Topic 10 - Monetary system and banks quiz

3. Which of the following ranks these assets from most liquid to least liquid? A) demand deposits, a US government bond, a highly‐rated corporate bond, a foreign government bond with a junk rating B) a foreign government bond with a junk rating, a highly‐rated corporate bond, a US government bond, demand deposits C) a US government bond, demand deposits, a highly‐rated corporate bond, a foreign government bond with a junk rating D) demand deposits, a highly‐rated corporate bond, a foreign government bond with a junk rating, a US government bond

A

Banks have deposits of 100 and reserves of 20. Banks hold no excess reserves. The public holds all of its money as deposits. It follows that the reserve requirement is _____ and the value of the money multiplier is _____. A) 0.2; 5 B) 0.25; 4 C) 0.8; 1.25 D) 0.6; 1.7

A

Banks have deposits of 50 and reserves of 10. The public holds its money as 50 of deposits and 25 of currency. It follows that the reserve‐to‐deposit ratio is _____, and the currency‐to‐ deposit ratio is _____. A) 0.2; 0.5 B) 1/6; 0.5 C) 0.2; 1/3 D) 1/6; 1/3

A

If banks decide to significantly increase their holdings of excess reserves (for example, because of uncertainties in financial markets), then the money multiplier _____, and the Fed must _____ the monetary base to keep the money supply constant. A) falls; expand B) falls; contract C) rises; expand D) rises; contract

A

If households decide to increase the amount of currency they hold relative to their bank deposits (for example, because households don't trust banks to remain open), then the money multiplier _____, and the Fed must _____ the monetary base to keep the money supply constant. A) falls; expand B) falls; contract C) rises; expand D) rises; contract

A

In the expression for the money multiplier, cu is _____ as a ratio to _____. A) currency in the hands of the public; deposits owned by the public B) currency in the vaults of banks; deposits owned by the public C) currency in the hands of the public; money supply D) currency in the vaults of banks; money supply

A

Outside money refers to A) liabilities of the government that serve as bank reserves or circulate as money. B) liabilities of commercial banks that can be used as a means of payment. C) liabilities of the US Treasury, i.e., US government bonds. D) liabilities of financial intermediaries other than commercial banks.

A

Suppose the reserve‐to‐deposit ratio (res) is 1/10. This means that banks hold _____ of their deposits in the form of reserves, and _____ as other assets such as bonds and loans. A) 1/10; 9/10 B) 9/10; 1/10 C) 1/11; 10/11 D) 10/11; 1/11

A

The Fed buys bonds. This _____ reserves and the money supply, and pushes interest rates _____. A) increases; down B) increases; up C)decreases; down D) decreases; up

A

The money supply increases by 100. The required reserve ratio is 0.10. Banks hold no excess reserves, and the public holds all of its money in the form of bank deposits. We may infer that the Fed _____ US Treasury Bills worth _____ in the bond market. A) purchased; 10 B) sold; 10 C) purchased; 1,000 D) sold; 1,000

A

What is the definition of inside money? A) liability of banks that serve as a means of payment B) government liabilities that serve as a means of payment C) liabilities of both the government and banks that serve as a means of payment D) government liabilities that serve as reserves of banks

A

Which of the following is an expansionary open market operation? A) The Federal Reserve purchases US government bonds in the public market for bonds. B) The US Treasury purchases US government bonds from the Federal Reserve. C) The Federal Reserve sells US government bonds to the US Treasury. D) The US Treasury sells US government bonds in the public market for bonds.

A

4. Which of the following is true? In the US, paper money is printed by _____, and coins are minted by _____. A) US Treasury; Federal Reserve C) US banking system; Federal Reserve B) Federal Reserve; US Treasury D) US banking system; US Treasury

B

Assuming that the reserve‐to‐deposit ratio (res) and the currency‐to‐deposit ratio (cu) do not change over time, the expression for the money multiplier is A) 1/res B) 1 + cu/res + cu C) 1 + cu/cu D) 1/rr

B

During the Great Depression, the Fed _____ the monetary base and the money supply _____. A) increased; increased C) decreased; increased B) increased; decreased D) decreased; decreased

B

How is a bank's equity measured? Equity equals A) assets C) assets/(assets - liabilities) B) assets - liabilities D) assets/liabilities

B

In the expression for the money multiplier, res is defined to be _____ as a proportion of _____. A) required reserves; deposits. B) required reserves plus excess reserves; deposits. C) required reserves; loans. D) required reserves plus excess reserves; loans.

