Money and Banking Chapter 15 and 16 Ravindra, Chapter 3 Money and Banking, Chapter 6 Money and Banking, Chapter 18 Money and Banking, Chapter 12 Money and Banking, Chapter 17 Money and Banking

Susie buys a share of Alphabet stock through her broker, Mr. Diaz, who works for Acme Investing and purchases the stock at the NYSE. In this transaction, ______ is a financial instrument, ______ is a financial institution, and _____ represents a financial market.

1. Alphabet 2.Acme Investing 3. NYSE

99) Currently the requirement of holding a non-interest-bearing reserve account at the Fed must be met by A) all banks, member or not. B) only member banks. C) member banks and nonmember banks with over $100 million in assets. D) only nationally chartered banks.

A) all banks, member or not.

55) Harry gets $1,000 in currency from his grandfather when he graduates from college. He deposits these funds into his checking account. What is the impact of Harry's deposit on the monetary base? The monetary base A) did not change. B) increased by $1,000. C) decreased by $1,000. D) increased by more than $1,000.

A) did not change.

20) Juan purchases automobile insurance. The insurance contract is a A) financial instrument. B) form of money. C) transfer of risk from the insurance company to Juan. D) financial intermediary.

A) financial instrument.

24) Vault cash is not included in the central bank's liability category of currency because A) only non-bank currency is in the liability category of currency. B) it really is only electronic funds. C) it is in the asset category of reserves. D) it is the liability of the U.S. Treasury.

A) only non-bank currency is in the liability category of currency.

56) Over the two-year period during which the financial crisis occurred, the amount of assets in the Federal Reserve balance sheet increased by A)2.5 times. B)3 times. C)4.5 times. D)6 times.

A)2.5 times.

63) A customer of Bank A writes a $20,000 check for a new car, which the car dealer deposits in his bank, Bank B. How does this transaction change reserves at Bank A and Bank B? A)Bank A's reserves decrease by $20,000 and Bank B's reserves increase by $20,000. B)Neither Bank A's nor B's reserves will change. C)Bank B's reserves will decrease and Bank A's reserves will increase by $20,000. D)Banks A's reserves will decrease by the required reserve rate times $20,000 and Banks B's reserves will increase by (1 - required reserve rate) times $20,000.

A)Bank A's reserves decrease by $20,000 and Bank B's reserves increase by $20,000.

6) In the U.S., the authority to issue currency is held by the A)Federal Reserve. B)U.S. Treasury. C)Office of the Comptroller of the Currency. D)U.S. Mint.

A)Federal Reserve.

40) The relationship between stability and economic growth is best summarized by which one of the following statements? A)Stability results in higher output growth rates. B)Inflation volatility results in higher output growth rates. C)There is no correlation between the volatility in growth rates and annual output growth. D)The more volatile the growth rate, the higher is the annual output growth.

A)Stability results in higher output growth rates.

22) Which one of the following statements is false? A)The largest source of funds for banks to lend comes from the owner's capital. B)Transaction deposits make up less than 15 percent of banks' sources of funds. C)The largest source of funds for banks are nontransactions accounts. D)Borrowing is a larger source of funds for banks than transaction deposits.

A)The largest source of funds for banks to lend comes from the owner's capital.

42) A futures contract is an example of A)a derivative instrument. B)an instrument used solely by financial institutions. C)a high-risk security that will only have value if certain events occur. D)a contract that is traded but is not a financial instrument.

A)a derivative instrument.

2) At the most basic level, a bond is A)a loan that involves that a contract. B)the transfer of funds from a lender to a borrower. C)a financial arrangement that involves the transfer of funds to a government or business entity. D)a financial arrangement that involves the current transfer of resources from a lender to a borrower, with a transfer back at some time in the future.

A)a loan that involves that a contract.

39) The interest rate the Fed charges for secondary credit is A)above the primary discount rate. B)below the market federal funds rate. C)below the primary discount rate. D)equal to the market federal funds rate.

A)above the primary discount rate.

8) A liability of the central bank in functioning as the bankers' bank is A)accounts of commercial banks. B)securities. C)loans. D)currency.

A)accounts of commercial banks.

61) Beginning in July of 2018, President Donald Trump openly and frequently criticized the Federal Reserve and its Chairman Jay Powell. Blatantly undermining the independence of the Fed in this way would likely A)add a risk premium, driving down prices of U.S. assets. B)cause the Fed to change course and move in the opposite direction of Trump's wishes. C)result in the Fed carrying out the monetary policy recommended by President Trump. D)illustrate the strength of the U.S. economy and encourage investment from abroad.

A)add a risk premium, driving down prices of U.S. assets.

44) Interest rate volatility is a problem because it A)adds to uncertainty, thereby diminishing an investment. B)decreases risk. C)can impact productivity in a positive way. D)can make financial decisions less difficult.

A)adds to uncertainty, thereby diminishing an investment.

77) Ceteris paribus, which one of the following would lead to a decrease in bond demand? A)an increase in expected inflation B)an increase in wealth C)a decrease in risk D)a decrease in liquidity

A)an increase in expected inflation

108) Each of the Reserve Banks has a president who is A)appointed by the bank's board of directors but approved by the board of governors. B)appointed by the board of governors but approved by the bank's board of directors. C)elected by the commercial banks in their district. D)selected from the Board of Directors.

A)appointed by the bank's board of directors but approved by the board of governors.

1) Depository institutions, non depository institutions, and commercial banks A)are all financial intermediaries. B)offer the same kinds of financial services to the public. C)have the same types of liabilities and different types of assets. D)are different because only depository institutions are profit-driven.

A)are all financial intermediaries.

14) Reserve demand becomes horizontal at the IOER rate because A)banks will not make loans at less than the IOER rate. B)banks must earn more than the IOER rate to lend. C)the reserve supply is always set by the Fed so that the federal funds rate is greater than the IOER rate. D)the IOER rate is the upper bound of the target federal funds rate.

A)banks will not make loans at less than the IOER rate.

11) Financial intermediaries are A)banks. B)firms that provide access to the financial markets. C)insurance companies. D)essential to direct finance.

A)banks.

14) The stability of the financial system is enhanced by the ability of central banks to A)be a lender of last resort. B)provide loans to insolvent banks. C)provide deposit insurance. D)convert poorly run banks into branches of the central bank.

A)be a lender of last resort.

33) Asymmetric information in financial markets is a potential problem usually resulting from A)borrowers having more information than the lenders. B)lenders having more information than borrowers. C)the fact that people are basically dishonest. D)the uncertainty about Federal Reserve monetary policy.

A)borrowers having more information than the lenders.

6) The conventional policy tools available to the Fed include each of the following, except which one? A)currency-to-deposit ratio B)discount rate C)target federal funds rate range D)reserve requirement

A)currency-to-deposit ratio

38) A central bank's sale of securities from its portfolio will A)decrease the size of its balance sheet. B)have no impact at all on the balance sheet. C)only change the composition of its liabilities. D)only change the composition of its assets.

A)decrease the size of its balance sheet.

82) During the 1990s, the money multipliers for M1 and M2 A)decreased. B)remained fairly constant even though the economy grew. C)the M1 multiplier decreased while the M2 multiplier increased dramatically. D)increased dramatically as the economy grew.

A)decreased.

71) If we assume a 10 percent required reserve rate, banks hold no excess reserves, and there is no change in currency holdings, an open market sale of $5 million of U.S. Treasury securities by the Fed will result in deposits A)decreasing by $50 million. B)increasing by $5 million. C)increasing by $50 million. D)not changing.

