chapter 9

higher rates of inflation

123. In the long run, countries with higher rates of money growth usually have: A. higher rates of inflation. B. lower rates of inflation. C. faster growth rates of real output. D. smaller budget deficits.

large government budget deficits

124. Extremely rapid rates of money growth are usually the result of: A. rapid population growth. B. excessively high interest rates. C. large government budget deficits. D. sharp increases in productivity.

the same percentage increase

125. According to the quantity equation, if velocity and output are constant, then an increase in the money supply leads to ______ in inflation. A. a less than proportional increase B. a less than proportional decreases C. the same percentage increase D. a greater than proportional increase

coupon

15. Regular interest payments made to bondholders are called ______ payments. A. diversification B. reserve C. coupon D. dividend

providing information and risk-sharing services

2. Decentralized market-based financial systems improve the allocation of saving by: A. insuring capital gains exceed dividend payments. B. eliminating the need for commercial banks or other financial intermediaries. C. matching net capital inflows to net capital outflows. D. providing information and risk-sharing services.

decreases

21. When the interest rate on newly issued bonds increases, the price of existing bonds: A. increases. B. decreases. C. increases only if the coupon rate is below the new rate. D. may either increase or decrease.

decrease

26. When the coupon rate on newly-issued bonds increases from 5% to 6%, the prices of existing bonds: A. increase. B. decrease. C. remain unchanged. D. increase only if the coupon rate is less than 6%.

increase

27. When the coupon rate on newly-issued bonds decreases from 6% to 5%, the prices of existing bonds: A. increase. B. decrease. C. remain unchanged. D. decrease only if the coupon rate is less than 5%.

claims to partial ownership of a firm

28. Shares of stock are: A. legal promises to repay a debt. B. claims to partial ownership of a firm. C. regular payments made to owners of a firm. D. legal promises to make regular payments to the stockholder.

capital gains, dividends

29. Stockholders receive returns on their financial investment in the form of ______ and _____. A. interest payments; dividends B. capital gains; dividends C. coupon payments; capital gains D. capital gains; interest payments

intermediaries; markets

3. The financial system consists of financial _____, such as commercial banks, and financial _____, such as the stock market. A. markets; intermediaries B. allocations; investments C. intermediaries; markets D. markets; institutions

dividend

30. A regular payment received by stockholders for each share they own is called a: A. coupon payment. B. dividend. C. bond. D. capital gain.

risk premium

31. The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the: A. real interest rate. B. nominal interest rate. C. risk premium. D. discount rate.

longer; greater

18. The coupon rate on newly issued bonds is usually higher for bonds with ______ terms and ______ risk that the borrower will go bankrupt. A. shorter; greater B. shorter; smaller C. longer; greater D. longer; smaller

increase; reduces

35. An increase in interest rates results in a(n) ______ in the required rate of return to hold stocks and ______ current stock prices. A. increase; reduces B. increase; raises C. decrease; raises D. decrease; reduces

interest rates decrease

36. The current price of a stock increases when: A. expected future dividends decrease. B. the expected future price of the stock decreases. C. interest rates decrease. D. the perceived riskiness of the stock increases.

financial intermediaries

4. Firms that extend credit to borrowers using funds from savers are called: A. bond dealers. B. stock brokers. C. central banks. D. financial intermediaries.

increase, decrease, decreases

41. Stock prices increase when expected future dividends ____, interest rates _____, and/or the risk premium ______. A. increase; increase; increases B. increase; increase; decreases C. decrease; decrease; increases D. increase; decrease; decreases

diversification

45. The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called: A. allocation. B. following the risk premium. C. diversification. D. risk reservation.

mutual fund

49. A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a: A. commercial bank. B. credit union. C. stock exchange. D. mutual fund.

principle of comparative advantage

5. The specialized information-gathering activities that banks use to evaluate borrowers are an example of the: A. cost-benefit principle. B. principle of comparative advantage. C. scarcity principle. D. principle of increasing opportunity cost.

most likely to be productive

50. The ongoing search by savers for high returns leads the bond and stock markets to direct funds to the uses that appear: A. most likely to be productive. B. least likely to be productive. C. to have the least risk. D. to have no risk.

any asset used to make purchases

51. Money is: A. the same as income. B. all financial assets. C. any asset used to make purchases. D. the sum of assets minus debts.

barter

52. The direct trade of goods and services for other goods and services is called: A. financial intermediation. B. diversification. C. barter. D. using a medium of exchange.

medium of exchange

53. Double coincidence of wants is avoided if money is used as a: A. medium of exchange. B. measure of value. C. standard of deferred payment. D. store of value

double coincidence of wants

54. Finding both parties to a trade who have something the other party wishes to trade for is called a: A. unit of account. B. store of value. C. medium of exchange. D. double coincidence of wants.

it is used as to purchase goods and services

55. Money serves as a medium of exchange when: A. it is used to purchase goods and services. B. there is direct trade of goods and services. C. it is a basic measure of economic value. D. it is a means of holding wealth.

