Chapter 15

Which of the following assets are counted in M1? A) transaction deposits C) bonds B) mutual funds accounts D) line of credit

A

Which of the following is true of M2? A) It is larger than M1. B) Money market mutual fund accounts D) Travelerʹs checks B) It excludes savings deposits. C) It does not include highly liquid components of the money supply. D) It is less than M1.

A

A checkable and debitable account A) is a very illiquid asset. B) is one on which the holder can write checks. C) must be traded on the stock exchange. D) cannot serve as a store of value.

B

An increase in the reserve ratio A) has an expansionary effect on the money supply. B) has a contractionary effect on the money supply. C) increases the money multiplier. D) will cause banks to make more loans.

B

Assets that can be easily converted into money without significant loss of value are A) transactions balances. C) currencies. B) near monies. D) liabilities.

B

If people withdraw $10 million from the nationʹs money market mutual funds and redeposit the funds in various checkable and debitable accounts, then A) M1 and M2 will remain unchanged. B) M1 will increase, M2 will remain unchanged. C) M1 will increase, M2 will decrease. D) M1 and M2 will increase.

B

The Federal Reserve System acts as the governmentʹs fiscal agent by A) auditing taxpayers. B) providing checking account services for the government. C) preparing the budget the President presents to Congress every year. D) determining how to finance a deficit.

B

The balance sheet of a bank shows its A) profits and losses. C) earnings and expenses. B) assets and liabilities. D) revenues and costs.

B

A statement of assets and liabilities of any business entity is called A) an income statement. B) a cash flow statement. C) a balance sheet. D) a statement of net worth.

C

The difference between assets and liabilities is A) a sweep account. C) net worth. Answer: C B) a balance sheet. D) legal reserves.

C

An interest-earning account that can be withdrawn at any time without payment of a penalty is a A) savings deposit. C) time deposit. B) money market deposit account. D) certificate of deposit.

A

An item to which a business holds legal claim is called a(n) A) asset. B) liability. C) loan. D) time deposit.

A

Bank examinations by the FDIC help reduce the ________ problem, by preventing bank managers from allocating funds already obtained from depositors to non-creditworthy loans. A) moral hazard C) adverse selection B) principled hazard D) contrary selection

A

Financial intermediaries are important because A) they bring lenders and borrowers together in a way that lowers transaction costs. B) they provide large funds to the stock market. C) they employ large numbers of people. D) they increase costs for banks.

A

If proceeds from loans are NOT deposited back in the banking system, then A) the magnitude of the multiplier process is reduced. B) there is no effect on the magnitude of the multiplier process. C) the magnitude of the multiplier process is increased. D) the Fed intervenes by selling more Federal government bonds.

A

If the money multiplier is 2.4 and the Fed buys $8 million in securities on the open market, transaction deposits could potentially A) increase by $19.2 million. B) increase by $8 million. C) decrease by $19.2 million. D) decrease by $16.5 million.

A

If the reserve ratio decreases from 20 percent to 10 percent, then the potential money multiplier A) increases from 5 to 10. B) decreases from 10 to 5. C) does not change. D) decreases from 20 to 10.

A

If the reserve ratio is raised, the money multiplier A) is lowered. B) is increased. C) stays the same. D) is doubled.

A

Thrift institutions A) receive most of their funds from the publicʹs savings deposits. B) include commercial banks and investment firms. C) include credit unions but not savings and loan associations. D) do not offer transaction deposits.

A

What differentiates a savings deposit from a small-denomination certificate of deposit (CD)? A) A CD has a fixed maturity date; a savings deposit can be withdrawn at any time. B) A savings deposit cannot be withdrawn before its maturity date without incurring a penalty; funds in a CD are available at any time with no interest penalty. C) Only a savings deposit is a time deposit. D) All depository institutions accept savings deposits, whereas only a thrift institution can issue a CD.

A

Which of the following is NOT part of M1? A) Credit cards C) Currency B) Checking accounts D) Travelerʹs checks

A

According to the text, the actual M1 multiplier in the U.S. today is A) between 0 and 1. B) between 1.5 and 2.0. C) negative. D) over 10.

B

According to the text, the actual M2 multiplier in the United States today is A) about 5. B) between 1.0 and 2.0. C) negative. D) over 10.

B

Adverse selection refers to the A) possibility that the borrower may engage in riskier behavior after the loan is obtained. B) likelihood that a potential borrower may use the funds that he receives for unworthy, high risk projects. C) possession of information by one party in a financial transaction not known by the other party. D) use of statistical discrimination in making loans.

B

An account issued by banks yielding a market rate of interest with a minimum balance requirement and a limit on transactions is a A) savings deposit. C) time deposit. B) money market deposit account. D) certificate of deposit.

B

Suppose you borrow $500 from your bank to pay for a guitar. This is an example of A) direct financing. C) moral hazard. B) indirect financing. D) transaction costs.

B

The M2 measure of money is suggested by the ________ approach to measuring money. A) investment B) liquidity C) transactions D) security

B

The likelihood that individuals who seek to borrow money may use the funds for unworthy, high-risk projects is A) asymmetric information. C) moral hazard. B) adverse selection. D) financial intermediation.

B

Total reserves are A) required reserves plus vault cash. C) required reserves. B) required reserves plus excess reserves. D) excess reserves.

B

Which of the following assets are counted in M2? A) gold B) balances in retail mutual funds accounts C) value of outstanding bonds D) lines of credit offered by commercial banks

B

Which of the following is NOT part of M1 but is included in M2? A) Currency B) Small-denomination certificates of deposits C) Travelerʹs checks D) Cash

B

Which one of the following is true? A) Transaction deposits are counted in M2 but are not included in M1. B) Most of the U.S. currency in existence circulates outside U.S. borders. C) Travelerʹs checks are not considered to be money because they are not valid unless signed. D) Balances in money market deposit accounts are counted in M1 but are not included in M2.

B

Check collection and clearing happen A) at the bank where the check was written. B) only at private clearing centers. C) at the Fed and at private clearing centers. D) only at the Fed.

