1. Money functions as:
A. a store of value.
B. a unit of account.
C. a medium
D. all of these.
2. If you are estimating your total expenses for school next semester, you are using money primarily as:
A. a medium of exchange.
B. a store of value.
unit of account.
D. an economic investment.
3. In the United States, the money supply (M1) is comprised of:
A. coins, paper currency, and checkable deposits.
currency, checkable deposits, and U.S. Treasury bonds.
C. coins, paper
currency, checkable deposits, and credit balances with brokers.
paper currency, coins, gold certificates, and time deposits.
4. The money supply is backed:
A. by the government's ability to control the supply of
money and therefore to keep its value relatively stable.
C. dollar-for-dollar with gold and silver.
dollar-for-dollar with gold bullion (i.e. gold bars).
5. The M2 money supply includes:
A. stock certificates.
B. currency in bank vaults.
the cash value of life insurance policies.
D. individual shares in
money market mutual funds.
6. The purchasing power of money and the price level vary:
B. directly during recessions, but
inversely during inflations.
C. directly, but not
D. directly and proportionately.
7. During period of rapid inflation, money may cease to work as a medium of exchange:
A. unless it has been designated legal tender.
it is backed by gold.
C. it is too scarce for everyone to have enough
D. because people and businesses will not want to
accept it in transactions.
8. In the U.S. economy the money supply is controlled by the:
A. U.S. Treasury.
B. Federal Reserve System.
Committee on Banking and Finance.
9. The Federal Open Market Committee (FOMC) is made up of:
A. the chair of the Board of Governors along with the 12
presidents of the Federal Reserve Banks.
B. the seven members of the
Board of Governors along with the president of the New York Federal
C. the seven members of the Board of Governors of the
Federal Reserve System along with the three members of the Council of
D. the seven member of the Board of Governors of
the Federal Reserve System along with the president of the New York
Federal Reserve Bank and four other Federal Reserve Banks presidents on
a rotating basis.
10. Which one of the following is true about the U.S. Federal Reserve System?
A. There are 12 regional Federal Reserve Banks.
head of the U.S. Treasury also chairs the Board of Governors.
There are 14 members of the Board of Governors.
D. The Open Market
Committee is smaller in size than the Board of Governors.
11. The Board of Governors of the Federal Reserve has ____ members.
12. To say that the Federal Reserve Banks are quasi-public banks means that:
A. they are privately owned, but managed in the public
B. they deal only with banks of foreign nations and do not
have direct business contact with U.S. banks.
C. they deal only with
commercial banks, and not the public.
D. they are publicly owned, but
13. An important routine function of the Federal Reserve Bank is to:
A. supervise the liquidation of the assets of bankrupt state
B. help large commercial banks develop correspondent
relationships with smaller commercial banks.
C. advise commercial
banks as to the most profitable ways of reinvesting profits.
provide facilities by which commercial banks may collect and clear
14. The use of U.S. dollars in foreign countries:
A. is illegal under international law.
B. helps foreign
buyers and sellers overcome problems with their domestic
C. varies directly (positively) with U.S. interest
D. is less in volume than the use of foreign currencies in the
15. Which of the following causes the Federal Reserve System to be independent from the U.S. federal government?
A. the U.S. government can completely audit the Federal
B. the terms for the Board of Governors is staggered,
preventing a President to appoint a new board.
C. the Federal Reserve
receives funding from the U.S. federal government.
D. the Board of
Governors has to include the secretary from the U.S.
1. The goldsmith's ability to create money was based on the fact that:
A. withdrawals of gold tended to exceed deposits of gold in
any given time period.
B. consumers and merchants preferred to use
gold for transactions, rather than paper money.
C. the goldsmith was
required to keep 100 percent gold reserves.
D. paper money in the
form of gold receipts was rarely redeemed for gold.
2. Bank panics:
A. occur frequently in fractional reserve banking
B. are a risk of fractional reserve banking, but are
unlikely when banks are highly regulated and lend prudently.
cannot occur in a fractional reserve banking system.
D. occur more
frequently when the monetary system is backed by gold.
3. A bank that has assets of $85 billion and a net worth of $10 billion must have:
A. liabilities of $75 billion.
B. excess reserves of $10
C. liabilities of $10 billion.
D. excess reserves of $75
4. Which of the following are all assets to a commercial bank?
A. demand deposits, stock shares, and reserves
cash, property, and reserves
C. vault cash, property, and stock
D. vault cash, stock shares, and demand deposits
5. Banks create money when they:
A. add to their reserves in the Federal Reserve Bank.
accept deposits of cash.
C. sell government bonds.
checkable deposits for the IOU's of businesses and
6. When a check is drawn and cleared, the
A. reserves and deposits of both the bank against which the
check is cleared and the bank receiving the check are unchanged by this
B. bank against which the check is cleared loses
reserves and deposits equal to the amount of the check.
receiving the check loses reserves and deposits equal to the amount of
D. bank against which the check is cleared acquires
reserves and deposits equal to the amount of the check.
