Macro Exam 4

assume that the legally required reserve is 15 percent and commercial banks choose to hold additional excess reserves equal to 5 percent of any newly acquired deposits. Under these circumstances the monetary multiplier for the commercial banking system is: a. 6.67 b. 5 c. 4 d. 3

b. 5

the basic policy-making body in the U.S. banking system is the: a. Federal Open Market Committee (FOMC) b. Board of Governors of the Federal Reserve c. Federal Monetary Authority d. Council of Economic Advisers

b. Board of Governors of the Federal Reserve

prior to the financial crisis, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in targets for the: a. exchange rate b. Federal funds rate c. Prime interest rate d. Consumer price index

b. Federal funds rate

when economists say that money serves as a medium of exchange, they man that it is a. declared as legal tender by the government b. a means of payment c. a monetary unit for measuring and comparing the relative values of goods d. a way to keep wealth in a readily spendable form for future use

b. a means of payment

the principal advantage money has over barter is its function as: a. a store of value b. a medium of exchange c. unit of account d. debrt

b. a medium of exchange

when economists say that money serves as a unit of account, they mean that it is a. a means of payment b. a monetary unit for measuring and comparing the relative values of goods c. declared as legal tender by the government d. a way to keep wealth in a readily spendable form for future use

b. a monetary unit for measuring and comparing the relative values of goods

when economists say that money serves as a store of value, they mean that it is a. a monetary unit for measuring and comparing the relative values of goods b. a way to keep wealth in a readily spendable form for future use c. declared as legal tender by the government d. a means of payment

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

bank panics: a. occur frequently in fractional reserve banking systems b. are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently c. cannot occur in a fractional reserve banking system d. occur more frequently when the monetary system is backed by gold

b. are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently

which of the following describes the identity embodied in a balance sheet? a. net worth plus assets equal liabilities b. assets equal liabilities plus net worth c. assets plus reserves equal net worth d. assets plus liabilities equal net worth

b. assets equal liabilities plus net worth

the level of GDP will tend to increase when: a. reserve requirements are increased b. there is an increase in the discount rate c. the Federal Reserve buys government securities in the open market d. the Federal Reserve sells government securities in the open market

c. the Federal Reserve buys government securities in the open market

when the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce: a. the discount rate b. the target federal funds rate c. the inflation rate d. the unemployment rate

c. the inflation rate

the opportunity cost of holding money: a. is zero because money is not an economic resource b. varies inversely with the interest rate c. varies directly with the interest rate d. varies inversely with the level of economic activity

c. varies directly with the interest rate

stabilizing a nation's price level and the purchasing power of its money can be achieved: a. only with fiscal policy b. only with monetary policy c. with both fiscal and monetary policy d. with neither fiscal nor monetary policy

c. with both fiscal and monetary policy

vault cash

cash held by the bank

paper money

circulating debt of Federal Reserve Banks

interest rates

the price paid for the use of money

fractional reserve banking system

only a portion (fraction) of checkable deposits is backed by reserves currency in bank vaults or deposits at the central bank

a commercial bank has actual reserves of $50,000 and checkable deposits of $200,000, and the required reserve ratio is 20 percent. The excess reserves of the bank are: a. $10,000 b. $20,000 c. $40,000 d. $50,000

a. $10,000

assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction, a. the supply of money is increased by $5,000 b. a claim has been "demonetized" c. the supply of money declines by the amount of the loan d. the Metro Bank acquires reserves from other banks

a. the supply of money is increased by $5,000

which one of the following is true about the U.S. Federal Reserve System? a. there are 12 regional Federal Reserve Banks b. the head of the U.S. Treasury also chairs the Federal Reserve Board c. the Open Market Committee is smaller in size than the Federal Reserve Board d. there are 14 members of the Federal Reserve Board

a. there are 12 regional Federal Reserve Banks

paper money (currency) in the United States is issued by the a. Federal Reserve Banks b. U.S. Treasury c. national banks d. U.S. Mint

a. Federal Reserve Banks

money is "created" when a. a bank grants a loan to a customer b. a depositor deposits money at the bank c. someone lends money to a friend or a family member d. people use money to pay for stuff they buy from one another

