FIN Quiz 1-3

A financially healthy bank borrowing overnight from the Federal Reserve is known as a. seasonal credit. b. primary c. secondary

b

An inverted yield curve likely means the a. economy is expanding rapidly. b. economy is headed for recession. c. Federal Reserve is conducting expansionary policy. d. economy is experiencing increasing inflationary pressure.

b

The two major goals of Canadian monetary policy are __________ and __________. a. inflation control; economic growth b. flexible exchange rates; inflation control c. flexible exchange rates; economic growth d. economic growth; low unemployment

b

What is the term for using all available information to form expectations about the future to make decisions in the present? a. Informed expectations b. Rational expectations c. Ex ante planning d. Adaptive planning

b

Which of these would cause a decrease in aggregate demand? a. An increase in imports b. An increase in net exports c. A decrease in imports d. An increase in exports

a

John Maynard Keynes argued that people demand money for three reasons. What are these three reasons? a. Precautionary motive, speculative motive, and wealth motive b. Transactions motive, precautionary motive, and familial motive c. Transactions motive, precautionary motive, and speculative motive d. Quantity motive, speculative motive, and philanthropic motive

c

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________. a. downward sloping; vertical b. upward sloping; horizontal c. horizontal; vertical d. upward sloping; vertical

c

The coupon rate of a bond refers to the a. discount offered to the bond purchaser. b. original amount of money borrowed by the bond issuer. c. interest rate to be paid to the holder of the bond. d. number of years until repayment of the bond principal.

c

If the market interest rate exceeds the coupon rate on a bond, the selling price of the bond will be greater than the bond's face value. t/f

false

A 4%, $10,000, 30-year bond will produce for the owner a series of 30 annual payments of $400 from the issuer of the bond and a one-time payment of $9,600.

false - 10000

Jenny has had a portion of stock in an e-commerce company for some time. She is ready to resell her stock. In what market would she do this? a. Secondary market b. Liquidity market c. Resale market d. After market

A

Currently, the power of the Federal Reserve rests with a. the chair of the Federal Reserve and a board of six governors. b. the chair of the Fed and the board of the New York Federal Reserve Bank. c. 24 member banks. d. an elected board of governors of the Federal Reserve.

a

If the goal of monetary policy is to keep interest rates stable, the Federal Reserve's response to increases in the demand for money will be to a. increase the supply of money. b. hold the supply of money constant. c. decrease the demand for money. d. decrease the supply of money.

a

In 1968, Congress passed a key piece of legislation to protect consumers called the __________ Act. a. Truth in Lending b. Fair Credit Billing c. Fair Credit Reporting d. Truth in Savings

a

Which entities, by definition, issue the legal contracts known as bonds? a. Governments, corporations, and government agencies b. Corporations and government agencies c Governments and banks d. Government agencies only

a

At the time of the Great Depression, the __________ believed that the economic disruptions being experienced were temporary and that market forces would eventually reestablish prosperity. a. supply-side economists b. Marxists c. classical economists d. Keynesian economists

c

How many different prices would there be in a barter economy with 100 goods? a. 100 b. 300 c. 4,950 d. 6559

c

The economy is experiencing a decrease in excess reserves relative to the level of bank deposits. What effect will this have on the money supply multiplier? a. The money supply multiplier will be twice as strong. b. The money supply multiplier will decrease; it will be weakened. c. The money supply multiplier will increase; it will be strengthened. d. The money supply multiplier will be unchanged.

c

The risk that a bond issuer will not be able to live up to the promise they make when they issue a bond is known as __________ risk. a. inflation b. bankruptcy c. default d. default premium

c

The sum of Federal Reserve notes in circulation, plus US coins, plus bank reserves is collectively referred to by which of these designations? a. The money base b. m2 c. monrayr base d. m1

c

Assets accepted for repayment of debt to the government as well as private transactions are known as a. fiat money. b. money aggregates. c. dollarization. d. legal tender.

d

In order to overcome the stigma that might come from borrowing from the Federal Reserve following the 2007 financial crisis, the Federal Reserve first created a. quantitative easing. b. the discount window. c. the Federal Open Market Committee (FOMC). d. the term auction facility (TAF).

d

When interest rates on loans and mortgages are low, the huge rush of easy borrowing is sometimes referred to as a credit crunch. tf

false - A credit crunch is the term used when private borrowers find borrowing from banks to be difficult.

