks charge their best customers. c) rate at which one currency can be exchanged for another. d) amount of gold backing a U.S. dollar.
c) rate at which one currency can be exchanged for another.
Keynesian monetary theory: a) is the same as the classical theory in all essential elements. b) states that changes in the money supply have no impact on GDP in either the short or long run. c) states that an increase in the money supply leads to lower interest rates, which stimulates investment and aggregate demand. d) states that an increase in the money supply will lower interest rates and thereby shift the long-run aggregate supply curve to the right.
c) states that an increase in the money supply leads to lower interest rates, which stimulates investment and aggregate demand.
"Hawks" are economists who argue that: a) the goal of full employment should take priority over the goal of low inflation. b) greater central bank action is needed in times of economic hardship. c) too much monetary policy can have inflationary effects. d) the Federal Reserve should be abolished.
c) too much monetary policy can have inflationary effects.
According to the paradox of thrift, if households intend to save more, they will: a) ultimately spend more. b) cause an increase in jobs because investment will increase. c) ultimately cause job losses. d) cause the GDP to increase because inflation will decrease.
c) ultimately cause job losses.
If the reserve requirement is currently 20%, what is the maximum amount of money that could be generated from a $2,000 bank deposit? a) $1,600 b) $2,000 c) $4,000 d) $10,000
d) $10,000
Suppose Will gives his wallet containing $100 to Alex to hold while he works out. During Will's workout, Alex uses the $100 to pay his mechanic who fixed his scooter. The mechanic then took this $100 to his vet to pay off his account for rescuing his pet bird. The vet then used the $100 to pay Alex for money she owed him for tutoring her in economics. After Will's workout, Alex returns the wallet with the same $100 bill inside. Although the same $100 bill was used without Will's knowledge, everybody's debt has been settled. How much money was created? a) $0 b) $100 c) $200 d) $300
d) $300
What is the potential money multiplier if the reserve requirement is 4%? a) 2.5 b) 4 c) 14 d) 25
d) 25
Which of the following will NOT reduce the actual money multiplier? a) Banks keeping some excess reserves. b) Consumers keeping money on hand for transactions. c) An increase in reserve requirements. d) A certain bank being loaned up.
d) A certain bank being loaned up.
When the stock market is rising rapidly, what tends to happen to bond prices and interest rates on bonds? a) Bond prices rise and interest rates on bonds fall. b) Bond prices rise and interest rates on bonds rise as well. c) Bond prices fall and interest rates on bonds fall as well. d) Bond prices fall and interest rates on bonds rise.
d) Bond prices fall and interest rates on bonds rise.
In which of the following is a risk-tolerant investor most likely to invest in? a) CDs b) Savings accounts c) A-rated bonds d) Growth stocks
d) Growth stocks
Suppose that the economy is currently below its long-run equilibrium output. Which of the following is an example of monetary policy that can help put the economy back toward equilibrium? a) Decreasing income taxes to encourage more spending and investment. b) Reducing the money supply to push interest rates higher to encourage more savings. c) Raising income taxes to help pay off government debt. d) Increasing the money supply to reduce interest rates to encourage more spending and investment.
d) Increasing the money supply to reduce interest rates to encourage more spending and investment.
Which of the following must be true of a commodity for it to be used as money? a) It must be backed by gold. b) It must be made of paper or metal. c) It cannot have intrinsic value. d) It must be readily accepted by many people.
d) It must be readily accepted by many people.
_______ refers to how quickly, easily, and reliably an asset can be converted into cash. a) Barter b) Fiat money c) Unit of account d) Liquidity
d) Liquidity
_____ is (are) the buying and selling of U.S. government securities. a) The discount rate b) The federal funds rate c) Reserve requirements d) Open market operations
d) Open market operations
Which of the following is a way banks reduce risk? a) Screening firms. b) Evaluating firms. c) Monitoring firms. d) Pooling money into portfolios.
d) Pooling money into portfolios.
