Macroeconomics

Banks are _____ that link lenders (depositors) to borrowers. a. financial intermediaries b. government agencies c. monopolies d. nonprofit organizations

a. financial intermediaries

_____ is a liability for a commercial bank. a. The currency in the vault b. A checkable deposit by a customer c. A U.S. Treasury bill d. A loan to a customer

b. A checkable deposit by a customer

The primary currency circulating in the United States consists of a. gold certificates. b. credit cards. c. bank checks that are certified. d. Federal Reserve notes.

d. Federal Reserve notes.

If a borrower fails to repay a loan to a bank, _____. a. the bank will go bankrupt b. the bank will attempt to sell the loan c. the bank will report this to the borrower's employer d. the bank will not get affected as it has a diversified portfolio

d. the bank will not get affected as it has a diversified portfolio

Suppose the Federal Reserve has set the required reserve ratio at 0.20. Second Republic Bank currently has $150,000 in checkable deposits and $45,000 in outstanding loans. The required and excess reserves for the Second Republic Bank are _____ and _____, respectively. a. $30,000, $75,000 b. $21,000, $30,000 c. $39,000, $9,000 d. $9,000, $105,000

a. $30,000, $75,000

Suppose the Fed injects $50 billion of new money by buying U.S. Treasury bonds from the public. If the required reserve ratio is 10 percent, banks convert all excess reserves into loans, and the public hold all their money in their checking accounts rather than in cash, then the money supply will increase by _____ due to this injection. a. $500 billion b. $50 billion c. $5 billion d. $950 billion

a. $500 billion

Which of the following is likely to occur if the Fed conducts an open-market sale of U.S bonds? a. Excess reserves of banks will decline and supply in the federal funds market will decline, leading to an increase in the federal funds rate and the short-term interest rate charged by banks. b. Excess reserves of banks will increase and supply in the federal funds market will also increase, leading to a decline in the federal funds rate and the short-term interest rate charged by banks. c. Excess reserves of banks will decline and supply in the federal funds market will increase, leading to an increase in the federal funds rate and the short-term interest rate charged by banks. d. Excess reserves of banks will decline and supply in the federal funds market will increase, leading to a decline in the federal funds rate and the short-term interest rate charged by banks.

a. Excess reserves of banks will decline and supply in the federal funds market will decline, leading to an increase in the federal funds rate and the short-term interest rate charged by banks.

Which of the following is true if the required reserve ratio is 10 percent and new deposits worth $1 million are made at a bank? a. Required reserves are $100,000, and excess reserves are $900,000. b. Required reserves are $10,000,000, and excess reserves are $90,000,000. c. Required reserves are $1,000,000, and excess reserves are $9,000,000. d. Required reserves are $900,000, and excess reserves are $100,000.

a. Required reserves are $100,000, and excess reserves are $900,000.

_____ are included in the narrow definition of money. a. Traveler's checks b. Time deposits c. Money market mutual funds d. Saving deposits

a. Traveler's checks

Banks can cope better with asymmetric information in the market for loans than individual lenders can because a. banks have expertise in evaluating the creditworthiness of loan applicants. b. banks invest in risky assets. c. banks can borrow from the Fed as a last resort. d. banks reduce the transaction cost of channeling savings to creditworthy borrowers.

a. banks have expertise in evaluating the creditworthiness of loan applicants.

One of the advantages of open-market operations is that they _____. a. can be used in any amount chosen by the Fed b. help banks reduce their risk through diversification c. can always prevent panic runs on banks during recessions d. help overcome the asymmetric information problem in the loan market

a. can be used in any amount chosen by the Fed

From the perspective of a bank, the objectives of _____ and _____ are at odds with one another. a. liquidity, profitability b. asset liquidity, holding of bank reserves c. profitability, cost minimization d. accepting deposits, providing loans

a. liquidity, profitability

M2 includes a. money market mutual funds. b. debit cards. c. mutual insurance policies. d. credit cards.

a. money market mutual funds.

The Federal Open Market Committee makes decisions regarding a. the sale and purchase of government securities. b. the amount of money that a bank can create. c. fixation of the federal funds rate. d. fixation of the discount rate.

a. the sale and purchase of government securities.

The Fed makes an initial cash injection of $10,000 by buying a $10,000 Treasury bond from Janis. Janis deposits the $10,000 in her checking account at Friendly Bank. Friendly Bank holds $1,000 in reserve and lends out $9,000 to Bruno, who deposits this $9,000 in his checking account at Last National Bank. In this scenario, _____ is the total money supply so far. a. $9,000 b. $19,000 c. $10,000 d. $1,000

b. $19,000

Which of the following is true of debit cards but not of credit cards? a. Debit cards offer an easy way of getting a loan from the card issuer. b. Funds that can be accessed by debit cards are included in M1. c. The checking account is not reduced immediately after the card is used to make a payment. d. Funds that can be accessed by debit cards are not included in M1.

b. Funds that can be accessed by debit cards are included in M1

Which of the following correctly describes the difference between M1 and M2? a. M1 includes currency, coins, gold and silver, whereas M2 does not include gold and silver. b. M1 includes currency, traveler's checks, and money in checkable accounts, whereas M2 includes M1 plus savings deposits, small-denomination time deposits, and money market mutual funds. c. M1 includes currency and traveler's checks, whereas M2 includes M1 plus money in checking accounts. d. M1 is includes only currency, whereas M2 includes M1 plus travelers checks and money in checkable accounts.

b. M1 includes currency, traveler's checks, and money in checkable accounts, whereas M2 includes M1 plus savings deposits, small-denomination time deposits, and money market mutual funds.

_____ are measures of money supply that are defined by the Federal Reserve. a. Money multipliers b. Money aggregates c. Currency aggregates d. Federal funds

b. Money aggregates

Which of the following can be used by the Fed to initiate the process of money creation? a. Selling a $2,500 bond to a securities dealer. b. Purchasing a $2,500 bond from a bank. c. Raising the federal funds rate. d. Raising the reserve requirement ratio.

b. Purchasing a $2,500 bond from a bank.

Which of the following is likely to happen if the Fed sells government bonds? a. The money supply in the United States will decrease by the original reduction in bank reserves times the discount rate. b. The money supply in the United States will decrease by the original reduction in bank reserves times the simple money multiplier. c. The money supply in the United States will increase by the original increase in bank reserves times the discount rate. d. The money supply in the United States will increase by the original increase in bank reserves times the simple money multiplier.

b. The money supply in the United States will decrease by the original reduction in bank reserves times the simple money multiplier.

Which of the following is used by the Fed to control the money supply? a. The purchase of private equities. b. The required reserve ratio. c. The debt-to-capital ratio. d. The sale of private equities.

b. The required reserve ratio.

The size of the money market multiplier is likely to reduce if _____. a. banks lower the federal funds rate b. banks let excess reserves sit idle c. borrowed funds are lent to other individuals who deposit them in other banks d. people choose to hold less money in cash and more in checking accounts

b. banks let excess reserves sit idle

a. credit cards immediately reduce the checking account of the cardholder, while debit cards provide a grace period between a purchase and required payment. b. credit cards provide a grace period between a purchase and required payment, while debit cards immediately reduce the checking account of the cardholder. c. credit cards usually require a personal identification number, or PIN, to use, while debit cards can be used more easily. d. credit cards are used as substitutes for checks by cardholders, while debit cards are used as substitutes for personal loans.

b. credit cards provide a grace period between a purchase and required payment, while debit cards immediately reduce the checking account of the cardholder.

Open-market operations enable the Fed to control bank reserves and the _____. a. fractional reserves b. federal funds rate c. reserve requirements d. discount rate

b. federal funds rate

The money multiplier is the multiple by which the a. money demand increases as a result of an increase in the banking system's debt-to-capital ratio. b. money supply increases as a result of an increase in the banking system's reserves. c. money demand increases as a result of an increase in the banking system's reserves. d. money supply increases as a result of an increase in the banking system's debt-to-capital ratio.

b. money supply increases as a result of an increase in the banking system's reserves.

The federal funds market a. provides for day-to-day lending and borrowing between the Fed and the banks that have excess reserves. b. provides for day-to-day lending and borrowing among banks having excess reserves on account at the Fed. c. provides for day-to-day lending and borrowing between the Fed and the general public. d. provides for day-to-day lending and borrowing between the banks that have excess reserves and the general public.

b. provides for day-to-day lending and borrowing among banks having excess reserves on account at the Fed.

When a new deposit is made at a bank, required reserves represent a. the reserves that the bank uses for its own expenditure. b. the fraction of total deposits that the bank cannot lend. c. the fraction of total deposits that the bank can lend to borrowers. d. the reserves that cannot be held at the Fed.

b. the fraction of total deposits that the bank cannot lend.

Which of the following statements is true? a. An individual bank can easily lend its required reserves. b. An individual bank can easily lend an amount greater than its excess reserves by creating new money. c. An individual bank can easily charge a higher interest rate than the federal funds rate if it lends money to another bank. d. An individual bank cannot lend an amount greater than its excess reserves.

d. An individual bank cannot lend an amount greater than its excess reserves

You have $1,000 in your checking account at Generous Savings and Loans (GSL). GSL holds $300 of your money in reserve and makes a $700 student loan to Wilma, who promises to repay the loan with interest. Wilma now has an additional $700 in her checking account. This implies that the M1 money supply has increased by _____. a. $1,700 b. $2,000 c. $700 d. $1,000

c. $700

If total deposits at Resolute Bank and Trust are $100 million, total loans are $70 million, and excess reserves are $20 million, then the required reserve ratio is _____. a. 20 percent b. 30 percent c. 10 percent d. 70 percent

c. 10 percent

In which of the following situations will the process of money creation slow down? a. If the Fed lowers the required reserve ratio. b. If people hold most of their money in checking accounts. c. If banks let their excess reserves sit idle. d. If borrowers use the borrowed money for consumption.

c. If banks let their excess reserves sit idle.

Which of the following steps were undertaken by the Fed during the mortgage crisis in 2007 and 2008? a. It sold government securities, raising more than $150 billion. b. It increased the discount rate and discouraged further borrowing by banks. c. It lowered the discount rate and encouraged banks to borrow from the Fed. d. It encouraged people to withdraw funds using their ATM and debit cards.

c. It lowered the discount rate and encouraged banks to borrow from the Fed.

Which of the following limits the creation of new money by banks? a. The public keeping their money in checking accounts. b. The Fed setting a low reserve ratio. c. The public holding their money in cash. d. Banks converting all excess reserves into loans.

c. The public holding their money in cash.

Which of the following is a feature of time deposits? a. Time deposits serve as a medium of exchange. b. Time deposits allow premature withdrawals without any penalty. c. Time deposits earn a fixed interest rate if held for a specific period of time. d. Time deposits can be converted into checking accounts anytime.

c. Time deposits earn a fixed interest rate if held for a specific period of time.

The _____ is the interest rate charged by banks from one another for overnight borrowing. a. inflation rate b. nominal interest rate c. federal funds rate d. discount rate

c. federal funds rate

The simple money multiplier is the reciprocal of the _____. a. discount rate b. interest rate c. required reserve ratio d. deposit rate

c. required reserve ratio

When banks transform excess reserves into loans, _____. a. the value of money increases b. the value of money decreases c. the money supply increases d. the money supply decreases

c. the money supply increases

Which of the following is most likely to happen if the Fed increases reserve requirements? a. Banks will enforce loan contracts more effectively. b. An individual bank's ability to create money will increase. c. Banks will develop expertise in structuring loans. d. An individual bank's ability to create money will decrease.

d. An individual bank's ability to create money will decrease

Which of the following statements is true of M1 money supply? a. Checking accounts are not considered a part of M1 money supply. b. Currency in bank vaults is counted as a part of the M1 money supply. c. Near-monies are counted as a part of M1 money supply. d. Checking accounts are considered a part of M1 money supply.

d. Checking accounts are considered a part of M1 money supply

Which of the following correctly identifies the difference between primary and secondary discount rates? a. The Fed uses the primary discount rate for decreasing the money supply, while it uses the secondary discount rate for increasing the money supply in an economy. b. The Fed uses the primary discount rate for increasing the money supply, while it uses the secondary discount rate for decreasing the money supply in an economy. c. The primary discount rate is about one percentage point above the federal funds rate, while the secondary discount rate is about one percentage point higher than the required reserve ratio. d. The primary discount rate is about one percentage point above the federal funds rate, while the secondary discount rate is about one-half a percentage point higher than the primary discount rate.

d. The primary discount rate is about one percentage point above the federal funds rate, while the secondary discount rate is about one-half a percentage point higher than the primary discount rate

Which of the following is a characteristic of money market mutual fund accounts? a. There are restrictions on the minimum balance but no restrictions on the number of checks that can be written per month. b. There are no restrictions on the minimum balance and the number of checks that can be written per month. c. There are no restrictions on the minimum balance, but there are restrictions on the number of checks that can be written per month. d. There are restrictions on the minimum balance and the number of checks that can be written per month.

d. There are restrictions on the minimum balance and the number of checks that can be written per month.

Which of the following is true of checkable deposits? a. These are not regarded as money as they do not serve as mediums of exchange. b. These are assets of the issuing bank. c. These cannot be accessed using debit cards. d. These are included in the narrow definition of money.

d. These are included in the narrow definition of money

The largest component of the M1 monetary aggregate is _____. a. traveler's checks b. saving deposits c. transfer payments d. checkable deposits

d. checkable deposits

The _____ is the key to the multiple expansion of checkable deposits. a. real interest rate on loans b. nominal interest rate on loans c. deposit insurance system d. fractional reserve requirement

d. fractional reserve requirement

M1 a. includes M2 as well as savings deposits. b. is the broad definition of money. c. includes only currency. d. is the narrow definition of money

d. is the narrow definition of money

The assets of a bank include _____. a. saving accounts b. deposits c. money market accounts d. loans

d. loans

The Fed can increase the money supply by a. raising the required reserve ratio. b. raising the discount rate. c. raising the federal funds rate. d. purchasing U.S. Treasury bonds.

d. purchasing U.S. Treasury bonds

Suppose the money supply (as measured by checkable deposits) is currently $750 billion. The required reserve ratio is 30 percent, and banks do not hold excess reserves. If the Fed wants to decrease the money supply by $50 billion, it should ________ worth of U.S. government bonds approximately. a. buy $525.0 billion b. sell $225.0 billion c. buy S800.0 billion d. sell $15.0 billion

d. sell $15.0 billion

A state bank must apply to the _____ to obtain a charter or a right to operate. a. U.S. Comptroller of the Currency b. Fed c. U.S. Ministry of Finance d. state banking authority

d. state banking authority

The Fed uses _____ more as a signal to financial markets about its monetary policy than as a tool for controlling the money supply. a. the money market multiplier b. the required reserve ratio c. open-market operations d. the discount rate

d. the discount rate

The discount rate is a. the rate that a commercial bank charges to people for long-term loans. b. the rate that commercial banks charge one another for overnight loans. c. the rate charged by the Fed on consumer loans it makes to the public. d. the rate charged by the Fed on loans to commercial banks.

d. the rate charged by the Fed on loans to commercial banks

There is asymmetric information in the loan market when a. there is excess information in the loan market. b. market participants use information that is available on the Web. c. market participants take advantage of the Federal Reserve information system. d. there is an inequality in information available to the market participants.

d. there is an inequality in information available to the market participants

Excess reserves equal a. total deposits divided by required reserves. b. total deposits plus required reserves. c. total deposits multiplied by required reserves. d. total deposits minus required reserves.

d. total deposits minus required reserves