Lenders benefit from inflation in the short run. t/f

false - lenders will get paid back with dollars with less purchasing power

Times of financial uncertainty tend to cause an increase in the overall demand for money. tf

t

Which of these statements is most true of the function of banks? a. Banks lend money and help with the problem of free-riders. b. Banks play a key role in creating money, and they help with the problem of adverse selection. c. Banks are a safe way to save, and savers earn high interest. d. Banks lend money and help with the problem of symmetric information.

b

Which of these statements is the most accurate description of a liquidity trap? a. Lenders are willing to lend, but high interest rates keep borrowing slightly lower than needed. b. Borrowers are unwilling to borrow, and lenders are unwilling to lend due to pessimism about the future. c. Lenders are willing to lend, but borrowers borrow too much due to increased optimism about the future. d. Borrowers are willing to borrow, and expansionary policy is used to stimulate the economy as needed.

b

Which of these statements was an argument for the elimination of trade barriers between various European nations after WWII? a. The elimination of trade barriers was seen as a way to strengthen ties with the more prosperous United States. b. Economic sanctions after WWI had contributed to economic and political instability; European nations wanted to avoid that instability after WWII. c. The elimination of trade barriers was the first step in creating a European Union over the next 20 years. d. Economic aid and the elimination of trade barriers would placate the more aggressive countries.

b

During World War II, US policymakers feared inflation would result from the dramatic increase in wartime spending. In order to prevent that inflation, US policymakers a. cut the money supply, increased interest rates, and rationed many commodities. b. cut the money supply, implemented wage and price controls, and rationed many commodities. c. implemented wage and price controls, issued war bonds, and rationed many commodities. d. increased interest rates, issued war bonds, and implemented wage and price controls.

c

Edward would be equally happy with receiving $95 today or $100 one year from today. Edward's friend Bella would be just as happy receiving $90 today or $100 one year from today. Based on this information, which of the following best describes the difference between Edward and Bella? a. Bella is more easygoing about her finances. b. Edward has a higher rate of time preference than Bella. c. Edward is in more urgent need of money today. d. Bella has a higher rate of time preference than Edward.

d

Following World War II, inflation became so bad that Germans stopped using Reichsmarks for transactions, and instead used cigarettes for small transactions and cognac for large transactions. Which of the following best describes this situation? a. Reichsmarks were plentiful and valuable, but Germans preferred to barter. b. Germans wanted to disassociate themselves from the Third Reich. c. Cigarettes and cognac were more plentiful than Reichsmarks, so Germans found them more convenient to use for transactions than Reichsmarks. d. Cigarettes and cognac functioned as money in Germany in this period following World War II.

d

In a 2003 analysis of the Federal Reserve's role in the stock market collapse in October of 1929, Allan Meltzer concluded that the a. federal government and the Federal Reserve effectively coordinated their response to the events in October of 1929. b. federal government's action to intervene in the financial system in October of 1929 delayed the onset of the Great Depression. c. Federal Reserve acted appropriately and quickly in reaction to the events in October of 1929. d. Federal Reserve followed the wrong policy doctrine and thus contributed to the onset of the Great Depression.

d

In the early days of the Fed, the discount rate, the rate at which the regional Federal Reserve banks would lend to commercial banks, was determined by the a. Federal Reserve bank of New York. b. board of governors. c. secretary of the treasury. d. regional Federal Reserve banks.

d

One emergency lending procedure put into place in 2008 was the creation of the Term Securities Lending Facility. This entity was set up to a. lend funding to any commercial bank that needed it. b. lend funding to the Money Market Investor Funding Facility c. lend up to $50 billion of Treasury securities to primary securities dealers for a fee. d. lend up to $200 billion of Treasury securities to primary securities dealers for a fee.

d

The best way to measure the default risk premium that a borrower is paying is to a. look at the borrower's bond rating as reported by Moody's Investors Services. b. look at the borrower's bond rating as reported by Standard and Poor's Bond Rating Services. c. look at the profitability of the lender relative to its industry. d. compare the interest rate the borrower pays with the risk-free premium, usually represented by the rate on US Treasury Securities.

d

Consider the following data about the economy: currency outstanding (C) = $1 trillion, total deposits (D) = $750 billion, total reserves (R) = $76 billion, and the required reserve ratio (RR ratio) = 10%. What is the level of required reserves for this economy?

