chapter 24 econ exam 3
139. The Federal Reserve System was established in 1913 in response to the A) First World War. B) bank panic of 1907. C) depression of 1883. D) prosperity of the 1920s.
B
146. The seven members of the Board of Governors serve 14-year terms to A) provide steady employment. B) reduce political influence. C) prevent illegal appointments. D) inhibit independent decisions.
B
127. Assume that the required reserve ratio is 20%. What is the maximum increase in money supply for the banking system as a whole following a $10,000 increase in excess reserves? A) $5,000 B) $10,000 C) $40,000 D) $50,000
D
66. A financial institution that accepts deposits, makes loans, and offers checking accounts is A) an insurance company. B) the Federal Deposit Insurance Corporation. C) the Federal Reserve System. D) a commercial bank.
D
31. Currency in the United States today is A) fiat money. B) intrinsic money. C) backed by gold. D) quasi- intrinsic.
A
38. The Fed's narrowest measure of money supply is A) M1. B) M2. C) credit card balances. D) balances held in money market funds.
A
29. Money that some authority has declared legal tender is called A) fiat money. B) currency. C) convertible paper money. D) commodity money.Q
A
104. Refer to Table 9-5. The required reserve ratio is 10%. What is the amount of Bolton Bank's required reserves? A) $30 million B) $70 million C) $100 million D) $300 million
A
143. The Federal Reserve does all of the following except A) make loans to individuals B) influence the supply of money C) influence the value of money D) regulate the banking system
A
160. The _____ rate is the interest rates charged when a bank lends reserves to another bank. A) federal funds B) discount C) prime D) reserve rate
A
161. If the Fed increases the discount rate, it is pursuing A) a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy. B) a contractionary policy because it reduces banks' profit margins by raising the cost of borrowing and lowering the return on lending. C) an expansionary policy because it raises the cost of holding excess reserves in the banking system. D) an expansionary policy because it increases bank profits by putting upward pressure on the interest rates that banks can charge on its loans.
A
170. The Fed's most important and most frequently used tool of monetary policy is A) moral suasion. B) open-market operations. C) changes in the discount rate. D) changes in required reserve ratios.
B
186. Refer to Scenario 1. Which of the following happens when Sheila Jones deposits the proceeds from the sale of her bond to the Fed into her checking account at the Perez Bank? A) Perez Bank's checkable deposits increases by $100,000 and its reserves increases by $90,000. B) Perez Bank's checkable deposits and reserves increase by $100,000 each. C) Perez Bank's checkable deposits increases by $90,000 and its reserves increases by $100,000. D) Perez Bank's checkable deposits and reserves increase by $90,000 each.
B
188. Refer to Scenario 1. As a result of Sheila's deposit, Perez Bank can increase its loans by A) $10,000. B) $90,000. C) $100,000. D) $1,000,000.
B
136. Which of the following are primary functions of a central bank? I. act as a regulator of banks II. issue government bonds III. set monetary policy IV. regulate dividend payments by corporations A) I, II, III, and IV B) I, II, and III C) I and III D) I and II
C
182. When the Fed sells government bonds it ____ reserves and ______ the money supply. A) increases; increases B) decreases; increases C) decreases; decreases D) increases; decreases
C
108. Refer to Table 9-5. The required reserve ratio is 10%. By how much could the banking system ultimately increase the money supply if all excess reserves are loaned out, people never withdraw cash, and all loan proceeds are spent? A) $30 million B) $70 million C) $300 million D) $700 million
D
109. Refer to Table 9-5. The required reserve ratio is 10%. What is the value of the deposit multiplier? A) 1 B) 2.5 C) 7 D) 10
D
129. The maximum amount of increase in the money supply that can be caused by an increase in excess reserves is equal to the A) deposit multiplier ´ the required reserve ratio. B) loan multiplier ´ the change in excess reserves. C) deposit multiplier ÷ the change in excess reserves. D) deposit multiplier ´ the change in excess reserves.
D
183. Suppose the Fed sells $1,000 of government securities to Commercial Banks. Which pair of the T-accounts below shows this transaction? D) Federal Reserve Commercial Banks Assets Liabilities Assets Liabilities Securities -1, 000 Commercial Banks' Reserves -1,000 Reserves -1,000 Securities +1,000
D
189. Refer to Scenario 1. Once the full impact of the Fed's open market purchase and Sheila's deposit worked its way through the banking system, what is the maximum change on the money supply as a result of these two events? A) Money supply falls by $100,000. B) Money supply falls by $1,000,000. C) Money supply rises by $10,000. D) Money supply rises by $1,000,000.
D
1. In the federal penitentiary at Lompoc, California, inmates used packages of mackerel to buy items such as haircuts at the prison barber shop and laundry services. What function do these packages of mackerel serve? A) They functioned as money. B) They served as a corruption deterrent. C) They enabled prison officers to monitor illegal money flows. D) They forced prisoners to engage in barter.
A
16. The unit-of-account function of money means that money is used A) as a consistent means of measuring the value of things. B) as the common denominator of future payments. C) to pay for goods and services. D) to accumulate purchasing power.
A
19. Which of the following best illustrates the unit of account function of money? A) You list prices for clothing sold on your Web site, www.nattydresser.com, in dollars. B) You pay for your cruise tickets with dollars. C) You keep $50 in your backpack for emergencies. D) You keep your tips earned from your tour guide job in a separate jar at home.
A
30. Money that some authority, generally a government, has ordered to be accepted as a medium of exchange is called _______ money. A) fiat B) intrinsic C) commodity D) debt
A
5. Money is any item that A) serves as a medium of exchange for goods and services. B) can be converted into silver with relatively little loss in value. C) can be converted into gold with relatively little loss in value. D) facilitates a connecting link between credit instruments and debt instruments.
