ECO 2013 ch 11&12 Q's

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If the reserve requirement is 25% and a new deposit leads to a potential increase in the money supply of $4,000, the amount of the new deposit must equal: $1,000. $10,000. $4,000. $5,000.

$1,000

If a person borrows $2,000 at 5% interest and never makes any payments, how much will the loan balance be after five years? $2,250 $2,500 $2,255.55 $2,552.56

$2,552.56

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's required reserves? $1,125 $6,000 $1,500 $375

$375

If the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of: $50. $2,500. $4,500. $5,000.

$5,000.

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How much money can the banking system create? $0 $1,125 $6,000 $1,500

$6,000

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond (the price) is: $80. $800. $1,000. $8,000

$800.

Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. This bank's reserve ratio is: 0.075. 0.025. 0.10. 0.25.

0.10.

Suppose a one-year bond with a face value of $200 is sold for $188. What is the bond's yield? 5.3% 6.0% 6.4% 12.0%

6.4%

The main policymaking arm of the Fed is the: Federal Open Market Committee. Beige Book Committee. Council of Economic Advisers. Money Committee.

Federal Open Market Committee.

What happens to the money multiplier when the reserve requirement increases from 20% to 25%? It decreases from 5 to 4. It increases from 4 to 5. It stays the same. It falls to zero.

It decreases from 5 to 4.

Which of the following statements is CORRECT? M2 measures assets primarily used as a medium of exchange. M2 includes M1. M1 includes assets primarily used as a means of saving. The Federal Reserve discontinued reporting on M1 and M2 because they provide little insight into the state of the economy.

M2 includes M1.

Which statement concerning the structure of the Federal Reserve System is correct? There are 10 regional Federal Reserve banks. The Fed's Board of Governors consists of 12 members. The Federal Open Market Committee (FOMC) has seven members. The Chair and Vice Chair of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years.

The Chair and Vice Chair of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years.

An interest rate that is low only for a short time is called: a teaser rate. an annual percentage rate. a balloon payment. a balance transfer fee.

a teaser rate

Liquidity refers to: a) how quickly, easily, and reliably an asset can be converted into a medium of exchange. b)how easily cash can be transported across national borders. c)how fast money can be transferred from one account to another account. d)how fast money travels throughout the economy.

a) how quickly, easily, and reliably an asset can be converted into a medium of exchange.

What is the yield of a perpetuity bond that has an interest payment of $500 and a price of $15,000? a)3.33% b)2.66% c)2% d)1.25%

a)3.33% The yield (Y) on the bond is 3.33%. It is determined by dividing the interest payment by the price of the bond, so the equation is: Y = $500 ÷ $15,000, or Y = 3.33%.

The minimum age at which you can withdraw funds from an IRA without penalty is: a)59½ years. b)62 years. c)65 years. d)67 years.

a)59½ years.

The quantity demanded for funds in the loanable funds market is _________ related to the interest rate. a)negatively b)positively c)perfectly d)not

a)negatively

Which one of the following will cause the supply of loanable funds curve to shift leftward? lowering of firms' expectations about the economy an increase in government regulations that make plant expansion difficult an increase in asset prices leading to a decrease in purchases of stocks and bonds an increase in the government deficit

an increase in the government deficit

If the reserve requirement is greater than the reserve ratio, excess reserves: are negative. are equal to total reserves. are greater than zero. are greater than total reserves.

are negative.

The graph shows the supply and demand for loanable funds. If the market interest rate is 3%: a) the market will reach equilibrium only if lenders decide to save more. b) there will be an excess supply of funds. c) more funds will be demanded by firms than supplied by households. d) there will be pressure for the interest rate to rise.

b) there will be an excess supply of funds.

What happens to the amount of funds supplied to the loanable funds market when the interest rate increases? a)The amount of loanable funds supplied fluctuates up and down as the interest rate increases. b)The amount of loanable funds supplied increases. c)The amount of loanable funds supplied decreases. d)The amount of loanable funds supplied stays the same.

b)The amount of loanable funds supplied increases.

All of the following are functions of money EXCEPT: a) as a medium of exchange. b) as a unit of account. c) as a standard value. d) as a store of value.

c) as a standard value.

Pooling money into portfolios is a way financial institutions reduce: a) information costs. b) transactions costs. c) risk. d) production costs.

c) risk.

