Econ Exam 4
The largest mutual fund, as of March 2019, held approximately _____ billion in assets under management.
$260
A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. How much are the commercial bank's checkable-deposit liabilities?
$300 million
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $200 million worth of government securities. If the securities are purchased from the public, then this action has the potential to increase bank lending by a maximum of
$600 million, but by $800 million if the securities are purchased directly from commercial banks.
Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of
$75000
Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be
10 percent
Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of
1000
If an investment is 70 percent likely to return 10 percent per year and 30 percent likely to return 15 percent a year, then its average expected rate of return is
11.5 percent
If the price index rises from 100 to 130, then the purchasing power of the dollar will fall by about
23 percent
The commercial banking system has excess reserves of $200,000. Then new loans of $800,000 are made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be
25 percent
Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults The M1 definition of money includes item(s)
3 and 6
If an investment is 80 percent likely to gain 40 percent but also 20 percent likely to lose 10 percent, then its average expected rate of return is
30 percent
George buys an antique car for $20,000 and sells it five years later for just over $24,000. George's per-year rate of return is
4 percent
George buys an antique car for $20,000 and sells it five years later for just over $24,000. George's per-year rate of return is
4 percent.
If the reserve requirement is 10 percent, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank?
450
Mark buys a bond for $8,000 and receives interest payments of $100 every three months. The interest rate on the bond is approximately
5 percent
Terri buys a house for $200,000 and expects to sell it in three years for $300,000. Her expected percentage rate of return over that three-year period is
50 percent
How many members can serve on the Board of Governors of the Federal Reserve System?
7
The Board of Governors of the Federal Reserve has ____ members.
7
Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons. His expected rate of return per year on the bond is
7 percent.
Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the
M1 money supply will not change.
Near monies are included in
M2 only
How do actively managed funds differ from passively managed funds?
Managers of actively managed funds use their discretion to buy and sell assets as they attempt to generate higher returns.
Which one of the following is true about the U.S. Federal Reserve System?
There are 12 regional Federal Reserve Banks.
Which of the following best describes what occurs when monetary authorities sell government securities?
There is a decrease in the size of commercial banks' excess reserves, the money supply decreases, and interest rates rise, thereby causing a decrease in investment spending and real GDP.
When economists say that money serves as a unit of account, they mean that it is
a monetary unit for measuring and comparing the relative values of goods.
When a bank's loans are written off, then the bank's
ability to make new loans is restricted
When a bank's loans are written off, then the bank's
ability to make new loans is restricted.
Approximately how many commercial banks are now operating in the United States?
about 4,600
(Last Word) Before being adjusted for costs,
actively managed funds and index funds perform about the same.
The primary reason commercial banks must keep required reserves on deposit at the Fed is to
allow the Fed to control the amount of bank lending.
Members of the Federal Reserve Board of Governors are
appointed by the president to staggered 14-year terms.
A commercial bank's reserves are
assets to the commercial bank and liabilities to the Federal Reserve Bank holding them
A commercial bank's reserves are
assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.
Which of the following factors can contribute to a reduction in the money supply? bank purchases of Treasury bonds from the Fed bank sales of government bonds to meet liquidity demands banks expanding the approval and granting of loans a decrease in the required reserve ratio
bank purchases of treasury bonds from the Fed
In essence, which of the following groups "creates" money?
banks' loan officers when they grant loans
During periods of rapid inflation, money may cease to work as a medium of exchange
because people and businesses will not want to accept it in transactions.
If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government
budget surplus, the sale of securities in the open market, a higher discount rate, and higher reserve requirements.
Which one of the following is an example of an economic investment? putting money in a bank CD buying a corporate bond or stock purchasing shares of a mutual fund building a new bank office
building a new bank office
If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy?
buy bonds in the open market
The M1 money supply is composed of
checkable deposits and currency in circulation
Rates of return on short-term U.S. government bonds are compensation for
delaying consumption only.
Compound interest
describes how quickly an interest-bearing asset increases in value.
The interest rate at which the Federal Reserve Banks lend to commercial banks is called the
discount rate
A commercial bank's checkable-deposit liabilities can be estimated by
dividing its required reserves by the reserve ratio
The interest rate that banks charge one another for the loan of excess reserves is the
federal funds rate
The interest rate that banks charge one another on overnight loans is called the
federal funds rate.