A
52. Refer to Table 9-2. In Year 1, if savings deposits had been $200 billion instead of $150 billion, M1 would have been A) unaffected. B) larger by $50 billion. C) smaller by $50 billion. D) $100 billion.
A
63. An institution that collects funds from lenders and distributes these funds to borrowers is called A) a financial intermediary. B) the Federal Reserve System. C) a mercantile exchange. D) a currency market.
A
75. In the banking system today, the reserves banks hold against their deposit liabilities must take one of two forms. They are A) vault cash and deposits at the Fed. B) vault cash and checkable deposits. C) currency in circulation and checkable deposits. D) gold and vault cash.
A
76. Which of the following is an example of a bank's reserves? A) currency held in the vaults of the bank B) demand deposits with other member banks C) U.S. Treasury bills D) U.S. Treasury bonds
A
79. The principle of fractional reserve banking makes it possible for a A) bank to make loans. B) bank to print currency. C) bank to avoid reserve requirements. D) bank to sell securities.
A
8. Which of the following illustrates the medium-of-exchange function of money? A) writing a check to buy a new Volkswagen B) noting that the price of a $20,000 Volkswagen is 16,000 euros C) keeping $20,000 in cash in your mattress instead of buying a new Volkswagen D) driving your $20,000 Volkswagen to a friend's house
A
83. Any reserves that banks hold in excess of required reserves are called A) excess reserves. B) margin reserves. C) federal reserves. D) surplus reserves.
A
85. A bank that has no excess reserves A) cannot create loans. B) is not in equilibrium. C) is on the brink of bankruptcy. D) has no required reserves.
A
86. Refer to Table 9-3. What is the value of the bank's net worth? A) $200 million B) $2,000 million C) $2,800 million D) $3,000 million
A
32. One disadvantage of commodity money is that A) it cannot be readily converted to gold. B) its quantity can fluctuate erratically. C) its value does not change. D) it has no value apart from its use as money.
B
33. Because commodity money is not uniform in quality, there is a tendency A) for higher quality commodity money to drive lower quality commodity money out of circulation. B) for lower quality commodity money to drive higher quality commodity money out of circulation. C) for stable commodity money to drive unstable commodity money out of circulation. D) for unstable commodity money to drive stable commodity money out of circulation.
B
37. Which of the following is the most liquid asset? A) season tickets to the Yankees' games B) the cash that your Aunt Ursula stuffs in her mattress C) a $5,000 6-month certificate of deposit (time deposit) D) one hundred shares of IBM stock
B
44. Refer to Table 9-1. The money supply measured by M1 is A) $325 billion. B) $450 billion. C) $1,425 billion. D) $1,875 billion. Table 9-1 Components of the Money Supply $ billion Currency 100 Checkable deposits 300 Traveler's checks 50 Small-denomination time deposits 700 Savings deposits 75 Money market mutual funds (individuals) 500 Other liquid assets 150 Large-denomination time deposits 200
B
48. Refer to Table 9-2. In Year 1, the supply of money measured by M1 was A) $150 billion. B) $300 billion. C) $450 billion. D) $950 billion. Table 9-2 Components of the Money Supply Year 1 Year 2 $ billion $ billion Currency 50] 100 Savings deposits 150] 200 Checkable deposits and traveler's checks 250 450 Small-denomination time deposits 100 ]]150 Treasury Bonds 400] 500
B
49. Refer to Table 9-2. In Year 2, the supply of money measured by M1 was A) $300 billion. B) $550 billion. C) $750 billion. D) $900 billion. Components of the Money Supply Year 1 Year 2 $ billion $ billion Currency 50] 100 Savings deposits 150] 200 Checkable deposits and traveler's checks 250 450 Small-denomination time deposits 100 ]]150 Treasury Bonds 400] 500
B
50. Refer to Table 9-2. In Year 1, if the supply of money measured by M2 was $650 billion, then the components of M2 not shown in the table must have totaled A) less than $100 billion. B) $100 billion. C) $200 billion. D) $250 billion. Components of the Money Supply Year 1 Year 2 $ billion $ billion Currency 50] 100 Savings deposits 150] 200 Checkable deposits and traveler's checks 250 450 Small-denomination time deposits 100 ]]150 Treasury Bonds 400] 500
B
60. Debit cards are A) counted as money because they perform the medium of exchange function of money. B) not considered money because they merely show that their owners have a relationship to money. C) are counted as a part of M2 but not M1. D) counted as money because they provide access to their owners' checkable deposits.
B
81. If banks were required to keep 100% of deposits in reserves, they could A) make more loans. B) make no loans. C) create more deposits. D) only use required reserves for loans.
B
84. A bank is "loaned up" when A) legal reserves are zero. B) excess reserves are zero. C) primary reserves are zero. D) required reserves are zero.
B
89. Refer to Table 9-3. If the required reserve ratio is 10%, what is the amount of excess reserves held by Alpha-Beta Bank? A) $25 million B) $40 million C) $60 million D) $75 million
B
91. Refer to Table 9-3. If the required reserve ratio is 10%, what is the maximum amount of new loans that Alpha-Beta can create? A) $25 million B) $40 million C) $60 million D) $75 million
B
92. A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 10%, what is the amount of required reserves? A) $0 B) $10,000 C) $20,000 D) $30,000
B
94. A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 20%, what is the maximum amount of loans this bank can create? A) $0 B) $10,000 C) $20,000 D) $30,000
B
24. Which of the following statements is true? A) In Romania under Communist Party rule in the 1980s, Kent cigarettes served as a medium of exchange. This illustrates the use of Kent cigarettes as fiat money. B) Commodity money has no value apart from its use as money. C) In Romania under Communist Party rule in the 1980s, Kent cigarettes served as a medium of exchange. This illustrates the use of Kent cigarettes as commodity money. D) Fiat money must be backed by gold; otherwise it is worthless.