B

In the modern US, the money supply (M1) consists of liabilities of A) the government. B) the government and commercial banks. C) the government and commercial banks, and gold. D) commercial banks.

B

Reserves of a bank consist which items on the bank's balance sheet? A) US government bonds B) vault cash plus the bank's deposits with the Fed C) corporate bonds the bank owns D) deposits in the bank

B

Suppose the currency‐to‐deposit ratio is 1/7, and the reserve‐to‐deposit ratio is 1/10. The value of the money multiplier is A) 0.5 B) 4.7 C) 2.125 D) 7

B

The Fed funds rate is below the Fed's target. In response, the Fed _____ bonds, which _____ reserves and the money supply. A) buys; decreases B) sells; decreases C) buys; increases D) sells; increases

B

The reserve‐to‐deposit ratio is 0.1, and the currency‐to‐deposit ratio is 0.2. What is the composition of the money supply? _____ percent of the money supply is currency, and _____ percent of the money supply is deposits. A) 1/5; 4/5 B) 1/6; 5/6 C) 2/5; 3/5 D) 3/10; 7/1

B

Which of the following is false? A) The monetary base includes currency in the vaults of banks. B) M1 includes currency in the vaults of banks. C) The monetary base includes currency in the hands of the public. D) M1 includes currency in the hands of the public.

B

Which of the following is true? A) If a firm's assets lose value, its leverage ratio falls. B) If a firm reduces both assets and liabilities by the same amount, its leverage ratio falls. C) If a firm raises capital, its leverage ratio rises. D) All of the above.

B

Which of the following would change the size of the monetary base? A) Bank of America deposits some of the excess currency from its vaults with the Fed. B) The Fed sells a government bond to Bank of America. C) A Bank of America customer writes a check on her account to a Wells Fargo customer, who deposits the funds in her Wells Fargo account. D) Bank of America makes a loan to one of its customers.

B

1. Choose the best definition. A liquid asset is an asset A) that can be sold quickly. B) whose value in terms of goods does not fluctuate very much over time. C) that can be sold quickly without losing value in terms of goods. D) that can be used as a medium of exchange in transactions

C

During the financial crisis of 2008‐9 and the ensuing Great Recession A) the currency‐to‐deposit ratio increased. B) M1 decreased. C) the monetary base increased. D) the money multiplier increased.

C

If the Federal Reserve buys U.S. Treasury bonds from the public, the monetary base _____, and interest rates _____. A) increases; rise B) decreases; rise C) increases; fall D) decreases; fall

C

Suppose the reserve‐to‐deposit ratio is 0.3, and the currency‐to‐deposit ratio is 0.4. The Fed wants to increase the money supply by $500 million. To do so, the Fed should increase the monetary base by $_____ million. A) 500 B) 1,000 C) 250 D) 100

C

The reserve‐to‐deposit ratio is 0.1, and the currency‐to‐deposit ratio is 0.2. The value of the money multiplier is A) 10 B) 5 C) 4 D) 3.7

C

What is the definition of a financial firm's leverage ratio? A) assets/liabilities C) assets/(assets - liabilities) B) liabilities/assets D) liabilities/(assets - liabilities)

C

What is the difference between a bank's assets being "illiquid" and a bank being "insolvent?" A) If a bank's assets are illiquid, then the bank is insolvent. B) Illiquidity means the bank's assets are worth less than its liabilities, while insolvency means the bank's assets cannot be sold quickly for what they are worth. C) Illiquidity means the bank's assets cannot be sold quickly for what they are worth, while insolvency means the bank's assets are worth less than its liabilities. D) These two terms mean the same thing.

C

Which of the following correctly ranks a bank's assets from most liquid to least liquid? A) corporate bonds, government bonds, mortgages, reserves B) government bonds, reserves, mortgages, corporate bonds C) reserves, government bonds, corporate bonds, mortgages D) mortgages, corporate bonds, government bonds, reserves

C

Which of the following is not counted as reserves of a bank? A) vault cash B) the bank's deposits with the Federal Reserve C) currency outside of banks D) all of the above are counted as reserves

C

Which of the following statements about the Federal Reserve is false? A) Monetary policy is formed by the Federal Open Market Committee of the Federal Reserve. B) Currency in circulation and reserves of banks are liabilities of the Federal Reserve. C) The Federal Reserve is part of the US Treasury. D) There are 12 regional Federal Reserve Banks.

