Question 1

When the Fed wants to undertake open market operations, it

Accepted Answer

A)   can require all commercial banks to buy from or sell to it.
B)   can require all member banks to buy from or sell to it.
C)   buys or sells securities through the trading desk at the New York Federal Reserve Bank.
D)   buys from or sells to the U.S. Treasury.E) A) and C)
F) A) and B)

Question 2

The potential for a financial breakdown at large institutions to spread throughout the financial system is called

Accepted Answer

A)   a systemic risk.
B)   a too-large-to-fail problem.
C)   an averse selection problem.
D)   a moral hazard.E) B) and C)
F) None of the above

Question 3

It is widely believed that the Federal Reserve's most important function is

Accepted Answer

A)   to provide loans to the federal government.
B)   to regulate the money supply.
C)   to set the legal, controlled consumer interest rates.
D)   to lend to risky customers.E) A) and B)
F) B) and D)

Question 4

Which of the following is a checkable and debitable account?

Accepted Answer

A)   A brokerage account with your stockbroker
B)   A savings account
C)   A checking account
D)   All of the above are checkable and debitable accounts.E) A) and D)
F) C) and D)

Question 5

The M1 definition of the money supply includes all of the following EXCEPT

Accepted Answer

A)   currency.
B)   transaction deposits.
C)   savings accounts.
D)   travelers checks.E) A) and B)
F) None of the above

Question 6

The direct exchange of goods and services for other goods and services is known as

Accepted Answer

A)   primitive trade.
B)   nonmarket trade.
C)   barter.
D)   purchasing power parity.E) A) and B)
F) A) and C)

Question 7

If people withdraw $10 million from the nation's money market mutual funds and redeposit the funds in various checkable and debitable accounts, then

Accepted Answer

A)   M1 and M2 will remain unchanged.
B)   M1 will increase, M2 will remain unchanged.
C)   M1 will increase, M2 will decrease.
D)   M1 and M2 will increase.E) A) and C)
F) B) and D)

Question 8

Liquidity refers to

Accepted Answer

A)   the ease with which an asset can be acquired or disposed of without incurring high transaction costs.
B)   the expected return from an asset.
C)   the amount of indebtedness held against an asset.
D)   the net worth of the individual in question.E) A) and B)
F) A) and C)

Question 9

Which of the following would reduce the money multiplier?

Accepted Answer

A)   The purchase of bonds by the Fed
B)   Lowering the reserve ratio
C)   Increases in the reserve ratio
D)   A flow of currency into the banking systemE) All of the above
F) B) and D)

Question 10

The narrowest definition of the money supply is

Accepted Answer

A)   M1.
B)   M2.
C)   the difference between M2 and M1.
D)   the sum of M1 and M2.E) B) and D)
F) All of the above

Question 11

Traveler's check are

Accepted Answer

A)   part of M1 only.
B)   part of M2 only.
C)   part of M1 and M2.
D)   not part of M1 or M2.E) B) and D)
F) All of the above

Question 12

When you use a debit card to purchase a pair of jeans, you are

Accepted Answer

A)   creating a 30-day loan from your bank to the seller.
B)   creating a 30-day loan from the seller to your bank.
C)   giving your bank an instruction to transfer funds directly from your bank account to the store's bank account.
D)   creating an overnight repurchase agreement between your bank and the store.E) A) and B)
F) A) and D)

Question 13

When comparing the price of a plasma TV with the price of an LED TV, Amanda discovered the LED was more expensive. This is an example of using money as

Accepted Answer

A)   a store of value.
B)   a medium of exchange.
C)   a unit of accounting.
D)   a standard of deferred payment.E) None of the above
F) B) and C)

Question 14

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.E) C) and D)
F) A) and B)

Question 15

Initially, the reserve ratio is 10 percent. Now banks decide they want an additional 10 percent of deposits as reserves. There are no currency drains. If the Fed buys $1 million of U.S. government securities, the money supply will

Accepted Answer

A)   not change because of the excess reserves banks keep on hand.
B)   increase by $1 million.
C)   increase by $5 million.
D)   increase by $10 million.E) All of the above
F) B) and C)

Question 16

Fractional reserve banking is a system in which

Accepted Answer

A)   depository institutions pay a fraction of advertised interest rates.
B)   a fraction of banking services must be provided by depository institutions.
C)   depository institutions hold a fraction of total deposits in reserve.
D)   the money supply is a set fraction of the U.S. gold reserves.E) B) and C)
F) A) and D)

Question 17

To the extent that money serves as a medium of exchange

Accepted Answer

A)   it benefits both buyers and sellers.
B)   it reduces transaction costs.
C)   it eliminates the need for barter.
D)   All of the above are correct.E) A) and B)
F) A) and C)

Question 18

An increase in the reserve ratio

Accepted Answer

A)   has an expansionary effect on the money supply.
B)   has a contractionary effect on the money supply.
C)   increases the money multiplier.
D)   will cause banks to make more loans.E) A) and D)
F) A) and B)

Question 19

A method of measuring the money supply by looking at money as a medium of exchange is the

Accepted Answer

A)   fiduciary monetary system.
B)   capital control.
C)   transactions approach.
D)   liquidity approach.E) A) and B)
F) C) and D)

Question 20

Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

Accepted Answer

A)   $0.
B)   $20.
C)   $80.
D)   $400.E) B) and C)
F) All of the above

Exam 15: Money, Banking, and Central Banking

A method of measuring the money supply by looking at money as a medium of exchange is the

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Traveler's check are

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The M1 definition of the money supply includes all of the following EXCEPT

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Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $100 can make additional loans of

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Which of the following would reduce the money multiplier?

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When the Fed wants to undertake open market operations, it

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If people withdraw $10 million from the nation's money market mutual funds and redeposit the funds in various checkable and debitable accounts, then

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The narrowest definition of the money supply is

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Fractional reserve banking is a system in which

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An increase in the reserve ratio

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

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Which of the following is a checkable and debitable account?

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Initially, the reserve ratio is 10 percent. Now banks decide they want an additional 10 percent of deposits as reserves. There are no currency drains. If the Fed buys $1 million of U.S. government securities, the money supply will

Correct AnswerverifiedShow Answer

The direct exchange of goods and services for other goods and services is known as

Correct AnswerverifiedShow Answer

When comparing the price of a plasma TV with the price of an LED TV, Amanda discovered the LED was more expensive. This is an example of using money as

Correct AnswerverifiedShow Answer

When you use a debit card to purchase a pair of jeans, you are

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The potential for a financial breakdown at large institutions to spread throughout the financial system is called

Correct AnswerverifiedShow Answer

It is widely believed that the Federal Reserve's most important function is

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To the extent that money serves as a medium of exchange

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Liquidity refers to

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