money and banking practice questions

Practice Multiple-Choice Questions for

Money and Banking

Why Study Money, Banking, and Financial Markets: Chapter 1

Money appears to have a major influence on

a. inflation.

b. the business cycle.

c. interest rates.

*d. each of the above.

In the United States, monetary policy is implemented by the

a. U.S. Congress

b. U.S. Treasury

c. Office of Thrift Supervision

*d. Federal Reserve

The financial system provides all of the following financial services except:

a. risk sharing

b. provision of liquidity

c. reduction of information costs

*d. the elimination of public debt

The central bank of the United States is the

a U.S. Treasury

b. Federal Deposit Insurance Corporation

*c. Federal Reserve

d. Comptroller of the Currency

A higher interest rate might induce households to _____ but businesses to _____.

*a. save more, borrow less

b. save less, borrow more

c. save more, borrow more

d. save less, borrow less

Budget deficits are important to study in a money and banking class because

a. budget deficits cause banks to fail.

b. without budget deficits banks would not exist.

*c. budget deficits may influence the conduct of monetary policy.

d. of each of the above.

An increase in the growth rate of the money supply is most likely to be followed by

a. a recession.

b. a decline in economic activity.

*c. inflation.

d. all of the above.

A sharp decrease in the growth rate of the money supply is most likely to be followed by

*a. a decline in economic activity.

b an upswing in the business cycle.

c. inflation.


Suppose that due to a fear that the United States is about to enter a long period of stagnant

growth, stock prices fall by 50% on average. Predict what would happen to spending by

consumers.

a. spending would probably increase.

*b. spending would probably fall.

c. spending would probably be unaffected.

d. the change in spending would be ambiguous.

Budget deficits can be a concern because they might

a. ultimately lead to lower inflation.

b. lead to lower interest rates.

*c. lead to a higher rate of money growth which causes inflation.

d. cause all of the above to occur.

Which of the following is most likely to result from a stronger euro?

*a. U.S. goods exported aboard will cost less in Germany, and so Germans will buy more of

them.

b. U.S. goods exported aboard will cost more in Germany, and so Germans will buy more of

them.

c. U. S. goods exported abroad will cost more in Germany, and so Germans will buy fewer of

them.

d. Americans will purchase more foreign goods.

Which of the following are true statements?

a. Inflation is defined as a continual increase in the money supply.

b. Inflation is a condition of a continually rising price level.

c. The inflation rate is measured as the rate of change in the aggregate price level.

*e. Only (b) and (c) of the above are true statements.

When the dollar depreciates in value, it benefits_______ and harms________.

*a. American exporters; American consumers

b. American exporters; foreign consumers

c. foreign exporters; American exporters

d. foreign exporters; American tourists

The Federal Reserve System is:

a. a large commercial bank

b. another name for the U.S. Treasury

*c. the central bank in the United States

d. the organization that insures bank deposits in the U.S.

When a nation's money supply persistently increases at a faster rate than the nation can increase

its output of goods and services, which of the following happens?

a. budget deficits increase

*b. inflation occurs

c. real output accelerates

d. living standards rise

Assuming that the inflation rate is positive, which of the following statements characterizes the

relationship between the actual or observed interest rate and the real interest rate?

a. they are the same thing

b. real interest rates are higher than actual interest rates

*c. real interest rates are lower than actual interest rates

d. none of the above is necessarily true

A chief concern about large budget deficits is that they may lead to:

*a. lower living standards in the future

b. lower interest rates in the present

c. deflation in the future

d. all of the above

When you purchase shares of corporate stock, then:

a. you have loaned money to the corporation

*b. you own part of the corporation

c. you have made new funds available to the corporation

d. all of the above

Suppose XYZ corporation earns profits of $2 per share, is priced at $30 per share, and pays an

annual dividend of $1.50 per share. Which of the following is correct?

a. the PE ratio of XYZ stock is 15

b. the dividend yield of XYZ Corporation is 5 percent

c. the company pays out 75 percent of its profits in dividends

*d. all of the above are correct

A graph depicting money growth rates and inflation rates for a cross-section of nations would

likely indicate that:

*a. countries with high money growth tend to have high inflation

b. countries with high money growth tend to have low inflation

c. there is no clear correlation between money growth rates and inflation rates across countries

d. the United States had the lowest inflation rate of any country

Monetary policy consists of:

a. controlling taxes to influence consumer and business spending

*b. influencing the availability of bank credit by changing interest rates

c. adjusting the level of government expenditures to stimulate economic activity

d. all of the above

Inflation is most often caused by:

a. supply side forces such as oil prices which increase costs to producers

b. demand side forces which depress the level of consumer spending

*c. rapid expansion of the money supply

d. unreasonable wage demands on the part of labor unions

The interest rate is:

a. the cost of using borrowed funds

b. a key variable that influences investment in capital goods

c. strongly influenced by monetary policy actions

*d. all of the above

Common stocks (or corporate stocks):

a. represent an IOU on the part of the issuing firm

b. entitle the holder to contractual payments

c. were a poor investment over the period 1982-1996

*d. allow the holder to share in the earnings of the firm

Financial intermediaries:

a. channel funds from savers to borrowers

b. greatly enhance economic efficiency

c. have been an source of many financial innovations

*d. have done all of the above

The real interest rate is defined as:

a. the nominal interest rate plus the rate of inflation

*b. the nominal interest rate minus the rate of inflation

c. the nominal rate people pay rather than the advertised rate

d. none of the above

Financial intermediaries include all of the following except:

a. a savings and loan association

b. a mutual savings bank

*c. the bond market

d. a credit union

Changes in the money supply are often accompanied by changes in

a. economic output

b. interest rates

c. inflation rates


An Overview of the Financial System: Chapter 2

Which of the following cannot be described as indirect finance?

a. You take out a mortgage from your bank.

b. An insurance company lends money to General Motors Corporation.

*c. You borrow $1000 from your best friend.

d. You buy shares in a mutual fund.

e. None of the above.

Investment banks are characterized by all of the following except:

*a. they help businesses to raise capital in secondary markets

b. they advise businesses on the best way to raise capital: issuing stocks or bonds

c. they earn income by underwriting new issues of securities

d. by underwriting, investment banks decrease the risk encountered by the issuing firm

Which of the following is a short-term financial instrument?

*a U.S. Treasury bill.

b. Share of IBM stock.

c. New York City bond with a maturity of 2 years.

d. Residential mortgage.

The majority of funds that businesses raise comes from:

a. issuing bonds

b. issuring commercial paper

*c. loans from financial institutions

d. issuing stock

Suppose you wish to buy a clothes washer/dryer from ABC Appliance. Because you do not have

$1,000 cash, you fill out a loan application with Miller Financial that allows you to pay off the

washer/dryer in 30 monthly installments. Miller Financial is an example of a (an):

*a. consumer finance company

b. savings and loan association

c. brokerage company

d. investment bank

When an investment bank ______, it guarantees a price for the securities that the issuing firm is

selling. The bank then attempts to sell the issue at a higher price and capture the difference as

profit.

a. engages in price discrimination

*b. underwrites

c. grant securitized real estate loans

d. collateralizes an investment

Which of the following statements about the characteristics of debt and equity is true?

a. They can both be short-term financial instruments.

b. Bond holders are a residual claimant.

c. The income from bonds is typically more variable than that from equities.

d. Bonds pay dividends.

*e. None of the above.

Which of the following markets in the United States is not set up as an organized exchange?

a. Stock market

b. Corporate bond market

*c. U. S. government bond market

d. Futures market

Which of the following is traded in a money market?

a. U.S. Treasury bonds

b. Mortgages

c. Common stocks

*d. Federal funds

e. None of the above

Which of the following is a depository institution?

a. Life insurance company

*b. Credit union

c. Pension fund

d. Finance company

The primary assets of a savings and loan association are

a. money market instruments.

b. corporate bonds and stock.

c. consumer and business loans.

*d. mortgages.

The primary liabilities of a savings and loan association are

a. bonds.

b. mortgages.

*c. deposits.

d. commercial paper.

Savings and loan associations are regulated by the

a. Office of the Comptroller of the Currency.

b. Federal Home Loan Bank System and FSLIC.

c. Securities and Exchange Commission.

*d. The Office of Thrift Supervision.

A bond denominated in a currency other than that of the country in which it is sold is called a(n)

a. foreign bond.

*b. eurobond.

c. equity bond.

d. currency bond.

Financial intermediaries promote efficiency and thereby increase people’s wealth

a. by reducing the transaction cost of linking together lender and borrowers.

b. to the extent that they help solve problems created by adverse selection and moral hazard.

c. by providing additional jobs.

*d. because of only (a) and (b) of the above.

Contractual savings institutions include:

a. commercial banks and thrifts.

*b. life insurance companies and pension funds.

c. finance companies and mutual funds.


Typically, lenders have inferior information relative to borrowers about the potential returns and

risks associated with any investment project. This difference in information is called_________,

and it gives rise to the ________problem.

a. asymmetric information; moral hazard

*b. asymmetric information; adverse selection

c. adverse selection; moral hazard

d. adverse selection; asymmetric information

U. S. Treasury bills are

a. issued in three-, six-, nine-, and twelve-month maturities.

b. the most liquid of the money market instruments.

c. the safest of all the money market instruments.

*d. are only (b) and (c) of the above.

Federal funds are loans made by the

a. Federal Reserve System to commercial banks.

*b. one commercial bank to another.

c. the U.S. Treasury to the Federal Reserve.

d. the Federal Reserve to the U. S. Treasury.

All of the following are financial intermediaries except

a. commercial banks

b. insurance companies

c. pension funds

d. mutual funds

*e. none of the above

Life insurance policies typically contain a clause stating that the company will not be required to

pay death benefits in the event that the insured commits suicide. Life insurance companies

include such clauses in insurance contracts to protect against the ________ problem

a. time value of money

*b. adverse selection

c. restrictive covenant

d. defined contribution

General Motors Acceptance Corporation (GMAC) is an example of a

*a. sales finance company

b. consumer finance company

c. business finance company

d. public finance company

Lisa wants to add a new room to her house. What type of finance company will she deal with in

getting the loan to finance the room addition?

a. sales finance company

*b. consumer finance company

c. business finance company

d. public finance company

Mutual funds that charge a sales commission when shares are purchases are called

a. no-load funds

*b. loaded funds

c. sinking funds

d. sinking-charge funds

When an investment bank purchases a new issue of securities in the hopes of making a profit, it

is said to ________ the issue.

a. pawn

b. backstock

c. syndicate

*d. underwrite

Brokers are distinguished from the dealers in that brokers do not

*a. hold inventories of securities

b. make profits

c. incur losses

d. deal directly with the public

Prior to making a loan, banks screen their prospective loan customers to avoid the problem of

a. moral hazard

b. diversification

*c. adverse selection

d. direct finance

When borrowers have superior information about the potential returns and risks associated with

an investment project, it results in the problem referred to as

a. direct finance

b. indirect finance

c. financial intermediation

*d. asymmetric information

Suppose that Jim Miller receives a business loan to purchase equipment for his manufacturing

company. After he receives the loan, he decides to go on a vacation with the money. This is an

example of

*a. moral hazard

b. adverse selection

c. direct finance

d. direct transformation

Financial intermediaries

a. solve some of the problems associated with asymmetric information

b. decrease transaction costs for borrowers and lenders

c. allow borrowers and lenders to engage in risk sharing


Investment banks facilitate the sale of securities in the

*a. primary market

b. secondary market

c. retail market

d. wholesale market

Asymmetric inflation in financial markets exists because

a. lenders know more about the likelihood of the repayment of a loan than do borrowers

*b. borrowers know more about the likelihood of the repayment of a loan than do lenders

b. both borrowers and lenders have the same information about the likelihood of the

repayment of a loan

d. neither borrowers nor lenders have any information about the likelihood of the repayment

of a loan

Suppose you buy a 10-year savings bond at U.S. Bank. His is an example of a _____ instrument

bought in the _____.

*a. capital market, primary market

b. capital market, secondary market

c. money market, primary market

d money market, secondary market

What Is Money? Chapter 3

Which of the following describes the relationship between legal tender and money?

a. being legal tender is a necessary but not sufficient condition for a substance to be money.