C

Money market mutual funds are funds pooled by A) a group of people to buy shares of stocks. B) a group of people to buy stock market funds. C) a group of people to buy short maturity credit instruments. D) a group of people to buy U.S. Treasury bonds.

C

The Board of Governors of the Federal Reserve System has how many governors? A) 1. B) 5. C) 7. D) 12.

C

The M1 measure of money is suggested by the ________ approach to measuring money. A) investment B) liquidity C) transactions D) security

C

The liquidity approach to measuring the money supply uses A) M1 only. C) M1 plus some highly liquid assets. B) near moneys only. D) M2 plus some highly liquid assets.

C

The reserve ratio is 20 percent. If the Fed buys $1 million of U.S. government securities and the check is deposited in Bank A, but Bank A increases its vault cash by the entire amount, then the money supply A) does not increase. B) increases by $800,000. C) increases by $1 million. D) increases by more than $1 million.

C

The transactions approach to measuring money includes A) government bonds. B) the value of shares of stock in commercial banks. C) travelerʹs checks. D) all of these.

C

Two people are involved in a borrower/lender situation, and one person has superior knowledge of its own current and future prospects over the other person. This is known as A) preventable information. C) asymmetric information. B) symmetric information. D) deceptive knowledge.

C

When a bank buys a bond from the Fed, A) its liabilities decrease. C) its reserves initially decrease. B) its liabilities increase. D) its reserves initially increase.

C

Which of the following is NOT a function of the Federal Reserve System? A) supply fiduciary currency to the economy B) provide a system for check collection and clearing C) implement fiscal policy D) regulate the money supply

C

Which of the following is NOT a part of the Federal Reserve System? A) The Twelve District Federal Reserve banks B) The Federal Open Market Committee C) The Federal Deposit Insurance Corporation D) The Board of Governors

C

Which of the following is NOT an asset of commercial banks? A) consumer loans C) savings deposits B) business loans D) home mortgages

C

With a reserve ratio of 10 percent, the maximum potential money multiplier is A) 1. B) 5. C) 10. D) 100.

C

ractional reserve banking is a system in which A) depository institutions pay a fraction of advertised interest rates. B) a fraction of banking services must be provided by depository institutions. C) depository institutions hold a fraction of total deposits in reserve. D) the money supply is a set fraction of the U.S. gold reserves.

C

1) In a barter system, we would expect to see A) many different units of money. B) money and goods exchanged for each other. C) wide-spread financial institutions. D) goods traded directly for other goods and services.

D

What is the typical role of a central bank? A) It serves as a bank for the national treasury. B) It regulates depository institutions. C) It serves as a lender of last resort. D) All of the above.

D

Which of the following is NOT included in the MZM definition of money? A) currency. C) travelers checks. B) money market funds. D) small-denomination time deposits.

D

Which of the following would NOT be an asset on a bankʹs balance sheet? A) Loans outstanding B) Bank building C) Cash in the vault D) Transactions deposits

D

Monetary policy actions are determined by the A) Federal Open Market Committee. C) President of the United States. B) New York Federal Reserve Bank. D) U.S. Congress.

A

Open market operations are A) the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply. B) the buying and selling of existing U.S. government securities in open private markets by citizens. C) the selling of new government securities by banks in order to increase the money supply. D) the selling of new government securities in open private markets by banks in order to finance the deficit.

A

Which one of the following is NOT a part of the M1 definition of money? A) Paper currency (i.e., Federal Reserve notes) B) Coins C) Savings accounts D) Checkable and debitable accounts

C

Who appoints the chair of the Federal Reserve System? A) the Senate and Congress B) member banks of the Federal Reserve System C) the President of the United States D) the Federal Open Market Committee (FOMC)

C

Which of the following is NOT a financial intermediary? A) commercial banks C) the Federal Reserve Bank of New York B) a savings and loan association D) the Internal Revenue Service

D

Which of the following is NOT a reason that people tend to deposit their funds with banks rather than lend their funds directly to other individuals? A) adverse selection problems C) moral hazard problems B) asymmetric information problems D) liquidity problems

D

Which of the following is NOT an asset of a bank? A) cash C) total reserves B) loans D) transaction deposits

D

The Federal Deposit Insurance Corporation A) increases the stability of the banking system by reducing the likelihood of bank runs. B) discourages banks from engaging in excessive risk taking. C) only insures deposits in money-center banks. D) was established after the Panic of 1907.

A

The M2 money supply is equal to the M1 money supply plus A) small time deposits, savings deposits, and retail money market mutual fund shares. B) all credit card balances and retail money market mutual fund shares. C) large time deposits and retail money market mutual fund shares. D) every account held by commercial banks.

A

The concept of holding reserves, such as gold, that are less than the value of the total deposits A) is known as fractional reserve banking. B) has been illegal since the passage of the Financial Services Modernization Act of 1999. C) is known as non-credit banking. D) None of the above are correct.

A

The part of the Federal Reserve System (the Fed) that directs the buying and selling of U.S. government securities is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors.

A

The reason that the commercial banking system can generate a multiple expansion or contraction of the money supply is that A) banks are required to hold only a fraction of their deposit liabilities as reserves. B) most banks maintain a relatively large stock of reserves. C) banks hold reserves equal to their net worth. D) banks generally are required to hold surplus funds on deposit with other banks.

A

The level of reserves in the banking system is determined by A) the American Banking Association. B) the Federal Open Market Committee. C) bond dealers. D) the Treasury Department.

B

The maximum potential money multiplier is equal to A) the reserve ratio. B) the inverse of the required reserve ratio. C) one minus the reserve ratio D) the number of dollars on reserve.

B

Let us suppose that you apply for a loan with a bank. You tell the bank that you are going to remodel your kitchen, but after you get the loan you go to Las Vegas to gamble with the money. Your behavior is an example of A) adverse selection. C) moral hazard. B) direct credit allocation. D) indirect credit allocation.