$75 billion Correct. With a required reserve ratio of 10% and the level of deposits equal to $750 billion, the level of required reserves is 0.1 × $750 billion = $75 billion.

Carlos is considering buying either a corporate bond or a municipal bond that are exactly the same except for their yield. Carlos is in the 33% marginal tax bracket, and the municipal bond he is considering pays a 4% interest rate. To make Carlos indifferent between the two bonds, the corporate bond must offer an interest rate of how much? a. 4.97% b. 6.52% c. 5.52% d. 5.97%

5.97

Financial assets include which of the following? a. Credit cards, bonds, and stocks b. Money, bonds, and stocks c. Money, credit cards, and bonds d. Savings accounts, money, and debit cards

Money, bonds, and stocks

You read a review written by a well-respected financial analyst who says that the steep yield curve we currently see suggests that borrowers require a relatively higher premium to hold longer-term bonds now, compared to short-term bonds. This analyst is most likely a proponent of which theory of interest rates? a. Term premium b. Default risk c. Segmented market d. Pure expectations

a

When a bank repays a loan at the discount window to the Federal Reserve, which of the following will happen? a. It will decrease bank reserves and immediately raise interest rates. b. It will decrease bank reserves and decrease the monetary base. c. It will decrease bank reserves but have no effect on the monetary base. d. It will increase the monetary base by decreasing bank reserves.

b

Which of the following would be considered an asset on a bank's balance sheet? a. Loans from other banks b. consumer c. Savings accounts d. demand deposits

b

It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is a. .3 b. .7 c. .5 d. 1

b - 70/100

A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to a. make a payment to the bondholder of $500 in the first year and $10,000 in 10 years. b. make a single payment to the bondholder of $10,500 in 10 years. c. pay the bondholder $500 every year for 10 years and also a $10,000 payment in 10 years. d. pay the bondholder $500 every year for the first nine years and also a $10,000 payment in 10 years.

c

A major advantage that municipal bonds have over corporate bonds for investors is that a. corporate bonds are not as readily available as municipal bonds. b. municipal bonds have a shorter term to maturity. c. the income earned on municipal bonds is not subject to federal income tax. d. municipal bonds have a lower default risk.

c

Which of the following qualifies as a liability to a bank? a. A business loan b. A mortgage c. Demand deposits d. A Treasury bond

c

Which of the following statements most accurately describes the measurements of the money supply known as M1 and M2? a. M1 was a measure of the money supply that worked until about the 1990s; then M2 became a more accurate measure and is still in use today. b. M1 was a measure of the money supply that worked well until the Great Depression, M2 was used until the 1990s, and M3 is considered accurate today. c. M1 was a measure of the money supply that worked well until the mid-1970s; then M2 became a more accurate measure until the 1990s. d. Neither M1 nor M2 worked very well after the 1970s.

c

Armand buys a 10-year, $10,000 bond that pays him $500 every year for 10 years and repays the face value in year 10. During the 10-year period, the rate of inflation holds steady at 3% per year. The real rate of return on Armand's investment is a. 5 b. 0 c. 3 d. 2

d - Correct. The nominal rate of interest that Armand is being paid on his bond is 5%. With the rate of inflation at 3% during the time he holds the bond, his real rate of return, or the real rate of interest, is 5% - 3% = 2%.

When there is too much money chasing too few goods, the likely impact is

inflation

Bond prices and interest rates are inversely or directly

inversely

The Consumer Financial Protection Bureau (CFPB), launched in 2011, is housed under the Federal Reserve. tf

true

A flight to quality is most likely to have which of these effects? a. It will increase the default risk premium that higher risk borrowers will pay and may cause some businesses to cut costs. b. It will decrease the default risk premium that higher risk borrowers have to pay and may bring about economic growth. c. It will be more difficult for individual borrowers to borrow, but ease borrowing for businesses. d. It will be easier for both individuals and businesses that want to sell high-risk bonds.

a

According to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what? a. It causes an increase in the interest rate, due to a greater consumer demand for money to spend; business spending decreases. b. It causes an increase in the interest rate, due to greater consumer demand for money to spend; business spending goes up as well. c. It causes a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending goes up. d. It causes a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending decreases as well.