a. a bank grants a loan to a customer

if you write a check on a bank to purchase a used Honda Civic, you are using money primarily as: a. a medium of exchange b. a store of value c. a unit of account d. an economic investment

a. a medium of exchange

a bank owns a 10-story office building. in the bank's balance sheet, this would be an example of: a. an asset b. a liability c. capital stock d. a checkable deposit

a. an asset

which of the following would be considered to be the most liquid? a. checkable deposits b. money market mutual funds c. small time deposits d. savings deposits

a. checkable deposits

if the interest rate increases, there will be a(n): a. decrease in the amount of money held as assets b. decrease in the transactions demand for money c. increase in the transactions demand for money d. increase in the amount of money held as assets

a. decrease in the amount of money held as assets

the main tools that the Fed can use to alter the reserves of commercial banks are required-reserve ratio and the following, except: a. exchange rate b. interest on reserves c. open market operations d. discount rate

a. exchange rate

the interest rate that banks charge one another for the loan of excess reserves is the: a. Federal funds rate b. discount rate c. prime interest rate d. interest on reserves

a. federal funds rate

prior to the financial crisis a contraction of the money supply: a. increased the interest rate and decreased aggregate demand b. increased both the interest rate and aggregate demand c. lowered the interest rate and increased aggregate demand d. lowered both the interest rate and aggregate demand

a. increased the interest rate and decreased aggregate demand

the purchasing power of money and the price level vary: a. inversely b. directly during recessions, but inversely during inflations c. directly, but not proportionately d. directly and proportionately

a. inversely

After the financial crisis, if the Fed wanted to contract the money supply: a. it would raise the interest rate on excess reserves and use reverse repos to purchase any non-banks' excess cash b. it would decrease the interest rate on excess reserves and use reverse repos to purchase any non-banks' excess cash c. it would raise the interest rate on excess reserves and use repos to sell non-banks' excess cash d. it would decrease the interest rate on excess reserves and use repos to sell non-banks' excess cash

a. it would raise the interest rate on excess reserves and use repos to purchase any non-banks' excess cash

the greater the required reserve ratio, the a. lower is the monetary multiplier b. higher is the spending multiplier c. lower is the spending multiplier d. higher is the monetary multiplier

a. lower is the monetary multiplier

the interest rate that banks use as a reference point for interest rates on a wide range of loans to businesses and individuals is the: a. prime interest rate b. term auction rate c. real interest rate d. discount rate

a. prime interest rate

which of the following statements is true? a. the prime interest rate is higher than the Federal funds rate b. the prime interest rate is often the same as the discount rate c. the Federal funds rate is higher than the prime interest rate d. the Federal funds rate and the prime interest rate are often the same

a. the prime interest rate is higher than the Federal funds rate

which of the following statements best describes the 12 Federal Reserve Banks? a. 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 b. they are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry c. they are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners d. they are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities

a. 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

assume the commercial banking system has checkable deposits of $20 billion and excess reserves of $2 billion when the reserve ratio is 25 percent. If the reserve ratio is then lowered to 20 percent, we can conclude that the; a. Fed has decided that money supply needed to be reduced b. banking system now has excess reserves of $3 billion c. monetary multiplier has decreased d. maximum money-creating potential of the banking system has been increased $7 billion

b. banking system now has excess reserves of $3 billion

the money supply is backed a. dollar-for-dollar by gold and silver b. by the government's ability to control the supply of money and therefore to keep its value relatively stable c. by gold reserves representing a fraction of the total value of dollars in circulation d. by government bonds

b. by the government's ability to control the supply of money and therefore to keep its value relatively stable

when a check is cleared against a bank, it will lose: a. cash and securities b. checkable deposits and reserves c. reserves and capital stock d. loans and demand deposits

b. checkable deposits and reserves

which of the following would reduce the money supply? a. commercial banks use excess reserves to buy government bonds from the public b. commercial banks sell government bonds to the public c. commercial banks loan out excess reserves d. a check clears from Bank A to Bank B