a store of value

57. When your grandfather keeps a bundle of $100 dollar bills behind a brick in the basement, this is an example of dollars serving as: A. bank reserves. B. a medium of exchange. C. a unit of account. D. a store of value.

a unit of account

59. If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money as: A. bank reserves. B. a medium of exchange. C. a unit of account. D. a store of value.

commercial banks

6. Privately-owned firms that accept deposits from individuals and businesses and use those deposits to make loans are called: A. mortgage banks. B. brokerage firms. C. commercial banks. D. investment banks.

other assets pay relatively higher rates of interest than money

61. The main disadvantage of using money as a store of value is that: A. other assets provide greater anonymity than cash. B. barter is a more efficient way to conduct transactions than using money. C. unlike other assets, money serves as a medium of exchange. D. other assets pay relatively higher rates of interest than money.

serving as a medium of exchange, unit of account, and store of value

62. The three functions of money are: A. spending for consumption, investment, and government purchases. B. measuring balance of payments, exchange rates, and interest rates. C. implementing monetary policy, fiscal policy, and structural policy. D. serving as a medium of exchange, unit of account, and store of value.

easy comparison of the relative prices of goods and services

63. Money serves as a basic yardstick for measuring economic value (a unit of account), allowing: A. people to hold their wealth in a liquid form. B. governments to restrict the issuance of private monies. C. easy comparison of the relative prices of goods and services. D. goods and services to be exchanged with a double coincidence of wants.

currency, checking deposits, and travelers' checks

64. The M1 measure of money consists of the sum of: A. currency, checking deposits, and travelers' checks. B. currency and travelers' checks. C. currency, checking deposits, and savings deposits. D. checking deposits and travelers' checks.

m1, savings deposits, small time deposits, and money market mutual funds

65. The M2 measure of money consists of the sum of: A. savings deposits, small time deposits, and money market mutual funds. B. currency, checking and savings deposits, and small time deposits. C. currency, checking and savings deposits. D. M1, savings deposits, small time deposits, and money market mutual funds.

gathering information about and evaluating potential borrowers

7. Banks help savers find productive uses for their funds because banks have specialized in: A. gathering information about and evaluating potential borrowers. B. obtaining preferential tax treatment for savers. C. securing government guarantees for loans. D. evaluating the riskiness of stocks.

are not part of people's wealth

70. Credit card balances are not considered to be money primarily because they: A. are rarely used to make purchases. B. are not part of people's wealth. C. are an asset used in making transactions. D. do not represent an obligation to pay someone else.

reserves and loans

73. Assets of the commercial banking system include: A. reserves and loans. B. deposits. C. reserves and deposits. D. loans and deposits.

depsosits

74. Liabilities of the commercial banking system include: A. reserves and loans. B. deposits. C. reserves and deposits. D. loans and deposits

cash and similar assets help to meet depositor withdrawals or payments

75. Bank reserves are: A. currency and customer checking deposits. B. currency, customer checking and savings deposits. C. any asset used to purchase goods and services. D. cash and similar assets held to meet depositor withdrawals or payments.

deposits

76. 100 percent reserve banking refers to a situation in which banks' reserves equal 100 percent of their: A. loans. B. deposits. C. profits. D. income.

to meet depositor withdrawals and payments

77. Banks hold reserves: A. to earn interest. B. to increase profits. C. only because the government requires them to hold reserves. D. to meet depositor withdrawals and payments.

less than 100 percent

78. In a fractional-reserve banking system the reserw24ve/deposit ratio equals: A. more than 100 percent. B. currency held by the public divided by deposits. C. 100 percent. D. less than 100 percent.

through multiple rounds of lending

79. Commercial banks create new money: A. when they increase their desired reserve/deposit ratio. B. by issuing checks. C. through multiple rounds of lending. D. when they buy government bonds from the Federal Reserve.

providing credit that might otherwise not be available

8. Financial intermediaries, such as commercial banks, help borrowers, particularly small borrowers, by: A. providing information to evaluate potential lenders. B. offering tax-preferred borrowing opportunities. C. eliminating the risk of borrowing. D. providing credit that might otherwise not be available.

money is created

80. When a bank makes a loan by crediting the borrower's checking account balance with an amount equal to the loan: A. money is created. B. the bank gains new reserves. C. the bank immediately loses reserves. D. the Fed has made an open-market purchase.

make more loans

81. When the actual reserve/deposit ratio exceeds the desired reserve/deposit ratio banks: A. do nothing because this is a profitable situation. B. stop making loans. C. send the extra reserves to the central bank. D. make more loans.

bank reserves increase, which allows banks to lend more and increase the money supply

84. When an individual deposits currency into a checking account: A. bank reserves increase, which allows banks to lend more and increases the money supply. B. bank reserves decrease, which reduces the amount banks can lend and reduces the growth of the money supply. C. bank reserves are unchanged. D. bank liabilities increase, which reduces the amount banks can lend and reduces the growth of the money supply.