*b. being legal tender is a sufficient but not necessary condition for a substance to be money

c. being legal tender is a necessary and sufficient condition for a substance to be money

d. being legal tender is neither necessary nor sufficient for a substance to be money

Which of the following is not legal tender?

a. a dime

b. a $20 dollar bill

*c. a checking account in a commercial bank

d. none of the above--that is, all of the above are legal tender

As a condition for barter, two traders would have to have

*a. a double coincidence of wants

b. precious metals such as gold or silver

c. a common desire to trade the same product

d. the incentive to hold prices at their minimal levels

Disadvantages of commodity money under barter include

a. a lack of general acceptability

b. a lack of durability and portability

c. a lack of divisibility into small units


During periods of inflation, people may hold money even when other assets are superior stores of

value. This is best explained by the fact that money is

a. the only medium of exchange

*b. liquid

c. divisible into small units (dollars, quarters, dimes)

d. a substitute for government securities

For money to serve as a good medium of exchange, it must be

a. durable

b. transportable

c. of standardized quality


The U.S. financial system is currently a fiat money system. This means that

a. the money supply includes coins but not paper currency

b. there are limits on the amount of money that can be created

*c. money has value only because of government regulation or law

d. money is backed by gold and silver reserves

A six pack of Mountain Dew is priced at $2.79. This example illustrates money serving as:

a. a medium of exchange

*b. a standard of value

c. a means of payment

d. a store of value

In the 1970s, the U.S. price level doubled. In the 1970s, money served which function very

poorly?

a. standard of value

b. unit of account

c. means of payment

*d. store of value

Our current monetary system may be characterized as a:

a. gold standard system

b. commodity money system

*c. credit or fiat money system

d. representative full-bodied monetary system

According to Sir Thomas Gresham,

a. good (undervalued) money drives bad (overvalued) money out of circulation

*b. bad (overvalued) money drives good (undervalued) money out of circulation

c. all money is good money

d. all money is bad money

A “token coin” implies that

a. the value of a coin as money is less than the value of the metal from which it is made

*b. the value of a coin as money exceeds the value of the metal from which it is made

c. the value of a coin as money equals the value of the metal from which it is made

d. all of the above

The first official monetary system of the United States was a/an

a. unlimited gold standard

b. limited gold bullion standard

c. monometallic standard

*d. bimetallic standard

For the United States, the 1974 Gold Act

a. placed the country on an unlimited gold coin standard

b. placed the country on a limited gold bullion standard

c. placed the country on a bimetallic standard

*d. demonetized gold from the monetary system

Today, our money is "backed"

a. 25 percent by gold certificates held by the Federal Reserve

b. 40 percent by gold certificates held by the Federal Reserve

c. by a combination of gold certificates and silver certificates

*d. by faith that our government will keep the growth of money in moderation

Which of the following is not included in M2?

a. currency and coins

b. demand deposits

c. money market mutual fund shares

*d. corporate bonds held by firms and individuals

Which of the following payments instruments are least efficient from society's point of view?

a. currency

b. a system of electronic funds transfers

*c. credit cards

d. all are equally efficient

Which of the following have not served as money at some time?

a. gold

b. tobacco

*c. credit cards

d. silver

The designation "legal tender":

a. applies to all forms of M1 money today

b. is a necessary condition for an item to be considered money

*c. means that a seller cannot refuse payment made in that form

d. all of the above

Which of the following can serve as a store of value?

a. art

b. money

c. gold


Which of the following assets is most liquid?

a. 2-year Treasury bonds

b. shares of common stock

*c. passbook savings accounts

d. gold bars

The $20 gold piece so common in old Western films is an example of:

*a. full-bodied commodity money

b. representative full-bodied commodity money

c. fiat money

d. barter money

The development of representative full-bodied commodity money stemmed mainly from the

underlying commodity’s lack of:

a. scarcity

*b. portability

c. durability


When an economist talks about the impossibility of barter, she really is not saying that barter is

impossible. Rather, she means to imply that

*a. barter transactions are relatively costly.

b. barter has no useful place in today’s world. It is impossible for barter transactions to leave

the parties to an exchange better off.

c. it is impossible for barter transactions to leave the parties to an exchange better off.

d. each of the above is true.

The resources expended trying to find potential buyers or sellers and negotiating over price and

terms are called

a. barter costs.

*b. transaction costs.

c. information costs.

d. enforcement costs.

If cigarettes serve as a medium of exchange, a unit of account, and a store of wealth, cigarettes

are said to function as

a. bank deposits.

b. reserves.

*c. money.

d. loanable funds.

Because money reduces both the time it takes to make exchanges and the necessity of a double

coincidence of wants, people will find that they can more easily pursue their individual

comparative advantages. Thus money

a. encourages nonproductive pursuits.

*b. encourages specialization.

c. forces people to become too specialized.

d. causes a waste of resources due to the duplication of many activities.

As the transaction costs of selling an asset rise, the asset is said to become

a. more valuable.

b. more liquid.

*c. less liquid.

d. more moneylike.

Which of the following are problems with a payments system based largely on checks?

a. Checks are costly to process.

b. Checks are costly to transport.

c. Checks take time to move through the check-clearing system.

*d. All of the above.

e. Only (a) and (b) of the above.

Starting January 1, 1999 the ______ became the official currency of countries joining the

European

Monetary System:

*a. euro

b. franc

c. dollar

d. yen

Which of the following is not included in the money aggregate M2?

a. Currency

b. Money market deposit accounts

c. Small denomination CDs (time deposits)

*d. Savings bonds

Which of the following best describes the behavior of the money aggregates M1 and M2?

*a. While both M1 and M2 tend to rise and fall together, they can grow at very different rates.

b. M1 always grows at a much faster rate than M2.

c. While both M1 and M2 tend to move closely together over periods as short as a year, in the

long run they tend to move in opposite directions.

d. While both M1 and M2 tend to move closely together over periods as short as a year, in the

long run their growth rates are vastly different.

The conversion of a barter economy to one that uses money

a. increases efficiency by reducing the need to exchange goods.

*b. increases efficiency by reducing transaction costs.

c. has no effect on economic efficiency since efficiency is a production concept, not an

exchange concept.

d. decreases efficiency by reducing the need to specialize.

Generally, the problem of defining money becomes__________troublesome as the pace of

financial innovation________.

a. less; quickens

*b. more; quickens

c. more; slows

d. more; stops

If an individual “cashes in” a U.S. savings bond for currency,

a. M1 increases and M2 stays the same.

b. M1 stays the and M2 increases.

c. M1 stays the same and M2 stays the same.

*d. M1 increases and M2 increases.

Generally speaking, the initial data on the monetary aggregates reported by the Fed are

a. not a reliable guide to the short-run behavior of the money supply.

b. a reliable guide to the long-run behavior of the money supply.

c. a reliable guide to the short-run behavior of the money supply.

*d. both (a) and (b) of the above.

Gold certificates and silver certificates provide an example of

a. full-bodied money

*b. representative full-bodied money

c. fiat money

d. debt money

Gold coins and silver coins provide an example of

*a. full-bodied money

b. representative full-bodied money

c. fiat money

d. debt money

Concerning the U.S. money supply, which of the following statements about the liquidity of the

assets in M1 and M2 is true?

a. The assets of M2 are more liquid than the assets of M1

*b. The assets of M1 are more liquid than the assets of M2

c. The assets of M1 and M2 have equal liquidity

d. The assets of M1 and M2 have no liquidity

Which asset is the least efficient because it results in the greatest transaction costs?

a. paper currency

b. fiat money

c. personal checks

*d. commodity money

An example of fiat money is

a. a $10 silver piece

b. a $50 gold piece

c. a MasterCard or VISA

*d. a $100 bill

A barter economy is not characterized by

*a. transaction costs tend to be quite low

b. people cannot specialize in the production of one good

c. the exchange of goods requires that there be a double coincidence of wants

d. goods are exchanged directly for other goods

Interest Rates: Chapters 4-6

Student loans and mortgage loans are examples of

a. “simple” loans

*b. fixed-payment loans

c. coupon loan

d. discount loans

A sharp decline in market interest rates will:

*a. increase the price of existing bonds

b. increase the yield on existing bonds

c. decrease the price of existing bonds

d. do none of the above

The prime loan rate (prime interest rate):

a. is set by the Federal Reserve

b. is the loan rate charged to small businesses and consumers

*c. is a benchmark interest rate set by large banks

d. exerts only a weak influence over bank loan rates

The real interest rate is defined as:

a. the nominal interest rate plus the rate of inflation

*b. the nominal interest rate minus the rate of inflation

c. the nominal rate people pay rather than the advertised rate


According to the Fischer Effect, interest rates rise when

a. national income increases

b. the economy moves into a recession

c. price deflation occurs

*d. expected inflation rises

The U.S. experience over the past 60 years suggests that interest rates

*a. rise during business cycle expansions and fall during contractions

b. rise during business cycle contractions and fall during expansions

c. fall during business cycle contractions and remain constant during expansions

d. fall during business cycle expansions and remain constant during contractions

In 1997, the U.S. Treasury began to issue indexed securities whose interest and principal

payments are adjusted for changes in the consumer price index. These securities are known as

a. Treasury bills

b. Treasury notes

c. Treasury bonds

*d. TIPS

Assume the nominal interest rate is 12 percent, the expected inflation rate is 5 percent, and the

marginal income tax rate is 25 percent. Then the after-tax real interest rate is:

a. 7 percent

b. negative 2 percent

*c. 4 percent


The passage of a balanced budget amendment to the U.S. Constitution requiring the federal

budget to be balanced annually would tend to result in

a. the bond demand curve shifting rightward

b. the bond demand curve shifting leftward

c. the bond supply curve shifting rightward

*d. the bond supply curve shifting leftward

If nominal interest rates are 8 percent, expected inflation is 4 percent, and the

relevant marginal tax rate is 25 percent:

a. the real rate of interest is 6 percent

b. the aftertax real rate of interest is 2.25 percent

c. the real rate of interest is 2 percent

*d. the aftertax real rate of interest is 2 percent

The early years of the Reagan administration witnessed deregulation in several industries,

including banking, communications, airlines, and others. This widespread deregulation tended

to______ the marginal productivity of capital and ______ real interest rates.

*a. increases, increases

b. increases, decreases

c. decreases, increases

d. decreases, decreases

In which of the following situations would you rather be borrowing?

a. the interest rate is 20% and expected inflation rate is 15%

b. the interest rate is 4% and expected inflation rate is 1%.

c. the interest rate is 13% and expected inflation rate is 15%

*d. the interest rate is 10% and expected inflation rate is 15%

It is normally true that, the longer the time to maturity of a U.S. Treasury bill:

a. the lower the discount rate

*b. the less liquid the asset

c. the lower the level of taxation on the Treasury bill

d. the lower the market risk in the Treasury bill

Transactions costs are lowest in:

*a. Treasury bills

b. common stocks

c. U.S. government bonds

d. municipal bonds

The least liquid asset below is:

*a. Treasury bond

b. money market mutual fund share

c. passbook savings account

d. checking account deposit

To be considered highly liquid, an asset must:

a. be easily convertible to the medium of exchange

b. not fluctuate sharply in value

c. be sellable without substantial transactions costs

*d. exhibit all of the above qualities

Which of the following bears the most market risk?

*a. corporate bond

b. savings account deposit

c. certificate of deposit (CD)

d. checking account deposit

Which of the following is NOT true?