C
3. Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services. Why were they willing to accept mackerel in exchange for goods and services? A) because mackerel is a good source of protein B) because prison authorities deemed mackerel legal tender C) because the inmates know that they could use the packages of mackerel to buy other goods and services D) because the inmates do not wish to consume mackerel
C
34. Gresham's Law A) deals with the theory of regulatory forces in the economy. B) is the tendency for good money to drive bad money out of circulation. C) is the tendency for bad money to drive good money out of circulation. D) was passed in 1913, as part of the Federal Reserve Act.
C
36. Rank the following items in terms of most liquid to least liquid. A) checkable deposits, cash, an office building your father owns B) cash, credit card, money market mutual funds, checkable deposits, C) cash, checkable deposits, savings deposits, an office building your father owns D) cash, Microsoft stock certificates you own, checkable deposits
C
40. Which of the following is part of M1? I. currency in a bank's vault II. cash in your wallet III. checkable deposits IV. savings deposits A) I, II, III, and IV B) I, II, and III C) II and III D) II, III, and IV
C
45. Refer to Table 9-1. The money supply measured by M2 is A) $450 billion. B) $1,425 billion. C) $1,725 billion. D) $2,075 billion. Components of the Money Supply $ billion Currency 100 Checkable deposits 300 Traveler's checks 50 Small-denomination time deposits 700 Savings deposits 75 Money market mutual funds (individuals) 500 Other liquid assets 150 Large-denomination time deposits 200
C
56. Freema withdraws $1,000 from her checking account to purchase a $1,000 time-deposit. As a result of her transaction, A) M1 and M2 decrease. B) M1 decreases and M2 increases. C) M1 decreases and M2 is unaffected. D) M1 and M2 are unaffected.
C
58. If you withdraw currency from your savings account, you are A) increasing M1, decreasing M2. B) increasing both M1 and M2. C) increasing M1 but not affecting M2. D) decreasing both M1 and M2.
C
6. Which of the following describes the medium-of-exchange function of money? A) noting that Audible.com sells downloadable audio books for $10 per book B) making a monthly payment toward your car loan C) paying $30 for a haircut D) putting away $50 each month into your savings account
C
61. How does the Fed decide which monetary measure should be the focus of its monetary policy choices? A) The Fed would like to track a monetary measure that is most closely related to the market interest rate. B) The Fed would like to track a monetary measure that is most closely related to the quantity of money demanded by economic agents. C) The Fed would like to track a monetary measure that is most closely related to the level of real GDP and the price level. D) The Fed would like to track a monetary measure that is most closely related to government spending.
C
62. The non-bank public chooses among various financial assets in deciding in what form it wants to hold liquidity. It thereby increases or decreases I. the M1 measure of money supply. II. the reserves of commercial banks. III. the reserves that commercial banks are required to hold. A) none of the above since only the Fed can alter the money supply B) I, II, and III C) I and II only D) I only
C
65. An activity performed by commercial banks that is not performed by insurance companies is A) functioning as financial intermediaries. B) creating financial obligations against themselves. C) accepting deposits and offering checking accounts. D) allocating financial resources between borrowers and lenders.
C
68. Why might monetary policy authorities be concerned when non-bank financial intermediaries account for a growing share of an economy's financial assets? A) Monetary policy authorities fear that this situation might erode the value of the U.S. dollar in foreign exchange markets. B) Monetary policy authorities are concerned that this situation might promote income inequality since high income individuals are more likely to use the services of non-bank financial intermediaries, compared to low-income individuals. C) Monetary policy authorities fear that this situation might lessen their ability to control money supply because non-bank financial intermediaries are not as heavily regulated as banks. D) It will be more difficult for monetary policy authorities to monitor those assets that are most closely related to the level of economic activity.
C
69. Which of the following is an example of a bank's liabilities? A) its reserves B) its loans C) checkable deposits D) its holdings of U.S. government bonds
C
87. Refer to Table 9-3. What is the value of the bank's total reserves? A) $25 million B) $75 million C) $100 million D) $200 million
C
88. Refer to Table 9-3. If the required reserve ratio is 10%, what is the value of the bank's required reserves? A) $25 million B) $40 million C) $60 million D) $75 million
C
90. Refer to Table 9-3. If the required reserve ratio is 10% and the market interest rate is 6%, then the opportunity cost of holding excess reserves is A) zero since Alpha-Beta does not hold any excess reserves. B) $0.9 million. C) $2.4 million. D) $4 million.
C
93. A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 10%, what is the amount of excess reserves? A) $0 B) $10,000 C) $20,000 D) $30,000
C
95. Refer to Table 9-4. If Acme Bank has no excess reserves, the required reserve ratio is A) 26.67% B) 16% C) 10% D) There is insufficient information to answer question.
C
97. Linda sells her Economics textbook to Ejere for $40. Ejere pays Linda with a check, which she deposits in her checking account in West Bank. Which statement below describes the check-clearing process? A) Linda's bank gains $40 in checkable deposits and loses $40 in reserves. Ejere's bank gains $40 in reserves and loses $40 in deposits. B) Linda's bank loses $40 in checkable deposits and gains $40 in reserves. Ejere's bank gains $40 in checkable deposits and loses $10,000 in reserves. C) Ejere's bank loses $40 in both reserves and checkable deposits. Linda's bank gains $40 in both checkable deposits and reserves. D) Ejere's bank loses $40 in reserves and gains $10,000 in checkable deposits. Linda's bank loses $40 in both reserves and checkable deposits.