a

Actual bank reserves are equal to a. required reserves + excess reserves. b. vault cash + required reserves. c. deposits at the Fed + required reserves. d. deposits at the Fed + excess reserves.

a

Commonly accepted and widely used money that has no intrinsic value is known as a. fiat money. b. counterfiet c. commodity money. d. disenfranchised money.

a

In the early twentieth century, the business scene in America was transformed by the formation of trusts. Business trusts are __________ integrated ownership structures. a. horizontally b. verticlaly c. diagnollay

a

Regulation Q, passed following the Great Depression, set a a. maximum on the interest rate that banks can pay on deposits. b. floor on the interest rate that banks can pay on deposits. c. maximum on the quantity of money that the US Treasury can print. d. maximum on the interest rates banks can charge.

a

Stagflation in the US economy was worsened by a. an oil embargo instituted by the Organization of Petroleum Exporting Countries (OPEC) in 1973. b. the unilateral cancellation of the convertibility of the US dollar to gold by President Nixon in 1971. c. the resignation of President Nixon in 1974. d. the US pullout from Vietnam in 1973.

a

Stagflation is the term used for an economy experiencing a combination of a. high unemployment and rising rates of inflation. b. high unemployment and no inflation or deflation. c. neither inflation nor deflation. d. low unemployment but rising rates of inflation.

a

The biggest change in the Federal Reserve's balance sheet between March 2007 and May 2013 was the __________ on the __________ side of the balance sheet. a. jump in depository institution deposits; liability b. increase in gold; asset c. increase in currency outstanding; liability d. decrease in repurchase agreements; asset

a

What is the term for removal of funds from a financial intermediary (e.g., a bank) to invest them directly, as through a mutual fund? a. Disintermediation b. Debanking c. Dollarization d. Allocation

a

How did John Maynard Keynes explain the Great Depression, and what did he suggest? a. Keynes explained the Depression as a loss of faith or optimism among businessmen; he suggested economic encouragement for businessmen to end the Great Depression. b. Keynes explained that a market-clearing equilibrium only happens on its own in the long run; additional action was needed to get the economy out of the Depression. c. Keynes came up with a theory stressing many supply and demand curves within the economy. d. Keynes explained that a market-clearing equilibrium would happen eventually; he suggested providing financial help to those who needed it and then waiting for the market to self-correct.

b

Imagine you live in a country suffering from extreme inflation of 20% per month. The money you earn, every single molino, is worth a little less each week, so you and many others around you begin to use the currency of a more prosperous neighboring country, the dolingo. What is the term for this practice of adopting another country's currency? a. Disintermediation b. Dollarization c. Monetization d. Dolingization

b

In Vance's homeowner's insurance policy, it states that he is required to pay out-of-pocket the first $5,000 for any homeowner's insurance claim that he submits before the insurance company will reimburse for any loss. This is an example of using a. incentives to overcome the principal-agent problem. b. a deductible to try to mitigate the problem of moral hazard. c. a restrictive covenant to mitigate the problem of moral hazard. d. screening to overcome the adverse selection problem.

b

Initially, the US Federal Reserve was created by Congress for what primary function? a. Print all currency for the US economy b. Serve as a lender of last resort c. Serve as the chief monitor of economic activity in the US economy d. Be a repository of all gold deposits in the US financial system

b

Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression? a. Consumer and government spending b. Government spending of some kind c. Increased exports d. Consumer spending

b

Suppose the market for loanable funds is currently in equilibrium. Which of the following factors will cause an increase in the interest rate? a. An expansionary monetary policy b. An increase in business confidence c. A decrease in government budget deficits d. An increase in the household saving rate

b

The purchase of direct debt and mortgage-backed securities by the Federal Reserve in November 2008 is referred to as a. a repurchase agreement. b. quantitative easing. c. liquidity easing. d. qualitative easing.

b

The three governing bodies of the European Central Bank (ECB) are the a. governing council, general council, and executive committee. b. governing council, general council, and executive board. c. executive board, general council, and monetary authority. d. open market committee, executive board, and governing council.

b

Which of these most accurately defines possible effects of fluctuating interest rates in the financial markets? a. Risk levels b. Prices and levels of employment c. Inflation d. The rate of saving

b

Inflation is a benefit in the short run to a. borrowers b. both c. lenders d. none

a

Banks that have some financial difficulty and borrow from the Federal Reserve in what is known as secondary credit will pay an interest rate equal to the a. federal funds rate. b. discount rate plus a penalty. c. federal funds rate plus a penalty. d. discount rate.

