chapter_10(1) - Principles of Macroeconomics, 9e ­ TB1...

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Unformatted text preview: Principles of Macroeconomics, 9e ­ TB1 (Case/Fair/Oster) Chapter 10 1 The Money Supply and the Federal Reserve System 10.1 An 1 M ul ti pl e C 1) h o i c e Money is A) the same as B) income. anything that is generally accepted as a medium of exchange. C) the value of all coins and currency in circulation at any time. D) backed by gold in Fort Knox. Answer: B Diff: 1 Topic: An Overview of Money Skill: Definition 2) Any transaction that involves exchanging one good for another without using money is considered a A) liquidity B) transaction. barter C) transaction. deferred D) payment. black market exchange. Answer: B Diff: 1 Topic: An Overview of Money Skill: Definition 3) Jacob makes excellent tamales and Amanda is very good at mowing lawns. Amanda agrees to mow Jacob's lawn, if he makes her a dozen tamales. This is an example of A) legal tender. B) barter. C) commodity D) money. fiat money. Answer: B Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 4) Which of the following factors causes the barter system to be inefficient? A) Its cost of B) transaction is too low. The cost C) associated with information search is too low. It requires a D) double coincidence of wants. It requires high liquidity. Answer: C Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 5) Josie trade swimming lessons for cooking lessons. Maria wants to trade cooking lessons for swimming wants to lessons. Josie and Maria have A) the basis for a liquidity exchange. B) a double C) incidence of demand. the basis for a double fiat exchange. D) a double coincidence of wants. Answer: D Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 6) The development of money as a medium of exchange has facilitated the expansion of trade because A) holding money increases people's wealth. B) holding money increases people's income. C) money D) eliminates the "double coincidence of wants" problem. no other mediums of exchange are available. Answer: C Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 7) When money is used as a medium of exchange A) the need for a barter system diminishes. B) the cost of C) transactions increases. the need for a banking system in the economy decreases. D) it reduces the number of transactions in the economy. Answer: A Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 8) Betty won poker tournament. She deposits her $500 winnings into a money market fund so that she can use the $500 in a money next year to help her pay for a trip to Las Vegas. This is an example of money serving as a(n) A) unit of account. B) medium of C) exchange. store of value. D) investment good. Answer: C Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 9) When you pay $8 for salad you ordered for lunch, you are using money as a(n) A) store of value. B) investment C) good. medium of D) exchange. unit of account. Answer: C Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 10) Veronica income tax rebate check of $600 in May 2008. Veronica put this money in a saving account so that she received a could spend it when she went on vacation in July 2008. This is an example of money serving as a(n) federal A) store of value. B) medium of C) exchange. unit of account. D) investment good. Answer: A Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 11) When you keep your savings in a saving account, you are using money as a(n) A) investment B) good. store of value. C) medium of D) exchange. unit of account. Answer: B Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 12) The main disadvantage of using money as a store of value is that A) money is not B) portable. it requires a C) double coincidence of wants. currency is D) intrinsically worthless. the value of money actually falls when the prices of goods and services rise. Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 13) The liquidity property of money is the property that makes money A) a good medium of exchange and a good unit of account. B) a good store of value and a good unit of account. C) a good medium of exchange and a good store of value. D) a good store of value and a good standard of deferred payment. Answer: C Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 14) When the manager of a department store attaches price tags to his/her products, he/she is using money as a A) medium of B) exchange. store of value. C) unit of transfer. D) unit of account. Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 15) Circuit City, a retailer of electronics, has 2,000 different products in inventory. Circuit City reports its inventory is worth $12 million. This is an example of using money as a A) medium of B) exchange. unit of account. C) standard of D) deferred payment. store of value. Answer: B Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 16) Denny's lists the price of a Grand Slam Breakfast at $4.99 a plate. Listing the price on the menu is an example of money serving as a(n) A) store of value. B) unit of account. C) medium of D) exchange. investment good. Answer: B Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 17) When Mexico experiences a period of high inflation and Mexicans lose confidence in their peso as a store of value, which of the following would be most likely to occur? A) The demand for pesos would increase. B) The buying C) power of the peso would increase. The value of D) foreign currencies would depreciate relative to the peso. Mexicans would use a different currency as a medium of exchange. Answer: D Diff: 2 Topic: An Overview of Money Skill: Analytic AACSB: Analytic Skills 18) A that is not backed by gold, silver, or any other precious commodity equal to the face value of the money currency is known as A) fake money. B) weak money. C) token money. D) commodity money. Answer: C Diff: 1 Topic: An Overview of Money Skill: Definition 19) After World War II, cigarettes were used as money in Germany. This is an example of A) fiat money. B) legal money. C) token money. D) commodity money. Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 20) The U.S. dollar is an example of fiat money because A) it is the B) strongest currency in the world. it is the most C) widely used currency in international trade. it is backed by a large reserve of gold and silver. D) by law, it is decreed as money. Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 21) Which of the following is an example of fiat money? A) cigarettes B) an ounce of C) gold a U.S. oneD) hundred dollar bill a government bond Answer: C Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 22) Money that a government has required to be accepted in settlement of debts is A) fiat money. B) commodity C) money. barter money. D) legal tender. Answer: D Diff: 1 Topic: An Overview of Money Skill: Definition 23) To ensure that paper money will be accepted, the U.S. government implicitly promises the public that A) it will not print money so fast that it loses its value. B) it will not C) change the rate at which the dollar is exchanged for other currencies. it will always remain the strongest currency of all industrialized nations. D) the U.S. monetary system will always be backed by a precious metal. Answer: A Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 24) Currency debasement occurs when A) the value of B) money falls as a result of a rapid increase in its supply. the government requires that a certain form of money must be accepted in settlement of debts. C) items are D) designated as money that are intrinsically worthless. items are used as money that also have intrinsic value in some other use. Answer: A Diff: 2 Topic: An Overview of Money Skill: Definition 25) Assume country of Salmon, the government tripled the money supply overnight. As a result of this action, the that in the price of a loaf of bread increased from 1 bill to 100 bills. This is an example of A) a change in the legal tender. B) a change from commodity money to fiat money. C) currency D) debasement. deflation. Answer: C Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 26) Currency held outside banks + demand deposits + travelers checks + other checkable deposits = A) M3. B) M2 - M1. C) M3 - M1. D) M1. Answer: D Diff: 2 Topic: An Overview of Money Skill: Definition 27) Transacti on money is A) M1. B) M2. C) M3. D) M4. Answer: A Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 28) Traveler's checks are A) not money. B) included in M1 and M2. C) not included in M2. D) not included in M1. Answer: B Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 29) Which of the following is included in M2, but not included in M1? A) currency held outside banks B) travelers checks C) demand D) deposits savings accounts Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 30) Jaime transfers $2,500 from his checking account to his savings account. This transaction will A) decrease both B) M1 and M2. not change M1 and decrease M2. C) decrease M1 D) and not change M2. increase both M1 and M2. Answer: C Diff: 2 Topic: An Overview of Money Skill: Analytic AACSB: Analytic Skills 31) Ruby transfers $700 from her saving account to her checking account. This transaction will A) increase M1 and not change M2. B) not change M1 and decrease M2. C) increase both D) M1 and M2. decrease both M1 and M2. Answer: A Diff: 2 Topic: An Overview of Money Skill: Analytic AACSB: Analytic Skills 32) Teddy transfers $175 from his money market fund to his checking account. This transaction will A) decrease M2 B) and increase M1. increase M1, C) but leave M2 unchanged. decrease M1 D) and increase M2. decrease both M1 and M2. Answer: B Diff: 2 Topic: An Overview of Money Skill: Analytic AACSB: Analytic Skills 33) Which of the following would NOT be counted as part of M1? A) demand B) deposits traveler's check C) money market accounts D) currency Answer: C Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 34) Saving account balances are included in A) M1. B) M2. C) neither M1 nor M2. D) both M1 and M2. Answer: B Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 35) Which of the following would NOT be included in M2? A) demand B) deposits money market accounts C) checking D) accounts Treasury bonds Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 36) Included in M2 are A) bank loans. B) credit cards. C) bank capital. D) demand deposits. Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 37) Which of the following would NOT be included in M1? A) demand B) deposits money market accounts C) checking D) accounts traveler's checks Answer: B Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 38) Currency held outside banks is included in A) both M1 and B) M2. M2 only. C) M1 only. D) neither M1 nor M2. Answer: A Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 39) Close substitutes for transactions money are known as A) fiat monies. B) near monies. C) commodity D) monies. token monies. Answer: B Diff: 1 Topic: An Overview of Money Skill: Definition 40) Which of the following is the best example of a near money? A) a valuable B) painting a dollar bill C) a Treasury bond D) a money market account Answer: D Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 41) An equation for M1 is A) M2 + Savings Accounts - Currency Held Outside Banks + Other Near Monies. B) M2 - Savings C) Accounts - Money Market Accounts - Other Near Monies. Money Market Accounts + Automatic-transfer Savings Accounts. D) M2 + Near Monies. Answer: B Diff: 2 Topic: An Overview of Money Skill: Definition 42) The main advantage of using M2 instead of M1 as the measure for money is that A) M2 can be B) measured more accurately. M2 includes C) only instantly accessible assets. M2 is D) sometimes more stable. M2 varies as the interest rate varies. Answer: C Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 43) Commerc ial banks A) implement B) monetary policy. are nonprofit C) organizations that lend and borrow funds. are financial D) intermediaries that lend funds and accept deposits. hold reserves against bank capital. Answer: C Diff: 1 Topic: An Overview of Money Skill: Definition 44) Among the assets of a commercial bank are A) loans. B) demand C) deposits. savings D) deposits. time deposits. Answer: A Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 45) Among the liabilities of commercial banks are A) loans. B) demand C) deposits. reserves. D) government securities. Answer: B Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 46) Net worth is A) assets B) liabilities. assets + capital. C) assets - capital. D) assets + liabilities. Answer: A Diff: 1 Topic: An Overview of Money Skill: Definition 47) Related to Economics in Practice on p. 183 [495]: In the Solomon Islands, dolphin teeth are used as currency. In the this instance, dolphin teeth would be considered A) fiat money. B) token money. C) commodity D) money. legal tender. Answer: C Diff: 1 Topic: An Overview of Money: Economics in Practice Skill: Conceptual AACSB: Reflective Thinking 48) Related to Economics in Practice on p. 183 [495]: In the Solomon Islands, dolphin teeth are used as currency. Using the dolphin teeth to make a purchase would be using the teeth as a(n) A) medium of B) exchange. store of value. C) unit of account. D) legal tender. Answer: A Diff: 1 Topic: An Overview of Money: Economics in Practice Skill: Conceptual AACSB: Reflective Thinking 2 Tr ue /F al 1) s e When you use money to fill your car with gas every week, you are using money as a unit of account. Answer: FALSE Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 2) Money is anything that generally is accepted as a medium of exchange. Answer: TRUE Diff: 1 Topic: An Overview of Money Skill: Definition 3) In an economy that uses fiat money, there is no need for double coincidence of wants. Answer: TRUE Diff: 1 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 4) When you take $100 from your saving account and deposit it in your checking account, M2 decreases. Answer: FALSE Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 5) If all banks are loaned up and so will not make further loans, a $1,000 deposit creates $1,000 in new money. Answer: FALSE Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 6) Fiat money is money the government says is money. Answer: TRUE Diff: 2 Topic: An Overview of Money Skill: Definition 7) The M1 definition of money includes money market accounts. Answer: FALSE Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 8) The M2 definition of money includes demand deposits. Answer: TRUE Diff: 2 Topic: An Overview of Money Skill: Conceptual AACSB: Reflective Thinking 10.2 How 1 M ul ti pl e C 1) h o i c e Napoli National Bank has liabilities of $3 million and net worth of $200,000. Napoli National Bank's assets are A) $200,000. B) $3 million C) $3.2 million. D) $2.8 million. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 2) Saturn County Savings and Loan has liabilities of $400,000 and net worth of $125,000. Saturn County Savings and Loan's assets are A) $525,000. B) $275,000. C) $400,000. D) $125,000. Answer: A Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 3) Thompso Trust has assets of $500,000 and liabilities of $400,000. Thompson National Trust's net worth is n National A) $900,000. B) $400,000. C) $100,000. D) $500,000. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 4) A commercial bank lists A) loans as B) liabilities. deposits as C) liabilities. required D) reserves as liabilities. excess reserves as liabilities. Answer: B Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 5) Things that a firm owns that are worth something are classified as A) liabilities. B) assets. C) deposits. D) net worth. Answer: B Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 6) Which of the following is considered a liability to a bank? A) time deposits B) reserves C) the bank's loans D) the bank's buildings and equipment Answer: A Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 7) The central bank of the United States is known as the A) Federal Reserve System. B) Federal Deposit Insurance Corporation. C) Department of the Treasury. D) Federal Savings and Loan Insurance Corporation. Answer: A Diff: 1 Topic: How Banks Create Money Skill: Fact 8) A loan made by a bank is considered ________ of that bank. A) a liability B) capital C) net worth D) an asset Answer: D Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 9) A checking deposit in a bank is considered ________ of that bank. A) an asset B) a liability C) net worth D) capital Answer: B Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Refer to the information provided in Table 10.1 below to answer the questions that follow. Table 10.1 10) Refer to 10.1. The required reserve ratio is 25%. If the First Charter Bank is meeting its reserve requirement and Table has no excess reserves, its reserves equal A) $100. B) $200. C) $600. D) $300. Answer: B Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 11) Refer to 10.1. The required reserve ratio is 25%. If the First Charter Bank is meeting its reserve requirement and Table has no excess reserves, its loans equal A) $900. B) $1,000. C) $600. D) $1,800. Answer: B Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 12) Refer to Table 10.1. First Charter Bank's total assets are A) $1,200. B) $400. C) $800. D) $2,400 Answer: A Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 10.2 below to answer the questions that follow. Table 10.2 13) Refer to Table 10.2. First Commercial Bank's excess reserves equal $________. A) 600,000 B) 1,000,000 C) 200,000 D) 1,500,000 Answer: A Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 14) Refer to Table 10.2. The required reserve ratio A) is 5%. B) is 10%. C) is 20%. D) cannot be determined from the given information. Answer: B Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 15) Refer to Table 10.2. First Commercial Bank's total loans equal $________. A) 1,000,000 B) 5,000,000 C) 2,500,000 D) 1,700,000. Answer: D Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 10.3 below to answer the questions that follow. Table 10.3 16) Refer to Table 10.3. The net worth of People's Bank is $________. A) 1,000,000 B) 200,000 C) 800,000 D) 300,000 Answer: D Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 17) Refer to Table 10.3. The required reserve ratio is A) 25%. B) 20%. C) 50%. D) 10%. Answer: B Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 18) Refer to Table 10.3. People's Bank excess reserves are $________. A) 200,000 B) 100,000 C) 300,000 D) 400,000 Answer: A Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 19) Refer to Table 10.3. Total loans of People's Bank equal $________. A) 100,000 B) 400,000 C) 500,000 D) 800,000 Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 20) Crescent has $200 million in deposits. Crescent City Bank is meeting its reserve requirement and has no excess City Bank reserves. It has $40 million in reserves. Crescent City Bank faces a required reserve ratio of A) 5%. B) 4%. C) 20%. D) 25%. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 21) Narnia Bank has $750 million in deposits. The required reserve ratio is 30%. Narnia National Bank must keep National ________ in reserves. A) $125 million B) $150 million C) $225 million D) $250 million Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 22) Neon $300 million in deposits. The required reserve ratio is 25%. Neon Bank must keep ________ in Bank has reserves. A) $275 million B) $145 million C) $75 million D) $120 million Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 23) The al Bank has $5 million in deposits and $500,000 in reserves. If the required reserve ratio is 5%, excess Intracoast reserves are equal to A) $125,000. B) $500,000. C) zero. D) $250,000. Answer: D Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 24) The Bank Arugula has $9 million in deposits and $900,000 in reserves. If the required reserve ratio is 10%, excess of reserves are equal to A) $90,000. B) $180,000. C) $81,000. D) zero. Answer: D Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 25) The Bank Oak has $2 million in deposits and $400,000 in reserves. If excess reserves are equal to $100,000, the of Red required reserve ratio is A) 15%. B) 10%. C) 20%. D) 5%. Answer: A Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills Refer to the information provided in Table 10.4 below to answer the questions that follow. Table 10.4 26) Refer to Table 10.4. If the required reserve ratio is 15%, First Charter Bank A) is loaned up. B) has too few C) reserves on hand. is meeting its required reserve ratio and has $200,000 in excess reserves. D) has excess reserves of $100,000. Answer: A Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 27) Refer to 10.4. First Charter Bank could make additional, first round loans of $400,000 if the required reserve ratio Table were A) 10%. B) 8%. C) 7.5%. D) 12%. Answer: A Diff: 3 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 28) Refer to 10.4. If the required reserve ratio were changed to 5% and First Charter Bank continues to hold Table $1,200,000 in reserves, its excess reserves will be A) $600,000. B) $1,000,000. C) $800,000. D) $400,000. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 29) Dollar Bank is currently loaned up. If the required reserve ratio is lowered, A) Dollar Bank's net worth will increase. B) Dollar Bank C) will have excess reserves that it can lend out. Dollar Bank D) will still be loaned up because it did not receive any additional deposits. Dollar Bank's actual reserves will increase, but it will still be loaned up. Answer: B Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 30) When a bank has no excess reserves, and thus can make no more loans, it is said to be A) bankrupt. B) ripe for a C) takeover. in receivership. D) loaned up. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Conceptual 31) Commerc ial banks create money through A) printing B) treasury notes. making loans. C) facilitating D) borrowing from the Federal Reserve to the public. reducing risk in the economy. Answer: B Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 32) The multiple by which total deposits can increase for every dollar increase in reserves is the A) required reserve ratio. B) bank's line of C) credit. deposit D) insurance limit. money multiplier. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Definition 33) Suppose required reserve ratio is 20%. A $40 million cash deposit will, at most, allow an expansion of the money the supply to A) $20 million. B) $80 million. C) $200 million. D) $800 million. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 34) Suppose required reserve ratio is 15%. A $10 million deposit will, at most, allow an expansion of the money the supply to A) $147.5 million. B) $250 million. C) $150 million. D) $66.7 million. Answer: D Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 35) The required reserve ratio is 5%. The money multiplier is A) 0.5. B) 5. C) 15. D) 20. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 36) The required reserve ratio is 50%. The money multiplier is A) 2.5. B) 10. C) 5. D) 2. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 37) If the money multiplier is 8, the required reserve ratio is A) 8%. B) 16%. C) 12.5%. D) 20%. Answer: C Diff: 1 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 38) Assume become more conservative in their lending policies and start holding some excess reserves. Compared to that banks a situation in which banks are not holding excess reserves, the size of the money supply will be A) zero. B) larger. C) the same. D) smaller. Answer: D Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 39) As commercial banks keep more excess reserves, money creation A) increases. B) decreases. C) remains the D) same. could either increase or decrease. Answer: B Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Refer to the information provided in Scenario 10.1 below to answer the questions that follow. SCENARIO 10.1: The following table shows the changes in deposits, reserves, and loans of 4 banks as a result of a $100,000 initial deposit in Bank No. 1. Assume all banks are loaned up. 40) Refer to Scenario 10.1. What is the required reserve ratio? A) 4% B) 5% C) 8% D) 10% Answer: B Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 41) Refer to Scenario 10.1. What is the money multiplier in this economy? A) 20 B) 10 C) 50 D) 16.67 Answer: A Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 42) Refer to Scenario 10.1. Based on the initial $100,000 deposit, the money supply will, at most, expand to A) $1 million. B) $2 million. C) $50 million. D) $16.67 million. Answer: B Diff: 2 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 43) Refer to 10.1. If the required reserve ratio were changed to 10%, total loans of Bank No. 2 will change to Scenario A) 81,000. B) 90,000. C) 85,000. D) 77,440. Answer: A Diff: 3 Topic: How Banks Create Money Skill: Analytic AACSB: Analytic Skills 2 Tr ue /F al 1) s e Only the required reserve ratio determines how much money the Federal Reserve can create. Answer: FALSE Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 2) Excess reserves in a bank are the difference between required reserves and the bank's total net worth. Answer: FALSE Diff: 1 Topic: How Banks Create Money Skill: Definition 3) Among the assets of commercial banks are demand deposits. Answer: FALSE Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 4) The amount of money banks can loan out is determined by the discount rate. Answer: FALSE Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 5) Among the liabilities of commercial banks are deposits. Answer: TRUE Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 6) Since they must lend money to make money, all banks are necessarily insolvent. Answer: FALSE Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking 10.3 The 1 M ul ti pl e C 1) h o i c e The Federal Reserve System consists of ________ Federal Reserve Banks. A) 8 B) 10 C) 12 D) 14 Answer: C Diff: 1 Topic: The Federal Reserve System Skill: Fact 2) Which of the following activities is one of the responsibilities of the Federal Reserve? A) issuing new B) bonds to finance the federal budget deficit loaning money to other countries that are friendly to the United States C) assisting banks that are in a difficult financial position D) auditing the various agencies and departments of the federal government Answer: C Diff: 2 Topic: The Federal Reserve System Skill: Fact 3) Among the members of the Federal Open Market Committee A) is the Secretary of the Treasury. B) is the C) Comptroller of the Currency. are the seven D) members of the Board of Governors of the Fed. is the Chair of the Senate Banking Committee. Answer: C Diff: 2 Topic: The Federal Reserve System Skill: Fact 4) The Board of governors of the Fed A) are appointed by the House of Representatives. B) has 12 C) members. have a 7-year term. D) i s headquartered in Washington, D.C. Answer: D Diff: 2 Topic: The Federal Reserve System Skill: Fact 5) The Fed A) issues deposits to the public. B) lends money to foreign governments. C) clears interD) bank payments. lends money to the public. Answer: C Diff: 2 Topic: The Federal Reserve System Skill: Fact 2 Tr ue /F al 1) s e The President of the NY Federal Reserve Bank is always a member of the Federal Open Market committee. Answer: TRUE Diff: 1 Topic: The Federal Reserve System Skill: Fact 2) The Chair of the Fed also serves as one of the Reserve Bank Presidents. Answer: FALSE Diff: 1 Topic: The Federal Reserve System Skill: Fact 3) The Fed acts as a lender of last resort for the banking system. Answer: TRUE Diff: 2 Topic: The Federal Reserve System Skill: Fact 4) The of the Board of Governors of the Fed make up a majority of the Federal Open Market Committee. members Answer: TRUE Diff: 2 Topic: The Federal Reserve System Skill: Fact 5) The Fed is a division of the Department of the Treasury. Answer: FALSE Diff: 2 Topic: The Federal Reserve System Skill: Fact 10.4 How 1 M ul ti pl e C 1) h o i c e Which of the following instruments is NOT used by the Federal Reserve to change the money supply? A) the discount B) rate the required C) reserve ratio the federal tax code D) open market operations Answer: C Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Fact 2) The Federal Open Market Committee (FOMC) directs the Open Market Desk to A) determine the required reserve ratio. B) determine the discount rate. C) buy or sell D) government securities. determine the federal funds rate. Answer: C Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Fact 3) Which of the following is NOT a tool available to the Fed to change the supply of money? A) open market B) operations the required C) reserve ratio the money D) multiplier the discount rate Answer: C Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Fact 4) The discount rate is A) the interest rate commercial banks charge each other for borrowing funds. B) the interest rate commercial banks charge their new customers. C) the interest rate the Fed charges commercial banks for borrowing funds. D) the interest rate commercial banks charge their most creditworthy customers. Answer: C Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Definition 5) A decrease in the required reserve ratio A) will increase the money supply. B) will decrease C) the money supply. will not change the money supply. D) will decrease the discount rate. Answer: A Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 6) Assume that all commercial banks are loaned up. Total deposits in the banking system are $200 million. The required reserve ratio is increased. The money supply will A) decrease. B) increase. C) not change D) because there was no change in deposits. not change because the required reserve ratio has no impact on money supply. Answer: A Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Analytic AACSB: Analytic Skills 7) The Fed tended not to use changes in the reserve requirement as a means of controlling the money supply because has A) only banks that the Fed are subject to reserve requirements, and most banks do not belong to the Fed. are members of B) a change in the reserve requirement has only a very small impact on the money supply. C) it is a crude tool because a change in the requirement does not affect banks until about two weeks after the monetary policy change is implemented. D) it takes a long time for the Congress to approve a change in the reserve requirement. Answer: C Diff: 3 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 8) The interest rate banks pay to borrow money from the Fed is the A) federal funds B) rate. discount rate. C) prime lending rate. D) reserve rate. Answer: B Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Definition 9) Which of the following represents an action by the Federal Reserve that is designed to increase the money supply? A) a decrease in B) the required reserve ratio an increase in the discount rate C) a decrease in D) federal tax rates selling government securities in the open market Answer: A Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 10) Which of the following represents an action by the Federal Reserve that is designed