C
12. When you buy a ticket to the rodeo, you are using money as a A) source of economic activity. B) store of value. C) factor of production. D) medium of exchange.
D
13. Money is essentially defined by A) the intrinsic value of what is being used as money. B) the judicial branch. C) the government. D) social usage.
D
14. When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n) A) medium of exchange. B) unit of account. C) factor of production. D) store of value.
D
15. Which of the following describes the store of value function of money? A) noting that Audible.com sells downloadable audio books for $10 per book B) making a monthly payment toward your car loan C) paying $30 for a haircut D) putting away $50 each month into your savings account
D
20. Keeping a $20 bill in your purse to purchase a movie DVD when it comes out next month means that money functions as a A) medium of exchange. B) unit of account. C) standard of deferred payment. D) store of value.
D
21. Which of the following illustrates the store-of-value function of money? A) writing a check to buy a new Volkswagen B) noting that the price of a $20,000 Volkswagen is 16,000 euros C) agreeing to repay a bank $400 a month for the next 48 months for a loan to buy a new Volkswagen D) keeping $20,000 in cash in your mattress instead of buying a new Volkswagen
D
22. Inflation reduces the ability of money to function as a A) medium of exchange. B) medium of value. C) unit of account. D) store of value.
D
23. Money that has value apart from its use as money is called A) fiat money. B) currency. C) convertible paper money. D) commodity money.
D
46. Refer to Table 9-1. The difference between M1 and M2 amounts to A) $325 billion. B) $350 billion. C) $450 billion. D) $1,275 billion. Components of the Money Supply $ billion Currency 100 Checkable deposits 300 Traveler's checks 50 Small-denomination time deposits 700 Savings deposits 75 Money market mutual funds (individuals) 500 Other liquid assets 150 Large-denomination time deposits 200
D
47. Which of the following statements is false about M1 and M2? A) M2 is a broader measure of the money supply than M1. B) M2 contains assets that are less liquid than those in M1. C) All the assets included in M1 are also included in M2. D) All the assets included in M2 are also included in M1.
D
57. When her $1,000 time deposit expires, Suneeta decides not to renew the time deposit and opts to cash out. As a result of her transaction A) M1 and M2 increase. B) M1 increases and M2 decreases. C) M1 is unaffected and M2 decreases. D) M1 increases and M2 is unaffected.
D
9. Which of the following is an advantage of using money as a medium of exchange? A) It simplifies purchases because all prices are specified in money values. B) There is no interest charged on using money for purchases. C) It is easy to mass produce money. D) It avoids having to rely on barter, the exchange of one good or service for another.
D
96. Refer to Table 9-4. Assume Acme Bank initially has no excess reserves. If Guevara withdraws $6,000 from her checking account at Acme Bank, which of the following will occur? A) Acme's excess reserves are reduced by $6,000. B) Acme will have excess reserves of $2,000. C) Acme will have a required reserve deficiency of $3,000. D) Acme will have a required reserve deficiency of $5, 400.
D
99. Suppose you deposit $1,000 cash in your checking account at a bank. If the bank is loaned up and if the required reserve ratio is 10%, the maximum amount that the bank can lend now, following your deposit is A) $100. B) $900. C) $1,000. D) $10,000.
D
11. When a person makes price comparisons among products, money is being used as a(n) A) unit of account. B) standard of quality. C) medium of exchange. D) checkable deposit.
A
35. The ease with which an asset can be converted to money is its A) liquidity. B) adaptability. C) accessibility. D) rigidity.
A
51. Refer to Table 9-2. In Year 2, if the supply of money measured by M2 was $1,000 billion, then the components of M2 not shown in the table must have totaled A) less than $250 billion. B) $250 billion. C) $300 billion. D) $450 billion.
A
54. The largest component of M1 is A) checkable deposits. B) credit card balances. C) currency. D) savings deposits.
A
59. Credit cards are A) not money. B) not money, because they can't be used to purchase goods and services. C) considered to be money. D) counted as a part of M2 but not M1.
A
7. You spend $20 to buy a used textbook at the college bookstore. What function does money perform here? A) medium of exchange B) store of value C) unit of account D) standard of deferred payment
A
98. Nita deposits a check for $750 drawn against Home Federal Bank into her account at Village Bank. Which pair of the T-accounts below shows this transaction on the respective bank's balance sheets? A) Village Bank Home Federal Bank Assets Liabilities Assets Liabilities Reserves +750 Checkable deposits +750 Reserves -750 Checkable deposits -750
A
17. The function of money illustrated by the prevailing prices of goods and services is the A) medium of exchange function. B) unit of account function. C) standard of deferred payments function. D) store of value function.
B
2. Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services. What function do these packages of mackerel perform? A) They function as a store of value. B) They function as a medium of exchange. C) They function as a unit of account. D) They function as a factor of production.
B
26. Which of the following items serve as a unit of account? I. $100 cash II. checkable deposits III. an original Picasso painting IV. a $1,000 corporate bond that you own A) I only B) I and II C) I, II, and III D) I, II, and IV E) I, II, III, and IV
B
43. Which of the following would lead to a change in the money measure, M1? A) a customer purchases music downloads with a debit card B) a customer withdraws funds from her checking account to purchase a 6-month time deposit C) depositing a paycheck drawn against Bank of America into your checking account in Wells Fargo Bank D) interest payments by the Treasury on its debt
B
53. Refer to Table 9-2. In Year 2, if savings deposits had been $250 billion instead of $200 billion, M2 would have been A) $575 billion. B) larger by $50 billion. C) smaller by $50 billion. D) unaffected.
B
67. In 2008, commercial banks' share of the U.S. credit market changed as a result of A) commercial banks that experienced significant difficulties resulting from real estate investments applied for status as investment banks. B) investment banks that experienced significant difficulties resulting from real estate investments applied for status as commercial banks. C) increasing returns on real estate investments led commercial banks to expand. D) increasing returns on real estate investments led investment banks to expand.
