Question 1

If the reserve ratio is 0.1, the money multiplier will be:

Accepted Answer

A)  1.
B)  10.
C)  100.
D)  1,000. B

Question 2

Small-denomination time deposits are included in:

Accepted Answer

A)  M1.
B)  M2.
C)  currency.
D)  checking accounts. B

Question 3

Credit cards create:

Accepted Answer

A)  financial liabilities for those who use them.
B)  financial liabilities for the issuer once they are used by the holder.
C)  money for those who use them.
D)  money for those who issue them. A

Question 4

The winner of the Mega Millions lottery game can choose to accept a one-time payout of $190.1 million or receive $11 million per year for 30 years. Assuming no tax consequences and an interest rate of 4 percent, using the tables shown below, what is the best decision for the winner? $\begin{array}{|r|l|}
\hline\begin{array}{c}
 \text { Annuity Table } \
 \text {  (value now of \$1 Per year To be } \
 \text {  received for x-years) } \
\begin{array}{c|c|c|c}
\hline {\text { Year }} & \mathbf{3 \%} & \mathbf{4 \%} & \mathbf{6 \%} \
\hline 10 & 8.53 & 8.11 & 7.36 \
\hline 15 & 11.94 & 11.12 & 9.71 \
\hline 20 & 14.88 & 13.59 & 11.47 \
\hline 30 & 19.60 & 17.29 & 13.76 \
\hline
\end{array}
\end{array}& \begin{array}{c}
 \text { Present Value Table } \
 \text { (Value now to \$ 1 to be received} \
 \text {   x-years un the future) } \
\begin{array}{c|c|c|c}
\hline \text { Year } & \mathbf{3} \% & \mathbf{4 \%} & \mathbf{6 \%} \
\hline 10 & 0.74 & 0.68 & 0.53 \
\hline 15 & 0.64 & 0.56 & 0.42 \
\hline 20 & 0.55 & 0.46 & 0.31 \
\hline 30 & 0.41 & 0.31 & 0.17 \
\hline
\end{array}
\end{array}\
\hline
\end{array}$

Accepted Answer

A)  Take the payout over 30 years because that's more money.
B)  Take the $190.1 today because that's more money.
C)  It does not matter because the two payouts cannot be compared.
D)  It does not matter because the two sums have roughly equal time values.

Question 5

In POW camps during World War II, nearly everything was traded for cigarettes. For example, one bar of soap cost two cigarettes, and two candy bars cost four cigarettes. During the time of the POW camps, cigarettes:

Accepted Answer

A)  did not serve as money because their value was not backed by government.
B)  did not serve as money because no one controlled the supply of cigarettes.
C)  served as money for those who smoked.
D)  served as money because they served as a unit of account, medium of exchange, and store of wealth.

Question 6

Money can be many things, but it is not:

Accepted Answer

A)  a financial liability.
B)  a financial asset.
C)  liquid.
D)  illiquid.

Question 7

Which function of money is in each of the following cases demonstrating?
(1)You pay $15 for a movie ticket.
(2)You deposit your tax refund check in your saving account.
(3)A restaurant manager sets the prices of meals she serves in dollars.
(4)A restaurant manager keeps $5,000 worth of cash in a safety deposit box.
(5)McDonald's announces that a Big-Mac now costs only $3.00.
(6)Bill Gates net worth is around $90 billion.

Accepted Answer

The answer of Which function of money is in each...

Question 8

If the reserve ratio is 0.25, the money multiplier is:

Accepted Answer

A)  4.0.
B)  5.0.
C)  20.0.
D)  25.0.

Question 9

What is produced and exchanged in the real sector?

Accepted Answer

A)  Money
B)  Goods and services
C)  Financial assets
D)  All assets with a money price

Question 10

Some economists believe that the financial sector does not channel all saving back into the spending stream. Which of the following financial assets, when held by individuals, does not reenter the spending stream?

Accepted Answer

A)  Money
B)  Bonds
C)  Stocks
D)  Loans

Question 11

A bank has a reserve requirement of 0.08. If it has demand deposits of $200,000 and is holding $4,000 in reserves:

Accepted Answer

A)  all the bank's reserves are excess reserves.
B)  the bank is not meeting its reserve requirement.
C)  the bank is holding $2,000 in excess reserves.
D)  the bank could extend additional loans and still meet its reserve requirement.

Question 12

Suppose the reserve ratio changes from 10% to 20%,with all else unchanged and banks fully loaned out.Does the money supply in the economy increase or decrease? Why? Use the simple money multiplier to illustrate your answer.

Accepted Answer

The answer of Suppose the reserve ratio changes from 10%...

Question 13

Money facilitates trade because it:

Accepted Answer

A)  does not require a double coincidence of wants among individuals.
B)  requires a double coincidence of wants among individuals.
C)  does not require a medium of exchange.
D)  requires carrying other goods around for barter.

Question 14

The measure of money that best fulfills the medium of exchange function because it is most liquid is:

Accepted Answer

A)  M1.
B)  M2.
C)  M3.
D)  L.

Question 15

Excess reserves equal:

Accepted Answer

A)  total deposits.
B)  total deposits minus required reserves.
C)  total reserves.
D)  total reserves minus required reserves.

Question 16

A commercial bank is a financial institution that:

Accepted Answer

A)  prints and distributes currency.
B)  borrows from and lends to individuals and businesses.
C)  holds the savings of individuals for a fee until they need them.
D)  determines the value of currency.

Question 17

Using the annuity rule, we can infer that an increase in the market interest rate from 5 to 10 percent will:

Accepted Answer

A)  halve the present value of an annuity.
B)  double the present value of an annuity.
C)  not change the present value of an annuity.
D)  have an unknown effect on the present value of an annuity.

Question 18

When a bank creates loans, it also creates money.

Accepted Answer

A) True 
 B)False

Question 19

Using the annuity rule, it follows that an annuity with a present value of $100 and an annual payment of $20 must have an interest rate of:

Accepted Answer

A)  2 percent.
B)  5 percent.
C)  10 percent.
D)  20 percent.

Question 20

Which institutions can create money?

Accepted Answer

A)  The government and its agencies
B)  The Fed and the banks
C)  Mutual funds and retirement funds
D)  Households and corporations

Exam 28: The Financial Sector and the Economy