Unit Four TEst

1. Unit Four TEst

2. Functions of Money • 1. The U.S. dollar • a. serves as a medium of exchange • b. is backed by silver • c. is fiat money • d. a and b • e. a and c

3. Money 2. Which of the following is not true about the U.S. dollar? • a. It serves as a medium of exchange • b. It is a unit of account • c. It is fiat money • d. It is a store of value • e. It is not susceptible to inflation

4. Types of Money 3. Money 1 includes • a. currency • b. savings accounts • c. Money 2 • d. Certificates of Deposits • e. Money market accounts

5. Types of Money 4. Money 3 includes • a. Currency • b. Checking accounts • c. Savings accounts • d. Time deposits • e. All of the above

6. The Fed 5. Monetary policy is set by • a. Congress • b. The Executive Branch • c. The Treasury Department • d. The Federal Reserve • e. Alexander Hamilton

7. The Fed 6. The Federal Reserve does all except which of the following? • a. make loans to individuals • b. control the supply of money • c. control the value of money • d. regulate the banking system • e. sells government securities

8. Monetary Policy 7. When the Fed wants to change the money supply, it most frequently • a. conducts open market operations. • b. changes the discount rate. • c. changes the reserve requirement. • d. issues Federal Reserve notes. • e. stops the money making machines.

9. Functions of Money 8. The measurement of GDP in dollars illustrates which function of money? • a. Medium of exchange • b. Store of value • c. Unit of account • d. Fiat function • e. Aggregate supply function

10. Fractional Reserve Banking • 9. At the ElbowPatch bank, the money supply is $80,000 and required reserves are $20,000. Assuming that people hold only deposits and no currency, and that banks hold only required reserves, the required reserve ratio is • a. 40 percent • b. 25 percent. • c. 20 percent. • d. 15 percent. • e. 10 percent

11. Monetary Policy • 10. To increase the money supply, the Fed could • a. sell government bonds. • b. increase the discount rate. • c. decrease the reserve requirement. • d. increase the reserve requirement. • e. Both a and c are correct.

12. Monetary Policy • 11. To decrease the money supply, the Fed could • a. sell government bonds. • b. increase the discount rate. • c. increase the reserve requirement. • d. buy government bonds. • e. all but d.

13. Monetary Policy • 12. To combat high unemployment, the Fed might • a. increase the reserve requirement • b. raise interest rates • c. increase the discount rate • d. buy government bonds • e. sell government bonds

14. Monetary Policy and the Money Multiplier • 13. If the reserve ratio is 10 percent, and banks do not hold excess reserves, when the Fed purchases $10 million of government bonds, bank reserves • a. increase by $10 million and the money supply eventually increases by $100million. • b. decrease by $10 million and the money supply eventually increases by $100 million. • c. increase by $10 million and the money supply eventually decreases by $100 million. • d. decrease by $10 million and the money supply eventually decreases by $100 million. • e. none of the above

15. Monetary Policy • 14. If the reserve ratio is 25 percent, and banks do not hold excess reserves, when the Fed sells $40 million of bonds to the public, bank reserves • a. increase by $40 million and the money supply eventually increases by $100 million. • b. increase by $40 million and the money supply eventually increases by $160 million. • c. decrease by $40 million and the money supply eventually decreases by $100 million. • d. decrease by $40 million and the money supply eventually decreases by $160 million. • e. none of the above

16. Liquidity • 15. The ease with which an asset can be • a. traded for another asset determines whether or not that asset is a unit of account. • b. transported from one place to another determines whether or not that asset could serve as fiat money. • c. converted into a store of value determines the liquidity of that asset. • d. turned into gold tobacco determines the value of that asset • e. converted into the economy’s medium of exchange determines the liquidity of that asset.

17. Types of Money • 16. Which of the following is not included in M1? • a. A dollar in your wallet • b. $100 in your checking • c. $500 in your savings account • d. $200 in a demand deposit account • e. a traveler’s check

18. Functions of Money • 17. You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money? • a. medium of exchange • b. unit of account • c. store of value • d. liquidity • e. exploitation

19. Banking • 18. In a system of 100-percent-reserve banking, • a. banks do not hold money • b. banks do not accept deposits • c. banks cannot create money • d. banks cannot reserve more than the Fed’s reserve requirement • e. banks cannot hold saving accounts

20. Fractional Reserve Banking 19. Suppose that Larry bank does not want to hold excess reserves, the reserve requirement is 5% and Larry bank receives a deposit of $1,000. This bank will • a. increase its required reserves by $50. • b. initially see its total reserves increase by $1,000. • c. will be able to make a new loan of $950. • d. All of the above are correct. • e. None of the above are correct.

21. Required Reserves 20. Suppose the Fed requires banks to hold 10 percent of their deposits as reserves. A bank has $20,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves? • a. $30,000 • b. $29,000 • c. $28,100 • d. $19,100 • e. $11,000

22. 21. Fractional Reserve Banking • Assets • Liabilities • Reserves $2,000 • Deposits $10,000 • Loans $8,000 •   This bank operates in a • a. system of 0-percent-reserve banking. • b. system of 100-percent-reserve banking. • c. system of Federal-Reserve banking. • d. fractional-reserve banking system.

