Chapter 14 - Money, Banking, And The Federal Reserve System The Reconstruction Finance Corporation Was Established Extract

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1.

Money is anything that:

A)

serves as a medium of exchange for goods and services.

B)

can be converted to silver with relatively little loss in value.

C)

can be converted to gold with relatively little loss in value.

D)

is traded in the stock market.

2.

Money is:

A)

paper money and coins but not checks.

B)

currency and stocks.

C)

anything that can easily be used to buy goods and services.

D)

None of the answers is correct.

3.

An economy that lacks a medium of exchange must use a(n) _____ system.

A)

anarchist

B)

barter

C)

communist

D)

expanding

4.

Which of the following assets is the MOST liquid?

A)

a $50 bill

B)

a $50 gift certificate

C)

100 shares of stock

D)

an economics textbook

5.

Which of the following combinations of assets is considered to be money?

A)

currency in circulation, checkable bank deposits, and credit cards

B)

currency in circulation, checkable bank deposits, and traveler’s checks

C)

currency in circulation and in bank vaults, checkable bank deposits, and traveler’s

checks

D)

currency in circulation and in bank vaults, checkable bank deposits, and credit

cards

6.

Which of the following would NOT fit the economist’s definition of money?

A)

currency

B)

checkable bank deposits

C)

coins

D)

bonds

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7.

Which of the following assets is the MOST liquid?

A)

checkable bank deposits

B)

currency

C)

stocks

D)

money market mutual funds

8.

Which of the following is an asset that most people would consider money?

A)

a house

B)

shares of stock in a company

C)

a checking account balance

D)

a car

9.

Money is any asset that:

A)

the government says is money.

B)

can easily be used to purchase goods and services.

C)

has a positive value.

D)

the government says is money and that has a positive value.

10.

Which of the following assets is money?

A)

a $20 bill

B)

a work of art

C)

a baseball signed by a famous player

D)

shares of stock in a profitable company

11.

Which of the following is considered to be money?

A)

stock

B)

bonds

C)

credit cards

D)

checkable bank deposits

12.

The double coincidence of wants problem can be solved by:

A)

more resources.

B)

more production.

C)

money.

D)

economic growth.

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13.

An example of a double coincidence of wants is:

A)

a car mechanic who wants a TV finding an owner of an electronics store who

wants a car repaired.

B)

a car dealer who wants a TV finding an electronics store owner who wants money.

C)

an electronics store owner who wants car repairs finding a car mechanic who wants

money.

D)

a car dealer who wants a new employee finding a car mechanic who wants money.

14.

The narrowest definition of money EXCLUDES:

A)

currency in the vault at the bank.

B)

traveler’s checks.

C)

currency in circulation.

D)

checkable bank deposits.

15.

Currency in circulation is cash:

I. held by the public.

II. in the vaults of commercial banks.

III. in the vault of the Federal Reserve.

A)

I only

B)

II only

C)

III only

D)

I, II, and III

16.

All of the following are roles of money EXCEPT a:

A)

measure of wealth.

B)

medium of exchange.

C)

unit of account.

D)

store of value.

17.

When you are using money to purchase a new MP3 player, money is serving as a:

A)

store of value.

B)

medium of exchange.

C)

unit of account.

D)

double coincidence of wants.

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18.

Suppose a group of people decided to set up their own economic system with cartons of

milk serving as money. If we decided to use this “liquid asset” as our medium of

exchange and all prices were measured in cartons of milk, milk would still not be a good

form of money mainly because it would not be a good:

A)

medium of exchange.

B)

unit of account.

C)

store of value.

D)

near-money.

19.

“Tuition at State University this year is $8,000.” Which function of money does this

statement best illustrate?

A)

store of value

B)

medium of exchange

C)

unit of account

D)

means of deferred payment

20.

Which of the following is NOT considered one of the three chief characteristics of

money?

A)

It serves as a medium of exchange.

B)

It acts as a store of value.

C)

It is a highly illiquid asset.

D)

It is a unit of account.

21.

Money used to buy groceries is a:

A)

medium of exchange.

B)

reserve of wealth.

C)

unit of account.

D)

store of value.

22.

The medium-of-exchange function means that money is used:

A)

as the common denominator of prices.

B)

as the common denominator of future payments.

C)

to pay for goods and services.

D)

to accumulate purchasing power.

23.

Money used to buy a ticket to a football game is functioning primarily as a:

A)

medium of exchange.

B)

store of value.

C)

unit of account.

D)

standard of deferred payment.

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24.

The functions of money are:

A)

expander of economic activity, medium of exchange, and store of value.

B)

medium of exchange, store of value, and factor of production.

C)

store of value, medium of exchange, and determinant of investment.

D)

store of value, unit of account, and medium of exchange.

25.

When a person makes price comparisons among products, money is being used mainly

as a(n):

A)

unit of account.

B)

expander of economic activity.

C)

medium of exchange.

D)

checkable deposit.

26.

When you buy a ticket to the rodeo, you are using money as mainly a(n):

A)

expander of economic activity.

B)

store of value.

C)

factor of production.

D)

medium of exchange.

27.

When you discover money in your coat that you put there last winter, you unexpectedly

find you were using money primarily as a(n):

A)

medium of exchange.

B)

expander of economic activity.

C)

factor of production.

D)

store of value.

28.

When we keep part of our wealth in a savings account, money is playing the role mainly

of:

A)

medium of exchange.

B)

unit of account.

C)

barter.

D)

store of value.

29.

When we put a price on a meal, money is playing the role primarily of:

A)

medium of exchange.

B)

unit of account.

C)

barter token.

D)

store of value.

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30.

When people purchase downloaded music, they are using money primarily as a:

A)

medium of exchange.

B)

store of value.

C)

unit of account.

D)

store of account.

31.

The store-of-value function of money is:

A)

necessary and distinctive.

B)

not necessary but distinctive.

C)

necessary but not distinctive.

D)

not necessary and not distinctive.

32.

When you or your parents pay the tuition at college, money is being used mainly as a:

A)

unit of account.

B)

store of value.

C)

medium of exchange.

D)

unit of account, a store of value, and a medium of exchange.

33.

When you are looking at a car’s price to decide whether you can afford it, you are using

money primarily as a:

A)

unit of account.

B)

store of value.

C)

medium of exchange.

D)

medium of exchange and a unit of account.

34.

When, in The Wealth of Nations, Adam Smith wrote of “a sort of waggon-way through

the air,” he was referring to:

A)

the invisible hand.

B)

the forces of competition.

C)

mass transit systems of the future.

D)

paper money.

35.

Commodity-backed money is:

A)

a medium of exchange with no intrinsic value.

B)

equivalent to commodity money.

C)

a medium of exchange with alternative economic uses.

D)

gold and silver coins used for exchange.

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36.

When countries replaced gold and silver coins with paper money exchangeable for

certain amounts of precious metals, the monetary system evolved from using _____

money to using _____ money.

A)

commodity; fiat

B)

commodity-backed; fiat

C)

commodity; commodity-backed

D)

fiat; commodity-backed

37.

Commodity money is:

A)

whatever the government has decreed is money.

B)

a good used as a medium of exchange that has other uses.

C)

money used for commodity futures trading.

D)

whatever people accept as money.

38.

Money that has value apart from its use as money is:

A)

fiat money.

B)

currency.

C)

convertible paper money.

D)

commodity money.

39.

Money that the government has ordered to be accepted as money is:

A)

fiat money.

B)

not usable in international transactions.

C)

convertible paper money.

D)

commodity money.

40.

Money that some authority, generally a government, has ordered to be accepted as a

medium of exchange is called _____ money.

A)

fiat

B)

intrinsic

C)

bank-created

D)

debt

41.

Currency in the United States today is _____ money.

A)

fiat

B)

intrinsic

C)

commodity

D)

commodity-backed

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42.

Money whose value derives entirely from its official status as a means of exchange is

known as:

A)

commodity money.

B)

commodity-backed money.

C)

fiat money.

D)

bank reserves.

43.

The U.S. dollar is an example of:

A)

commodity-backed money.

B)

fiat money.

C)

commodity money.

D)

near-money.

44.

The U.S. dollar is defined as:

A)

fiat money, because it was established as money by an act of law.

B)

faith money, because we trust the government to defend its value.

C)

commodity-backed money, because it is convertible to gold.

D)

commodity money, because it is widely used to buy commodities.

45.

Fiat money:

A)

is currency from Italy.

B)

can include currency backed by gold but not by silver.

C)

is currency backed by the gold in Fort Knox.

D)

has advantages over commodity-backed money.

46.

The U.S. dollar in your pocket today is best described as:

A)

commodity money.

B)

near-money.

C)

fiat money.

D)

commodity-backed money.

47.

A share of stock is considered:

A)

an asset for the owner of the stock.

B)

part of M2.

C)

a liability for the owner of the stock.

D)

part of the money supply.

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48.

A bond is considered:

A)

an asset for the owner of the bond that is not part of the money supply.

B)

M1.

C)

M2.

D)

a liability for the owner of the bond that is part of the money supply.

49.

The primary difference between M1 and M2 is that:

A)

the dollar amount of M1 is much larger than the dollar amount of M2.

B)

M1 includes checkable deposits, but M2 does not.

C)

M2 includes checkable deposits, but M1 does not.

D)

M2 includes savings deposits and time deposits, but M1 does not.

50.

Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in

your checking account:

A)

M1 increases by $50.

B)

M2 increases by $50.

C)

M1 and M2 both increase by $50.

D)

there is no change in M1 or M2.

51.

If you transfer $1,000 from your savings account to your checking account:

A)

M1 decreases by $1,000, and M2 increases by $1,000.

B)

M1 increases by $1,000, and M2 decreases by $1,000.

C)

M1 and M2 don’t change.

D)

M1 increases by $1,000, but M2 doesn’t change.

Use the following to answer questions 52-53:

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52.

(Table: Monetary Aggregates) Look at the table Monetary Aggregates. The value of M1

is:

A)

$880 billion.

B)

$895 billion.

C)

$2,005 billion.

D)

$920 billion.

53.

(Table: Monetary Aggregates) Look at the table Monetary Aggregates. M2 is:

A)

$2,805 billion.

B)

$3,340 billion.

C)

$3,355 billion.

D)

$2,005 billion.

54.

Suppose Ronny decides to withdraw all of the cash from his checking account and open

a single time deposit account at the same bank. As a result of this transaction:

A)

M2 falls but M1 remains unchanged.

B)

M1 and M2 both fall.

C)

M1 and M2 both remain unchanged.

D)

M1 falls but M2 remains unchanged.

55.

Which one of the following is NOT included in M1?

A)

savings deposits

B)

checkable bank deposits

C)

currency

D)

traveler’s checks

56.

If monetary aggregates were ranked from most liquid to least liquid, the order would be:

A)

M1 and M2.

B)

stocks and bonds, M2, and M1.

C)

M2, private equity investments, and M1.

D)

gold, M1, and M2.

57.

Which of the following is TRUE?

A)

M2 includes the gold stock but not M1.

B)

M2 includes M1.

C)

The gold stock backs M2 but not M1.

D)

M1 includes M2 but not the gold stock.

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58.

Saving deposits are counted in:

A)

M1 but not in M2.

B)

vault cash but not in M2.

C)

M2 but not in M1.

D)

M1, M2, and the gold stock.

59.

The largest monetary aggregate is:

A)

M1, because it contains all of the currency in circulation.

B)

M2, because it contains currency in circulation, all bank deposits, other deposits,

and deposit-like assets.

C)

the reserves in the vaults of Federal Reserve banks, because they are the money

multiplier.

D)

the total volume of stocks and bonds, because they store most of the national

wealth.

60.

Which of the following is near-money?

A)

a traveler’s check

B)

a credit card

C)

a debit card

D)

a savings account

61.

Which of the following financial assets belongs to M2 but not to M1?

A)

a savings account

B)

a checkable deposit

C)

currency

D)

traveler’s checks

62.

When a waiter deposits his cash tips in his savings account:

A)

M2 increases.

B)

M1 decreases.

C)

M2 decreases.

D)

M3 increases.

63.

Included in M1 are:

A)

checkable bank deposits.

B)

savings deposits.

C)

U.S. Treasury bills.

D)

demand deposits, savings deposits, and U.S. Treasury bills.

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64.

Included in M2 is (are):

A)

currency in circulation only.

B)

money market funds only.

C)

traveler’s checks only.

D)

currency in circulation, money market funds, and traveler’s checks.

65.

If the currency in circulation is $100 million, checkable bank deposits are $500, savings

deposits are $300 million, and traveler’s checks are $10 million, then M1 is:

A)

$100 million.

B)

$410 million.

C)

$610 million.

D)

$900 million.

66.

Suppose you transfer $500 from your checking account to your savings account. With

this transaction, M1 _____ and M2_____.

A)

increases; stays the same

B)

stays the same; increases

C)

decreases; increases

D)

decreases; stays the same

67.

Suppose you transfer $500 from your savings account to your checking account. With

this transaction, M1 _____ and M2 _____.

A)

increases; decreases

B)

increases; stays the same

C)

decreases; decreases

D)

stays the same; decreases

68.

Which of the following is part of M1?

A)

short-term certificates of deposit

B)

shares of corporate stock

C)

currency in a bank’s vault

D)

checkable bank deposits

69.

Which of the following is part of M1?

A)

long-term certificates of deposit

B)

corporate bonds

C)

currency in a person’s purse

D)

money market fund account balances

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70.

Which of the following is part of M1?

A)

gold

B)

shares of corporate stock

C)

currency in a bank’s vault

D)

traveler’s checks

71.

M1 consists of:

A)

currency only.

B)

currency and checkable bank deposits only.

C)

currency in circulation and checkable bank deposits only.

D)

currency in circulation, checkable bank deposits, and traveler’s checks only.

72.

The Federal Reserve reports on two main monetary aggregates:

A)

M2 and total debt.

B)

M1 and currency held by banks.

C)

M1 and M2.

D)

M1 and total stock purchases.

Use the following to answer questions 73-74:

Table: Components of the Money System

73.

(Table: Components of the Money Supply) Look at the table Money Supply. The money

supply measured by M1 is:

A)

$325 billion.

B)

$450 billion.

C)

$1,425 billion.

D)

$1,875 billion.

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74.

(Table: Components of the Money Supply) Look at the table Money Supply. The money

supply measured by M2 is:

A)

$450 billion.

B)

$1,425 billion.

C)

$1,725 billion.

D)

$2,075 billion.

75.

Checkable deposits are about _____ of M1.

A)

100%

B)

67%

C)

30%

D)

10%

76.

Currency is about _____ of M1.

A)

10%

B)

22%

C)

75%

D)

100%

77.

Currency, checkable deposits, and traveler’s checks are about _____ of M1.

A)

10%

B)

55%

C)

75%

D)

100%

78.

Near-moneys are:

A)

paper money.

B)

fiat money.

C)

highly liquid financial assets.

D)

any financial assets.

79.

Prior to the Civil War:

A)

the U.S. government issued paper money but only in small quantities.

B)

the U.S. government did not allow banks to issue private money.

C)

the U.S. government did not issue paper money.

D)

all private money issued by banks was of equal value.

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80.

After 1873, the U.S. government:

A)

stopped redeeming greenbacks for gold.

B)

guaranteed the value of a dollar in terms of gold.

C)

guaranteed the value of a dollar in terms of gold or silver.

D)

stopped the use of commodity-backed money.

81.

Which of the following was used as money by European settlers in the American

colonies before the Revolutionary War ?

I. dixies

II. tobacco

III. paper money issued by the newly established Federal Reserve

A)

I only

B)

II only

C)

III only

D)

I, II, and III

82.

In the nineteenth century before the Civil War, most commodity-backed money in the

United States was:

A)

issued by the Treasury Department.

B)

issued by the Federal Reserve and redeemable for gold coins.

C)

issued by private banks and redeemable for silver coins.

D)

borrowed from banks in Europe.

83.

Banks don’t lend out all of the funds deposited because:

A)

it would not be profitable.

B)

they have to satisfy any depositor who wants to withdraw funds.

C)

they have to reduce their liquidity position.

D)

they have to make more money on interest-bearing deposits.

84.

Bank reserves are:

A)

the fraction of deposits kept in gold with the Federal Reserve.

B)

the deposits lent to finance illiquid investments.

C)

the fraction of deposits kept in the form of very liquid assets.

D)

gold kept in the bank’s vault.

85.

Banks can lend money because:

A)

they have so much to lend.

B)

they know not everyone wants their deposits back at the same time.

C)

there is a high demand for commodity money.

D)

they don’t know how much cash they have in their vault.

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86.

The reserve ratio is the:

A)

bank’s holdings of gold.

B)

government’s holdings of gold at Fort Knox.

C)

fraction of deposits that banks hold in their vaults plus their deposits at the Federal

Reserve.

D)

ratio of gold to the paper money in the economy.

Use the following to answer questions 87-88:

Table: Balance Sheet

87.

(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%,

deposits are:

A)

$5,000.

B)

$15,000.

C)

$60,000.

D)

$80,000.

88.

(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%,

loans are:

A)

$5,000.

B)

$15,000.

C)

$60,000.

D)

$80,000.

89.

The reserve ratio is the fraction of its:

A)

deposits that a bank holds as reserves.

B)

loans that a bank is required to hold as reserves.

C)

loans that a bank holds as reserves.

D)

assets that a bank is required to hold as reserves.

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90.

Among the assets of a bank are:

A)

customers’ deposits.

B)

loans.

C)

customers’ borrowings.

D)

deposits and loans.

91.

Among the liabilities of banks are:

A)

customers’ deposits.

B)

loans.

C)

reserves.

D)

loans and reserves.

92.

If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and

$15,000 on deposit at the Federal Reserve, then its reserve ratio is:

A)

5%.

B)

10%.

C)

12.5%.

D)

25%.

93.

Bank reserves are:

A)

the money in bank vaults only.

B)

the amount of cash that a bank must hold to pay FDIC insurance premiums.

C)

the currency held at bank vaults plus bank deposits at the Federal Reserve.

D)

the entire amount of checkable bank deposits.

94.

A reserve ratio is the:

A)

proportion of cash and security reserves the bank holds.

B)

fraction of deposits that the bank is required to hold as reserves.

C)

loan-to-deposit ratio in the bank’s balance sheet.

D)

money belonging to the bank’s largest depositors.

95.

Reserve requirements:

A)

set the maximum amount of reserves a bank must hold.

B)

set the minimum amount of reserves a bank must hold.

C)

are established by Congress.

D)

are set by the American Bankers Association.

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96.

The reserve ratio is defined as the ratio of:

A)

bank assets to bank liabilities.

B)

bank assets to bank reserves.

C)

customers’ bank deposits to bank assets.

D)

bank reserves to customers’ checkable bank deposits.

97.

Banks are illiquid because:

A)

their deposits are less liquid than their loans.

B)

their loans are less liquid than their deposits.

C)

their assets are greater than their liabilities.

D)

their liabilities are greater than their assets.

98.

Which of the following about bank runs is FALSE?

A)

They may start as a result of a rumor that a bank is in financial trouble.

B)

Many banks’ depositors try to withdraw their funds because they fear a bank

failure.

C)

Bank runs typically happen only to small banks with few financial assets.

D)

Bank runs often lead to a loss of faith in other banks, causing additional bank runs.

99.

A bank run can break a bank because:

A)

borrowers default on their loans, and the bank’s assets become worthless.

B)

banks cannot quickly convert illiquid loans to liquid assets without facing a large

financial loss.

C)

depositors’ panic spreads to borrowers, who want to take additional loans from the

bank.

D)

the bank’s reserves kept with the Federal Reserve are in the form of illiquid U.S.

Treasury bonds.

100.

Bank runs in the United States during the 1930s damaged the economy because:

A)

capital requirements prevented bank managers from taking additional lending risks.

B)

the reserve ratio was set too high.

C)

the Federal Reserve system did not exist at the time.

D)

the loss of confidence at one bank quickly extended to other banks.

101.

A bank run occurs when:

A)

too many people are trying to borrow more at one time.

B)

many bank depositors are trying to withdraw their funds from the bank.

C)

interest rates start to increase.

D)

interest rates are higher than inflation rates.

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102.

A major problem with bank runs is that they:

A)

spread to other banks.

B)

cause inflation because the money moves so fast.

C)

drive down interest rates.

D)

drive down both inflation and interest rates.

103.

The government has almost eliminated the possibility of bank runs by instituting

protective measures. All of the following are such measures EXCEPT:

A)

capital requirements.

B)

reserve requirements.

C)

loan guarantees.

D)

deposit insurance.

104.

The guarantee by the FDIC to reimburse bank customers up to $250,000 per deposit in

the event of bank problems is called:

A)

fractional reserve banking.

B)

reserve requirements.

C)

discount rate.

D)

deposit insurance.

105.

Probably the most important feature of deposit insurance is that it:

A)

is paid for by the federal government.

B)

costs so little to buy the policies to keep your money safe.

C)

protects the economy against bank runs.

D)

ensures that banks will always make a profit.

106.

Which of the following is NOT one of the main features designed to protect depositors

and the economy against bank runs?

