Macro 1202: Exam 1

Banks create money when they: (a) make loans. (b) take deposits. (c) hold excess reserves. (d) pay withdrawals to depositors.

A

n the United States, financial crises have often resulted in: (a) increased calls for legislation for greater financial regulation. (b) more competition in the financial industry. (c) no changes in the financial industry since such crises are rare. (d) less financial regulation.

A

Which of the following is a tool used by the Federal Reserve in the conduct of monetary policy? (a) changes in the prime rate (b) issuing new government bonds and retiring old ones (c) buying and selling corporate bonds (d) buying and selling federal government bonds

D

f the reserve ratio is 15 percent, an additional $2,000 of reserves added to the system will increase the money supply by (a) $1,500. (b) $3,000. (c) $13,150. (d) $13,333.

D

he Glass-Steagall Act of 1933 (use the internet if you need more hints): (a) A. created the Reconstruction Finance Corporation. (b) limited interest rates that savings and loans could charge on mort- gages. (c) created the Federal Reserve. (d) separated banks into two categories, commercial banks and invest- ment banks

D

True or False? The dollar amount of a future payment is greater than its present value?

True

Bank Run

a situation in which many depositors simultaneously decide to withdraw from a bank

the present value of a future payment ___ if the ___? a) decreases: interest rate increases b) increases: future payment decreases c) decreases: interest rate decreases d) increases; stock market falls

a) decreases; interest rate increases

Among the liabilities of banks are: (a) deposits. (b) loans. (c) reserves. (d) loans and reserves.

a) deposits

T Account

is a stripped down version of a bank balance sheet, showing only how a transaction changes a bank's balance sheet

What are reserves?

reserves are deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve

Required Reserve Ratio

the minimum fraction of deposits banks are required by law to keep as reserves

banks don't lend out all of the funds placed in their hands by depositors because...

they have to satisfy any depositor who wants to withdraw funds

A bank run occurs when: (a) many bank depositors are trying to withdraw their funds from the bank. (b) too many people are trying to borrow more at one time. (c) interest rates start to increase. (d) interest rates are higher than inflation rates.

(a) many bank depositors are trying to withdraw their funds from the bank.

If a bank has deposits of $100,000, cash on hand of $10,000 and $15,000 on deposit at the Federal Reserve, and the required reserve ratio is 0.20, then the bank: (a) has no excess reserves. (b) has excess reserves of $5,000. (c) has insufficient reserves to meet requirements. (d) has an insufficient deposit to loan ratio.

(b) has excess reserves of $5,000.

Banks can lend money because: (a) they have so much to lend. (b) they know not everyone wants their deposits back at the same time. (c) there is a high demand for loans. (d) they know how much cash they have in their vault.

(b) they know not everyone wants their deposits back at the same time.

1. You have won the lottery and have been given the choice of receiving $5 million today or $10 million after 10 years. Assume that the interest rate remains fixed at 10% per year for the entire 10-year period. As a brilliant economist, you know that you should choose: (a) $10 million after 10 years, since this is more than you would get if you invested $5 million for 10 years at an annual rate of interest of 10%. (b) $10 million after 10 years, since that is a larger amount than the present value of $5 million paid after 10 years. (c) $5 million today, since it would be worth more than $10 million after 10 years, if the $5 million earned interest at the rate of 10% per year. (d) $10 million after 10 years, since it is the larger amount.

(c) $5 million today, since it would be worth more than $10 million after 10 years, if the $5 million earned interest at the rate of 10% per year.

The reserve ratio is the: (a) bank's holdings of gold. (b) government's holdings of gold at Fort Knox. (c) fraction of deposits the banks hold in their vaults plus their deposits at the Federal Reserve. (d) ratio of gold to the paper money in the economy.

(c) fraction of deposits the banks hold in their vaults plus their deposits at the Federal Reserve.

The present value of a future payment if the . (a) increases; period between the present and the future increases. (b) decreases; future payment increases. (c) increases; interest rate decreases. (d) decreases; stock market rises.

(c) increases; interest rate decreases.

Of the following assets which is the most liquid? (a) stocks in Intel Corporation (b) a painting by van Gogh (c) a used car (d) fine jewelry

A

Suppose the Fed buys $50 million in Treasury bills from commercial banks. If the reserve ratio is 10%, the monetary supply might eventually by . (a) increase; $500 million (b) increase; $450 million (c) decrease; $450 million (d) decrease; $500 million

A

The Federal Reserve System is the for the United States. (a) A. central bank (b) government-owned bank (c) U.S. Treasury Bank (d) bank described in B and C

A

Banks are illiquid because: (a) their deposits are less liquid than their loans. (b) their loans are less liquid than their deposits. (c) their assets are greater than their liabilities. (d) their liabilities are greater than their assets.

B

To increase the money supply, the Fed could (a) sell government bonds. (b) buy government bonds. (c) increase the discount rate. (d) increase the reserve requirement.

B

ll of the following are responsibilities of the Fed EXCEPT: (a) control the monetary base. (b) mint bills and coins. (c) oversee and regulate the banking system. (d) set the discount rate

B

The multiplier is equal to . (a) reserve; the required reserve ratio (b) bank loan; the required reserve ratio divided by 1 1 (c) money; 1 divided by the required reserve ratio (d) excess reserve; change in reserves divided by the change in deposits

C

According to the Glass-Steagall Act of 1933 (a) investment banks could accept deposits, which were covered by de- posit insurance. (b) commercial banks could create and trade financial assets such as stocks and bonds. (c) investment banks could create and trade financial assets such as stocks and bonds, but commercial banks could not trade stocks and bonds. (d) there was no difference between commercial banks and investment banks.

C

The monetary measure "M2" is (a) smaller and less liquid than M1. (b) smaller but more liquid than M1. (c) larger but less liquid than M1. (d) larger than and more liquid than M1.

C

The reserve requirement is 20%, and Leroy deposits his $1,000 check re- ceived as a graduation gift in his checking account. The bank does not want to hold excess reserves. How much can the bank loan based on the $1,000 deposit? (a) $1,000 (b) $200 (c) $800 (d) $0

C

f the reserve ratio is 5 percent and a bank receives a new deposit of $500, this bank (a) will become illiquid if it does not increase its required reserves by $500. (b) will initially see its total reserves increase by $25. (c) will be able to make a new loan of $475. (d) makes overnight loans to other banks.

C

n a deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 will increase the total value of bank deposits by: (a) $5,000 (b) $10,000 (c) $20,000

C

Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by: (a) $500 (b) $2,500 (c) $100 (d) $400.

D

The Federal Reserve Bank of the United States is: (a) a purely private central bank. (b) a purely public central bank. (c) is part of the U.S. government. (d) is not exactly part of the U.S. government but not really a private institution either.

D

To increase the money supply, the central bank could: (a) lower the discount rate. (b) make open-market purchases. (c) lower reserve requirements. (d) lower the discount rate, make open-market purchases, or lower reserve requirements.

D

Among the assets of a bank are: (a) deposits. (b) loans. (c) borrowings. (d) deposits and loans.

b) loans

excess reserves

banks might choose to hold reserves over and above the legal requirements

Which of the following is NOT true about bank runs? (a) They may start as a result of a rumor that a bank is in financial trouble. (b) Many banks' depositors try to withdraw their funds due to fears of a bank failure. (c) Bank runs typically only happen to small banks with few financial assets. (d) Bank runs often lead to a loss of faith in other banks, causing addi- tional bank runs

c) Bank runs typically only happen to small banks with few financial assets.

The government has almost eliminated the possibility of bank runs by instituting protective measures. All of the following are such measures EXCEPT: (a) the capital requirements. (b) the reserve requirements. (c) the loan guarantee. (d) the deposit insurance.

c) loan guarantee

bank reserves are: a) the fraction of deposit kept in gold with Federal Reserve b)the deposits lent to finance illiquid investments c) the fraction of deposits kept in the form of very liquid assets d) gold kept in the banks vault

c) the fraction of deposits kept in the form of very liquid assets

The present value of a future payment will be smaller: (a) the sooner the payment is due. (b) the smaller the interest rate. (c) the higher the interest rate. (d) the higher the interest rate and the later the payment is due.

d) the higher the interest rate and the later the payment is due.