C

Which of the following statements is true? A) A more highly‐leveraged bank is in a better position to make loans to firms than a bank with less leverage. B) A bank wants to reduce leverage as much as possible. C) A highly‐leveraged bank has an incentive to buy risky assets that might put the bank in a position to need FDIC or taxpayer money. D) As long as a bank's capital (equity) is positive, the FDIC does not need to close the bank.

C

Which of the following would decrease the monetary base? A) Citibank transfers some of its vault cash to the Federal Reserve. B) Bob deposits some cash in his Citibank account. C) The Fed sells a bond to Citibank. D) Citibank makes a loan with some of its excess reserves

C

Which of the following would have the immediate effect of increasing a bank's reserves? A) the bank buys a US Treasury bond from the Fed B) the bank deposits excess vault cash with the Fed C) a business deposits its cash receipts in the bank D) all of the above

C

2. Which of the following ranks these assets from least liquid to most liquid? A) cash, a ninety‐day US Treasury bill, a highly‐rated corporate bond, a mortgage on a large office building B) a ninety‐day US Treasury bill, cash, a mortgage on a large office building, a highly‐ rated corporate bond C) a highly‐rated corporate bond, a mortgage on a large office building, a ninety‐day US Treasury bill, cash D) a mortgage on a large office building, a highly‐rated corporate bond, a ninety‐day US Treasury bill, cash

D

How can a bank reduce its leverage ratio (over some interval of time)? A) Increase equity. B) Hold assets that increase in value. C) Reduce both assets and liabilities by the same amount. D) All of the above

D

In which case does the money multiplier achieve its largest possible value? Households and firms hold _____ of their money in the form of currency, and banks hold _____ of deposits in the form of reserves. A) all; all C) none; all B) all; the required minimum D) none; the required minimum

D

Suppose the currency‐to‐deposit ratio (cu) is 1/7. This means that _____ of the money supply is in the form of deposits, and _____ is in the form of currency in the hands of the public. A) 1/7; 6/7 B) 6/7; 1/7 C) 1/8; 7/8 D) 7/8; 1/8

D

The monetary base is defined to be A) currency in bank vaults. B) currency in bank vaults plus currency in the hands of the public. C) bank reserves. D) bank reserves plus currency in the hands of the public.

D

The quantity of money in the economy is 5000. Currency outside of banks is 2000. Banks' reserves are 500. The value of the monetary base is ______ and the value of the money multiplier is ______. A) 2000; 2.5 B) 5000; 10 C) 2000; 4 D) 2500; 2

D

Which of the following is true? The _____ fell during the Great Depression, but not during the Great Recession. A) money multiplier C) monetary base B) reserve‐to‐deposit ratio D) real money supply

D

Which of the following would change the monetary base? A) John gets his first credit card. He carries less cash around than before. B) John makes a large withdrawal of cash from his checking account right before he goes on vacation. C) Wells Fargo Bank wants more vault cash, so it makes a withdrawal from its account with the Fed. D) Wells Fargo Bank wants more vault cash, so it sells a government bond to the Fed.

D

Which of the following would increase the size of the money multiplier? The currency‐to‐ deposit ratio _____ or the reserve‐to‐deposit ratio _____. A) increases; increases C) decreases; increases B) increases; decreases D) decreases; decreases

D

Whose choices affect the size of the money multiplier? (i) households (ii) firms (iii) banks (iv) the Fed A) (i) and (ii) B) (i), (ii), and (iii) C) (iii) and (iv) D) all

D

Which of the following is included in M2 but is not in M1? A) demand deposits in banks B) balances in non‐institutional money market mutual fund accounts C) bank reserves D) currency in circulation

b

Which of the following is not included in M1? A) households' credit card balances B) balances in non‐institutional money market mutual funds accounts C) currency in the vaults of banks D) none of the above is included in M1

d

Which of the following is not included in any monetary aggregate? A) demand deposits in banks B) balances in non‐institutional money market mutual fund accounts C) currency in circulation D) credit card balances

d

Which of the following is true? A) M1 includes the monetary base. C) M1 includes M2. B) The monetary base includes M1. D) M2 includes M1.

d

Which of the following is true? A) The monetary base is part of the money supply. B) The money supply is part of the monetary base. C) The monetary base and the money supply have no components in common. D) The monetary base and the money supply have currency in circulation in common.

d