A)

deposit insurance

B)

capital requirements

C)

reserve requirements

D)

interest rate ceilings on checkable deposits.

107.

All of the following are examples of bank regulations designed to prevent bank runs

EXCEPT:

A)

reserve requirements.

B)

deposit insurance.

C)

the federal funds rate.

D)

capital requirements.

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108.

Capital requirements for banks serve all of the following purposes EXCEPT:

A)

to reduce a bank owner’s incentive for excessive risk taking.

B)

to offset the change in incentives caused by deposit insurance.

C)

to put to use the excess of a bank’s assets over its deposits and other liabilities.

D)

to reduce deposits.

109.

If a bank has assets of $100 million, according to practice, its liabilities should NOT

exceed:

A)

$7 million.

B)

$70 million.

C)

$93 million.

D)

$107 million.

110.

Which of the following acts to protect depositors from a bank run by insuring all

deposits up to $250,000?

A)

the FDIC

B)

the Department of Justice

C)

the Federal Reserve

D)

the Office of Management and Budget

111.

The existence of banks:

A)

results in the money supply being larger than the amount of currency in circulation.

B)

inhibits the creation of money.

C)

makes the money supply equal to the amount of currency in circulation.

D)

results in the money supply being less than the amount of currency in circulation.

112.

Banks create money when they:

A)

make loans.

B)

take deposits.

C)

hold excess reserves.

D)

pay withdrawals to depositors.

113.

Which of the following would be the IMMEDIATE effect if an individual made a

$9,000 cash deposit in a bank?

A)

The money supply would rise by $9,000.

B)

The money supply would fall by $9,000.

C)

The money supply would not be affected.

D)

The money supply would fall but by less than the $9,000 deposit.

Page 21

114.

Suppose the reserve ratio is 20%. If Sam deposits $500 in his checking account, his

bank can increase loans by:

A)

$500.

B)

$2,500.

C)

$100.

D)

$400.

115.

Suppose the reserve ratio is 20%. If Holly deposits $1,000 of cash in her checking

account and her bank lends $600 to Freda, the money supply:

A)

remains the same.

B)

decreases by $1,000.

C)

decreases by $600.

D)

increases by $600.

116.

Suppose a bank does NOT hold excess reserves and the reserve ratio is 20%. If Molly

deposits $1,000 of cash in her checking account and the bank lends $600 to Freda, the

bank can lend an additional:

A)

$400.

B)

$200.

C)

$1,000.

D)

$5,000.

117.

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 20%.

Then Andy deposits $1,000 of cash in his checking account and the bank lends $600 to

Molly. That bank can lend an additional:

A)

$200.

B)

$1,000.

C)

$800.

D)

$2,400.

118.

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%.

Then Andy deposits $1,000 of cash in his checking account and the bank lends $600 to

Molly. That bank can lend an additional:

A)

$100.

B)

$800.

C)

$900.

D)

$300.

Page 22

119.

Suppose a bank has excess reserves of $50 and the reserve ratio is 20%. If Andy

deposits $5,000 of cash in his checking account and the bank lends $2,500 to Molly, the

money supply:

A)

is increased by $7,500.

B)

is increased by $2,500.

C)

remains unchanged.

D)

is decreased by $5,000.

120.

Suppose your grandma sends you $100 for your birthday and you deposit it in your

checking account. The reserve ratio is 10%. Based upon this deposit, the bank’s reserves

have increased by _____ and the bank’s checkable deposits have increased by _____.

A)

$100; $100

B)

$100; $90

C)

$90; $100

D)

$10; $100

121.

If banks were required to keep 100% of deposits in reserves, they could:

A)

make more loans.

B)

make no loans.

C)

make more deposits.

D)

use excess reserves for loans.

122.

If a bank has deposits of $100,000, cash in its vault of $10,000, and $15,000 on deposit

at the Federal Reserve and if the required reserve ratio is 20%, then the bank:

A)

has no excess reserves.

B)

has excess reserves of $5,000.

C)

has insufficient reserves to meet requirements.

D)

has an insufficient deposit to loan ratio.

123.

Suppose a bank receives a $5,000 deposit and the reserve ratio is 25%. Based on this

deposit alone, the bank can lend out:

A)

$4,500.

B)

$4,000.

C)

$3,750.

D)

$3,500.

Page 23

124.

Suppose a bank receives a $5,000 deposit and the reserve ratio is 25%. The bank is

required to keep in reserve:

A)

$1,250.

B)

$1,000.

C)

$200.

D)

$500.

125.

Suppose your grandma sends you $100 for your birthday and you deposit that $100 in

your checking account. The reserve ratio is 10%. Based upon this deposit, the bank’s

excess reserves have increased by _____, and if the bank lends these new excess

reserves, the money supply could eventually grow by as much as an additional _____.

A)

$90; $1,000

B)

$100; $900

C)

$90; $900

D)

$100; $1,000

126.

In a deposits-only monetary system with a 5% required reserve ratio, a bank deposit of

$1,000 will increase the total amount of bank deposits by:

A)

$5,000.

B)

$10,000.

C)

$20,000.

D)

$50,000.

127.

The money multiplier and the required reserve ratio are:

A)

independent of one another.

B)

directly related to one another.

C)

inversely related.

D)

both greater than 1.

128.

Suppose that there are no excess reserves in the banking system and the current amount

of demand deposits is $100,000. If the monetary authorities lower the required reserve

ratio from 10% to 5%:

A)

the amount of excess reserves in the banking system will fall.

B)

the amount of excess reserves in the banking system will remain the same.

C)

the money-creating potential of the banking system will decline.

D)

the money-creating potential of the banking system will rise.

Page 24

129.

Suppose an economy has $200,000 of demand deposits and $40,000 of excess reserves,

with a 10% required reserve ratio. If the monetary authorities raise the required reserve

ratio to 20%:

A)

excess reserves will rise by 10%.

B)

excess reserves will fall by 10%.

C)

there will be no more excess reserves in the system.

D)

excess reserves will decrease by $20,000.

130.

The _____ multiplier is equal to _____.

A)

reserve; the required reserve ratio

B)

bank loan; the required reserve ratio divided by 1

C)

money; 1 divided by the required reserve ratio

D)

excess reserve; change in reserves divided by the change in deposits

131.

Suppose a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio.

If the bank lends the maximum amount of money allowed, then the checkable deposits

(including the original deposit) increase by:

A)

$20.

B)

$100.

C)

$500.

D)

$1,000.

132.

Suppose the banking system does NOT hold excess reserves and the reserve ratio is

20%. If Sam deposits $500 cash in his checking account, the banking system can

increase the money supply by:

A)

$5,000.

B)

$2,000.

C)

$2,500.

D)

$400.

133.

Suppose the banking system does NOT hold excess reserves and the reserve ratio is

25%. If Molly deposits $1,000 cash in her checking account, the banking system can

increase the money supply by:

A)

$5,000.

B)

$1,000.

C)

$3,000.

D)

$4.000.

Page 25

Use the following to answer questions 134-137:

134.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. If the reserve ratio is 5% and the banking system

does NOT want to hold excess reserves, how much more can be added to the money

supply?

A)

about $667,000

B)

about $111,000

C)

$250,000

D)

$1 million

135.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. If the reserve ratio is 9% and the banking system

does NOT want to hold excess reserves, how much more can be added to the money

supply?

A)

about $667,000

B)

about $111,000

C)

$250,000

D)

$1 million

136.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. If the reserve ratio is 8% and the banking system

does NOT want to hold excess reserves, how much more can be added to the money

supply?

A)

about $667,000

B)

about $111,000

C)

$250,000

D)

$1 million

Page 26

137.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. If the reserve ratio is 6% and the banking system

does NOT want to hold excess reserves, how much more can be added to the money

supply?

A)

about $667,000

B)

about $111,000

C)

$250,000

D)

$1 million

138.

Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If

Sarah deposits $5,000 in cash in her checking account, the money supply can potentially

increase by:

A)

$20,000.

B)

$25,000.

C)

$5,000.

D)

$1,000.

139.

Suppose the reserve ratio is 25%; the money multiplier is:

A)

5.

B)

0.25.

C)

4.

D)

0.04.

140.

The money multiplier is equal to:

A)

1 divided by the reserve ratio.

B)

1 divided by excess reserves.

C)

1 minus the reserve ratio.

D)

the reserve ratio plus excess reserves divided by the reserve ratio.

141.

Suppose the required reserve ratio is 25% and a customer deposits $300 in her

checkable deposit. The money supply will _____ if the banking system does NOT hold

any excess reserves.

A)

increase by $1,200

B)

increase by $900

C)

increase by $300

D)

be unchanged

Page 27

142.

Which of the following is a component of BOTH the monetary base and the money

supply?

A)

bank reserves at the Fed

B)

currency in bank vaults

C)

demand deposits

D)

currency in circulation

143.

A decrease in bank deposits that is matched by an increase in currency in circulation:

A)

decreases the monetary base.

B)

does not affect the monetary base.

C)

increases the monetary base.

D)

increases the money supply.

144.

When a bank deposit is withdrawn and kept as currency, bank reserves decrease and the:

A)

monetary base decreases.

B)

monetary base does not change.

C)

monetary base increases.

D)

money supply decreases.

145.

The money multiplier is equal to:

A)

the ratio of the money supply to the monetary base.

B)

the ratio of the monetary base to the money supply.

C)

the money supply divided by the reserve ratio.

D)

about 3.9 in the United States.

146.

The monetary base is the sum of:

A)

reserves held by the banks and currency in circulation.

B)

checkable bank deposits and bank reserves.

C)

savings deposits and currency in circulation.

D)

checkable bank deposits and currency in circulation.

147.

Which of the following is TRUE?

A)

Currency in circulation is not part of the monetary base.

B)

Bank reserves are part of the monetary base.

C)

Most of the monetary base consists of checkable deposits.

D)

The money multiplier is the ratio of the monetary base to the money multiplier.

Page 28

148.

Suppose the required reserve ratio is 10% and a depositor withdraws $500 from her

checkable deposit. The money supply will _____ if the banking system does NOT hold

any excess reserves.

A)

be unchanged

B)

decrease by $500

C)

decrease by $4,500

D)

decrease by $5,000

Use the following to answer questions 149-153:

Scenario: Money Creation

The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits

the money in his checking account. The bank does NOT want to hold excess reserves.

149.

(Scenario: Money Creation) Look at the scenario Money Creation. Immediately after the

deposit, reserves _____ and demand deposits _____ by $1,000.

A)

increase by $1,000; increase

B)

increase by $1,000; decrease

C)

decrease by $1,000; decrease

D)

decrease by $200; increase

150.

