ECO2013-Andrew Tucker-Exam Three

Two functions of a commercial bank

1. accept deposits 2. give out loans

The value of money=

1/price level therefore it is inverse to the price level. If prices go up, money value goes down.

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

d.) $6,000 (1/.25)=4 4 ( 1,500)= 6,000

The amount by which the bank's actual reserves > the required reserves

"Excess reserves"

WHAT IS MONEY?

Anything that is accepted in exchange for other goods and services or for the payment of debt.

Federal Reserve board members serve for ______ years, but the chair serves for ______. A) 4; 14 years B) 14; 4 years C) 4; 4 years D) 14; life

B) 14; 4 years

The Federal Open Market Committee (FMOC) consists of:

-Seven members of the Board of Governors -Five of the 12 regional Federal Reserve Bank presidents

three sources of the supply for loanable funds

1. Past and present savings of households 2. Business savings 3. THE FEDERAL RESERVE BANK

Money derives its value from:

1. acceptability 2. it is legal tender 3. its relative scarcity

Sasha buys a pair of shoes for $200. She pays for it with 200, one-dollar bills. The dollar bills, in this case, are functioning as a: A) unit of account. B) store of value. C) medium of exchange. D) barter tool.

C) medium of exchange.

The Federal Open Market Committee is responsible for: A) setting interest rates. B) running the check-clearing process. C) overseeing the buying and selling of government securities in the open market. D) reducing the Fed's reliance on open market operations.

C) overseeing the buying and selling of government securities in the open market.

Assume the reserve requirement is 10% and all banks are fully loaned up. If a new deposit of $10,000 is made into Bank X, with this deposit Bank X can make new loans of: A) $9,000. B) $10,000. C) $1,000. D) $11,000.

A) $9,000. (10,000 * .10)= 1,000 The amount that must be kept on reserve (1,000 - 10,000)= 9,000 The rest that can be used to loan money out with

Which of the following illustrates the information lag? A) The economy is predicted to increase at 0.1% in July, but the numbers are revised in August to reflect an actual 2% decrease. B) Current data have been provided to policymakers, but they decide to wait and see what happens in the next quarter. C) The government responds to the 2% decrease in the economy, and private investment is crowded out of the investment market. D) The government decides not to respond to the 2% decrease in the economy because it is worried about the possibility of inflation.

A) The economy is predicted to increase at 0.1% in July, but the numbers are revised in August to reflect an actual 2% decrease.

The _____ lag is the time policymakers must wait for economic data to be collected, processed, and reported. A) information B) recognition C) implementation D) decision

A) information

In which city is the Federal Reserve's Board of Governors? A) Boston B) New York C) Philadelphia D) Washington, DC

D) Washington, DC

In a ______ banking system, banks hold only a portion of deposits in reserves, loaning out the rest.

FRACTIONAL reserve banking system

M3 =

M2 + large time deposits

If mangos were widely accepted for purposes of exchange: A) mangos would be money. B) mangos would lose value. C) people would not work for mangos. D) mango plantations would decrease in value.

A) mangos would be money.

Sometimes the Fed's goals conflict, and the Fed must emphasize one goal over another. Which of the following is a goal of the Fed that does NOT conflict with its goal of full employment? A) promoting economic growth B) promoting an equitable distribution of income C) keeping the price level stable D) keeping tax rates low

A) promoting economic growth

Suppose the government implements a policy reducing the rewards earned by savers. In this case the ________ loanable funds shifts _________. A) supply of; left B) supply of; right C) demand for; left D) demand for; right

A) supply of; left ***

Which of the following is a basic goal of the Federal Reserve System? a.) full employment b.) a balanced federal budget c.) zero interest rates d.) export promotion

a.) full employment

three sources of the demand for loanable funds

1. Businesses (largest source of demand) 2. Households 3. Government

Money Measure Components, June 2010 Money Component Amount (billions) Currency $883.6 Traveler's checks 4.8 Demand deposits 467.0 Savings deposits 5,086.1 Small-denomination time deposits 1,054.0 Other checkable deposits 382.0 Retail money funds* 746.6 *Includes money market accounts and money market mutual fund accounts From the information in the table, M1 for June 2010 was: A) $1,737.4 billion. B) $1,355.4 billion. C) $1,350.6 billion. D) $1,732.6 billion.

