Practice Test 4 Multiple Choice



Download 256.18 Kb.
Date conversion16.05.2016
Size256.18 Kb.
Practice Test 4

Multiple Choice

Identify the letter of the choice that best completes the statement or answers the question.

____ 1. In addition to fiscal policy, the other main tool used to affect aggregate demand is



a.

trade policy.

b.

industrial policy.

c.

planning policy.

d.

monetary policy.

____ 2. Nowadays, most observers believe that monetary policy



a.

is less important than fiscal policy.

b.

is more important than fiscal policy.

c.

and fiscal policy are equally important.

d.

and fiscal policy are both unimportant.

____ 3. Which of the following is an example of money serving as a medium of exchange?



a.

Richard puts money into a piggy bank.

b.

Ellen deposits cash into a money market account.

c.

Sean puts a new $20 bill into his currency collection.

d.

Marian buys a carbo-loaded drink before a marathon.

____ 4. Liquidity refers to the



a.

rapidity with which money flows through the economy.

b.

ease with which an asset can be converted into cash.

c.

ease with which banks move funds from checking to savings accounts.

d.

All of the above are correct.

____ 5. The official definition of the money supply that includes coins, paper money, travelers' checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called ________.



a.

M1

b.

M2

c.

M3

d.

L

____ 6. In the modern U.S. economy, most transactions are made with



a.

cash.

b.

gold and silver.

c.

credit cards.

d.

checking deposits.

____ 7. The distinction between M1 and M2 is based on



a.

portability-the ease with which an asset can be moved.

b.

divisibility-the ease with which an asset can be used to make smaller payments.

c.

liquidity-the ease with which an asset can be converted into cash.

d.

storability-how long an asset will retain its value.

____ 8. With the invention of banking, one important aspect of money was that



a.

banks have some discretion over the money supply.

b.

banks have complete control over the money supply.

c.

governments lost all control over the money supply.

d.

individuals have no discretion over the money supply.

____ 9. The fractional reserve system of banking evolved because



a.

goldsmiths did not have safes large enough to hold all their gold deposits.

b.

there was always a dire need for additional money.

c.

goldsmiths knew that on any given day, only a few depositors would come to claim their deposits.

d.

goldsmiths knew that they would not be prosecuted for lending out money they did not have.

____ 10. Fractional reserve banking takes its name from the fact that banks



a.

hold only a fraction of their reserves at the bank itself.

b.

keep only a fraction of their total deposits on reserve.

c.

lend only a fraction of their total reserves to customers.

d.

reserve only a fraction of their activity for lending.

____ 11. An important effect of fractional reserve banking is that bankers have



a.

little control over total reserves.

b.

total control over the amount of lending in the economy.

c.

no control over the amount of reserves in the banking system.

d.

some discretion over the money supply.

____ 12. Under fractional banking, when a bank lends to a customer



a.

the money supply increases.

b.

bank profitability is decreased.

c.

the bank is protected from a run.

d.

bank credit decreases.

____ 13. Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves



a.

are disliked by depositors.

b.

means lower profits for banks.

c.

are discouraged by government regulators.

d.

All of the above are correct.

____ 14. Banks are required to keep a minimum level of reserves on hand. The intent of this regulation is



a.

monetary control rather than bank safety.

b.

bank safety in case of bank runs.

c.

maintenance of bank profits.

d.

limiting the level of bank profits.

____ 15. An asset of a bank is



a.

the value of money that is on deposit.

b.

the amount a depositor may legally borrow.

c.

something of value that the bank owes to a depositor.

d.

something of value that a bank owns.

____ 16. Under the modern system of fractional reserve banking, banks



a.

keep cash reserves equal to only a fraction of their deposit liabilities.

b.

loan out their excess reserves at interest, which is the key to their profitability.

c.

are always potentially vulnerable to runs.

d.

All of the above are correct.

____ 17. If a bank has $1,000,000 in reserves and checking deposits of $3,000,000, what is the bank's reserve position if the required reserve ratio is 20 percent?



a.

The bank has $500,000 of required reserves and $500,000 of excess reserves.

b.

The bank has $600,000 of required reserves and $400,000 of excess reserves.

c.

The bank has $400,000 of required reserves and $600,000 of excess reserves.

d.

The bank has $200,000 of required reserves and $800,000 of excess reserves.

____ 18. Which of the following would be an asset to a bank?



a.

cash in the vault

b.

a loan to a university student

c.

a government security

d.

All of the above are correct.

____ 19. Which of the following would be a liability to a bank?



a.

cash in the vault

b.

a loan to a new business

c.

a checking account of a professor

d.

All of the above are correct.

____ 20. Which of the following is a bank liability?



a.

cash in the vault

b.

loans made to customers

c.

money market deposit accounts

d.

bank computers

e.