(Scenario: Money Creation) Look at the scenario Money Creation. How much of the

$1,000 deposit is the bank required to keep in reserves?

A)

$1,000

B)

$100

C)

$200

D)

$800

151.

(Scenario: Money Creation) Look at the scenario Money Creation. How much of the

$1,000 deposit can the bank lend out?

A)

$1,000

B)

$200

C)

$800

D)

$0

Page 29

152.

(Scenario: Money Creation) Look at the scenario Money Creation. What is the

maximum possible expansion in the money supply?

A)

$1,000

B)

$1,800

C)

$4,000

D)

$5,000

153.

(Scenario: Money Creation) Look at the scenario Money Creation. By how much did the

monetary base change?

A)

$0

B)

$800

C)

$1,000

D)

$4,000

Use the following to answer questions 154-158:

Scenario: Money Supply Changes

The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable

deposit. Assume that banks do not hold any excess reserves and that the public holds no

currency, only checkable bank deposits.

154.

(Scenario: Money Supply Changes) Look at the scenario Money Supply Changes. After

the withdrawal reserves _____, and checkable deposits _____ by $5,000.

A)

decrease by $5,000; decrease

B)

decrease by $5,000; increase

C)

increase by $5,000; decrease

D)

increase by $500; increase

155.

(Scenario: Money Supply Changes) Look at the scenario Money Supply Changes. As a

result of the withdrawal, required reserves _____ by _____.

A)

increase; $5,000

B)

increase; $500

C)

decrease; $5,000

D)

decrease; $500

Page 30

156.

(Scenario: Money Supply Changes) Look at the scenario Money Supply Changes. As a

result of the withdrawal, excess reserves _____ by _____.

A)

increase; $5,000

B)

increase; $500

C)

decrease; $4,500

D)

decrease; $500

157.

(Scenario: Money Supply Changes) Look at the scenario Money Supply Changes. By

how much must the bank’s loans decrease as a result of the withdrawal?

A)

$5,000

B)

$4,500

C)

$500

D)

$0

158.

(Scenario: Money Supply Changes) Look at the scenario Money Supply Changes. By

how much will the money supply contract as a result of the withdrawal?

A)

$0

B)

$5,000

C)

$45,000

D)

$50,000

Use the following to answer questions 159-163:

Scenario: Money Supply Changes II

Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester.

Assume that the reserve requirement is 20% and that banks do not hold excess reserves.

159.

(Scenario: Money Supply Changes II) Look at the scenario Money Supply Changes II.

After the withdrawal, reserves _____, and checkable deposits _____.

A)

increase by $8,000; increase by $8,000

B)

increase by $1,600; decrease by $1,600

C)

decrease by $8,000; decrease by $8,000

D)

decrease by $1,600; decrease by $1,600

160.

(Scenario: Money Supply Changes II) Look at the scenario Money Supply Changes II.

As a result of the withdrawal, required reserves:

A)

decrease by $1,600.

B)

decrease by $6,400.

C)

decrease by $8,000.

D)

don’t change.

Page 31

161.

(Scenario: Money Supply Changes II) Look at the scenario Money Supply Changes II.

As a result of the withdrawal, excess reserves _____ by _____.

A)

increase; $8,000

B)

decrease; $8,000

C)

decrease; $6,400

D)

decrease; $1,600

162.

(Scenario: Money Supply Changes II) Look at the scenario Money Supply Changes II.

As a result of the withdrawal, loans _____ by _____.

A)

increase; $8,000

B)

decrease; $8,000

C)

decrease; $6,400

D)

decrease; $1,600

163.

(Scenario: Money Supply Changes II) Look at the scenario Money Supply Changes II.

By how much will the money supply contract as a result of the withdrawal?

A)

$40,000

B)

$0

C)

$8,000

D)

$32,000

Use the following to answer questions 164-167:

Scenario: Holding Cash

Suppose that the public holds 50% of the money supply in currency and the reserve requirement

is 20%. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit.

164.

(Scenario: Holding Cash) Look at the scenario Holding Cash. As a result of the deposit,

required reserves will increase by:

A)

$0.

B)

$1,200.

C)

$3,000.

D)

$6,000.

Page 32

165.

(Scenario: Holding Cash) Look at the scenario Holding Cash. As a result of the deposit,

the bank’s loans will increase by:

A)

$6,000.

B)

$1,200.

C)

$3,000.

D)

$4,800.

166.

(Scenario: Holding Cash) Look at the scenario Holding Cash. Assume that after

receiving the deposit, the bank lends out its excess reserves. When the loan is spent,

_____ of the loan will be a checkable deposit and _____ will be held by the public as

cash.

A)

$6,000; $0

B)

$4,800; $1,200

C)

$2,400; $2,400

D)

$3,000; $3,000

167.

(Scenario: Holding Cash) Look at the scenario Holding Cash. The money multiplier is:

A)

2.

B)

greater than 5.

C)

5.

D)

less than 5.

Use the following to answer questions 168-172:

168.

(Scenario: Monetary Base and Money Supply) Look at the scenario Monetary Base and

Money Supply. How much is M1?

A)

$325 billion

B)

$330 billion

C)

$380 billion

D)

$480 billion

Page 33

169.

(Scenario: Monetary Base and Money Supply) Look at the scenario Monetary Base and

Money Supply. How much is the monetary base?

A)

$325 billion

B)

$330 billion

C)

$225 billion

D)

$175 billion

170.

(Scenario: Monetary Base and Money Supply) Look at the scenario Monetary Base and

Money Supply. How much are required reserves?

A)

$50 billion

B)

$100 billion

C)

$150 billion

D)

$250 billion

171.

(Scenario: Monetary Base and Money Supply) Look at the scenario Monetary Base and

Money Supply. How much are excess reserves?

A)

$50 billion

B)

$100 billion

C)

$150 billion

D)

$250 billion

172.

(Scenario: Monetary Base and Money Supply) Look at the scenario Monetary Base and

Money Supply. By how much can checkable bank deposits increase?

A)

$100 billion

B)

$250 billion

C)

$500 billion

D)

$1,650 billion

173.

Decisions about monetary policy are made by:

A)

the president and Congress.

B)

the President’s Council of Economic Advisers.

C)

the Federal Open Market Committee.

D)

representatives of banks that are members of the Federal Reserve System.

174.

In the United States, the institution that is charged with determining the size of the

monetary base and with regulating the banking system is the:

A)

Treasury Department.

B)

Commerce Department.

C)

U.S. Senate Banking Committee.

D)

Federal Reserve.

Page 34

175.

The Federal Reserve System is the _____ for the United States.

A)

central bank

B)

government-owned bank

C)

U.S. Treasury bank

D)

social insurance system

176.

The Federal Reserve Bank of the United States is:

A)

a purely private central bank.

B)

a purely public central bank.

C)

part of the U.S. government.

D)

not exactly part of the U.S. government but not really a private institution either.

177.

The Federal Reserve System was established in:

A)

1913.

B)

1971.

C)

1857.

D)

1873.

178.

The U.S. Federal Reserve, the Bank of England, the Bank of Japan, and the ECB are all:

A)

central banks.

B)

large commercial banks.

C)

investment banks.

D)

a combination of savings and loans and credit unions.

179.

How many members are there on the Federal Reserve Board of Governors?

A)

3

B)

7

C)

100

D)

435

180.

William McChesney Martin, Alan Greenspan, and Ben Bernanke were all:

A)

speakers of the U.S. House of Representatives.

B)

candidates for vice president of the United States.

C)

chairs of the Federal Reserve.

D)

U.S. senators during the Great Depression.

Page 35

181.

Open market operations are carried out by the Federal Reserve Bank of:

A)

San Francisco.

B)

Kansas City.

C)

Philadelphia.

D)

New York.

182.

The central bank of the United States is called the:

A)

Congressional Budget Office.

B)

Internal Revenue Service.

C)

Federal Reserve System.

D)

Federal Deposit Insurance Corporation.

183.

In the structure of the Federal Reserve, which of the following is part of the

government?

I. the Board of Governors

II. the 12 regional Federal Reserve Banks

A)

I only

B)

II only

C)

I and II

D)

neither I nor II

184.

Which of the following is a function of the Federal Reserve System?

I. collecting corporate income tax

II. setting personal income tax rates

III. holding bank reserves

A)

I only

B)

II only

C)

III only

D)

I, II, and III

185.

Which of the following is a function of the Federal Reserve System?

I. conducting fiscal policy

II. examining and supervising commercial banks in the Fed regions

III. evaluating corporate mergers

A)

I only

B)

II only

C)

III only

D)

I,II, and III

Page 36

186.

Which of the following is a function of the Federal Reserve System?

I. conducting monetary policy

II. examining and supervising commercial banks in the Fed regions

III. providing liquidity to financial institutions

A)

I only

B)

II only

C)

III only

D)

I, II, and III

187.

The major tools of monetary policy available to the Federal Reserve System include:

A)

reserve requirements, margin regulations, and moral suasion.

B)

reserve requirements, open-market operations, and the discount rate.

C)

open-market operations, margin regulations, and moral suasion.

D)

the discount rate, margin regulations, and moral suasion.

188.

The tools of conducting monetary policy include:

A)

changes in the required reserve requirement.

B)

changes in the prime rate.

C)

open market purchases of corporate stock.

D)

changes in tax rates.

189.

If the Federal Reserve increases the discount rate:

A)

the money supply is likely to decrease.

B)

the money supply is likely to increase.

C)

the money supply is not likely to change.

D)

the federal funds rate must decrease.

190.

If it looks as if a bank won’t meet the Federal Reserve Bank’s reserve requirement,

normally it will first turn to the:

A)

other member banks and borrow money at the federal funds rate.

B)

Federal Reserve and borrow money at the discount rate.

C)

open market and borrow money there.

D)

Congress to borrow funds.

191.

Federal funds are:

A)

government tax receipts.

B)

loans between banks.

C)

government expenditures.

D)

bank deposits at the Federal Reserve.

Page 37

192.

The discount rate is the interest rate the Federal Reserve charges on loans to:

A)

consumers.

B)

the federal government.

C)

state governments.

D)

banks.

193.

The three main monetary policy tools are:

A)

interest rates, taxes, and government purchases.

B)

currency, near-moneys, and reserve ratio.

C)

deposit insurance, discount rate, and money multiplier.

D)

reserve requirements, the discount rate, and open-market purchases.

194.

When banks borrow from and lend reserves to each other, they are participating in the

_____ market.

A)

subprime mortgage

B)

long-term capital

C)

money

D)

federal funds

195.

The federal funds rate is the interest rate at which:

A)

banks borrow funds directly from the Federal Reserve.