b

Cleo is hired as the CEO of Wolfstarter Company, a publicly owned corporation. After she is hired, she authorizes the purchase of a company limousine to chauffeur her around town, purchases a skybox at the stadium of the local NFL team, and provides herself with a company-paid membership at the local country club. This behavior could be an example of a. the free-rider problem. b. the principal-agent problem. c. adverse selection. d. undisclosed information.

b

During World War II, the US government financed the dramatic increase in wartime spending by a. increasing tax rates and purchasing war bonds. b. increasing tax rates and selling war bonds. c. decreasing tax rates and selling war bonds. d. increasing tax rates and increasing the money supply.

b

If bankers have reason to feel optimistic about the future, they may become very eager to loan money. If insufficient regulations are in place, this could most likely cause what? a. Very little change in the short run, as higher interest rates will simply compensate b. A higher percentage of loans in default, as riskier borrowers are attracted to easy loans c. A credit crunch, as riskier borrowers take out loans d. A credit crunch, which will reduce household consumption and business investment spending, leading to a decline in real output

b

The Panic of 1907 was triggered by a. a need to divert cash to San Francisco following the 1906 earthquake, government intervention that broke up many of the major trusts, and a lack of effective oversight of financial markets. b. excessive speculation in the stock market, excessively loose lending by banks and trusts, and a lack of effective oversight of financial markets. c. excessively loose lending by banks and trusts, a need to divert cash to San Francisco following the 1906 earthquake, and excessively restrictive regulation of financial markets. d. excessive speculation in the stock market, excessively tight lending by banks and trusts, and excessively restrictive regulation of financial markets.

b

The acquisition of a public or private company that is financed largely by debt is referred to as a leveraged buyout, or LBO. Which of these statements is true of the LBO craze of the 1980s? a. The amount of the purchase price funded by debt was legally capped at 70%. b. The amount of the purchase price funded by debt was as high as 90%. c. The amount of the purchase price funded by debt was typically less than 50%. d. The amount of the purchase price that could be funded by debt was legally capped at 40%.

b

The advantage of municipal bonds over corporate bonds increases as the federal marginal tax rate a. decreases. b. increases. c. is eliminated. d. remains unchanged.

b

The board of governors of the Federal Reserve has three primary responsibilities, which are a. monetary policy, fiscal policy, and the operations of the Fed. b. the operations of the Fed, commercial bank regulation, and monetary policy. c. maintenance of the gold standard, the operations of the Fed, and monetary policy. d. oversight of the printing of money, commercial bank regulation, and the operations of the Fed.

b

The bond rating system, in which companies like Moody's and Standard & Poor's provide ratings for a company's default risk, is one way to deal with a. symmetric information. b. adverse selection. c. moral selection. d. adverse hazard.

b

The position of chair of the Federal Reserve is filled in what way? a. The chair of the Fed is elected by a congressional committee of economic experts. b. The chair of the Fed is appointed by the president of the United States and confirmed by the US Senate. c. The chair of the Fed is appointed by the president of the United States and confirmed by the House of Representatives and the Senate. d. The chair of the Fed is elected by a vote of the members of Congress.

b

In the early 1980s, Paul Volcker used an easy monetary policy to bring inflation under control. a. t b. f

b - tight monetary policy

Rachel goes for a job interview and knows a lot about the job she is applying for. The woman who interviews her is filling in for another employee and knows very little about Rachel. We might say the woman conducting the interview is likely to have what kind of situation? a. The interviewer has systemic information, since she can ask probing questions of Rachel. b. The interviewer is facing adverse selection, since she knows nothing about Rachel. c. The interviewer is in a situation of moral hazard, since Rachel may turn out to be a poor employee. d. The interviewer has asymmetric information as she knows less about Rachel than Rachel knows of herself.

