Exam 4 (Ch. 11-Ch.13)

Question 1

Financial institutions greatly increase the flow of funds to the economy by:

a)            decreasing information costs.

b)            lending to whoever wants to borrow from them.

c)            increasing transaction costs.

d)            assuming all of the risk of lending funds.

Question 2

The demand for loanable funds is downward-sloping because:

a)            higher interest rates encourage firms to borrow more.

b)            as interest rates drop, the value of the money supply drops.

c)            higher interest rates are equivalent to higher returns on business projects.

d)            as interest rates fall, business find more projects to be profitable and thus want to borrow more.

Question 3

Fiat money:

a)            loses its value over time.

b)            is made out of commodities such as gold or silver.

c)            does not necessarily have any intrinsic value but has been declared by a government to be money.

d)            was initially used by an automobile manufacturer.

Question 4

Institutions that serve as the bridge between savers and borrowers are known as:

a)            commercial banks.

b)            credit unions.

c)            financial intermediaries.

d)            securities firms.

Question 5

The supply of loanable funds includes:

a)            saving by the public.

b)            saving by government entities.

c)            saving by business firms.

d)            All of the answers are correct.

Question 6

The supply of loanable funds slopes ______ because an increase in the interest rate induces __________.

a)            downward; less saving

b)            downward; less investment

c)            upward; more saving

d)            upward; more investment

Question 7

Near money includes:

a)            some of M2 and some of M1.

b)            some of M2 but none of M1.

c)            hard assets such as land.

d)            only the money in M3 that is no longer collected.

Question 8

Which of the following is UNTRUE?

a)            Near money includes money market mutual fund accounts with check writing features.

b)            Near money cannot be drawn on instantaneously but is nonetheless accessible.

c)            Near money includes savings accounts.

d)            Near money includes individual stocks and bonds.

Question 9

As the real interest rate falls:

a)            the quantity demanded of loanable funds rises.

b)            less funds are demanded.

c)            the demand for loanable funds falls.

d)            the demand for loanable funds rises.

Question 10

When a financial institution accepts funds from savers and pools this money into a portfolio of diversified financial instruments, it is:

a)            spreading risk.

b)            reducing information costs.

c)            preventing fraud.

d)            reducing transaction costs.

Question 11

Money used to purchase goods or services is functioning as a:

a)            store of value.

b)            medium of exchange.

c)            unit of account.

d)            standard value

Question 12

Liquidity refers to:

a)            how fast money travels throughout the economy.

b)            how fast money can be transferred from one account to another account.

c)            how easily cash can be transported across national borders.

d)            how quickly, easily, and reliably an asset can be converted into a medium of exchange.

Question 13

Which one of the following will cause the supply of loanable funds curve to shift rightward?

a)            a perceived peak in an asset index like the Dow Jones Industrial Average

b)            technological advances that result in new products

c)            an increase in the government deficit

d)            an improvement in firms' expectations about the economy

Question 14

If the Federal Reserve decides to increase the money supply:

a)            the federal funds rate will rise.

b)            the federal funds rate will be unaffected.

c)            deflation will occur.

d)            the federal funds rate will fall.

Question 15

The Fed's monetary policies, like fiscal policy, are subject to _____ lags.

a)            information

b)            implementation

c)            decision

d)            All of the answers are correct.

Question 16

Which of the following is a basic goal of the Federal Reserve System?

a)            export promotion

b)            a balanced federal budget

c)            full employment

d)            zero interest rates

Question 17

The main tool of monetary policy is:

a)            the reserve requirements.

b)            the discount rate.

c)            open market operations.

d)            capital gains taxes.

Question 18

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How many dollars' worth of loans can the banking system create?

a)            $6,000

b)            $0

c)            $1,500

d)            $4,500

Question 19

There are two ways for money to be initially deposited into the banking system. They include:

a)            the deposit of a check by a bank customer and a gold deposit by the government.

b)            the deposit of a check by a bank customer and a cash deposit by a bank customer.

c)            a cash deposit by a bank customer and an electronic reserve deposit by the government.

d)            a cash deposit by a bank customer and a cash deposit by the government.