there is 100 percent reserve banking

85. The money supply will increase by a multiple of the increase in bank reserves created by the central bank unless: A. there is fractional reserve banking. B. there is 100 percent reserve banking. C. the public holds no currency. D. banks' desired reserve/deposit ratio is 0.20.

reduce the cost of gathering information about borrowers

9. Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries: A. reduce the cost of gathering information about borrowers. B. have a monopoly on lending. C. increase the risk of lending. D. offer higher rates of return than available elsewhere.

increase

90. If the public switches from using cash for most transactions to using checks instead, then all else equal, the money supply will: A. increase. B. decrease. C. not change. D. either increase or decrease.

decrease

92. If banks' desired reserve ratio increases from 0.10 to 0.15, the public still desires to hold the same amount of currency, and the Fed takes no actions, the money supply will: A. increase. B. decrease. C. not change. D. either increase or decrease.

the Federal Reserve System

97. The central bank of the United States is: A. Bank of America. B. Bank of the United States. C. the U.S. Treasury. D. the Federal Reserve System.

conduct monetary policy, oversee financial markets

98. The two main responsibilities of the Federal Reserve System are to ______ and to ______. A. apprehend counterfeiters; regulate the stock market B. enable banks to make affordable mortgages; control the exchange rate of the U.S. dollar C. insure bank deposits; print currency D. conduct monetary policy; oversee financial markets

conducting open-market operations

99. The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through: A. conducting open-market operations. B. changing the Federal Reserve discount rate. C. changing bank reserve requirement ratios. D. changing interest rates.

earn an return on their savings and to facilitate making payments

10. Two reasons savers keep deposits at banks are to: A. secure mortgages and to purchase stocks. B. earn a return on their savings and to facilitate making payments. C. lower interest rates and to increase the money supply. D. equalize loan supply and demand and to earn interest.

open market operations

100. The most important tool of monetary policy is: A. reserve requirement ratios. B. the discount rate. C. open market operations. D. market interest rates.

buys, increases

101. In an open-market purchase the Federal Reserve ______ government bonds and the supply of bank reserves ______. A. buys; increases B. buys; decreases C. sells; decreases D. sells; increases

a decentralized, market-oriented financial system

1. In the United States saving is allocated to its most productive use by: A. the Federal Reserve. B. the Federal, state, and local governments. C. regulations and laws designed to improve productivity. D. a decentralized, market-oriented financial system.

sells, decreases

102. In an open-market sale the Federal Reserve ______ government bonds and the supply of bank reserves ____. A. buys; increases B. buys; decreases C. sells; increases D. sells; decreases

the long run

109. The link between the money supply and prices is strongest in: A. the long run. B. the short run. C. a recession. D. a boom.

legal promise to repay debt

11. A bond is a(n): A. regular payment made to owners of a firm. B. claim to partial ownership of a firm. C. agreement issued by a financial intermediary linking savers and investors. D. legal promise to repay a debt.

inflation

110. A rapidly growing supply of money will lead to: A. rising real GDP. B. rising velocity. C. unemployment. D. inflation.

velocity

111. The speed at which money circulates is called: A. the multiplier B. acceleration. C. velocity. D. the pace of money.

velocity

112. Nominal GDP divided by the money stock equals: A. real GDP. B. the value of transactions. C. the price level. D. velocity.

(pxy)/m

113. If M stands for the money stock, P for the price level, and Y for real GDP, then velocity, V, equals: A. (P × Y) ÷ M. B. (P × M) ÷ Y. C. (M × Y) ÷ P. D. (M × P) ÷ Y.

increased

115. The introduction of credit cards and debit cards has ______ velocity. A. increased B. decreased C. had no impact on D. eliminated

payment methods and technology

116. Velocity is determined by: A. the Federal Reserve. B. the size of the government budget deficit. C. average labor productivity times the population growth rate. D. payments methods and technology.

money times velocity equals nominal gdp

118. The quantity equation states that: A. money times velocity equals nominal GDP. B. money times velocity equals real GDP. C. money times the average price level equals nominal GDP. D. money times the average price level equals real GDP.

originally lent

12. The principal amount of a bond is the amount: A. originally lent. B. of interest agreed upon when the bond was originally issued. C. paid to the bondholders on a regular basis. D. of interest the bondholder is entitled to when the bond matures.

is the definition of velocity rewritten

121. The quantity equation is always true because it: A. is the definition of velocity rewritten. B. is a law of economics. C. has been empirically tested. D. has been historically verified.

the principle will be repaid

13. The maturation date of a bond is the date at which: A. coupon payments will be made. B. the principal will be repaid. C. dividend payments will be made. D. taxes on the bond are due.

interest rate promised when a bond is issued

14. The coupon rate is the: A. amount originally lent. B. regular payment of interest to a bondholder. C. interest rate promised when a bond is issued. D. maximum interest rate that can be paid on a bond.

price

17. The market value of a particular bond at any given point in time is called the bond's: A. coupon rate. B. principal. C. term. D. price.