C

The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors.

C

Travelerʹs check are A) part of M1 only. C) partofM1andM2. B) part of M2 only. D)notpartofM1orM2.

C

Who benefits from the process of financial intermediation? A) Savers only. B) Borrowers only. C) Both savers and borrowers. D) There is no benefit, because money does not create wealth.

C

A checking account balance in a commercial bank is A) part of the currency supply. B) a time deposit. C) not liquid enough to be considered money. D) an asset readily usable for most transactions.

D

A sale of U.S. government securities by the Fed causes a(n) A) expansion of the money supply equal to the amount of the securities sold. B) contraction of the money supply equal to the amount of the securities sold. C) expansion of the money supply of more than the amount of the securities sold. D) contraction of the money supply of more than the amount of the securities sold.

D

The cost of holding money is best described as A) the cost of printing money. B) the cost which price decreases impose on money holders. C) the yield which is paid to money holders by the U.S. government. D) the yield that could have been earned had the asset been held in another form.

D

The essential difference between paper money and coins as forms of money is that A) the metallic content of coins makes them more acceptable as money. B) paper money issued by the Federal Reserve Board is backed by gold while coins are not. C) paper money serves as a unit of account while coins do not. D) paper is paper and not metal. The metal is more durable.

D

The part of the Federal Reserve System (the Fed) that supervises and regulates member banks is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors.

D

The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a A) lending risk. B) moral hazard. C) liquidity risk. D) systemic risk.

D

For a small-denomination certificate of deposit to be included in M2 it must be a denomination of less than A) $1,000,000. B) $100,000. C) $10,000. D) $1,000.

B

A time deposit with a fixed maturity date offered by banks is called a A) checking account. B) savings deposit. C) small-denomination certificate of deposit. D) corporate bond.

C

An indiviual who desires the most liquid asset possible will hold A) currency. B) a savings account. C) checkable deposits at a bank. D) U.S. government bonds

A

Mary decides to buy a bond from Joe for $100. The money supply will A) neither increase nor decrease. B) increase by $100. C) increase by more than $100. D) decrease by $100.

A

When the Fed buys U.S. government securities, the money supply A) increases because there is an increase in transaction deposits at the bank of the bond dealer but there is no decrease in transaction deposits at any other bank. B) decreases because there is an increase in the reserves of the bond dealerʹs bank. C) remains unchanged because the increase in transaction deposits at the bond dealerʹs bank is offset by a reduction in transaction deposits at the Fed. D) remains unchanged because the increase in transaction deposits at the bond dealerʹs bank is offset by a fall in transaction deposits at another bank.

A

Assuming a reserve ratio of 10 percent, if a bank sells $100,000 in securities how much can the bank loan out? A) $90,000 B) $100,000 C) $110,000 D) $10,000

B

For the past several decades, the U.S. M1 multiplier has been between ________. A) 1.0 and 2.0. B) 2.5 and 3.0. C) 3.0 and 6.0. D) 6.5 and 10.0.

B

If a check written on one bank is deposited in another bank A) the money supply increases. B) the money supply remains unchanged. C) the money supply decreases. D) new reserves are created for the banking system.

B

When money provides a yardstick that allows individuals to compare the relative values of goods and services, it is functioning as a A) medium of exchange. C) store of value. B) unit of accounting. D) standard of deferred payment

B

The use of money as a medium of exchange I. lowers transaction costs. II. permits more specialization.

Both I and II

Given the list of assets below, which is the most liquid? A) $500 worth of General Motors common stock B) $500 worth of General Motors bonds C) A $500 travelers check D) A one-ounce gold coin

C

In which year was the Federal Deposit Insurance Corporation (FDIC) established? A) 1913 B) 1929 C) 1933 D) 1951

C

Which of the following is NOT a potential problem due to federal depository insurance? A) Banks have an incentive to make riskier loans than they would otherwise. B) Depositors have little incentive to monitor the behavior of the managers of the depository institutions. C) Depositors demand greater interest rates on their deposits to compensate them for the riskier behavior of the managers of the depository institutions. D) Lenders have less incentive to investigate the credit-worthiness of borrowers.

C

Which of the following is the most liquid asset? A) small denomination time deposits B) short-term treasury bonds C) currency D) shares of stock

C

Asymmetric information before a transaction takes place generates the problem of A) bank runs. C) moral hazard. B) irrational behavior. D) adverse selection.

D

The opportunity cost of holding a dollar is A) a dollar. B) the opportunity cost. C) less than a dollar. D) the interest yield that could have been earned by holding some other asset.

D

When a bank sells a bond to the Fed, A) its liabilities decrease. C) its reserves initially decrease. B) its liabilities increase. D) its reserves initially increase.

D

Bank X had a reputation for asking few questions when it provided loans. Five years later, the majority of the loans were not repaid. This is because the bank had failed to address the A) adverse selection problem. C) contrary selection problem. B) moral hazard problem. D) free-rider problem.

A

In a fiduciary monetary system, the value of the money issued by a government is based on A) the gold held in that governmentʹs vaults. B) public confidence in that currencyʹs acceptability and predictability of value. C) the ability to convert it to some asset of value, like silver. D) its being made out of some material with a market value equal to a billʹs face value.

B

Other things being equal, when the Fed buys U.S. government securities, A) the U.S. Treasury must immediately issue new securities to replace the securities that the Fed has removed from the market. B) the Fedʹs total assets and total liabilities immediately expand by exactly the amount of the Fedʹs purchase. C) the quantity of deposits in the U.S. banking system expands by less than the amount of the Fedʹs purchase. D) the quantity of paper currency and coins in circulation expands by more than the amount of the Fedʹs purchase.

B

Which of the following statements about the FDIC is correct? I. The deposit insurance premiums charged by the FDIC to a member bank fully reflect the riskiness of that bankʹs assets II. The manner in which the FDIC is set up helps protect depository institutions from the rigors of true market competition A) I only B) II only C) Both I and II D) Neither I nor II

B

Which one of the following would increase reserves for the banking system? A) The Fed sells government securities on the open market. B) The Fed buys government securities on the open market. C) You purchase a newly-issued U.S. Treasury bond. D) You purchase a U.S. Treasury bond from a bond dealer.

