Econ Test 2
The metaphor of _______ is used to explain how monetary policy may be effective in slowing business expansions and controlling inflation, but may be much less reliable in helping the economy get out of a recession. A. "pushing on a string" B. "making a silk purse out of a pig's ear" C. "on the road again" D. "here today, gone tomorrow"
A. "pushing on a string"
22. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of: A. $1,000. B. $2,000. C. $800. D. $5,000.
A. $1,000.
25. Refer to the above data. The maximum amount by which the commercial banking system can expand the supply of money by lending is: A. $30 billion. B. $23.1 billion. C. $27 billion. D. $15 billion.
A. $30 billion.
If the reserve requirement is 10 percent, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank? A. $450 B. $400 C. $5,000 D. $550
A. $450
10. As it relates to Federal Reserve activities, the acronym FOMC describes the: A. Federal Open Market Committee. B. Federal Options Market Committee. C. Federal Organization for Monetary Control. D. Federal Organization for Money Creation.
A. Federal Open Market Committee.
Which Federal Reserve Bank carries out the buying/selling of U.S. securities on behalf of decisions made by the Federal Open Market Committee regarding these purchases/sales? A. Federal Reserve Bank of New York B. Federal Reserve Bank of Chicago C. Federal Reserve Bank of San Francisco D. Federal Reserve Bank of Atlanta
A. Federal Reserve Bank of New York
The total demand for money curve will shift to the right as a result of: A. an increase in nominal GDP. B. an increase in the interest rate. C. a decline in the interest rate. D. a decline in nominal GDP.
A. an increase in nominal GDP.
The Federal funds rate is the interest rate that _______ charge(s) ______. A. banks; other banks. B. the Fed; commercial banks. C. banks; their best corporate customers. D. banks; on federal student loans.
A. banks; other banks.
To reduce the Federal funds rate, the Fed can: A. buy government bonds from the public. B. increase the discount rate. C. increase the prime interest rate. D. sell government bonds to commercial banks.
A. buy government bonds from the public.
6. The money supply is backed: A. by the government's ability to control the supply of money and therefore to keep its value relatively stable. B. by government bonds. C. dollar-for-dollar by gold and silver. D. by gold reserves representing a fraction of the total value of dollars in circulation.
A. by the government's ability to control the supply of money and therefore to keep its value relatively stable.
2. In the United States, the money supply (M1) is comprised of: A. coins, paper currency, and checkable deposits. B. currency, checkable deposits, and Series E bonds. C. coins, paper currency, checkable deposits, and credit balances with brokers. D. paper currency, coins, gold certificates, and time deposits.
A. coins, paper currency, and checkable deposits.
A contraction of the money supply: A. increases the interest rate and decreases aggregate demand. B. increases both the interest rate and aggregate demand. C. lowers the interest rate and increases aggregate demand. D. lowers both the interest rate and aggregate demand.
A. increases the interest rate and decreases aggregate demand.
7. The value of money varies: A. inversely with the price level. B. directly with the volume of employment. C. directly with the price level. D. directly with the interest rate.
A. inversely with the price level.
The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that: A. reserves lost by any particular bank will be gained by some other bank. B. the central banks follow policies that prevent reserves from falling below the level required by law. C. the MPC of borrowers is greater than zero, but less than 1. D. the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.
A. reserves lost by any particular bank will be gained by some other bank.
Which of the following will increase commercial bank reserves? A. the purchase of government bonds in the open market by the Federal Reserve Banks B. a decrease in the reserve ratio C. an increase in the discount rate D. the sale of government bonds in the open market by the Federal Reserve Banks
A. the purchase of government bonds in the open market by the Federal Reserve Banks
Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction: A. the supply of money is increased by $5,000. B. the supply of money declines by the amount of the loan. C. a claim has been "demonetized." D. the Metro Bank acquires reserves from other banks.
A. the supply of money is increased by $5,000.
15. To say that the Federal Reserve Banks are quasi-public banks means that: A. they are privately owned, but managed in the public interest. B. they deal only with banks of foreign nations and do not have direct business contact with U.S. banks. C. they deal only with commercial banks, and not the public. D. they are publicly owned, but privately managed.
A. they are privately owned, but managed in the public interest.
Which of the following statements is correct? A. The total (actual) reserves of a commercial bank equal its excess reserves minus its required reserves. B. A bank's liabilities plus its net worth equal its assets. C. When borrowers repay bank loans, the supply of money increases. D. A single commercial bank can safely lend a multiple amount of its excess reserves.
B. A bank's liabilities plus its net worth equal its assets.
Which of the following best describes the cause-effect chain of a restrictive monetary policy? A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D. An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.
B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.