b. commercial banks sell government bonds to the public

to keep high inflation from eroding the value of money, monetary authorities in the United States a. make paper money legal tender for the payment of debt b. control the supply of money in the economy c. establish insurance on checkable deposit accounts d. create token money that is less than its intrinsic value

b. control the supply of money in the economy

assume that Johnson deposits $350 of currency in his account in the XYZ bank. Later the same day, Swanson negotiates a loan for $2,000 at the same bank. In what direction and by what amounts has the supply of money changed? a. increased by $2,250 b. increased by $2,000 c. decreased by $350 d. decreased by $1,650

b. increased by $2,000

when commercial banks use excess reserves to buy government securities from the public a. checkable deposits decline b. new money is created c. commercial bank reserves increase d. the money supply falls

b. new money is created

If you place a part of your summer earnings in a savings account, you are using money primarily as a a. unit of account b. store of value c. standard of value d. medium of exchange

b. store of value

other things equal, if the required reserve ratio was lowered: a. banks would have to reduce their lending b. the size of the monetary multiplier would increase c. the actual reserves of banks would increase d. the federal funds interest rate would rise

b. the size of the monetary multiplier would increase

to say that coins are "token money" means that: a. their face value is less than their intrinsic value b. their face value is greater than their intrinsic value c. their face value is equal to their intrinsic value d. they are not legal tender

b. their face value is greater than their intrinsic value

checkable deposits are classified as money because a. they earn interest income for the depositor b. they can be readily used in purchasing goods and paying debts c. banks hold currency equal to the value of their checkable deposits d. they are ultimately the obligations of the Treasury

b. they can be readily used in purchasing goods and paying debts

the currency, or money, of the United States, like those of other countries, is a. commodity money b. token money c. deposit money d. intrinsic money

b. token money

the asset demand for money: a. is unrelated to both the interest rate and the level of GDP b. varies inversely with the rate of interest c. varies inversely with the level of real GDP d. varies directly with the level of nominal GDP

b. varies inversely with the rate of interest

a commercial bank has checkable deposit liabilities of $400,000, reserves of $150,000, and a required reserve ratio of 25 percent. the amount by which a single commercial bank and the amount by which the banking system can increase loans are, respectively: a. $50,000 and $100,000 b. $50,000 and $150,000 c. $50,000 and $200,000 d. $150,000 and $200,000

c. $50,000 and $200,000

assume that the required reserve ratio for the commercial banks is 25 percent. If the Federal Reserve Banks buy 43 billion in government securities from the non-bank securities dealers, then as a result of this transaction, the lending ability of the commercial banking system will increase by: a. $4.5 billion b. $15 billion c. $9 billion d. $12 billion

c. $9 billion

Moral hazard created during the financial crisis occurred because: a. federal government bailed out large firms b. federal reserve took a variety of actions as a lender of last resort c. a and b d. companies created collateralized default swaps

c. a and b

a bank that has liabilities of $150 billion and a net with of $20 billion must have a. assets of $150 billion b. excess reserves of $150 billion c. assets of $170 billion d. excess reserves of $130 billion

c. assets of $170 billion

in a fractional reserve banking system, a. bank panics cannot occur b. the Federal Reserve has no control over the amount of money in circulation c. banks can create money through the lending process d. the monetary system must be backed by gold

c. banks can create money through the lending process

the design of mortgage-backed securities, or securitization, refers to: a. buying and selling securities b. insurance against potential losses due to defaults c. bundling mortgages into new securities d. all of the above

c. bundling mortgages into new securities

the Federal Reserve System performs many functions, but its most important one is a. issuing currency b. providing for check clearing and collection c. controlling the money supply d. acting as fiscal agent for the U.S. government

c. controlling the money supply

maximum checkable-deposit expansion is equal to: a. actual reserves minus excess reserves b. assets plus net worth and liabilities c. excess reserves times the monetary multiplier d. excess reserves divided by the monetary multiplier

c. excess reserves times the monetary multiplier

overnight loans from one bank to another for reserve purposes entail an interest rate called the a. discount rate b. prime rate c. federal funds rate d. treasury bill rate

