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Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Dollar bills in the modern economy serve as money because
1)
A)
people have confidence that others will accept them as money.
B)
they have value as a commodity independent of their use as money.
C)
they are backed by the gold stored in Fort Knox.
D)
they can be redeemed for gold by the central bank.
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%.
2)
Refer to Scenario 15-2. As a result of Kristy's deposit, Bank A's excess reserves increase by
2)
A)
$50,000.
B)
$10,000.
C)
$8,000.
D)
$2,000.
3)
In a ________ economy there are more prices than in a ________ economy.
3)
A)
fiat; money
B)
barter; money
C)
money; barter
D)
fiat; barter
4)
After the fall of the Saddam Hussein government of Iraq, the Iraqi dinar
4)
A)
rose significantly in value against the U.S dollar.
B)
fell by about one-fourth in value against the U.S. dollar.
C)
collapsed in value against the U.S. dollar.
D)
ceased to circulate as currency.
5)
The M1 measure of the money supply equals
5)
A)
currency plus checking account balances plus traveler's checks.
B)
currency plus checking account balances plus traveler's checks plus savings account balances.
C)
currency plus checking account balances.
D)
paper money plus coins in circulation.
6)
A decrease in the reserve requirement ________ bank reserves and ________ the money supply.
6)
A)
decreases; increases
B)
increases; increases
C)
increases; decreases
D)
decreases; decreases
Table 15-1
Assets Liabilities
Reserves
+$4,000 Deposits +$4,000
7)
Refer to Table 15-1. Suppose a transaction changes a bank's balance sheet as indicated in the
T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has
excess reserves of
7)
A)
$4,000.
B)
$400.
C)
$3,600.
D)
$0.
8)
Which of the following is one of the most important benefits of money in an economy?
8)
A)
Money makes exchange easier, leading to more specialization and higher productivity.
B)
Money allows for the accumulation of wealth.
C)
Money encourages people to produce all of their own goods (self-sufficiency) and therefore
increases economic stability.
D)
Money allows for the exchange of goods and services.
9)
People hold money as opposed to financial assets because money
9)
A)
earns a higher return than other financial assets.
B)
earns interest.
C)
is perfectly liquid.
D)
earns no interest.
10)
Suppose Warren Buffet withdraws $1 million from his checking account at Chase Manhattan Bank.
If the reserve requirement ratio is 0.2 what is the maximum change in deposits in the banking
system?
10)
A)
$5 million
B)
-$5 million
C)
-$4 million
D)
$5 million
E)
-$200,000
11)
Using the quantity equation, if the velocity of money grows at 4 percent, the money supply grows
at 6 percent, and real GDP grows at 2 percent, then the inflation rate will be
11)
A)
15 percent.
B)
8 percent.
C)
6 percent.
D)
24 percent.
12)
According to the quantity theory of money the inflation rate equals
12)
A)
the growth rate of the money supply minus the growth rate of real output.
B)
real output minus the money supply.
C)
the money supply minus real output.
D)
the growth rate of real output minus the growth rate of the money supply.
Scenario 15-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%.
13)
If the required reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an
increase in checking account deposits (including the original deposit) in the banking system as a
whole of up to
13)
A)
$1,000.
B)
$100,000.
C)
$100.
D)
$10,000.
14)
Which of the following is not a function of the Federal Reserve System or the "Fed"?
14)
A)
acting as a banker's bank
B)
insuring banks demand deposits
C)
acting as a lender of last resort
D)
taking actions to control the money supply
E)
performing check clearing services
15)
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
15)
A)
interest rates, tax rates, and government spending.
B)
open market operations, discount policy, and reserve requirements.
C)
open market operations, the exchange rate of the dollar against foreign currencies, and
government purchases.
D)
tax rates, government purchases, and government transfer payments.
16)
The German Hyperinflation of the early 1920s was caused by
16)
A)
rising oil prices after WWI, which caused a severe stagflation and hyperinflation.
