UNit 4
20. The federal funds rate is the interest rate charged by: a. banks for loans to other banks. b. the Fed for overnight loans. c. the Fed for borrowed reserves. d. the federal government on loans to member banks.
A
37.The required reserve ratio is: a. the minimum amount of reserves the Fed requires a bank to hold. b. the interest rate that the Fed charges banks who borrow from it. c. the interest rate on loans made by banks to other banks. d. the maximum percentage of the cost of a stock that can be borrowed from a bank, with the stock offered as collateral. e. an appeal by the Fed to banks, asking for voluntary compliance with the Fed's wishes.
A
42.If the required reserve ratio decreases, the: a. money multiplier increases. b. money multiplier decreases. c. amount of excess reserves the bank has decreases. d. money multiplier stays the same. e. amount of excess reserves stays the same.
A
51.When reserve requirements are increased, the: a. excess reserves of commercial banks will decrease. b. excess reserves of commercial banks will increase. c. U.S. Treasury will have to borrow additional funds. d. money supply will rise.
A
7. If every person is willing to accept money in payment, rather than goods and services, money serves as a: a. medium of exchange. c. store of value. b. unit of account. d. coincident exchange.
A
Which of the following is the most liquid store of purchasing power?
A dollar bill
Anything can be money if it acts as a: a. unit of account. c. medium of exchange. b. store of value. d. All of these must be correct.
All of these must be correct.
4. Which of the following statements is true? a. Money must be relatively "scarce" if it is to have value. b. Money must be divisible and portable. c. M1 is the narrowest definition of money.
All the above
21. In order for barter to occur, traders must have a: a. unit of account. c. medium of exchange. b. coincidence of wants. d. central banking facility.
B
22. Comparing how many dollars it takes to attend college each year to annual earnings on a job represents the use of money as a: a. medium of exchange. c. store of value. b. unit of account. d. store of coincidence.
B
28.The Fed: a. has little control over the money supply. b. serves as the central bank for the United States. c. often uses a mix of lower taxes in its fiscal policy. d. ensures commercial bank profitability.
B
29.Which of the following is in charge of the buying and selling of government securities by the Fed? a. The president. c. The Congress. b. The Federal Open Market Committee. d. None of these.
B
30.Assume we have a simplified banking system in balance-sheet equilibrium. Also assume that all banks are subject to a uniform 10 percent reserve requirement and demand deposits are the only form of money. A commercial bank receiving a new demand deposit of $100 would be able to extend new loans in the amount of: a. $10. c. $100. b. $90. d. $1,000.
B
31.Assume a bank has total deposits of $100,000 and $20,000 is set aside to meet reserve requirements of the Fed. Its required reserve ratio is: a. $20,000. c. 0.2 percent. b. 20 percent. d. 1 percent.
B
33.Banks normally hold few excess reserves because this practice is: a. subject to an excess reserves tax. c. against Fed policy. b. not profitable. d. illegal.
B
34.A bank faces a required reserve ratio of 5 percent. If the bank has $200 million of checkable deposits and $15 million of total reserves, then how large are the bank's excess reserves? a. $0. c. $10 million. b. $5 million. d. $15 million.
B
38.Best National Bank is subject to a 10 percent required reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of: a. $100. c. $1,000. b. $900. d. $10,000.
B
40.Assume a simplified banking system subject to a 20 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply: a. increases $100,000. c. increases $600,000. b. increases $500,000. d. decreases $500,000.
B
48.When the Fed lowers the discount rate, it makes it: a. cheaper for banks to borrow from each other. b. cheaper for banks to obtain additional reserves by borrowing from the Fed. c. more difficult for banks to accept deposits. d. more difficult for banks to extend loans.
B
5. Which of the following provides the best explanation of why money is valuable? a. Money is valuable because it is indivisible. b. Money is valuable because it is scarce. c. Money is valuable because it is backed by precious metals, primarily gold and silver. d. Money is valuable because it has intrinsic value, independent of its use as a means of exchange.
B
Suppose you deposit $1,000 from under your mattress to your checking account. How does this action affect the M1 and M2 money supplies?
Both unchanged
13. What is the length of the term of the members of the Board of Governors of the Federal Reserve System? a. Four years. c. Fourteen years. b. Six years. d. Life or until the member resigns.
C
15. A bank creates money when it: a. gets new checkable deposits which the depositor formerly held as cash. b. has a loan paid off, which creates excess reserves for the bank. c. makes a loan from its excess reserves. d. holds back excess reserves because of an increase in the required reserve ratio. e. gets more excess reserves because of a decrease in the required reserve ratio.
C
26.The conduct of monetary policy is the responsibility of: a. commercial banks. c. the Federal Reserve System. b. the U.S. Treasury. d. the Congress and the president.
C
44.When the required reserve ratio is changed, a. the money multiplier is changed but the amount of excess reserves in the banking system is unchanged. b. the money multiplier is unchanged but the amount of excess reserves in the banking system is changed. c. the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio. d. the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio. e. neither the money multiplier nor the amount of excess reserves change.
C
49.Which of the following policy actions by the Fed would cause the money supply to decrease? a. An open-market purchase of government securities. b. A decrease in required reserve ratios. c. An increase in the discount rate. d. A decrease in the discount rate.
C
14. Which of the following would be classified as a liability for a bank? a. Required reserves. c. Loans. b. Excess reserves. d. Checkable deposits.
D
16. The term "open market operations" refers to the: a. loan-making activities of commercial banks. b. effect of expansionary monetary policy on interest rates. c. operation of competitive markets in the banking industry as the result of deregulation. d. buying and selling of government securities by the Federal Reserve.
D
17. Which of the following policy actions by the Fed would cause the money supply to increase? a. An open market sale of government securities. b. An increase in required reserve ratios. c. An increase in the discount rate. d. An open-market purchase of government securities.
D
18. When the Federal Reserve sells government bonds to the public, it: a. increases the M1 money supply and increases the excess reserves of the commercial banking system. b. increases the M1 money supply, while reducing the excess reserves of the commercial banking system. c. reduces the M1 money supply, while increasing the excess reserves of the commercial banking system. d. reduces the M1 money supply and decreases the excess reserves of the commercial banking system.
D
19. If the economy is inflationary, the Fed would most likely: a. increase bank reserves by raising the discount rate. b. increase bank reserves by buying government securities c. decrease bank reserves by lowering the discount rate. d. decrease bank reserves by selling government securities. e. decrease bank reserves by lowering the legal reserve requirement.
D
23. The characteristics that money should have include: a. portability, durability, and flexibility. b. durability, flexibility and stability. c. durability, portability, and non-homogeneity. d. scarcity, portability, and divisibility. e. portability, homogeneity, and flexibility.
D
24.Which of the following items is included when computing M1? a. Coins in circulation. b. Currency in circulation. c. Checking accounting entries. d. All of the above. e. None of the above
D
25.Which of the following is considered part of M2? a. Savings deposits. c. Small time deposits of less than $100,000. b. Money market mutual fund shares. d. All of these.
D
27.Which of the following groups oversees and administers the Federal Reserve System? a. The House of Representatives. b. The President's Council of Economic Advisors. c. The U.S. Treasury Department. d. None of these, the Fed is an independent agency.
D
32.Which of the following is a valid statement? a. Excess reserves = total reserves minus required reserves. b. Required reserves = the minimum reserves required by the Fed. c. Required reserve ratio = required reserves as a percentage to total deposits. d. All of these.
D
35.Which of the following is a bank liability? a. Required reserves. b. Excess reserves. c. Actual reserves. d. Checkable deposits. e. Loans.
D
39.When new checkable deposits are created through loans, a. the money supply contracts. b. excess reserves are destroyed. c. the money supply remains the same. d. the money supply expands. e. the required reserve ratio declines
D
41.In a simplified banking system subject to a 25 percent required reserve ratio, a $1,000 open-market purchase by the Fed would cause the money supply to: a. increase by $1,000. c. decrease by $4,000. b. decrease by $1,000. d. increase by $4,000.
D
43.Suppose the Fed bought $150 million of U.S. securities from security dealers. The reserve requirement is 20 percent, and there are no initial excess reserves. A few weeks later, if the public's holdings of currency are constant and the banks have loaned all excess reserves, the money supply will increase by: a. $150 million. c. $600 million. b. $300 million. d. $750 million.
D
46.When the Federal Reserve sells government bonds to the public, it: a. increases the M1 money supply and increases the reserves of the commercial banking system. b. increases the M1 money supply, while reducing the reserves of the commercial banking system. c. reduces the M1 money supply, while increasing the reserves of the commercial banking system. d. reduces the M1
D
47.Which of the following policy actions by the Fed would cause the money supply to increase? a. An open market sale of government securities. b. An increase in required reserve ratios. c. An increase in the discount rate. d. An open-market purchase of government securities.
D
50.Which of the following policy actions by the Fed would cause the money supply to decrease? a. An open-market purchase. c. A decrease in the discount rate. b. A decrease in required reserve ratios. d. None of these.
D
Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money suppliesa. a.M1 and M2 are both unchanged. b. M1 falls by $1,000, and M2 rises by $1,000. c. M1 is unchanged, and M2 rises by $1,000. d. M1 falls by $1,000, and M2 is unchanged.
D
36.The required reserve ratio for a bank is set by: a. Congress. b. the bank itself. c. the Treasury Department. d. the banking system. e. the Federal Reserve.
E
44.When the required reserve ratio is changed, a. the money multiplier is changed but the amount of excess reserves in the banking system is unchanged. b. the money multiplier is unchanged but the amount of excess reserves in the banking system is changed. c. the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio. d. the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio. e. neither the money multiplier nor the amount of excess reserves change.
E
Buying a cup of coffee with a dollar bill represents the use of money as a:
Medium of exchange
Which one of the following is part of the M2 definition of the money supply, but not part of M1
Small time deposits
Money is
anything that serves as a medium of exchange, a unit of account, and a store of value
The M1 money supply is composed of
currency, demand deposits, traveler's checks, and other checkable accounts
