Question 1

The Fed is the only formal and legal organization that can create money.

Accepted Answer

A) True 
 B)False

Question 2

Explain the distinction between a real transaction and a financial transaction (giving examples of each)and explain why for most real transactions,there is a financial transaction that mirrors it.

Accepted Answer

A real transaction involves the transfer

Question 3

Which of the following statements about the financial and real sectors is true?

Accepted Answer

A) For every financial asset there is a real asset. 
B) For every real asset there is a financial asset. 
C) For every financial transaction there is a real transaction. 
D) For every real transaction there is a financial transaction. 
A) For every financial asset there is a real asset. 
B) For every real asset there is a financial asset. 
C) For every financial transaction there is a real transaction. 
D) For every real transaction there is a financial transaction.

Question 4

Which of the following is not counted as money?

Accepted Answer

A) Bank reserves 
B) Currency held by the public 
C) Loans made by a bank 
D) Federal Reserve notes 
A) Bank reserves 
B) Currency held by the public 
C) Loans made by a bank 
D) Federal Reserve notes

Question 5

Banks must keep an amount equal to a percentage of their deposits on hand as:

Accepted Answer

A) excess reserves. 
B) savings accounts. 
C) required reserves. 
D) safe deposit reserves. 
A) excess reserves. 
B) savings accounts. 
C) required reserves. 
D) safe deposit reserves.

Question 6

If the reserve requirement is 20 percent, and banks keep no excess reserves, an increase in an initial inflow of $100 into the banking system will cause an increase in the money supply of:

Accepted Answer

A) $20. 
B) $50. 
C) $100. 
D) $500. 
A) $20. 
B) $50. 
C) $100. 
D) $500.

Question 7

When banks offer checking accounts, they are issuing a(n):

Accepted Answer

A) financial asset that functions as money. 
B) financial liability. 
C) financial asset that cannot function as money. 
D) IOU. 
A) financial asset that functions as money. 
B) financial liability. 
C) financial asset that cannot function as money. 
D) IOU.

Question 8

When the Fed prints and issues bills, it creates:

Accepted Answer

A) a financial liability for the holder of the IOU. 
B) a financial asset for itself. 
C) a real asset. 
D) money. 
A) a financial liability for the holder of the IOU. 
B) a financial asset for itself. 
C) a real asset. 
D) money.

Question 9

The largest component of M1 is:

Accepted Answer

A) checking accounts. 
B) saving and money market accounts. 
C) currency. 
D) reserves. 
A) checking accounts. 
B) saving and money market accounts. 
C) currency. 
D) reserves.

Question 10

Suppose the money multiplier is 5. If banks hold excess reserves, the required reserve ratio must:

Accepted Answer

A) be less than 0.10. 
B) be less than 0.20. 
C) equal 0.20. 
D) be greater than 0.20. 
A) be less than 0.10. 
B) be less than 0.20. 
C) equal 0.20. 
D) be greater than 0.20.

Question 11

What is exchanged in the financial sector?

Accepted Answer

A) Money only 
B) Goods and services 
C) All financial assets 
D) Only assets with a money price 
A) Money only 
B) Goods and services 
C) All financial assets 
D) Only assets with a money price

Question 12

The fraction of deposits a bank must hold in the form of reserves is called the:

Accepted Answer

A) reserve ratio. 
B) excess reserve ratio. 
C) required reserve ratio. 
D) currency to reserve ratio. 
A) reserve ratio. 
B) excess reserve ratio. 
C) required reserve ratio. 
D) currency to reserve ratio.

Question 13

People living in the town of Norwich, England, have begun a system of trade called the LETS, which allows people to enter into exchanges without using the British pound. Members offer a particular service, such as babysitting, gardening, and plumbing for which they get Croy credits. They can then use these Croys to buy services from other people. Does this system represent what economists call barter?

Accepted Answer

A) No, to be true barter, the exchange rate between the Croy and the British pound must be flexible. 
B) No, this group has merely replaced one money, the pound, with a less flexible medium of exchange that they call the Croy. 
C) Yes, because it does not use the true money, the British pound. 
D) Yes, because the Croy is not real money but just a bookkeeping account. 
A) No, to be true barter, the exchange rate between the Croy and the British pound must be flexible. 
B) No, this group has merely replaced one money, the pound, with a less flexible medium of exchange that they call the Croy. 
C) Yes, because it does not use the true money, the British pound. 
D) Yes, because the Croy is not real money but just a bookkeeping account.

Question 14

If a loan has a probability of not being paid back, the interest rate will:

Accepted Answer

A) likely include a risk premium. 
B) be the real interest rate. 
C) insufficient to compensate bondholders. 
D) lower than the market interest rate. 
A) likely include a risk premium. 
B) be the real interest rate. 
C) insufficient to compensate bondholders. 
D) lower than the market interest rate.