*a. liquidity and risk are positively related

b. risk and yield are positively related

c. liquidity and yield are inversely related

d. all of the above are true

Which asset carries the greatest default risk?

a. corporate bond

*b. corporate stock

c. long-term Treasury bond

d. money market mutual fund shares

In the loanable funds model, which of the following would shift the demand curve for loanable

funds rightward?

a. an increase in the money supply

b. a reduction in the federal budget deficit

*c. an increase in business confidence

d. an increase in the private saving rate

In the loanable funds model, which of the following would shift the supply curve of loanable

funds leftward?

a. a reduction in expected inflation

b. an increase in the federal budget deficit

*c. households becoming less thrifty


Assume Congress threatens to default on U.S. government bonds. In terms of the supply and

demand for loanable funds in the U.S. government securities market, which of the following

would occur?

a. demand for funds would rise and interest rates would rise

*b. supply of funds would fall and interest rates would rise

c. demand for funds would fall and interest rates would rise

d. supply of funds would fall and interest rates would fall

In terms of the loanable funds market, an increase in the expected rate of inflation shifts:

*a. demand for funds right, supply of funds left, and interest rates rise.

b. demand for funds right, supply of funds right, and interest rates rise.

c. demand for funds left, supply of funds right, and interest rates fall.

d. supply of funds left, demand for funds left, and interest rates rise

Suppose that the real interest rate remains constant at 3 percent while expected inflation

increases from 4 percent to 6 percent. Then the nominal interest rate:

a. increases from 4 percent to 6 percent

*b. increases from 7 percent to 9 percent

c. increases from 1 percent to 3 percent

d. does none of the above

Referring to the loanable funds market, in a severely declining economy the:

a. supply of funds rises and interest rates rise

b. supply of funds falls and interest rates rise

*c. demand for funds falls and interest rates fall

d. demand for funds rises and interest rates rise

If market interest rates rise:

a. bond prices must rise

*b. bond prices must fall

c. bond prices cannot fall

d. bond prices will either rise or fall

The predominant factor driving the long-run behavior of interest rates has been:

a. budget deficits

b. business cycles

*c. expected inflation

d. exchange rate behavior

The total rate of return on a bond equals

a. the interest rate and the rate of capital gain/loss earned from holding the bond to maturity

b. only the rate of capital gain or loss of holding a bond

*c. the interest rate and the rate of capital gain/loss earned during the holding period

d. the yield to maturity and the current yield earned during the holding period

During periods of rising interest rates, which of the following bonds would be subject to the

highest amount of interest rate risk?

a. 1 year bond

b. 2 year bond

c. 3 year bond

*d. 10 year bond

The risks of investing in an individual bond or a bond fund include

a. inflation risk

b. default risk

c. interest rate risk


Treasury Inflation-Protected Securities

*a. pay a fixed rate of interest applied to a principal that rises with inflation

b. pay an increasing rate of interest that is applied to a fixed amount of principal

c. are insured by the Federal Deposit Insurance Corporation

d. are insured by the U.S. Comptroller of the Currency

Higher expected inflation should

a. decrease the nominal interest rate and decrease the real interest rate

b. decrease the nominal interest rate and increase the real interest rate

c. increase the nominal interest rate and decrease the real interest rate

*d. increase the nominal interest rate, but its effect on the real interest rate is unclear

If market interest rates rise:

*a. long-term bondholders will experience capital losses as they sell bonds

b. long-term bondholders will experience capital gains as they sell bonds

c. Treasury bill holders lose; bondholders do not

d. then none of the above occur

Net suppliers of loanable funds in the U.S. tend to be:

a. business firms and households

*b. foreigners and households

c. government and business firms

d. business firms and foreigners

The interest rate that large banks often use as a benchmark rate to set their various loan rates is

known as:

*a. the prime loan rate

b. the standard loan rate

c. the bank rate

d. the discount rate

If government substantially relaxes depreciation allowances for firms, we would expect:

a. the supply of loanable funds to increase and real interest rates to fall

b. the supply of loanable funds to decrease and real interest rates to rise

*c. the demand for loanable funds to increase and real interest rates to rise

d. the demand for loanable funds to decrease and real interest rates to rise

When the interest rate is below the equilibrium interest rate, there is an excess ______ for (of)

bonds and the interest rate will_______.

a. supply; fall

*b. supply; rise

c. demand; rise

d. demand; fall

In a recession, the demand for bonds tends to shift to the ______, and the supply of bonds issued

by business shifts to the _____ .

a. right; right

b. right; left

*c. left; left

d. left; right

In the money market, when the interest rate is below the equilibrium interest rate, there is an

excess_____for (of) money. People will try to sell bonds, and the interest rate will_______.

*a. demand; rise

b. demand; fall

c. supply; fall

d. supply; rise

If the Fed wants to permanently lower interest rates, then it should raise the rate of money

growth if

a. there is a fast adjustment of expected inflation.

b. there is slow adjustment of expected inflation.

c. the liquidity effect is smaller than he expected inflation effect.

*d. the liquidity effect is larger than the other effects.

When the growth rate of the money supply is increased, interest rates will rise immediately if the

liquidity effect is _____ the inflationary expectations effect.

a. equal to

b. larger than

*c. smaller than

d. all of the above

When the interest rate on a bond is____the equilibrium interest rate, in the bond market there is

excess______and the price of bonds will_____.

a. below; demand; rise

b. above; demand; fall

*c. below; supply; fall

d. above; supply; rise

What is the risk premium on a 10-year corporate bond that pays 9 percent interest while a 10-

year U.S. Treasury bond yields 7 percent?

a. 1 percent

*b. 2 percent

c. 8 percent

d. 16 percent

In the Keynesian liquidity preference framework; when income is_____during a business cycle

contraction, interest rates will_______.

a. rising, rise

b. rising, fall

c. falling, rise

*d. falling, fall

According to J. M. Keynes, the demand for money is underlaid by a

a. transactionary demand

b. precautionary demand

c. speculative demand


The most plausible explanation for why interest rates would rise is

a. the economy entering into a recession.

b. the demand for money falling in the loanable funds market.

c. rapid declines in the level of national income.

*d. The continual increase in expected inflation.

The “term structure of interest rates” involves the relationship between:

a. marketability and yield

b. tax treatment and yield

c. risk and yield

*d. time to maturity and yield

According to the “risk structure of interest rates,” _______ play a role in explaining interest

rates:

a. default risk

b. liquidity

c. income tax considerations


In drawing a yield curve, which of the following is not held constant?

a. default risk

b. tax treatment

*c. length of time to maturity

d. marketability

A yield curve will slope downward when

*a. short-term interest rates are above long-term rates

b. long-term interest rates are above short-term rates

c. short-term interest rates equal long-term rates

d. inflation rates are high

Concerning Treasury securities, which of the following patterns of the “term structure of interest

rates” tend to occur most frequently?

*a. ascending yield curve

b. descending yield curve

c. flat yield curve

d. humped yield curve

According to the expectations theory, expected inflation should make the yield curve

a. flatter

*b. steeper

c. horizontal

d. downward sloping

In the liquidity premium theory of term structure, a horizontal yield curve is interpreted to mean

that the market expects:

a. interest rates to rise

*b. interest rates to fall

c. interest rates to remain constant

d. inflation is to rise

If the Federal Reserve adopts an expansionary monetary policy, the yield curve tends to

a. shift upward

*b. shift downward

c. become vertical

d. become horizontal

Risk premiums on securities are caused by

a. default risk

b. liquidity considerations

c. tax considerations


If interest rates are expected to rise sharply, wise investors will prefer to hold:

*a. Treasury bills

b. Treasury bonds

c. Treasury notes

Which of the following long-term bonds tend to have the highest interest rate?

a. corporate Baa Bonds

b. U. S. Treasury bonds

*c. corporate Caa bonds

d. municipal bonds

When the default risk on corporate bonds increase, other things equal, the demand curve for

corporate bonds shifts to the ___ and the demand curve for Treasury bonds shifts to the ____.

a. right: right

b. right; left

*c. left; right

d. left; left

When the corporate bond market becomes less liquid, other things equal, the demand curve for

corporate bonds shifts to the ___ and the demand curve for Treasury bonds shift to the ____.

a. right; right

b. right; left

c. left; left

*d. left; right

The risk premium on corporate bonds tends to fall when

*a. corporate bonds are rated AAA rather than AA.

b. a flurry of major corporate bankruptcies occurs.

c. the Treasury bond market becomes more liquid.

d. both (b) and (c) of the above occur.

The interest rate on municipal bonds rises relative to the interest rate on corporate bonds when

*a. there is a major default in the municipal bond market.

b. income tax rates are raised.

c. Treasury securities become more widely traded.

d. corporate bonds becomes riskier.

If the expected path of 1-year interest rates over the next 3 years is 4, 1 and 1%, then the

expectations theory predicts that today’s interest rate on the 3-year bond is

a. 1%.

*b. 2%.

c. 3%.

d. 4%.

If the yield curve slopes upward mildly for short maturities and then slopes sharply upward for

longer maturities, the liquidity premium theory (assuming a mild preference for short-term

bonds) indicates that the market is expecting

a. a rise in short-term interest rates in the near future and a decline further out in the future.

*b. constant short-term interest rates in the near future and a rise further out in the future.

c. a decline in short-term interest rates in the near future and a rise further out in the future.

d. a decline in short-term interest rates in the near future which levels off further out in the

future.

Municipal bonds issued by state and local governments

a. tend to be more liquid than U.S. Treasury bonds

b. are generally considered to be default free

*c. interest payments are exempt from federal income taxes

d. tend to rise in value during periods of inflation

The demand for bonds will increase (demand curve shifts rightward) for all of the following

reasons except:

a. an increase in the liquidity of bonds relative to other assets

b. a decrease in information costs of bonds relative to other assets

c. a decrease in the riskiness of bonds relative to other assets

*d. higher expected inflation that decreases the real return on bonds relative to other assets

The supply bonds will increase (the supply curve shifts rightward) for all of the following

reasons except:

*a. falling profitability leads firms to want to borrow less to finance capital investment

b. a decrease in business taxes that results in rising after-tax profits

c. an increase in inflation that reduces the purchasing power of funds used to repay a bond

d. a rise in government borrowing that is financed by the issuing of Treasury bonds

Regarding the financial market, which of the following statements is true?

*a. the demand for bonds is equivalent to the supply of loanable funds

b. the demand for bonds is equivalent to the demand for loanable funds

c. the supply of bonds is equivalent to the supply of loanable funds

d. the supply of bonds is equivalent to the real interest rate

What is the risk premium on a 10-year corporate bond that pays 8 percent interest if a 10-year

U.S. Treasury bond is yielding 4 percent?

a. 2 percent

*b. 4 percent

c. 8 percent

d. 16 percent

The Foreign Exchange Market/International Financial System: Chapters 17-18

The ______ says that if two countries produce an identical good, profit opportunities should

ensure that its price is the same, regardless of which country produces the good?

a. asset market theory

b. preferred habitat theory

*c. law of one price

d. segmented market theory

If the dollar moves from 100 yen to 110 yen, then:

a. the dollar has depreciated

b. the yen has appreciated

c. both of the above have occurred

*d. none of the above have occurred

According to the asset markets approach to exchange rate determination, short-run movements in

exchange rates are best explained by

*a. expected rates of return on domestic and foreign financial assets

b. domestic and foreign regulations imposed on trading in the global stock market

c. relative rates of inflation in international commodity markets

d. relative productivity levels among domestic and foreign corporations

A nation's currency will appreciate in the long run if the nation exhibits which of the following

characteristics?

a. high inflation and high productivity growth

*b. high productivity growth and increased tariffs on imports

c. high productivity growth and reduced tariffs on imports


The law of one price would least likely hold for which of the following goods?

a. silver and gold

b. corn or wheat

c. crude oil

*d. haircuts

The level of the exchange rate is of importance to a nation because its level determines in part:

a. the price of domestically produced goods to be sold abroad

b. the price of foreign-produced goods to be sold domestically

c. the price that domestic citizens pay for foreign assets


One reason the purchasing power parity theory of exchange rates seems to be unreliable in

explaining short-term exchange rate movements is that:

a. price elasticities of demand for foreign products are low

b. export and import activities have been rising over time

c. interest rates and inflation rates often move together

*d. export and import activity is quite small relative to international capital flows

In the long run, the U.S. dollar appreciates if:

a. U.S. prices rise and U.S. productivity falls

*b. U.S. prices fall and the U.S. increases tariffs on imports

c. U.S. prices fall and the U.S. removes all import quotas

d. U.S. interest rates rise and the U.S. removes all tariffs on imported goods

In the short-run model of exchange rate determination, if we consider the U.S.-European

exchange rate (euros per dollar), if the European Central Bank unexpectedly boosts interest rates,

then this will cause the

a. euro to depreciate

b. dollar to appreciate

*c. euro to appreciate

d. all of the above

The U.S. dollar tends to appreciate against the Italian lira when:

a. real Italian interest rates rise

b. nominal U.S. interest rates rise

*c. real U.S. interest rates rise

d. real U.S. interest rates fall

For an American who invests in British securities, her expected rate of return consists of

a. only the interest rate on the British securities

b. only the gains/losses from converting dollars into pounds, and vice versa, to finance the

investment

*c. the interest rate on the British securities plus/minus gains/losses from converting dollars

into pounds, and vice versa

d. the interest rate on the British securities minus the interest rate on equivalent U.S. securities

A major reduction in the U.S. federal budget deficit, other things being equal, would most likely:

a. reduce the capital inflow and increase the U.S. trade deficit

b. reduce the trade deficit and attract increased foreign capital

c. raise interest rates and reduce the U.S. trade deficit (imports exceed exports)

*d. reduce the capital inflow and reduce the U.S. trade deficit (imports exceed exports)

The underlying axiom of the purchasing power parity theory is:

a. the principle of comparative advantage

b. the interest parity condition

c. the principle of opportunity cost

*d. the law of one price

Suppose that purchasing power parity holds, and that the current exchange rate between the

dollar and the yen is 110 yen/$. If inflation in the U.S. runs at 4 percent and inflation in Japan

runs at 2 percent, next year we would expect the exchange rate to be roughly

a. 112 yen/$

*b. 108 yen/$

c. 116 yen/$

d. 102 yen/$

The largest volume of activity in foreign exchange markets is related to:

*a. international flows of financial capital

b. exports and imports

c. government transactions abroad

d. firms building plants abroad

When the Swiss franc appreciates (holding everything else constant), then

*a. Swiss watches sold in the United States become more expensive.

b. American computers sold in Switzerland become more expensive.

c. Swiss army knives sold in the United States become cheaper.

d. American toothpaste sold in America becomes cheaper.

e. Both (a) and (d) of the above are true.

