ECON EXAM 4

The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 20 percent, the money-creating potential of the entire banking system is

$10,000.

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10 percent of all deposits on reserve at the regional Federal Reserve Bank. The deposit increases the loan capacity of the bank by

$10,800.

A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10 percent. The excess reserves of the bank are

$100,000.

As of March 2019, the supply of money (M1) in the United States was about

$3,760 billion.

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 12 percent. All figures are in billions of dollars. The maximum amount by which the commercial banking system can expand the supply of money by lending is

$350 billion.

Suppose a credit union has checkable deposits of $500,000 and the legal reserve ratio is 10 percent. If the institution has excess reserves of $4,000, then its actual reserves are

$54,000.

How much did the U.S. Congress allocate to the Troubled Asset Relief Program in 2008?

$700 billion

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

$75,000.

Refer to the accompanying consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. The commercial banking system has excess reserves of

$9 billion.

The accompanying table is the consolidated balance sheet for the commercial banking system. All figures are in billions. Assume that the required reserve ratio is 10 percent. The maximum amount by which this commercial banking system can expand the supply of money by lending is

$900,000 billion.

Refer to the accompanying table of information for the Moolah Bank, and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by

$900.

Answer the question based on the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions.The monetary multiplier for the commercial banking system is

10

The Federal Reserve System is divided into

12 districts

If the price index rises from 100 to 130, then the purchasing power of the dollar will fall by about

23 percent

Refer to the graph. If the initial equilibrium interest rate was 5 percent and the money supply increased by $100 billion, then the new interest rate would be

3 percent.

Refer to the accompanying list. The M1 money supply is composed of items

4 and 6.

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.

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years. If he deposits $500 today, what annually compounded rate of interest would he have to earn to reach his goal?

4.8 percent

(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

Which of the following transactions has the immediate effect of increasing the money supply M1?

A commercial bank buys government securities from the general public.

Refer to the graph. Each labeled point represents a different asset. For which of these assets would we expect arbitrage to cause movement to a different point?

D and F

In the U.S. economy, the money supply is controlled by the

Federal Reserve System.

(Last Word) The Assistant U.S. Attorney General in charge of prosecuting financial crimes did which of the following in response to HSBC bank's years of money laundering and helping firms and individuals cheat on their taxes?

Imposed only modest fines on HSBC so as not to destabilize the bank and the financial system.

Which of the following statements is correct?

Interest rates and bond prices vary inversely.

Which of the following statements is true about buying an old factory?

It is a financial investment but not an economic investment.

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.

Refer to the given market-for-money diagrams. If the Federal Reserve increased the stock of money, the

S curve would shift rightward and the equilibrium interest rate would fall.

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 statements best describes the 12 Federal Reserve Banks?

They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.

Two investments, X and Y, have beta values of 0.1 and 3.0 respectively. Based on this, we can claim that, relative to the market portfolio,

X has less nondiversifiable risk and Y has more nondiversifiable risk than the market portfolio.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by

a downsloping line or curve from left to right.

If you are estimating your total expenses for school next semester, you are using money primarily as

a unit of account.

When economists say that money serves as a store of value, they mean that it is

a way to keep wealth in a readily spendable form for future use.

Members of the Federal Reserve Board of Governors are

appointed by the president to staggered 14-year terms.

Near monies

are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.

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.

Which one of the following is an example of an economic investment?

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 Federal Reserve System of the United States is the country's

central bank

Holding the money deposits of businesses and households and making loans to the public are the basic functions of

commercial banks and thrift institutions.

"Thrifts" refers to the following institutions except

commercial banks.

What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

compound interest

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

decrease the excess reserves of member banks and thus decrease the money supply.

Refer to the graph. If the interest rate rises from 2 percent to 3 percent, the supply of money must have

decreased by $50 billion.

The interest rate at which the Federal Reserve Banks lend to commercial banks is called the

discount rate.

A stock investor may expect returns in the form of

dividends and capital gains

Given a 25 percent reserve ratio, assume the commercial banking system is loaned up. Now assume the reserve ratio is reduced to 20 percent. As a result of this reduction,

each dollar of bank reserves will now support a maximum of $5 of checkable deposits.

The interest rate that banks charge one another on overnight loans is called the

federal funds rate.

The basic requirement for an item to function as money is that it be

generally accepted as a medium of exchange.

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share. Every year he has received, from company profits, $1 for each share he owns. Indy should necessarily sell his stock if

he expects the sum of future capital gains and dividends to be negative.

When a bank grants a loan to a customer who gets the funds and keeps them at home for a while, the money supply will

increase

Other things equal, an increase in productivity will

increase both aggregate supply and real output.

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should

increase the interest rate from 4 percent to 6 percent.

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at equilibrium at the intersection of the aggregate supply curve and aggregate demand curve AD3. What policy should the Fed pursue to achieve a noninflationary, full-employment level of real GDP?

increase the money supply from $75 to $150 billion

An increase in the money supply is likely to reduce

interest rates

Time value of money refers to the idea that a specific amount of money

is more valuable the sooner it is received.

Refer to the accompanying table of information for the Moolah Bank. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's

liabilities are $1,000.

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point C on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output Qf in the economy, the Fed should

make no change in the interest rate.

The Federal Reserve alters the amount of the nation's money supply by

manipulating the size of excess reserves held by commercial banks.

Purchasing groceries using a debit card best exemplifies money serving as a

medium of exchange.

Which of the following is an economic investment?

newly built houses

Refer to the diagram of the market for money. Other things equal, the money demand curve in the diagram would shift leftward if

nominal GDP decreased.

The Financial Crisis of 2007-2008 started in which sector of the economy?

real estate and housing sector

Requiring banks to use less leveraging is equivalent to

requiring a higher level of bank net worth.

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that

reserves lost by any particular bank will be gained by some other bank.

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.

If you place a part of your summer earnings in a savings account, you are using money primarily as a

store of value.

As expansionary monetary policy tools, quantitative easing (QE) and traditional open-market purchases differ in all of the following, except

the desired goal of shifting aggregate demand.

Research suggests that

the less independent the central bank, the higher the average annual rate of inflation.

Assume that the Federal Reserve Banks sell $40 million in government securities to commercial banks and the reserve ratio is 20 percent, then the effect will be to reduce

the money supply by potentially $200 million.

The average expected rate of return of a financial asset equals

the rate that compensates for time preference plus the rate that compensates for risk.

The multiple by which the commercial banking system can expand the supply of money is equal to

the reciprocal of the reserve ratio.

Other things equal, if the required reserve ratio was lowered,

the size of the monetary multiplier would increase.

When banks borrow and lend reserves in the federal funds market,

the total reserves of the banking system stay the same.

As a result of policy actions taken by the Fed since 2008, it (the Fed) can no longer expect to affect the federal funds rate through traditional open market operations to alter the overall amount of excess reserves in the banking system. This is because

there is a massive amount of excess reserves already in the banking system.

In defining money as M1, economists exclude time deposits because

they are not directly or immediately a medium of exchange

When the interest rate falls, the

total amount of money demanded increases.

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share. Every year he has received, from company profits, $1 for each share he owns. If Indy sells all his shares at a price of $30 per share, he will receive a

total capital gain of $1,000.

Stock market price quotations best exemplify money serving as a

unit of account.

Which of the following statements best reflects the concept of present value?

"You owe me $500, due at the end of the year, but I will reduce your debt to $450 if you pay me now."

Refer to the given table. The value of the dollar in year 2 is

$0.80.

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

$1,000.

What is the present value of $5,000 to be received 10 years from now if the interest rate is 10 percent?

$1,927.72

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

arbitrage.

The intercept of the Security Market Line at any point in time is determined primarily by

Federal Reserve monetary policy.

The average expected rate of return is a

probability-weighted average.

In economics, the expression "You can lead a horse to water, but you can't make it drink" illustrates the

cyclical asymmetry of monetary policy.

One major advantage of money serving as a medium of exchange is that it allows society to

escape the complications of barter.

One fundamental concept in financial economics is that an investment's rate of return is

inversely related to the price paid for it.

Which of the following is included as part of the M1 money supply?

$200,000 balance in the checking account of Main Street Trading Corp.

The Federal Reserve System consists of which of the following?

Board of Governors and the 12 Federal Reserve Banks

The functions of money are to serve as a

Unit of account, store of value, and medium of exchange

The Security Market Line (SML) is upward-sloping, indicating that the

average expected return on investments decreases as their risk level decreases.

The figures in the table are for a single commercial bank, Bank A. All figures are in thousands of dollars. If the reserve ratio is 10 percent and a check for $10,000 is drawn and cleared in favor of Bank B, then the actual reserves of Bank A will

decrease $10,000.

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 excess reserves at Bank A and Bank B?

increase by $10,000 at Bank A, and decrease by $10,000 at Bank B

Bonds represent

loans to governments and corporations

What "backs" the money supply of the United States?

the U.S. government's ability to keep the value of money relatively stable

The Federal Open Market Committee (FOMC) is made up of

the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis.