econ exam 7&8
2) When an asset enables people to transfer purchasing power into the future it serves the function of a ________. A) store of value B) unit of account C) medium of exchange D) means of deferred payment
a
38) When the Fed buys or sells government bonds to private banks in exchange for reserves, it is referred to as: A) moral suasion. B) reserve targeting. C) the Fed's dual mandate. D) open market operations.
d
17) Assuming all else equal, if the airline industry decides to purchase a large number of new planes, it is likely to cause: A) an increase in the demand for loans and an increase in the rate of interest on these types of loans B) an increase in the demand for loans and a decrease in the rate of interest on these types of loans C) a decrease in the demand for loans and an increase in the rate of interest on these types of loans D) a decrease in the demand for loans and a decrease in the rate of interest on these types of loans
a
19) Assuming all else equal, if households are pessimistic about future income, it is likely to cause a(n): A) a decrease in the supply of credit and an increase in interest rates on these types of loans B) a decrease in the supply of credit and a decrease in interest rates on these types of loans C) an increase in the supply of credit and a decrease in interest rates on these types of loans D) an increase in the supply of credit and an increase in interest rates on these types of loans
a
2) Credit is: A) the loan that a debtor receives. B) the income that an employee earns. C) any good that is available for free. D) any good that cannot be consumed but is used for the production of other goods.
a
20) Which of the following is actually SET by Fed policy? A) Discount rate and Fed Funds target rate B) Effective Fed Funds rate and Discount rate C) Treasury Bill rate and Discount rate D) Treasury Bill rate and Prime rate
a
20) Which of the following sit on the part of the Fed that sets monetary policy targets? A) Federal Reserve District Bank presidents B) Chair of the Council of Economic Advisors C) Secretary of the Treasury D) all of the above
a
23) The general term applied to the Federal Reserve, the Bank of England, and the Bank of Japan is A) wholesale bank B) retail bank C) clearing bank D) investment bank
a
24) Investment pools gathered from a small number of very wealthy individuals or institutions are referred to as: A) hedge funds. B) fixed deposits. C) capital investment. D) institutional savings.
a
25) Which of the following holds the reserves of private banks in the United States? A) The Fed B) The Pentagon C) The Treasury Department D) The FDIC
a
28) Deposits in a bank are A) loans to the bank and liabilities of the bank B) loans to the bank and assets of the bank C) loans by the bank and assets of the bank D) investments in the bank and capital of the bank
a
4) Anne works as a babysitter. She uses her wage as a babysitter to buy a pair of roller skates. In this case, money served the function of ________. A) a medium of exchange B) a store of value C) a unit of account D) a means of deferred payment
a
43) A bank is solvent when: A) the value of its total assets exceeds the value of its liabilities. B) the value of its liabilities exceeds the value of its assets. C) its stockholders' equity exceeds the value of its assets. D) the value of its liabilities exceeds its stockholders' equity.
a
43) Who regulates the quantity of money circulating in the economy? A) the Federal Reserve B) the banking system C) the U.S. Congress D) the President of the United States
a
46) Another name for an institutional bank run is A) Wholesale market bank run B) Bank panic C) Retail market bank run D) Stock market crash
a
8) If an individual borrows $100 at an annual rate of interest of 5%, how much interest will he have to pay at the end of a year? A) $5 B) $10 C) $20 D) $50
a
*27) Which of the following statements is true of the federal funds market? A) No banks are refused loans in the federal funds market. B) In the federal funds market, banks with a shortage of reserves borrow funds, while banks with an excess of reserves lends them out. C) The interbank lending system works more efficiently in periods of financial panic than in periods of financial stability. D) Although the federal funds market aims to provide liquidity to needy banks, it is not very popular as overnight loans are logistically inefficient for large banks.
b
20) Another label for the market for loaned funds is the: A) spot market. B) credit market. C) capital market. D) exchange market.
b
25) Institutions that pool funds from savers and lend it out at interest but are not banks are A) central banks. B) money market mutual funds. C) brokerages D) deposit insurance committees.