A)decreasing by $50 million.

13) In the United States, loans made by Federal Reserve to banks are A)discount loans. B)reserves. C)discount loans and reserves. D)discount loans and foreign exchange reserves.

A)discount loans

74) Which one of the following would not be considered an unconventional monetary policy tool? A)discount rate B)policy duration commitment C)quantitative easing D)credit easing

A)discount rate

74) If people increase their currency holdings, all else the same, the monetary base A)does not change but the quantity of M2 will decrease. B)increases as does the quantity of M2. C)decreases as does the quantity of M2. D)does not change and neither does M2.

A)does not change but the quantity of M2 will decrease.

68) If the Fed were to decrease the required reserve rate from 10 percent to 5 percent, the simple deposit expansion multiplier would A)double. B)decrease by 5 percent. C)increase by a factor of five. D)be half as large as it was before the reduction.

A)double.

58) Financial markets contribute to all of the following except which one? A)elimination of risk B)providing liquidity C)pooling and communicating information D)sharing of risk

A)elimination of risk

46) Exchange rate stability is likely to be a more important goal for the central banks of A)emerging market economies than the central bank of the United States. B)the United States and Japan than most small developing countries. C)countries where exports and imports make up a small total of all economic activity. D)large, closed economies.

A)emerging market economies than the central bank of the United States.

65) The Taylor rule allows the real long-term interest rate to A)fluctuate with the natural rate of interest. B)be zero. C)be 5 percent less the inflation rate. D)be 1 percent.

A)fluctuate with the natural rate of interest.

20) As a portion of total assets measured in billions of dollars, the smallest asset on the Fed's balance sheet is A)gold. B)securities. C)foreign exchange reserves. D)loans.

A)gold.

19) If the demand for reserves remains constant and the market federal funds rate is below the target rate, the Fed would A)increase the IOER (interest on excess reserves). B)decrease the IOER (interest on excess reserves). C)do nothing and let the market work. D)increase the supply of reserves.

A)increase the IOER (interest on excess reserves).

27) As the inflation rate A)increases, inflation becomes less stable. B)decreases, inflation becomes less stable. C)decreases, inflation becomes more volatile. D)increases, inflation becomes more stable.

A)increases, inflation becomes less stable.

79) The fact that a bank's assets tend to be long-term while its liabilities are short-term creates A)interest-rate risk. B)credit risk. C)decreased risk for the bank. D)trading risk.

A)interest-rate risk.

61) The weighted average difference between the interest received on assets and the interest rate paid for liabilities for a bank is the bank's A)interest-rate spread. B)net interest margin. C)net interest income. D)return on equity.

A)interest-rate spread.

88) A bank faces foreign exchange risk when A)it has assets denominated in one currency and liabilities in another. B)it lends to foreign borrowers because they are less likely to repay a U.S. bank. C)foreign governments restrict dollar-denominated payments .D)it has branches in other countries.

A)it has assets denominated in one currency and liabilities in another.

63) A rumor starts that a bank has suffered significant losses and may not be able to honor its promises to depositors. This causes most of the depositors to line up in front of the bank the next morning wanting to withdraw their deposits. This is an example of A)liquidity risk. B)operational risk. C)interest-rate risk. D)credit risk.

A)liquidity risk.

80) Unconventional policy tools are useful when A)lowering the target interest rate to zero is not sufficient to stimulate the economy. B)conventional policy tools result in shifts in the economy that are too large. C)conventional policy tools support only growth in the economy. D)restrictive monetary policy is necessary.

A)lowering the target interest rate to zero is not sufficient to stimulate the economy.

79) One reason for having a monetary policy framework is that it A)makes clear what specific goals the central bankers are pursuing. B)provides leeway for central bankers to change their goals without communicating the change and disrupting financial markets. C)provides central bankers the secrecy needed to perform their jobs effectively. D)can make goal setting vague enough so that the central bankers can always claim success.

A)makes clear what specific goals the central bankers are pursuing.

24) If prices are not stable, A)money becomes less useful as a store of value. B)money performs better as a unit of account. C)it may be an inconvenience, but resources are still allocated efficiently. D)prices become highly useful for conveying information.

A)money becomes less useful as a store of value.

73) Assume that the required reserve rate is 10 percent, banks want to hold excess reserves in an amount that equals 3 percent of deposits, and the public withdraws 10 percent of every deposit in cash. An open market purchase of $1 million by the Fed will see banking system deposits increase by A)more than $1 million but less than $10 million. B)exactly $1 million. C)less than $1 million. D)more than $10 million but less than $20 million.

A)more than $1 million but less than $10 million.

30) The monetary base is the sum of A)reserves and currency in the hands of the public. B)reserves and M2. C)currency in the hands of the public and M2. D)currency in the hands of the public M1.

A)reserves and currency in the hands of the public.

7) Financial instruments are used to channel funds from A)savers to borrowers in financial markets and via financial institutions. B)savers to borrowers in financial markets but not through financial institutions. C)borrowers to savers in financial markets but not through financial institutions. D)borrowers to savers through financial institutions, but not in financial markets.

A)savers to borrowers in financial markets and via financial institutions.

77) Forward guidance includes A)statements today about policy targets in the future. B)expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. C)asset purchases that shift the composition of the Fed's balance sheet. D)statements of policy changes and dates those changes will take effect.

A)statements today about policy targets in the future.

7) Which of the following is a conventional tool of monetary policy? A)target federal funds rate range B)deposit rate C)currency-to-deposit ratio D)deposit rate and target federal funds rate range

A)target federal funds rate range

26) The efficient allocation of resources requires A)that prices reflect the relative value of goods and services. B)that inflation not exceed three percent a year. C)deflation. D)prices to remain constant.

A)that prices reflect the relative value of goods and services.

10) If the Federal Reserve is to be independent, then the quantity of securities it purchases must be determined by A)the Federal Reserve itself. B)Congress. C)the amount the public does not want to purchase at the going price. D)the Treasury.

A)the Federal Reserve itself.

8) The ability to create money means the central bank can control A)the availability of money and credit in a country's economy. B)tax revenue. C)the unemployment rate. D)government expenditures.

A)the availability of money and credit in a country's economy.

68) As general business conditions deteriorate, all other factors constant, A)the demand for bonds will decrease. B)the supply of bonds will increase. C)bond prices will decrease. D)bond yields will increase.

A)the demand for bonds will decrease.

2) One way the Fed can inject reserves into the banking system is to increase A)the size of the Fed's balance sheet through purchasing securities. B)the discount rate. C)loans to nonbank corporations. D)the size of the Fed's balance sheet through selling securities.

A)the size of the Fed's balance sheet through purchasing securities.

30) The interest rate on excess reserves is A)the upper bound of the federal funds target rate range. B)the lower bound of the federal funds target rate range. C)unrelated to the federal funds target rate range. D)equal to the target federal funds rate

A)the upper bound of the federal funds target rate range.

12) A bank's reserves include A)vault cash. B)U.S. Treasury Securities. C)the bank's loan portfolio. D)U.S. Treasury bills and vault cash.

A)vault cash.

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

B) Federal Reserve.

38) Which one of the following statements is not true? A) Periods of growth above the potential level are periods of high employment. B) Periods of growth below the potential level are periods of low unemployment. C) Periods of growth above the potential level are periods of low unemployment. D) Periods of growth below the potential level are periods of high unemployment.

B) Periods of growth below the potential level are periods of low unemployment.