All of the above are correct.

____ 21. One aspect of bank accounting is that many liabilities of banks are



a.

assets of other persons and businesses in the economy.

b.

also liabilities of other persons and businesses in the economy.

c.

not matched by liabilities of most other banks.

d.

not actually owed to any other person or business in the economy.

____ 22. Do bankers create money?



a.

No, they cannot do this as private businesses.

b.

No, they are prevented by federal law.

c.

Yes, through multiple deposit creation.

d.

Yes, by opening checking accounts for customers.

____ 23. If the reserve requirement is 20 percent and a new deposit of $10,000 in cash is made by a customer to their checking account, by how much are excess reserves increased?



a.

$10,000

b.

$8,000

c.

$4,000

d.

$2,000

____ 24. If the required reserve ratio, m, is 20 percent, then the oversimplified money multiplier is



a.

10.

b.

5.

c.

4.

d.

2.

____ 25. If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?



a.

$25 million

b.

$20 million

c.

$5 million

d.

$2.5 million

____ 26. If people begin to hold more cash, the money multiplier process will



a.

increase in intensity.

b.

remain the same.

c.

decrease in actual size.

d.

cause larger amounts of excess reserves.

____ 27. The money creation formula is oversimplified because it assumes that



a.

every recipient of a bank loan will redeposit the proceeds in another bank.

b.

loan recipients will not take any of the proceeds in cash.

c.

every bank lends out all excess reserves.

d.

All of the above are correct.

____ 28. The central bank of the United States is known as the



a.

Internal Revenue Service.

b.

Federal Reserve System.

c.

Federal Deposit Insurance Corporation.

d.

Department of Commerce.

____ 29. The Fed's principal objective is to



a.

make profits to pay into the U.S. Treasury.

b.

collect tax revenues.

c.

supervise the business decisions of banks.

d.

manage the money supply and interest rates.

____ 30. Part of the reason that people confuse money and income is because



a.

money is tangible, but income is intangible.

b.

money serves as the unit of account.

c.

money is abstract, but income is concrete.

d.

income is almost impossible to measure.

____ 31. The immediate impetus for the establishment of the Federal Reserve System came from



a.

severe outbreaks of inflation in the early 1900s.

b.

four severe banking panics between 1873 and 1907.

c.

the discovery of gold in Alaska.

d.

the desire to copy the founding of the Bank of England.

____ 32. The actual control of the Federal Reserve System resides in the



a.

Congress of the United States.

b.

member banks.

c.

Senate Banking Committee.

d.

Board of Governors.

____ 33. Members of the Board of Governors of the Fed are



a.

elected to two-year terms by the Electoral College.

b.

appointed by the president for four-year terms and confirmed by the Congress.

c.

appointed by the president for 14-year terms and confirmed by the Senate.

d.

appointed by the president for 14-year terms and confirmed by the Supreme Court.

____ 34. The Federal Open Market Committee consists of



a.

the president and the Board of Governors.

b.

Congresspeople, Senators, and the Board of Governors.

c.

the Secretary of the Treasury and the Board of Governors.

d.

the Board of Governors and five district bank presidents.

____ 35. The Federal Open Market Committee meets



a.

once a month.

b.

eight times a year.

c.

four times a year.

d.

semi-annually.

____ 36. In making policies about the nation's money supply, the Federal Reserve Board



a.

operates as an independent entity.

b.

must consult each member bank.

c.

must consult with Congress.

d.

must coordinate all activity with the White House.

____ 37. When the Federal Reserve System was first established, its founders intended the Fed to



a.

assist the Treasury in collecting taxes.

b.

be primarily responsible for government regulations.

c.

pursue an active monetary policy to stabilize the economy.

d.

provide protection against financial panics by acting as the lender of last resort.

____ 38. In practice, money supply and short-term interest rates are determined by the



a.

Treasury and Commerce departments.

b.

Federal Open Market Committee.

c.

Board of Governors.

d.

House and Senate.

____ 39. The Fed is institutionally independent. A major advantage of this is that monetary policy



a.

is subject to regular congressional scrutiny.

b.

will often offset fiscal policy.

c.

is not controlled by politicians.

d.

is usually coordinated with fiscal policy.

____ 40. The Fed is institutionally independent. A major disadvantage of this is that monetary policy



a.

will always be coordinated with fiscal policy.

b.

is not subject to democratic control as other policies are.

c.

will never offset fiscal policy.

d.

cannot be changed once it has been instituted.

____ 41. Open market operations have their initial effect on bank



a.

lending.

b.

reserves.

c.

profits.

d.

revenues.

____ 42. Open market operations generally involve the purchase and sales of



a.

government securities.

b.

stocks and bonds.

c.

coins and currency.

d.