c. federal funds rate

if the amount of money demanded exceeds the amount supplied, the: a. demand-for-money curve will shift to the left b. money supply curve will shift to the right c. interest rate will rise d. interest rate will fall

c. interest rate will rise

which is considered a strength of monetary policy compared to fiscal policy? a. the ability to increase the budget deficit b. the ability to decrease the budget surplus c. its protection from political pressure d. its cyclical asymmetry

c. its protection from political pressure

a bank has $2 million in checkable deposits. in the bank's balance sheet, this would be part of a. capital stock b. assets c. liabilities d. net worth

c. liabilities

a newspaper headline reads: "Fed Raises Discount Rate for Third Time This Year." This headline indicates that the Federal Reserve is most likely trying to: a. reduce the cost of credit b. stimulate the economy c. reduce inflationary pressures in the economy d. increase the money supply

c. reduce inflationary pressures in the economy

cash held by a bank in its vault is a part of the bank's a. money supply b. net worth c. reserves d. liabilities

c. reserves

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. The M1 money supply is composed of items a. 1 and 4 b. 5 and 6 c. 6 and 7 d. 4 and 6

d. 4 and 6

currency in circulation is part of: a. M1 only b. M2 only c. Neither M1 nor M2 d. Both M1 and M2

d. Both M1 and M2

in the consolidated balance sheet of the Federal Reserve Banks, loans to commercial banks are: a. a liability of the Federal Reserve Banks and commercial banks b. an asset of the Federal Reserve Banks and commercial banks c. a liability of the Federal Reserve Banks and an asset for commercial banks d. an asset of the Federal Reserve Banks and a liability for commercial banks

d. an asset of the Federal Reserve Banks and a liability for commercial banks

what is one significant characteristic of fractional reserve banking? a. banks are not subject to "panics" or "runs" b. banks use deposit insurance for loans to customers c. bank loans will be equal to the amount of gold on deposit d. banks can create money through lending their reserves

d. banks can create money through lending their reserves

in the United States, the money supply (M1) includes a. coins, paper currency, checkable deposits, and credit balances with brokers b. currency, checkable deposits, and Series E bonds c. paper currency, coins, gold certificates, and time depostis d. coins, paper currency, and checkable deposits

d. coins, paper currency, and checkable deposits

excess reserves refer to the a. difference between actual reserves and loans b. minimum amount of actual reserves a bank must keep on hand to back up its customers deposits c. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank d. difference between actual reserves and required reserves

d. difference between actual reserves and required reserves

Henry deposits $2,000 in currency in the First Street Bank. later that same day, Jane Harris negotiates a loan for $5,400 at the same bank. After these transactions, the supply of money has a. decreased by $3,300 b. increased by $3,300 c. increased by $2,100 d. increased by $5,400

d. increased by $5,400

the primary purpose of the legal reserve requirement is to a. provide a dependable source of interest income for commercial banks b. prevent banks from hoarding too much vault cash c. prevent commercial banks from earning excess profits d. provide a means by which the monetary authorities can influence the lending ability of commercial banks

d. provide a means by which the monetary authorities can influence the lending ability of commercial banks

assume that the stock of money is determined by the Federal Reserve and does not change when the interest rate changes. This situation means that the: a. supply of money curve is inversely related to the interest rate b. demand for money curve is directly related to the interest rate c. supply of money curve is horizontal d. supply of money curve is vertical

d. supply of money curve is vertical

The Federal Open Market Committee (FOMC) is made up of: a. the chair of the Board of Governors along with twelve presidents of the Federal Reserve Banks b. the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank c. the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers. d. 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 Banks presidents on a rotating basis.

d. 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 Banks presidents on a rotating basis.

lowering the reserve ratio: a. reduces the amount of excess reserves the banks keep b. also reduces the discount rate c. increases the total reserves in the banking system d. turns required reserves into excess reserves

d. turns required reserves into excess reserves

checkable deposits

debts of financial institutions

unit of account

goods valued in dollars

store of value

holds some wealth in money form

medium of exchange

used to buy and sell goods