The theory of purchasing-power parity indicates that if the price level in the United States rises

by 5% while the price level in Mexico rises by 6%, then

*a. the dollar appreciates by 1% relative to the peso.

b. the dollar depreciates by 1% relative to the peso.

c. the exchange rate between the dollar and the peso remains unchanged.

d. the dollar appreciates by 5% relative to the peso.

e. the dollar depreciates by 5% relative to the peso.

If, in retaliation for “unfair” trade practices, Congress imposes a quota on Japanese cars, but at

the same time Japanese demand for American goods increases, then in the long run

a. the Japanese yen should appreciate relative to the dollar.

*b. the Japanese yen should depreciate relative to the dollar.

c. the dollar should depreciate relative to the yen.

d. it is not clear whether the dollar should appreciate or depreciate relative to the yen.

If the interest rate on dollar-denominated assets is 10% and it is 8% on euro-denominated assets,

then if the euro is expected to appreciate at a 5% rate,

*a. dollar-denominated assets have a lower expected return than euro-denominated assets.

b. the expected return on dollar-denominated assets in euros is 2%.

c. the expected return on euro-denominated assets in dollars is 3%.

d. none of the above will occur.

All other things equal, an increase in inflation in Mexico shifts the supply of dollars _______, the

demand for dollars to the _________, and causes a(n) _______ in the peso relative to the dollar.

a. right; left; appreciation

*b. left; right; depreciation

c. right; left; depreciation

d. left; right; appreciation

When U.S. real interest rates rise, the

*a. expected returns for U.S. investments increases, and the dollar appreciates.

b. expected return for U.S. investments decreases, and the dollar appreciates.

c. expected return U.S. investments increases, and the dollar depreciates

d. expected return U.S. investments decreases, and the dollar depreciates.

If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by

seven percent over the coming year, then the expected return on the dollar deposit in terms of

foreign currency is

a. 3%

*b. 17%

c. -3%

d. 10%

A lower domestic money supply causes the domestic currency to

a. depreciate more in the short run than in the long run.

b. depreciate more in the long run than in the short run.

*c. appreciate more in the short run than in the long run.

d. appreciate more in the long run than in the short run.

The gold standard was essentially a

*a. fixed exchange rate system

b. floating exchange rate system

c. managed floating exchange rate system

d. all of the above

If the Federal Reserve wants the dollar to appreciate, it will likely adopt a (an)

a. expansionary monetary policy

*b. contractionary monetary policy

c. expansionary fiscal policy

d. contractionary fiscal policy

To stop a speculative attack against a weak currency, the government of this currency might

a. revalue the currency

*b. devalue the currency

c. increase the domestic money supply

d. reduce taxes on households and business

Which exchange rate system involves a strategy of “leaning against the wind?”

a. fixed exchange rates

b. floating exchange rates

*c. managed floating exchange rates

d. pegged exchange rates

If Argentina commits to dollarization, then

*a. it eliminates the possibility of a speculative attack on its domestic currency

b. its monetary policy is free to combat domestic inflation and unemployment

c. it pursues a policy of freely floating exchange rates

d. its currency becomes tied to the dollar

If Hong Kong adopts a currency board, it

a. replaces its currency with the U.S. dollar, for its money

b. increases the possibility of a speculative attack against its currency

*c. gives up its option of pursuing an independent monetary policy

d. increases the likelihood that inflation will intensify in its economy

Currency crises are typically caused by all of the following except

*a. budget surpluses financed by higher taxes

b. weak financial systems

c. lack of confidence in the domestic government

d. pegging a currency at an unrealistic exchange rate

A speculative attack against a weak currency might be lessened or eliminated by all of the

following except

a. the adoption of capital controls

b. the taxation of foreign exchange transactions

*c. the renewal of high inflation

d. the switch from budget deficits to budget surpluses

When nations of Europe replaced their currencies with the euro, all of the following were

predicted to occur for participating nations except

a. more uniform prices

b. lower transaction costs

*c. more uncertainty for investors

d. enhanced competition

According to the theory of optimal currency areas, the euro would have the best chance of

success if the participating countries

a. have dissimilar business cycles

b. have dissimilar economic structures

c. high legal and cultural barriers preventing labor mobility across national borders

*d. a flexible system of prices and wages

Market-determined exchange rates are best represented by a system of

a. fixed exchange rates

b. pegged exchange rates

c. managed floating exchange rates

*d. floating exchange rates

Assume a globally competitive market for securities in which there is no exchange-rate risk.

According to the interest parity conditions, if the rate of interest in the United States equals 4

percent, it will

a. equal 2 percent in Europe

b. equal 3 percent in Europe

*c. equal 4 percent in Europe

d. equal 5 percent in Europe

The Banking Industry: Chapters 10-12

The era of state-chartered banks of the 1830s-1860s was characterized by all of the following

except

a. an era of free banking existed in which virtually anyone could open a bank

b. many banks had insufficient capital and made speculative loans

c. a high rate of failures swept through the banking system

*d. banks were not allowed to issue their own notes as currency

Which method did the FDIC use to resolve the failure of Washington Mutual Bank (WaMu) in

2008?

a. deposit payoff approach

*b. purchase and assumption approach

d. open bank assistance

d. bank takeover approach

Because an increase in FDIC insurance premiums reduces the net revenue of a bank, it will

attempt to pass this "tax" onto the depositor via a lower interest rate on deposits and higher

service charges on customer accounts. Given a bank's demand curve for deposits, we would

expect household depositors to bear all of the burden of increasing insurance premiums if

a. the supply curve of deposits is relatively elastic

b. the supply curve of deposits is relatively inelastic

c. the supply curve of deposits is perfectly elastic

*d. the supply curve of deposits is perfectly inelastic

The National Banking Act of 1863 accomplished all of the following except

a. it authorized the establishment of federally chartered banks

b. it resulted in the creation of the U.S. Comptroller of the Currency

*c. it succeeded in driving the state-chartered banks out of business

d. it imposed a 10 percent tax on the currencies issued by state-chartered banks

Which of the following is not a "government sponsored enterprise?"

a. Federal National Mortgage Association

b. Student Loan Marketing Association

*c. National Credit Union Administration

d. Federal Home Loan Mortgage Corporation

Economic forces driving bank mergers include all of the following except

*a. diseconomies of scale

b. economies of scope

c. risk diversification for bank management

d. personal incentives of bank management

Concerning a bank, suppose its joint costs of producing two complementary outputs are less than

the combined costs of producing the two outputs separately. This situation is known as

a. economies of scale

*b. economies of scope

d. diseconomies of scale

d. diseconomies of scope

The Glasss-Steagall Act (Banking Act of 1933)

a. authorized the federal government to charter national banks

b. gave rise to the dual system of banking in the United States

c. prohibited banks from reorganizing their corporate structures as holding companies

*d. separated commercial banking from investment banking

If the banking industry is characterized by economies of scale, the average cost of producing

financial services

a. increases as the quantity of services provided increases

*b. decreases as the quantity of services provided increases

c. remains constant as the quantity of services provided increases

d. is completely unrelated to the quantity of services provided

If the banking industry is characterized by diseconomies of scale, the average cost of producing

financial services

*a. increases as the quantity of services provided increases

b. decreases as the quantity of services provided increases

c. remains constant as the quantity of services provided increases

d. is completely unrelated to the quantity of services provided

For a bank, a situation where the joint costs of providing two complementary services are less

than the combined costs of providing the two services separately is known as

a. economies of scale

b. diseconomies of scale

*c. economies of scope

d. diseconomies of scope

The deficiencies of the National Banking System of the 1860s-early 1900s included all of the

following except

a. the notes issued by national banks resulted in a rigid and inelastic currency

b. rigid reserve requirements hindered the operation of banks

c. an inefficient check collection system prevailed throughout the economy

*d the Comptroller of the currency became the lender of last resort to troubled banks

Which of the following is a fundamental commercial bank accounting identity?

a. assets plus capital equals liabilities

b. assets plus liabilities equals capital

*c. assets minus liabilities equals capital


Bank mergers can yield welfare gains in all of the following situations except

a. when the newly merged bank adds to preexisting industry capacity and fosters additional

competition

b. when the newly merged bank is able to enter new markets that neither bank could have

entered prior to the merger

c. when the newly merged bank yields operating efficiencies that were unavailable to either

bank prior to the merger

*d. the newly merged bank has greater ability to reduce market service and charge higher fees to

depositors

Which of the following is a source of commercial bank funds?

a. deposits

b. capital

c. nondeposit borrowing


Which of the following is a use for commercial bank funds?

a. loans

b. securities

c. reserves


Credit unions are characterized by all of the following except:

a. they offer checkable deposits in the form of share draft accounts

b. they are non-profit financial cooperatives who are owned by their members

*c. their deposits are insured by the Federal Deposit Insurance Corporation

d. they have generally maintained capital levels higher than the average commercial bank

On the commercial bank balance sheet, which of the following is an asset?

a. capital accounts

*b. deposits with Federal Reserve

c. transactions deposits

d. all of the above

A basic characteristic of credit unions is that

a. they are exempt from paying property taxes, sales taxes, and payroll taxes

b. their deposits are insured by the Federal Deposit Insurance Corporation

*c. they hold about 7 percent of American household assets

d. they raise funds by selling stock to investors throughout the economy

If a bank has total assets of $100 million and capital accounts of $8 million, then:

*a. its total liabilities are $92 million

b. its total liabilities are $108 million

c. it has an equity multiplier of 10

d. none of the above are true

Which of the following pay a higher interest rate than some checking accounts but have only

limited check writing privileges?

a. NOW accounts

b. ATS accounts

*c. MMD accounts

d. Negotiable CDS

Assets Liabilities

Reserves 40 Deposits 180

Government securities 60 Borrowing in the Federal 60

Loans 200 funds market

Net worth 60

ABC Bank’s balance sheet is illustrated in the table above (figures are in millions of dollars).

The capital asset ratio for this bank equals:

a. 10 percent

b. 15 percent

*c. 20 percent

d. 25 percent

If a bank is subject to a 10 percent reserve requirement, has checkable deposits of $100 million,

and has excess reserves of $2 million, then:

a. its required reserves are $12 million

*b. its total reserves are $12 million

c. its legal reserves are $14 million

d. none of the above are true

The securities purchased by a bank for investment purposes are known as

a. primary reserves

*b. secondary reserves

c. equity capital

d. discounts

The most liquid asset for Wells Fargo Bank is:

a. commercial loans

b. marketable securities

c. cash items in the process of collection

*d. reserves

Typically, the largest portion of bank profits stems from:

*a. loans

b. securities

c. fees for services

d. derivatives

When a bank writes off a loan as bad, its:

a. total assets and total liabilities decrease by that amount

b. total liabilities and capital decrease by that amount

*c. total assets and capital decrease by that amount

d. total assets, total liabilities and capital decrease by that amount

Which of the following bank assets is the most liquid?

a. Consumer loans.

b. State and local government securities.

c. Physical capital.

*d. U.S. government securities.