B
71. Which of the following is an example of a bank's assets? A) reserves borrowed from the Fed B) loans made to customers C) checkable deposits D) savings deposits
B
74. Which of the following equations is correct? A) assets = liabilities − net worth B) assets = liabilities + net worth C) liabilities = assets + net worth D) net worth = liabilities + assets
B
77. Which of the following is an example of a bank's reserves? A) demand deposits with other banks B) deposits with the Federal Reserve C) Treasury bonds and bills D) state bonds of the state in which the bank is located but not state bonds of other states.
B
18. The price of a 32GC iPhone is $299. What is the function of money in this context? A) a medium of exchange B) a means of payment C) a unit of account D) a measure of quality
C
28. Which of the following is a store of value and a common medium of exchange? A) corporate bonds B) stocks C) checking account balances D) debit cards
C
55. Which of the following is included in M2 but not in M1? A) currency B) demand deposits C) small-denomination time deposits D) debit cards
C
72. Which of the following is an example of a bank's assets? A) reserves borrowed from the Fed B) checkable deposits C) vault cash D) savings deposits
C
78. A system in which banks hold reserves whose value is less than the sum of claims on those reserves is called A) speculative banking. B) leveraged banking. C) fractional reserve banking. D) international banking.
C
80. The law requires banks to maintain A) fractional reserves in the form of deposit liabilities against their liquid assets. B) fractional reserves in the form of federal securities against their outstanding loans. C) fractional reserves in the form of cash in their vaults or deposits with the central bank against their deposit liabilities. D) legal reserves in the form of gold against their outstanding loans.
C
10. The functions of money are A) a conductor of economic activity, a medium of exchange, and a store of value. B) a medium of exchange, a store of value, and a factor of production. C) a store of value, a medium of exchange, and a determinant of investment. D) a store of value, a unit of account, and a medium of exchange.
D
100. Suppose the required reserve ratio is 10%. Mr. Normal uses his ATM card to withdraw $1,000 from this checking account in California National Bank. This action has A) increased the M1 measure of money supply by $1,000. B) reduced the bank's required reserves by $1,000. C) increased the M2 measure of money supply by $1,000. D) not changed the M1 or M2 measures of money supply.
D
25. Which of the following items serve as a store of value? I. cash in your pocket II. the balance in your checking account III. an original Picasso painting IV. a $1,000 corporate bond A) I and II B) I, II, and III C) I, II, and IV D) I, II, III, and IV
D
27. Which of the following items serve as a medium of exchange in the United States? I. $100 cash II. 50 euros III. the balance in your checking account IV. a $1,000 corporate stock that you own A) I only B) I and II C) I, II, and III D) I and III E) I, II, III, and IV
D
39. Which of the following is part of M1? I. currency in a bank's vault II. cash in your wallet III. checkable deposits IV. traveler's checks` A) I, II, III, and IV B) I, II, and III C) II and III D) II, III, and IV
D
4. Any item that serves as a medium of exchange is called A) gold. B) capital. C) silver. D) money.
D
41. M1 includes A) currency only. B) currency plus checkable deposits. C) currency in circulation plus checkable deposits. D) currency in circulation plus checkable deposits plus traveler's checks.
D
64. Which of the following is not an example of a financial intermediary? A) a pension fund B) an insurance company C) a commercial bank D) the New York Stock Exchange
D
73. A bank's reserves are A) the minimum value of assets it must have. B) the amount of gold it is required to have as reserves against loans. C) the value of federal securities it is required to have as reserves against loans. D) deposits that banks have accepted from customers but have not loaned out.
D
82. The quantity of reserves that banks must hold against deposits is called A) the reserve ratio. B) excess reserves. C) total reserves. D) required reserves.
D
42. The monetary aggregate, M1, increases when A) an individual cashes a check written by a business. B) an individual purchases clothes with a debit card. C) an individual switches funds from a savings account to a checking account. D) an individual buys groceries with a credit card.
c
185. Refer to Table 9-7. The table shows entries on the balance sheets for the Federal Reserve and the banking system above. These balance sheet entries are consistent with A) an open market sale of $1,500 in bonds. B) an open market purchase of $1,500 in bonds. C) neither an open market sale nor an open market purchase. D) either an open market sale or an open market purchase.
a
106. Refer to Table 9-5. If the required reserve ratio is 10% and the market interest rate is 8%, what is Bolton Bank's opportunity cost of holding the excess reserves it is currently holding? A) $5.6 million B) $3.2 million C) $0.8 million D) 0; Bolton Bank has no excess reserves.
A
111. Suppose the required reserve ratio is 10%. If a bank has total reserves of $80,000 and checkable deposits of $550,000, what is the amount of the bank's excess reserves? A) $25,000 B) $55,000 C) $80,000 D) $250,000
A
119. Refer to Table 9-6. What is the value of $G (the total new required reserves)? A) $1,000 B) $4,000 C) $5,000 D) $6,000
A
130. What happens when you withdraw cash from a bank? A) The bank's reserves are reduced. B) The bank's reserves are increased. C) The bank's reserves are not affected. D) The bank's total reserves remain unchanged but the composition of required reserves and excess reserves change.
A
133. The Federal Depository Insurance Corporation (FDIC) has the power to close a bank when A) the bank's net worth falls below a certain level. B) the bank's excess reserves fall below a certain level. C) the bank's total deposits fall below a certain level. D) the bank has inadequate insurance.
A
135. Which of the following is a consequence of deposit insurance? A) It may induce the officers of a bank to take more risks. B) It encourages banks to make loans only to the most credit-worthy customers. C) It minimizes the risk of defaulting on loans made to the bank's customers. D) It encourages depositors to closely scrutinize a bank's lending activities.