22) Reserves are A) assets of the central bank and liabilities of commercial banks. B) assets of commercial banks and liabilities of the central bank. C) liabilities of commercial and central banks. D) assets and liabilities for the central bank.

B) assets of commercial banks and liabilities of the central bank.

33) One trait a central bank has over other businesses, including banks, is that it A) receives all of its funding from the government. B) can control the size of its balance sheet. C) doesn't have stockholders. D) doesn't have a board of directors.

B) can control the size of its balance sheet.

80) During the Great Depression, the monetary base in the United States A) decreased significantly. B) increased. C) remained constant. D) was highly erratic.

B) increased.

1) The primary monetary policy tool most used by central banks today is A) the quantity of M1. B) interest rates. C) the quantity of M2. D) the size of the money multiplier.

B) interest rates.

1) A financial intermediary A) is an agency that guarantees a loan. B) is a third party that facilitates a transaction between a borrower and a lender. C) would be used in direct finance. D) must be a depository institution.

B) is a third party that facilitates a transaction between a borrower and a lender.

12) In its role as the bankers' bank, a central bank performs each of the following except which one? A) providing loans during times of financial distress B) providing deposit insurance C) overseeing commercial banks and the financial system D) managing the payments system

B) providing deposit insurance

100) One reason it took so long to have a central bank in the United States is that A)it was not needed. 100) One reason it took so long to have a central bank in the United States is that B) states feared centralization of power. C)state currencies worked fine. D)the primarily agrarian economy made it difficult for financial difficulties to become widespread.

B) states feared centralization of power.

65) If the required reserve rate is expressed by rD and deposits by D, the formula for calculating the amount of required reserves is A)(1/rD )D. B)1/rD. C)(rD )D. D)D/rD.

B)1/rD.

93) The Federal Reserve was created in A)1929. B)1913. C)1909. D)1945.

B)1913.

49) If a bank has $150 million in assets and a net worth of $20 million, its asset-to-equity ratio is A)6.5 to 1. B)7.5 to 1. C)0.13 to 1. D)0.15 to 1.

B)7.5 to 1.

67) Use the following formula for the Taylor rule to determine the target federal funds rate. target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) where the current rate of inflation is 4percent, natural rate of interest is 2percent, target rate of inflation is 2percent, and output is 3percent above its potential, the target federal funds rate is A)7percent. B)8.5percent. C)5percent. D)4.5percent.

B)8.5percent.

107) How many members belong to the board of directors for each of the Reserve Banks of the Fed? A)7 B)9 C)12 D)14

B)9

142) Which one of the following is responsible for invoking the Fed's emergency powers? A)FOMC B)Board of Governors C)Fed Chairman D)a majority of the Federal Reserve Bank presidents

B)Board of Governors

14) Why is the price of a one-year Treasury bill per $100 of face value different from the price of a three-month Treasury bill per $100 of face value if the annual interest rate is the same for both? A)One is zero-coupon bond and the other is a traditional coupon bond. B)For bond price calculations, n and i must be expressed in the same units of time. C)There is no difference since the annual interest rate is the same for both Treasury bills. D)Bond prices and interest rates move in opposite directions for bonds that are shorter than one year in duration.

B)For bond price calculations, n and i must be expressed in the same units of time.

78) If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then m would equal A)R/ER. B)M/MB. C)C + D. D)D - C

B)M/MB.

105) Considering the Federal Reserve Districts, which one of the following is true? A)With the exception of New York, no district coincides with a single state. B)No district coincides with a single state. C)Some districts are made up of single states. D)The districts are divided with equal population.

B)No district coincides with a single state.

136) The federal funds rate is stated as A)a real interest rate .B)a nominal interest rate. C)a rate that is automatically indexed to inflation. D)the current rate less the expected rate of inflation.

B)a nominal interest rate.

37) The interest rate on primary credit extended by the Fed is A)below the IOER. B)above the IOER. C)equal to the IOER. D)consistently uncorrelated with the IOER.

B)above the IOER.

63) The Taylor rule is A)the formula for setting monetary policy that is followed explicitly by the FOMC. B)an approximation that seeks to explain how the FOMC sets their target. C))a rule adopted by Congress to make the Fed's monetary policy more accountable to the public.

B)an approximation that seeks to explain how the FOMC sets their target.

4) The effective lower bound for nominal interest rates is A)zero. B)an unknown level below zero. C)a rate consistent with two percent inflation. D)a rate consistent with the full employment output level of economic activity.

B)an unknown level below zero.

25) Financial instruments A)are created to transfer risks that are difficult to predict B)are created to transfer risks that are relatively easy to predict. C)require certainty of an event to be able to transfer risk. D)eliminate the risk from uncertainty, they do not transfer it.

B)are created to transfer risks that are relatively easy to predict.

38) Secondary credit provided by the Fed is designed for banks that A)qualify for a lower interest than what is available under primary credit. B)are in trouble and cannot obtain a loan from anyone else. C)want to borrow without putting up collateral. D)are foreign.

B)are in trouble and cannot obtain a loan from anyone else.

6) Loans made between borrowers and lenders are A)liabilities to the lenders and assets to the borrowers since the borrower obtains the funds. B)assets to the lenders and liabilities of the borrowers since the promises are made to the lenders. C)not part of either parties' assets or liabilities until the loans are repaid. D)liabilities to both the lenders and the borrowers.

B)assets to the lenders and liabilities of the borrowers since the promises are made to the lenders

16) Bonds issued by the U.S. Treasury would A)not be held by the Fed. B)be held by the Fed as part of its securities. C)be held by the Fed as part of its foreign exchange reserves. D)be held by the Fed as part of its loans.

B)be held by the Fed as part of its securities.

161) The objectives set for the Fed by Congress are A)very specific, which adds to the Fed's accountability. B)by design, quite vague, allowing the Fed to really set its own goals. C)specific regarding inflation, but vague on all other goals. D)specific on the growth rate for the economy, but vague on all other objectives.

B)by design, quite vague, allowing the Fed to really set its own goals.

62) In the United States, monetary policy is formed by A)an individual advised by a close group of people. B)committee. C)the president and approved by Congress. D)the Chairman of the Federal Reserve and can only be overturned by the presidents of the Regional Federal Reserve Banks.

B)committee.

28) Many financial instruments are standardized because A)it is believed that most parties to a contract do not read them anyway. B)complexity is costly, the more complex a contract, the more it costs to create. C)the standardization of contracts makes them harder to understand. D)it is required by the government.

B)complexity is costly, the more complex a contract, the more it costs to create.

55) To be independent, a central bank must have A)policies that can be overturned only by the president. B)control of its own budget. C)board members who are appointed for very short terms. D)the chairperson serve as a member of the president's cabinet.

B)control of its own budget.

5) Which one of the following is a liability on the central bank's balance sheet? A)loans B)currency C)securities D)foreign exchange reserves

B)currency

29) Which one of the following is a commercial bank liability? A)mortgage loans B)demand deposits C)reserves D)U.S. Treasury securities

B)demand deposits

25) If the Fed sees no need to engage in expansionary monetary policy, then A)the Fed will likely shrink its balance sheet rapidly. B)eventually, the Fed will shrink its balance sheet by letting securities it holds expire. C)it will be impossible for the Fed to shrink its balance sheet. D)the Fed is likely to increase the size of its balance sheet.

B)eventually, the Fed will shrink its balance sheet by letting securities it holds expire.

78) Quantitative easing is A)statements today about policy targets in the future. B)expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. C)asset purchases that shift the composition of the Fed's balance sheet. D)expansion of the demand for aggregate reserves to drive down the IOER.