B)
the German government raising funds for expenditures by selling bonds to the central bank.
C)
an overly aggressive monetary policy implemented to combat a severe recession.
D)
large deficits resulting from the high levels of war spending and falling taxes.
Scenario 15-1
Currency $1,000
Checking Account Balances $2,000
Savings Account Balances $5,000
Small-Denomination Time Deposits $6,000
Noninstitutional Money Market Fund Shares $7,000
Consider the information above for a simple economy. Assume there are no traveler's checks.
17)
Refer to Scenario 15-1. M2 in this simple economy equals
17)
A)
$14,000.
B)
$21,000.
C)
$3,000.
D)
$8,000.
18)
The major shortcoming of a barter economy is
18)
A)
the requirement of specialization and exchange.
B)
the requirement of a double coincidence of wants.
C)
that money loses value from inflation.
D)
that goods and services are not traded.
19)
You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in
your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have
19)
A)
money = $200, annual income = $500, and wealth = $4,300.
B)
money = $300, annual income = $6,000, and wealth = $5,000.
C)
money = $2,300, annual income = $6,000, and wealth = $5,000.
D)
money = $300, annual income = $6,000, and wealth = $4,300.
Scenario 15-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%.
20)
Refer to Scenario 15-2. As a result of Kristy's deposit, checking account deposits in the banking
system as a whole (including the original deposit) could eventually increase up to a maximum of
20)
A)
$50,000.
B)
$8,000.
C)
$100,000.
D)
$10,000.
21)
Which of the following is not counted in M1?
21)
A)
checking account balances
B)
currency in circulation
C)
coins in circulation
D)
credit card balances
E)
the value of traveler's checks
22)
To decrease the money supply, the Federal Reserve could
22)
A)
lower the required reserve ratio.
B)
lower the discount rate.
C)
conduct an open market sale of Treasury securities.
D)
raise transfer payments.
E)
raise income taxes.
23)
If whole tomatoes were money, which of the following functions of money would be the hardest
for tomatoes to satisfy?
23)
A)
unit of account
B)
medium of exchange
C)
store of value
D)
gold certificate
24)
If a person withdraws $500 from his/her savings account and puts it in his/her checking account,
then M1 will ________ and M2 will ________.
24)
A)
not change; not change
B)
not change; increase
C)
increase; decrease
D)
not change; decrease
E)
increase; not change
25)
The quantity theory of money was derived from the quantity equation by asserting that
25)
A)
the money supply was fixed.
B)
the velocity of money was fixed.
C)
the velocity of money was zero.
D)
real output was fixed.
26)
The statement, "My iPhone is worth $500" represents money's function as
26)
A)
a standard of deferred payment.
B)
a unit of account.
C)
a store of value.
D)
a medium of exchange.
27)
The Argentine people lost confidence in the peso and as a result
27)
A)
the economy suffered a bout of stagflation.
B)
the economy was plagued by double-digit inflation.
C)
economic activity became overstimulated.
D)
economic activity was severely limited.
28)
Economists estimate that ________ of U.S. currency is outside the United States and held primarily
by ________.
28)
A)
less than one quarter; households and firms in countries where there is little confidence in the
local currency
B)
over half; households and firms in countries where there is little confidence in the local
currency
C)
over half; foreign banks and foreign governments
D)
less than one quarter; foreign banks and foreign governments
29)
If households choose to take some fraction of each check they deposit and hold it as currency, then
the simple deposit multiplier ________ the real world multiplier.
29)
A)
is greater than
B)
is equal to
C)
is less than
D)
bears no relationship to
30)
Banks can make additional loans when required reserves are
30)
A)
less than total reserves.
B)
greater than total reserves.
C)
less than total deposits.
D)
less than total loans.