A
140. The Federal Reserve System I. is the central bank for the United States. II. is a United States government owned bank. III. is a branch of the Treasury of the United States. A) I only B) I and II only C) I and III only D) I, II, and III
A
144. The Federal Reserve System is made up of twelve regional banks owned by A) commercial banks in the respective districts that have chosen to be members of the Fed. B) Wall Street investors. C) the Board of Governors appointed by the President. D) the U.S. Treasury.
A
159. When a member bank borrows reserves from the Fed, A) it pays an interest rate called the discount rate. B) it pays no interest rate but is required to repay the loan within the stipulated period. C) it pays an interest rate equivalent to the coupon rate on long-term government bonds. D) it pays an interest rate equal to the federal funds in the reserves market.
A
166. The rate of interest charged for reserves in the federal funds market is the A) federal funds rate. B) open market rate. C) required reserve rate. D) discount rate.
A
171. If the Fed buys U.S. government bonds from the public, it A) increases the volume of reserves in the banking system and the money supply tends to grow. B) decreases the volume of reserves in the banking system and the money supply tends to grow. C) increases the volume of reserves in the banking system and the money supply tends to fall. D) decreases the volume of reserves in the banking system and the money supply tends to fall.
A
102. Which of the following is true regarding the interest rate earned on the reserves that bank's keep at the Fed? A) These reserves earn no interest. B) It is relatively low. C) It varies depending on the federal funds rate. D) It is equal to the discount rate.
B
103. When a bank receives new deposits, it can make new loans up to the amount of A) the deposits received. B) the excess reserves generated by the deposits C) the reserves generated by the deposits. D) the required reserves generated by the deposits.
B
105. Refer to Table 9-5. The required reserve ratio is 10%. What is the amount of Bolton Bank's excess reserves? A) $30 million B) $70 million C) $100 million D) zero
B
110. Suppose the required reserve ratio is 10%. If a bank has total reserves of $80,000 and checkable deposits of $550,000, what is the amount of the bank's required reserves? A) $25,000 B) $55,000 C) $80,000 D) $135,000
B
113. Refer to Table 9-6. What is the value of $A in stage 1? A) $100 B) $200 C) $600 D) $800
B
116. Refer to Table 9-6. What is the value of $D in Stage 4 (round up to the nearest whole number)? A) $82 B) $102 C) $128 D) $160
B
120. Refer to Table 9-6. What is the value of $H (the total loans)? A) $1,000 B) $4,000 C) $5,000 D) $6,000
B
122. The deposit multiplier is given by the formula A) change in checkable deposits ÷ change in required reserves. B) change in checkable deposits ÷ change in reserves. C) change in excess reserves ÷ change in checkable deposits. D) change in legal reserves ÷ change in excess reserves.
B
125. What is the value of the deposit multiplier in a 100-percent reserve banking system? A) 0. B) 1 C) a value between 0 and 1 D) a value greater than 1
B
131. What happens to the value of the deposit multiplier when banks hold excess reserves? A) It is larger than the value implied by the formula. B) It is smaller than the value implied by the formula. C) It is only affected by the amount of loans that banks are willing to make, not the amount of excess reserves held. D) There is insufficient information to answer the question.
B
137. A primary function of a central bank is to A) regulate dividend payments by corporations. B) act as a regulator of banks. C) control the bond market. D) publish statistics on banking and related financial matters.`
B
142. The Federal Reserve System was created by the A) National Banking Act of 1864. B) Federal Reserve Act of 1913. C) Glass-Steagall Act of 1933. D) Banking Act of 1935.
B
150. The three main monetary policy instruments are A) the money supply, the market interest rate, and deposit insurance. B) open market operations, reserve requirement ratio, and the discount rate. C) open market operations, deposit insurance, and the money supply. D) open market operations, reserve requirement ratio, and the market interest rate.
B
151. For a given level of reserves, an increase in the reserve requirement ratio will A) decrease legal reserves and decrease the money supply. B) increase legal reserves and decrease excess reserves. C) increase legal reserves and increase excess reserves. D) increase excess reserves and increase the money supply.
B
154. Increasing the reserve requirement ratio is A) a contractionary policy because it lowers the amount of total reserves in the banking system. B) a contractionary policy because it lowers the amount of excess reserves in the banking system. C) an expansionary policy because it raises the amount of excess reserves in the banking system. D) an expansionary policy because it raises the amount of required reserves in the banking system.
B
157. Suppose a bank has $50,000 in deposits and $6,000 in reserves. The required reserve ratio is 10%. Which of the following occurs if the required reserve ratio is increased to 12%? A) The bank's total reserves will fall. B) The bank will now be fully loaned up. C) The bank will have insufficient required reserves. D) The bank's profit will fall.
B
158. The Fed seldom uses the reserve requirement ratio to influence the money supply. What is the reason for this? A) It is difficult and costly for the Fed to monitor compliance. B) Frequent manipulation of reserve requirements would require bankers to constantly adjust their lending policies to changing requirements, which could be destabilizing for financial markets. C) The Fed would like to discourage banks from making loans indiscriminately and therefore sets just one standard. D) Reserves in excess of a certain amount will not be covered by the Federal Depository Insurance Corporation.
B
164. The discount rate A) is determined by markets forces of demand and supply in the market for bank reserves. B) is set by the Board of Governors. C) is determined by investment banks. D) is determined by market forces of demand and supply in the credit market.
B
173. The Fed can increase the federal funds rate by A) selling government securities which increases bank reserves. B) selling government securities which decreases bank reserves. C) buying government securities which increases bank reserves. D) buying government securities which decreases bank reserves.