d

The Federal Reserve notices an increase in the public's desire to hold cash and fears that it may cause an increase in interest rates. To keep interest rates steady, the Federal Reserve would likely execute which of these plans? a. A reverse repurchase agreement to provide a short-term reduction in the money supply b. A matched-sale purchase agreement to provide a short-term boost to the money supply c. A repurchase agreement to provide a short-term reduction in the money supply d. A repurchase agreement to provide a short-term boost to the money supply

d

Economic theorists expanded on the Keynesian aggregate supply model in the late 1940s, broadening it into a three-part aggregate supply curve. Which of the following best describes that three-part supply curve? a. An upward-sloping initial segment, followed by an upward-sloping segment until full-employment GDP is reached, and finally followed by another flat segment beyond full-employment GDP b. A flat initial segment until full-employment is reached, followed by a vertical segment at full-employment GDP, and finally followed by another flat segment once the full-employment price level is reached c, A flat initial segment, followed by an upward-sloping middle segment until full-employment GDP is reached, and finally a vertical segment at full-employment GDP d. A flat initial segment, followed by a modestly upward-sloping middle segment until full-employment GDP is reached, and finally a more steeply upward-sloping segment beyond full-employment GDP

c

Financial markets bring together __________ and __________. a. lenders; savers b. firms; households c. borrowers; lenders d. households; banks

c

Holly goes to her bank to take out a loan, and the bank agrees to the loan on the condition that Holly maintain a balance of $1,000 in her savings account with the bank. This is an example of a bank using a a. compensating balance as a way to mitigate the problem of adverse selection. b. restrictive covenant as a way to mitigate the problem of moral hazard. c. compensating balance as a way to mitigate the problem of moral hazard. d. deductible as a way to mitigate the problem of moral hazard.

c

How did business firms respond to the stock market crash of 1929 and the subsequent Depression? a. In general, business firms began to borrow more money from banks in an effort to simply stay in business. b. In general, business firms began to borrow more money from banks in an attempt to increase production and stimulate sales. c. In general, business firms cut prices to stimulate sales; when this was not successful, they stopped borrowing from banks. d. In general, business firms raised prices slightly to make up for decreased sales; when this was not successful, they stopped borrowing from banks.

c

In order to fund World War II, the United States followed the policy prescription of a. Adam Smith. b. Milton Friedman. c. John Maynard Keynes. d. Friedrich von Hayek.

c

The Federal Reserve district banks are primarily responsible for a. supervising and examining banks in their districts, keeping track of the economy in their districts, and tracking the flow of money in and out of their districts. b. interacting with the state governments within their districts, tracking the flow of money in and out of their districts, and tracking the flow of commerce in and out of their districts. c. the check-clearing system, supervising and examining banks in their districts, and keeping track of the economy in their districts. d. the check-clearing system, supervising and examining banks in their districts, and interacting with the state governments within their districts.

c

The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are a. the foreign trade effect, the government intervention effect, and the real savings effect. b. the Pigou effect, the foreign trade effect, and the real savings effect. c. the Pigou effect, Keynes's interest rate effect, and the foreign trade effect. d. the foreign trade effect, Keynes's interest rate effect, and the price effect.

c

What is the best description of the relationship between the price of bonds and the quantity of bonds demanded, all else equal? a. Linear b. Positive c. Inverse d. Direct

c

What would be expected in a market for used cars, assuming asymmetric information and buyers who have little way to determine good used cars from poor used cars? a. There would be little to no impact on the market for used cars. b. The average price for used cars would go down and drive the clunker used cars out of the market. c. The average price for used cars would go down and drive the better used cars out of the market. d. The asymmetric information would lead to a fair and efficient market.

c

When the Federal Reserve buys US Treasury securities on the open market, it is attempting to a. raise interest rates. b. slow economic growth. c. lower interest rates. d. reduce inflation.

c

When the Federal Reserve makes a loan at the discount window to a bank, which of the following will happen? a. It will increase bank reserves and decrease the monetary base. b. It will increase bank reserves and immediately lower the interest rate. c. It will increase bank reserves and increase the monetary base. d. It will increase bank reserves but have no effect on the monetary base.

c

When the currency ratio increases, the impact of changes in the monetary base on the money supply is a. reversed. b. strengthened. c. weakened d. unchanged.

c

Which of these could be a reason for a decrease in the demand for loanable funds? a. An increase in expectations about future inflation b. Lower expected household income c. A decrease in expectations about future inflation d. A deterioration in business confidence

c

Why is it easier for the Fed to manage the level of bank reserves using the term auction facility (TAF) as opposed to using discount window lending? a. Banks do not need to overcome the stigma of requesting a loan when using the TAF. b. Banks that use seasonal credit are more likely to use the term auction facility. c. Banks receive TAF proceeds on a 3-day delay, rather than on the day they are requested. d. Banks receive TAF proceeds after a lengthy verification process.

