Chapter 5 MC

A high level of inflation: a. is relatively unimportant to individuals b. is considered to be acceptable in the nation's quest for high levels of employment c. discourages investment by increasing the uncertainty about future returns d. is almost always due to financing wars

C. discourages investment by increasing the uncertainty about future returns

U.S. debt management, which is an important function of the Treasury, is generally designed to: a. increase interest rates b. stimulate economic activity c. encourage orderly economic growth and stability d. both b and c

C. encourage orderly economic growth and stability

Almost all Treasury disbursements are made by: a. checks drawn directly on the U.S. Treasury b. check drawn against deposits at commercial banks in large cities c. drafts drawn on member banks d. checks drawn against deposits at Federal Reserve Banks

D. Checks drawn against deposits at the Federal Reserve Banks

Budgetary deficits always have the effect of: a. creating inflationary pressures b. crowding out private lenders c. forcing the Federal Reserve to buy government securities d. creating governmental competition for private investment funds

D. creating governmental competition for private investment funds

The budget-making process is carried out by: a. Congress b. U.S. Treasury c. the President d. U.S. Treasury in cooperation with the Fed e. both a and c

E. both b & c

When the United States Treasury makes a payment to an individual or business, it usually takes the form of a: a. check drawn on the Central Bank of China b. check drawn directly against the U.S. Treasury c. special Treasury voucher d. check drawn against a bank in which tax balances are held e. none of the above

E. none of the above

During the 2007 - 2009 financial crisis, ___________ and __________, who were major participants in the secondary mortgage markets, were on the verge of financial insolvency and possible collapse in mid-2008. a. Fannie Mae and Freddie Mac b. the Federal Treasury and the Federal Reserve c. Morgan Stanley and Smith Barney d. Washington Mutual and Lehman Brothers e. none of the above

a. Fannie Mae and Freddie Mac

A country's economic policy actions are directed toward all of the following goals EXCEPT: a. balance in the federal budget b. high employment c. price stability d. all of the above are policy goals

a. balance in the federal budget

Total bank reserves do not include which of the following? a. deficit reserves b. excess reserves c . required reserves d. all the above are included in total bank reserves

a. deficit reserves

Under required reserves of 20%, the maximum to which the money supply could be expanded by the banking system is: (Pick the closest answer.) a four times a new primary deposit b. five times a new primary deposit c . six times a new primary deposit d. until all of a new primary deposit has been converted to required reserves

a. four times a new primary deposit

One factor that decreases the volume of bank reserves is a(n): a . increase in the public's demand for currency to be held outside the banking system b. decrease in the reserve requirement ratio c. increase in life insurance company reserves d. increase in Federal Reserve Float e. none of the above

a. increase in the public's demand for currency to be held outside the banking system

The money supply (M1) is equal to the monetary base a. multiplied by the money multiplier. b. added to the money multiplier. c. subtracted from the money multiplier. d. none of the above

a. multiplied by the money mulitiplier

Which one of the following transactions or operations is entirely at the initiative of the Federal Reserve? a. open market operations b. change in float c. change in bank borrowings d. change in Treasury cash holdings

a. open market operations

Deposits that add new reserves to the bank where they are deposited and to the banking system are called: A. primary deposits b. derivative deposits c. secondary deposits d. Special Drawing Rights

a. primary deposits

The federal government pays for the services it provides primarily through: a taxation b. creating money c. borrowing d. selling assets owned by the government

a. taxation

If a check is written for the full amount of a derivative deposit created by a bank loan and then is sent to a bank in another city for deposit: a. the lending bank would lose all of its excess reserves b. the lending bank would still have reserves to lend c. the full amount would be added to the receiving bank's excess reserves d. both a and c

a. the lending bank would lose all of its excess reserves

In a simple financial system, if the reserve requirement is 25% and $5,000 is injected into the banking system, the maximum expansion in the money supply would be: (Pick the closest answer.) a. $1,250 b. $20,000 c. $6,667 d. none of the above

b. 20000

If a customer makes new deposits of $10,000 to a bank and the reserve requirement is 15%, then excess reserves will be: (Pick the closest answer.) a. $1,500 b. $8,500 c. $10,000 d. none of the above

b. 8500

Which of the following statements is most correct? a. Bank reserves are not affected by transactions involving the Treasury. b. Derivative deposits occur when reserves created from primary deposits are made available through bank loans to borrowers who leave them on deposit in order to write checks against the funds. c. Total bank reserves in the banking system consist of member bank deposits held in Federal Reserve Banks, plus non-member banks vault cash. d. Federal Reserve notes have been increasingly backed by gold certificates and eligible paper in recent years

b. Derivative deposits occur when reserves created from primary deposits are made available through bank loans to borrowers who leave them on deposit in order to write checks against loanable funds