Suppose that some people invest $1,000 today in a financial asset that will make one future payment. The longer they must wait for the future payment, the
higher the future payment they will expect to receive.
Assume that the required reserve ratio is 20 percent. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the reserves at Bank A and Bank B?
increase by $50,000 at Bank A, and decrease by $50,000 at Bank B
When a bank accepts a checkable deposit from a customer, its deposits will increase and its excess reserves will
increase by less than the deposits.
If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will
increase the interest rate and reduce the price level, assuming it is flexible downward
If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will
increase the interest rate and reduce the price level, assuming it is flexible downward.
A commercial bank has no excess reserves until a depositor places $2,000 in cash in the bank. The reserve ratio is 10 percent. The bank then lends $1,500 to a borrower. As a consequence of these transactions, the bank's excess reserves are
increased by $300.
The Federal Reserve could reduce the money supply by
increasing the interest on excess reserves
The Federal Reserve System is an
independent agency of government
Which of the following statements is correct? Interest rates and bond prices vary directly. Interest rates and bond prices vary inversely. Interest rates and bond prices are unrelated. Interest rates and bond prices vary directly during inflation and inversely during recessions.
interest rates and bond prices vary inversely
The present value of a future amount of money will be greater the
less the amount of time before the future payment is received.
Arbitrage causes all financial assets
of the same risk level to have the same average expected rate of return.
The Fed can regularly influence and change the risk-free rate of financial investments through its
open-market operations.
The federal funds rate is the rate that banks pay for loans from
other banks
The discount rate is the interest
rate at which the Federal Reserve Banks lend to commercial banks.
The Financial Crisis of 2007-2008 started in which sector of the economy?
real estate and housing sector
One way to enhance the stability of the banking system is to
require higher bank capitalization or net worth
The reserve ratio refers to the ratio of a bank's
required reserves to its checkable-deposit liabilities.
The limited liability rule means that if a corporation goes bankrupt,
shareholders can only lose the amount they invested.
The last transaction in the federal funds market occurred in 2008 because
since the financial crisis, nearly every bank has significant excess reserves.
When the reserve requirement is increased,
the excess reserves of banks are reduced
Other factors constant, the future value will be smaller,
the shorter is the time period t.
Which of the following is not true about the Federal Reserve Banks? They serve as bankers' banks. They are privately owned but government controlled. Unlike other banks, they are not motivated by profits. They compete with commercial banks in their basic functions.
they compete with commercial banks in their basic functions
From September 2007 to April 2008, the Fed lowered the federal funds rate from 5.25 percent to 2 percent in a series of steps. The Fed's actions were largely in response to
threats to the financial system from the mortgage default crisis.
To say "money is what money does" means that
whatever performs the functions of money extremely well is considered to be money.
Suppose that the federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?
The value of the "wheat dollar" would be unstable depending on crop yields from year to year, Farmers would replace corn and soybean crops with wheat, Wheat would function as money so long as people accept it in exchange for goods and services
(Advanced analysis) Ricardo deposits $1,000 into his savings account. What rate of interest would he have to earn on his savings for his deposit to be worth $2,000 in eight years?
9.1 percent
Lottery winners who take the lump-sum payouts instead of payments spread out over many years
prefer immediate to delayed returns.
Which of the following are all assets to a commercial bank?
vault cash, property, and reserves
Mutual funds may contain
either stocks or bonds
The ZIRP (zero interest rate policy) of the Fed led to the so-called zero lower bound problem, which refers to the problem of
interest rates that can't go any lower, i.e., they cannot be driven down below zero.
The purchasing power of money and the price level vary
inversely
The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves
is larger, the smaller the required reserve ratio
Members of the Federal Reserve Board of Governors are
appointed by the president to staggered 14 year terms
If D equals the maximum amount of new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then
D=E x m
"Thrifts" refers to the following institutions
credit unions, commercial banks, savings and loan associations
A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will
decrease by 2 percent points
Which of the following Fed actions increases the excess reserves of commercial banks?
lowering the reserve ratio
The interest rate will fall when the
quantity of money supplied exceeds the quantity of money demanded.
Interest paid on excess reserves held at the Fed
will incentivize financial institutions to hold more reserves and reduce risky lending.