A) $1,737.4 billion. (Currency $883.6 Traveler's checks 4.8 Demand deposits 467.0 Other checkable deposits 382.0)

Assets Vault Cash: $2,500 Deposits at the Federal Reserve: $7,500 Loans: $90,000 Liabilities and Net Worth Deposits: $100,000 If this bank is subject to a reserve requirement of 5%, what is the amount of its excess reserves? A) $2,500 B) $5,000 C) $10,000 D) Negative. This bank does not have excess reserves; it needs $2,500 to meet its reserve requirement.

A) $2,500 (100,000 * .05)= 5,000 (7,500 - 5,000)= 2,500

Assets Vault Cash: $2,500 Deposits at the Federal Reserve: $7,500 Loans: $90,000 Liabilities and Net Worth Deposits: $100,000 If this bank is subject to a reserve requirement of 5%, how much more can it loan out if it wants to be fully loaned up? A) $2,500 B) $5,000 C) $10,000 D) Nothing. This bank is already fully loaned up.

A) $2,500 (Because excess reserves are what banks can use to loan money with, and as we saw in the previous problem, excess reserves = $2,500)

Callie withdraws $600 from her bank account. If the reserve requirement is 15%, by how many dollars must her bank reduce its lending? A) $510 B) $600 C) $90 D) $667

A) $510 (600 * .15) = 90 That must be kept in reserve (600-90)= 510 is the rest that can be used as loanable funds

The yield on a perpetuity bond that has an interest payment of $60 and a price of $1,200 is: A) 5%. B) 6%. C) 12%. D) 25%.

A) 5%. (60/1200)

Consider this T-account for your bank, showing that you deposited $100 into your checking account and that your bank then made a $75 loan to Michelle. Assets +$100 (cash) +$75 (loan to Michelle) Liabilities +$100 (increase in your checking account) +$75 (increase in Michelle's checking account) Your bank's reserve ratio is: A) 57.14% B) 75% C) 125%. D) 42.8%.

A) 57.14% 100/175= .5714

(graph) If technological advances increase productivity, the demand for loanable funds curve will shift from _____ to _____ and the new equilibrium will be at point _____, holding supply constant at S0. A) D0; D1; c B) D0; D1; b C) D1; D0; a D) D1; D0; d

A) D0; D1; c

Rank these components in order from the SMALLEST share of M1 to the largest. A) coins, banknotes, demand deposits B) banknotes, coins, demand deposits C) demand deposits, coins, banknotes D) demand deposits, banknotes, coins

A) coins, banknotes, demand deposits

In September 2013, the Federal Open Market Committee said it would wait for more evidence that progress had been made on the economic recovery before it cut back on open market purchases. The Bureau of Economic Analysis did not release its advanced estimate of the third quarter's GDP growth until a month after the quarter ended. The second estimate was released two months after the quarter ended, and a third revised estimate was released about three months after the quarter ended. This wait for accurate data to be collected is known as the: A) information lag. B) recognition lag. C) decision lag. D) implementation lag.

A) information lag.

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $10,000 bond. The impact on the banking system is a(n): A) injection of $10,000 in new reserves. B) reduction of $50,000 in reserves. C) injection of $50,000 in new reserves. D) injection of $2,000 in new reserves.

A) injection of $10,000 in new reserves. The FOMC pays for the bond by putting the money directly into the bank's account with them (which is a reserve account)

If a bank has assets of $5 billion and liabilities of $4.8 billion: A) its equity equals $200 million. B) its equity equals −$800 million. C) it faces a solvency crisis. D) its equity equals −$800 million and it faces a solvency crisis.

A) its equity equals $200 million. because Assets has to = liabilities + equity

M2 is ____ in dollar value than M1; it also contains ____ assets. A) larger; less liquid B) larger; more liquid C) smaller; less liquid D) smaller; more liquid

A) larger; less liquid

The supply curve for loanable funds is: A) positively sloped. B) negatively sloped. C) horizontal. D) vertical.

A) positively sloped.

If Zachary deposits $500 cash into his checking account, then his bank's assets: A) rise by $500, and its liabilities rise by $500. B) rise by $500, but its liabilities do not change. C) do not change, but its liabilities rise by $500. D) rise by $500, and its liabilities fall by $500.

A) rise by $500, and its liabilities rise by $500.

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is: A) $1,500. B) $2,000. C) $2,500. D) $3,000.

B) $2,000. (Follow the same logic as the previous question, but now there is $1,000 less available as excess reserves so the answer would be $1,000 less than the previous answer)

If the reserve requirement is 10% and a bank initially receives $20,000 in deposits, then the maximum amount of money that the banking system can create is: A) $20,000. B) $200,000. C) $180,000. D) $100,000.

B) $200,000.

If the reserve requirement is 20%, the money multiplier is: A) 4. B) 5. C) 0.2. D) 0.8.

B) 5.

Which is an example of money being used as a unit of account? A) A customer buys a burger, fries, and medium diet cola for $6.95. B) A restaurant's profits for the week of October 3 to October 10 are $1,250. C) A customer receives $3.05 in change and returns the next day to make another purchase. D) A restaurant sells a large ice cream sundae and charges the customer's debit card.

B) A restaurant's profits for the week of October 3 to October 10 are $1,250.

Suppose there is news of rising unemployment. Which scenario is most likely? A) Firms invest more in automation; the demand for loanable funds rises; interest rates rise; borrowing drops, which makes the anticipated bad times a reality. B) Households save in anticipation of bad times; the supply of loanable funds rises; interest rates fall; firms take advantage of lower interest rates and make more investments, which stimulates the economy. C) Householders spend more in anticipation that they won't have the money if they lose their job; the supply of loanable funds falls; interest rates rise; firms cut back on borrowing and spending, which brings about more unemployment. D) Householders borrow more to prepare for unemployment; the demand for loanable funds rises; interest rates rise; business cuts back on investment, which slows the economy.

B) Households save in anticipation of bad times; the supply of loanable funds rises; interest rates fall; firms take advantage of lower interest rates and make more investments, which stimulates the economy.

Yolanda took $5,000 from her checking account and put the money in her savings account at the same bank. A) Both M1 and M2 were reduced by $5,000. B) M1 went down by $5,000, but M2 was unchanged. C) Neither M1 nor M2 changed because the transfer was done at the same bank. D) M1 and M2 both rose by $5,000.

B) M1 went down by $5,000, but M2 was unchanged.

(Figure: Market for Loanable Funds 2) If households decide to save a larger portion of their income because they fear job loss due to a recession, the loanable funds supply curve will shift from _____ to _____, and the new equilibrium will be at point _____, holding demand constant at D0. A) S0; S1; a B) S0; S1; b C) S1; S0; b D) S1; S0; d

B) S0; S1; b

Assume the reserve requirement is 25% and the Federal Open Market Committee buys $4 million of U.S. government bonds from the public. As a result of this transaction the supply of money is: A) not directly affected but has the potential to be increased by a total of $12 million. B) directly increased by $4 million and has the potential to be increased by another $12 million. C) directly reduced by $4 million and has the potential to be reduced by another $12 million. D) directly increased by $4 million and has the potential to be increased by another $8 million.

B) directly increased by $4 million and has the potential to be increased by another $12 million. (an overall increase of 16 million which can be calculated using the money multiplier of 1/.25= 4, and 4 * 4 million is 16 million)

The unit of account function of money: A) requires a double coincidence of wants, as in barter. B) eliminates the need to value every item in terms of every other item. C) is the most important function of money. D) refers to the value of money over time.

B) eliminates the need to value every item in terms of every other item.

If the reserve requirement is 25%, then a $1 increase in deposits means that the money supply: A) will increase by $4. B) has the potential to increase by $4. C) will increase by $25. D) has the potential to increase by $25.

B) has the potential to increase by $4. (1/.25)= 4 The money multiplier (4 * 1)= $4

Barter as a system tends to work only: A) in small U.S. towns and villages. B) in primitive economies with little product variety. C) when agricultural products are exchanged. D) among large, multinational corporations.

B) in primitive economies with little product variety.

The reward for saving is called ____, and this variable is placed on the _____ axis of the loanable funds market graph. A) interest; horizontal B) interest; vertical C) investment; horizontal D) investment; vertical

B) interest; vertical

Financial institutions: A) reduce information costs, set interest rates for bonds, and diversify assets. B) reduce information costs, reduce transaction costs, and diversify assets. C) pool funds from lenders, reduce transaction costs, and diversify assets. D) reduce information costs, reduce transaction costs, and pool funds from lender

B) reduce information costs, reduce transaction costs, and diversify assets.

Ceteris paribus, suppose an economy institutes reforms that reduce government regulations. In this case the demand for loanable funds shifts ______ and the equilibrium interest rate _______. A) left; rises B) right; rises C) left; falls D) right; falls

B) right; rises

How do banks create money?

By loaning out their excess reserves. ***The fractional reserve system permits banks to create money through their ability to accept deposits and make loans.***

Suppose a bank has $1 million in deposits, a reserve requirement of 10%, and bank reserves of $300,000. The bank has excess reserves of: A) $50,000. B) $100,000. C) $200,000. D) $300,000.

C) $200,000. (1 million * .10)= 100,000 required in reserves (300,000 - 100,000)= 200,000 excess

Suppose a bank has $1 million in deposits, a reserve requirement of 20%, and bank reserves of $400,000. The bank has excess reserves of: A) $50,000. B) $100,000. C) $200,000. D) $300,000.

C) $200,000. (1 million * .20) = $200,000 the amount required in reserves (400,000 - 200,000)= $200,000 the excess money put into reserves

Which is an example of money being used as a store of value? A) A customer buys a burger, fries, and medium diet cola for $6.95. B) A restaurant's profits for the week of October 3 to October 10 are $1,250. C) A customer receives $3.05 in change and returns the next day to make another purchase. D) A restaurant sells a large ice cream sundae and charges the customer's debit card.

C) A customer receives $3.05 in change and returns the next day to make another purchase.

Which of the following is a provision of the Federal Reserve Act or subsequent legislation that contributes to the independence of the Fed? A) The Fed's actions are subject to executive branch control. B) Appointments to the Federal Reserve Board are staggered so that one expires every other year. C) Members of the Federal Reserve Board cannot be reappointed. D) The Federal Reserve System is subject to Congressional oversight.

C) Members of the Federal Reserve Board cannot be reappointed.

Which of the following statements is CORRECT? A) The Fed's actions are subject to executive branch control. B) Politically controlled banks are better at fighting inflation than are independent central banks. C) The Federal Reserve is considered to be an independent central bank. D) The Federal Reserve System is not subject to Congressional oversight.

C) The Federal Reserve is considered to be an independent central bank.

Which one of the following will cause the supply of loanable funds curve to shift rightward? A) an improvement in firms' expectations about the economy B) technological advances that result in new products C) a perceived peak in an asset index like the Dow Jones Industrial Average D) an increase in the government deficit

C) a perceived peak in an asset index like the Dow Jones Industrial Average

An economist notices that M1 is rapidly rising. One conclusion she might draw is that: A) depositors want to save for the long term. B) interest rates on savings accounts are rising. C) consumers are preparing to make more purchases. D) banks are discouraging their customers from borrowing and spending.

C) consumers are preparing to make more purchases.

Legislators debate for six months on which spending programs to utilize to manipulate the business cycle. This is an example of the: A) recognition lag. B) information lag. C) decision lag. D) implementation lag.

C) decision lag.

In February 2010, the Central Bank of Brazil raised reserve requirements. By raising reserve requirements, Brazil was attempting to: A) increase its money supply. B) stabilize its money supply. C) decrease its money supply. D) improve the liquidity of its banks.

C) decrease its money supply.

At Christmas, people tend to draw money out of their checking accounts to pay for Christmas presents. As a result, the money multiplier will: A) increase. B) not change. C) decrease. D) become more volatile.

C) decrease.

Jody purchases a stock from her employer, Acme Corporation. This is an example of ________ finance: A) unregulated B) indirect C) direct D) investor

C) direct

Sometimes the Fed's goals conflict, and the Fed must emphasize one goal over another. Which of the following is a goal of the Fed that might conflict with its goal of full employment? A) promoting economic growth B) promoting an equitable distribution of income C) keeping the price level stable D) keeping tax rates low

C) keeping the price level stable

Appointments to the Federal Reserve Board are staggered so that one expires every other year. This provision was enacted to ensure: A) that Federal Reserve Board members would serve their entire term. B) that the Fed would be accountable to Congress. C) stability and continuity on the Board. D) that regional considerations would not impact the Board's decisions.

C) stability and continuity on the Board. (If they all were appointed at the same time then they would all have to end their term at the same time causing a 100% change of policy-makers on the board all at once)

The reason bond prices and interest rates are inversely related is that: A) bond prices are fixed for the life of a bond. B) market interest rates stay the same for the life of a bond. C) the coupon payment is fixed for the life of a bond. D) bonds are always perpetuities.

C) the coupon payment is fixed for the life of a bond.

A bank has excess reserves of $5,000 and demand deposits of $40,000; the reserve requirement is 20%. If the reserve requirement is increased to 25%, the maximum amount of new loans this bank can make is: A) $1,500. B) $2,000. C) $2,500. D) $3,000.

D) $3,000. (40,000 * .20) = $8,000 the amount required in reserves (8,000 + 5,000)= $13,000 the amount ACTUALLY in reserves (40,000 * .25) = $10,000 the amount that is now required to be in reserves (10,000 - 13,000)= $3,000 the remaining excess reserves that can still be used for loans.

The money multiplier is: A) interest payment divided by yield. B) yield divided by interest payment. C) 1/1 - MPS. D) 1 divided by reserve requirement.

D) 1 divided by reserve requirement. 1/ RR (decimal form)

Suppose the ZZZ Corporation sells a one-year coupon bond for $1,000. Its coupon payment is $100 for the year. In this example, the yield is ________%. If instead the price of the bond is $500, the yield is ________. A) 10; 10% B) 100; 200% C) 100; 100% D) 10; 20%

D) 10; 20%

Which of the following is NOT a financial intermediary? A) Citibank B) Schwab mutual funds C) Hartford Insurance D) Federal Reserve Bank

D) Federal Reserve Bank

Which of the following is a provision of the Federal Reserve Act or subsequent legislation that weakens the independence of the Fed? A) The Fed's actions are subject to executive branch control. B) Members of the Federal Reserve Board serve 14-year terms. C) Members of the Federal Reserve Board cannot be reappointed. D) The Federal Reserve System is subject to Congressional oversight.

D) The Federal Reserve System is subject to Congressional oversight.

The 12 Federal Reserve banks and their branches do all of the following except: A) distribute coins and currency. B) regulate and supervise member banks. C) serve as the banker for the United States Treasury. D) accept deposits from U.S. citizens.

D) accept deposits from U.S. citizens. The federal reserve is a bank for banks. Individuals cannot use it personally.

Which of the following is NOT a policy tool of the Federal Reserve? A) reserve requirements B) the discount rate C) open market operations D) fiscal policy

D) fiscal policy The federal reserve deals with MONETARY policy. They control the MONEY supply.

If the reserve requirement is 20%, then a $1 decrease in deposits means that the money supply: A) will decrease by $5. B) has the potential to increase by $20. C) will increase by $5. D) has the potential to decrease by $5.

D) has the potential to decrease by $5. (1/.20)= 5 The money multiplier (5 * 1)= $5 (withdrawals or decreases in deposits cause DECREASES in money supply.)

Assume the reserve requirement is 10%. If the Federal Open Market Committee buys a $10,000 bond from Bank A, Bank A's reserves: A) decrease by $10,000. B) increase by $9,000. C) increase by $1,000. D) increase by $10,000.

D) increase by $10,000. The reserve requirement here is irrelevant to what immediately happens to the bank's reserves.

Assume that the reserve requirement is 20% and the Federal Open Market Committee buys a $100,000 bond. The money supply: A) increases by a maximum of $100,000. B) decreases by $100,000. C) increases by a maximum of $20,000. D) increases by a maximum of $500,000.

D) increases by a maximum of $500,000. They FOMC deposits the $100,000 directly into the bank's reserve account which is considered "excess reserves". Assuming that the bank uses this excess (like many do) to give out loans, it could potentially create a ripple effect of $500,000 of money supply increase (the money multiplier is 1/.20 =5).

If a bank is subject to a reserve requirement of 15%, then it is required to: A) place 15% of its deposits in the vault. B) lend out 15% of its deposits. C) place 15% of its deposits in the account with its regional Federal Reserve bank. D) place 15% of its deposits in the account with its regional Federal Reserve bank or the vault.

D) place 15% of its deposits in the account with its regional Federal Reserve bank or the vault.

Unit of account

Money provides a yardstick for measuring and comparing the values of a wide variety of goods and services. It eliminates the problem of double coincidence of wants associated with barter.

___________ is the central bank of the United States.

The Federal Reserve System

How many regional Federal Reserve Banks are there?

Twelve regional Federal Reserve Banks in major cities around the nation

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

a.) a teaser rate.

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: a.) falls to $875. b.) falls to $800. c.) rises to $1,125. d.) falls to $700.

a.) falls to $875.

Open market operations involve the purchase and sale of: a.) government securities. b.) corporate bonds. c.) municipal bonds. d.) utility bonds.

a.) government securities.

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

a.) increases the ability of banks to make loans.

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: a.) interest rates will rise. b.) interest rates will fall. c.) stock prices will rise. d.) bond prices will rise.

a.) interest rates will rise.

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

b.) $375

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: a.) $80. b.) $800. c.) $1,000. d.) $8,000.

b.) $800.

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

b.) M2 includes M1.

Which of the following statements concerning the structure of the Federal Reserve System is CORRECT? a.) The Fed's Board of Governors consists of 12 members. b.) The chairman and vice-chairman of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years. c.) There are 10 regional Federal Reserve banks. d.) The Federal Open Market Committee (FOMC) has seven members.

b.) The chairman and vice-chairman of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years. (The Fed's Board of Governors consists of 7 members, there are 12 regional Federal Reserve banks, the Federal Open Market Committee (FOMC) has 12 members)

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

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

When the Fed buys bonds, its demand ____ the price of bonds, ____ nominal interest rates. a.) increases; increasing b.) increases; decreasing c.) decreases; increasing d.) decreases; decreasing

b.) increases; decreasing

The demand curve for loanable funds represents _____ and is _____. a.) investors; horizontal b.) investors; downward sloping c.) savers; horizontal d.) savers; downward sloping

b.) investors; downward sloping

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

b.) reducing transaction costs.

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: a.) unit of account. b.) store of value. c.) medium of exchange. d.) barter tool.

b.) store of value.

If the Federal Reserve decides to increase the money supply: a.) the federal funds rate will rise. b.) the federal funds rate will fall. c.) the federal funds rate will be unaffected. d.) deflation will occur.

b.) the federal funds rate will fall.

As the real interest rate falls: a.) the demand for loanable funds rises. b.) the quantity demanded of loanable funds rises. c.) the demand for loanable funds falls. d.) less funds are demanded.

b.) the quantity demanded of loanable funds rises

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

c.) $5,000.

Assets Vault Cash: $2,500 Deposits at the Federal Reserve: $7,500 Loans: $90,000 Liabilities and Net Worth Deposits: $100,000 This bank's reserve ratio is: a.) 0.025. b.) 0.075. c.) 0.10. d.) 0.25.

c.) 0.10

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

c.) 6.4%

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

c.) fall by $300, and its 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 _____. a.) rise; fall b.) rise; rise c.) fall; rise, fall, or stay the same d.) rise, fall, or stay the same; rise.

c.) fall; rise, fall, or stay the same

Monetary policy involves all of the following EXCEPT: a.) increases in bank reserves. b.) increases in interest rates. c.) increases in personal taxes. d.) increase in buying securities.

c.) increases in personal taxes.

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

c.) only when you make withdrawals.

The main tool of monetary policy is: a.) the discount rate. b.) capital gains taxes. c.) open market operations. d.) the reserve requirements.

c.) open market operations.

Which of the following lists represents monetary policy actions that are consistent with one another? a.) buy government bonds, raise reserve requirements, raise the discount rate b.) sell government bonds, raise reserve requirements, lower the discount rate c.) sell government bonds, raise reserve requirements, raise the discount rate d.) buy government bonds, lower reserve requirements, raise the discount rate

c.) sell government bonds, raise reserve requirements, raise the discount rate

reserve ratio=

commercial bank's required reserves / commercial bank's DD liabilities

If the reserve requirement is 2.5% and a bank initially receives $30,000 in deposits from the Fed, then the maximum amount of money that the banking system can create is: a.) $750 b.) $1,500 c.) $30,000 d.) $1.2 million

d.) $1.2 million 1/.025 = 40 40 (30,000)= 1.2 million

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

d.) $2,552.56 (2000 (1.05)^5)

The Fed's monetary policies, like fiscal policy, are subject to _____ lags. a.) information b.) implementation c.) decision d.) All of the answers are correct.

d.) All of the answers are correct.

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

d.) a standard value.

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

d.) an increase in the government deficit

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

d.) by guaranteeing a high rate of return for all lenders

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

d.) lower; more liquid

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

d.) the actual multiplier will fall.

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

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

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.) more funds will be demanded by firms than supplied by households. c.) there will be pressure for the interest rate to rise. d.) there will be an excess supply of funds.

d.) there will be an excess supply of funds.

The Fed's Board of Governors consists of ______ members who are appointed by the _________ and confirmed by the ________.

seven; President; Senate

Why do the Board of Governors at the Fed set a reserve ratio?

they use this as a MECHANISM OF CONTROL over commercial banks and the money supply

Which of the following is the LEAST liquid? A) money in a savings account B) a Picasso painting C) a U.S. Treasury bond D) $100 in cash

B) a Picasso painting

If the government decrees that bottle tops will be treated as money, then a bottle top: A) can still never be money because it has so little intrinsic value. B) is called fiat money. C) will not function well as a unit of account. D) will serve well for international trade.

B) is called fiat money.

Assume that the reserve requirement is 20%. A bank has $20 billion in demand deposits. How much money does the bank have to keep in reserves? A) $20 billion B) $10 billion C) $4 billion D) $2 billion

C) $4 billion

M2 =

M1+ small time deposits

who sets the reserve ratio?

The Board of Governors at the Federal Reserve

Store of value

The function that enables people to save the money they earn today and use it to buy the goods and services they want tomorrow.

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

a.) Federal Open Market Committee.

M1 =

currency + checkable deposits

the following was found online

the following was found online