Question 1

Which of the following is not one of the ways that the German government ended the hyperinflation of the 1920s?

Accepted Answer

A)  negotiating a new agreement with the Allies (the United States, Great Britain, France, and Italy) that reduced its reparations payments 
B)  reducing government expenditures and raising taxes to balance its budget 
C)  raising the required reserve ratio to reduce bank loans 
D)  replacing the existing mark with a new mark

Question 2

The discount rate is

Accepted Answer

A)  the interest rate banks charge each other for overnight loans. 
B)  the interest rate banks charge their best customers. 
C)  the interest rate the Fed charges to banks for loans from the Fed. 
D)  the interest rate the U.S. Treasury pays on Treasury Bills.

Question 3

If people speculate that a run on one bank will cause a run on all banks in the financial system,and this speculation proves accurate,then the financial system would experience what is known as a

Accepted Answer

A)  commodity crisis. 
B)  securitization meltdown. 
C)  bank panic. 
D)  institutional death spiral.

Question 4

Which of the following best describes how banks create money?

Accepted Answer

A)  Banks charge higher interest rates on loans than they pay on deposits. 
B)  Banks charge fees for providing financial advice. 
C)  Banks create checking account deposits when making loans from excess reserves. 
D)  Banks make loans from reserves.

Question 5

Scenario 16-1
Currency $1,000
Checking Account Balances 2,000
Savings Account Balances 5,000
Small-Denomination Time Deposits 6,000
Noninstitutional Money Market Fund Shares 7,000
Consider the information above for a simple economy. Assume there are no traveler's checks.
-Refer to Scenario 16-1.M2 in this simple economy equals

Accepted Answer

A)  $3,000. 
B)  $8,000. 
C)  $14,000. 
D)  $21,000.

Question 6

If the required reserve ratio is 10 percent,an increase in bank reserves of $1,000 can support an increase in checking account deposits (including the original deposit)in the banking system as a whole of up to

Accepted Answer

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

Question 7

People hold money as opposed to financial assets because money

Accepted Answer

A)  earns interest. 
B)  is perfectly liquid. 
C)  earns no interest. 
D)  earns a higher return than other financial assets.

Question 8

The major shortcoming of a barter economy is

Accepted Answer

A)  the requirement of a double coincidence of wants. 
B)  the requirement of specialization and exchange. 
C)  that goods and services are not traded. 
D)  that money loses value from inflation.

Question 9

Suppose the velocity of money is not fixed,but stable at about two percent growth per year.How could the quantity theory of money be modified to include a stable growth rate of the velocity of money? In this modified quantity theory of money with velocity growing at two percent per year,what would the growth rate of the other variables in the theory need to be to cause inflation?

Accepted Answer

The answer of Suppose the velocity of money is not...

Question 10

Fiat money has

Accepted Answer

A)  little to no intrinsic value but is backed by the quantity of gold held by the central bank. 
B)  little to no intrinsic value and is authorized by the central bank or governmental body. 
C)  value, because it can be redeemed for gold by the central bank. 
D)  a great intrinsic value that is independent of its use as money.

Question 11

Which of the following is not counted in M1?

Accepted Answer

A)  checking account balances 
B)  credit card balances 
C)  coins in circulation 
D)  currency in circulation 
E)  traveler's check balances

Question 12

The quantity equation states that

Accepted Answer

A)  the money supply (M) divided by the velocity of money (V) equals the price level (P) divided by real output (Y), i.e., M/V = P/Y. 
B)  M × V = P × Y. 
C)  M + V = P + Y. 
D)  M - V = P - Y.

Question 13

If you transfer all of your currency to your checking account,then initially,M1 will ________ and M2 will ________.

Accepted Answer

A)  increase; not change 
B)  not change; increase 
C)  not change; not change 
D)  decrease; increase

Question 14

Table 16-3
 $\begin{array}{|c|c|}
\hline \text { Assets } & \text { Liabilities } \
\hline \text { Reserves }+\$ 7,000 & \text { Deposits }+\$ 50,000 \
\hline \text { Loans }+\$ 46,000 & \text { Net Worth }+\$ 3,000 \
\hline
\end{array}$
-Refer to Table 16-3.Consider the above simplified balance sheet for a bank.If the required reserve ratio is 10 percent,the bank can make a maximum loan of

Accepted Answer

A)  $2,000. 
B)  $5,000. 
C)  $6,300. 
D)  $45,000.

Question 15

Why do banks create money? Do they create money to help the Federal Reserve control the money supply or is there a more basic reason?

Accepted Answer

The answer of Why do banks create money? Do they...

Question 16

Banks hold 100% of their checking deposits as vault cash to ensure that bank runs do not occur.

Accepted Answer

A) True 
 B)False

Question 17

If households in the economy decide to take money out of checking account deposits and hold it as currency,this will initially

Accepted Answer

A)  not change M1 and increase M2. 
B)  decrease M1 and decrease M2. 
C)  decrease M1 and not change M2. 
D)  not change M1 and not change M2.

Question 18

Which of the following describes the degree of control that the Fed has over the money supply?

Accepted Answer

A)  The Fed has absolute control over the money supply. 
B)  The Fed has no control of the money supply. 
C)  The Fed has substantial control over the money supply. 
D)  The Fed is not concerned about the level of the money supply, and does not attempt to control it.

Question 19

If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money supply,what would be the effect on M1 or M2?

Accepted Answer

A)  M1 would rise. 
B)  M1 would fall. 
C)  M1 would rise and M2 would remain constant. 
D)  M2 would rise but M1 would remain constant.

Question 20

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

Accepted Answer

A)  printing money. 
B)  acting as a lender of last resort. 
C)  raising the discount rate. 
D)  increasing the required reserve ratio.

Exam 16: Money,Banks,and the Federal Reserve System