B

As a result of money in an economy, A) people are greedier than in a barter economy. B) stealing exists and people have to find ways to prevent theft. C) transaction costs are higher than would be the case in a barter economy. D) real Gross Domestic Product (GDP) and economic growth are greater than they would be in a barter economy.

D

As of 2010, the FDIC insured deposit accounts up to which of the following amounts? A) $10,000. B) $25,000. C) $100,000. D) $250,000.

D

Bank runs are a possibility because A) the FDIC is inefficient. B) bankers are often poor businesspeople. C) in difficult times people want currency instead of demand deposits. D) banks do not keep enough reserves to cover all their depository liabilities.

D

For the money expansion process to produce the maximum potential multiplier effect, A) all loans of a given bank have to be deposited in that bank. B) the required reserve ratio has to be 100 percent. C) the Fed has to sell government bonds to back up the loans. D) all loans from banks have to be redeposited throughout the banking system.

D

If the Federal Reserve sells $100 of securities through a commercial bank when the reserve requirement is 10 percent, the maximum potential change in the money supply is A) a $100 increase. B) a $1,000 increase. C) a $100 decrease. D) a $1,000 decrease.

D

In addition to insuring accounts, the FDIC today has the additional power of A) setting reserve requirements. B) establishing FOMC goals. C) establishing the discount rate. D) establishing higher capital requirements for banks.

D

To contract the money supply, the Fed should A) reduce the differential between the discount rate and the federal funds rate. B) increase government spending and cut taxes. C) lower the required reserve ratio. D) sell U.S. government securities.

D

When people decide to increase the amount of currency they are currently holding A) the potential money multiplier will increase. B) the potential money multiplier will decrease. C) the actual money multiplier will increase. D) the actual money multiplier will decrease.

D

The Board of Governors of the Federal Reserve System has A) 7 members serving 14 year terms. B) 7 members serving 4 year terms. C) 12 members serving 14 year terms. D) 12 members serving 4 year terms.

A

A major function of the Federal Reserve System is A) the implementation of fiscal policy for the federal government. B) the control of the money supply. C) the control of government spending. D) the control of taxing policy.

B

A statement of assets and liabilities of any business entity is A) a sweep account. B) a balance sheet. C) net worth. D) legal reserves.

B

Control of the money supply is handled by A) Congress. B) the Federal Reserve System. C) all commercial banks. D) Congress and all member commercial banks.

B

To reach the maximum money multiplier, it is assumed that A) commercial banks keep the amount of reserves. equal to total bank deposits. B) all loans get redeposited in a checkable account. C) there is insufficient loan demand. D) loans are diverted into circulating currency.

B

A ʺbankerʹs bankʺ is another name for A) a financial intermediary. B) a government bank. C) a central bank. D) the Federal Depository Insurance Agency.

C

The Board of Governors of the Federal Reserve System is A) appointed by the Congress. B) elected by the public. C) appointed by the President with approval of the U.S. Senate. D) elected by members of the American Banking Association.

C

The best measure of money is A) coins and currency. B) the one based on the transactions approach. C) the one based on the liquidity approach. D) something economists have never agreed on.

D

An increase in the interest rate would induce people to A) sell shares of stock and buy bonds, but would have no effect on their desire to hold money. B) get rid of all their money and buy stocks with it. C) sell their least liquid assets and hold more money in case interest rates go up again. D) hold a smaller fraction of their wealth in the form of money.

D

Financial institutions that receive most of their funds from the savings of the public are A) the fiduciary monetary system. C) universal banking. B) the world index fund. D) thrift institutions.

D

In 2010, President Obama signed into law that made the Federal Reserve as the nationʹs A) largest private bank. B) federal income tax collector. C) fiscal policy making unit. D) regulator of systemic financial risk.

D

Suppose that the reserve ratio is 20 percent. A bankʹs customer deposits into her account $100,000 in funds from a check written on an account at another bank. The maximum potential increase in the money supply resulting from this transaction is equal to A) $0. B) $20,000. C) $200,000. D) $500,000.

A

The reserve ratio equals 20 percent. The Fed buys $1 million in U.S. government securities. The most the money supply can increase is A) $1 million. B) $4 million. C) $5 million. D) $10 million.

C

The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a bond dealer by transmitting the funds to the dealerʹs deposit account at Bank A. Bank A makes the maximum loan possible to a construction company, which buys materials with the loan. The check is deposited in Bank B, which loans out all it can to a car dealership. To this point, the money supply has increased by A) $1 million. B) $1.8 million. C) $2.44 million. D) $3 million.

C

Liquidity refers to A) the ease with which an asset can be acquired or disposed of without incurring high transaction costs. B) the expected return from an asset. C) the amount of indebtedness held against an asset. D) the net worth of the individual in question.

A

Among the liabilities of a bank are its A) transaction deposits. C) excess reserves. B) total reserves. D) loans.

A

Assuming a reserve ratio of 10 percent, if a bank receives $100,000 in deposits how much can the bank loan out? A) $90,000 B) $100,000 C) $110,000 D) $10,000

A

Banks do not need to keep all of their deposits on hand as reserves because A) only a fraction of deposits are withdrawn at any one time. B) FDIC protects banks from excessive withdrawal demands. C) there is too much risk of bank robberies. D) they can always generate new reserves through the money creation process.

A

Federal Reserve notes are A) a liability of the Federal Reserve System. B) an asset to the Federal Reserve System. C) both an asset and a liability to the Federal Reserve System. D) a liability to the United States Treasury.

A

If the FOMC decides that the Fed should buy bonds it A) instructs the New York Federal Reserve Bankʹs trading desk to buy them. B) asks the Congress for permission to buy them. C) requires the Presidentʹs signature on the buy order. D) requires the permission of the Financial Oversight Committee.