The U.S. banking system has the ability to alter the size of the money supply because of the use of: a. a 100% reserve system b. a fractional reserve system c. the Federal Reserve System's excess reserves d. Federal Reserve notes issued by the U.S. Treasury

b. a fractional reserve system

Federal Reserve open market operations, setting reserve requirement, and lending to depository institutions are: a. usually conducted simultaneously b. all designed to have their effect by influencing the reserves of depository institutions c. of equal importance in their effort d. functions shared with the U.S. Treasury

b. all designed to have their effect by influencing the reserves of depository institutions

Continuing federal programs that stabilize economic activity are called a. transfer payments b. automatic stabilizers c. social insurance programs d. none of the above

b. automatic stabilizers

In our financial system, the money multiplier: a. is not affected by the Federal Reserve b. can fluctuate over time c. is not affected by the nonbank public d. is not affected by the U.S. Treasury

b. can fluctuate over time

Bank reserves are increased when the Treasury: a. sells Treasury bonds to individuals b. decreases its holding of cash c. increases its account at a Federal Reserve bank d. none of the above

b. decreases its holding of cash

A customer of a bank needs additional currency and cashes a check for $10,000. The reserve requirement is 20%. The bank has no excess reserves. It must: (Pick the closest answer.) a. refuse the check b. get an additional $8,000 of reserves c. get an additional $2,000 of reserves d. none of the above

b. get an additional 8000 of reserves

Government financing of large budgetary deficits: a. absorbs savings which decreases interest rates b. may crowd out private borrowers c. is known as monetizing the deficit d. increases savings which increases interest rates

b. may crowd out private borrowers

Banking system reserves plus currency held by the public is referred to as the: a. M1 money supply b. monetary base c. monetary multiplier d. monetary requirement

b. monetary base

Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $20,000. What would be the maximum amount of new loans that could be made by the system based on this primary deposit? a. $16,000 b. $40,000 c. $80,000 d. $100,000

c. 80,000

When a customer demands additional currency by cashing a check for $500, all of the following occur except: a. the deposits of the bank are reduced $500 b. required reserves are reduced c. Federal Reserves notes decrease d. additional reserves must be acquired if the bank has no excess reserves

c. Federal Reserves notes decrease

As the decade of the 2000s came to a close, the unemployment rate remained at the 10 percent level and continued at high level resulting in the Fed engaging in . a. Quality Enhancement b. Quantity Enforcement c. Quantitative Easing d. Qualification Education e. none of the above

c. Quantitative Easing

Bank reserves are not affected by: a. the purchase of government bonds by the Fed b. changes in reserve requirements c. the sale of government bonds by the Fed d. changes in the level of deposits of foreign banks at the Federal Reserve banks e. all of the above affect bank reserves

e. all of the above affect bank reserves

A primary focus of the Economic Stabilization Act of 2008, which became known as the ___________________________, was to allow the U.S. Treasury purchase up to $700 billion of troubled or toxic assets held by financial institutions. a. Troubled Asset Relief Program (TARP) b. Toxic Asset Recovery Program (TARP) c. Troubled Area Relief Program (TARP) d. Toxic Area Recovery Program (TARP) e. none of the above

A. Troubled Asset Relief Program (TARP)

When the United States Treasury makes a payment to an individual or business, it usually takes the form of a: a. check drawn on a Federal Reserve Bank b. check drawn directly against the U.S. Treasury c. special Treasury voucher d. check drawn against a bank in which tax balances are held

A. check drawn on a Federal Reserve Bank

Examples of automatic stabilizers are: a. open market operations b. changes in the discount rate c. unemployment insurance d. issuance of currency

C. Unemployment Insurance

Automatic stabilizers include all of the following except: a. unemployment insurance b. social security c. welfare d. pay-as-you-go tax system

B. Social Security

The US Treasury is responsible for: A. Monetary policy B. debt management C. fiscal policy D. the money supply

B. debt management

In fall 2008, the U.S. Congress and President George W. Bush responded to the financial crisis with the passage of the _____________ in early October of that year. a. Economic Stimulus Act b. Economic Recovery Act c. Economic Stabilization Act d. Economic Booster Act e. none of the above