Tools of bank liability management include:

a. buying federal funds

b. issuing negotiable CDS

c. issuing repurchase agreements


The main type of loans made by credit unions is

a. loans to the federal government

b. business loans

*c. consumer loans

d. agricultural loans

Total reserves

a. equal the deposits banks hold at the Fed.

b. include bank holdings of U.S. government securities.

*c. can be divided up into required reserves plus excess reserves.

d. equal both (a) and (c) of the above.

When a $1000 check written on Citibank is deposited in an account at the Bank of America, then

a. the liabilities of Citibank increase by $1000.

b. the reserves of Citibank increase by $1000.

c. the liabilities of Bank of America fall by $1000.

*d. the reserves of Bank of America increase by $1000.

When you deposit a $100 check in your bank account at the First National Bank of Chicago and

you withdraw $50 in cash, then

a. the liabilities of First National Bank rise by $100.

b. the reserves of First National Bank rise by $100.

c. the assets of the First National Bank rise by $100.

*d. the liabilities of the First National Bank rise by $50.

Commercial banks obtain funds by:

a. issuing demand deposits

b. borrowing from other banks

c. issuing ownership claims (equity)


Which of the following may be considered a form of commercial bank lending?

*a. federal funds sold

b. discounts and advances

c. issuance of negotiable CDS

d. issuance of MMDs

A bank’s primary reserves include:

a. vault cash

b. deposits at the Federal Reserve

c. Treasury bills, notes, and bonds

*d. a and b

For commercial banks, the ratio of loans to assets _______ during economic expansions, while

the ratio of bank security holdings to assets_______ during periods of recession.

a. increases; decreases

b. decreases; increases

c. decreases; decreases

*d. increases; increases

While reading your bank’s annual report, you notice that the bank was forced to write off

several million dollars of bad loans it made to finance Arnold Schwarzenegger’s biggest bomb,

The Last Action Hero. On the asset side of the bank’s balance sheet, you would see a decline

in ________, and on the liability side of the balance sheet, you would notice a corresponding

decrease in _________.

a. reserves, capital accounts

b. capital accounts, deposits

*c. loans, capital accounts

d. loans, deposits

e. none of the above occurs.

The elimination of Regulation Q in the 1980s caused banks to

a. be able to invest in corporate stock

b. engage in speculation in the foreign exchange market

c. form holding companies as a way to participate in interstate banking

*d. have to pay a competitive interest rate for their savings deposits

If a bank has $1 million of checkable deposits and a required reserve ratio of 5%, and it holds

$100,000 in total reserves, then it must rearrange its balance sheet if there is a deposit outflow of

*a. $60,000.

b. $20,000.

c. $30,000.

d. $40,000.

Preparing for a celebration following a nail-biting victory at your school’s latest football game,

you proceed to the ATM to withdraw $40 from your checking account. This action:

a. reduces your bank’s excess reserves by $40

b. reduces your bank’s capital accounts by $40

*c. reduces your bank’s liabilities by $40

d. reduces your bank’s required reserves by $40

The U.S. Treasury Secretary who attempted to establish a nationwide banking system in 1791

was

a. Benjamin Franklin

b. Thomas Jefferson

*c. Alexander Hamilton

d. Abraham Lincoln

A purpose of the Federal Reserve paying interest on the deposits of banks is to

a. place a ceiling on the federal funds rate

*b. place a floor on the federal funds rate

c. provide additional revenue for banks to use in purchases of corporate stock

d. provide additional revenue for banks to use in foreign currency speculation

With the passage of the National Banking Act of 1863,

a. state-chartered banks greatly declined in importance

*b. state-chartered banks proliferated as never before

c. banks were allowed to establish branches that crossed state lines

d. all banks were subject to the regulation of the Federal Reserve

The National Banking Act of 1863 accomplished the following:

a. allowed the federal government to charter banks

b. ended the free banking era

c. allowed for issuance of a uniform currency


During the 1860s, Congress got state-chartered banks out of the business of issuing their bank

notes as currency by putting a ______ tax on their issuance.

a. 5 percent

*b. 10 percent

c. 15 percent

d. 20 percent

Compared to small banks, large banks

a. may be able to take advantage of economies of scale

b. may be able to take advantage of economies of scope

c. tend to be better diversified so they have a lower risk of failure


National banks are chartered by:

a. the Federal Deposit Insurance Corporation

b. the Federal Reserve

c. the Securities and Exchange Commission

*d. the Comptroller of the Currency

The U.S. historic emphasis of small, “unitary” banks has often been associated with

*a. a high rate of bank failures

b. a low rate of banks failures

c. banks that are highly capitalized and thus insulated from runs by nervous depositors

d. banks that are diversified and not tied to a particular local economy

If a usury law applied to mortgage loans becomes “binding,”

a. a surplus of funds tends to flow to mortgage customers

*b. a shortage of funds frustrates some mortgage customers

c. banks lower the points (fees) that they apply to mortgage loans

d. banks make higher profits by placing funds into mortgage loans

The Banking Act of 1933

a. was primarily concerned about stemming the tide of bank failures

b. eliminated interest payments on demand deposits

c. imposed interest-rate ceilings on savings/time deposits


Regulation Q

a. imposed barriers on the interstate branching of commercial banks

b. resulted in the Federal Reserve paying interest on deposit accounts of banks

c. separated investment banking and commercial banking

*d established ceilings on interest rates that banks could pay on savings/time deposits

Depositors sometimes make “runs” on banks because they

a. face stiff competition from other financial intermediaries

b. are overregulated by the government, thus lessening their ability to make loans

c. specialize in making mortgage loans to high income households

*d. offer deposits that are highly liquid, permitting panic to easily occur

Which act/law phased out interest-rate ceilings applied to time/savings deposits?

a. the Humphry-Hawkins Act of 1948

b. the Glass-Steagall Act of 1956

*c. the Monetary Control Act of 1982

d. the Riegel-Neal Act of 1994

A bank will want to hold less excess reserves (everything else equal) when

*a. it expects to have deposit inflows in the near future.

b. brokerage commissions on selling bonds rise.

c. both (a) and (b) of the above occur.

d. neither (a) nor (b) of the above occurs.

Which of the following occurred during the 1990s?

a. the FDIC was created, providing a system of national deposit insurance

b. laws were passed that eliminated state-chartered banks

*c. interstate banking was allowed, resulting in large nationwide banks

d. the Comptroller of the Currency was given the authority to regulate national banks

Concerning an adjustable rate mortgage (ARM)

*a. the interest rate on your mortgage will decline if other interest rates decline

b. the interest rate is inversely related to the consumer price index

c. you always pay fixed principal/interest installments over the duration of your mortgage

d. if interest rates increase, your monthly mortgage will not go up

When a bank faces a reserves deficiency because of a deposit outflow, it will try to do which of

the following first?

a. call in loans

b. borrow from the Fed

c. sell securities

*d. borrow from other banks

Which statement correctly characterizes the trends regarding the number of unit banks and the

number of bank branches in the past 40 years?

a. the number of unit banks and the number of branches have fallen

*b. the number of unit banks has fallen; number of branches has risen

c. the number of unit banks has risen; number of branches has risen


One large company that holds many different banks as subsidiaries is called a (an)

a. investment bank

b. euro bank

*c. bank holding company

d. deposit bank

Which of the following agencies is primarily responsible for supervising bank holding

companies?

a. U.S. Treasury

*b. Federal Reserve System

c. Securities and Exchange Commission

d. Federal Deposit Insurance Commission

The recent wave of large bank mergers in the United States can be explained by which of the

following economic forces?

a. economies of scale, where average cost falls as production volume increases

b. economies of scope, where the joint costs of producing two complementary outputs are less

than the combined costs of producing the two outputs separately

c. the potential for risk diversification

d. the tendency for managerial compensation to increase with firm size

*e. all of the above

With the advent of deposit insurance, federal regulation of banking is needed because

*a. deposit insurance decreases the motivation for depositors to scrutinize banks

b. bank managers try to maximize profit by purchasing U.S. government securities

c. federally chartered banks have very modest failure rates

d. federally chartered banks are prevented from crossing state lines

Restrictions on branch banking ultimately led to:

a. creation of bank holding companies

b. creation of nonbank banks

c. stimulus to the development of electronic banking


From a public policy viewpoint, the most legitimate reasons to espouse a laissez faire policy

toward bank mergers is that they may be motivated by:

a. desire for monopoly power

*b. economies of scale

c. higher executive compensation


From a public policy viewpoint, the most legitimate reasons to espouse a laissez faire policy

toward bank mergers is that they may be motivated by:

a. desire for monopoly power

*b. economies of scale

c. higher executive compensation


Economists believe that the existence of FDIC deposit insurance does which of the following?

a. reduces the propensity for bank panics

b. increases the moral hazard problem in banking

*c. does both of the above


Regarding FDIC deposit insurance, which of the following is true?

a. the limits of coverage have increased more slowly than the U.S. price level

*b. the maximum coverage per depositor per bank is now $250,000

c. the percentage of bank deposits insured has declined over the past 30 years.

d. all of the above are true

A feature of FDIC insurance that would work to promote efficiency is:

a. zero deposit insurance premiums

b. insuring 100 percent of deposits

*c. risk-based deposit insurance premiums


The moral hazard problem increases:

a. the greater the amount of equity at stake

*b. the more fully a certain event is insured against

c. the more closely the regulator’s information resembles the regulated’s information

d. all of the above reduce the moral hazard problem

Economies of scale:

a. are experienced when it is cheaper to produce a group of services together rather than

separately

*b. are experienced when the average cost curve for the bank is negatively sloped

c. have not been proven to exist in banking services

d. occur due to the confusion and duplication associated with a large bureaucracy

A bank failure is more likely to occur when

a. a bank holds more U.S. government securities

*b. a bank suffers large deposit outflows.

c. a bank hold more excess reserves.

d. a bank has more bank capital.

When interest rates are expected to fall in the future, a banker is likely to

a. make short-term rather than long-term loans.

b. buy short-term rather than long-term bonds.

*c. buy long- term rather than short-term bonds.

d. do both (a) and (b) of the above.

If a bank manager determines that his bank’s gap between rate-sensitive assets and rate-sensitive

liabilities is a positive $20 million, then a five percentage point increase in interest rates will

cause bank profits to

*a. increase by $1 million.

b. decrease by $1 million.

c. increase by $10 million.

d. decrease by $10 million.

Items listed on the liability side of banks’ balance sheets include

*a. bank capital.

b. loans.

c. reserves.


e. only (a) and (b) of the above.

Collectively, reserves, cash items in process of collection, and deposits at other banks, are

referred to as ____________in a bank balance sheet.

a. secondary reserves

*b. cash items

c. liquid items

d. compensating balances

Which of the following is a bank regulatory agency?

a. Comptroller of the Currency

b. Federal Reserve System

c. Federal Deposit Insurance Corporation

*d. All of the above

When economists argue that banking regulations have been a mixed blessing, they are referring

to the fact that

a. bank regulations foster competition at the expense of the banking system safety.

*b. bank regulations foster banking system safety at the expense of competition.

c. branch banking, while desired by consumers, leads to less competition

d. bank regulations foster competition by limiting branching.

The U.S. banking system has been labeled a dual system because

a. banks offer both checking and savings accounts.

b. it actually includes both banks and thrift institutions.

*c. it is regulated by both federal and state governments.

d. it was established during the Civil War, thus making it necessary to create separate regulatory

bodies for the North and South.

The most important developments that have reduced banks’ cost advantages in the past thirty

years include;

a. the elimination of Regulation Q ceilings.

b. the competition from money market mutual funds.

c. the competition from junk bonds.


*e. only (a) and (b) of the above.

Moral hazard is an important feature of insurance arrangements because the existence of

insurance

a. reduces the incentives for risk taking.

b. is a hindrance to efficient risk taking.

c. caused the private cost of the insured activity to increase.

d. does all of the above.

*e. does none of the above.

Deposit insurance

a. attracts risk-prone entrepreneurs to the banking industry.

b. encourages bank managers to take on greater risks than they otherwise would.

c. increases the incentives of depositors to monitor the riskiness of their banks’ asset portfolios.


*e. does only (a) and (b) of the above.

Regular bank examinations help to reduce the ____ problem, but also help to indirectly reduce

the _____problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs

will be discouraged from entering the banking industry.

a. adverse selection; adverse selection

b. adverse selection; moral hazard

*c. moral hazard; adverse selection

d. moral hazard; moral hazard

If the FDIC decides that a bank is too big to fail, it will use the

a. payoff method, effectively covering all deposits-even those that exceed the $250,000 ceiling.

b. payoff method, covering only those deposits that do not exceed the $250,000 ceiling.

