Page 61
331.
If a bank has $2,000 in excess reserves and a 10% reserve requirement, the maximum
potential increase in the money supply is $20,000.
A)
True
B)
False
332.
The monetary base is currency in circulation plus bank reserves.
A)
True
B)
False
333.
A central bank is an institution that oversees and regulates the banking system and
controls the monetary base.
A)
True
B)
False
334.
The two parts of the U.S. Federal Reserve are the Board of Governors and 50 regional
banks.
A)
True
B)
False
335.
The members of the Board of Governors of the Fed serve 14-year terms.
A)
True
B)
False
336.
The chair of the Fed can serve only one four-year term.
A)
True
B)
False
337.
One of the functions of the 12 regional Fed banks is to audit the books of private-sector
banks in their region to be sure that they are financially sound.
A)
True
B)
False
338.
Changing the reserve requirement is the main tool of monetary policy.
A)
True
B)
False
Page 62
339.
The Federal Open Market Committee, composed of the Board of Governors and five of
the regional bank presidents, makes the decisions about monetary policy.
A)
True
B)
False
340.
The Office of Management and Budget serves as the central bank of the United States.
A)
True
B)
False
341.
The two parts of the Federal Reserve are the Board of Governors and the 12 regional
Federal Reserve Banks.
A)
True
B)
False
342.
When the federal government writes a check, it is written on an account at the U.S.
Treasury Department.
A)
True
B)
False
343.
The Federal Reserve regional banks and the Board of Governors supervise, examine,
and regulate commercial banks.
A)
True
B)
False
344.
It is the responsibility of the U.S. Department of Commerce to maintain stability in the
financial system by providing liquidity to commercial banks.
A)
True
B)
False
345.
One of the functions of the Fed is to use monetary policy, which involves changes in the
money supply and changes in interest rates to affect aggregate spending, to lessen the
impact of economic fluctuations on the economy.
A)
True
B)
False
Page 63
346.
The monetary policy tools used by the Federal Reserve to adjust the money supply are
changes in tax rates and government purchases of goods and services.
A)
True
B)
False
347.
The monetary policy tools used by the Federal Reserve to adjust the money supply are
reserve requirements, the discount rate, and open-market operations.
A)
True
B)
False
348.
In the federal funds market, governments of different countries obtain long-term loans
from the governments of other countries.
A)
True
B)
False
349.
At the end of each business day, the Federal Reserve requires banks to hold reserves
equal to 10% of their checkable deposits.
A)
True
B)
False
350.
The federal funds rate is determined by the demand and supply for bank reserves, both
of which are strongly influenced by the Federal Reserve.
A)
True
B)
False
351.
Changes in the reserve requirement are the monetary policy tool used most often by the
Fed.
A)
True
B)
False
352.
If the Federal Reserve increases reserve requirements, the fed funds rate will likely
increase, banks will loan less, and the money supply will likely decrease.
A)
True
B)
False
353.
The discount rate is usually exactly equal to the federal funds rate.
A)
True
B)
False
Page 64
354.
Normally the discount rate is below the federal funds rate to encourage banks to borrow
from the Fed rather than from other banks.
A)
True
B)
False
355.
When the Fed increases the discount rate, the spread between the discount rate and the
fed funds rate increases and the cost of being short of reserves increases.
A)
True
B)
False
356.
When the Fed increases the discount rate, banks are likely to increase their lending, and
the money supply increases.
A)
True
B)
False
357.
The discount rate is the interest rate that the Federal Reserve charges on loans to banks.
A)
True
B)
False
358.
In general, the discount rate is set above the federal funds rate to discourage banks from
borrowing from the Fed.
A)
True
B)
False
359.
If a bank falls short of its reserve requirement, it might borrow reserves from banks with
excess reserves in the federal funds market.
A)
True
B)
False
360.
To increase the money supply, the central bank could make open-market purchases.
A)
True
B)
False
361.
Treasury bills purchased from commercial banks by the Fed are assets for the Federal
Reserve.
A)
True
B)
False
Page 65
362.
U.S. Treasury bills held by the Fed are assets for the U.S. government.
A)
True
B)
False
363.
The Fed’s primary liabilities are the monetary base, that is, currency in circulation plus
bank reserves.