How much interest will be earned on $1,000 at 10% interest over 5 years? Assume compounding interest. a)$16,449.40 b)$14,863.09 c)$610.51 d)$13,420.99

c)$610.51

Currency represents about how much of M1? a)almost 100% b)approximately 75% c)approximately 50% d)approximately 25%

c)approximately 50%

Which of the following is not included in M1? a)coins b)paper currency c)money market deposit accounts d)checkable deposits

c)money market deposit accounts

If Abigail withdraws $300 cash from her checking account, her bank's assets then: fall by $300 and liabilities fall by $300. do not change but liabilities fall by $300. fall by $300 and liabilities rise by $300. fall by $300 but liabilities do not change.

fall by $300 and liabilities fall by $300.

Suppose while households are deciding to increase saving, the demand by firms for investment funds falls. In the market for loanable funds the real interest rate will ___ and the quantity of loanable funds will _____. rise; fall rise; rise fall; rise, fall, or stay the same rise, fall, or stay the same; rise.

fall; rise, fall, or stay the same

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price: falls to $875. falls to $800. rises to $1,125. falls to $700.

falls to $875

Which of these is a basic goal of the Federal Reserve System? a balanced federal budget export promotion zero interest rates full employment

full employment

Open market operations involve the purchase and sale of: corporate bonds. municipal bonds. utility bonds. government securities.

government securities.

Which is NOT a way financial institutions reduce risk? a)performing credit checks on borrowers b)diversifying funds c)collecting information helpful for risk assessment d)guaranteeing a high rate of return for all lenders

guaranteeing a high rate of return for all lenders

A lower reserve requirement: lowers the money multiplier. increases the ability of banks to make loans. restricts the borrowing capability of borrowers. further limits deposit creation.

increases the ability of banks to make loans.

When the Fed buys bonds, its demand _____ the price of bonds, _____ nominal interest rates. decreases; increasing increases; decreasing increases; increasing decreases; decreasing

increases; decreasing

Monetary policy, like fiscal policy, is subject to _____ lags. implementation decision information information, implementation, and decision

information, implementation, and decision

The Fed announced in September 2013 that it would postpone winding down its monetary stimulus until the economic recovery was stronger. When the Fed does finally begin to reduce bond purchases: bond prices will rise. interest rates will fall. interest rates will rise. stock prices will rise.

interest rates will rise.

The demand curve for loanable funds represents _____ and is _____. investors; horizontal investors; downward sloping savers; horizontal savers; downward sloping

investors; downward sloping

If excess reserves are equal to zero, the reserve ratio: is greater than the reserve requirement. is equal to the reserve requirement. is less than the total ratio. is greater than the total ratio.

is equal to the reserve requirement.

If a customer deposits $500 cash in a checking account, the bank's: liabilities increase. assets decrease. liabilities decrease. liabilities stay the same.

liabilities increase.

Checking deposits generally have a _____ return on investment than do certificates of deposit because checking deposits are _____. higher; less liquid higher; more liquid lower; less liquid lower; more liquid

lower; more liquid

Traditional Individual Retirement Accounts (IRAs) are taxed: when you make contributions and again when you make withdrawals. only when you make contributions. only when you make withdrawals. Traditional IRAs are never taxed.

only when you make withdrawals.

The main tool of monetary policy is: the discount rate. capital gains taxes. open market operations. the reserve requirement.

open market operations.

When a financial institution provides a standardized financial product such as a mortgage, it is: reducing information costs. reducing transaction costs. spreading risk. preventing fraud.

reducing transaction costs.

Country Bank needs to increase the amount of deposits it holds in reserve in response to a change in the Fed requirements. Which of the following monetary policy tools did the Fed just use? government spending reserve requirements discount rate open market operations

reserve requirements

Which list represents monetary policy actions that are consistent with one another? sell government bonds, raise reserve requirements, lower the discount rate sell government bonds, raise reserve requirements, raise the discount rate buy government bonds, lower reserve requirements, raise the discount rate buy government bonds, raise reserve requirements, raise the discount rate

sell government bonds, raise reserve requirements, raise the discount rate

If Jack Sparrow buries a chest of gold bullion on a deserted island and plans to come back later, then the gold is functioning as a: unit of account. store of value. medium of exchange. barter tool.

store of value.

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults: the actual multiplier will fall. the potential multiplier will rise. the actual multiplier will rise. the potential multiplier will fall.

the actual multiplier will fall.

As the real interest rate falls: the demand for loanable funds rises. the quantity demanded of loanable funds rises. the demand for loanable funds falls. less funds are demanded.

the quantity demanded of loanable funds rises.

The discount rate is: the rate regional Federal Reserve banks charge depository institutions to borrow reserves. now set below the federal funds rate. the interest rate banks charge one another when they lend or borrow reserves. the Fed's most effective monetary policy tool.

the rate regional Federal Reserve banks charge depository institutions to borrow reserves.


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