31)
Economies where goods and services are traded directly for other goods and services are called
________ economies.
31)
A)
direct
B)
seigniorage
C)
barter
D)
trade
32)
The Federal Reserve was established in 1913 to
32)
A)
prevent inflation by decreasing the money supply.
B)
prevent bad loans by requiring banks to hold reserves.
C)
stimulate the economy by increasing bank reserves.
D)
stop banking panics by acting as a lender of last resort.
33)
A bank considers a car loan to a customer ________ and a customer's checking account to be
________.
33)
A)
an asset; net worth
B)
an asset; a liability
C)
an asset; an asset
D)
a liability; an asset
E)
a liability; a liability
34)
Which of the following about fiat money is false? Fiat money
34)
A)
has little to no value except as money.
B)
is authorized by a central bank or governmental body.
C)
is backed by gold.
D)
serves as a medium of exchange.
35)
According to the quantity theory of money, if the money supply grows at 20 percent and real GDP
grows at 5 percent, then the inflation rate will be
35)
A)
25 percent.
B)
15 percent.
C)
20 percent.
D)
100 percent.
36)
Which of the following is not a consequence of the Fed changing the reserve requirement?
36)
A)
Changes in the ratio effectively places a tax on banks' deposit taking and lending activities.
B)
Changes in the ratio are easily incorporated into banks' routine management.
C)
Decreasing the ratio will increase excess reserves.
D)
Increasing the ratio will decrease the amount of reserves banks have to loan.
37)
Which of the following is not a consequence of hyperinflation?
37)
A)
Money loses value so rapidly that firms and individuals stop holding it.
B)
It causes an economy to suffer slow growth.
C)
Money's function as a medium of exchange is enhanced.
D)
The price level grows in excess of hundreds of percentage points per year.
38)
If the central bank can act as a lender of last resort during a banking panic, banks can
38)
A)
encourage the public to borrow directly from the central bank; this will worsen the banking
panic.
B)
satisfy customer withdrawal needs and eventually restore the public's faith in the banking
system.
C)
borrow more and more money from the central bank; this will lower the central bank's
reserves and decrease the public's faith in the banking system.
D)
call in their loans to their customers and eventually restore the public's faith in the banking
system.
39)
The main tool the Federal Reserve uses to conduct monetary policy is
39)
A)
discount policy.
B)
check clearing.
C)
acting as the lender of last resort.
D)
open market operations.
E)
setting reserve requirements.
40)
Which of the following statements about gold as money is false?
40)
A)
It is durable.
B)
It is acceptable to traders.
C)
It is of standardized quality.
D)
It has value other than money.
41)
If a person takes $100 from her piggy bank at home and puts it in her savings account, then M1 will
________ and M2 will ________.
41)
A)
increase; increase
B)
increase; decrease
C)
not change; increase
D)
decrease; increase
E)
decrease; not change
42)
If a person withdraws $500 from her checking account and holds it as currency, then M1 will
________ and M2 will ________.
42)
A)
not change; increase
B)
not change; not change
C)
increase; decrease
D)
decrease: decrease
E)
decrease; increase
43)
Fiat money has
43)
A)
little to no intrinsic value but is backed by the quantity of gold held by a central bank.
B)
great intrinsic value that is independent of its use as money.
C)
little to no intrinsic value but is authorized by a central bank or governmental body.
D)
value because it can be redeemed for gold by a central bank.
44)
Bank reserves include
44)
A)
deposits with the Federal Reserve and holdings of securities.
B)
loans to bank customers and deposits with the Federal Reserve.
C)
vault cash and deposits with the Federal Reserve.
D)
vault cash and loans to bank customers.
E)
customer checking accounts and vault cash.
Scenario 15-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%.
45)
Refer to Scenario 15-2. As a result of Kristy's deposit, Bank A's required reserves increase by
45)
A)
$2,000.
B)
$50,000.
C)
$8,000.
D)
$10,000.