Question 15

As the reserve ratio goes up, less money will be created because:

Accepted Answer

A) people will hold less cash. 
B) people will hold more cash. 
C) banks will extend more loans. 
D) banks will extend fewer loans. 
A) people will hold less cash. 
B) people will hold more cash. 
C) banks will extend more loans. 
D) banks will extend fewer loans.

Question 16

The value and functionality of money are determined by the:

Accepted Answer

A) lack of credibility in other financial assets. 
B) credibility in other financial assets. 
C) general acceptability to other people. 
D) regulations defined by the Fed. 
A) lack of credibility in other financial assets. 
B) credibility in other financial assets. 
C) general acceptability to other people. 
D) regulations defined by the Fed.

Question 17

If commercial banks hold all their assets in the form of required reserves:

Accepted Answer

A) only they will be able to create money. 
B) only the central bank will be able to create money. 
C) no one will be able to create money. 
D) both commercial banks and the central bank will be able to create money. 
A) only they will be able to create money. 
B) only the central bank will be able to create money. 
C) no one will be able to create money. 
D) both commercial banks and the central bank will be able to create money.

Question 18

Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000. If the required reserve ratio is 20 percent, the maximum amount the banking system can add to the money supply is:

Accepted Answer

A) $15,000. 
B) $75,000. 
C) $175,000. 
D) $500,000. 
A) $15,000. 
B) $75,000. 
C) $175,000. 
D) $500,000.

Question 19

Which of the following is not a necessary characteristic of money?

Accepted Answer

A) Difficult to counterfeit 
B) Available in unlimited supply 
C) Durable 
D) Divisible 
A) Difficult to counterfeit 
B) Available in unlimited supply 
C) Durable 
D) Divisible

Question 20

The money supply is best described as being:

Accepted Answer

A) determined by the size of the money multiplier. 
B) determined by the amount of reserves. 
C) endogenously determined by the monetary system. 
D) fixed, to avoid inflation. 
A) determined by the size of the money multiplier. 
B) determined by the amount of reserves. 
C) endogenously determined by the monetary system. 
D) fixed, to avoid inflation.

Exam 28: The Financial Sector and the Economy

The Fed is the only formal and legal organization that can create money.

Explain the distinction between a real transaction and a financial transaction (giving examples of each)and explain why for most real transactions,there is a financial transaction that mirrors it.

Which of the following statements about the financial and real sectors is true?

Which of the following is not counted as money?

Banks must keep an amount equal to a percentage of their deposits on hand as:

If the reserve requirement is 20 percent, and banks keep no excess reserves, an increase in an initial inflow of $100 into the banking system will cause an increase in the money supply of:

When banks offer checking accounts, they are issuing a(n):

When the Fed prints and issues bills, it creates:

The largest component of M1 is:

Suppose the money multiplier is 5. If banks hold excess reserves, the required reserve ratio must:

What is exchanged in the financial sector?

The fraction of deposits a bank must hold in the form of reserves is called the:

If a loan has a probability of not being paid back, the interest rate will:

As the reserve ratio goes up, less money will be created because:

The value and functionality of money are determined by the:

If commercial banks hold all their assets in the form of required reserves:

Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000. If the required reserve ratio is 20 percent, the maximum amount the banking system can add to the money supply is:

Which of the following is not a necessary characteristic of money?

The money supply is best described as being:

Economics and Economic Reasoning

The Production Possibility Model, Trade, and Globalization

Economic Institutions

Supply and Demand

Using Supply and Demand

Describing Supply and Demand: Elasticities

Taxation and Government Intervention

Market Failure Versus Government Failure

Comparative Advantage, Exchange Rates, and Globalization

International Trade Policy

Production and Cost Analysis I

Production and Cost Analysis II

Perfect Competition

Monopoly and Monopolistic Competition

Oligopoly and Antitrust Policy

Real-World Competition and Technology

Work and the Labor Market

Who Gets What the Distribution of Income

The Logic of Individual Choice: the Foundation of Supply and Demand

Game Theory, Strategic Decision Making, and Behavioral Economics

Thinking Like a Modern Economist

Behavioral Economics and Modern Economic Policy

Microeconomic Policy, Economic Reasoning, and Beyond

Economic Growth, Business Cycles, and Unemployment

Measuring and Describing the Aggregate Economy

The Keynesian Short-Run Policy Model: Demand-Side Policies

The Classical Long-Run Policy Model: Growth and Supply-Side Policies

Monetary Policy

Financial Crises, Panics, and Unconventional Monetary Policy

Deficits and Debt: the Austerity Debate

The Fiscal Policy Dilemma

Jobs and Unemployment

Inflation, Deflation, and Macro Policy

International Financial Policy

Macro Policy in a Global Setting

Structural Stagnation and Globalization

Macro Policy in Developing Countries

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