B)expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target.

109) Each president of a Reserve Bank serves for a A)fourteen-year term. B)five-year term. C)seven-year term. D)two-year renewable term.

B)five-year term.

11) A central bank holds foreign exchange reserves for A)diversification purposes. B)foreign exchange interventions. C)safekeeping. D)diversification and safekeeping.

B)foreign exchange interventions

1) On the morning of September 11, 2001, terrorists attacked the United States and caused enormous disruptions. In assessing the performance of the Fed and the impact on financial systems in hindsight, this is a story of A)inaction by the Federal Reserve. B)great success by the Federal Reserve. C)appropriate actions taken too late by the Federal Reserve. D)catastrophic outcomes due to a lack of backup systems at the Federal Reserve.

B)great success by the Federal Reserve.

137) The FOMC controls the real interest rate A)if inflation changes quickly. B)if inflation doesn't change quickly. C)only if it adjusts the federal funds rate to match the changes in the rate of inflation. D)only on an annual basis.

B)if inflation doesn't change quickly.

64) In the United States, one problem with central bank independence is that A)it is almost impossible to obtain because Congress controls the budget of the Federal Reserve. B)in a representative democracy, monetary policymakers must be held accountable to the public. C)central bank independence has not produced favorable results. D)the central bank can control policy, but the U.S. Treasury controls the money supply.

B)in a representative democracy, monetary policymakers must be held accountable to the public.

75) If there were an increase in the number of bank failures, we should expect the amount of excess reserves in the banking system to A)decrease. B)increase. C)not change. D)decrease since failing banks lost theirs.

B)increase.

10) The process of financial intermediation A)creates a net cost to an economy. B)increases the economy's ability to produce. C)is always used when a borrower needs to obtain funds. D)is used primarily in underdeveloped countries.

B)increases the economy's ability to produce.

86) A bank that makes the most of its long-term loans at adjustable interest rates is A)reducing both interest-rate and credit risk. B)increasing credit risk and reducing interest-rate risk. C)reducing credit risk and increasing interest-rate risk. D)increasing both interest-rate and credit risk.

B)increasing credit risk and reducing interest-rate risk.

29) The correlation between high rates of inflation and economic growth is A)direct; one brings about the other. B)inverse; high inflation usually means low economic growth. C)nonexistent; there is no correlation between these measures. D)direct at low rates of economic growth and inverse at high rates.

B)inverse; high inflation usually means low economic

60) The high volume of shares of stock that are traded on a normal day on stock markets reflects the A)high transaction costs associated with these financial markets. B)low transaction costs and high liquidity associated with these markets. C)low transaction costs and low liquidity associated with these markets. D)high transactions costs and low liquidity associated with these markets.

B)low transaction costs and high liquidity associated with these markets.

27) More detailed financial instruments tend to be A)less costly because all possible contingencies are covered. B)more costly because they will cost more to create. C)more desirable than less detailed ones, no matter what the price. D)less costly because they can be standardized more easily.

B)more costly because they will cost more to create.

32) Higher than expected inflation will increase the A)real interest rate borrowers pay on fixed rate mortgages. B)nominal amounts people need to save for retirement. C)real interest rate savers earn on fixed rate CDs. D)real interest rates both paid on mortgages and earned on CDs.

B)nominal amounts people need to save for retirement.

66) A primary financial market is A)located only in New York, London, and Tokyo but can handle transactions anywhere in the world. B)one where the borrower obtains funds directly from the lender for newly issued securities. C)a market where U.S. Treasury bonds are traded. D)one that can only deal in the highest investment grade securities.

B)one where the borrower obtains funds directly from the lender for newly issued securities.

32) The Fed will make a discount loan to a bank during a crisis A)no matter what condition the bank is in. B)only if the bank is sound financially and can provide collateral for the loan. C)but if the bank doesn't have collateral the interest rate is higher. D)only if the bank would fail without the loan.

B)only if the bank is sound financially and can provide collateral for the loan.

75) The Federal Reserve's policy regarding announcing its policy decisions has A)always been to announce it immediately because this was part of the original Federal Reserve Act of 1913. B)only recently gone to immediate announcement; until 1994 these policy decisions were secret. C)been to release the decisions immediately since its early failure at preventing the Great Depression. D)changed so that now the Fed does not release its decisions publicly.

B)only recently gone to immediate announcement; until 1994 these policy decisions were secret.

40) Seasonal credit provided by the Fed is not as common as it used to be because A)there are fewer banks in these areas. B)other sources for long-term loans have developed for banks in these areas. C)it has been replaced by secondary credit. D)much of the credit was not repaid.

B)other sources for long-term loans have developed for banks in these areas.

34) In calculating the current yield for a bond, the A)coupon payment and purchase price is all that is needed. B)present value of the capital gain/loss is ignored. C)present value of the final payment is the only important consideration. D)present value of the coupon payments is the only important consideration.

B)present value of the capital gain/loss is ignored.

1) A zero-coupon bond refers to a bond that A)does not pay any coupon payments because the issuer is in default. B)promises a single future payment. C)pays coupons only once a year. D)pays coupons only if the bond price is above face value.

B)promises a single future payment.

21) A primary goal of central banks is to A)reduce the idiosyncratic risk that impacts specific investments. B)reduce systematic risk. C)keep stock and bond prices high. D)keep inflation rates high.

B)reduce systematic risk.

18) As a portion of total assets measured in billions of dollars, the largest asset on the Fed's balance sheet is A)gold. B)securities. C)foreign exchange reserves. D)loans.

B)securities.

11) Which one of the following would be categorized as an unconventional monetary policy tool? A)the interest rate on excess reserves (IOER) B)targeted asset purchases C)federal funds rate target range D)deposit rate

B)targeted asset purchases

96) The three branches of the Federal Reserve System include each of the following, except which one? A)the Board of Governors. B)the Federal Deposit Insurance Corporation. C) the Federal Open Market Committee. D)the twelve regional Federal Reserve Banks.

B)the Federal Deposit Insurance Corporation.

79) The money multiplier is much lower today than it was 25 years ago because A)people are holding less currency today. B)the currency-to-deposit ratio is much higher today. C)credit cards are more widely used. D)there is less currency available today.

B)the currency-to-deposit ratio is much higher today.

81) One thing the Fed has learned over the past 25 years is that A)the money multiplier is fairly constant no matter what changes are made to the monetary base. B)the money multiplier is unstable over time. C)it should focus its attention on targeting M2. D)the money multiplier has a trend rate of growth that is fairly constant.

B)the money multiplier is unstable over time.

49) The value of a financial instrument rises as A)the size of the payment promised decreases. B)the promised payment is made sooner rather than later. C)it is less likely the payment will be made. D)the payments are made when the prospective investor needs them least.

B)the promised payment is made sooner rather than later.

22) Consider the following graph. If the Fed increases the IOER from IOER Rate0 to IOER Rate1, they are implementing what type of policy? A)expansionary monetary policy to increase lending throughout the economy B)tighter monetary controls where there is an increase in the rate at which banks are willing to lend C)loosening of controls such that banks are less aggressively bidding for funds to deposit with the Fed D)no change in monetary policy since reserve supply is so high that the market federal funds rate will be unchanged

B)tighter monetary controls where there is an increase in the rate at which banks are willing to lend

43) The primary use of derivative contracts is A)for IRA and other pension plans since they only have value well into the future. B)to shift risk among investors. C)for investors seeking a greater return by taking greater risk. D)to add to the profits an investor obtains through information asymmetry.