A

If the FOMC decides to engage in the selling of government bonds, what is the effect on the money supply? A) a decrease B) an increase C) no change D) an initial increase followed by an additional rise when the bonds mature

A

Suppose you and a friend are shopping at a swap meet and you borrow $500 from your friend to pay for a guitar that you see there. This is an example of A) direct financing. C) moral hazard. B) indirect financing. D) transaction costs.

A

The function that banks perform by obtaining funds from households, businesses, and governments and lending these funds to other households, businesses, and governments is known as A) financial intermediation. C) fiscal intermediation. B) lending intermediation. D) liquidity intermediation.

A

The potential for a financial breakdown at large institutions to spread throughout the financial system is called A) a systemic risk. B) a too-large-to-fail problem. C) an averse selection problem. D) a moral hazard.

A

To expand the money supply, the Fed should A) buy U.S. government securities. C) raise the required reserve ration. B) sell U.S. government securities. D) cut taxes.

A

A bank currently has $50 million in deposits, $6 million in cash in the vault, $4 million on deposit with the Fed, and $5 million in government securities. The reserve ratio is 20 percent. A new deposit is made of $1 million. What is the maximum size loan the bank can make once the check clears? A) 0 B) $800,000 C) $1 million D) $5.8 million

B

All of the following are functions of the Fed EXCEPT A) providing paper currency. B) enforcing international trade agreements. C) serving as a mechanism for clearing checks. D) the banker and fiscal agent for the government.

B

From an accounting point of view, a checking account should be considered part of a bankʹs A) assets. B) liabilities. C) profits. D) reserves.

B

If all of a bankʹs depositors showed up on one day requesting cash withdrawals of all their deposited funds, A) the bank would pay them all, although reluctantly. B) the bank would likely fail to have sufficient reserves to honor their requests. C) the bank could lawfully refuse their demands. D) the bank would immediately call all outstanding loans.

B

If banks engage in fractional reserve banking, it means that A) they never run short of currency. B) they hold less than 100 percent of their deposits as reserves. C) a fraction of their legal reserves are held as top-grade government securities. D) they do not hold any excess reserves.

B

It is widely believed that the Federal Reserveʹs most important function is A) to provide loans to the federal government. B) to regulate the money supply. C) to set the legal, controlled consumer interest rates. D) to lend to risky customers.

B

People with savings often deposit their funds in a commercial bank, rather than investing them directly with business enterprises, in order to A) avoid the problems associated with financial intermediation. B) avoid the problems associated with asymmetric information. C) earn the highest possible return for taking on the riskiest investments. D) All of the above are correct.

B

Suppose you place your savings in a time deposit at the bank, and that bank lends some of those funds to a business that desires a loan. This is an example of A) direct finance. C) asymmetric information. B) indirect finance. D) adverse selection.

B

Suppose your $50,000 certificate of deposit matures and you transfer the funds to your checking account. This causes A) M1 to decrease by $50,000 and M2 to increase by $50,000. B) M1 to increase by $50,000 and M2 to remain the same. C) both M1 and M2 to increase by $50,000. D) no change to either M1 or M2.

B

The Fed A) is responsible for minting coins. B) distributes Federal Reserve notes, which are paper currency. C) is responsible for conducting U.S. fiscal policy. D) has 15 Federal Reserve banks and governing boards in New York and Chicago.

B

The Federal Reserve System has A) 7 district banks. C) 24 district banks. B) 12 district banks. D) 50 district banks.

B

The Federal Reserve System was established in which year? A) 1865. B) 1913. C) 1929. D) 1941.

B

The U.S. central bank performs all the following roles for the nation EXCEPT A) performing banking functions for their nationsʹ governments. B) lending funds directly to the public. C) providing financial services for private banks. D) conducting their nationsʹ monetary policies.

B

The largest component of M1 is A) transaction deposits. C) travelers checks. B) currency and coins. D) savings accounts.

B

The members of the Federal Open Market Committee are A) the Treasury secretary, the head of the Federal Deposit Insurance Corporation, and the Comptroller of the Currency. B) the seven members of the Fedʹs Board of Governors and five of the Federal Reserve bank presidents. C) the President, the Speaker of the House of Representatives, and the Senate Majority Leader. D) the five top officials at the Federal Reserve Bank of New Yorkʹs Trading Desk.

B

Total reserves of private banks are A) all customer deposits. B) deposits held at the Fed and vault cash. C) the minimum amount banks need to hold against time deposits. D) federal reserve notes.

B

Which of the following describes a moral hazard problem? A) a process by which individuals have substantial resources devoted to the exchange process and need to make a profit or they will be adversely affected B) a post-contractual problem that may result because participants to the exchange process have information that allows them to act in an opportunistic manner C) a process by which individual buyers or sellers with better information are more likely to participate in voluntary exchange D) a contractual problem that results because monopolies exist in all economies

B

Which of the following is NOT a function of the Federal Reserve System? A) Regulating the money supply B) Making loans to households and businesses C) Acting as the fiscal agent of the federal government D) Supervising member banks

B

Which of the following is NOT true about the duties the Fed performs for the federal government? A) The Federal Reserve is the banker and fiscal agent of the federal government. B) The U.S. Treasury controls the Fed. C) The Federal Reserve aids in the purchase and sale of certain government securities. D) The U.S. Treasury has a checking account at the Fed.

B

A bank with $100 million in deposits has $15 million of cash in the bank, $10 million in deposits with the Fed, and $15 million in government securities in its vault. Its total reserves equal A) $10 million. B) $15 million. C) $25 million. D) $40 million.

C

A bank with $200 million in transaction deposits keeps $20 million in cash in the bank vault, $10 million in deposits at the Fed, and $5 million in government securities in the bank vault. Its total reserves equal A) $10 million. B) $20 million. C) $30 million. D) $35 million.

C

A deposit in a financial institution that requires notice of intent to withdraw is a A) savings deposit. C) time deposit. B) money market deposit account. D) certificate of deposit.

C

As a ʺlender of last resort,ʺ the Fed A) is obligated to bail out any depository institution in the country that is in financial difficulty. B) protects the deposits of $100,000 or less in all commercial banks in the country. C) provides loans to banks experiencing temporary liquidity problems. D) bails out any corporation the government has decided should not fail.

C

Currency consists of A) only coins minted by the U.S. Treasury. B) Travelerʹs checks. D) Currency. B) only Federal Reserve notes. C) coins minted by the U.S. Treasury and Federal Reserve notes. D) coins, Federal Reserve Notes and travelerʹs checks.

C

Goldsmiths were able to practice an early form of fractional reserve banking because they knew that A) people were relatively unsophisticated in their financial transactions. B) gold was the major form of money. C) not all depositors would claim their gold at the same time. D) gold did not serve as a unit of account.

C

Suppose that a new customer opens a checking account and a saving account, placing $50,000 in each. Later, the bank makes a loan of $100,000 to a business firm. For this bank, A) assets increased by $50,000 because the saving account is an asset, while liabilities increased by $50,000 because the checking account is a liability. B) assets increased by $100,000 because the checking and saving accounts are assets, and liabilities increased by $100,000 because the loan is a liability. C) assets increased by $100,000 because the loan is an asset, and liabilities increased by $100,000 because the checking and saving accounts are liabilities. D) assets remained unchanged but liabilities increased by $100,000 because of the loan.

C

The Federal Reserve Bank was first established in the U.S. by an Act of Congress passed in A) 1789. B) 1861. C) 1913. D) 1947.

C

The current chair of the Board of Governors of the Federal Reserve is A) Alan Greenspan. B) John Snow. C) Ben Bernanke. D) Henry Paulson.

C

The money supply is A) the rate at which the Federal Reserve Board prints currency. B) limited to currency and coins. C) the amount of money in circulation. D) the rate at which the Federal Reserve Board creates money.

C

The part of the Federal Reserve System that determines monetary policy actions is the A) District Bank Board. B) Federal Deposit Insurance Corporation (FDIC). C) Federal Open Market Committee. D) Comptrollerʹs Office.

C

The two basic ways to define money are A) the transactions approach and the fiduciary approach. B) the transactions approach and the M1 approach. C) the transactions approach and the liquidity approach. D) the liquidity approach and the store of value approach.

C

When you make a purchase at a retail store by giving your bank an instruction to transfer funds directly from your bank account to the storeʹs bank account, you have most likely made the purchase using A) cash. B) a loan. C) a debit card. D) credit.

C

When you use a debit card to purchase a pair of jeans, you are A) creating a 30-day loan from your bank to the seller. B) creating a 30-day loan from the seller to your bank. C) giving your bank an instruction to transfer funds directly from your bank account to the storeʹs bank account. D) creating an overnight repurchase agreement between your bank and the store.

C

Which of the following actions has no effect on the total money supply? A) The Federal Open Market Committee buys government securities. B) The Federal Open Market Committee sells government securities. C) There is a transfer of deposits from one bank to another bank. D) There is change in the money multiplier.

C

Which of the following is NOT a correct statement about the Federal Reserve banks? A) They supervise member banks within the Federal Reserve System. B) They provide a system of check collection and clearing. C) They provide the economy with gold backed currency. D) They act as banker and fiscal agent for the U.S. government.

C

Which of the following is NOT a description of indirect finance? A) You take out a student loan from your bank. B) An insurance company lends funds to IBM. C) You borrow $500 from your best friend. D) You buy shares in a mutual fund.

C

Which of the following is NOT a function of the Federal Reserve System? A) The Fed holds reserves of depository institutions. B) The Fed supplies the economy with fiduciary currency. C) The Fed determines government spending and taxation policies. D) The Fed acts as fiscal agent for the United States Department of the Treasury.

C

Which of the following is NOT included in M1? A) transaction deposits C) small time deposits B) currency D) travelers checks

C

Which of the following statements is correct? I. The Fed can periodically and without warning examine member commercial banks to ensure that they are conforming to current banking standards. II. The Fed helps the government collect certain tax revenues and aids in the purchase and sale of government securities. A) I only B) II only C) Both I and II D) Neither I nor II

C

All of the following are examples of financial intermediaries EXCEPT A) credit unions. C) retirement funds. B) insurance companies. D) stock exchanges.

D

All of the following are functions of the Federal Reserve System (the Fed) EXCEPT A) supplying currency. B) check clearing. C) regulation of the money supply. D) lender of last resort for consumers.

D

Fractional reserve banking began A) in the early twentieth century. C) in the Middle Ages B) in the early nineteenth century. D) in ancient Greece.

D

In a fractional reserve banking system, A) banks are required to keep all deposits on hand so that they can pay their depositors when they desire to withdraw funds. B) banks are required to keep a fraction of deposits in bonds. C) banks are required to keep a fraction of all deposits on hand and send the rest to the Fed. D) banks do not keep sufficient reserves on hand to cover 100 percent of their depositorsʹ accounts.

D

Money functions as a(n) A) store of value. B) unit of account. C) medium of exchange. D) all of the above.

D

Other things being equal, if the reserve ratio is raised from 10 percent to 20 percent, A) minimum potential value of the money multiplier rises from 0.10 to 0.20. B) minimum potential value of the money multiplier falls from 100 to 50. C) maximum potential value of the money multiplier rises from 10 to 20. D) maximum potential value of the money multiplier falls from 10 to 5.

D

The initial impact of the Fedʹs open market sale of government securities by the Federal Reserve is A) an increase in the money supply by some multiple of the dollar volume of the sale. B) an increase in commercial bank deposits at the Fed. C) a fall in the money supply by some multiple of the dollar volume of the sale. D) a reduction of the commercial banking systemʹs reserve deposits at the Fed.

D

The most important function of the Fed is to A) provide a system for collecting and clearing checks. B) collect taxes. C) support the federal governmentʹs deficit spending by buying government securities. D) regulate the money supply.