Federal Reserve notes.

____ 43. Does the Fed have good control over the money supply?



a.

Yes, open market operations generate exact changes in bank lending.

b.

Yes, reserve requirements create new loans.

c.

No, because of difficulties estimating the reserve ratio.

d.

No, because of difficulties estimating the size of the excess reserves and cash holdings by the public.

____ 44. The Fed relies on open market operations, which work



a.

with the Treasury in creating money to finance bonds.

b.

through major stock exchanges to influence bond prices.

c.

directly through the nonbank public to change their assets.

d.

through the banking system by affecting their reserves.

____ 45. If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?



a.

It will give the bank new reserves.

b.

It will write the bank a check.

c.

It will transfer cash to the bank's vault.

d.

It will take reserves from another bank.

____ 46. If the Fed sells a T-bill to a commercial bank, how will this effect the money supply?



a.

It will increase the money supply.

b.

It will increase bank reserves.

c.

It will decrease the money supply.

d.

It will have no effect on the money supply.

____ 47. Which of the following is the most frequently used tool of monetary policy?



a.

changing the discount rate

b.

changing reserve requirements

c.

open market operations

d.

interest rate changes

____ 48. The Fed's purchase and sale of government securities is known as



a.

margin operations.

b.

open market operations.

c.

bank reserve operations.

d.

cash management operations.

____ 49. The Fed conducts an open market purchase of Treasury bills of $10 million. If the required reserve ratio is .10, what change in the money supply can be expected using the oversimplified money multiplier?



a.

$100 million

b.

$10 million

c.

0

d.

-$10 million

e.

-$100 million


Table 12-1
EFFECTS OF AN OPEN MARKET TRANSACTION ON THE BALANCE SHEETS OF BANKS AND THE FED (In millions of dollars)


BANKS

FEDERAL RESERVE SYSTEM

ASSETS

LIAB.

ASSETS

LIAB.

Reserves +$10




U.S. Gov't

Bank Reserves

U.S. Gov't




Sec. +$10

+$10

Securities -$10









____ 50. In Table 12-1, the Federal Reserve System has



a.

sold $10 million in government securities to banks, taking payment in cash.

b.

sold $10 million in government securities to banks, taking payment from the bank's reserves.

c.

purchased $10 million in government securities from banks, paying for them with increases in banks' reserves.

d.

purchased $10 million in government securities from banks, paying for them with new Federal Reserve notes.

____ 51. In Table 12-1, if the required reserve ratio is 10 percent, what will happen to the money supply? Use the oversimplified money multiplier in your calculations.



a.

The money supply will decrease by $100 million.

b.

The money supply will decrease by $10 million.

c.

The money supply will not change.

d.

The money supply will increase by $10 million.

e.

The money supply will increase by $100 million.

____ 52. After the transaction in Table 12-1 is completed, what happens to actual reserves, required reserves, and excess reserves? Assume the required reserve ratio is 25 percent.



a.

Actual reserves increase by $10 million, required reserves increase $2.5 million, and excess reserves increase by $7.5 million.

b.

Actual reserves decrease by $10 million, required reserves decrease $2.5 million, and excess reserves decrease by $7.5 million.

c.

Actual reserves increase by $10 million, required reserves are unchanged, and excess reserves increase by $10 million.

d.

Actual reserves decrease by $10 million, required reserves decrease by $10 million, and excess reserves are unchanged.

____ 53. Discount rate policy is most often



a.

lowered when market rates rise.

b.

used to actively control the money supply.

c.

the Fed's primary tool of monetary control.

d.

passively changed by the Fed to follow market rates.

____ 54. The discount rate is the rate that the



a.

Treasury pays on savings bonds.

b.

Fed charges member banks.

c.

Fed charges on government securities.

d.

Fed charges the Treasury for sales of securities.

____ 55. If the Fed raises the discount rate, what happens to reserves and the money supply?



a.

Reserves increase and the money supply decreases.

b.

Both increase.

c.

Reserves decrease and the money supply increases.

d.

Both decrease.

____ 56. The reason that the Fed does not actively use discount rate policy to control the money supply is because the Fed



a.

acts when a majority of member banks agree on policy and the banks rarely agree.

b.

earns interest on discounting and cannot afford to lose the revenue.

c.

does not know how banks will respond to discount rate changes.

d.

has been directed by Congress to set the discount rate at a permanent level.

____ 57. If the Fed raises the reserve requirement on deposits from 15 percent to 20 percent, what would happen to the money supply?



a.

It would decrease.

b.

It would increase.

c.

It would remain unchanged.

d.

It depends on the value of interest rates.