*c. purchase and assumption method, effectively covering all deposits-even those that exceed

the $250,000 ceiling.

d. purchase and assumption method, covering only those deposits that do not exceed the

$250,000 ceiling.

The “too-big-to-fail” policy

a. puts small banks at a competitive disadvantage relative to large banks in attracting large

depositors.

b. treats large depositors of small banks inequitably when compared to depositors of large

banks.

c. ameliorates moral hazard problems.


*e. does only (a) and (b) of the above.

Eliminating deposit insurance has the disadvantage of

a. reducing the stability of the banking system due to an increase in the likelihood of bank runs.

b. not being a politically feasible strategy.

c. encouraging banks to engage in excessive risk taking.


*e. only (a) and (b) of the above.

When a bank is well-capitalized, the bank has_____to lose if it fails and is thus_____likely to

pursue risky activities.

a. more: more

*b. more; less

c. less; more

d. less; less

One problem with the too-big-to-fail policy is that it_____the incentives for_____by big banks.

*a. increases; moral hazard

b. decreases: moral hazard

c. increases: adverse selection

d. decreases: adverse selection

Suppose that the FDIC increases the deposit insurance premiums of banks. Banks will have the

incentive to pass the higher insurance premiums to their household depositors in the form of a

lower interest rate on deposits or higher service charges on their accounts. This will especially

occur when the household supply curve of deposits is

a. highly elastic with respect to interest-rate changes

b. somewhat elastic with respect to interest-rate changes

c. somewhat inelastic with respect to interest-rate changes

*d. highly inelastic with respect to interest-rate changes

Savers are willing to accept a lower interest rate on checkable deposits than on time deposits

(CDs) because

*a. savers are willing to exchange some interest for greater liquidity

b. time deposits are subject to interest rate ceilings set by the government

c. checkable deposits provide greater FDIC insurance coverage than time deposits

d. time deposits are not subject to a specified maturity date

Because bank deposits are covered by FDIC insurance, profit-maximizing banks

a. have the incentive to minimize risky activities

b. have the incentive to maintain high levels of capital

*c. tend to be subject to the problem of moral hazard

d. ignore banking laws set by the Federal Reserve and other regulators

Having greater capital requirements for banks

a. results in a greater problem of moral hazard

*b. results in shareholders of a bank having more of their own funds at risk

c. encourages banks to pursue more risky lending activities

d. encourages banks to make more consumer loans and fewer business loans

Which U.S. Treasury Secretary attempted to establish a nationwide banking system in 1791?

a. George Washington

b. Tom Dooley

c. John Adams

*d. Alexander Hamilton

With the advent of FDIC deposit insurance, federal regulation of banking has been viewed as

necessary because

*a. deposit insurance lessens the incentive for depositors to monitor banking activities

b. deposit insurance is financed by tax assessments on banks

c. banks have generally ignored the regulatory policies of the FDIC

d. bank managers apply for deposit insurance only during periods of economic downturn

Central Banks and the Federal Reserve System: Chapter 13

Loans made by the Federal Reserve to depository institutions are in the form of:

*a. reserves

b. cash

c. float

d. capital accounts

Technically, the Federal Reserve System is owned by:

a. the U.S. Treasury

b. the Department of Commerce

c. the World Bank

*d. the commercial banks that are Federal Reserve members

The predominant source of the net income of the Federal Reserve derives from:

a. priced services it makes available to depository institutions

b. loans to depository institutions

*c. its portfolio of U.S. government securities

d. profits earned in the foreign exchange market

Members of the Board of Governors of the Federal Reserve System obtain their positions

through:

a. appointment by the directors of the Federal Reserve banks

b. appointment by the Chairman of the Board of Governors

*c. appointment by the U.S. President and approval by the Senate

d. appointment by the U.S. Senate and approval by the President

Voting members of the Federal Open Market Committee include the following:

a. the 7 members of the Board of Governors and the 12 Federal Reserve district bank presidents

b. the 12 members of the Board of Governors and the 7 Federal Reserve district bank presidents

*c. the 7 members of the Board of Governors and 5 of the 12 Federal Reserve district bank

presidents

d. none of the above accurately describe the voting members of the Federal Open Market

Committee

When the Federal Open Market Committee approves its directive, it is then presented to:

a. the Chairman of the Board of Governors

b. the Chairman of the Federal Open Market Committee

*c. the manager of the System Open Market Account

d. the president of the Federal Reserve Bank of New York

A major factor contributing to the political independence of the Federal Reserve is:

*a. the Fed is financially independent of congressional appropriations

b. members of the Board of governors are appointed by the president of the United States

c. members of the Board of Governors may serve only two terms

d. all of the above are contributing factors

The Federal Reserve System was created:

a. to conduct monetary policy for purposes of stabilizing the economy

b. primarily to hold large quantities of the ever expanding government debt

*c. to provide liquidity to the banking system in time of crisis

d. to supervise all national banks

The primary motivation behind the creation of the Federal Reserve System was the desire to

*a. lessen the occurrence of bank panics.

b. stabilize short-term interest rates.

c. eliminate state regulated banks.

d. finance World War I.

The regional Federal Reserve banks

a. establish the discount rate.

b. ration discount loans to banks.

c. clear checks.

*d. do all of the above.

While the regional Federal Reserve banks “establish” the discount rate, in truth, the discount rate

is determined by

a. Congress.

b. the president of the United States.

*c. the Board of Governors.

d. the Federal Reserve Advisory Council.

A majority of the Federal Open Market Committee is comprised of

a. the 12 Federal Reserve Bank presidents.

b. the five voting Federal Reserve bank presidents.

*c. the seven members of the Board of Governors.

d. none of the above.

The Fed’s purchase and sale of securities is determined by

a. the Board of Governors.

b. the Federal Reserve banks from each district.

*c. the Federal Open Market Committee.

d. the Federal Reserve Advisory Council.

Power within the Federal Reserve is essentially headquartered in

a. New York.

*b. Washington, D.C.

c. Boston.

d. San Francisco.

While the Fed enjoys a relatively high degree of independence for a government agency, it feels

political pressure from the president and Congress because

a. Fed members desire reappointment every 3 years.

b. the Fed must go to Congress each year for operating revenues.

*c. Congress could limit Fed power through legislation.

d. of all of the above.

Supporters of keeping the Federal Reserve independent from both the executive and legislative

branches of government believe that a less independent Fed would

a. pursue overly expansionary monetary policies.

b. be more likely to pursue policies consistent with the political business cycle.

c. ignore short-run problems in favor of longer-run concerns.

*d. do only (a) and (b) of the above.

Any income that the Federal Reserve realizes that is in excess of the amount necessary to cover

its operating expenses

a. goes to the Fed’s Board of Governors as bonuses

*b. is returned to the U.S. Treasury

c. goes to member banks who are the stockholders of the Fed

d. is paid out as interest income to the depositors of the Fed

Multiple Deposit Creation and the Determinants of the Money Supply: Chapter 14

When Hometown Bank grants new loans in the amount of $10,000, this leads to an expansion of

the money supply by:

*a. $10,000

b. $10,000 times the initial excess reserves in the banking system

c. $10,000 times the reciprocal of the reserve requirement

d. zero

Assume you win a lottery and receive a check for $1 million. Assuming the reserve requirement

is 20 percent, then the impact of your depositing your check in your bank is to:

a. increase its reserves by $1 million

b. increases its required reserves by $200,000

c. increase its excess reserves by $800,000

*d. do all of the above

Given a 15 percent reserve requirement, Federal Reserve purchases of $1000 million of U.S.

Treasury securities from dealers results in:

*a. an increase in reserves of $1000 million

b. an initial increase in the money supply of $6666.7 million

c. an initial increase in excess reserves of $150 million

d. an eventual increase in the money supply of $1 million

If banks in a given week expand loans by $300 million and sell off $200 million in Treasury bills

to the public, the net effect on the money supply (M1) is to:

a. increase it by $300 million

b. increase it by $500 million

*c. increase it by $100 million

d. do none of the above

Banks create money when they:

a. reduce loans and sell securities

b. expand loans and sell securities

c. reduce loans and buy securities

*d. expand loans and buy securities

Which of the following directly increases the money supply?

a. the public withdraws cash from banks

b. the public deposits cash into banks

c. banks sell securities to dealers

*d. none of the above

The simple deposit expansion multiplier is equal to:

a. one minus the reserve requirement percentage

b. one time the reserve requirement percentage

*c. one divided by the reserve requirement percentage


The demand for the monetary base is composed of demand by:

a. banks and the U.S. Treasury

b. banks and the Federal Reserve

*c. banks and the public

d. the Treasury and the Federal Reserve

Suppose you deposit $100 of currency into your commercial bank savings account. This action

does what to the monetary base?

*a. leaves it unchanged

b. increases it $100

c. decreases it $100


The monetary base is comprised of

a. currency in circulation and Federal Reserve notes.

b. currency in circulation and government securities.

*c. currency in circulation and reserves.

d. reserves and government securities.

The sum of vault cash and bank deposits with the Fed minus required reserves is called

a. the monetary base.

b. the money supply.

*c. excess reserves.

d. total reserves.

When the Fed simultaneously purchases government bonds and extends discount loans to banks,

a. the money supply unambiguously falls.

*b. the money supply unambiguously rises.

c. the net effect on the money supply cannot be determined because the two Fed actions

counteract each other.

d. the Fed action has no effect on the money supply.

When the Fed simultaneously extends discount loans and sells government bonds,

a. the money supply unambiguously increases.

b. the money supply unambiguously falls.

*c. the net effect on the money supply cannot be determined without further information

because the two Fed actions counteract each other.

d. the Fed action has no effect on the money supply.

When the Fed wants to reduce reserves in the banking system, it will

a. purchase government bonds.

b. extend discount loans to banks.

c. print more currency.

*d. sell government bonds.

The simple deposit multiplier is equal to 4 when the required reserve ratio is equal to

*a. 0.25.

b. 0.40.

c. 0.05.

d. 0.15.

The First National Bank of Galata has $150 in excess reserves. If the required reserve ratio is

10%, how much extra can the First national Bank lend?

a. $1500

b. $750

*c. $150

d. $0

If excess reserves in the banking system amount to $75 and the required reserve ratio is 0.20,

checkable deposits could potentially expand by

a. $75.

b. $750.

c. $37.5

*d. $375.

If a member of the nonbank public purchases a government bond from the Federal Reserve with

currency, then

a. both the monetary base and reserves will fall.

b. both the monetary base and reserves will rise.

*c. the monetary base will fall, but reserves will remain unchanged.

d. the monetary base will fall, but currency in circulation will remain unchanged.

e. none of the above will occur.

Which of the following are found on the asset side of the Federal Reserve’s balance sheet?

a. Treasury securities

b. Treasury deposits

c. Discount loans

d. Both (a) and (b) of the above

*e. Only (a) and (c) of the above.

Which of the following are found on the liability side of the Federal Reserve’s balance sheet?

a. Cash items in the process of collection.

*b. Deferred availability cash items.

c. Gold.

d. All of the above.

e. Only (b) and (c) of the above.

When float increases,

a. currency in circulation falls.

b. the monetary base falls.

*c. the monetary base rises.

d. the monetary supply falls.

e. none of the above.

A reduction in which of the following leads to an increase in the monetary base?

*a. U.S. Treasury deposits at the Fed when it makes tax refunds

b. Float

c. Discount loans

d. All of the above

When comparing the simple model of multiple deposit creation with the money supply model

that accounts for depositors’ currency drains and bank’s precautionary balances of excess

reserves, the more complicated model indicates that

a. an increase in the monetary base that goes into loans is not multiplied to arrive at the change

in the money supply.

*b. the money multiplier is negatively related to the currency drain ratio.

c. the money multiplier is positively related to the precautionary excess reserves ratio.

d. the money multiplier is positively related to the required reserve ratio.

e. Only (a) and (b) of the above.

The money multiplier increases in value as the

a. currency ratio increases.

b. excess reserves ratio increases.

*c. required reserve ratio decreases.

d. required reserve ratio increases.

Depositors often withdraw more currency from their bank accounts during the Christmas season.

Therefore, one would predict that

*a. the money multiplier will tend to fall during Christmas season.

b. the money multiplier will tend to rise during Christmas season.

c. discount borrowing will tend to fall during Christmas season.

d. none of the above will occur.