c

A one-time deposit in a bank will result in a. an expansion in the money supply that is equal in size to the one-time deposit. b. an expansion in the money supply that is smaller than the size of the one-time deposit. c. no expansion in the money supply. d. an expansion in the money supply that is larger than the size of the one-time deposit.

d

At its inception and during its early days, the power of the Federal Reserve bank lay mostly a. with the board of governors housed in the Treasury Department. b. in the New York Federal Reserve Bank. c. in the commercial banks that became members of the Federal Reserve system. d. with the 12 independent regional Federal Reserve banks.

d

Atwood and Spearman, Inc. bonds are selling for more than Boehm and Bull, Inc. bonds. The difference in yields between these two bond options is known as the a. default risk premium. b. anticipated yield stretch. c. expected yield premium. d. default risk premium spread.

d

The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase a. the opportunity cost to firms of funding projects with cash increases, causing firms to bring less of their cash to the pool of loanable funds. b. the opportunity cost of government borrowing increases, causing government to run budget surpluses instead of deficits and therefore bring more cash to the pool of loanable funds. c. in the United States, savers in the rest of the world will be more inclined to save in their domestic market, thereby bringing less of their saving to the US pool of loanable funds. d. the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds.

d

Trevor goes to the ATM machine and withdraws $500 in cash. How will this affect the monetary base? a. The monetary base will increase by less than the size of the withdrawal as the increase in the currency in circulation will not be completely offset by a decrease in bank reserves. b. The monetary base will decline as bank reserves fall. c. The monetary base will increase with the increase in currency in circulation. d. The monetary base will remain unchanged with the increase in the currency in circulation being exactly offset by a decrease in bank reserves.

d

Unlike older bonds, which were printed on paper with mail-in coupons used to trigger interest payments, bonds today are mostly recorded in a different way. Which statement best describes how bond details are recorded for most bonds today? a. Bonds are recorded electronically and on paper. b. Bonds are recorded electronically, but coupons are still used to collect interest. c. Bonds are recorded on paper, which both parties keep, and electronically. d. Bonds are recorded electronically.

d

What innovation did the Federal Housing Administration develop that helped make mortgage loans more accessible? a. The 30-year, 50% down payment mortgage b. The 20-year, adjustable rate mortgage c. The guaranteed interest rate mortgage d. The 30-year, fixed-rate mortgage

d

When a coffee shop lists a tall coffee on its menu at $2.95, the coffee shop is using money as a a. store of value. b. source of profit. c. medium of exchange. d. unit of account.

d

When there is a decrease in the required reserve ratio (rr) what will be the change, if any, in the money supply multiplier? a. It will be decreased or weakened. b. It will be unchanged. c. It will be doubled. d. It will be increased or strengthened.

d

Which of the following are included in the M1 definition of the money supply? a. Currency and money market deposit accounts b. Currency, checkable deposits, and money market accounts c. Small time deposits and currency d. Currency, demand deposits, and other checkable deposits

d

Which of these is currently true for the chair of the Federal Reserve? a. The chair position requires a background in economics or finance; the four-year term is renewable. b. The chair position is a term of just two years and is nonrenewable. c. The chair position requires a background in banking or finance; the two-year term is nonrenewable. d. The chair position has no formal qualifications; the four-year term is renewable.

d

Which of these statements best describes why the required reserve ratio is no longer relevant in most cases today? a. The required reserve ratio rarely had a positive effect in most situations. b. Changes in the required reserve ratio can affect the size of the money multiplier. c. Sweep accounts eliminated the need for the required reserve ratio. d. About 70% of banks already have reserves that exceed their level of required reserves.

d

In the conduct of monetary policy, the Federal Reserve has greater control over open market operations than it does over the results of quantitative easing. tf

t

Several factors can cause the SRAS curve to shift; these factors include a change in the cost of inputs, a change in taxes, and even a change in seller expectations. tf

t

The primary responsibility of all central banks is monetary policy. tf

t

When resource markets are efficient, recessionary gaps close by themselves without any government intervention. tf

t