B)to shift risk among investors.

41) At a growth rate of 6 percent an economy will double in size in A) 7 years. B) 14 years. C) 12 years. D) 6 years.

C) 12 years.

3) Tom obtains a car loan from Old Town Bank. The car loan is Tom's A) asset and the bank's liability. B) asset, but the liability belongs to the bank's depositors. C) liability and an asset for Old Town Bank. D) liability and a liability of the bank until Tom pays it off.

C) liability and an asset for Old Town Bank.

38) Disability income insurance is insurance that A) borrowers can take out in case the company they invest in defaults. B) makes payments of wages to workers when the company they work for is disabled due to a natural disaster. C) makes payments to workers when they are unable to work due to an injury. D) is only available through the government as part of the Social Security System.

C) makes payments to workers when they are unable to work due to an injury.

95) Member banks of the Federal Reserve System include A) only nationally chartered banks. B) all state chartered banks with assets exceeding $100 million. C) nationally chartered banks and state chartered banks that decide to join. D) nationally chartered banks and all state chartered banks.

C) nationally chartered banks and state chartered banks that decide to join.

40) Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The banking system's balance sheet will specifically show A) only an increase in liabilities of $2 billion. B) only a decrease in assets of $2 billion. C) no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion, respectively. D) no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing by $2 billion, respectively.

C) no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion, respectively.

64) The components of the formula for the Taylor rule include each of the following, except which one? A)target federal funds rate B)current inflation rate C)30-year U.S. Treasury bond rate D)inflation gap

C)30-year U.S. Treasury bond rate

31) How did the Federal Reserve change its discount lending practices in 2002? A)For most of its history the Federal Reserve has loaned reserves to banks at a rate equal to the target federal funds rate; after 2002, the rate would be below the target federal funds rate. B)The changes made in 2002 have made it more difficult for the Fed to meet its interest-rate stability objective. C)Before 2002, the Fed discouraged banks from borrowing at the discount window and actually created volatility in the market for reserves. D)Since 2002, the Fed controls the quantity of credit extended as well as its price.

C)Before 2002, the Fed discouraged banks from borrowing at the discount window and actually created volatility in the market for reserves.

7) Monetary policy in the United States is under the control of the A)U. S. Treasury. B)President. C)Federal Reserve. D)U.S. Senate.

C)Federal Reserve.

76) If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then C + R would equal A)M. B)R. C)MB. D)ER.

C)MB.

9) On the Federal Reserve's balance sheet, securities would include A)private and public debt. B)mainly U.S. Treasury and municipal bonds. C)U.S. Treasury securities. D)bonds issued by commercial banks.

C)U.S. Treasury securities.

3) A consol is A)another name for a zero-coupon bond. B)a bond with a maturity date exceeding 10 years. C)a bond that makes periodic interest payments forever. D)a form of a bond that is issued quite often by the U.S. Treasury.

C)a bond that makes periodic interest payments forever.

56) Financial instruments used primarily as stores of value do not include A)asset backed securities. B)U.S. Treasury bonds. C)a car insurance policy. D)a bank loan.

C)a car insurance policy.

149) A typical FOMC meeting would best be described as A)an informal meeting with significant give and take among participants. B)an informal meeting with the Chairman as a passive observer. C)a fairly formal session with not much give and take. D)a press conference, where the financial press can ask questions regarding the Fed's view of the economy.

C)a fairly formal session with not much give and take.

23) Vault cash is A)equal to the total amount of reserves and is an asset of the central bank. B)not reserves but is a liability of the central bank. C)a part of reserves and an asset of commercial banks. D)not reserves but is an asset of central banks.

C)a part of reserves and an asset of commercial banks.

15) A financial instrument would include A)only a written obligation and a transfer of value. B)only a written obligation and a specified date. C)a written obligation, a transfer of value, a future date, and certain conditions. D)a written obligation, a transfer of value, a specific date for payment, and undefined conditions.

C)a written obligation, a transfer of value, a future date, and certain conditions.

30) Most economists agree that the target rate of inflation for central banks should be A)between 7 and 9 percent. B)less than zero. C)above zero for fears of deflation. D)something over 3 but less than 6 percent.

C)above zero for fears of deflation.

35) A repurchase agreement is A)an asset that represents the value of all collateral repossessed by the bank and held for sale. B)a long-term collateralized loan. C)an agreement where the parties agree to reverse the transaction on a specific day. D)only made between two or more banks.

C)an agreement where the parties agree to reverse the transaction on a specific day.

16) Which one of the following is not a financial instrument? A)a share of Microsoft stock B)a U.S. Treasury bond C)an electric bill D)a life insurance policy

C)an electric bill

46) When the Fed makes a discount loan, the impact on the Fed's balance sheet will reflect A)no change in liabilities but an increase in assets. B)a decrease in assets and liabilities. C)an increase in assets and liabilities. D)an increase in assets and a decrease in liabilities.

C)an increase in assets and liabilities.

69) If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchase by the Fed will result in which change in loans? A)no change B)a decrease of $1 million C)an increase of $10 million D)an increase of $1 million

C)an increase of $10 million

3) The actions of central banks around the world A)are most extreme in developing economies. B)are politically controversial during financial crises. C)are vital to the day-to-day operation of any modern economy. D)affect citizens of modern economies only during times of financial crisis.

C)are vital to the day-to-day operation of any modern economy

79) Targeted asset purchases are A)statements today about policy targets in the future. B)expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target. C)asset purchases that shift the composition of the Fed's balance sheet. D)asset purchases that increase the reserves held by the federal government.

C)asset purchases that shift the composition of the Fed's balance sheet.

8) Loans made between borrowers and lenders are A)usually not taxable at the federal level. B)legal only in the state of origination. C)assets of the lenders. D)assets of the borrowers.

C)assets of the lenders.

28) On a bank's balance sheet, A)assets show the sources of funds and the net worth shows the uses of funds. B)net worth shows the sources of funds and liabilities show the uses of funds. C)assets show the uses of funds and liabilities show the sources of funds. D)net worth represents both a source and a use of funds.

C)assets show the uses of funds and liabilities show the sources of funds.

15) Bonds issued by a foreign government in its own currency would A)not be held by the Fed. B)be held by the Fed as part of its securities .C)be held by the Fed as part of its foreign exchange reserves. D)be held by the Fed as part of its loans.

C)be held by the Fed as part of its foreign exchange reserves.

81) Raising interest rates following the use of unconventional policy tools depends on A)the size and composition of the central bank's balance sheet. B)the toolbox available to the central bank. C)both the size and composition of the central bank's balance sheet and the toolbox available to the central bank. D)neither the size and composition of the central bank's balance sheet and the toolbox available to the central bank.

C)both the size and composition of the central bank's balance sheet and the toolbox available to the central bank.

90) Cyber risk describes losses that result from A)natural disasters. B)bank loans not being repaid. C)compromised information systems. D)fluctuating values in financial instruments.

C)compromised information systems.

17) One function of modern central banks is to A)control securities markets. B)control the government's budget. C)control the availability of money and credit. D)manage fiscal policy.

C)control the availability of money and credit.

72) When expected inflation decreases for any given nominal interest rate, all of the following occur except the A)real interest rate decreases. B)bond supply curve shifts to the left. C)cost of borrowing increases and the desire to borrow decreases D)price of bonds increases.

