Question 1

Explain what happens to the money supply when the Fed sells bonds on the open market. What happens to the assets and liabilities of the Fed?

Accepted Answer

The money supply falls when the Fed sell

Question 2

The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank A. Bank A loans the maximum amount possible to a construction company, which buys materials from a lumber yard. The lumberyard deposits the construction company's check in Bank B. What is the maximum loan Bank A can now make and the maximum loan Bank B can now make?

Accepted Answer

A)  Bank A: 0; Bank B: $640,000 
B)  Bank A: 0; Bank B: $800,000 
C)  Bank A: $800,000; Bank B: $640,000 
D)  Bank A: $800,000; Bank B: 0 
A)  Bank A: 0; Bank B: $640,000 
B)  Bank A: 0; Bank B: $800,000 
C)  Bank A: $800,000; Bank B: $640,000 
D)  Bank A: $800,000; Bank B: 0

Question 3

The advantage of holding money as an asset is that

Accepted Answer

A)  money earns interest. 
B)  money is liquid. 
C)  money is safe from thievery. 
D)  the value of money appreciates over time. 
A)  money earns interest. 
B)  money is liquid. 
C)  money is safe from thievery. 
D)  the value of money appreciates over time.

Question 4

The reserve ratio is 5 percent. If the bank receives a customer deposit of $100,000, then an immediate effect is

Accepted Answer

A)  a reduction in the bank's total assets of exactly $5,000. 
B)  a reduction in the bank's total liabilities of exactly $5,000. 
C)  no change in the bank's total assets or total liabilities. 
D)  an increase in the bank's reserves of exactly $5,000. 
A)  a reduction in the bank's total assets of exactly $5,000. 
B)  a reduction in the bank's total liabilities of exactly $5,000. 
C)  no change in the bank's total assets or total liabilities. 
D)  an increase in the bank's reserves of exactly $5,000.

Question 5

If the FDIC eliminated its insurance program for deposits, then

Accepted Answer

A)  the banking system would probably fail. 
B)  individual depositors would have more incentive to ascertain the soundness and solvency of the bank. 
C)  banks would probably hold fewer reserves. 
D)  moral hazard would be increased. 
A)  the banking system would probably fail. 
B)  individual depositors would have more incentive to ascertain the soundness and solvency of the bank. 
C)  banks would probably hold fewer reserves. 
D)  moral hazard would be increased.

Question 6

When the Federal Reserve sells a government security to a bond dealer, which transmits payment from a transactions deposit account at a bank

Accepted Answer

A)  the cash of the Federal Reserve will decrease. 
B)  the net worth of the commercial bank will decrease. 
C)  the loans of the commercial bank will increase. 
D)  the money supply will decrease. 
A)  the cash of the Federal Reserve will decrease. 
B)  the net worth of the commercial bank will decrease. 
C)  the loans of the commercial bank will increase. 
D)  the money supply will decrease.

Question 7

Which function of money allows people to specialize in areas in which they have a comparative advantage?

Accepted Answer

A)  medium of exchange 
B)  unit of accounting 
C)  store of value 
D)  standard of deferred payment 
A)  medium of exchange 
B)  unit of accounting 
C)  store of value 
D)  standard of deferred payment

Question 8

Which of the following is NOT a potential problem due to federal depository insurance?

Accepted Answer

A)  Banks have an incentive to make riskier loans than they would otherwise. 
B)  Depositors have little incentive to monitor the behavior of the managers of the depository institutions. 
C)  Depositors demand greater interest rates on their deposits to compensate them for the riskier behavior of the managers of the depository institutions. 
D)  Lenders have less incentive to investigate the credit-worthiness of borrowers. 
A)  Banks have an incentive to make riskier loans than they would otherwise. 
B)  Depositors have little incentive to monitor the behavior of the managers of the depository institutions. 
C)  Depositors demand greater interest rates on their deposits to compensate them for the riskier behavior of the managers of the depository institutions. 
D)  Lenders have less incentive to investigate the credit-worthiness of borrowers.

Question 9

Total reserves of private banks are

Accepted Answer

A)  all customer deposits. 
B)  deposits held at the Fed and vault cash. 
C)  the minimum amount banks need to hold against time deposits. 
D)  federal reserve notes. 
A)  all customer deposits. 
B)  deposits held at the Fed and vault cash. 
C)  the minimum amount banks need to hold against time deposits. 
D)  federal reserve notes.

Question 10

When money serves as a store of value, it allows you to

Accepted Answer

A)  transfer wealth into the future. 
B)  eliminate a double coincidence of wants. 
C)  be an effective negotiator. 
D)  find good bargains. 
A)  transfer wealth into the future. 
B)  eliminate a double coincidence of wants. 
C)  be an effective negotiator. 
D)  find good bargains.

Question 11

The value of the money multiplier depends on

Accepted Answer

A)  the reserve ratio. 
B)  the ratio of total assets to total liabilities for the banking system as a whole. 
C)  the interest rate offered on bonds currently being sold by the Fed. 
D)  the interest rate offered on bonds currently being purchased by the Fed. 
A)  the reserve ratio. 
B)  the ratio of total assets to total liabilities for the banking system as a whole. 
C)  the interest rate offered on bonds currently being sold by the Fed. 
D)  the interest rate offered on bonds currently being purchased by the Fed.