D

The part of the Federal Reserve System (the Fed) that sets reserve requirements is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors.

D

The process by which financial institutions accept savings from businesses, households and governments and lend the savings to other businesses, households and governments is A) asymmetric information. C) moral hazard. B) adverse selection. D) financial intermediation.

D

The reserve ratio is 10 percent. If the bank receives a customer deposit of $100,000, then an immediate effect is A) a reduction in the bankʹs total assets of exactly $10,000. B) a reduction in the bankʹs total liabilities of exactly $10,000. C) no change in the bankʹs total assets or total liabilities. D) an increase in the bankʹs reserves of exactly $10,000.

D

The term ʺdepository institutionʺ refers to A) commercial banks only. B) credit unions only. C) savings and loan associations only. D) commercial banks, credit unions, and savings and loan associations.

D

When we examine the U.S. money supply, the smallest component of M1 is A) currency and coins. C) certificates of deposit. B) transaction deposits. D) travelerʹs checks.

D

Which of the following depository institutions is NOT regulated by a government agency? A) Savings and loan associations B) Credit unions C) Commercial banks that are not part of the Federal Reserve System D) None of the above: All depository institutions are regulated by some government agency

D

Which of the following institutions has responsibility for producing the coins that are distributed in the United States? A) The Office of the Comptroller of the Currency B) The Federal Reserve System C) The U.S Bureau of Engraving and Printing D) The U.S. Mint

D

Which of the following is a time deposit with a fixed maturity date offered by banks and other financial institutions? A) Savings deposit B) Money market deposit account C) Time deposit D) Small-denomination certificate of deposit

D

Which of the following will limit the expansion of the money supply following a new deposit? A) Failure of banks to voluntarily hold excess reserves B) A strong demand for new loans C) A re-depositing of all loan proceeds D) A strong demand for holding currency outside of commercial banks

D

Which one of the following is a function of the Federal Reserve System? A) providing the economy with currency B) providing a system for check clearing C) serving as a lender of last resort D) all of the above

D

Why might the Federal Reserve intervene in foreign currency markets? A) to ensure the safety of overseas investments for banks B) to ensure the safety of overseas investments for private investors C) to ensure the safety of overseas investments for pension funds D) to maintain a desired exchange rate for the dollar

D

f the Fed purchases $100,000 in government bonds from a bank, then the A) liabilities of the bank rise by $100,000. B) reserves of the bank rise by $100,000. C) assets of the bank rise by $100,000. D) reserves of the bank rise by $100,000.

D

Suppose that the Fed purchases $1,000,000 worth of bonds and that the reserve ratio is 25 percent. Then, the maximum potential expansion of deposits is A) $4,000,000. B) $10,000,000. C) $400,000. D) $25,000,000. Answer: A

A

A corporate bond is not as liquid as cash because the bond A) cannot be converted to spendable dollars either until it matures or is sold to another investor. B) can be exchanged only for the goods or services produced by the company that issued the bond. C) must be exchanged for a stock certificate before it can be converted to spendable funds. D) represents an exchange for gold only.

A

Because deposits are insured by the FDIC, most of us do not look at the lending behavior of our banks. This creates a(n) ________ problem. A) moral hazard C) adverse selection B) principled hazard D) contrary selection

A

Due to the existence of the FDIC, banks A) may make riskier loans knowing that their depositors are insured. B) have not changed their behavior even with the existence of insurance. C) become more cautious in making loans. D) are no longer concerned about net worth.

A

Open market operations are conducted by the Fed A) in the private secondary U.S. securities market. B) in the New York Stock Exchange. C) through the Bureau of Engraving. D) through the Washington location of the Federal Reserveʹs Bank of Governors.

A

For barter to occur there must be A) hyperinflation. B) a double coincidence of wants for each good to be exchanged. C) one person who pays cash. D) two people willing to pay with credit.

B

If the Federal Reserve buys $500 of government securities when the required reserve ratio is 20 percent, the maximum potential change in the money supply is a(n) A) increase by $100. B) increase by $2,500. C) decrease by $100. D) decrease by $2,500.

B

The Fedʹs buying and selling of existing government securities is called A) market interventions. B) open market operations. C) changes in the reserve requirement ratio. D) changes in the difference between the discount rate and the federal funds rate.

B

The U.S. fiduciary monetary system A) is the one agency responsible for providing coins and paper currency. B) is one where money is not convertible to a fixed quantity of gold. C) puts capital controls in place. D) controls the private banking system.

B

When the Fed buys government securities, A) reserves increase, leading to a decrease in the money supply by an amount more than the purchase of the government securities. B) reserves decrease, leading to a increase in the money supply by an amount more than the purchase of the government securities. C) reserves increase, leading to a increase in the money supply by an amount more than the purchase of the government securities. D) reserves decrease, leading to a decrease in the money supply by an amount more than the purchase of the government securities.

C

When the Fed sells government securities, A) reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities. B) reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities. C) reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities. D) reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.

D

The fact that individuals whose credit worthiness is less than it appears to be are those who are most willing to borrow funds at any given interest rate is an example of A) adverse selection. C) moral bonuses. B) symmetric information. D) diverse origins.

A

The opportunity cost of holding money A) is measured by the alternative interest yield obtainable by holding some other asset. B) is based on the fiduciary monetary system. C) refers to the amount of paper currency held by the Fed. D) refers to the Fedʹs role as the lender of last resort.

A

The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a bond dealer by transmitting the funds to the dealerʹs deposit account at Bank A. Bank A loans the maximum amount possible to a construction company, which buys materials from a lumber yard. The lumberyard deposits the construction companyʹs check in Bank B. What is the maximum loan Bank A can now make and the maximum loan Bank B can now make? A) Bank A: 0; Bank B: $640,000 B) Bank A: 0; Bank B: $800,000 C) Bank A: $800,000; Bank B: $640,000 D) Bank A: $800,000; Bank B: 0A

A

The value of the money multiplier depends on A) the reserve ratio. B) the ratio of total assets to total liabilities for the banking system as a whole. C) the interest rate offered on bonds currently being sold by the Fed. D) the interest rate offered on bonds currently being purchased by the Fed.