B
174. If the Fed raises its target for the federal fund rate, this indicates A) the Fed is pursuing an expansionary monetary policy. B) the Fed is pursuing a contractionary monetary policy. C) the Fed is attempting to lower unemployment. D) the Fed is concerned that the growth in aggregate demand will exceed potential GDP.
B
177. Suppose the Fed conducts an open market sale of $50 million in government securities. If the required reserve ratio is 20%, what is the maximum change in the money supply? Assume that banks try not to hold excess reserves and there is no currency withdrawal from the banking system. A) maximum increase in money supply = $250 million B) maximum decrease in money supply = $250 million C) maximum increase in money supply = $50 million D) maximum decrease in money supply = $50 million
B
180. Suppose the Fed purchases $1,000 of government securities from the general public who then deposit the proceeds into their checking accounts in commercial banks. Which pair of the T-accounts below shows this transaction?B) Federal Reserve Commercial Banks Assets Liabilities Assets Liabilities Government Commercial Banks' Securities +1,000 Reserves +1,000 Reserves +1,000 Checkable Deposits +1,000
B
184. When the Fed _______ governments bonds it _______ bank reserves. A) sells; increases B) buys; increases C) buys; decreases D) issues new; increases
B
191. Refer to Scenario 2. To collect the $50,000 payment made by Henry, the Fed A) adds $50,000 to Jekyll Bank's reserves by $50,000. B) subtracts $50,000 from Jekyll Bank's reserves. C) accepts the cash from Jekyll Bank which acts on behalf of Henry Hyde. D) collects $5,000 (the required reserve portion) from Jekyll Bank.
B
167. The federal funds rate is determined A) by the Board of Governors. B) by the supply and demand for bank reserves. C) directly by households' and firms' demands for funds. D) by the federal government.
B \
101. When banks hold more reserves than are required, such reserves are called A) total reserves. B) required reserves. C) excess reserves. D) loan reserves.
C
107. Refer to Table 9-5. The required reserve ratio is 10%. What is the maximum amount of new loans that Bolton bank can create and by how much can Bolton initially increase the money supply, assuming that newly created deposits are transferred to another bank? A) $30 million; $30 million B) $70 million; $30 million C) $70 million; $70 million D) $70 million; $700 million
C
112. Refer to Table 9-6. What is the required reserve ratio? A) 5% B) 10% C) 20% D) 25%
C
118. Refer to Table 9-6. What is the value of $F (the total new checkable deposits)? A) $1,000 B) $4,000 C) $5,000 D) $6,000
C
126. Assume that the required reserve ratio is 10%. An increase of $1,000 in the banking system's excess reserves may result in a total expansion of new deposits for the banking system as a whole by as much as A) $1,000. B) $9,000. C) $10,000. D) $100,000.
C
132. Which of the following statements is true? A) The higher the required reserve ratio, the higher the deposit multiplier. B) The higher the excess reserves, the higher the deposit multiplier. C) The value of the deposit multiplier falls if economic agents withdraw cash from the banking system. D) The deposit multiplier only works to increase money supply, not to decrease money supply.
C
138. A primary function of a central bank is to A) regulate dividend payments by corporations. B) control the bond market. C) set monetary policy. D) publish statistics on banking and related financial matters.
C
141. Which of the following is not a function of the Federal Reserve System? A) It acts as a central bank. B) It acts as a banker to banks. C) It determines tax levels in conjunction with the U.S. Treasury. D) It sets monetary policy.
C
148. Membership in the Federal Reserve System A) is held by state-owned banks only. B) is held collectively by all banks in the banking system. C) is held by only a minority of banks in the banking system. D) is held by banks that also have branches outside the United States.
C
149. Which organization is responsible for managing the nation's money supply? A) The Federal Reserve Bank of New York B) The United States Treasury C) The Federal Open Market Committee D) The American Association of Bankers
C
153. For a given level of reserves, a decrease in the reserve requirement ratio will A) decrease legal reserves and decrease the money supply. B) increase legal reserves and decrease excess reserves. C) decrease legal reserves and increase excess reserves. D) decrease excess reserves and decrease the money supply.
C
155. Decreasing the reserve requirement ratio is A) a contractionary policy because it lowers the amount of total reserves in the banking system. B) a contractionary policy because it lowers the amount of excess reserves in the banking system. C) an expansionary policy because it raises the amount of excess reserves in the banking system. D) an expansionary policy because it raises the amount of required reserves in the banking system.
C
156. Suppose a bank has $10,000 in deposits and $1,000 in reserves. The required reserve ratio is 5%. Which of the following occurs if the required reserve ratio is increased to 10%? A) The bank's required reserves will decrease to $500. B) The bank's excess reserves will increase to $1,000. C) The bank's required reserves will increase to $1,000. D) The bank's ability to create loans increases by 5%.
C
163. Which of the following is an interest rate that is set directly by the Fed? A) the prime lending rate B) the required reserve rate C) the discount rate D) the federal funds rate
C
168. Open market transactions involve which of the following activities? I. issuing new Federal Reserve notes II. buying or selling newly issued government bonds to raise funds for the government III. buying or selling previously issued government bonds to change the volume of bank reserves A) I only B) II only C) III only D) II and III only . E) I, II ,and III
C
172. The Federal Reserve influences the level of interest rates in the short run by changing the A) demand for money through changes in reserve requirements. B) demand for money through open market operations. C) supply of money through changes in open market operations. D) supply of money through changes in stock market operations.