Question 12

When money serves as a standard for comparing values of different things, it is functioning as a

Accepted Answer

A)  store of value. 
B)  hedge against inflation. 
C)  standard of deferred payment. 
D)  unit of accounting. 
A)  store of value. 
B)  hedge against inflation. 
C)  standard of deferred payment. 
D)  unit of accounting.

Question 13

-Refer to the above table. The value of M1 is

Accepted Answer

A)  $760 billion. 
B)  $810 billion. 
C)  $1,260 billion. 
D)  $2,560 billion. 
A)  $760 billion. 
B)  $810 billion. 
C)  $1,260 billion. 
D)  $2,560 billion.

Question 14

Tanner decides to buy a bond from Joe for $1,000. The money supply will

Accepted Answer

A)  neither increase nor decrease. 
B)  increase by $1,000. 
C)  increase by more than $1,000. 
D)  decrease by $1,000. 
A)  neither increase nor decrease. 
B)  increase by $1,000. 
C)  increase by more than $1,000. 
D)  decrease by $1,000.

Question 15

The money supply in the United States is backed by

Accepted Answer

A)  faith. 
B)  gold. 
C)  silver. 
D)  platinum. 
A)  faith. 
B)  gold. 
C)  silver. 
D)  platinum.

Question 16

Suppose the Fed purchases $1 million in bonds in the open market. Explain how the money supply can increase by more than $1 million.

Accepted Answer

Transaction deposits and reserves increa

Question 17

The part of the Federal Reserve System (the Fed) that directs the buying and selling of U.S. government securities is

Accepted Answer

A)  the Federal Open Market Committee. 
B)  the Federal Advisory Committee. 
C)  the Federal Reserve district banks. 
D)  the Board of Governors. 
A)  the Federal Open Market Committee. 
B)  the Federal Advisory Committee. 
C)  the Federal Reserve district banks. 
D)  the Board of Governors.

Question 18

If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10 percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by ________, and the money supply can increase by as much as ________.

Accepted Answer

A)  $80,000; $800,000 
B)  $10,000; $100,000 
C)  $90,000; $1,000,000 
D)  $90,000; $900,000 
A)  $80,000; $800,000 
B)  $10,000; $100,000 
C)  $90,000; $1,000,000 
D)  $90,000; $900,000

Question 19

The transactions approach to measuring M1 includes all of the following EXCEPT

Accepted Answer

A)  traveler's checks. 
B)  certificates of deposit. 
C)  checking accounts. 
D)  currency. 
A)  traveler's checks. 
B)  certificates of deposit. 
C)  checking accounts. 
D)  currency.

Question 20

Adverse selection refers to the

Accepted Answer

A)  possibility that the borrower may engage in riskier behavior after the loan is obtained. 
B)  likelihood that a potential borrower may use the funds that he receives for unworthy, high risk projects. 
C)  possession of information by one party in a financial transaction not known by the other party. 
D)  use of statistical discrimination in making loans. 
A)  possibility that the borrower may engage in riskier behavior after the loan is obtained. 
B)  likelihood that a potential borrower may use the funds that he receives for unworthy, high risk projects. 
C)  possession of information by one party in a financial transaction not known by the other party. 
D)  use of statistical discrimination in making loans.

Exam 15: Money, Banking, and Central Banking

Explain what happens to the money supply when the Fed sells bonds on the open market. What happens to the assets and liabilities of the Fed?

The advantage of holding money as an asset is that

The reserve ratio is 5 percent. If the bank receives a customer deposit of $100,000, then an immediate effect is

If the FDIC eliminated its insurance program for deposits, then

When the Federal Reserve sells a government security to a bond dealer, which transmits payment from a transactions deposit account at a bank

Which function of money allows people to specialize in areas in which they have a comparative advantage?

Which of the following is NOT a potential problem due to federal depository insurance?

Total reserves of private banks are

When money serves as a store of value, it allows you to

The value of the money multiplier depends on

When money serves as a standard for comparing values of different things, it is functioning as a

-Refer to the above table. The value of M1 is

Tanner decides to buy a bond from Joe for $1,000. The money supply will

The money supply in the United States is backed by

Suppose the Fed purchases $1 million in bonds in the open market. Explain how the money supply can increase by more than $1 million.

The part of the Federal Reserve System (the Fed) that directs the buying and selling of U.S. government securities is

If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10 percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by ________, and the money supply can increase by as much as ________.

The transactions approach to measuring M1 includes all of the following EXCEPT

Adverse selection refers to the

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Measuring the Economys Performance

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Fiscal Policy

Deficit Spending and the Public Debt

Domestic and International Dimensions of Monetary Policy

Stabilization in an Integrated World Economy

Policies and Prospects for Global Economic Growth

Demand and Supply Elasticity

Consumer Choice

Rents, Profits, and the Financial Environment of Business

The Firm: Cost and Output Determination

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Regulation and Antitrust Policy in a Globalized Economy

The Labor Market: Demand, Supply and Outsourcing

Unions and Labor Market Monopoly Power

Income, Poverty, and Health Care

Environmental Economics

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

Filters

If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10 percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by , and the money supply can increase by as much as .