B)

banks borrow from other banks with excess reserves.

C)

the influential companies borrow from banks.

D)

households’ savings are invested in the Federal Reserve.

196.

Which of the following is (are) a tool(s) of monetary policy used by the Federal

Reserve?

I. reserve requirements

II. the discount rate

A)

I only

B)

II only

C)

I and II

D)

neither I nor II

Page 38

197.

Which of the following is (are) a tool(s) of monetary policy used by the Federal

Reserve?

I. open market operations

II. government purchases of goods and services

A)

I only

B)

II only

C)

I and II

D)

neither I nor II

198.

Which of the following is (are) a tool(s) of monetary policy used by the Federal

Reserve?

I. tax rates

II. government purchases of goods and services

A)

I only

B)

II only

C)

I and II

D)

neither I nor II

199.

The Fed’s minimum required reserve requirement for checkable bank deposits is:

A)

05%.

B)

3%.

C)

10%.

D)

50%.

200.

Loans of reserves from one bank to another are made in the _____ market.

A)

commodity

B)

foreign exchange

C)

stock

D)

federal funds

201.

When the Fed decreases the reserve requirement, banks lend _____ of their deposits,

which leads to a(n) _____ in the money supply.

A)

less; decrease

B)

less; increase

C)

more; decrease

D)

more; increase

Page 39

202.

When the Fed increases the reserve requirement, banks lend _____ of their deposits,

which leads to a(n) _____ in the money supply.

A)

less; decrease

B)

less; increase

C)

more; decrease

D)

more; increase

203.

If the Fed decreases the reserve requirement from 10% to 5%, the money multiplier will

_____ and the money supply will most likely _____.

A)

decrease; decrease

B)

decrease; increase

C)

increase; decrease

D)

increase; increase

204.

Normally the discount rate is _____ the federal funds rate.

A)

above

B)

below

C)

equal to

D)

after the discount, less expensive than

205.

When the Fed decreases the discount rate, the spread between the discount rate and the

fed funds rate _____ and the cost of being short of reserves _____.

A)

increases; increases

B)

increases; decreases

C)

decreases; increases

D)

decreases; decreases

206.

When the Fed decreases the discount rate, banks are likely to _____ their lending and

the money supply _____.

A)

increase; increases

B)

increase; decreases

C)

decrease; increases

D)

decrease; decreases

207.

The tool of monetary policy with which the Federal Reserve buys and sells government

bonds is called:

A)

moral suasion.

B)

reserve requirements.

C)

the discount rate.

D)

open-market operations.

Page 40

208.

Which of the following is a tool used by the Federal Reserve in the conduct of monetary

policy?

A)

changes in the prime rate

B)

issuing new government bonds and retiring old ones

C)

buying and selling corporate bonds

D)

buying and selling federal government bonds

209.

The Federal Reserve’s main assets are:

A)

currency in circulation and bank reserves.

B)

the facilities of the 12 district banks.

C)

corporate stocks and bonds.

D)

U.S. Treasury bills.

210.

The Federal Reserve’s main liabilities are:

A)

currency and bank reserves.

B)

the facilities of the 12 district banks.

C)

corporate stocks and bonds.

D)

U.S. Treasury bills.

211.

U.S. Treasury bills are a(n):

A)

liability of the U.S. government but an asset to the Federal Reserve.

B)

asset of the U.S. government but a liability to the Federal Reserve.

C)

part of the net worth of the U.S. government.

D)

liability to both the U.S. government and the Federal Reserve.

212.

The Federal Reserve never buys U.S. Treasury bills directly from the federal

government because it could:

A)

make the budget deficit worse.

B)

be a route to disastrous inflation.

C)

lead to a recession.

D)

reduce the power of the Fed.

213.

To change the money supply, the Federal Reserve most frequently uses:

A)

changes in the required reserve ratios.

B)

changes in the discount rate.

C)

open-market operations.

D)

changes in the inflation rate.

Page 41

214.

Open-market operations occur when the Federal Reserve:

A)

buys U.S. Treasury bills from the federal government.

B)

buys or sells foreign currency.

C)

buys or sells existing U.S. Treasury bills.

D)

sells U.S. Treasury bills to the federal government.

215.

If the Federal Reserve conducts an open-market purchase, bank reserves _____ and the

money supply _____.

A)

decrease; decreases

B)

increase; increases

C)

decrease; increases

D)

increase; decreases

216.

Suppose the Federal Reserve were to buy $100 million of U.S. Treasury bills. The

money supply would:

A)

stay the same.

B)

decrease by $100 million.

C)

increase by $100 million.

D)

increase by more than $100 million.

217.

When the Federal Reserve decreases bank’s reserves through an open-market operation:

A)

deposits increase, currency in circulation increases, and the monetary base remains

the same.

B)

the monetary base decreases, the money multiplier decreases, and the money

supply increases.

C)

loans increase, the federal funds rate rises, and the discount rate rises.

D)

the monetary base decreases, loans decrease, and the money supply decreases.

218.

Bonds of the U.S. government that mature in less than a year are called:

A)

commercial paper.

B)

U.S. Treasury bills.

C)

federal funds.

D)

U.S. reserves.

219.

If the Fed conducts an open-market sale, bank reserves _____ and the money supply is

likely to _____.

A)

increase; increase

B)

increase; decrease

C)

decrease; increase

D)

decrease; decrease

Page 42

220.

Most of the Fed’s income comes from:

A)

interest on its loans to commercial banks.

B)

payments from the U.S. government in return for the Fed serving as its fiscal agent.

C)

interest on the U.S. Treasury bills that it owns.

D)

fees that it charges commercial banks for clearing checks and electronic funds

transfers.

221.

Most of the interest on the Fed’s assets is:

A)

used to maintain the buildings and grounds of the 12 regional banks.

B)

used to purchase currency in the foreign exchange market.

C)

returned to the U.S. taxpayers.

D)

shared with banks that are members of the Federal Reserve System.

222.

The European Central Bank was established:

A)

during the French Revolution at the end of the eighteenth century.

B)

in 1913, at the same time as the U.S. Federal Reserve System.

C)

as part of the treaty ending World War II.

D)

in 1999, when the euro was adopted.

223.

The eurozone is

A)

another name for Scandinavia.

B)

the only countries in Europe that engage in free trade with the United States.

C)

the countries that use the euro as their common currency.

D)

made up of the communist countries in eastern Europe.

224.

The economy of the eurozone is:

A)

approximately the size of the U.S. economy.

B)

bigger than the economies of the rest of the world combined.

C)

about the size of the economy of New York state.

D)

smaller than the economy of California.

225.

The supply of euros is controlled by:

A)

the Bank of England.

B)

the U.S. Federal Reserve System.

C)

the foreign exchange markets.

D)

the European Central Bank.

Page 43

226.

The European Central Bank is the equivalent of:

A)

the Bank of Italy.

B)

the Board of Governors of the U.S. Federal Reserve.

C)

the Bank of Japan.

D)

the Federal Deposit Insurance Corporation.

227.

All of the following are responsibilities of the Federal Reserve EXCEPT to:

A)

control the monetary base.

B)

mint bills and coins.

C)

oversee and regulate the banking system.

D)

set the discount rate.

228.

Which of the following actions would allow banks to lend out more money?

A)

an increase in the required reserve ratio

B)

a decrease in the discount rate

C)

an increase in the federal funds rate

D)

an increase in the required reserve ratio coupled with an increase in the federal

funds rate

229.

The Federal Reserve controls:

A)

the discount rate only.

B)

the monetary base only.

C)

the reserve ratio only.

D)

the discount rate, the monetary base, and the reserve ratio.

230.

To _____ the money supply, the Federal Reserve could _____.

A)

increase; lower the reserve requirements

B)

decrease; lower the discount rate

C)

increase; raise the federal funds rate

D)

decrease; conduct open-market purchases

231.

To _____ the money supply, the Federal Reserve could _____.

A)

decrease; lower the reserve requirements

B)

increase; lower the discount rate

C)

increase; conduct open-market sales

D)

decrease; lower the federal funds rate

Page 44

232.

To _____ the money supply, the Federal Reserve could _____.

A)

increase; decrease the money multiplier

B)

decrease; lower the reserve requirements

C)

increase; conduct open-market purchases

D)

decrease; lower the discount rate

233.

To increase the money supply, the central bank could:

A)

raise the discount rate.

B)

make open-market sales.

C)

raise reserve requirements.

D)

lower the discount rate.

234.

To decrease the money supply, the central bank could:

A)

lower the discount rate.

B)

make open-market sales.

C)

decrease the discount rate.

D)

lower the federal funds rate.

235.

If the Federal Reserve wants to discourage banks from borrowing directly from the

Federal Reserve and thus decrease the monetary base, it will likely:

A)

increase the discount rate.

B)

increase the federal funds rate.

C)

increase the reserve requirement.

D)

sell U.S. Treasury bills in an open market operation.

236.

If the Federal Reserve wants to increase the monetary base, it might:

A)

engage in an open market purchase of Treasury bills.

B)

increase the discount rate.

C)

increase the reserve ratio.

D)

decrease personal income taxes.

237.

If the Federal Reserve wants to increase the money supply, it could:

A)

sell U.S. Treasury bills.

B)

cut taxes across the board.

C)

lower the reserve requirement.

D)

increase the discount rate.

Page 45

238.

The banking crisis of 1907 that preceded the Great Depression and the recent one in

2008 were both caused by:

A)

short-run business cycle fluctuations.

B)

lack of investment spending and high unemployment.

C)

risky speculation in real estate and in the stock market.

D)

low labor productivity in the United States combined with a huge trade deficit.

239.

The Panic of 1907 was caused by:

A)

national banks issuing too much currency.

B)

trusts’ memberships in the New York Clearinghouse.

C)

trusts’ losses due to their unsuccessful stock market speculation.

D)

excessive investment in collateralized debt obligations.

240.

The Panic of 1907 came to an end when:

A)

J. P. Morgan, John D. Rockefeller, and the Secretary of the Treasury increased

bank reserves.

B)

the Social Security Act was passed.

C)

the Federal Reserve was established.

D)

Franklin Delano Roosevelt declared a bank holiday.

241.

The main problem with the banking system from 1864 to 1913 was that:

A)

the Federal Reserve’s monetary policy was too restrictive.

B)

government budget deficits destabilized the system.

C)

the money supply was not sufficiently responsive to local economic changes.

D)

the currency was not uniform because each bank issued its own notes.

242.

Trusts _____ than national banks.

A)

were more closely regulated

B)

had lower reserve requirements

C)

had higher reserve requirements

D)

kept more capital

243.

The Panic of 1907 began when:

A)

the Knickerbocker Trust failed.