b
27) Loans that a bank makes are A) liabilities of the bank B) assets of the bank C) deposits of the bank D) capital of the bank
b
48) When used as an accounting device to keep track of value, money is functioning as A) a medium of exchange B) a unit of account C) a store of value D) all of the above
b
56) ________ refers to funds available for immediate payment. A) Velocity B) Liquidity C) Term deposits D) Mutual funds
b
7) Interest rates are determined by A) the Federal Reserve System in meetings of the Federal Open Market Committee B) the interaction of the demand for loans of certain types and the supply of funds for those loans C) the amount of money invested in stock exchanges like the New York Stock Exchange D) the difference in exchange rates across different countries
b
7) The paper currency that is currently being used in the U.S. is an example of ________ money. A) hard B) fiat C) commodity D) price-indexed
b
9) When economists refer to the "real" interest rate, they mean A) the nominal interest rate adjusted for tax rates. B) the nominal interest rate adjusted for inflation. C) the nominal interest rate adjusted for income changes. D) the nominal interest rate adjusted for changes in exchange rate
b
50) The biggest wave of bank failures in the U.S. occurred: A) before the Great Depression. B) during the Great Depression. C) in the early 1990s. D) during 2007 to 2009.
b`
14) The U.S. central bank is the government institution that: A) controls the money supply and invests in foreign assets. B) monitors financial institutions, controls the money supply, and invests in foreign assets. C) monitors financial institutions, controls the money supply, and sets certain key interest rates. D) monitors financial institutions, controls the money supply, sets certain key interest rates, and decides on political targets.
c
44) A credit card is A) money. B) barter money. C) not money. D) fiat money.
c
1) When an asset is traded for goods and services it is serving the function of a ________. A) store of value B) unit of account C) loanable fund D) medium of exchange
d
44) A bank run occurs when: A) a bank's assets exceeds its liabilities. B) a bank sells its assets to its own stockholders. C) the central monetary authority regulates the functioning of banks. D) a bank experiences an extraordinarily large volume of withdrawals.
d
47) Which of the following is a common property of items used as money? A) can be easily divided into units of various size or value B) can be easily transported C) has a relatively stable quantity and value D) all of the above
d
47) Which of the following statements is true of the U.S. economy? A) No bank runs have occurred after 1990 in the U.S. economy. B) No bank runs have occurred before 1990 in the U.S. economy. C) Almost one-fourth of the U.S. banks failed during the Great Depression. D) The number of bank runs decreased after the FDIC was established.
d
8) In theory, any object ________ could play the role of fiat money. A) that has an unlimited demand B) for which demand is limited C) in unlimited supply D) in limited supply
d
26) The federal funds market refers to the market where: A) banks obtain loans of reserves from each other. B) the federal government borrows overnight funds from the Fed. C) the Fed obtains loans of reserves from central banks of other nations. D) there are no predetermined rates of interest on loans and the highest bidding borrower gets the loan.
a
32) Which of the following financial organizations have the ability to influence the supply of bank reserves in the United States? A) The Fed B) Only private commercial banks C) Only public sector banks D) The World Bank
a
36) Demand deposits have a ________ maturity. A) 0-year B) 1-year C) 2-year D) 3-year
a
48) The clip from the movie "It's a Wonderful Life" illustrates which of the following A) the problem of liquidity risk for banks and financial firms when depositors withdraw funds rapidly B) the problem of default risk when individuals lose jobs and struggle to repay debt C) the problem of obtaining credit for new business projects during financial crises D) the problem of using paper money
a
49) The occurrence and risk of bank runs grows out of A) the liquidity risk embedded in deposits being used as loans B) the default risk of borrowers falling behind on payments C) the reporting risk of banks failing to report losses on loans D) the use of paper money rather than a gold standard
a
9) Which of the following is true of fiat money? A) Fiat money is not backed by a physical commodity. B) Fiat money is illegal and difficult to counterfeit. C) The technology required to produce fiat money is not widely available. D) The raw materials required for the production of fiat money are available only in a few countries.
a
13) Which of the following statements is true? A) Currency in circulation in any economy is likely to be equal to the total money supply in the economy. B) Currency in circulation in any economy is likely to be less than the total money supply in the economy. C) In the United States, currency in circulation accounts for more than 50% of the total money supply. D) In the United States, currency in circulation accounts for less than 1% of the money supply
b
15) In the United States, the central bank is called the: A) Bank of America. B) Federal Reserve Bank. C) Reserve Bank of America. D) National Bank of America.
b
21) The policy making body within the Fed is comprised of A) the Fed Chairman and Board of Governors B) The Board of Governors and the District Bank Presidents C) The Secretary of Treasury and Board of Governors D) The Director of Office of Management and Budget, The Fed Chairman , and Treasury Secretary
b
21) Which of the following statements is true? A) An excess supply of credit exerts an upward pressure on the real rate of interest. B) An excess demand for credit exerts an upward pressure on the real rate of interest. C) At rates of interest below the equilibrium rate, there is an excess supply of credit. D) At rates of interest above the equilibrium rate, there is an excess demand for credit
b
22) The term "lender of last resort" for the financial system as a whole during widespread crisis A) applies to the FDIC in its guarantees of bank deposits up to a certain level B) applies to the Fed as in its ability to lend to the banking system C) applies to a few very large New York-centered banks D) applies to the U.S. Treasury
b
28) A commercial bank's last resort for borrowing reserves is from the: A) federal funds market. B) discount window. C) central government. D) foreign banks.
b
29) Cash equivalents are: A) a part of a bank's liability. B) riskless, liquid assets that banks can immediately access. C) the amount of deposits held by the public in a particular bank. D) assets that do not attract interest, and hence generate no additional revenue.
b
29) The ________ is the interest rate that banks charge each other for overnight loans. A) spot interest rate B) federal funds rate C) discount window interest rate D) subsidized banking interest rate
b
3) When an asset is used as a universal yardstick that is used for expressing the worth of different goods and services, it is serving the function of a ________. A) store of value B) unit of account C) medium of exchange D) loanable fund
b
30) The funds being lent in the federal funds market are: A) bank deposits of domestic households. B) reserves at the Fed. C) investments of foreign firms. D) tax revenue earned by the federal government.
b
31) Which of the following is the primary and direct mechanism with which the Federal Reserve System can influence interest rates and the broader economy? A) manipulating exchange rates B) managing the money supply C) setting mortgage rates D) changing government spending
b
34) Borrowed funds that are to be repaid in a year or more are referred to as: A) annual debt. B) long-term debt. C) loanable funds. D) stockholders' equity.
b
35) ________ refers to the time until debt must be repaid. A) Principal B) Maturity C) Dividend D) Time value of money
b
37) The transfer of short-term liabilities into long-term investments is called: A) risk transformation. B) maturity transformation. C) investment restructuring. D) intertemporal transformation.
b
38) One of the risks of maturity transformation is that: A) it discourages savings. B) it can lead to bank runs. C) it can increase the rate of inflation. D) it reduces the profitability of banks.
b
39) For households and business, their deposits in the bank are money, but for the bank they A) are investments in the bank and a form of owner's capital B) are loans to the bank that the bank uses to make loans C) are like deposits in a warehouse where the vault plays the role of warehouse D) are loans to depositors
b
41 An official measure of money in the United States is M1, which includes the sum of A) checkable deposits plus small time deposits. B) currency plus checkable deposits. C) currency plus plus credit card transactions. D) currency plus traveler's checks plus time deposits.
b
42) A bank is insolvent when: A) its total assets exceed its total liabilities. B) its total liabilities exceed its total assets. C) its stockholders' equity exceeds its total assets. D) its stockholders' equity exceeds its total liabilities
b
5) Ryan saved $50,000 last year in his bank account so that he could buy a car this year. In this case, money served the function of a ________. A) medium of exchange B) store of value C) unit of account D) means of deferred payment
b
53) A financial institution that helps companies sell stocks and bonds to the public as in the initial public offering (IPO) of Facebook is a(n): A) money market mutual fund B) investment bank C) brokerage D) stock mutual fund
b
54) In financial markets, a "bond" is A) a way that companies split up ownership among many investors B) a way that companies borrow directly from the public C) a way that companies insure themselves against financial risk D) a way that companies transfer risk to other companies
b
54) In financial markets, a "bond" is A) a way that companies split up ownership among many investors B) a way that companies borrow directly from the public C) a way that companies insure themselves against financial risk D) a way that companies transfer risk to other companies
b
6) ________ money refers to something that is used as money but that is otherwise worthless and typically has the backing of the government or a central bank. A) Commodity B) Fiat C) Representative D) Federal
b
15) Which of the following is likely to cause in increase in the demand for credit? A) decreases in national income B) increases in concerns about future economic performance C) plans to increase production and expand to newer markets D) plans to decrease production and exit from existing markets
c
16) Which of the following is likely cause a decrease in the demand for credit? A) increases in national income B) decreases in concerns about future economic performance C) decreases in the scale of production D) increases in the scale of production
c
17) Which of the following statements is NOT a function of the Fed? A) It oversees interbank payment systems. B) It monitors the stockholders' equity of commercial banks. C) It regulates the various stock markets in the economy. D) It ensures that commercial banks report their assets and liabilities with accuracy.
c
19) Which of the following is the interest rate targeted by the Fed? A) Treasury Bill rate B) Discount rate C) Fed Funds rate D) Prime rate
c
22) Institutions that channel funds from suppliers of financial capital to users of financial capital are referred to as: A) central banks. B) mutual funds. C) financial intermediaries. D) deposit insurance committees. Answer: C
c
26) Which of these financial intermediaries is most likely to invest in new companies that are just starting up and have no track record? A) Hedge funds B) Private equity funds C) Venture capital funds D) Asset management companies
c
30) An asset is liquid if: A) it offers a positive rate of interest. B) its value does not change from day to day. C) it can be easily converted into cash without loss of value. D) its value is more likely to increase in future.
c
33) Demand deposits are termed so because: A) depositors can demand any rate of interest on such deposits. B) most consumers want to open such accounts as they are greatly in demand. C) depositors can withdraw money from such deposits at any point of time. D) there are no limitations on the amount of money that can be deposited into such accounts.
c
40) Normally, the Federal Deposit Insurance Corporation would shut down a bank when: A) stockholders' equity is greater than zero. B) assets of the bank exceed the liabilities of the bank. C) liabilities of the bank exceed the assets of the bank. D) assets of the bank equal the liabilities of the bank.
c
41) Which of the following is a role of the Federal Deposit Insurance Corporation in the United States? A) It monitors the money supply. B) It controls the real rate of interest. C) It regulates banks that are insolvent. D) It determines the monetary policy of the country.
c
42) Suppose you use your debit card to buy soda from a soda machine. Which of the following is true regarding the transaction? A) The debit card is not money; it's only an instruction to make a loan. B) The debit card is money; your use reflects the exchange of a good. C) The debit card is not money; its use is only a tool to cause money to move from your account. D) Your use makes the debit card money as funds are transferred between your and the machine owner
c
45) An institutional or wholesale market bank run or is most likely to occur when: A) households deposit their money into a weak bank. B) households withdraw their money from a weak bank. C) firms and other banks withdraw money from a weak bank. D) firms and other banks deposit their money into a weak bank.
c
45) If Rob deposits $300 in currency into his savings account at Bank of America, A) M1 decreases. B) M1 does not change. C) M2 increases. D) M2 decreases.
c
46) When the term Treasury Bills is used, it refers to A) money/currency printed or produced by the Federal Reserve B) gold-back money currency that existed in the 1800s C) short term loans issued by the U.S. government D) long term loans issued by the U.S. government
c
5) The total interest that a borrower has to pay on a loan is equal to the: A) principal plus the rate of interest. B) principal minus the rate of interest. C) principal times the rate of interest. D) principal divided by the rate of interest.
c
51) In stock markets, A) investors become lenders to companies B) investors act as a financial intermediary C) investors purchase shares of ownership in companies D) investors increase the supply of credit
c
55) The most established theory of stock prices relates a company's asset prices to: A) the future value of inflation and interest rates. B) past earnings of companies and past values of interest rates. C) future earning prospects of companies and future values of interest rates. D) future earning prospects of companies and future values of inflation rates
c
6) The annual price of a one dollar loan is referred to as the: A) principal. B) service tax. C) rate of interest. D) discount value.
c
11) Select the accurate statement below regarding gold standards and fiat paper standards: A) paper standards require commitments to the value of money while gold standards require commitments to the conversion rate B) gold standards can create problems of deflation during periods where there is a high demand for gold C) gold standards tend to restrict the ability of governments to devalue their currency by creating more D) all of the above
d
18) Savers are willing to lend out money because: A) of altruism. B) the rate of inflation in an economy is normally positive. C) the rate of inflation in an economy is normally negative. D) they prefer to spend money in the future rather than today.