A)
True
B)
False
364.
When the Fed buys $250 million worth of Treasury bills from commercial banks, the
banks’ reserves increase by less than $250 million.
A)
True
B)
False
365.
If the Fed sells $250 million worth of Treasury bills to commercial banks, the banks pay
with their reserves.
A)
True
B)
False
366.
When the U.S. government issues Treasury bills, it sells them directly to the Federal
Reserve.
A)
True
B)
False
367.
When the Fed buys $100 billion of Treasury bills from commercial banks, the monetary
base increases by $100 billion.
A)
True
B)
False
368.
Between 1864 and 1913, U.S. banking was dominated by an unregulated system of state
banks, each issuing its own currency.
A)
True
B)
False
Page 66
369.
Before 1864, U.S. banking was dominated by an unregulated system of state banks,
each issuing its own currency, with little regulation.
A)
True
B)
False
370.
The main problem with the national banking system in the United States between 1864
and 1913 was that the money supply was difficult to shift from urban to rural areas.
A)
True
B)
False
371.
In the early twentieth century, to protect against bank runs in some areas local banks
pooled resources to form clearinghouses that would guarantee the deposits of its
members.
A)
True
B)
False
372.
Before the Panic of 1907, trusts became unprofitable because they used too much of
their capital to form their own clearinghouses.
A)
True
B)
False
373.
Originally trusts were formed to manage inheritances and estates of wealthy clients and
were supposed to avoid risky financial practices.
A)
True
B)
False
374.
When the Knickerbocker Trust failed, the New York Clearinghouse stepped in and
guaranteed its liabilities, avoiding a major financial crisis.
A)
True
B)
False
375.
The Panic of 1907 lasted only a little longer than a week, but the result was a four-year
recession during which output fell and unemployment rose.
A)
True
B)
False
Page 67
376.
The Panic of 1907 came to an end when the Federal Reserve began to regulate trusts.
A)
True
B)
False
377.
After establishment of the Federal Reserve in 1913, there were no more bank runs.
A)
True
B)
False
378.
When it was established in 1913, the Federal Reserve was given the authority to require
all banks to hold adequate reserves for their deposits and to inspect their accounts.
A)
True
B)
False
379.
Beginning in 1913, when the Federal Reserve was established, it had the power to make
loans to commercial banks.
A)
True
B)
False
380.
One of the functions of the Reconstruction Finance Corporation, established in 1932,
was to make loans to commercial banks.
A)
True
B)
False
381.
The Glass-Steagall Act of 1933 gave the Reconstruction Finance Corporation the power
to make loans to commercial banks but prohibited the Federal Reserve from making
loans to commercial banks.
A)
True
B)
False
382.
The banking crises of the 1930s resulted in a very large increase in the money supply,
which increased the severity of the Great Depression.
A)
True
B)
False
Page 68
383.
Under the Glass-Steagall Act, commercial banks, which accept deposits and are covered
by deposit insurance, were not allowed to trade in financial assets, such as stocks and
bonds.
A)
True
B)
False
384.
Under the Glass-Steagall Act, investment banks were allowed to accept deposits that
were not covered by deposit insurance, as well as to trade in financial assets, such as
stocks and bonds.
A)
True
B)
False
385.
The purpose of Regulation Q, which prevented banks from paying interest on checking
accounts, was to prevent unhealthy competition between banks.
A)
True
B)
False
386.
Although many of the regulations established in the 1930s have disappeared, Regulation
Q and the prohibition of commercial banks from trading financial assets, such as stocks
and bonds, remain in place today.
A)
True
B)
False
387.
Savings and loans are financial institutions that accept savings and use them to fund
long-term mortgages for home buyers.
A)
True
B)
False
388.
Savings and loans accept long-term savings deposits and use them to fund short-term
loans to businesses.
A)
True
B)
False
389.
The savings and loan crisis began in the early 1970s, when interest rates increased
sharply and depositors at S&Ls withdrew their money from their low-interest savings
accounts and invested in money market accounts that paid higher interest rates.
A)
True
B)
False
Page 69
390.
Savings and loans were very profitable in the 1970s because investors withdrew their
funds from low-interest-paying money market accounts and invested them in
high-interest-paying accounts at thrifts.