46)
Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required
reserve ratio is 10 percent. If the Federal Reserve raises the required reserve ratio to 12 percent,
then the bank will now have excess reserves of
46)
A)
$12,000.
B)
-$12,000
C)
$0.
D)
-$2,000.
47)
The Federal Reserve's narrowest definition of the money supply is
47)
A)
L.
B)
M0.
C)
M2.
D)
M3.
E)
M1.
48)
Which of the following best describes how banks create money?
48)
A)
Banks charge higher interest rates on loans than they pay on deposits.
B)
Banks create checking account deposits when making loans from excess reserves.
C)
Banks charge fees for providing financial advice.
D)
Banks make loans from reserves.
49)
Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The
maximum loan your bank can made as a direct result of your deposit is
49)
A)
$1,800.
B)
$2,000.
C)
$20,000.
D)
$200.
Scenario 15-1
Currency $1,000
Checking Account Balances $2,000
Savings Account Balances $5,000
Small-Denomination Time Deposits $6,000
Noninstitutional Money Market Fund Shares $7,000
Consider the information above for a simple economy. Assume there are no traveler's checks.
50)
Refer to Scenario 15-1. M1 in this simple economy equals
50)
A)
$1,000.
B)
$3,000.
C)
$8,000.
D)
$2,000.
51)
The Federal Open Market Committee consists of the seven members of the ________, the president
of the Federal Reserve Bank of New York, and ________.
51)
A)
Council of Economic Advisors; four members of the U.S. Banking Committee
B)
Federal Reserve's Board of Governors; four presidents from the other 11 Federal Reserve
banks
C)
Federal Reserve's Board of Governors; four members of the Council of Economic Advisors
D)
Council of Economic Advisors; four presidents from the 11 Federal Reserve banks
52)
Argentine banks were hampered by the government's decision to tie the peso to the U.S. dollar at a
rate of one to one. This policy of fixing the peso to the dollar
52)
A)
lowered the rate of inflation in Argentina to less then 3 percent.
B)
caused deflation in the Argentine economy.
C)
prevented the central bank from acting as the lender of last resort during a banking panic.
D)
encouraged faith in the banking system and resulted in the public depositing large sums into
Argentine banks.
53)
The largest liability on the balance sheet of most banks is its
53)
A)
loans.
B)
vault cash.
C)
deposits with the Federal Reserve.
D)
holdings of securities.
E)
checking account and savings account deposits of its customers.
54)
The M2 measure of the money supply equals
54)
A)
M1 plus savings account balances plus small-denomination time deposits.
B)
M1 plus savings account balances plus small-denomination time deposits plus
noninstitutional money market fund shares.
C)
savings account balances plus small-denomination time deposits plus noninstitutional
money market fund shares.
D)
savings account balances plus small-denomination time deposits plus traveler's checks.
55)
Suppose the reserve requirement ratio is .20. If banks are conservative and choose not to loan all of
their excess reserves, the real world deposit multiplier is
55)
A)
greater than 5.
B)
less than 5.
C)
equal to 5.
D)
equal to 20.
56)
Which of the following determines the amount of money the banking system as a whole can create?
56)
A)
the quantity of vault cash held by banks
B)
the limit on profits by banks imposed by the U.S. Congress
C)
the quantity of bank reserves
D)
the gold reserves held by the Federal Reserve
57)
The most liquid measure of money supply is
57)
A)
M1.
B)
M2.
C)
L.
D)
M0.
E)
M3.
Scenario 15-2
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%.
58)
Refer to Scenario 15-2. As a result of Kristy's deposit, Bank A can make a maximum loan of
58)
A)
$2,000.
B)
$10,000.
C)
$50,000.
D)
$8,000.
59)
Suppose a bank has $100 million in checking account deposits with no excess reserves and the
required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15
percent, then the bank will now have excess reserves of
59)
A)
$15 million.
B)
$20 million.
C)
$5 million.
D)
$0.