d
23) Companies that enable investors to use their savings to buy financial securities are referred to as: A) banks. B) hedge fund companies. C) private equity funds. D) asset management companies.
d
24) Which of the following functions does the Fed perform? A) issuing and receiving payments on behalf of the U.S. government B) managing the U.S. Public Debt and setting long term interest rates C) setting short term interest rates and managing insolvent banks D) managing the money supply and clearing checks between banks
d
3) Which of the following statements is true? A) Money that is lent out is considered to be a liability. B) People who lend money are known as debtors. C) People who borrow money are known as creditors. D) Non-bank institutions are also a part of the credit market.
d
52) A financial institution that pools money from investors to buy stocks is a(n) A) money market mutual fund B) investment bank C) brokerage D) stock mutual fund
d
57) A bank is said to have enough liquidity if: A) it holds deposits amounting to at least $100,000. B) it operates for seven days a week for more than 12 hours a day. C) the value of its assets exceeds the value of its liabilities by at least $50,000. D) it has enough funds to conduct its day-to-day businesses and meet the regulatory requirements
d
58) The Dow Jones Industrial Index and Standard and Poor's 500 Index are examples of A) weighted averages of bond prices B) weighted averages of default probabilities C) weighted averages of company size D) weighted averages of stock prices
d
18) The Federal Reserve System is part of A) the U.S. Department of Treasury B) the U.S. Department of Commerce C) the Bureau of Economic Analysis D) none of the above
Answer: D (It is an independent federal agency)
16) Which of the following tools does the Fed use to pursue its objectives? A) It influences short-run interest rates. B) It determines the efficient level of government spending. C) It influences market prices through price ceilings and price floors. D) It provides loans to new firms and businesses at extremely low rates of interest.
a
*39) If the Fed sells government bonds in the open market, it will cause: A) a decrease in the supply of bank reserves B) an increase in the supply of bank reserves C) an increase in the Fed Funds rate D) a decrease in stock market prices
a
10) The "gold-standard" is a system in which: A) paper currency is convertible into gold at a fixed value . B) people use gold as a medium of exchange. C) gold mining firms own the right to print currency. D) gold is imported into the U.S. in exchange of paper currency.
a
11) If the nominal interest rate in an economy is 6%, and the rate of inflation in the economy is 4%, the real interest rate in the economy is: A) 2%. B) 24%. C) 1.5%. D) 10%.
a
*12) Consider two economies: A and B. The nominal interest rate is the same in both economies, but the rate of inflation is higher in economy B. Which of the following statements will then be true? A) The real interest rate will be higher in economy A. B) The real interest rate will be higher in economy B. C) The real interest rate will be the same in both economies. D) Whether the real interest rate is higher in economy A or B will depend on the number of borrowers in both economies.
a
*14) If the annual inflation rate in an economy is negative, the purchasing power of a dollar: A) will increase over time. B) will decrease over time. C) will remain the same over time. D) can increase or decrease depending on the nominal interest rate.
a
*40) If the Fed buys government bonds in the open market, it will cause: A) a decrease in the supply of bank reserves B) an increase in the supply of bank reserves C) a decrease in the Fed Funds rate D) a decrease in stock market prices
b
1) Economic agents who borrow funds are known as: A) creditors. B) debtors. C) receivers. D) investors.
b
10) Which of the following equations is correct? A) Real interest rate = Nominal interest rate + Inflation rate B) Real interest rate = Nominal interest rate - Inflation rate C) Real interest rate = Nominal interest rate × Inflation rate D) Real interest rate = Nominal interest rate / Inflation rate
b
12) M2 adds together: A) currency in circulation, savings accounts, and held with foreigners. B) currency in circulation, checking accounts, savings accounts, travelers' checks, and money market accounts. C) currency in circulation, checking accounts, savings accounts, travelers' checks, and currency held with foreigners. D) currency in circulation and currency held with foreigners.
b
13) If the annual inflation rate in an economy is positive, the purchasing power of a dollar kept in a bank: A) will increase over time. B) will decrease over time. C) will remain the same over time. D) can increase or decrease depending on the economic growth rate.
b