A)
True
B)
False
391.
High inflation rates in the 1970s were harmful to S&Ls because they decreased the
value of the thrifts’ long-term mortgages.
A)
True
B)
False
392.
High inflation rates in the 1970s were helpful to S&Ls because the price of the fees that
S&Ls charged increased faster than their costs, so that the profitability of S&Ls
increased.
A)
True
B)
False
393.
To make it easier for S&Ls to compete with banks in the late 1970s, Congress allowed
the thrifts to undertake riskier investments in addition to home mortgages.
A)
True
B)
False
394.
Many S&Ls failed in the late 1970s and early 1980s when they lost most of their
depositors to Fannie Mae and Freddie Mac.
A)
True
B)
False
395.
In 1989, Congress increased oversight of S&Ls and allowed two government agencies,
Fannie Mae and Freddie Mac, to take over much of the home mortgage lending
previously done by the thrifts.
A)
True
B)
False
396.
Fannie Mae and Freddie Mac are the government agencies that insure deposits at
financial institutions.
A)
True
B)
False
Page 70
397.
Fannie Mae and Freddie Mac are quasi-government agencies established during the
Great Depression to make home ownership more affordable for low- and
moderate-income households.
A)
True
B)
False
398.
The losses to S&L depositors were paid entirely from the assets of the failed thrifts and
funds of the owners.
A)
True
B)
False
399.
A hedge fund is a relatively unregulated private investment partnership open only to
wealthy individuals and institutions.
A)
True
B)
False
400.
The balance sheet effect is the increase in a firm’s net worth due to falling asset prices.
A)
True
B)
False
401.
A vicious cycle of deleveraging occurs when sales of assets to cover losses produce
negative balance sheet effects on other firms, causing creditors to call in their loans,
which forces further sales of assets and further decreases in prices.
A)
True
B)
False
402.
The U.S. economy recovered from the 2001 recession primarily because low interest
rates caused a boom in the housing market.
A)
True
B)
False
403.
Subprime lending takes place at below-prime interest rates.
A)
True
B)
False
Page 71
404.
In securitization a pool of loans is assembled and shares of that pool are sold to
investors.
A)
True
B)
False
405.
Shares in the pools of securitized mortgages proved to be very safe investments, since
large numbers of defaults on mortgages did not occur at the same time.
A)
True
B)
False
406.
Most of the subprime loans were made by loan originators, who sold the loans to other
investors for securitization.
A)
True
B)
False
407.
Bank-like activities undertaken by non-bank financial firms like investment banks and
hedge funds, but without regulatory oversight or protection, are known as shadow
banking.
A)
True
B)
False
408.
Bank-like activities undertaken by non-bank financial firms like investment banks and
hedge funds, but without regulatory oversight or protection, are classified as traditional
banking.
A)
True
B)
False
409.
When the government injected capital into banks during the 2008 financial crisis, it was
buying bonds issued by the troubled banks.
A)
True
B)
False
410.
During the financial crisis of 2008, the Treasury Department prevented the failure of
Bear Stearns investment bank and AIG insurance company because they were
considered too important to the economy to fail.
A)
True
B)
False
Page 72
411.
The Wall Street Reform and Consumer Protection Act, also called Dodd-Frank, was
passed in the 1930s to correct the problems that led to the Great Depression.
A)
True
B)
False
412.
The purpose of the Bureau of Consumer Financial Protection is to prevent exploitation
of borrowers through complicated financial deals that were made to appear attractive to
them.
A)
True
B)
False
413.
The Wall Street Reform and Consumer Protection Act established a government
committee with the right to regulate “systemically important” nonbank financial
institutions as if they were banks.
A)
True
B)
False
414.
Explain how money adds to welfare, even though it does not directly produce anything.
415.
If professional basketball superstar LeBron James signed his jersey and gave it to you, it
would certainly be a valuable asset. Why would this valuable asset not serve as a very
good form of money if you took it to a shopping mall, looking to purchase a pair of
shoes? Use the three roles of money in your explanation.
416.
Using gold as an example, what is the difference between commodity money and
commodity-backed money?
417.
It’s your birthday, and your uncle opens up his wallet and gives you a $20 bill. You take
the $20 and deposit it in your checking account. What is the effect of this transaction on
M1 or M2? Explain.