23. 22. Fractional Reserve Banking • The bank’s reserve ratio is • a. 7.50 percent. • b. 10 percent. • c. 12 percent. • d. 20 percent. • e. 21.5 percent.

24. 23. Fractional Reserve Banking • Suppose a bank has $10,000 in deposits and $8,000 in loans. It has loaned out all it can given the reserve requirement. It follows that the required reserve ratio is • a. 10% • b. 20% • c. 30% • d. 40% • e. 80%

25. 24. Fractional Reserve Banking • If the reserve ratio is 12.5%, then the money multiplier is • a. 6.25 • b. 8 • c. 12.5 • d. 25 • e. 87.5

26. 25. Monetary Policy • In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions • a. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds. • b. would increase the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds. • c. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have sold bonds. • d. would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds. • e. none of the above

27. 26. Money Multiplier • The Reserve Requirement is 10 percent. Mary takes $1000 that she has held in currency in a shell purse and deposits in the bank. In this case, the money supply can change by as much as • a. $1000 • b. $4000 • c. $5000 • d. $9000 • e. $10,000

28. 27. Monetary Policy Contractionary monetary policy • a. increases AD • b. decreases interest rates • c. increases AS • d. increases interest rates • e. decreases AS

29. 28. • Which of the following would lessen the effect of expansionary monetary policy? • a. Increased lending by banks • b. Increased excess reserves • c. Increased deposits by homeowners • d. Increased borrowing by homeowners • e. Increased borrowing by businesses

30. 29. • The Fed uses monetary policy to • a. set the interest rates in the economy • b. offset fiscal policy • c. directly manipulate consumption • d. guide government expenditures • e. alter the money supply

31. 30. Monetary Policy When the central bank decides to decrease the money supply to combat inflation, it • a. reduces interest rates • b. causes the value of the US dollar to fall • c. increases private spending • d. causes the value of the US dollar to increase • e. increases aggregate demand

32. 31. • 33. If the Federal Reserve sells a significant amount of government securities (treasury bonds) in the open market, which of the following will occur? • A. The total amount of loans made by commercial banks will decrease. • B. The total amount of loans made by commercial banks will increase. • C. The money supply will increase. • D. Rates of interest will decrease. • E. Rates of interest and amount of loans made by commercial banks will remain unchanged 

33. 32. Monetary Policy To counteract a recession, the Federal Reserve should • (a) raise the reserve requirement and the discount rate • (b) sell securities on the open market and raise the discount rate • (c) sell securities on the open market and lower the discount rate • (d) buy securities on the open market and raise the discount rate • (e) buy securities on the open market and lower the discount rate

34. 33. Deflation is most difficult on • a. a fractional-reserve bank • b. a person who has student loans • c. a credit card company • d. a 100% reserve bank • e. China

35. 34. The following is a certificate of debt • a. stock • b. money market account • c. time deposit • d. bond • e. demand deposit

36. 35. • The quantity theory of money supposes that the amount of money in the economy • a. affects price levels • b. does not affect CPI • c. affects real variables • d. does not affect inflation rate • e. only a and c

37. 36. According to the quantity theory of money, increasing the money supply will • a. decrease price level and decrease the value of money • b. decrease the price level and increase the value of money • c. increase price level and decrease the value of money • d. increase price level and increase the value of money • e. increase price level but will not change affect the value of money

38. 37. Which of the following is not a nominal variable? • a. Price level • b. Income level • c. Number of people employed • d. Minimum wage • e. Poverty threshold

39. 38. The neutrality of money theory asserts that the money supply • a. will not affect real variables • b. will not affect nominal variables • c. will change real and nominal variables relative to one another • d. will not affect the inflation rate • e. will not change the interest rate

40. 39. If the price of the goods in Ubetergethisright equal $500 and this economy makes 50 goods, but there are only $100 in this small economy, what is the velocity of money in this small but threatening nation? • a. 100 • b. 150 • c. 200 • d. 250 • e. 500

41. 40. The quantity equation for Ubetergethisright should look like this: • a. 100 x 250 = 50 x 500 • b. 100 x 50 = 500 • c. 50 X 250 = 100 X 125 • d. 100 X 500 = 125 X 450 • e. 150 X 50 = 100 X 75

42. 41. What is the real interest rate if the nominal interest rate is 7% and the inflation rate is 2.5%? • A. 9.5% • B. 7% • C. 4.5% • D. 10% • E. 3.5%

43. 42. The above equation illustrates • a. The quantity money theory • b. The equation of quantity theory • c. The Fisher Effect • d. The nominal theory of money • e. The Silence Effect

44. 43. Which components of aggregate demand will be most affected by an expansionary monetary policy? • a. C + I • b. G + I • c. Net exports • d. G + C • e. Only I