Download Practice with Money

Practice with Money
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. A share in the ownership of a company held by a shareholder is considered a(n):
A. bond.
B. stock.
C. dividend.
D. IOU.
E. mortgage.
____
2. Which of the following would accurately characterize the portion of a firm's profit paid to the owner of one
share of its stock?
A. interest
B. dividend
C. stock
D. bond
E. liabilities
____
3. A bond is:
A. a share of ownership of a company held by a shareholder.
B. an IOU that pays interest.
C. a portion of a firm's profits paid to stock owners.
D. part of private savings.
E. the interest payment on borrowing.
____
4. Which of the following is considered investment spending in macroeconomics?
A. GM builds a new plant to manufacture automobiles.
B. Ryan Jones buys some GM stock.
C. Ryan Jones buys some GM bonds.
D. Ryan Jones buys some GM stock and bonds.
E. Ryan Jones buys a GM automobile.
____
5. Economists view investment spending as which of the following?
A. stocks
B. bonds
C. Spending on physical capital.
D. mutual fund investing
E. Spending on human capital.
____
6. Physical capital is purchased through investment spending, which in turn is mostly financed out of:
A. taxes.
B. government borrowing.
C. import tariffs.
D. consumption expenditure.
E. domestic and foreign savings.
____
7. Which of the following is considered an act of investing in a physical asset?
A. Purchasing shares of stock in IBM.
B. Selling shares of stock in IBM.
C. Buying a bond issued by IBM.
D. Buying a new factory that produces IBM handheld devices.
E. Buying a new IBM computer to take to college.
____
8. Private savings is equal to:
A. income less taxes, plus transfers, less consumption.
B. taxes less government spending on goods and services.
C. the total amount of savings accounts plus stocks plus bonds owned by households.
D. income plus investment.
E. income less consumption
Scenario 22-1: Closed Economy S = I
In a closed economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is
$2 trillion. Taxes are $0.5 trillion.
____
9. Use Scenario 22-1. How much is private saving?
A. $4 trillion
B. $2.5 trillion
C. $3.5 trillion
D. –$0.5 trillion
E. $2 trillion
____ 10. Use Scenario 22-1. What is the government budget balance?
A. a surplus of $1.5 trillion
B. a deficit of $1.5 trillion
C. a surplus of $0.5 trillion
D. a deficit of $0.5 trillion
E. a deficit of $2.5 trillion
____ 11. Use Scenario 22-1. How much is national saving?
A. $3.5 trillion
B. $3 trillion
C. $2.5 trillion
D. $2 trillion
E. $1.5 trillion
____ 12. Use Scenario 22-1. How much is investment spending?
A. $3.5 trillion
B. $3 trillion
C. $2.5 trillion
D. $2 trillion
E. $1.5 trillion
____ 13. In a simple closed economy, all investment spending must come from:
A. saving.
B. money creation.
C. debt issuance.
D. foreign borrowing.
E. government spending.
____ 14. The budget balance is equal to:
A. taxes plus government spending.
B. taxes minus government spending.
C. consumption plus investment.
D. imports minus exports.
E. income minus consumption
____ 15. A budget surplus would exist when which of the following occurs?
A. Taxes are greater than government spending.
B. Taxes are less than government spending.
C. Taxes are less than government spending plus investment.
D. Investment is less than government spending less taxes.
E. Consumption spending is greater than savings.
____ 16. In a closed economy, all investment spending must come from:
A. government spending.
B. domestic savings.
C. foreign savings.
D. government spending, domestic savings and foreign savings.
E. consumption spending.
____ 17. The savings-investment spending identity says that:
A. each person in the economy must invest as much as he or she saves.
B. savings and investment spending are always equal for the economy as a whole.
C. savings must equal government investment for the economy as a whole.
D. each person in the economy must save as much as he or she invests.
E. savings plus investment spending equals gross domestic product.
____ 18. The government saves when it:
A. has a balanced budget.
B. has a budget deficit.
C. has a budget surplus.
D. borrows by selling bonds.
E. spends more than it collects in tax revenue.
____ 19. A difference between a closed and an open economy is that:
A. in the latter, foreign savings complement domestic savings in financing investment
spending.