C)cost of borrowing increases and the desire to borrow decreases

39) A $1,000 face value bond, with an annual coupon of $40, one year to maturity, and a purchase price of $980 has a A)current yield that equals 4.00%. B)coupon rate that equals 4.08%. C)current yield that equals 4.08% and a yield to maturity that equals 6.12%. D)A current yield that equals 4.08% and a yield to maturity that equals 4.0%.

C)current yield that equals 4.08% and a yield to maturity that equals 6.12%.

139) The primary purpose of meetings of the FOMC is to A)set the required reserve rate. B)set the discount rate. C)decide on how to influence financial conditions. D)set the prime rate.

C)decide on how to influence financial conditions.

26) Which one of the following has contributed to the standardization of financial instruments? A)rule of 70. B)law of demand. C)economies of scale. D)law of supply.

C)economies of scale.

47) Which one of the following would give the most importance to the goal of exchange rate stability? A)large, closed economies B)the United States and Japan and other developed countries C)emerging market countries where exports and imports are central to the structure of the economy D)Europe

C)emerging market countries where exports and imports are central to the structure of the economy

60) The most a bank could lend at any time without altering its assets is an amount equal to its A)checkable deposits. B)reserves. C)excess reserves. D)net worth.

C)excess reserves.

2) The Federal Reserve failed to keep the financial system operational during the 1930s because it A)kept the discount window open. B)provided too much liquidity to banks. C)failed to recognize the link between changes in the Fed's balance sheet and the growth rate of money. D)failed to supply enough cash to the economy, and commercial bank accounts at the Fed plummeted.

C)failed to recognize the link between changes in the Fed's balance sheet and the growth rate of money.

31) The problem for a central bank setting a zero-inflation policy would be that A)there is risk of high employment. B)it is impossible to have zero inflation. C)firms would have to cut the nominal wage to reduce the real wage. D)economic growth would also have to be zero.

C)firms would have to cut the nominal wage to reduce the real wage.

20) The specific goals of central banks include each of the following except which one? A)high and stable real growth B)low and stable inflation C)high levels of exports D)low and stable unemployment

C)high levels of exports

31) The monetary base is also known as A)M1. B)M2. C)high-powered money. D)free reserves.

C)high-powered money.

72) The simple deposit expansion multiplier is really too simple for understanding the link between changes in a central bank's balance sheet and the quantity of money in the economy because it A)ignores how central banks could change their balance sheet. B)assumes banks hold excess reserves. C)ignores the fact people might change their currency holdings. D)assumes there are no changes in vault cash.

C)ignores the fact people might change their currency holdings.

37) If a borrower has information that is not available to a prospective lender, there is A)a trading algorithm. B)a transfer of risk. C)information asymmetry. D)liquidity risk.

C)information asymmetry.

25) The federal funds market is the A)market where banks borrow from the Federal Reserve System. B)lending to banks by the U.S. Treasury when banks face liquidity emergencies. C)inter-bank market where excess reserves from one bank can be loaned to another bank. D)market where American banks borrow from foreign lenders.

C)inter-bank market where excess reserves from one bank can be loaned to another bank.

26) Discount lending by the Fed A)is the key component of monetary policy. B)is more important today than in years past. C)is usually small except in times of crisis. D)amounts to five billion dollars in volume during an average week.

C)is usually small except in times of crisis.

32) The information concerning the issuer of a financial instrument A)needs to be complete and closely monitored by the buyers of the instrument for change. B)is somewhat non-standardized to minimize the cost of the instrument. C)is usually standardized to the essential information required by the buyers. D)is closely monitored by the buyers of these instruments for change.

C)is usually standardized to the essential information required by the buyers.

34) In terms of economic growth, the central bank would like to A)have the maximum growth rate possible. B)keep the growth rate averaging zero. C)keep the economy close to its potential or sustainable rate of growth. D)balance every recession with a boom.

C)keep the economy close to its potential or sustainable rate of growth.

18) If the market federal funds rate were above the target rate, the response from the Fed would likely be to A)purchase U.S. Treasury securities. B)sell U.S. Treasury securities. C)lower the IOER (interest rate on excess reserves). D)lower the discount rate.

C)lower the IOER (interest rate on excess reserves).

66) During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but which one of the following ways? A)lending to nonbanks B)accepting very illiquid collateral against its loans C)lowering bank reserve requirements D)lowering its policy rate to zero

C)lowering bank reserve requirements

44) Considering the value of a financial instrument, the bigger the size of the promised payment the A)less valuable the financial instrument because risk must be greater. B)longer an investor has to wait for the payment. C)more valuable the financial instrument. D)greater the risk.

C)more valuable the financial instrument.

49) During the 2007-2009 financial crisis, which one of the following temporarily became the largest component of assets on the Fed's balance sheet? A)foreign exchange reserves B)U.S. Treasury securities C)mortgage-backed securities D)loans

C)mortgage-backed securities

97) Considering state chartered banks, A)most elect to join the Federal Reserve System. B)those with assets exceeding $100 million must join the Federal Reserve System. C)most elect not to join the system. D)only those that join the system must abide by reserve requirements.

C)most elect not to join the system.

98) Prior to 1980, A)member banks of the Federal Reserve did not have to hold non-interest-bearing reserve deposits at the Fed. B)nonmember banks had to hold non-interest-bearing reserve deposits at the Fed. C)nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed. D)all banks, member or not, had to hold non-interest-bearing reserve deposits at the Fed.

C)nonmember banks did not have to hold non-interest-bearing reserve deposits at the Fed.

14) Banks do not hold a lot of their assets in the form of cash mainly because A)of regulation B)of the fear of being robbed. C)of the opportunity cost of holding cash since cash does not earn interest. D)it can encourage employee theft.

C)of the opportunity cost of holding cash since cash does not earn interest.

89) Ceteris paribus, when internal processes are inadequate or even fail, losses can occur that result from what type of risk? A)credit risk B)trading risk C)operational risk D)interest-rate risk

C)operational risk

55) Which type of financial instrument is used mainly to transfer risk? A)asset-backed securities B)bonds C)options D)stocks

C)options

68) To say monetary policy is transparent implies that A)anyone could figure out what the correct policy should be. B)monetary policy should not be so difficult that most people couldn't understand it. C)policy makers offer plausible explanations for their decisions along with supporting data. D)when faced with the same problem, policy makers will always react the same way.

C)policy makers offer plausible explanations for their decisions along with supporting data.

23) The primary objective of most central banks in industrialized economies is A)high securities prices. B)low unemployment. C)price stability. D)a strong domestic currency.

C)price stability.

34) Bond rating agencies rate bonds based on characteristics of the borrower. These agencies are an example of a financial market response designed to A)increase information asymmetry. B)decrease the real return to bondholders. C)provide a lower cost solution to the high cost of information. D)transfer risk from the buyer to the rating agency.

C)provide a lower cost solution to the high cost of information.

26) Monetary policy operations for central banks are run through changes in which liability category? A)government's accounts B)currency C)reserves D)gold

C)reserves

155) Most of the Fed's income is A)paid to member banks in the form of a dividend. B)sent to the FDIC to shore up the depositor insurance fund. C)returned to the U.S. Treasury. D)used to build the Fed's portfolio of securities.

C)returned to the U.S. Treasury.

8) The FOMC A)sets the federal funds rate. B)uses the discount rate is its primary policy tool. C)sets the target federal funds rate range. D)sets the dealer's spread as the difference between the target and actual federal funds rate.

C)sets the target federal funds rate range.

45) Central banks are in a position to control risk in the economy because they control A)the unemployment rate. B)the economy's real growth rate. C)short-term interest rates. D)tax rates.