to increase the money supply? A) buying B) government securities in the open market an increase in the required reserve ratio C) a decrease in D) federal spending an increase in the discount rate Answer: A Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 11) Of the tools available to the Fed to regulate the money supply, which is the least used? A) the federal B) funds rate the reserve ratio C) tax cutting D) the open-market operations Answer: B Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 12) If the Fed sells government securities, then there is A) an increase in the supply of money. B) a decrease in C) the supply of money. a decrease in D) the discount rate. an increase in the required reserve ratio. Answer: B Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 13) Which of the following represents an action by the Federal Reserve that is designed to decrease the money supply? A) a decrease in B) the discount rate a decrease in C) federal spending selling D) government securities in the open market a decrease in the required reserve ratio Answer: C Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 14) When the the required reserve ratio, the banks' excess reserves will initially ________ and the money supply Fed raises ________. A) remains B) constant; decreases decrease; C) decreases increase; D) remain constant increase; increases Answer: B Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 15) The best instrument for controlling week-to-week changes in the money supply is A) the required B) reserve ratio. moral suasion. C) open-market D) operations. the discount rate. Answer: C Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 16) Which of the following statements is FALSE? A) Open-market B) operations can be used by the Federal Reserve with some precision. Open-market C) operations are extremely flexible. The Federal D) Reserve undertakes open-market operations on an infrequent basis. Open-market operations have a fairly predictable effect on the supply of money. Answer: C Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 17) An open- purchase of securities by the Fed results in ________ in reserves and ________ in the supply of money. market A) an increase; a decrease B) a decrease; a C) decrease an increase; an increase D) a decrease; an increase Answer: C Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 18) An open- sale of securities by the Fed results in ________ in reserves and ________ in the supply of money. market A) an increase; a decrease B) an increase; an increase C) a decrease; an increase D) a decrease; a decrease Answer: D Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 19) Assume from the banking system and that all commercial banks are loaned up. The required reserve ratio is 16%. there is no If the Fed sells $5 million worth of government securities to the public, the change in the money supply leakage will be A) -$16 million. B) -$31.25 million. C) -$21 million. D) -$11.75 million. Answer: B Diff: 3 Topic: How the Federal Reserve Controls the Money Supply Skill: Analytic AACSB: Analytic Skills 20) Assume from the banking system and that all commercial banks are loaned up. The required reserve ratio is 10%. there is no If the Fed buys $10 million worth of government securities from the public, the change in the money leakage supply will be A) $1 million. B) $110 million. C) $100 million. D) $10 million. Answer: C Diff: 3 Topic: How the Federal Reserve Controls the Money Supply Skill: Analytic AACSB: Analytic Skills 21) The money supply has increased from $1.4 trillion to $1.45 trillion. Which of the following could have caused this increase? A) The Fed sold B) government securities to the public. Consumers who were holding money outside the banking system deposit this money. C) The Fed D) increased the discount rate. Commercial banks began to hold excess reserves. Answer: B Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Analytic AACSB: Analytic Skills 22) If the Fed sets the money supply independent of the interest rate, then the money supply curve is A) upward sloping. B) downward C) sloping. vertical. D) horizontal. Answer: C Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 2 Tr ue /F al 1) s e A decrease in the required reserve ratio increases the money supply. Answer: TRUE Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 2) A sale of government securities to the public by the Federal Reserve will increase the money supply. Answer: FALSE Diff: 1 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 3) The rate cannot be used to control the money supply with great precision because its effects on banks' discount demand for reserves are uncertain. Answer: TRUE Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking 4) The tool most frequently used by the Fed to change the money supply is changing the required reserve ratio. Answer: FALSE Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Fact 5) If the Fed buys securities on the open market, it will increase the money supply. Answer: TRUE Diff: 2 Topic: How the Federal Reserve Controls the Money Supply Skill: Conceptual AACSB: Reflective Thinking ...
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