B. in the latter, the government is more open to the idea of financing investment spending
than in the former.
C. in the former, foreign savings complement domestic savings in financing investment
spending.
D. in the former, foreign savings finance more investment spending than in the latter.
E. in the former, government budget deficits help to finance additional investment spending.
____ 20. In a closed economy, the savings-investment spending identity is:
A. I = GDP – C – G + (IM – NX).
B. NS = GDP – I.
C. NS = GDP + (C – T + TR) + (T – TR – G).
D. I = GDP – C – G.
E. I = GDP + C + G
____ 21. In an open economy, total investment is equal to:
A. national savings + capital inflow
B. private savings + national savings + capital inflow
C. private savings + capital inflow
D. national savings – private savings – capital inflow
E. private savings – public savings + capital inflow
Scenario 22-3: Economy of Centralia
Centralia has no trade and no government. GDP = $25 trillion. Consumption Spending = $18 trillion.
____ 22. Use Scenario 22-3. Consider the information on the economy of Centralia. What is the level of private saving
in Centralia?
A. $43 trillion
B. $18 trillion
C. Cannot be determined from the information provided.
D. -$7 trillion
E. $7 trillion
____ 23. Use Scenario 22-3. Consider the information on the economy of Centralia. What is the level of investment
spending in Centralia?
A. $18 trillion
B. $7 trillion
C. $25 trillion
D. –$7 trillion
E. $43 trillion
____ 24. Use Scenario 22-3. Consider the information on the economy of Centralia. Suppose that there is a new
government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure.
Taxes = $2 trillion. Government Spending = Taxes. What is the level of private saving in Centralia now?
A. $11 trillion
B. $7 trillion
C. $5 trillion
D. $18 trillion
E. $9 trillion
____ 25. Capital inflow is equal to:
A. GDP + exports – imports.
B. the growth in capital stock – investment spending.
C. foreign direct investment.
D. the total inflow of foreign funds – the total outflow of domestic funds.
E. budget balance + private savings
____ 26. Net capital inflows equal:
A. national savings.
B. imports minus exports.
C. consumption.
D. consumption plus government spending.
E. investment spending.
____ 27. A capital inflow into a country is associated with:
A. imports exceeding exports.
B. a decreased source of funds available for domestic investment.
C. imports equaling exports.
D. imports less than exports
E. a growing government budget deficit.
____ 28. From the standpoint of economic growth, banks are important to:
A. fight inflation.
B. keep interest rates low.
C. channel savings into investment.
D. channel investment into savings.
E. reduce government budget deficits.
____ 29. The main role of financial systems is to:
A. make the capitalist class richer.
B. provide credit cards to as many people as possible.
C. channel goods and services to the people willing to pay for them.
D. channel funds from savers into investments.
E. increase risk through less diversification of financial investments.
____ 30. A financial asset is:
A. the same as a physical asset like a car.
B. a claim that entitles the owner to future income from the seller.
C. the value of accumulated savings.
D. another term for capital.
E. the earnings potential of a college degree.
____ 31. A physical asset is:
A. a claim on a tangible asset that gives the owner the right to dispose of it as he or she
wishes.
B. a claim that entitles the owner to future income from the seller.
C. the value of accumulated savings.
D. human capital.
E. the value of accumulated debt.
____ 32. A liability is:
A. when you are owed money by another person or firm.
B. a requirement that you pay income in the future.
C. when you are not able to perform an agreed task.
D. a claim that entitles the owner to future income from the seller.
E. the value of accumulated savings.
____ 33. Transactions costs are:
A. the return to the entrepreneur.
B. the return to moving a product to market.
C. the expenses of producing a product.
D. the expenses of negotiating and executing a deal.
E. the expenses of advertising and marketing a product.
____ 34. As an investor, you may choose to purchase a bond or a share of stock. If you choose to purchase the bond,
you are likely to receive a(n) _____ return in exchange for a(n) _____ level of risk.