B)

Teddy Roosevelt signed the Sherman Antitrust Act.

C)

the Federal Reserve was established.

D)

national banks were allowed to issue their own bank notes.

Page 46

244.

Between 1864 and 1913, American banking was dominated by:

A)

a federally regulated system of national banks.

B)

an unregulated system of state banks, each issuing its own currency.

C)

the Federal Reserve System in Washington, D.C.

D)

European banks that supplied coins and paper money for the U.S. economy.

245.

Before 1864 American banking was dominated by:

A)

a federally regulated system of national banks.

B)

an unregulated system of state banks, each issuing its own currency, with little

regulation.

C)

the Federal Reserve System in Washington D.C.

D)

European banks that supplied coins and paper money for the U.S. economy.

246.

The purpose of the local clearinghouses established by banks in the early 1900s was to:

A)

merge failing banks with healthy ones.

B)

facilitate the transfer of electronic funds between member banks.

C)

pool resources of several local banks so that the clearinghouse could guarantee a

member’s deposits in case of a bank run.

D)

help people who were unemployed find jobs.

247.

Before the Panic of 1907, trusts:

A)

issued their own currency.

B)

formed the New York Clearinghouse.

C)

had become very unprofitable.

D)

refused to join the New York Clearinghouse because it would have required the

trusts to hold higher cash reserves, which would have decreased their profits.

248.

When the Federal Reserve was established in 1913, it was granted the authority to:

I. require all depository institutions to hold reserves.

II. inspect all deposit-taking institutions.

III. issue currency.

A)

I only

B)

II only

C)

III only

D)

I, II, and III

Page 47

249.

The bank runs in 1930, 1931, and 1933 were caused primarily by:

A)

sharp decreases in farm commodity prices.

B)

excessive speculation in real estate.

C)

high energy prices.

D)

the failure of the Knickerbocker Trust.

250.

By 1933, banks were able to borrow from:

I. the Reconstruction Finance Corporation.

II. the Federal Reserve System.

A)

I only

B)

II only

C)

I and II

D)

neither I nor II

251.

The Federal Reserve:

A)

was established by Franklin Delano Roosevelt to disburse funds for the Works

Progress Administration.

B)

was established in 1913 in response to the Panic of 1907.

C)

conducts fiscal policy for state governments.

D)

was established by Ronald Reagan during the recession of 1982.

252.

When it was established in 1913, the Federal Reserve was NOT granted the authority to:

A)

require banks to hold reserves.

B)

inspect banks.

C)

prepare the federal budget.

D)

issue currency.

253.

The Reconstruction Finance Corporation:

A)

was established to extract war reparations from the South after the Civil War.

B)

supervised the government assistance to AIG and Lehman Brothers.

C)

was established in the 1930s to make loans to banks and to buy their preferred

stock.

D)

supervised the rebuilding of Iraq.

254.

The purpose of the bank holiday declared by Franklin Roosevelt in 1933 was to:

A)

close all banks until regulators could determine how to solve the banking crisis.

B)

give overworked bank employees a rest.

C)

exempt banks from taxes until the Depression was over.

D)

encourage people to use cash instead of checks.

Page 48

255.

The Glass-Steagall Act of 1933:

A)

established the Reconstruction Finance Corporation.

B)

limited interest rates that savings and loans could charge on mortgages.

C)

established the Federal Reserve.

D)

separated banks to two categories, commercial and investment.

256.

According to the Glass-Steagall Act of 1933:

A)

investment banks could accept deposits, which were covered by deposit insurance.

B)

commercial banks could set up and trade financial assets, such as stocks and bonds.

C)

investment banks could set up and trade financial assets, such as stocks and bonds,

but commercial banks could not trade stocks and bonds.

D)

there was no difference between commercial banks and investment banks.

257.

The purpose of Regulation Q was to:

A)

prevent commercial banks from trading stocks and bonds.

B)

require investment banks to purchase deposit insurance.

C)

prevent unhealthy competition between banks by limiting the number of customers

each bank could serve.

D)

prevent banks from paying interest on checking accounts.

258.

The original purpose of savings and loans was to:

A)

help businesses issue stocks and bonds.

B)

invest in money market mutual funds.

C)

accept deposits from state and local governments and loan them to businesses in

need of short-term loans.

D)

accept savings and loan them to home buyers for long-term mortgages.

259.

Savings and loans’ difficulties began in the 1970s, when inflation _____ and interest

rates _____.

A)

increased; increased

B)

increased; decreased

C)

decreased; increased

D)

decreased; decreased

260.

Many S&Ls failed in the 1980s mainly because:

A)

foreign governments defaulted on bonds that the thrifts were holding.

B)

many of their risky real estate loans went bad.

C)

Congress gave the home mortgage business to two government agencies, Fannie

Mae and Freddie Mac.

D)

the Glass-Steagall Act was passed.

Page 49

261.

High interest rates in the 1970s:

A)

helped S&Ls because it increased their return on investment.

B)

helped S&Ls because higher interest rates on their mortgages increased their

profitability.

C)

hurt S&Ls because they lost savings deposits to investments that paid higher

interest rates.

D)

hurt S&Ls because paying higher interest rates on their deposits decreased their

profits.

262.

As a result of the S&L crisis, in 1989 Congress:

A)

decreased regulation of thrifts.

B)

merged all remaining S&Ls with financially sound commercial banks.

C)

passed legislation prohibiting any financial institution other than S&Ls to make

mortgages.

D)

empowered two government agencies, Fannie Mae and Freddie Mac, to take over

much of the mortgage lending previously done by S&Ls.

263.

A private investment partnership open only to wealthy individuals and institutions is

a(n):

A)

hedge fund.

B)

investment bank.

C)

savings and loan.

D)

quasi-government agency.

264.

Long-Term Capital Management was a(n):

A)

investment bank.

B)

hedge fund.

C)

government agency that the Federal Reserve used to hold deposits of its member

banks.

D)

mortgage company.

265.

Most of Long-Term Capital Management’s funds were:

A)

savings of small investors.

B)

deposits of state and local governments.

C)

borrowed.

D)

subject to reserve requirements.

Page 50

266.

Long-Term Capital Management made rates of return as high as 40% by:

A)

buying oil from Canada and selling it to China.

B)

managing professional sports teams and being paid with a share of their profit.

C)

mining diamonds in Africa.

D)

using computer models to take advantage of small differences in asset prices in

global financial markets.

267.

The reduction in a firm’s net worth from falling asset prices is called:

A)

the balance sheet effect.

B)

the income statement effect.

C)

leverage.

D)

securitization.

268.

Long-Term Capital Management’s collapse in the late 1990s was caused primarily by:

A)

too much government regulation.

B)

financial crises in Asia and Russia.

C)

the fraud and corruption of its management.

D)

competition from investment banks, which were not regulated as strictly as hedge

funds.

269.

Interest rates were low in the United States in 2003 because of:

A)

a decrease in the money supply.

B)

capital outflows from the United States to China.

C)

capital inflows and monetary policy.

D)

increases in tax rates.

270.

Subprime loans are made:

A)

on houses that are below average value.

B)

with interest rates that are below the prime rate.

C)

with very short maturities.

D)

to buyers who don’t meet the usual criteria for getting a mortgage.

271.

Assembling a pool of loans and selling shares of the pool to investors is called:

A)

securitization.

B)

deleveraging.

C)

derivation.

D)

investment banking.

Page 51

272.

The TED spread is:

A)

the interest rate charged on subprime loans.

B)

the difference between the interest rate at which banks lend to each other and the

interest rate on U.S. government debt.

C)

the rate of return in securitization.

D)

the difference between interest rates in the U.S. and interest rates in China.

273.

In the financial crisis of 2008, which of the following firms failed?

A)

Bear Stearns, an investment bank

B)

AIG, an insurance company

C)

Lehman Brothers, an investment bank

D)

Bank of America, a commercial bank

274.

In return for injecting capital into banks, the U.S. government received:

A)

deposits at the bank.

B)

loans at an interest rate below the prime rate.

C)

bonds issued by the bank.

D)

shares of stock in the bank.

275.

_____ occurs when financial institutions assemble pools of loans and sell shares in the

income from these pools.

A)

Loan origination

B)

Securitization

C)

Risk aversion

D)

Adverse selection

276.

In 2008, when the U.S. financial system collapsed, it led to:

A)

very high inflation, and the Federal Reserve followed a strict contractionary

monetary policy to bring prices down.

B)

the Federal Reserve lowering the interest rate, and the economy revived as

businesses and individuals secured low-interest loans.

C)

a severe cycle of deleveraging and a credit crunch for the economy as a whole.

D)

the Federal Reserve increasing the interest rate, which further destabilized the

economy.

277.

A firm uses financial leverage when it:

A)

replaces labor with capital.

B)

borrows money from a bank to enlarge a factory.

C)

raises the price of a product when demand is inelastic.

D)

gets a volume discount from a supplier.

Page 52

278.

The Panic of 1907, the savings and loan crisis, and the financial crisis of 2008 were

similar in that they all:

A)

were caused by restrictive monetary policy.

B)

involved financial institutions that were not as strictly regulated as deposit-taking

banks.

C)

were caused by large budget deficits.

D)

were caused by excessive regulation by the Federal Reserve.

279.

The balance sheet effect is the:

A)

increase in a firm’s net worth from increasing asset prices.

B)

decrease in a firm’s net worth from decreasing asset prices.

C)

change in financial statements when firms borrow money.

D)

change in financial statements when firms buy their own stock.

280.

A vicious cycle of deleveraging occurs when:

A)

asset sales to cover losses produce negative balance sheet effects and force

creditors to call in loans, forcing more sales of assets at decreasing prices.

B)

bank regulators take over a bank.

C)

deposit insurance is paid out.

D)

top executives at failing companies are forced to return bonuses.

281.

The law intended to reform the financial system after the crisis of 2008 was called the:

A)

Wall Street Reform and Consumer Protection Act.

B)

Glass-Steagall Act.

C)

Camp David Accords.

D)

Financial Modernization Act.

282.

The Wall Street Reform and Consumer Protection Act, or Dodd-Frank:

A)

decreases regulation of commercial banks and investment banks.

B)

subjects “systemically important” institutions to high capital requirements and

limits the risks they can take.

C)

requires all banks to become members of the Federal Reserve.

D)

makes securitization illegal.

Page 53

Use the following to answer questions 283-284:

283.

(Table: ABC Bank’s Balance Sheet) Look at the table ABC Bank’s Balance Sheet. If the

minimum reserve ratio for ABC Bank is 10%, then the bank is required to maintain

minimum reserves of:

A)

$10 million.

B)

$15 million.