Question 20

The main policymaking arm of the Fed is the:

a)            Federal Open Market Committee.

b)            Council of Economic Advisers.

c)            Money Committee.

d)            Beige Book Committee.                               

Question 21

Which of the following items is NOT one of the primary tools of the Fed?

a)            reserve requirements

b)            discount rate

c)            open market operations

d)            tax rates

Question 22

Assume that the reserve requirement is 20%. A bank has $20 billion in demand deposits. How much money does the bank have to keep in reserves?

a)            $2 billion

b)            $20 billion

c)            $10 billion

d)            $4 billion

Question 23

If the reserve requirement is 2.5% and a bank initially receives $30,000 in deposits from the Fed, then the maximum amount of money that the banking system can create is:

a)            $30,000

b)            $1.2 million

c)            $1,500

d)            $750

 

Question 24

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults:

a)            the actual multiplier will fall.

b)            the potential multiplier will rise.

c)            the actual multiplier will rise.

d)            the potential multiplier will fall.

Question 25

Open market operations involve the purchase and sale of:

a)            corporate bonds.

b)            utility bonds.

c)            government securities.

d)            municipal bonds.

Question 26

The 12 Federal Reserve banks and their branches do all of the following except:

a)            accept deposits from U.S. citizens.

b)            serve as the banker for the United States Treasury.

c)            regulate and supervise member banks.

d)            distribute coins and currency.

Question 27

One of the key factors leading to the last economic crisis was:

a)            the war in Iraq.

b)            a surplus in the federal budget.

c)            a shortage of housing in the United States.

d)            a worldwide savings glut.

Question 28

Money illusion:

a)            occurs when output rises.

b)            is the distinguishing factor between the short run and the long run.

c)            is the misperception that one is wealthier; it occurs when the money supply grows.

d)            is the misperception that prices have changed; it occurs when the Fed reduces the money supply.

Question 29

When current real output exceeds potential real output, the Fed will _____ interest rates in an effort to fight _____.

a)            decrease; a recession

b)            decrease; inflation

c)            increase; inflation

d)            increase; a recession

Question 30

Generally, economists believe that monetary policy should focus on price stability in the _____ run and output or income in the _____ run.

a)            long; long

b)            long; short

c)            short; long

d)            short; short

Question 31

The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called:

a)            monetary incapacitation.

b)            the sterilization of money.

c)            the horizontality of demand.

d)            the liquidity trap.

Question 32

Which action is the Fed most likely to take to curb inflation?

a)            lower the discount rate

b)            lower reserve requirements

c)            raise taxes

d)            sell securities in the open market

Question 33

In times of economic downturn the Fed will engage in ____ monetary policy by ____ bonds.

a)            expansionary; selling

b)            contractionary; selling

c)            expansionary; buying

d)            contractionary; buying

Question 34

After the banking crisis of 2008, the financial services industry had:

a)            higher returns on equity.

b)            tighter regulations.

c)            fewer restrictions on leverage.

d)            lower capital requirements.

Question 35

To say that the Fed is transparent means that the Fed:

a)            uses a monetary growth rule.

b)            has a “just trust us” approach to conducting monetary policy.

c)            is open regarding its monetary policy.

d)            executes decisions in secrecy.

Question 36

Tightening monetary policy causes interest rates to ____ and aggregate ____ to _______.

a)            rise; demand; decrease

b)            fall; supply; increase

c)            fall; demand; increase

d)            rise; supply; decrease

Question 37

In a liquidity trap:

a)            monetary policy is ineffective in changing income and output.

b)            monetary policy is very effective in changing income and output.

c)            fiscal policy is ineffective in changing income and output.

d)            monetary policy is somewhat effective in changing income and output in the short run.

Question 38

In the classical monetary transmission mechanism any change in _______ will bring about ________.

a)            M; changes in interest rates

b)            V; a direct proportionate change in Q

c)            M or V; changes in P

d)            M a direct proportionate change in P

Question 39

Which economists believe that changes in the money supply lead only to price changes?

a)            classical economists

b)            Keynesians

c)            Fisherites

d)            monetarists

Question 40

If the economy is facing inflationary pressures, the Fed will:

a)            decrease government spending.

b)            raise taxes.

c)            lower interest rates.

 

d)            raise interest rates.

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