C
176. The Fed conducts an open market purchase of $10 million in government securities. If the reserve ratio is 20%, what is the maximum change in the money supply? Assume banks hold no excess reserves and there is no currency withdrawal from the banking system. A) maximum increase in money supply = $10 million B) maximum decrease in money supply = $10 million C) maximum increase in money supply = $50 million D) maximum decrease in money supply = $50 million
C
178. If the reserve ratio is 10%, and banks do not hold excess reserves, when the Fed purchases $10 million of government bonds, bank reserves A) increase by $10 million and the money supply could eventually increase by $10 million. B) decrease by $10 million and the money supply could eventually decrease by $100 million. C) increase by $10 million and the money supply could eventually increase by $100 million. D) decrease by $10 million and the money supply could eventually decrease by $10 million
C
179. The Federal Reserve buys $10,000 of government securities from commercial banks. If the required reserve ratio is 25%, what is the maximum amount of change in the nation's money supply? Assume that no banks keep excess reserves and no individuals or firms hold cash. A) expand by $10,000 B) expand by $30,000 C) expand by $40,000 D) expand by $7,500
C
187. Refer to Scenario 1. Immediately following Sheila's $100,000 deposit into her checking account, Perez Bank A) has no excess reserves. B) has $10,000 in excess reserves. C) has $90,000 in excess reserves. D) has $100,000 in excess reserves.
C
190. Refer to Scenario 2. Which of the following happens when Henry Hyde pays for the bond by writing a check from his checking account at the Jekyll Bank? A) Jekyll Bank's checkable deposits decreases by $50,000 and its reserves decreases by $45,000. B) Jekyll Bank's checkable deposits decreases by $45,000 and its reserves decreases by $50,000. C) Jekyll Bank's checkable deposits and reserves decrease by $50,000 each. D) Jekyll Bank's checkable deposits and reserves increase by $45,000 each.
C
192. Refer to Scenario 2. As a result of the open market sale, Jekyll Bank A) can create $50,000 of new loans. B) will have $45,000 of excess reserves. C) will have to borrow reserves to replenish its reserve deficiency. D) will have an increase in checkable deposits.
C
114. Refer to Table 9-6. What is the value of $B in stage 1? A) $100 B) $200 C) $600 D) $800
D
115. Refer to Table 9-6. New loans made in Stage 1($C) amount to A) $100. B) $200. C) $600. D) $800.
D
117. Refer to Table 9-6. What is the value of $E in Stage 4? A) $1,000 B) $1,800 C) $2,440 D) $2,952
D
121. Refer to Table 9-6. What is the value of the deposit multiplier? A) 0.1 B) 0.2 C) 1 D) 5
D
123. The banking system is able to make new loans equal to A) total legal reserves of the system. B) total excess reserves of the system. C) total required reserves of the system. D) a multiple of total excess reserves of the system.
D
124. The deposit multiplier is the inverse of A) legal reserves. B) excess reserves. C) checkable deposits. D) the required reserve ratio.
D
128. Assume that banks do not hold excess reserves, all deposits remain in the banking system and that the required reserve ratio is 20%. If one bank obtains excess reserves of $10,000, then the maximum increase in money supply is A) $10,000. B) $20,000. C) $40,000. D) $50,000.
D
134. Which of the following is true? A) A bank is solvent when its deposits become positive. B) A bank is insolvent when its reserves become negative. C) A bank is solvent when its excess reserves become negative. D) A bank is insolvent when its net worth becomes negative.
D
145. The Board of Governors of the Federal Reserve System is A) elected by the member banks' presidents. B) appointed by the Secretary of the Treasury. C) appointed by the state governors in each Federal Reserve district. D) appointed by the president of the United States and confirmed by the Senate.
D
147. To reduce the political influence on the Board of Governors, A) the president of the United States appoints a new board every four years. B) the reelection campaign for each member is less than one year. C) each member is appointed for 7 years, with one term expiring every year. D) each member is appointed for 14 years, with one term expiring every two years.
D
152. Which of the following is true regarding the reserve requirements? A) The Fed changes them frequently because they are a power monetary policy tool. B) The Fed does not change them much at all because taxation is a more impactful monetary policy tool. C) The Fed changes them frequently because doing so simplifies banking operations. D) The Fed does not change them much at all because doing so would make banking operations
D
162. Lowering the discount rate is A) a contractionary policy stance because the cost of borrowing funds falls, thereby encouraging consumption and investment spending. B) a contractionary policy because it reduces banks' profit margins by lowering the return on lending. C) an expansionary policy stance because consumers and businesses can now borrow funds directly from the Fed at a lower cost, thereby encouraging private spending. D) an expansionary policy stance because it will be less costly for banks to borrow funds and this puts downward pressure on interest rates in the economy.
D
165. Which of the following is a market in which banks lend reserves to one another? A) required reserve market B) open market C) discount market D) federal funds market
D
169. When the Federal Reserve conducts open market transactions, it A) buys or sells corporate bonds in the bond market. B) issues government bonds to raise funds for the government. C) makes credit available to financial institutions in crises. D) buys or sells previously issued government bonds.
D
175. Suppose the reserve ratio is 25% and banks do not hold excess reserves. When the Fed sells $40 million of bonds to the public, A) bank reserves increase by $40 million and money supply could increase by a maximum of $40 million. B) bank reserves increase by $40 million and money supply could increase by a maximum of $160 million. C) bank reserves decrease by $40 million and money supply could decrease by a maximum of $40 million. D) bank reserves decrease by $40 million and money supply could decrease by a maximum of $160 million.
D
181. When the Fed purchases government bonds it _____ reserves and ____ the money supply. A) decreases; increases B) increases; decreases C) decreases; decreases D) increases; increases
D
193. Refer to Scenario 2. Once the full impact of the Fed's open market sale works its way through the banking system, what is the maximum change on the money supply as a result of these two events? A) Money supply rises by $5,000. B) Money supply rises by $500,000. C) Money supply falls by $50,000. D) Money supply falls by $500,000.
D