C)short-term interest rates.

76) The credit risk a bank faces is the risk resulting specifically from A)the economy entering a recession. B)interest rates falling. C)some of the bank's loans not being repaid. D)the bank experiencing a decrease in deposits.

C)some of the bank's loans not being repaid.

150) The real power in the FOMC lies with A)the President of the New York Fed Bank. B)the System Open Market Manager. C)the Chairman of the Board of Governors. D)no single individual; all participants have an equal share of the power.

C)the Chairman of the Board of Governors.

13) Which one of the following is not a financial intermediary? A)a bank B)an insurance company C)the New York Stock Exchange D)a mutual fund

C)the New York Stock Exchange

11) A bank's reserves include A)U.S. Treasury bills. B)currency in the bank but not currency in the ATM machines. C)the bank's deposits at the Federal Reserve .D)U.S. Treasury bills and currency in the bank.

C)the bank's deposits at the Federal Reserve

94) The Federal Reserve System is composed of A)five branches with clear responsibilities. B)six branches with overlapping responsibilities. C)three branches with overlapping responsibilities. D)twelve branches with clear responsibilities.

C)three branches with overlapping responsibilities.

26) Loans made in the federal funds market are A)highly collateralized. B)made by the Federal Reserve System to the bank within 24 hours. C)unsecured loans. D)insured by the FDIC.

C)unsecured loans.

24) The daily reserve supply curve is A)upward-sloping. B)downward-sloping. C)vertical. D)horizontal.

C)vertical.

103) The Federal Reserve Bank of New York is unique from other Reserve banks because it is A)the only regional Bank that serves just one state. B)the only regional Bank located in a financial center. C)where the Federal Reserve System's portfolio is managed. D)the oldest and therefore the largest.

C)where the Federal Reserve System's portfolio is managed.

48) The fundamental characteristics influencing the value of a financial instrument include each of the following except A)the size of the payment promised. B)when the promised payment will be made. C)where the instrument is traded. D)the likelihood of payment.

C)where the instrument is traded.

76) Which one of the following would lead to an increase in bond supply? A) a decrease in government spending relative to revenue B) an increase in corporate taxes C) a decrease in expected inflation D) an improvement in general business conditions

D) an improvement in general business conditions

78) An increase in the nation's wealth, all other factors constant, would cause the A) bond supply curve to shift left. B) bond demand curve to shift left. C) bond supply curve to shift right. D) bond demand curve to shift right.

D) bond demand curve to shift right.

33) The main problem from inflation as seen by most economists is that A) inflation raises prices more than wages. B) inflation harms lenders more than it benefits borrowers. C) during periods of inflation some prices fall. D) inflation creates risk.

D) inflation creates risk.

39) The owner of a small business applies for a bank loan and tells the loan officer that the funds will be used to expand inventory for the upcoming holiday season. The small business finds itself in need of additional funds to meet the monthly rent for the next quarter, and the owner uses the loan proceeds to pay the rent. This is an example of A) liquidity risk. B) default risk. C) a lack of diversification for the bank. D) information asymmetry.

D) information asymmetry.

6) Considering the balance sheet for all commercial banks in the United States, the largest category of assets is A) cash items. B) U.S. Government Securities. C) required reserves. D) loans.

D) loans.

35) When a business purchases a $25,000 computer system by writing a check, the business's balance sheet will A) show an increase in assets and liabilities of $25,000. B) only show an increase in assets of $25,000. C) only show an increase in liabilities of $25,000. D) still show the same total amount of assets as before the purchase.

D) still show the same total amount of assets as before the purchase.

61) Bank A has checkable deposits of $100 million, vault cash equaling $1 million and deposits at the Fed equaling $14 million. If the required reserve rate is ten percent, what is the maximum amount Bank A could lend? A)$85 million B)$15 million C)$14 million D)$5 million

D)$5 million

66) Use the following formula for the Taylor rule to determine the target federal funds rate. target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) where the current rate of inflation is 5percent, the natural rate of interest is 2percent, the target rate of inflation is 2percent, and output is 3percent above its potential, the target federal funds rate is A)6.5percent. B)2.5percent. C)3.5percent. D)10percent.

D)10percent.

77) If M = quantity of money, m = money multiplier, MB = monetary base, C = currency, D = deposits, R = reserves, RR = required reserves, and ER = excess reserves, then RR would equal A)MB .B)D - C. C)M/MB. D)R - ER.

D)R - ER.

53) Financial instruments used primarily to transfer risk would include all of the following, except A)an insurance contract. B)a futures contract. C)options. D)a bank loan.

D)a bank loan.

138) Changes in the federal funds rate influence the economy's growth rate through all of the following except by A)making it more or less attractive to save. B)making it more or less expensive to borrow. C)making investment spending more or less attractive. D)altering the real interest rate when inflation is changing quickly.

D)altering the real interest rate when inflation is changing quickly.

50) Time consistency is critical for economic policy to be credible because A)people make decisions today with no regard for the future B)the ability to update decisions over time is necessary for policy to be effective. C)it is not possible to improve outcomes by limiting discretion in future time periods. D)an effective policy is a strategy for the future, so it must be costly for policymakers to renege.

D)an effective policy is a strategy for the future, so it must be costly for policymakers to renege.

34) Suppose the Federal Reserve purchases a U.S. Treasury bond for $1 million by writing a check. When the check returns, the Fed's balance sheet will show A)an increase in assets and a decrease in liabilities of $1 million. B)only an increase in assets of $1 million. C)only an increase in liabilities of $1million. D)an increase in assets and liabilities of $1 million.

D)an increase in assets and liabilities of $1 million.

39) Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Fed's balance sheet will show A)only an increase in the asset of securities of $2 billion. B)only show an increase in the liability of reserves of $2 billion. C)no change in the size of the balance sheet, just the composition of assets will change from cash to securities. D)an increase in the asset category of securities and the liability category of reserves by $2 billion.

D)an increase in the asset category of securities and the liability category of reserves by $2 billion.

21) Reserves are A)assets of the central bank and liabilities of the U.S. Treasury. B)assets of the central bank and liabilities of commercial banks. C)liabilities of commercial banks and assets of the U.S. Treasury. D)assets of commercial banks and liabilities of the central bank.

D)assets of commercial banks and liabilities of the central bank.

67) If the Fed were to increase the required reserve rate from 10 percent to 20 percent, the simple deposit expansion multiplier would A)double. B)increase by 10 percent. C)decrease by a factor of ten. D)be half as large as it was before the increase.

D)be half as large as it was before the increase.

57) The interest rate decisions made by the Federal Open Market Committee A)can be overridden by the president. B)can be overridden by the Secretary of the Treasury. C)can be overridden by the U.S. Senate by a two-thirds majority. D)cannot be overridden by anyone outside of the Federal Reserve.

D)cannot be overridden by anyone outside of the Federal Reserve.

162) One valuable lesson investors should learn from the stock market behavior during the late 1990s and early 2000s is that the Fed A)can control the stock market. B)can reduce the idiosyncratic risk of investing but not the systematic risk. C)can eliminate the risk from investing. D)cannot prevent a stock market decline.

D)cannot prevent a stock market decline.

76) The key to the success of forward guidance as a monetary policy tool is A)timing. B)a favorable exchange rate. C)transparency. D)credibility.

D)credibility.