The Fed lacks complete control over the monetary base because

a. it cannot set the required reserve ratio on checkable deposits.

b. it cannot perfectly predict the amount of discount borrowing by banks.

c. it cannot perfectly predict shifts from deposits to currency.

d. all of the above are true.

* e. only (b) and (c) are true.

The more complex money multiplier is smaller than the simple deposit multiplier when

a. the currency drain ratio is greater than zero.

b. the precautionary excess reserves ratio is greater than zero.

c. the required reserve ratio on checkable deposits is greater than zero.

*d. both (a) and (b) of the above occur.

The money multiplier is negatively related to

a. the excess reserves ratio.

b. the currency ratio.

c. the required reserve ratio on checkable deposits.

*d. all of the above.

e. only (a) and (b) of the above.

For a given level of the monetary base, a drop in the excess reserve ratio means

*a. an increase in the money supply.

b. an increase in the monetary base.

c. an increase in the nonborrowed base.


e. only (b) and (c) of the above.

If a bank reduce its holdings of excess reserves by making loans,

a. the monetary base will decrease.

*b. the money supply will increase.

c. both (a) and (b) of the above will occur.

d. neither (a) nor (b) of the above will occur.

The banking system’s precautionary excess reserves ratio is

a. negatively related to both the market interest rate and expected deposit outflows.

b. positively related to both the market interest rate and expected deposit outflows.

c. positively related to the market interest rate and negatively related to expected deposit

outflows.

*d. negatively related to the market interest rate and positively related to expected deposit

outflows.

If the required reserve ratio is one-fourth, excess reserves are not held, and checkable deposits

are $1200 billion, then the money multiplier is

a. 2.5.

b. 3.0.

c. 3.5.

*d. 4.0.

Monetary Policy: Chapters 15-16

An important routine function of a Federal Reserve Bank is to

a. supervise the liquidation of the assets of bankrupt commercial banks

b. help large banks develop financial relationships with smaller banks

c. advise banks as to the most profitable ways of buying securities

d. * provide facilities by which banks may clear and collect checks

Open market operations are of two types:

a. defensive and offensive.

b. dynamic and reactionary.

c. actionary and passive.

*d. dynamic and defensive.

If the Federal Reserve wants to inject reserves into the banking system, it will usually

*a. purchase government securities.

b. raise the discount rate.

c. sell government securities.

d. lower reserve requirements.

e. do either (a) or (b) of the above.

To temporarily increase reserves in the banking system, the Fed engages in

*a. a repurchase agreement.

b. a reverse repo.

c. a matched sale-purchase transaction.


When float increases, causing a temporary increase in reserves in the banking system, the Fed

can offset the effects of float by engaging in

a. a repurchase agreement.

b. an interest rate swap.

*c. a matched sale-purchase transaction.


The type of discount loan extended by the Fed to banks that experience financial difficulties and

do not qualify as fulfilling “generally sound financial condition” is called

a. primary credit.

b. seasonal credit.

*c. secondary credit.

d. installment credit.

Changes in the reserve requirements (required reserve ratio) are infrequently used for changing

the money supply because

*a. reserve requirements changes tend to be too powerful and disruptive for banks.

b. reserve requirement changes tend to be ineffective.

c. reserve requirement changes must be approved by the president.

d. of only (a) and (c) of the above.

A reduction in reserve requirements tends to cause the money supply to rise, since the change

causes

a. the money multiplier to fall.

*b. the money multiplier to rise.

c. total reserves to fall.

d. total reserves to rise.

Because the discount rate is kept above the federal funds interest rate,

a. the Fed must ration discount loans on a first-come, first-serve basis.

*b. banks have the incentive to borrow from other banks before borrowing from the Fed.

c. the Fed refuses to extend discount credit to banks that are not members of the Federal Reserve

System.

d. none of the above occurs.

Under 100% reserve banking, the money multiplier will be

a. 0.

*b. 1.

c. 10.

d. 100.

When the Fed engages in a matched sale-purchase with a bank, it first ______ securities which

the bank agrees to______ back to the Fed within a few days.

a. buys; buy

b. buys; sell

c. sells; buy

*d. sells; sell

When the Fed wants to decrease bank reserves on a temporary basis, it engages in a _______.

a. outright purchase of securities from banks

b. outright sale of securities from banks

*c. reverse repurchase agreement with banks

d. repurchase agreement with banks

The Fed extends______ to financially sound banks that experience unexpected withdrawals of

funds by depositors.

*a. primary credit loans

b. seasonal credit loans

c. secondary credit loans

d. emergency loans

If either Treasury deposits or foreign deposits at the Fed are predicted to_______, a ______ open

market ______ would be needed to offset the expected decrease in the monetary base.

a. rise; dynamic; purchase

b. fall; dynamic; sale

*c. rise; defensive; purchase

d. fall; defensive; purchase

When the Fed raises the discount rate, the_____ curve in the market for reserves shifts to

the______, thereby causing the federal funds interest rate to________.

a. supply; right; fall

b. supply; right; rise

*c. supply; left; rise

d. demand; right; fall

e. demand; left; rise

Even if the Fed could completely control the money supply, not everyone would be happy with

monetary policy, since

*a. the Fed is asked to achieve many goals, some of which are incompatible with one another.

b. the goals that are stressed by the Fed do not include high employment, making labor unions a

vocal critic of Fed policies.

c. the Fed places primary emphasis on exchange rate stability, often to the detriment of domestic

conditions.

d. its mandate requires it to keep Treasury security prices high.

Because timely information on the price level and economic growth is generally unavailable, the

Fed has adopted a strategy of

a. targeting the exchange rate, since the Fed has the ability to control this variable.

b. targeting the price of gold, since it is closely related to economic activity.

*c. using an intermediate target such as an interest rate.

d. stabilizing the consumer price index, since the Fed has a high degree of control over the CPI.

Which of the following is true about the Federal Reserve System?

*a. There are 12 regional Federal Reserve Banks

b. The head of the U.S. Treasury also chairs the Federal Reserve Board

c. There are 14 members of the Federal Reserve Board

d. The Federal Reserve receives its operating funds from the federal government

Many economists question the desirability of targeting interest rates by pointing out that

a. the Fed does not have direct control over interest rates.

b. changes in interest rates have little effect on economic activity.

c. interest rates are extremely difficult to measure.

d. all of the above are correct.

*e. only (a) and (c) of the above are correct.

The Federal Reserve regulates the money supply mainly by

a. controlling the production of coins and paper money issued by the U.S. mint

b. altering the reserve requirements of commercial banks

c. issuing discount loans to financially troubled commercial banks

d. *altering the reserves of banks through purchases/sales of government securities

Open market operations change

a. The size of the monetary multiplier, but not commercial bank reserves

b. *Commercial bank reserves, but not the size of the monetary multiplier

c. Neither commercial bank reserves nor the size of the monetary multiplier

d. Both commercial bank reserves and the size of the monetary multiplier

A decrease in the required reserve ratio increases

a. The total reserves of commercial banks

b. The required reserves of commercial banks

c. *The excess reserves of commercial banks

d. The actual reserves of commercial banks

The interest rate that banks charge one another on overnight loans is called the

a. *Federal funds rate

b. Prime lending rate

c. Subprime lending rate

d. Discount rate

To decrease the federal funds rate, the Fed can

a. *Buy securities from banks or the public

b. Sell securities to banks or the public

c. Increase the discount rate

d. Increase the prime interest rate

If the Fed was attempting to decrease demand-pull inflation, the proper policies would be to

a. Sell government securities, raise reserve requirements, and lower the discount rate

b. Sell government securities, lower reserve requirements, and lower the discount rate

c. Buy government securities, raise reserve requirements, and raise the discount rate

d. *Sell government securities, raise reserve requirements, and raise the discount rate

Which of the following best describes the cause-effect chain of a restrictive (tight) monetary

policy?

a. A decrease in the money supply will lower the interest rate, increase investment

spending, and increase aggregate demand and GDP

b. *A decrease in the money supply will raise the interest rate, decrease investment

spending, and decrease aggregate demand and GDP

c. An increase in the money supply will raise the interest rate, decrease investment

spending, and decrease aggregate demand and GDP

d. An increase in the money supply will lower the interest rate, decrease investment

spending, and increase aggregate demand and GDP

Opponents of the Federal Reserve’s adoption of an inflation targeting strategy argue that it would

a. Result in the federal government “crowding out” private investment spending

b. Expand the Federal Reserve’s monetary powers beyond reasonable limits

c. Reduce the size of the banking system’s money multiplier

d. *Limit the Fed’s ability to engage in countercyclical monetary policy

Which of the following is not considered to be a goal of monetary policy?

a. *Fair wages

b. High employment

c. Price stability

d. Economic growth

A decrease in Federal Reserve float will

a. Increase excess reserves of commercial banks

b. Increase required reserves of commercial banks

c. *Increase the federal funds rate

d. Decrease the federal funds rate

In the federal funds market diagram, an open market sale by the Fed

a. Shifts the supply curve of reserves to the right

b. *Shifts the supply curve of reserves to the left

c. Shifts the demand curve for reserves to the right

d. Shifts the demand curve for reserves to the left

Temporary, short-term discount loans to banks in areas in which agriculture and tourism are

important are known as

a. Primary credit

b. Secondary credit

c. *Seasonal credit

d. Extended credit

The Federal Reserve’s Open Market Trading Desk is another name for security traders at the

Federal Reserve Bank of

a. San Francisco

b. Chicago

c. Atlanta

d. *New York

The margin requirement set by the Federal Reserve is the

a. *Proportion of the purchase price of a stock that an investor must pay in cash

b. Difference between the interest rate banks may charge on loans and the interest rate they

pay to depositors

c. Same thing as the required reserve ratio on checking deposits

d. Difference banks must maintain between the value of their assets and the value of their

liabilities

Under the Federal Reserve Act, which banks must be members of the Federal Reserve System?

a. All commercial banks

b. *National banks

c. State banks

d. All banks with capital in excess of $100 million

An open market operation by the Fed intended to maintain the existing level of bank reserves is

known as a

a. *Defensive open market operation

b. Dynamic open market operation

c. Shorter-term financing operation

d. Longer-term financing operation

According to the equation of exchange, MV=PQ, an expansionary monetary policy of the Fed

may be offset by a/an

a. increase in the velocity of money

b. *decrease in the velocity of money

c. increase in the price level

d. increase in the output level

Which of the following is a “selective” monetary tool of the Fed

a. required reserve ratio

b. open market operation

c. discount rate

d. *margin requirement

Given a system of floating exchange rates, a contractionary monetary policy will cause the dollar

to

a. appreciate and U.S. net exports to increase

b. *appreciate and U.S. net exports to decrease

c. depreciate and U.S. net exports to increase

d. depreciate and U.S. net exports to decrease

The “net export effect”

a. *strengthens the stimulative effect of an expansionary monetary policy

b. weakens the stimulative effect of an expansionary monetary policy

c. does not affect the stimulative effect of an expansionary monetary policy

d. all of the above

An expansionary monetary policy by the Fed is most likely to

a. decrease the foreign demand for dollars and appreciate the dollar’s exchange value

b. *decrease the foreign demand for dollars and depreciate the dollar’s exchange value

d. increase the foreign demand for dollars and appreciate the dollar’s exchange value

d. increase the foreign demand for dollars and depreciate the dollar’s exchange value

Most open market operations are

a. dynamic

*b. defensive

c. equally divided between dynamic and defensive

d. neither defensive nor dynamic

When the nominal gross domestic product (GDP) is divided by the money supply (M), you will

obtain the

*a. velocity of money

b. purchasing power of money

c. level of government spending

d. level of labor productivity

Which is the equation of exchange?

a. PQ/M+V = GDP

b. V = M + PQ

*c. MV = PQ

d. V + I + G = GDP

In the equation of exchange, if V is stable, an increase in M will necessarily increase

a. the demand for money

b. the velocity of money

c. the level of government spending

*d. nominal GDP

IS-LM: Fiscal and Monetary Policy in a Closed Economy

The _____ shows the combinations of interest rates and equilibrium output (income) for which aggregate demand (C + I + G + Net Exports) equals aggregate output produced. a. LM Curve *b. IS Curve c. IS Curve and LM Curve d. None of the above The _____ is the locus of all combinations of interest rates and aggregate output levels which are consistent with equilibrium in the money market—that is, money supply = money demand *a. LM Curve b. IS Curve c. IS Curve and LM Curve d. None of the above When the IS curve and LM curve intersect, there is “general” equilibrium in the a. Product market only b. Money market only *c. Product market and money market d. None of the above In the IS-LM model, a shift in the investment curve such that investment demand rises by 25 at each rate of interest, will on the assumption that the spending multiplier equals 3, raise the equilibrium level of income a. By at least 75 *b. By an amount between zero and 75, depending on the elasticity of the LM curve in the relevant

range. c. By an amount that also depends on how much of a shift in the LM curve is caused by the shift in

the investment curve.