C. Economic Stabilization Act

Various programs of the federal government help stabilize disposable income, and in turn, economic activity in general. In so doing: a. income tax rates may be lowered during periods of prosperity and increased during slack economic periods b. some programs act on a continuing basis and are described as automatic stabilizers c . the timing of sale of U.S. savings bonds is instrumental in accomplishing this objective d. these programs seldom attain their goals

b. some programs act on a continuing basis and are described as automatic stabilizers

Which of the following statements is false? a. Required reserves are the minimum amount of total reserves that a depository institution must hold. b. The ability to alter the money supply and credit is based on the fact that our banking system does not utilize a fractional reserve system. c. The ability to predict M1 velocity, in addition to money supply changes, is important in achieving successful monetary policy making. d. A derivative deposit occurs when reserves created by a primary deposit are made available to borrowers through bank loans.

b. the ability to alter the money supply and credit is based on the fact that our banking system does not utilize a fractional reserve system

Assume that a bank must keep reserves of 20% against deposits. The bank receives a primary deposit of $50,000. Calculate the bank's excess reserves for this primary deposit. (Pick the closest answer.) a. $10,000 b. $20,000 c. $40,000 d. $50,000 e. $5,000

c. 40,000

Assume that a bank receives a primary deposit of $1,000. If the reserve requirement is 25%, what will be the amount of excess reserves available from this primary deposit for lending purposes? (Pick the closest answer.) a. zero b. $250 c. $750 d. $1,000 e. $500

c. 750

During the 2007 - 2009 financial crisis, some of the very largest financial institutions were deemed as being "too big to fail" because their failure would cause cascading negative repercussions throughout the U.S. and many foreign economies. As a result, the Federal Reserve a. moved to increase liquidity in the monetary system and reduced its target federal funds rate to below .25 percent. b. worked with the U.S. Treasury to help facilitate the merging of financially weak institutions with institutions that were financially stronger. c. both a and b are true d. none of the above are true

c. both a and b are true

The monetary base: a. equals the money supply b. consists of checkable and noncheckable deposits c. consists of bank reserves, plus currency held by the public d. equals the money multiplier, plus bank reserves

c. consists of bank reserves plus currency held by the public

Open market operations differ from discounting operations in that they are: a. initiated by member depository institutions b. designed to be of significance only to large city banks c. initiated by the Federal Reserve d. initiated by the U.S. Treasury

c. initiated by the Federal Reserves

The percentage of deposits that must be held as reserves is called a. excess reserves b. required reserves c. required reserve ratio d. none of the above

c. required reserve ratio

Which of the following statements is most correct? a. A monetary base of $5 million and a money multiplier of 5 means that the money supply will be $1 million. b. The magnitude of the money multiplier was in the 8 to 9 range at the end of 2012. c. The money multiplier is influenced by the public's switching between checkable and noncheckable deposits at their banks. d. The monetary base multiplied by the money multiplier calculates the amount of required reserves for the banking system as a whole.

c. the money multiplier is influenced by the public's switching between checkable and noncheckable deposits at their banks

Debt management includes all of the following except: a. the types of securities to sell b. the interest rate patterns to use c. the required reserves ratio d. all of the above are included in debt management

c. the required reserves ratio--by the FED

In an effort to stimulate economic activity, Congress and the president passed the $787 billion _________________________________ in February, 2009 with the funds to be used to provide tax relief, appropriations, and direct spending. a. American Reconstruction and Reconfiguration Act of 2009 b. American Real Estate and Reconstruction Act of 2009 c. American Real Estate Reinvestment Act of 2009 d. American Recovery and Reinvestment Act of 2009 e. none of the above

d. American Recovery and Reinvestment Act of 2009

One factor that decreases the volume of bank reserves is a decrease in: a. the public's demand for currency to be held outside the banking system b. the reserve requirement ratio c. life insurance company reserves d. Federal Reserve float

d. Federal Reserve float

Debt management of the federal government includes: a. determining which types of refunding to implement b. determining the types of securities to sell c. deciding which interest rate patterns to use d. all the above

d. all of the above

Transactions that affect bank reserves can be initiated by the: a. nonbank public b. Federal Reserve System c. U. S. Treasury d. all the above

d. all of the above

A country's economic policy actions are directed toward all of the following goals EXCEPT: a. economic growth b. high employment c. price stability d. all of the above are policy goals

d. all of the above are policy goals

Groups of policy makers that are actively involved in achieving U.S. economic policy objectives include all of the following EXCEPT: a. the Federal Reserve System b. the President c. Congress d. all of the above are policy makers

d. all of the above are policy makers

Which of the following statements is false? a. The multiplying capacity of primary deposits is hindered by cash leakages from the banking system. b. The monetary base is defined as bank reserves plus currency held by the public. c. In contrast to the other transactions that affect reserves in the banking system, open market operations are entirely at the initiative of the Federal Reserve. d. All the above statements are correct.