Which of the following statements is correct? A. Interest rates and bond prices vary directly. B. Interest rates and bond prices vary inversely. C. Interest rates and bond prices are unrelated. D. Interest rates and bond prices vary directly during inflations and inversely during recessions.
B. Interest rates and bond prices vary inversely
The securities held as assets by the Federal Reserve Banks consist mainly of: A. corporate bonds. B. Treasury bills and Treasury bonds. C. common stock. D. certificates of deposit.
B. Treasury bills and Treasury bonds.
Federal Reserve Notes in circulation are: A. an asset as viewed by the Federal Reserve Banks. B. a liability as viewed by the Federal Reserve Banks. C. neither an asset nor a liability as viewed by the Federal Reserve Banks. D. not part of the M1 money supply.
B. a liability as viewed by the federal reserve banks
When a check is drawn and cleared, the A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction. B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check. C. bank receiving the check loses reserves and deposits equal to the amount of the check.D. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check
B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check
25. An increase in the required (legal) reserve ratio: A. increases the money supply by increasing excess reserves and increasing the monetary multiplier. B. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. C. increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. D. decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.
B. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
The reserves of a commercial bank consist of: A. the amount of money market funds it holds. B. deposits at the Federal Reserve Bank and vault cash. C. government securities that the bank holds. D. the bank's net worth.
B. deposits at the Federal Reserve Bank and vault cash.
26. When a bank loan is repaid the supply of money: A. is constant, but its composition will have changed. B. is decreased. C. is increased. D. may either increase or decrease.
B. is decreased.
1. The transactions demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.
B. medium of exchange.
The primary purpose of the required (legal) reserve requirement is to: A. prevent banks from hoarding too much vault cash. B. provide a means by which the monetary authorities can influence the lending ability of commercial banks. C. prevent commercial banks from earning excess profits. D. provide a dependable source of interest income for commercial banks.
B. provide a means by which the monetary authorities can influence the lending ability of commercial banks.
27. The discount rate is the interest: A. rate at which the central banks lend to the U.S. Treasury. B. rate at which the Federal Reserve Banks lend to commercial banks. C. yield on long-term government bonds. D. rate at which commercial banks lend to the public.
B. rate at which the Federal Reserve Banks lend to commercial banks.
26. Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier? A. open market operations B. the reserve ratio C. the discount rate D. the federal funds rate
B. the reserve ratio
Other things equal, if the required reserve ratio was lowered: A. banks would have to reduce their lending. B. the size of the monetary multiplier would increase. C. the actual reserves of banks would increase. D. the Federal funds interest rate would rise.
B. the size of the monetary multiplier would increase.
Which of the following are all assets to a commercial bank? A. demand deposits, stock shares, and reserves B. vault cash, property, and reserves C. vault cash, property, and stock shares D. vault cash, stock shares, and demand deposits
B. vault cash, property, and reserves
Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's total (actual) reserves? A. $16,000 B. $84,000 C. $24,000 D. $20,000
C. $24,000
Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000 was drawn and cleared against it? A. $3,000 B. $24,000 C. $6,000 D. $16,000
C. $6,000
Overnight loans from one bank to another for reserve purposes entail an interest rate called the: A. prime rate. B. discount rate. C. Federal funds rate. D. treasury bill rate.
C. Federal funds rate.
To combat the Great Recession of 2007-2009, the Federal Reserve did all of the following except A. it reduced the Federal Funds rate B. It bought U.S. government securities on the open market C. It raised the required reserve ratio D. it reduced the discount rate
C. It raised the required reserve ratio
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by: A. a line parallel to the horizontal axis. B. a vertical line. C. a downsloping line or curve from left to right. D. an upsloping line or curve from left to right.
C. a downsloping line or curve from left to right.
24. The Federal Reserve System regulates the money supply primarily by: A. controlling the production of coins at the United States mint. B. altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. C. altering the reserves of commercial banks, largely through sales and purchases of government bonds. D. restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.
C. altering the reserves of commercial banks, largely through sales and purchases of government bonds.
Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves: A. are $1,000,000. B. are $10,000. C. are $20,000. D. cannot be determined from the given information
C. are $20,000.
23. Refer to the above diagram of the market for money. The downward slope of the money demand curve Dm is best explained in terms of the: A. transactions demand for money. B. direct or positive relationship between bond prices and interest rates. C. asset demand for money. D. wealth or real-balances effect.
C. asset demand for money.
Other things equal, if the supply of money is reduced: A. the demand for money will increase. B. the interest rates will fall. C. bond prices will fall. D. investment spending will increase.