A

What would cause a bank run? A) Depositors feel that the bank does not have sufficient assets to cover their deposits. B) Depositors feel that they are earning too low of a return on their deposits. C) Borrowers feel that they are being charged too high of an interest rate on their loans. D) Bank managers choose to hold more excess reserves.

A

When banks reduce the reserve ratio, the potential money multiplier A) increases. B) decreases. C) remains unchanged. D) sometimes increases, and sometimes decreases depending on the rate of inflation.

A

Which of the following represents a preventative measure against bank runs? A) The President of the United States can order banks to pay depositors. B) The Federal Reserve can lower reserve requirements to ensure that banks have sufficient funds. C) The FDIC provides deposit insurance. D) None of the above is correct.

A

The degree to which an asset can be acquired or disposed of without much loss of nominal value or transaction costs is known as A) fiat money. B) liquidity. C) fiducia. D) credit.

B

The reserve ratio is 10 percent. Depositors regularly keep 10 percent of their deposits as cash. If the Fed buys $1 million of U.S. government securities, excess reserves A) increase by $800,000. B) increase by $810,000. C) increase by $900,000. D) increase by $1 million.

B

The reserve ratio is 20 percent. After the Fed buys $1 million in U.S. government securities from a bond dealer by transmitting the funds to the dealerʹs deposit account at Bank A, Bank A lends a construction company an amount equal to its excess reserves. The construction company spends the entire amount on lumber from a lumber yard, which deposits the construction companyʹs check in its deposit account with Bank A. The maximum loan Bank A can now make is A) $0. B) $640,000. C) $800,000. D) $1 million.

B

The reserve ratio is 20 percent. If the Fed buys $1 million of U.S. government securities from a bond dealer by transmitting the funds to the dealerʹs deposit account at Bank ABC, then A) Bank ABC can make no additional loans. B) Bank ABC can make additional loans up to $800,000. C) Bank ABC can make additional loans up to $1 million. D) Bank ABC cannot make any additional loans, but the system as a whole can make additional loans up to $1 million.

B

When the Fed buys a $10,000 bond from a bond dealer, A) reserves of the banking system increase by $10,000, but the money supply will only be able to increase by something less than this amount. B) reserves of the banking system increase by $10,000, but the money supply can increase by more than $10,000. C) reserves of the banking system remain unchanged, but the money supply increases by $10,000. D) reserves of the banking system remain unchanged, but the money supply decreases by $10,000.

B

Which of the following is a liability to a bank? A) total reserves C) government securities B) transaction deposits D) loans

B

A purchase of U.S. government securities by the Fed causes A) a multiple contraction of the money supply because deposits fall by more than the amount of the securities purchased. B) a contraction of the money supply equal to the amount of the securities because all other transactions occur within the banking system. C) a multiple expansion of the money supply because the reserve ratio is less than one. D) an expansion of the money supply equal to the amount of the securities because all other transactions occur within the banking system.

C

A purchase of U.S. government securities by the Fed causes A) an expansion of the money supply equal to the amount of the securities purchased. B) a contraction of the money supply equal to the amount of the securities purchased. C) an expansion of the money supply of more than the amount of the securities purchased. D) a contraction of the money supply of more than the amount of the securities purchased.

C

If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10 percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by ________, and the money supply can increase by as much as ________. A) $80,000; $800,000 B) $10,000; $100,000 C) $90,000; $1,000,000 D) $90,000; $900,000

C

Open market operations are A) the procedures for approving loans at commercial banks. B) the procedures of applying for loans at commercial banks. C) the Federal Reserveʹs purchase and sale of existing U.S. government securities. D) steps a bank must complete before it can invest in stocks on the open market.

C

Open market operations involve A) the buying and selling of existing corporate bonds. B) the buying and selling of existing corporate stocks. C) the buying and selling of existing federal government bonds. D) the buying and selling of Federal Reserve bonds.

C

The FDIC was created because A) banks failed to create money the way the Fed wanted them to. B) people worried about bank failures after World War I, even though very few banks actually failed. C) there were so many bank failures in the 1930s. D) the Fed kept the required reserve ratio too low.

C

The formula 1 required reserve ratio A) federal funds rate. C) potential money multiplier. B) discount rate. D) actual change in the money supply.

C

The manner in which FDIC deposit insurance is set up in the United States encourages banks to A) be too conservative in their lending practices. B) maintain excess reserves that are too great. C) make riskier loans than they otherwise would. D) reject some loans that probably would be profitable.

C

The potential money multiplier gives us A) the growth in real national income when the money supply increases. B) the growth in the money supply when income increases. C) the maximum potential change in the money supply due to a change in reserves. D) the maximum potential change in the money supply due to a change in income.

C

The purchasing power or value of money A) is determined by law. B) depends on the value of gold. C) varies inversely with the price level. D) varies inversely with the interest rate.

C

The reason we are willing to accept money with no intrinsic value is that A) paper currency may be exchanged for full-bodied money. B) the money supply is backed by an equal amount of gold and silver. C) we have a fiduciary monetary system in which currency has both acceptability and predictability of value. D) the value of the money varies directly with changes in the price level.

C

Which of the following statements is/are correct? I. Depository institution managers undertake riskier actions than they otherwise would because of the existence of deposit insurance II. Because of the existence of deposit insurance, depositors in savings and loans and other banks have little incentive to investigate the financial stability of these institutions A) I only B) II only C) Both I and II D) Neither I nor II

C

Which of the following would reduce the money multiplier? A) Reducing the reserve ratio B) Bond purchases by the Fed C) Cash drains from banks D) Bank reductions in desired reserve holdings

C

Which of the following would reduce the money multiplier? A) The purchase of bonds by the Fed B) Lowering the reserve ratio C) Increases in the reserve ratio D) A flow of currency into the banking system

C