7. Excess reserves refer to the:
A. difference between a bank's vault cash and its reserves
deposited at the Federal Reserve Bank.
B. minimum amount of actual
reserves a bank must keep on hand to back up its customers
C. difference between actual reserves and loans.
difference between actual reserves and required reserves.
8. A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is
deposited in the bank, it can increase its loans by a maximum of:
9. The required reserve ratio applies to checkable deposits at:
A. national banks.
B. credit unions.
C. savings and
D. institutions of all of these types.
10. The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of:
A. the MPS.
B. its actual reserves.
C. its excess
D. the reserve ratio.
11. If excess reserves in the banking system are $4,000, checkable deposits are $40,000, and the required reserve ratio is 10 percent, then
actual reserves are:
12. (Last Word) Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics of
A. banks are more cautious lenders
B. banks keep large
amounts of excess reserves on hand
C. the FDIC insures bank deposits
and therefore depositors do not panic and rush to withdraw money when
individual banks have financial problems
D. the President now has the
authority to close banks whenever panics occur
13. If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the required reserve ratio is 10 percent, then
excess reserves are:
14. What is a bank run?
A. when a bank president steals the deposits and moves to
B. the ability for government to take over failed
C. government offers deposit insurance, which prevents bank
D. depositors rush to the bank to withdraw all their
deposits, causing a bank failure.
15. What is the federal funds rate?
A. the interest rate that banks charge to their best
B. the interest rate that banks lend to themselves using
their deposits at the Federal Reserve.
C. the interest rate the
Federal Reserve charges for loaning funds to banks.
D. the interest
rate the Federal Reserve charges for lending to the federal
1. The desire to hold money for transactions purposes arises because:
A. receipts of income and expenditures are not perfectly
B. people fear that prices will rise.
want money on hand in case a good financial investment opportunity
D. low interest rates reduce the opportunity cost of holding
2. The total demand for money curve will shift to the right as a result of:
A. an increase in nominal GDP.
B. an increase in the
C. a decline in the interest rate.
D. a decline in
3. The opportunity cost of holding money:
A. is zero because money is not an economic resource.
varies inversely with the interest rate.
C. varies directly with the
D. varies inversely with the level of economic
4. Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks?
A. loans to commercial banks
B. Federal Reserve Notes in
C. Treasury deposits
D. reserves of commercial
5. Federal Reserve Notes in circulation are:
A. an asset as viewed by the Federal Reserve.
liability as viewed by the Federal Reserve.
C. neither an asset nor a
liability as viewed by the Federal Reserve.
D. part of
M1, but not of M2.
6. Which of the following will increase commercial bank reserves?
A. the purchase of government bonds in the open market by the
B. an increase in the required reserve
C. an increase in the discount rate
D. the sale of
government bonds in the open market by the Federal Reserve
7. In the United States monetary policy is the responsibility of the:
A. U.S. Treasury.
B. Department of Commerce.
C. Board of
Governors of the Federal Reserve System.
8. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:
A. not directly affected, but the money-creating potential
of the commercial banking system is increased by $12 million.
directly increased by $4 million and the money-creating potential of the
commercial banking system is increased by an additional $16
C. directly reduced by $4 million and the money-creating
potential of the commercial banking system is decreased by an additional
D. directly increased by $4 million and the
money-creating potential of the commercial banking system is increased
by an additional $12 million.
9. Open-market operations refer to:
A. purchases of stocks in the New York Stock Exchange.
the purchase or sale of government securities by the Fed.
bank lending to commercial banks.
D. the specifying of loan maximums
on stock purchases.
10. An increase in the required reserve ratio:
A. increases the money supply by increasing excess reserves
and increasing the monetary multiplier.
B. decreases the money supply
by decreasing excess reserves and decreasing the monetary
C. increases the money supply by decreasing excess
reserves and decreasing the monetary multiplier.
D. decreases the
money supply by increasing excess reserves and decreasing the monetary
11. The purpose of a restrictive monetary policy is to:
A. alleviate recessions.
B. raise interest rates and
restrict the availability of bank credit.
C. increase aggregate
demand and GDP.
D. increase investment spending.
12. The interest rate at which the Federal Reserve lend to commercial banks is called the:
A.& prime rate.
B. short-term rate.
C. discount rate.
D. Federal funds rate.
13. Which of the following tools of monetary policy is considered the most important?
A. the discount rate
B. the reserve ratio
D. the Federal funds rate
14. Which of the following will likely accompany an expansionary monetary policy?
A. a higher prime interest rate
B. a lower Federal funds
C. a higher discount rate
D. higher income tax
15. In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond
enough to bring the economy out of recession. Japan's experience is an illustration of:
A. the crowding-out effect.
B. "pulling on a
C. the Taylor rule.