____ 58. Assume that the banking system has $200 billion in reserves. There are no excess reserves in the system. If the reserve requirement is decreased from 10 percent to 8 percent, what will happen to the level of excess reserves in the system?



a.

There will be a deficiency of $40 billion in reserves.

b.

There will be a deficiency of $20 billion in reserves.

c.

There will be $20 billion in excess reserves.

d.

There will be $40 billion in excess reserves.

____ 59. If interest rates increase, what will happen to the demand for money?



a.

It will shift outward.

b.

It will shift inward.

c.

Nothing, the economy will move to a new quantity demanded.

d.

It depends on what happens to prices.

____ 60. The money demand schedule is drawn on a graph that has the quantity of money on the horizontal axis and



a.

the price level is on the vertical axis.

b.

the interest rate is on the vertical axis.

c.

the price of bonds is on the vertical axis.

d.

a time series is on the vertical axis.

____ 61. Money demanded varies



a.

inversely with both prices and output.

b.

inversely with prices and directly with output.

c.

directly with prices and inversely with output.

d.

directly with both prices and output.

____ 62. The demand for money increases as the price level rises because



a.

people want money to buy goods that will appreciate with inflation.

b.

people need more money to finance transactions.

c.

the opportunity cost of holding money increases.

d.

higher prices reduce the value of dollar assets.

____ 63. Which of the following will lower interest rates in the short run?



a.

an increase in reserve requirements

b.

open market sales by the Fed

c.

a decrease in real GDP

d.

an increase in the price level

____ 64. Which of the following will cause movement along the money demand schedule?



a.

a change in the price level

b.

a change in real GDP

c.

a change in tax rates

d.

a change in interest rates


Figure 12-2

____ 65. In Figure 12-2, which panel shows the effect on the interest rate of inflation?



a.

1

b.

2

c.

3

d.

4

____ 66. In Figure 12-2, which panel shows the effect on the interest rate of a recession?



a.

1

b.

2

c.

3

d.

4

____ 67. If interest rates increase, what is most likely to happen to the total expenditure schedule?



a.

It will increase because G increases.

b.

It will decrease because I decreases.

c.

It will decrease because (X - IM) decreases.

d.

It will increase because I increases.

____ 68. If the Fed were to increase the money supply at the same time the government was increasing taxes, we could expect



a.

an increase in interest rates and real GDP.

b.

a decrease in interest rates and real GDP.

c.

a decrease in interest rates but the effect on real GDP is indeterminant.

d.

an increase in interest rates but the effect on real GDP is indeterminant.

____ 69. Under what conditions will the inflationary impact of an expansionary monetary policy be the largest?



a.

When equilibrium real GDP is at potential real GDP.

b.

When there is a recessionary gap.

c.

When unemployment rates are high and there is substantial excess industrial capacity.

d.

When real GDP is falling and the price level is decreasing.


Figure 14-2

____ 70. Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 14-2 from D0D0 to D1D1. Fiscal authorities who wish to restore real GDP to the full-employment level will



a.

run a budget surplus by increasing taxes or cutting government spending.

b.

run a balanced budget to prevent the interest rate from rising and cutting off investment.

c.

run a budget deficit by cutting taxes or increasing government spending.

d.

ignore the change in monetary policy since it has no effect on fiscal policy.

____ 71. Analysis indicates that the economy is in a recessionary gap. Which of the following is the least appropriate policy mix in this situation?



a.

a budget surplus and expansionary monetary policy

b.

a budget deficit and expansionary monetary policy

c.

a budget deficit and contractionary monetary policy

d.

a budget surplus and contractionary monetary policy

____ 72. Many economists believe that if fiscal policy turns contractionary to reduce the deficit,



a.

monetary policy can turn expansionary to counteract the effects on aggregate demand.

b.

monetary policy must be contractionary to reinforce the good effects of contractionary fiscal policy.

c.

foreign investment in the United States must be encouraged.

d.

taxes on the earnings from stock market gains should be increased.


Practice Test 4

Answer Section

MULTIPLE CHOICE

1. D


2. B

3. D


4. B

5. A


6. D

7. C


8. A

9. C


10. B

11. D


12. A

13. B


14. A

15. D


16. D

17. B


18. D

19. C


20. C

21. A


22. C

23. B


24. B

25. B


26. C

27. D


28. B

29. D


30. B

31. B


32. D

33. C


34. D

35. B


36. A

37. D


38. B

39. C


40. B

41. B


42. A

43. D


44. D

45. A


46. C

47. C


48. B

49. A


50. C

51. E


52. C

53. D


54. B

55. D


56. C

57. A


58. D

59. C


60. B

61. D


62. B

63. C


64. D

65. D


66. B

67. B


68. C

69. A


70. C

71. D


72. A


The database is protected by copyright ©essaydocs.org 2016
send message

    Main page