C)

$9.5 million.

D)

$7.5 million.

284.

(Table: ABC Bank’s Balance Sheet) Look at the table ABC Bank’s Balance Sheet. The

bank is holding excess reserves of:

A)

$17 million.

B)

$15 million.

C)

$5 million.

D)

$25 million.

Use the following to answer questions 285-287:

Scenario: First National Bank

First National Bank has $80 million in checkable deposits, $15 million in deposits with the

Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds.

285.

(Scenario: First National Bank) Look at the scenario First National Bank. The bank has

liabilities of:

A)

$105 million.

B)

$95 million.

C)

$80 million.

D)

$100 million.

Page 54

286.

(Scenario: First National Bank) Look at the scenario First National Bank. If the

minimum reserve ratio is 20%, how much is the bank required to keep in reserves?

A)

$20 million

B)

$16 million

C)

$25 million

D)

$10 million

287.

(Scenario: First National Bank) Look at the scenario First National Bank. Given the

bank’s minimum reserve ratio, how much can the bank issue in loans?

A)

$76 million

B)

$8 million

C)

$6 million

D)

$4 million

288.

If the Federal Reserve conducts a $10 million open-market sale and the reserve

requirement is 20%, the monetary base will:

A)

increase by $10 million.

B)

increase by $8 million.

C)

decrease by $10 million.

D)

decrease by $50 million.

289.

If the Federal Reserve conducts a $10 million open-market sale and the reserve

requirement is 20%, the maximum change in the money supply is:

A)

an increase of $10 million.

B)

a decrease of $10 million.

C)

a decrease of $8 million.

D)

a decrease of $50 million.

Use the following to answer questions 290-295:

Page 55

290.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the Fed

buys $25,000 worth of U.S. Treasury bills from the banking system. If the banking

system does NOT want to hold any excess reserves, _____ will be added to the money

supply.

A)

about $667,000

B)

about $111,000

C)

$250,000

D)

$1 million

291.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the Fed

buys $100,000 worth of U.S. Treasury bills from the banking system. If the banking

system does NOT want to hold any excess reserves, _____ will be added to the money

supply.

A)

about $667,000

B)

about 111,000

C)

$250,000

D)

$1 million

292.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the

Federal Reserve buys $11,000 worth of U.S. Treasury bills from the banking system. If

the banking system does NOT want to hold any excess reserves, _____ will be added to

the money supply.

A)

about $667,000

B)

about 111,000

C)

$250,000

D)

$1 million

293.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the

Federal Reserve sells $11,000 worth of U.S. Treasury bills to the banking system. If the

banking system does NOT want to hold any excess reserves, _____ will be _____ the

money supply.

A)

$110,000; added to

B)

$110,000; subtracted from

C)

$250,000; subtracted from

D)

$250,000; added to

Page 56

294.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the

Federal Reserve sells $25,000 worth of U.S. Treasury bills to the banking system. If the

banking system does NOT want to hold any excess reserves, _____ will be _____ the

money supply.

A)

$110,000; added to

B)

$110,000; subtracted from

C)

$250,000; subtracted from

D)

$250,000; added to

295.

(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets

and Liabilities of the Banking System. Suppose that the reserve ratio is 10% and the

Federal Reserve sells $66,700 worth of U.S. Treasury bills to the banking system. If the

banking system does NOT want to hold any excess reserves, _____ will be _____ the

money supply.

A)

$667,000; subtracted from

B)

$667,000; added to

C)

$250,000; subtracted from

D)

$250,000; added to

296.

Suppose the Federal Reserve buys $50 million in Treasury bills from commercial banks.

If the reserve ratio is 10%, the monetary supply might eventually _____ by _____.

A)

increase; $500 million

B)

increase; $450 million

C)

decrease; $450 million

D)

decrease; $500 million

297.

If the reserve ratio is 25% and the money supply increases by $100,000, then the initial

reserve injection by Federal Reserve was:

A)

$2,500.

B)

$10,000.

C)

$4,000.

D)

$25,000.

298.

Suppose that the money supply increases by $150 million after the Federal Reserve

engages in an open market purchase of $50 million. Then the reserve ratio is:

A)

0.1.

B)

0.5.

C)

0.33.

D)

0.2.

Page 57

299.

If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open

market and the reserve ratio is 10%, then the money supply will:

A)

have the potential to increase by $2,500 million.

B)

remain unchanged.

C)

increase by only $250 million.

D)

increase by only $25 million.

300.

Suppose that the Federal Reserve sells $500 in U.S. Treasury bills, and as a result the

money supply falls by $5,000. The reserve ratio can be as low as:

A)

100.

B)

10.

C)

0.1.

D)

0.5.

301.

Money is whatever the government decrees is money.

A)

True

B)

False

302.

Money is the most liquid asset in the economy.

A)

True

B)

False

303.

Trade without money requires a double coincidence of wants.

A)

True

B)

False

304.

A debit card is money because it gives access to a bank account.

A)

True

B)

False

305.

An asset is liquid if it can be converted to cash quickly with little or no loss of value.

A)

True

B)

False

306.

Checkable deposits are bank accounts on which people can write checks.

A)

True

B)

False

Page 58

307.

A gift certificate that can be used to buy goods at Walmart is money.

A)

True

B)

False

308.

Money is unique because it is the only asset that can be used as a store of value.

A)

True

B)

False

309.

When Angela puts cash in her desk drawer to save for Christmas shopping, she is using

money primarily as a store of value.

A)

True

B)

False

310.

Commodity-backed money is more efficient than commodity money because

commodity-backed money ties up fewer resources than commodity money.

A)

True

B)

False

311.

Commodity-backed money’s value is guaranteed by a promise that it can be converted to

a useful good.

A)

True

B)

False

312.

Commodity-backed money is a medium of exchange with no intrinsic value, whose

ultimate value is guaranteed by a promise that it can be converted to valuable goods.

A)

True

B)

False

313.

Fiat money has value because the government has declared that it can be exchanged for

gold or silver.

A)

True

B)

False

314.

Included in the M2 definition of money are checkable bank deposits.

A)

True

B)

False

Page 59

315.

All assets that are included in M1 are also included in M2.

A)

True

B)

False

316.

Before the Revolutionary War, clamshells were used by some of the European settlers

as commodity money.

A)

True

B)

False

317.

A dixie was the first gold coin issued by the U.S. Treasury.

A)

True

B)

False

318.

The problem with the paper money issued by private banks in the nineteenth century

was that if the issuing bank failed, the money was worthless.

A)

True

B)

False

319.

Today U.S. dollars are redeemable for gold or silver.

A)

True

B)

False

320.

Before the Civil War, private banks, not the U.S. government, issued paper money that

could be redeemed for silver coins.

A)

True

B)

False

321.

In the United States, only the U.S. Treasury can create money.

A)

True

B)

False

322.

Bank reserves are the currency banks hold in their vaults minus the deposits at the

Federal Reserve.

A)

True

B)

False

Page 60

323.

Banks are financial intermediaries that use deposits of its customers, which are liquid

assets, to finance the illiquid investments of borrowers.

A)

True

B)

False

324.

Bank reserves are the sum of M1 and M2.

A)

True

B)

False

325.

Banks’ assets tend to be less liquid than their liabilities.

A)

True

B)

False

326.

A bank run occurs when shares of bank stocks become irrationally popular and their

price is bid up too high.

A)

True

B)

False

327.

Bank runs today are not as frequent or as harmful to the economy as they were in the

1930s because today depositors are protected with FDIC deposit insurance.

A)

True

B)

False

328.

A bank’s capital is the sum of its assets, its deposits, and its other liabilities.

A)

True

B)

False

329.

In the U.S. banks are required to keep capital equal to at least 7% of the value of their

assets.

A)

True

B)

False

330.

The discount window is the branch of the Federal Reserve that monitors banks to be

sure that they are meeting reserve and capital requirements.

A)

True

B)

False

Page 61

331.

If banks temporarily don’t have sufficient funds to pay their depositors, they can borrow

the needed funds at the Federal Reserve discount window.

A)

True

B)

False

332.

If a bank has excess reserves of $3,000 and the reserve requirement is 20%, the

maximum amount of potential increase in the money supply is $600.

A)

True

B)

False

333.

If a bank has deposits of $10,000 and reserves of $5,000 and if the reserve requirement

is 20%, its excess reserves are $3,000.

A)

True

B)

False

334.

If a bank has deposits of $10,000 and reserves of $5,000 and if the reserve requirement

is 20%, it can make loans of $5,000.

A)

True

B)

False

335.

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

336.

The monetary base is currency in circulation plus bank reserves.

A)

True

B)

False

337.

A central bank is an institution that oversees and regulates the banking system and

controls the monetary base.

A)

True

B)

False

338.

The two parts of the U.S. Federal Reserve are the Board of Governors and 50 regional

banks.

A)

True

B)

False

Page 62

339.

The members of the Board of Governors of the Fed serve 14-year terms.

A)

True

B)

False

340.

The chair of the Fed can serve only one four-year term.

A)

True

B)

False

341.

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

342.

Changing the reserve requirement is the main tool of monetary policy.

A)

True

B)

False

343.

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

344.

The Office of Management and Budget serves as the central bank of the United States.

A)

True

B)

False

345.

The two parts of the Federal Reserve are the Board of Governors and the 12 regional

Federal Reserve Banks.

A)

True

B)

False

346.

When the federal government writes a check, it is written on an account at the U.S.

Treasury Department.

A)

True

B)

False

Page 63

347.

The Federal Reserve regional banks and the Board of Governors supervise, examine,

and regulate commercial banks.

A)

True

B)

False

348.

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

349.

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

350.

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

351.

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

352.

In the federal funds market, governments of different countries obtain long-term loans

from the governments of other countries.

A)

True

B)

False

353.

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

Page 64

354.

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

355.

Changes in the reserve requirement are the monetary policy tool used most often by the

Fed.

A)

True

B)

False

356.

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

357.

The discount rate is usually exactly equal to the federal funds rate.

A)

True

B)

False

358.

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

359.

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

360.

When the Fed increases the discount rate, banks are likely to increase their lending, and

the money supply increases.

A)

True

B)

False

361.

The discount rate is the interest rate that the Federal Reserve charges on loans to banks.

A)

True

B)

False

Page 65

362.

In general, the discount rate is set above the federal funds rate to discourage banks from

borrowing from the Fed.

A)

True

B)

False

363.

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

364.

To increase the money supply, the central bank could make open-market purchases.

A)

True

B)

False

365.

Treasury bills purchased from commercial banks by the Fed are assets for the Federal

Reserve.

A)

True

B)

False

366.

U.S. Treasury bills held by the Fed are assets for the U.S. government.