d. all of the above is correct

Changes in the growth rates for money supply and money velocity affect the growth rate in: a. real economic activity b. the rate of inflation c. the turnover of goods and services d. both a and b

d. both a and b

Total reserves in the banking system consist of: a. vault cash held at commercial banks and other depository institutions b. reserve deposits held at Federal Reserve banks c. currency in circulation d. both a and b

d. both a and b

Assume that a bank receives a primary deposit of $1,000, and the reserve requirement is 15%. Which of the following would reflect the asset side of the balance sheet after a maximum loan amount has just been made (i.e. before the check on the new loan is deposited in another bank)? a. reserves of $1,000 b. deposits of $1,000 c. reserves of $1,000 and loans of $150 d. reserves of $1,000 and loans of $850

d. resereves of 1000 and loans of 850

During the 2007 - 2009 financial crisis, many major financial institutions and business corporations were on the verge of collapse or failure; however, some of the very largest corporations and financial institutions were deemed as being ________ because their failure would cause cascading negative repercussions throughout the U.S. and many foreign economies. a. toxic firms b. boat rockers. c. too large to ignore d. too big to fail e. none of the above

d. too big to fail

The "perfect financial storm" that developed in 2008, which put the U.S. economy was on the verge of collapse was characterized by all of the following EXCEPT: a. The housing price "bubble" burst in 2006 and began a sharp decline. b. Stock market prices peaked in 2007 and began a sharp decline. c. Many of the mortgage-related debt securities originated and sold to others, or held, by banks became difficult to value during the perfect financial storm and quickly became known as "troubled" or "tonic" assets. d. Individuals and businesses were defaulting on loans and home mortgages in increasing numbers due to the weakening economy and falling home prices. e. All of the above were factors

e. all of the above were factors

Debt management of the federal government includes: a. determining which types of refunding to implement b. determining the types of securities to sell c. deciding which interest rate patterns to use d. two of the above e. answers a, b and c are correct

e. answers a, b, and c

The government entity responsible for fiscal policy is: a. the U.S. Treasury b. the Federal Reserve c. the Congress d. the President e. both c and d

e. both c and d

A high level of inflation: a. is relatively unimportant to individuals b. is considered to be acceptable in the nation's quest for high levels of employment c. encourages investment by reducing the uncertainty about future returns d. is almost always due to financing wars e. none of the above

e. none of the above

Bank reserves are increased when the Treasury: a. sells Treasury bonds to individuals b. needs to increase its payment of funds from its accounts at the Reserve Banks c. increases its account at a Federal Reserve bank d. increases its holding of cash e. none of the above

e. none of the above

Continuing federal programs that stabilize economic activity are called a. transfer payments b. leveling programs c. social insurance programs d. socialist spending e. none of the above

e. none of the above

Currently, the backing for Federal Reserve notes is primarily in the form of: a. gold certificates b. gold bullion c. eligible paper (business notes and drafts) d. none of the above

e. none of the above

Federal Reserve open market operations, setting reserve requirement, and lending to depository institutions are: a. usually conducted simultaneously b. designed to improve the federal deficit c. of equal importance in their effort d. functions shared with the U.S. Treasury e . none of the above

e. none of the above

Open market operations differ from discounting operations in that they are: a. initiated by member depository institutions b. designed to be of significance only to large city banks c. initiated by the President d. initiated by Congress e. none of the above

e. none of the above

The federal government pays for the services it provides primarily through: a. service fees b. creating money c. borrowing d. selling assets owned by the government e. none of the above

e. none of the above

Under required reserves of 20%, the maximum to which the money supply could be expanded by the banking system is: (Pick the closest answer.) a. ten times a new primary deposit b. fifteen times a new primary deposit c. twenty times a new primary deposit d. fifty times a new primary deposit e. none of the above

e. none of the above

Various programs of the federal government help stabilize disposable income, and in turn, economic activity in general. In so doing: a. income tax rates may be lowered during periods of prosperity and increased during slack economic periods b. these programs waste valuable resources c. the timing of sale of U.S. savings bonds is instrumental in accomplishing this objective d. these programs seldom attain their goals e. none of the above

e. none of the above