Which of the following actions by the Fed would be most likely to stimulate the economy? a) Increasing interest rates from 3% to 5% to encourage more savings. b) Raising the discount rate charged to commercial banks. c) Increasing the required reserve ratio to ensure that banks stay solvent. d) Purchasing bonds on the open market.
d) Purchasing bonds on the open market.
Which of the following is an example of expansionary monetary policy? a) The president signing an executive order to raise the minimum wage of government employees. b) Congress passing a new government stimulus package. c) The Fed raising the discount rate for member banks. d) The Fed increasing the money supply to push interest rates lower.
d) The Fed increasing the money supply to push interest rates lower.
Which of the following is a provision of the Federal Reserve Act or subsequent legislation that weakens the independence of the Federal Reserve? a) The Federal Reserve's actions are subject to executive branch control. b) Members of the Federal Reserve Board serve 14-year terms. c) Members of the Federal Reserve Board cannot be reappointed. d) The Federal Reserve System is subject to Congressional oversight.
d) The Federal Reserve System is subject to Congressional oversight.
How does an increase in the savings rate affect the multiplier in an economy, if at all? a) The multiplier would turn from positive to negative. b) The multiplier would stay the same. c) The multiplier would increase. d) The multiplier would decrease.
d) The multiplier would decrease.
Which of the following is not a function performed by the Federal Reserve? a) To clear checks. b) To maintain the money supply. c) To establish more effective supervision of the banking system in the United States. d) To keep interest rates low.
d) To keep interest rates low.
When a customer deposits money in a bank account, this deposit represents: a) a liability for the customer and an asset for the bank. b) an asset for both the bank and the customer. c) a liability for the customer and the bank. d) a liability for the bank and an asset for the customer.
d) a liability for the bank and an asset for the customer.
Financial intermediaries: a) increase transaction costs. b) increase information costs. c) increase overall risk to savers in order to make more money. d) allow a greater flow of funds between savers and investors.
d) allow a greater flow of funds between savers and investors.
When a customer takes out a loan from a bank, this loan is: a) a liability for the bank. b) savings for the bank. c) a loss for the bank. d) an asset for the bank.
d) an asset for the bank.
Contractionary monetary policy _____ consumption and _____ investment spending. a) increases; increases b) decreases; increases c) increases; decreases d) decreases; decreases
d) decreases; decreases
In the aftermath of the last financial crisis, critics of monetary policy argued that it was ineffective. The Federal Reserve had moved interest rates to historic lows without a significant stimulus effect. Some economists wondered if the United States was: a) undergoing simultaneous increases in aggregate demand and supply. b) undergoing offsetting changes in aggregate demand and supply. c) facing hyperinflation. d) in a liquidity trap.
d) in a liquidity trap.
Lower interest rates: a) decrease consumption and investment spending. b) increase consumption and decrease investment spending. c) decrease consumption and increase investment spending. d) increase consumption and investment spending.
d) increase consumption and investment spending.
Money illusion: a) is the misconception that prices have changed; it occurs when the Federal Reserve reduces the money supply. b) occurs when output rises. c) occurs only in the long run. d) is the misconception that one is wealthier; it occurs when the money supply grows.
d) is the misconception that one is wealthier; it occurs when the money supply grows.
Gus takes his $15 in lemonade stand earnings and deposits it into his savings account. Meanwhile, Gus's dad borrows $20,000 to buy a new family car. Gus's $15 represents a(n) ____ for the bank, while his dad's $20,000 loan represents a(n) ____ for the bank. a) asset; asset b) liability; liability c) asset; liability d) liability; asset
d) liability; asset
Suppose that the cost of a loaf of bread in Zanadoo is 20 shillings, and this represents a full day's wages for the typical factory worker. The 20 shillings represents a ____ value while the loaf of bread costing a full day's wage represents a ____ value. a) real; real b) nominal; nominal c) real; nominal d) nominal; real
d) nominal; real
If the Fed chooses to sell bonds on the open market, it is attempting to: a) lower interest rates using expansionary monetary policy. b) lower interest rates using contractionary monetary policy. c) raise interest rates using expansionary monetary policy. d) raise interest rates using contractionary monetary policy.
d) raise interest rates using contractionary monetary policy.