A)

True

B)

False

367.

The Fed’s primary liabilities are the monetary base, that is, currency in circulation plus

bank reserves.

A)

True

B)

False

368.

When the Fed buys $250 million of Treasury bills from commercial banks, the banks’

reserves increase by less than $250 million.

A)

True

B)

False

369.

If the Fed sells $250 million of Treasury bills to commercial banks, the banks pay with

their reserves.

A)

True

B)

False

Page 66

370.

When the U.S. government issues Treasury bills, its sells them directly to the Federal

Reserve.

A)

True

B)

False

371.

When the Fed buys $100 billion of Treasury bills from commercial banks, the monetary

base increases by $100 billion.

A)

True

B)

False

372.

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

373.

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

374.

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

375.

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

376.

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

Page 67

377.

Originally trusts were formed to manage inheritances and estates of wealthy clients and

were supposed to avoid risky financial practices.

A)

True

B)

False

378.

When the Knickerbocker Trust failed, the New York Clearinghouse stepped in and

guaranteed its liabilities, avoiding a major financial crisis.

A)

True

B)

False

379.

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

380.

The Panic of 1907 came to an end when the Federal Reserve began to regulate trusts.

A)

True

B)

False

381.

After establishment of the Federal Reserve in 1913, there were no more bank runs.

A)

True

B)

False

382.

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

383.

Beginning in 1913, when the Federal Reserve was established, it had the power to make

loans to commercial banks.

A)

True

B)

False

384.

One of the functions of the Reconstruction Finance Corporation, established in 1932,

was to make loans to commercial banks.

A)

True

B)

False

Page 68

385.

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

386.

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

387.

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

388.

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

389.

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

390.

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

391.

Savings and loans are financial institutions that accept savings and use them to fund

long-term mortgages for home buyers.

A)

True

B)

False

Page 69

392.

Savings and loans accept long-term savings deposits and use them to fund short-term

loans to businesses.

A)

True

B)

False

393.

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

394.

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

395.

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

396.

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

397.

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

398.

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

Page 70

399.

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

400.

Fannie Mae and Freddie Mac are the government agencies that insure deposits at

financial institutions.

A)

True

B)

False

401.

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

402.

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

403.

A hedge fund is a relatively unregulated private investment partnership open only to

wealthy individuals and institutions.

A)

True

B)

False

404.

The balance sheet effect is the increase in a firm’s net worth due to falling asset prices.

A)

True

B)

False

405.

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

Page 71

406.

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

407.

Subprime lending takes place at below-prime interest rates.

A)

True

B)

False

408.

In securitization a pool of loans is assembled and shares of that pool are sold to

investors.

A)

True

B)

False

409.

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

410.

Most of the subprime loans were made by loan originators, who sold the loans to other

investors for securitization.

A)

True

B)

False

411.

The TED spread is the interest rate that banks pay when they borrow reserves from the

Fed or another bank.

A)

True

B)

False

412.

A high TED spread means that banks expect they are taking on a high level of risk when

they lend to each other.

A)

True

B)

False

413.

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

Page 72

414.

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

415.

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

416.

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

417.

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

418.

Explain how money adds to welfare although it does not directly produce anything.

419.

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.

420.

Using gold as an example, what is the difference between commodity money and

commodity-backed money?

421.

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.

Page 73

422.

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.

423.

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.

424.

What is a bank run, how can it begin, and why is it dangerous for the greater economy?

425.

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?

426.

What will happen to the money supply if Jamie withdraws $400 from her checking

account and the required reserve ratio is 5%?

427.

How is the Federal Reserve accountable to the voters but at the same time insulated

from short-term political pressures?

428.

Explain how an increase in the reserve requirement by the Federal Reserve can lead to a

decrease in real GDP.

429.

Explain how an increase in the discount rate affects the economy.

430.

How does an open-market sale of Treasury bills affect the economy?

431.

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

432.

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.

433.

How did the banking crises of the early 1930s exacerbate the severity of the Great

Depression?

434.

What caused the savings and loan crisis of the 1980s?

435.

How was the financial crisis of 2008 similar to the Panic of 1907 and the S&L crisis?

436.

Explain the role of the housing market in the 2008 financial crisis.

437.

Explain how the Wall Street Reform and Consumer Protection Act of 2010 addressed

the problems that led to the 2008 financial crisis.

438.

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.

439.

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

440.

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.

441.

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.

442.

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.

443.

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.

444.

The most liquid form of money is:

A)

M1.

B)

M2.

C)

stocks and bonds.

D)

houses.

445.

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.

Page 76

446.

Traveler’s checks and checkable deposits are:

A)

part of M1.

B)

considered near-moneys.

C)

part of the monetary base.

D)

not considered part of the M grouping.

447.

M2 is made up of:

A)

M1 plus near-moneys.

B)

M1 plus stocks and bonds.

C)

only near-moneys.

D)

any assets that are not very liquid.

448.

Currency held in bank vaults and bank deposits held at the Federal Reserve are:

A)

part of M1.

B)

part of M2.

C)

part of M3.

D)

not part of the money supply.

449.

When a person deposits money in a bank, it is:

A)

only an asset for the bank.

B)

only a liability for the bank.

C)

a liability and an asset for the bank.

D)

most likely to result in a decrease in the money supply.

450.

Suppose a bank faces a 10% required reserve ratio and it has $100 in required reserves.

If it is fully loaned out, what is the amount of deposits in this bank?

A)

$900

B)

$10

C)

$1,000

D)

$10,000

451.

A bank’s capital is the:

A)

sum of its total assets and total liabilities.

B)

difference between its total assets and its total liabilities.

C)

difference between its total assets and its total required reserves.

D)

sum of its liabilities.

Page 77

452.

Deposit insurance:

A)

can increase the possibility of bank runs.

B)

often makes banks more accountable for their actions and less likely to engage in

risky behavior.

C)

essentially serves the same function as a fractional reserve system.

D)

leads depositors to be less inclined to monitor bank operations.

453.

Deposit insurance:

A)

is essentially the same as a bank’s required reserves.

B)

provides depositors with assurances that they will receive their deposits up to

$250,000 even if there are questions about a bank’s soundness.

C)

can be used only if depositors lose deposits in excess of $250,000.

D)

encourages banks to carefully consider to whom they lend funds.

454.

When a bank lends excess reserves to a customer:

A)

this does not affect the money supply.

B)

the money supply is increased.

C)

the money supply is decreased.

D)

it has the same effect as when one customer writes a check to another customer at a

different bank.

455.

When banks extend loans:

A)

the money supply decreases.

B)

the money supply increases.

C)

the money supply is unaffected, since no new money was printed.

D)

they do so with their required reserves.

456.

If the required reserve ratio rises:

A)

the money multiplier will also rise.

B)

the banking system must keep more of a deposit in its reserves.

C)

the amount of reserves in the banking system will decrease.

D)

excess reserves will also rise.

457.

Currency in circulation plus bank reserves:

A)

forms the monetary base.

B)

is equal to M1 plus M2.

C)

equals the required reserves for a bank.

D)

equals the excess reserves for a bank.

Page 78

458.

If banks decide to hold some of their excess reserves instead of lending them all out:

A)

the money multiplier will be less than 1 divided by the required reserve ratio.

B)

a loan of $1 will lead to a change in the money supply by a multiple amount equal

to 1 divided by the required reserve ratio.

C)

the money multiplier becomes 1 divided by the excess reserves.

D)

depositors will have to borrow more to increase the money supply.

459.

Between 1929 and 1933, bank deposits fell:

A)

as consumers spent more money to buy goods.

B)

as fears of bank failures compelled depositors to withdraw their deposits.

C)

and M1 rose as the currency holdings by customers decreased.

D)

and banks lent more money to customers.

460.

Holding everything else constant, if the required reserve ratio falls:

A)

the money multiplier increases.

B)

a $1 loan can lead to a smaller change in the money supply than before the change

in the required reserve ratio.

C)

the amount of excess reserves falls also.

D)

the money multiplier decreases.

461.

When a bank borrows from the Federal Reserve, it pays the:

A)

required reserve ratio.

B)

discount rate.

C)

federal funds rate.

D)

prime rate.

462.

The federal funds rate is the rate:

A)

a private borrower would pay a bank for a loan.

B)

one bank would pay another bank for a loan of reserves.

C)

a bank would pay the Federal Reserve for a loan of reserves.

D)

the Federal Reserve would pay to borrow money from government.

463.

Suppose the required reserve ratio increased from 10% to 20%. This would:

A)

reduce the money multiplier from 10 to 5.

B)

increase the amount of excess reserves available.

C)

increase the money multiplier from 5 to 10.

D)

not change the money multiplier.

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464.

If the Federal Reserve wanted to increase the money supply, it could _____ the required

reserve ratio, _____, and _____ bonds on the open market.

A)

decrease; increase the federal funds rate; sell

B)

decrease; decrease the discount rate; buy

C)

increase; increase the personal tax rate; sell

D)

decrease; increase the personal tax rate; buy

465.

The financial crisis of 2008 in the United States required:

A)

the Fed to solve the problem independent of government assistance.

B)

more government involvement and funding for troubled industries.

C)

tighter supervision by the Federal Reserve Bank of New York.

D)

the Treasury to solve the problems independently, since the Fed was unwilling to

help.

466.

In the United States, financial crises have often resulted in:

A)

increased calls for tighter financial regulation.

B)

more competition in the financial industry.

C)

no changes in the financial industry, since such crises are rare.

D)

less financial regulation.

467.

If the required reserve ratio is 10% and the Fed conducts an open market purchase of

$100, what is the maximum possible change in the money supply?

A)

$100

B)

$1,000

C)

$10,000

D)

$10

468.

Suppose an economy uses a monetary system of checkable deposits only and it has a

required reserve ratio of 20%. If the central bank in this economy conducts an open

market purchase of $5 million of Treasury bills, this will potentially _____ the money

supply by _____.

A)

increase; $25 million

B)

decrease; $25 million

C)

increase; $10 million

D)

decrease; $10 million

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Answer Key

Page 81

Page 82

Page 83

Page 84

Page 85

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321.

B

322.

B

323.

A

324.

B

326.

B

327.

A

328.

B

329.

A

330.

B

331.

A

332.

B

333.

A

334.

B

335.

A

336.

A

337.

A

338.

B

339.

A

340.

B

341.

A

342.

B

343.

A

344.

B

345.

A

346.

B

347.

A

348.

B

349.

A

350.

B

351.

A

352.

B

353.

B

354.

A

355.

B

356.

A

357.

B

358.

B

359.

A

360.

B

361.

A

362.

A

363.

A

364.

A

365.

A

366.

B

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