C. bond prices will fall.
17. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in: A. mutual fund companies B. insurance companies .C. commercial banks D. securities firms
C. commercial banks
16. Which of the following is the most important economic policy function of the Federal Reserve Banks? A. holding the deposits or reserves of commercial banks B. acting as fiscal agents for the Federal government C. controlling the supply of money D. the collection or clearing of checks among commercial banks
C. controlling the supply of money
To keep the purchasing power of money relatively stable, the Federal Reserve A. buys corporate stock B. employs fiscal policy C. controls the money supply D. uses wage and price controls
C. controls the money supply
Commercial banks create money when they: A. accept cash deposits from the public. B. purchase government securities from the central banks. C. create checkable deposits in exchange for IOUs.D. raise their interest rates.
C. create checkable deposits in exchange for IOUs.D. raise their interest rates.
Monetary policy is thought to be: A. equally effective in moving the economy out of a depression as in controlling demand-pull inflation. B. more effective in moving the economy out of a depression than in controlling demand-pull inflation. C. more effective in controlling demand-pull inflation than in moving the economy out of a recession. D. only effective in moving the economy out of a depression.
C. more effective in controlling demand-pull inflation than in moving the economy out of a recession.
The claims of the owners of a firm against the firm's assets are called: A. working capital. B. assets C. net worth. D. liabilities.
C. net worth.
Which of the following tools of monetary policy is flexible, and able to affect bank reserves quickly and by relatively specific amounts? A. the discount rate B. the reserve ratio C. open market operations D. the Federal funds rate
C. open market operations
Concerning the Federal Reserve System: A. the Federal Reserve is headquartered in New York City B. there are 6 Federal Reserve banks throughout the United States C. the Federal Reserve is the central bank of the United States D. the Federal Reserve insures the deposits of commercial banks, up to $250,000
C. the Federal Reserve is the central bank of the United States
The members of the Federal Reserve's Board of Governors are appointed by A. member banks of the Federal Reserve System B. members of the Federal Open Market Committee C. the U.S. president and confirmed by the Senate D. the presidents of the 12 Federal Reserve banks
C. the U.S. president and confirmed by the Senate
If the quantity of money demanded exceeds the quantity supplied: A. the supply-of-money curve will shift to the left. B. the demand-for-money curve will shift to the right. C. the interest rate will rise. D. the interest rate will fall.
C. the interest rate will rise.
5. Refer to the above information. Money supply M1 for this economy is: A. $60. B. $70. C.$130. D. $140.
C.$130.
A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of: A. $1,250. B. $120,000. C. $5,000. D. $3,750.
D. $3,750.
9. The Federal Reserve System was created in: A. 1926. B. 1946. C. 1895. D. 1913.
D. 1913.
Which of the following is correct? A. Required reserves minus total (actual) reserves equal excess reserves. B. Required reserves equal excess reserves minus actual reserves. C. Required reserves equal actual reserves plus excess reserves. D. Actual reserves minus required reserves equal excess reserves.
D. Actual reserves minus required reserves equal excess reserves.
Which of the following actions by the Fed will increase commercial bank lending potential? A. Raising the required reserve ratio. B. Increasing the Federal funds rate target. C. Raising the discount rate. D. Buying bonds from commercial banks and the public.
D. Buying bonds from commercial banks and the public.
12. The group that sets the Federal Reserve Systems policy on buying and selling government securities (bills, notes, and bonds) is the: A. Federal Deposit Insurance Corporation (FDIC). B. Federal Bond Sale Authority. C. Council of Economic Advisers. D. Federal Open Market Committee (FOMC).
D. Federal Open Market Committee (FOMC).
1. The paper money used in the United States is: A. National Bank Notes. B. Treasury Notes. C. United States Notes. D. Federal Reserve Notes.
D. Federal Reserve Notes.
The Federal Reserve is responsible for A. setting reserve requirements and holding reserves of banks B. issuing currency in the form of Federal Reserve Notes C. serving as an emergency lender of last resort to banks D. all of the above
D. all of the above
The U.S. government purposely established the Federal Reserve as an independent agency of the government. The objective was to protect the Fed from political pressure so that it could effectively control the money supply and maintain price stability. To promote this independence: A. members of the Fed's Board of Governors have terms of office of 14 years B. the Federal Reserve is owned by banks that are members of the Federal Reserve System C. the Fed is self-financing and does not require operating funds from the federal government D. all of the above
D. all of the above
The sale of government bonds by the Federal Reserve Banks to commercial banks will: A. increase aggregate supply. B. decrease aggregate supply. C. increase aggregate demand. D. decrease aggregate demand.
D. decrease aggregate demand.
Which one of the following is presently a major deterrent to bank panics in the United States? A. the legal reserve requirement B. the fractional reserve system C. the gold standard D. deposit insurance of the FDIC
D. deposit insurance of the FDIC
Excess reserves refer to the: A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. B. minimum amount of total (actual) reserves a bank must keep on hand to back up its customers deposits. C. difference between total (actual) reserves and loans. D. difference between total (actual) reserves and required reserves.