*d. By 3 times the final increase in investment, but this increase in investment will be 25 of less depending on the elasticity of the LM curve.

If government expenditures increase *a. The IS curve will shift to the right b. The IS curve will shift to the left c. The intended saving schedule will shift to the right d. The I + G schedule will shift to the right, but the IS curve will not shift An increase in taxes will shift the a. IS curve to the right *b. IS curve to the left c. LM curve to the right d. LM curve to the left This IS curve will be more elastic *a. The more elastic is the investment demand curve b. The greater is the stock of money *c. The smaller is the marginal propensity to save d. The larger is the government deficit A shift in the investment demand curve that shows that businesses will raise their spending on plant and equipment by $10 billion at each possible level of the interest rate will, other things being equal *a. Shift the IS curve rightward by an amount equal to the spending multiplier times $10 billion b. Raise the income level by something more than $10 billion but at the same time may either

raise or lower the interest rate. c. Produce a movement of the IS curve rightward or leftward depending on the slope of the saving

curve. d. Cause the largest possible shift in the IS curve in the special case where the LM curve is perfectly

elastic. The IS-LM framework shows that a deficit-financed expansion of government spending may not produce the maximum possible rise in the income level unless it *a. Is financed in a way that prevents the interest rate from rising b. Is financed by the sale of bonds to the nonbank public *c. Is accompanied by an expansionary monetary policy *d. IS financed in a way that increases the money supply by an appropriate amount Monetary policy is ineffective in stimulating the economy if the IS curve is *a. vertical b. downward sloping c. horizontal d. None of the above If there is an increase in the consumption function, all other things equal, the *a. IS curve will shift to the right b. IS curve will shift to the left c. LM curve will shift to the right

d. LM curve will shift to the left The IS curve can be thought of as an aggregate demand function and the LM curve as an aggregate supply function a. True *b. False In the IS model, changes in government expenditures will normally change income by a greater magnitude than an equivalent change in autonomous investment spending a. True *b. False The more interest-elastic the investment function, the more interest-elastic will be the IS curve *a. True b. False The LM curve suggests that there are a number of interest rates levels which are consistent with monetary equilibrium *a. True b. False The IS curve, but not the LM curve, can be shifted for public stablilization policy purposes a. True *b. False The following 4 questions are based on an upward sloping LM curve and a downward sloping IS curve. An increase in the money supply by the Federal Reserve (expansionary monetary policy) results in a *a. Rightward shift in LM, a decrease in the interest rate, and an increase in output b. Leftward shift in LM, an increase in the interest rate, and a decrease in output c. Rightward shift in IS, a decrease in the interest rate, and an increase in output d. Leftward shift in IS, a decrease in the interest rate, and an increase in output A decrease in the money supply by the Federal Reserve (contractionary monetary policy) results in a a. Rightward shift in LM, a decrease in the interest rate, and an increase in output *b. Leftward shift in LM, an increase in the interest rate, and a decrease in output c. Rightward shift in IS, a decrease in the interest rate, and an increase in output d. Leftward shift in IS, a decrease in the interest rate, and an increase in output An increase in spending by the federal government (expansionary fiscal policy) results in a a. Rightward shift in LM, a decrease in the interest rate, and an increase in out put b. Leftward shift in LM, an increase in the interest rate, and a decrease in output *c. Rightward shift in IS, an increase in the interest rate, and an increase in output d. Leftward shift in IS, a decrease in the interest rate, and an increase in output A decrease in spending by the federal government (contractionary fiscal policy) results in a. Rightward shift in LM, a decrease in the interest rate, and an increase in output

b. Leftward shift in LM, an increase in interest rate, and a decrease in output c. Rightward shift in IS, and increase in the interest rate, and an increase in output *d. Leftward shift in IS, a decrease in the interest rate, and a decrease in output For a given upward-sloping LM curve, an expansionary monetary policy has a greater effect on output and income when a. The IS curve is relatively steep and less elastic to interest-rate changes *b. The IS curve is relatively flat and more elastic to interest-rate changes c. The IS curve is vertical and is perfectly inelastic to interest-rate changes Given a downward-sloping IS curve, an expansionary fiscal policy is most effective in increasing output and income when a. The LM curve is vertical which means complete “crowding out” b. The LM curve is upward sloping which means partial “crowding out” *c. The LM curve is horizontal which means no “crowding out”

Macroeconomic Policy in an Open Economy

An expansionary American fiscal policy which drives up domestic interest rates is most likely to: a. Decrease the foreign demand for dollars and appreciate the international value of the dollar b. Decrease the foreign demand for dollars and depreciate the international value of the dollar *c. Increase the foreign demand for dollars and appreciate the international value of the dollar d. Increase the foreign demand for dollars and depreciate the international value of the dollar If the Fed went to purchase government securities in the open market, we would anticipate *a. Lower interest rates, an expanded GDP, and depreciation of the dollar b. Lower interest rates, an expanded GDP, and appreciation of the dollar c. Higher interest rates, a contracted GDP, and depreciation of the dollar d. Lower interest rates, a contracted GDP, and appreciation of the dollar Other things equal, a contractionary monetary policy will: a. Decrease the international value of the dollar b. Reduce the interest rate c. Increase GDP d. Reduce net exports *e. Increase net exports An increase in the aggregate demand curve might result from the Federal Reserve: a. Selling bonds in the open market b. Increasing the discount rate c. Increasing the reserve ratio *d. Buying bonds in the open market Other things equal, expansionary monetary policy will: a. Reduce net exports

b. Increase interest rates *c. Reduce the international value of the dollar d. Reduce GDP Under some conditions, proper domestic monetary policy may be at odds with the goal of correcting a trade imbalance because: a. Changes in domestic interest rate cause changes in domestic investment spending *b. Changes in domestic interest rate tend to cause changes in the international value of the dollar c. The domestic interest rate varies inversely with the value of the dollar d. Changes in the interest rate cause changes in domestic savings The “net export effect”: a. Strengthens the stimulative effect of an expansionary fiscal policy b. Weakens the stimulative effect of an expansionary monetary policy *c. Strengthens the stimulative effect of an expansionary monetary policy. d. Has no perceptible impact upon stabilization policies An expansionary monetary policy in the United States is most likely to: a. Decrease the foreign demand for dollars and appreciate the international value of the dollar *b. Decrease the foreign demand for dollars and depreciate the international value of the dollar c. Increase the foreign demand for dollars and appreciate the international value of the dollar d. Increase the foreign demand for dollars and depreciate the international value of the dollar A contractionary monetary policy in the United States is most likely: a. Depreciate the international value of the dollar and increase American net exports b. Depreciate the international value of the dollar and decrease American net exports c. Appreciate the international value of the dollar and increase American net exports *d. Appreciate the international value of the dollar and decrease American net exports International flows of financial capital in response to interest rate changes in the United States: a. Weaken domestic monetary policy through an offsetting net export effect. *b. Strengthen domestic monetary policy through a supporting net export effect. c. Strengthen domestic fiscal policy through an offsetting net export effect d. Do none of the above A contactionary American fiscal policy which reduces domestic interest rates is most likely to: *a. Depreciate the international value of the dollar and increase American net exports b. Depreciate the international value of the dollar and decrease American net exports c. Appreciate the international value of the dollar and increase American net exports d. Appreciate the international value of the dollar and decrease American net exports Which one of the following best describes the net effect associated with an expansionary American fiscal policy? a. Domestic interest rate falls, foreign demand for dollars rises, dollar appreciates, and net exports

increase. b. Domestic interest rate falls, foreign demand for dollars rise, dollar appreciates, and net exports

fall.

c. Domestic interest rate rises, foreign demand for dollars falls, dollar depreciates, and net exports increase.

*d. Domestic interest rate rises, foreign demand for dollars increases, dollar appreciates, and net exports decline.

The higher domestic interest rate resulting from an expansionary American fiscal policy will tend to: a. Increase domestic investment spending b. Increase U.S. exports c. Increase domestic consumption spending. *d. Decrease U.S. exports International flows of financial capital in response to interest rate changes in the United States: *a. Weaken domestic fiscal policy through an offsetting net export effect b. Strengthen domestic fiscal policy through a supporting net export effect c. Strengthen domestic fiscal policy through an offsetting net export effect d. Do none of the above All else equal, a contractionary American fiscal policy which reduces domestic interest rates tends to: a. Increase American imports b. Increase the international value of the dollar *c. Reduce the foreign demand for the American dollars. d. Aggravate an existing American trade deficit. All else equal, an expansionary monetary policy in the United States: a. Increase American imports b. Increase the international value of the dollar *c. Reduces the foreign demand for American dollars d. Aggravated an existing American trade deficit An expansionary monetary policy is appropriate for the alleviation of domestic: *a. Unemployment an compatible with the goal of correcting a trade deficit b. Unemployment and compatible with the goal of correcting a trade surplus c. Inflation and compatible with the goal of correcting a trade deficit d. Inflation and compatible with the goal of correcting a trade surplus Assume the United States is experiencing an 18 percent annual rate of inflation and is also incurring a trade deficit. All else equal, the use of appropriate monetary policy to reduce inflation would: a. Cause the dollar to depreciate in value b. Have no impact upon our trade deficit c. Decrease our trade deficit *d. Increase our trade deficit Which of the following is correct? *a. An easy money policy will cause the dollar to depreciate and will increase American net exports b. An easy money policy will cause the dollar to depreciate and will decrease American net exports c. An easy money policy will cause the dollar to appreciate and will increase American net exports d. An easy money policy will cause the dollar to appreciate and will decrease American net exports

Which of the following is correct? a. A tight money policy will cause the dollar to appreciate and American net exports to increase *b. A tight money policy will cause the dollar to appreciate and American net exports to decrease c. A tight money policy will cause the dollar to depreciate and American net exports to increase d. A tight money policy will cause the dollar to depreciate and American net exports to decrease Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy *a. Cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real

output b. Cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real

output *c. Have conflicting effects of aggregate demand, thus weakening the policy’s expansionary effect

on real output d. Have conflicting effects of aggregate demand, thus strengthening the policy’s expansionary

effect on real output A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession *a. Expansionary fiscal policy b. Expansionary monetary policy c. Contractionary fiscal policy d. Contractionary monetary policy A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession: a. Expansionary fiscal policy *b. Expansionary monetary policy c. Contractionary fiscal policy d. Contractionary monetary policy Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause a. The dollar to appreciate and will decrease U.S. net exports b. The dollar to appreciate and will increase U.S. net exports *c. The dollar to depreciate and will increase U.S. net exports d. The dollar to depreciate and will decrease U.S. net exports Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause *a. The dollar to appreciate and will decrease U.S. net exports b. The dollar to appreciate and will increase U.S. net exports c. The dollar to depreciate and will increase U.S. net exports d. The dollar to depreciate and will decrease U.S. net exports Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to: a. Trade-account deficit and a capital-account surplus

*b. Trade-account deficit and a capital-account deficit c. Trade-account surplus and a capital-account surplus d. Trade-account surplus and a capital-account deficit Under a fixed exchanged-rate system and high capital mobility, a contraction in the domestic money supply leads to a: a. Trade-account deficit and a capital-account surplus b. Trade-account deficit and a capital-account deficit *c. Trade-account surplus and a capital-account surplus d. Trade-account surplus and a capital-account deficit Under a fixed exchange system and high capital mobility, an expansionary fiscal policy leads to a: *a. Trade-account deficit and a capital-account surplus b. Trade-account deficit and a capital-account deficit c. Trade-account surplus and a capital-account surplus d. Trade-account surplus and a capital-account deficit Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a: a. Trade-account deficit and a capital-account surplus b. Trade-account deficit and a capital-account deficit c. Trade-account surplus and a capital-account surplus *d. Trade-account surplus and a capital-account deficit

money and banking practice questions

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