101) Prior to the creation of the Federal Reserve System in the United States, how did financial panics typically begin? A)shortage of gold B)stock market crash C)bank run on an urban bank D)crop failure or a bumper crop that drove the market price down

D)crop failure or a bumper crop that drove the market price down

29) The monetary base is the sum of A)reserves and M2. B)M1 and reserves. C)currency in the hands of the public, reserves, and M1. D)currency in the hands of the public and reserves in the banking system.

D)currency in the hands of the public and reserves in the banking system.

68) Use the following formula for the Taylor rule target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) to determine what would happen if output in the economy were to fall by an additional one percent below potential. Then, the target federal funds rate would A)increase by 1.5percent. B)decrease by 1.5percent. C)remain at 2.5percent. D)decrease by 0.5percent.

D)decrease by 0.5percent.

51) Mary decides to withdraw $500 out of her checking account. The impact of this transaction on the banking system's balance sheet will be to A)only reduce checkable deposits by $500. B)increase reserves and reduce checkable deposits by $500, respectively. C)only reduce reserves by the required reserve rate times $500. D)decrease reserves and checkable deposits by $500, respectively.

D)decrease reserves and checkable deposits by $500, respectively.

3) The Fed can control A)the amount of reserves, but cannot control the monetary base. B)the composition of the monetary base, but cannot affect the market interest rate. C)the size of the monetary base but not the price of its components. D)either the size of the monetary base or the price of its components.

D)either the size of the monetary base or the price of its components.

18) The rationale for the existence of central banks is mainly that A)financial markets lack transparency. B)they are needed for the supervision of banks. C)financial intermediation cannot occur without a central bank. D)financial systems are prone to periods of extreme volatility.

D)financial systems are prone to periods of extreme volatility.

67) If a bank has $200 million in deposits, the required reserve rate is 10% and the bank has $23 million in reserves, then the bank A)is short of required reserves. B)has excess reserves of $21 million. C)has excess reserves of $13 million. D)has excess reserves of $3 million.

D)has excess reserves of $3 million.

62) Inflation targeting does all of the following, except which one? A)increase policymakers' credibility B)increase policymakers' accountability C)communicate policymakers' objectives clearly and openly D)hinder economic growth

D)hinder economic growth

59) If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will A)increase by less than $100,000. B)not change. C)decrease by less than $100,000. D)increase by $100,000.

D)increase by $100,000.

81) When interest rates fall, a bank's capital will usually A)not change. B)decrease. C)turn negative. D)increase.

D)increase.

53) There is a strong consensus among economists that monetary policy is more effective when it is formulated A)by an individual rather than a committee. B)in secrecy without the reasoning behind it being revealed for many years. C)in a manner that keeps financial markets guessing. D)independently of political pressure.

D)independently of political pressure.

140) The policy directive that is produced from the FOMC meeting A)details the exact amount of U.S. Treasury securities the System Open Market Account Manager is to purchase or sell. B)sets the specific discount rate for the next eight weeks. C)sets the specific range that the target interest rate can fall within. D)instructs the staff of the New York Fed on how to manage the Fed's balance sheet.

D)instructs the staff of the New York Fed on how to manage the Fed's balance sheet.

23) Yield to maturity A)is equal to the coupon rate if the bond is held to maturity. B)is the same as the coupon rate. C)will exceed the coupon rate if the bond is purchased for face value. D)is the same as the coupon rate if the bond is purchased for face value and held to maturity.

D)is the same as the coupon rate if the bond is purchased for face value and held to maturity.

5) One monopoly that modern central banks have is in A)regulating commercial banks. B)making loans to banks. C)issuing U.S. Treasury securities. D)issuing currency.

D)issuing currency.

65) Many people believed that when the calendar changed from December 31, 1999, to January 1, 2000, many bank records were going to be wiped out. If this had caused people to withdraw all of their funds, this would be an example of A)credit risk. B)operational risk. C)interest-rate risk. D)liquidity risk.

D)liquidity risk.

59) If financial markets did not exist A)required returns would be lower since fewer instruments would trade. B)liquidity would diminish and returns would be lower. C)more funds would flow directly between borrowers and savers. D)liquidity would diminish, reducing the flow of funds between borrowers and savers.

D)liquidity would diminish, reducing the flow of funds between borrowers and savers.

17) Liabilities of commercial banks show up on the Fed's balance sheet as part of its A)liabilities. B)securities. C)foreign exchange reserves. D)loans.

D)loans.

87) Trading risk faced by U.S. banks results from A)the free-rider problem. B)changes in regulations. C)adverse selection. D)moral hazard.

D)moral hazard.

42) An open market sale of U.S. Treasury securities by the Fed will cause the banking system's balance sheet to show A)only an increase in liabilities. B)only a decrease in assets. C)no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing. D)no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

D)no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing.

58) If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's total reserves will A)increase by $100,000. B)increase by less than $100,000. C)decrease. D)not change.

D)not change.

104) The lines drawn to establish Federal Reserve Districts were based A)solely on population distribution in 1914. B)solely on economic forces that existed in 1914. C)on economic and political forces that existed in 1914. D)on economic and political forces as well as population distribution in 1914.

D)on economic and political forces as well as population distribution in 1914.

65) A primary financial market is A)a market just for corporate stocks. B)a market only for AAA rated Securities. C)the New York Stock Exchange. D)one in which newly issued securities are sold.

D)one in which newly issued securities are sold.

15) For U.S. commercial banks, marketable securities held as assets include A)stocks and bonds. B)only the stocks of U.S. corporations. C)only the bonds of the U.S. Treasury. D)only bonds.

D)only bonds.

18) The price of a coupon bond can best be described as the A)present value of the face value. B)future value of the coupon payments. C)future value of the coupon payments and the face value. D)present value of the face value plus the present value of the coupon payments.

D)present value of the face value plus the present value of the coupon payments.

75) Unconventional monetary policy tools include all of the following, except which one? A)quantitative easing B)forward guidance C)targeted asset purchases D)reserve requirement

D)reserve requirement

16) The principal tool the Fed uses to keep the federal funds rate close to the target is A)the required reserve rate. B)discount lending. C)open market operations. D)the IOER (interest rate on excess reserves).

D)the IOER (interest rate on excess reserves).

106) The Reserve Banks of the Federal Reserve System are owned by A)the taxpayers in their districts. B)the U.S. Treasury. C)the Board of Governors. D)the commercial banks in their districts.

D)the commercial banks in their districts.

32) In dollar amounts, A)the monetary base is larger than M2, and M1 is less than M2. B)M1 is smaller than the monetary base, and M2 is larger than both. C)the monetary base is larger than M1 and M2. D)the monetary base is smaller than M1, and M2 is larger than M1.

D)the monetary base is smaller than M1, and M2 is larger than M1.

47) When the Fed makes a discount loan, the impact on the banking system's balance sheet is A)an increase in liabilities with no change in assets. B)an increase in assets and a decrease in liabilities. C)a decrease in assets and an increase in liabilities. D)the same as that of an open market purchase.

D)the same as that of an open market purchase.

102) The number of regional Federal Reserve Banks is A)nine. B)seven. C)five. D)twelve

D)twelve

80) A monetary policy framework is used to clarify all of the following except which one? A)the likely response when policy goals are in conflict with one another B)the goal that is currently receiving the most attention C)how goals will be measured D)why zero inflation is not desirable

D)why zero inflation is not desirable

8) Once you buy a coupon bond, which one of the following can change? A)coupon rate B)coupon payment C)face value D)yield to maturity

D)yield to maturity

4) A pure discount bond is also known as a A)consol. B)fixed payment loan. C)coupon bond. D)zero-coupon bond.

D)zero-coupon bond.