418.
It’s your birthday, and your uncle opens up his wallet and gives you a $20 gift card to
the local movie theater. You take the $20 gift card and use it to watch a movie and buy
some popcorn and soda. What is the effect of this transaction on M1 or M2? Explain.
419.
Suppose you take $100 in cash to the bank and make a deposit in your checking
account. Making small talk, you ask the teller, “Do you make money here?” A little
surprised, the teller responds, “Of course not; only the U.S. Treasury makes money.” Is
the teller correct or incorrect? Explain.
420.
What is a bank run, how can it begin, and why is it dangerous for the greater economy?
421.
Eli receives $200 in cash for his birthday and deposits the money in his checking
account at River Town Bank.
a. How does this deposit initially change the T-account of River Town Bank? How does
it affect the money supply?
b. If the bank maintains a reserve ratio of 15%, how will River Town respond to the new
deposit?
c. If every time River Town makes a loan, the loan results in a new checkable deposit in
a different bank equal to the amount of the loan, by how much could the money supply
in the economy expand in total?
422.
What will happen to the money supply if Jamie withdraws $400 from her checking
account and the required reserve ratio is 5%?
423.
How is the Federal Reserve accountable to the voters but at the same time insulated
from short-term political pressures?
424.
Explain how an increase in the reserve requirement by the Federal Reserve can lead to a
decrease in real GDP.
425.
Explain how an increase in the discount rate affects the economy.
426.
How does an open-market sale of Treasury bills affect the economy?
427.
Suppose the Federal Reserve wants to increase the supply of money. How could the
Federal Reserve’s tools of monetary policy achieve this goal?
Page 74
428.
The Federal Reserve has just purchased $100 million in Treasury bills from commercial
banks.
a. How will this affect the T-accounts for the commercial banks?
b. If the public holds a fixed amount of currency (so that all loans produce an equal
amount of deposits in the banking system), the minimum reserve ratio is 5%, and banks
hold no excess reserves, by how much will deposits in the commercial banks change?
c. By how much will the money supply change? Describe the final changes to the
T-account for commercial banks when the money supply changes by this amount.
429.
How did the banking crises of the early 1930s exacerbate the severity of the Great
Depression?
430.
What caused the savings and loan crisis of the 1980s?
431.
How was the financial crisis of 2008 similar to the Panic of 1907 and the S&L crisis?
432.
Explain the role of the housing market in the 2008 financial crisis.
433.
Explain how the Wall Street Reform and Consumer Protection Act of 2010 addressed
the problems that led to the 2008 financial crisis.
434.
Money is:
A)
any form of wealth.
B)
an asset that can be easily used to purchase goods and services.
C)
only currency designated by law.
D)
only currency in circulation.
435.
The need for a double coincidence of wants is necessary:
A)
to use money.
B)
for barter exchanges.
C)
anytime credit cards or debit cards are used.
D)
to increase the number of exchanges taking place.
Page 75
436.
For an asset to be considered money, it must be:
A)
able to serve as medium of exchange, standard unit of account, and store of value.
B)
available in sufficient quantities and designated as such by law.
C)
fiat money also.
D)
backed by some precious commodity such as gold.
437.
Fiat money is:
A)
the same as commodity money.
B)
money backed by a government’s decree that it be accepted as a means of payment.
C)
money backed by gold or silver.
D)
used in barter exchanges.
438.
The use of counterfeit money leads to:
A)
costs for a government only if government has endorsed fiat money.
B)
losses only if consumers recognize that counterfeit money is present.
C)
lost revenue to pay for operations of the economy’s government.
D)
problems only when commodity-backed money is used.
439.
Paper money in the United States, which has no intrinsic value but can be converted to a
valuable good on demand and is used as a medium of exchange, is an example of:
A)
fiat money.
B)
commodity-backed money.
C)
a stock.
D)
a bond.
440.
The most liquid form of money is:
A)
M1.
B)
M2.
C)
stocks and bonds.
D)
houses.
441.
Debit cards:
A)
are considered part of the money supply, since they allow access to a part of the
money supply.
B)
are not generally accepted as a medium of exchange.
C)
are less liquid than stocks and bonds.
D)
are a liability for the user of the card.