D. difference between total (actual) reserves and required reserves.
The ______ refers to the minimum downpayment that investors must make when purchasing corporate stock A. reserve requirement B. federal funds rate C. discount rate D. margin requirement
D. margin requirement
14. An important routine function of the Federal Reserve Bank is to: A. supervise the liquidation of the assets of bankrupt state banks. B. help large commercial banks develop correspondent relationships with smaller commercial banks. C. advise commercial banks as to the most profitable ways of reinvesting profits. D. provide facilities by which commercial banks and thrift institutions may collect checks.
D. provide facilities by which commercial banks and thrift institutions may collect checks.
The reserve ratio refers to the ratio of a bank's: A. reserves to its liabilities and net worth. B. capital stock to its total assets. C. checkable deposits to its total liabilities. D. required reserves to its checkable-deposit liabilities.
D. required reserves to its checkable-deposit liabilities.
The Federal Open Market Committee (FOMC) A. directs the Federal Reserve's purchase and sale of government securities in the open market B. sets the reserve requirements for banks that belong to the Federal Reserve System C. serves as the lender of last resort to banks, through the discount window D. supervises the operations of banks to ensure that they are safe and sound
A. directs the Federal Reserve's purchase and sale of government securities in the open market
3. Checkable deposits are classified as money because: A. they can be readily used in purchasing goods and paying debts. B. banks hold currency equal to the value of their checkable deposits. C. they are ultimately the obligations of the Treasury. D. they earn interest income for the depositor.
A. they can be readily used in purchasing goods and paying debts.
It is costly to hold money because: A. deflation may reduce its purchasing power. B. in doing so, one sacrifices interest income. C. bond prices are highly variable. D. the rate at which money is spent may decline.
B. in doing so, one sacrifices interest income.
The impact of monetary policy on investment spending may be weakened: A. because of the Treasury's desire for high interest rates. B. if the rate at which dollars are spent changes in the same direction as the money supply. C. if the investment-demand curve shifts to the right during inflation and to the left during recession. D. if the investment-demand curve is very flat.
C. if the investment-demand curve shifts to the right during inflation and to the left during recession.
4. In defining money as M1, economists exclude time deposits (savings deposits) because: A. the intrinsic value of time deposits is nil (tiny). B. the purchasing power of time deposits is much less stable than that of checkable deposits and currency. C. they are not directly or immediately a medium of exchange. D. they are not recognized by the Federal government as legal tender.
C. they are not directly or immediately a medium of exchange.
13. The members of the Federal Reserve Board: A. serve seven-year terms. B. are appointed by the American Economic Association. C. are elected by votes of the 12 presidents of the Federal Reserve Banks. D. are appointed for 14-year terms.
D. are appointed for 14-year terms.
21. Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district. As a result: A. commercial bank reserves are increased by $10,000. B. the supply of money automatically declines by $7,500. C. commercial bank reserves are increased by $7,500. D. the supply of money is automatically increased by $10,000.
A. commercial bank reserves are increased by $10,000.
A commercial bank can expand its excess reserves by: A. demanding and receiving payment on an overdue loan. B. buying bonds from a Federal Reserve Bank. C. buying bonds from the public. D. paying back money borrowed from a Federal Reserve Bank.
A. demanding and receiving payment on an overdue loan.
A bank that has assets of $85 billion and a net worth of $10 billion must have: A. liabilities of $75 billion. B. excess reserves of $10 billion. C. liabilities of $10 billion.D. excess reserves of $75 billion.
A. liabilities of $75 billion.
When commercial banks use excess reserves to buy government securities from the public: A. new money is created. B. commercial bank reserves increase. C. the money supply falls. D. checkable deposits decline.
A. new money is created.
19. The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits: A. of commercial banks are unchanged, but their reserves increase. B. and reserves of commercial banks both decrease. C. of commercial banks are unchanged, but their reserves decrease. D. and reserves of commercial banks are both unchanged.
A. of commercial banks are unchanged, but their reserves increase.
20. Which of the following is a tool of monetary policy? A. open market operations B. changes in banking laws C. changes in tax rates D. changes in government spending
A. open market operations
8. During periods of rapid inflation, money may cease to work as a medium of exchange: A. unless it has been designated legal tender. B. unless it is backed by gold. C. because it is too scarce for everyone to have enough for transactions. D. because people and businesses will not want to accept it in transactions.
D. because people and businesses will not want to accept it in transactions.
The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of: A. the MPS. B. its actual reserves. C. its excess reserves. D. the reserve ratio.
D. the reserve ratio.
11. The Federal Open Market Committee (FOMC) is made up of: A. the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks. B. the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank. C. the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers. D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.
D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.
