Suppose that from a new checkable deposit, First National Bank holds two million
dollars in vault cash, eight million dollars on deposit with the Federal Reserve, and nine
million dollars in excess reserves. Given this information, we can say First National
Bank has ________ million dollars in required reserves.
A) one
B) two
C) eight
D) ten
Answer:
Funds held in ________ are subject to reserve requirements.
A) all checkable deposits
B) all checkable and time deposits
C) all checkable, time, and money market fund deposits
D) all time deposits
Answer:
Which of the following functions is not performed by any of the twelve regional
Federal Reserve Banks?
A) Check clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency
Answer:
What is the present value of $500.00 to be paid in two years if the interest rate is 5
percent?
A) $453.51
B) $550.00
C) $476.25
D) $550.00
Answer:
Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender’s relative lack of information about the borrower’s potential returns and
risks of his investment activities.
B) the lender’s inability to legally require sufficient collateral to cover a 100% loss if
the borrower defaults.
C) the borrower’s lack of incentive to seek a loan for highly risky investments.
D) the lender’s inability to restrict the borrower from changing his behavior once given
a loan.
Answer:
Everything else held constant, an increase in the money market fund ratio will result in
________ in the M1 money multiplier and ________ in the M2 money multiplier.
A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease
Answer:
If the deficit is financed by selling bonds to the ________, the money supply will
________, causing aggregate demand to ________.
A) public; rise; increase
B) public; fall; decrease
C) central bank; rise; increase
D) central bank; fall; decrease
Answer:
Inflation targets can increase the central bank’s flexibility in responding to declines in
aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall
below the floor of the target range will automatically stimulate the central bank to
________ monetary policy without fearing that this action will trigger a rise in inflation
expectations.
A) demand: tighten
B) demand; loosen
C) supply; tighten
D) supply; loosen
Answer:
A decline in taxes ________ consumer expenditure and shifts the ________ curve to the
________, everything else held constant.
A) raises; LM; right
B) lowers; IS; left
C) raises; IS; right
D) lowers; LM; left
Answer:
Allowing bank branching across state lines gives banks greater ability to coordinate
bank operations. This makes it easier for them to receive the benefits of
A) the dual banking system.
B) economies of scale.
C) disintermediation.
D) interest-rate irregularities.
Answer:
In the liquidity trap, the money demand curve
A) is horizontal.
B) is vertical.
C) is negatively sloped.
D) is positively sloped.
Answer:
The primary assets of a finance company are
A) municipal bonds.
B) corporate stocks and bonds.
C) consumer and business loans.
D) mortgages.
Answer:
If the expected return on bonds increases, all else equal, the demand for bonds
increases, the price of bonds ________, and the interest rate ________.
A) increases; decreases
B) increases; increases
C) decreases; decreases
D) decreases; increases
Answer:
The theory of portfolio choice suggests that the most important factor affecting the
demand for domestic and foreign assets is the ________ on these assets relative to one
another.
A) interest rate
B) risk
C) expected return
D) liquidity
Answer:
The gross domestic product is the
A) the value of all wealth in an economy.
B) the value of all goods and services sold to other nations in a year.
C) the market value of all final goods and services produced in an economy in a year.
D) the market value of all intermediate goods and services produced in an economy in a
year.
Answer:
The most significant change in the economic environment that changed the demand for
financial products in recent years has been
A) the aging of the baby-boomer generation.
B) the dramatic increase in the volatility of interest rates.
C) the dramatic increase in competition from foreign banks.
D) the deregulation of financial institutions.
Answer:
Everything else held constant, an increase in currency holdings will cause
A) the money supply to rise.
B) the money supply to remain constant.
C) the money supply to fall.
D) checkable deposits to rise.
Answer:
As a store of value, money
A) does not earn interest.
B) cannot be a durable asset.
C) must be currency.
D) is a way of saving for future purchases.
Answer:
Which of the following statements most accurately describes the task of bank asset
management?
A) Banks seek the highest returns possible subject to minimizing risk and making
adequate provisions for liquidity.
B) Banks seek to have the highest liquidity possible subject to earning a positive rate of
return on their operations.
C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit,
liquidity needs supersede the desire for profits.
D) Banks seek to acquire funds in the least costly way.
Answer:
A ________ is bought at a price below its face value, and the ________ value is repaid
at the maturity date.
A) coupon bond; discount
B) discount bond; discount
C) coupon bond; face
D) discount bond; face
Answer:
U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the
Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base.
A) a liability; an asset; increases
B) a liability; an asset; decreases
C) an asset; a liability; increases
D) an asset; a liability; decreases
Answer:
The net amount of international reserves that move between governments to finance
international transactions is called the ________ balance.
A) capital account
B) current account
C) trade
D) official reserve transactions
Answer:
Assume a closed economy. Suppose that autonomous consumption equals $400,
planned investment equals $500, government expenditure equals $200, net taxes
equals $50, and the mpc equals 0.9.
If net exports increase by 100 and the mpc is 0.75, equilibrium aggregate output
increases by
A) 100
B) 250
C) 400
D) 750
Answer:
The contagion effect refers to the fact that
A) deposit insurance has eliminated the problem of bank failures.
B) bank runs involve only sound banks.
C) bank runs involve only insolvent banks.
D) the failure of one bank can hasten the failure of other banks.
Answer:
An increase in default risk on corporate bonds ________ the demand for these bonds,
but ________ the demand for default-free bonds, everything else held constant.
A) increases; lowers
B) lowers; increases
C) does not change; greatly increases
D) moderately lowers; does not change
Answer:
The process of asset transformation refers to the conversion of
A) safer assets into risky assets.
B) safer assets into safer liabilities.
C) risky assets into safer assets.
D) risky assets into risky liabilities.
Answer:
Patrick places his pocket change into his savings bank on his desk each evening. By his
actions, Patrick indicates that he believes that money is a
A) medium of exchange.
B) unit of account.
C) store of value.
D) unit of specialization.
Answer:
One way for banks to reduce the principal-agent problems associated with trading
activities is to
A) set limits on the total amount of a traders’ transactions.
B) make sure that the person conducting the trades is also the person responsible for
recording the transactions.
C) encourage traders to take on more risk if the potential rewards are higher.
D) reduce the regulations on the traders so that they have more flexibility in conducting
trades.
Answer:
The amount of checkable deposits that banks are required by regulation to hold are the
A) excess reserves.
B) required reserves.
C) vault cash.
D) total reserves.
Answer:
An increase in the expected future domestic exchange rate causes the demand for
domestic assets to shift to the ________ and the domestic currency to ________,
everything else held constant.
A) right; appreciate
B) right; depreciate
C) left; appreciate
D) left; depreciate
Answer:
The classical economists’ contention that prices double when the money supply doubles
is predicated on the belief that in the short run velocity is ________ and real GDP is
________.
A) constant; constant
B) constant; variable
C) variable; variable
D) variable; constant
Answer: