Principles of Economics 1A - Macroeconomics

Chapter 14 - Sample Questions

____    1.   Demand deposits are

a.	long-term, high-interest savings accounts
b.	accounts into which banks can require depositors make regular deposits
c.	checkable deposits held by commercial banks that earn no interest
d.	negotiable order of withdrawal accounts
e.	loans from the Fed

 ____    2.   The M1 money supply consists of

a.	coins and currency held by the nonbank public
b.	coins and currency held by the nonbank public and currency held in banks
c.	coins and currency held by the nonbank public, checkable deposits, and traveler's checks
d.	coins and currency held in banks and checkable deposits
e.	paper currency

____    3.   Asymmetric information in financial markets exists when

a.	teachers know more about banking than students do
b.	borrowers know more about their ability to repay loans than lenders do
c.	lenders know more about borrowers than borrowers know about themselves
d.	borrowers pay off a loan before it is due
e.	borrowers and lenders know more about banking than banks do

____    4.   Banks are financial intermediaries because they

a.	receive new Federal Reserve notes from the Fed and put them into circulation
b.	bring together the two sides of the market-savers and borrowers
c.	bring different savers into contact with each other
d.	bring about the merger of smaller banks to make larger ones
e.	resolve disputes between stock brokers, mortgage companies, insurance agencies, and other financial institutions

____    5.   A bank's assets include all but one of the following. Which one is the exception?

a.	checkable deposits
b.	loans
c.	securities
d.	mortgages
e.	cash

____    6.   If a customer deposits $1,000 cash into her checking account, the bank's

a.	assets rise by $1,000 and liabilities fall by $1,000
b.	assets fall by $1,000 and liabilities rise by $1,000
c.	assets and liabilities both fall by $1,000
d.	assets and liabilities both rise by $1,000
e.	profits rise by $1,000

____    7.   If a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2, then the bank can lend

a.	$4,000
b.	$16,000
c.	no more than $4,800
d.	no less than $3,000
e.	$1,000

____    8.   The liquidity of an asset indicates

a.	its buying power
b.	the ease with which it can be converted into the medium of exchange without a significant loss of value
c.	the ease with which it can be converted into another asset
d.	how likely people are to convert it into the medium of exchange without a significant loss of value
e.	how easy it is to buy with a check

____    9.   A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is

 

a.	zero
b.	the prime rate
c.	the discount rate
d.	the federal funds rate
e.	the required reserve ratio

 ____   10.   Banks want to minimize their holdings of excess reserves because

a.	they will be penalized by the Federal Reserve System if excess reserves are too high
b.	required reserves will also be minimized
c.	the money multiplier will be larger leading to a greater money supply
d.	they want to borrow more on the federal funds market
e.	excess reserves earn no interest

____   11.   Banks differ from other types of businesses because banks

a.	earn profits
b.	combine economic resources to produce services
c.	can go out of business
d.	can create money
e.	are regulated by the government

____   12.   The immediate effect of a member bank's sale of U.S. government securities to the Fed is a(n)

a.	increase in that bank's required reserves
b.	decrease in that bank's required reserves
c.	increase in that bank's excess reserves
d.	decrease in that bank's excess reserves
e.	decrease in the Fed's assets

____   13.   In order to increase the money supply, the banking system must have

a.	required reserves
b.	the authority to buy corporate stocks
c.	the authority to print U.S. currency
d.	excess reserves
e.	the authority to engage in interstate banking

____   14.   Which of the following would likely increase the money supply?

a.	One bank buys government securities from another bank.
b.	The required reserve ratio increases.
c.	The Fed increases the reserves of commercial banks and the banks hold these as excess reserves.
d.	The discount rate increases.
e.	A bank sells government securities to the Fed.

____   15.   The banking system creates money in the sense that it

a.	prints money
b.	creates excess reserves from loans
c.	creates loans from excess reserves
d.	creates required reserves from loans
e.	creates loans from required reserves

____   16.   If the simple money multiplier is 5, the required reserve ratio must be

a.	5 percent
b.	0
c.	10 percent
d.	50 percent
e.	20 percent

____   17.   If banks allow some of their excess reserves to remain in the vault,

a.	the simple money multiplier will exceed the actual money multiplier
b.	the simple money multiplier will understate the expansion of credit
c.	the actual money multiplier and the simple money multiplier will be equal
d.	banks will earn more interest
e.	credit expansion will be greater than if they had lent out these reserves

____   18.   The Fed can reduce the money supply by

a.	buying securities from a bank
b.	buying securities from a private citizen
c.	selling securities
d.	issuing new Federal Reserve notes
e.	saving failing banks

____   19.   Open market operations involve

a.	opening the discount window
b.	buying stocks in the stock market
c.	buying and selling government securities in the open market
d.	opening new markets for commodities
e.	selling failed banks to other banks

____   20.   The Fed's most important monetary policy tool is

a.	printing money
b.	clearing checks
c.	setting the required reserve ratio
d.	setting the discount rate
e.	conducting open market operations

BUSC 1A  Quiz 11 answers

            1.   ANS:  C                    DIF:    Easy               TOP:   The Narrow Definition of Money: M1

            2.   ANS:  C                    DIF:    Easy               TOP:   The Narrow Definition of Money: M1

            3.   ANS:  B                    DIF:    Easy               TOP:   Banks Are Financial Intermediaries

            4.   ANS:  B                    DIF:    Easy               TOP:   Banks Are Financial Intermediaries

            5.   ANS:  A                    DIF:    Easy               TOP:   Starting a Bank         

            6.   ANS:  D                    DIF:    Moderate        TOP:   Starting a Bank         

            7.   ANS:  C                    DIF:    Moderate        TOP:   Reserve Accounts     

            8.   ANS:  B                    DIF:    Easy               TOP:   Liquidity Versus Profitability

            9.   ANS:  D                    DIF:    Easy               TOP:   Liquidity Versus Profitability

           10.   ANS:  E                    DIF:    Easy               TOP:   Liquidity Versus Profitability

           11.   ANS:  D                    DIF:    Easy               TOP:   Creating Money Through Excess Reserves

           12.   ANS:  C                    DIF:    Hard               TOP:   Creating Money Through Excess Reserves

           13.   ANS:  D                    DIF:    Moderate        TOP:   Creating Money Through Excess Reserves

           14.   ANS:  E                    DIF:    Moderate        TOP:   A Summary of the Rounds

           15.   ANS:  C                    DIF:    Moderate        TOP:   Creating Money Through Excess Reserves

           16.   ANS:  E                    DIF:    Easy               TOP:   Creating Money Through Excess Reserves

           17.   ANS:  A                    DIF:    Moderate        TOP:   Limitations on Money Expansion

           18.   ANS:  C                    DIF:    Easy               TOP:   Multiple Contraction of the Money Supply

           19.   ANS:  C                    DIF:    Easy               TOP:   Open Market Operations and the Federal Funds Rate

20.        ANS:    E          DIF:     Easy     TOP:    Open Market Operations and the Fed