A. higher; higher
B. lower; lower
C. lower; higher
D. higher; lower
E. equivalent; equivalent
____ 35. A loan is:
A. a liability for the lender and an asset for the borrower.
B.
C.
D.
E.
a physical asset that is traded in financial markets.
a claim on a bank that obliges the bank to provide funds to a lender.
a liability for the borrower and an asset for the lender.
a liability for both the borrower and the lender.
____ 36. Financial markets spread the potential gains and losses of borrowing and lending operations among many
individuals, therefore decreasing the overall uncertainty. This is an example of:
A. reducing transaction costs.
B. reducing risk.
C. providing liquidity.
D. guaranteeing rates of return.
E. the crowding out effect.
____ 37. Financial markets:
A. increase transactions costs.
B. reduce diversification.
C. provide liquidity.
D. determine tax rates.
E. are the same as resource markets.
____ 38. The term “liquid asset” means:
A. that the asset is used in a barter exchange.
B. that the asset is used as the medium of exchange.
C. that the asset is readily convertible to cash.
D. that the asset can be purchased if the market interest rate is low.
E. that the asset can be purchased only if the price is below equilibrium.
____ 39. Which of the following assets would be considered to be the least liquid?
A. cash
B. checking account balance
C. corporate bond
D. shares of stock in a publicly traded corporation.
E. a house
____ 40. Which of the following assets would be considered to be the most liquid?
A. currency
B. checking account balance
C. stock in a publicly traded company
D. a townhouse
E. a rare baseball card.
____ 41. An illiquid asset:
A. cannot be sold.
B. provides the owner no return or income.
C. is a tangible asset.
D. cannot quickly be converted into cash.
E. cannot be bought.
____ 42. When a corporation borrows money from a bank to expand its factory plant, the corporation is:
A. taking out a loan.
B. issuing bonds.
C. issuing stocks.
D. liquidating a bank deposit.
E. paying dividends.
____ 43. When a corporation borrows money from lenders in exchange for a fixed rate of return and a given maturity,
the corporation is:
A. taking out a loan.
B. paying dividends.
C. issuing stocks.
D. liquidating a bank deposit.
E. issuing bonds.
____ 44. When a corporation borrows money from lenders in exchange for a fixed share of the firm's assets and
potential profits, the corporation is:
A. taking out a loan.
B. issuing bonds.
C. issuing stocks.
D. liquidating a bank deposit.
E. paying dividends.
____ 45. Financial assets that carry more risk:
A. usually have a lower rate of return.
B. usually have a higher rate of return.
C. are purchased by risk-averse buyers.
D. are a hedge against the future.
E. provide the investor with a guaranteed return on the asset.
____ 46. Which of the following financial assets is likely to be the most liquid?
A. stocks
B. bonds
C. mutual funds shares
D. bank demand deposits
E. individual retirement accounts (IRAs)
____ 47. Human capital refers to:
A. changes in inventories.
B. changes in the level of education or training which workers possess.
C. funds available for investment spending.
D. spending on physical capital such as machines which aid workers.
E. spending on construction of new schools.
____ 48. Money is anything that:
A. serves as a medium of exchange for goods and services.
B. can be converted into silver with relatively little loss in value.
C. can be converted into gold with relatively little loss in value.
D. that is traded in the stock market.
E. serves as a financial asset.
____ 49. Money is:
A. any asset the government says is money.
B. any asset that can easily be used to purchase goods and services.
C. any asset that has a positive value.
D. any asset the government says is money and that has a positive value.
E. any asset that can be exchanged in a market.
____ 50. When you are using money to purchase a new MP3 player, money is serving as a:
A. store of value.
B. unit of barter.
C. unit of account.
D. double coincidence of wants.
E. medium of exchange.
____ 51. A bond is considered:
A. an asset that is not part of the money supply.
B. M1.
C. M2.
D. a liability that is part of the money supply.
E. the same as a share of stock in a company.
____ 52. The narrowest definition of money excludes:
A. currency in the vault at the bank.
B. traveler's checks.
C. currency in circulation.
D. checkable bank deposits.
E. coins in circulation.
____ 53. When you discover money in your coat that you placed there last winter, you unexpectedly find you were
using money as a(n):
A. medium of exchange.
B. expander of economic activity.
C. factor of production.
D. store of value.
E. instrument of barter.
____ 54. When we put a price on a meal, money is playing the role of:
A. medium of exchange.
B. unit of account.
C. barter token.
D. store of value.
E. factor of production.
____ 55. When countries replaced gold and silver coins with paper money exchangeable for certain amounts of
precious metals, the monetary system evolved from:
A. using commodity money to using fiat money.
B. using commodity-backed money to using fiat money.
C. using commodity money to using commodity-backed money.
D. using fiat money to using commodity-backed money.
E. using fiat money to using commodity money.
____ 56. Commodity money is:
A. whatever the government has decreed is money.
B. a good used as a medium of exchange that has other uses.
C. money used for commodity futures trading.
D. whatever people accept as money.
E. a good that is easily converted to paper money.
____ 57. The primary difference between M1 and M2 is that:
A. the dollar amount of M1 is much larger than the dollar amount of M2.
B.
C.
D.
E.
M1 includes checkable deposits, but M2 does not.
M2 includes checkable deposits, but M1 does not.
M2 includes savings deposits and time deposits, but M1 does not.
M1 includes savings deposits and time deposits, but M2 does not.
____ 58. Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking
account:
A. M1 increases by $50.
B. M2 increases by $50.
C. M1 and M2 both increase by $50.
D. there is no change in M1 or M2.
E. M1 increases by $50 and M2 decreases by $50.
____ 59. If you transfer $1,000 from your savings account to your checking account:
A. M1 decreases by $1,000, and M2 increases by $1,000.
B. M1 increases by $1,000, and M2 decreases by $1,000.
C. M1 and M2 don't change.
D. M1 increases by $1,000, but M2 doesn't change.
E. M2 decreases by $1,000, but M1 doesn’t change.
____ 60. Money that the government has ordered be accepted as money is:
A. fiat money.
B. currency.
C. convertible paper money.
D. commodity money.
E. barter goods.
____ 61. Currency in the United States today is _______ money.
A. fiat
B. intrinsic
C. commodity
D. commodity-backed
E. barter
____ 62. Suppose Ronny decides to withdraw all the cash out of his checking account and open a single time deposit
account at the same bank. As a result of this transaction:
A. M2 falls but M1 remains unchanged.
B. M1 and M2 both fall.
C. M1 and M2 both remain unchanged.
D. M1 falls but M2 remains unchanged.
E. M1 and M2 both rise.
____ 63. If currency in circulation is $100 million, demand deposits are $500, savings deposits are $300 million and
travelers' checks are $10 million, then the M1 money supply is:
A. $100 million.
B. $410 million.
C. $610 million.
D. $900 million.
E. $600 million.
____ 64. Debit cards are:
A. considered part of the money supply since they allow access to a part of the money supply.
B. are not generally accepted as a medium of exchange.
C. are less liquid than stocks and bonds.
D. create a liability for the user of the card.
E. are not considered part of the money supply as they are not paper currency.
____ 65. In order for an asset to be considered money, it must be:
A. able to serve as medium of exchange, standard unit of account, and store of value.
B. available in sufficient quantities and designated as such by law.
C. fiat money also.
D. backed by some precious commodity such as gold.
E. also useful as a commodity.
____ 66. The most liquid form of money is:
A. M1.
B. M2.
C. stocks and bonds.
D. houses.
E. corporate retirement pensions.
____ 67. Currency in circulation plus bank reserves:
A. form the monetary base.
B. are equal to M1 plus M2.
C. equals the required reserves for a bank.
D. equals the excess reserves for a bank.
E. equals the total quantity of loans made by banks in the banking system.
____ 68. Traveler's checks and checkable deposits are:
A. part of M1.
B. considered near monies.
C. part of the monetary base.
D. not considered part of the money supply.
E. considered illiquid financial assets.
____ 69. Suppose that the interest rate is zero and there is no inflation. In this case, the present value of $5 received one
year from today is
A. zero.
B. infinitely large.
C. exactly $5.
D. greater than $5.
E. less than $5.
____ 70. What is the present value of $100 received one year from now, if the interest rate is 5%?
A. $95.24
B. $105
C. $90.91
D. $100.50
E. $66.67
____ 71. If the interest rate is 10%, the amount received two years from now as a result of lending $1000 today is
A. $1200
B. $1100
C. $826.45
D. $909.09
E. $1210
____ 72. Your grandparents offer you $500 in one year. Assuming no inflation, if the interest rate is 10%, you are
indifferent between their gift in one year and _____ today.
A. $450
B. $500
C. $454.55
D. $550
E. $413.22
____ 73. Your firm wants to replace the furnace in the building with a more energy-efficient unit that has a two-year
lifetime. Suppose the new furnace will cost $10,000 right now. In each year of operation, the new furnace
will save the firm $5500 in energy expense. If the interest rate is 10%, the firm _____ buy the new furnace
because the net present value is _____.
A. should; +$1000
B. should; $0
C. should not; -$5000
D. should not; -$454.55
E. should not; -$1000
Assets
Liabilities
Deposits
_________
Reserves
$20,000
Loans
_______
Table 25-1: Balance Sheet
____ 74. Use Table 25-1. If the reserve ratio is 25%, deposits are:
A. $5,000.
B. $15,000.
C. $60,000.
D. $80,000.
E. $100,000.
____ 75. Use Table 25-1. If the reserve ratio is 25%, loans are:
A. $5,000.
B. $15,000.
C. $60,000.
D. $80,000.
E. $20,000.
Assets
Liabilities
$2 million Checkable deposits
million
Deposits at the Federal Reserve
$13 million
Loans
$75 million
Property
$8 million
Bonds
$2 million
Table 25-2: ABC Bank's Balance Sheet
Cash in bank vault
$100
____ 76. Use Table 25-2. Refer to the balance sheet. If the minimum reserve ratio for ABC Bank is 10%, then the bank
is required to maintain minimum reserves of:
A. $10 million.
B. $15 million.
C. $9.5 million.
D. $7.5 million.
E. $90 million.
____ 77. Use Table 25-2. Using the information in ABC Bank's Balance sheet, the bank is holding excess reserve of:
A. $17 million.
B. $15 million.
C. $5 million.
D. $25 million.
E. $3 million.
Scenario 25-1 First National Bank First National Bank has $80 million in checkable deposits, $15 million in
deposits with the Federal Reserve, $5 million cash in the bank vault and $5 million in government bonds.
____ 78. Use Scenario 25-1. Consider the information for First National Bank. The bank has liabilities of:
A. $105 million.
B. $95 million.
C. $85 million.
D. $100 million.
E. $80 million.
____ 79. Use Scenario 25-1. Consider the information for First National Bank. If the minimum reserve ratio is 20%,
how much is the bank required to keep in reserves?
A. $20 million
B. $16 million
C. $25 million
D. $10 million
E. $40 million
____ 80. Use Scenario 25-1. Consider the information for First National Bank. If the minimum reserve ratio is 20%,
what are the excess reserves available for the bank to lend?
A. $76 million
B. $8 million
C. $6 million
D. $4 million
E. $20 million.
____ 81. Which of the following would be the initial effect of an individual making a $10,000 cash deposit in a bank?
A. The money supply would rise by $10,000.
B. The money supply would fall by $10,000.
C. The money supply would not be affected by the deposit.
D. The money supply would fall, but by less than the $10,000 deposit.
E. The money supply would rise by more than $10,000.
____ 82. Banks create money when they:
A. make loans.
B. take deposits.
C. hold excess reserves.
D. pay withdrawals to depositors.
E. collect interest on loans.
____ 83. Suppose the reserve ratio is 20%. If Holly deposits $1,000 of cash into her checking account and her bank
lends $600 to Freda, the money supply:
A. remains the same.
B. decreases by $1,000.
C. decreases by $600.
D. increases by $600.
E. increases by $1,600
____ 84. Suppose a bank already has excess reserves of $800 and the reserve ratio is 30%. If Andy deposits $1,000 of
cash into his checking account and the bank lends $600 to Melanie, that bank can lend an additional:
A. $100.
B. $800.
C. $900.
D. $300.
E. $600.
Scenario 25-2: Money Creation
The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his
checking account. The bank does NOT want to hold excess reserves.
____ 85. Use Scenario 25-2. Which of the following is an accurate description of the bank's balance sheet immediately
after the deposit?
A. Reserves increase by $1,000, and demand deposits increase by $1,000.
B. Reserves increase by $1,000, and demand deposits decrease by $1,000.
C. Reserves decrease by $1,000, and demand deposits decrease by $1,000.
D. Reserves decrease by $200, and demand deposits increase by $1,000.
E. Reserves increase by $800, and demand deposits increase by $1,000.
____ 86. Use Scenario 25-2. How much of the deposit is the bank required to keep in reserves?
A. $1,000
B. $100
C. $200
D. $800
E. $250
____ 87. Use Scenario 25-2. How much can the bank loan based on the $1,000 deposit?
A. $1,000
B. $200
C. $800
D. $0
E. $900
____ 88. Use Scenario 25-2. What is the maximum expansion in the money supply possible?
A. $1,000
B. $1,800
C. $4,000
D. $5,000
E. $10,000
____ 89. Use Scenario 25-2. By how much did the monetary base change?
A. $0
B. $800
C. $1,000
D. $4,000
E. $5,000
____ 90. Which of the following is a component of BOTH the monetary base and the money supply?
A. bank reserves at the Fed
B. currency in bank vaults
C. demand deposits
D. Treasury securities.
E. currency in circulation
____ 91. The money multiplier and the required reserve ratio are:
A. independent of one another.
B. are directly related to one another.
C. are inversely related.
D. both greater than 1.
E. both less than 1.
____ 92. When a bank deposit is withdrawn and kept as currency, bank reserves decrease and the:
A. monetary base decreases.
B. quantity of loans increases.
C. monetary base increases.
D. money supply decreases.
E. monetary base does not change.
____ 93. Suppose the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Melanie deposits
$1,000 of cash into her checking account, the banking system can increase the money supply by:
A. $5,000.
B. $1,000.
C. $3,000.
D. $4.000.
E. $1,250.
Assets
Loans
Reserves
Liabilities
$900,000 Deposits
$1,000,000
$100,000
Scenario 25-3: Assets and Liabilities of the Banking System
____ 94. Use Scenario 25-3. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves,
then _______ will be added to the money supply.
A. $666,667
B. $111,111
C. $250,000
D. $1,000,000
E. $500,000
____ 95. The money multiplier is equal to:
A.
B.
C. 1 – Reserve ratio.
D.
E.
____ 96. A bank's capital is the:
A. the sum of its total assets and total liabilities.
B. difference between its total assets and its total liabilities.
C. difference between its total assets and its total required reserves.
D. is the sum of its liabilities.
E. the sum of its cash deposits.
____ 97. If banks decide to hold some of their excess reserves instead of lending them all out, then:
A. the money multiplier will be less than 1 divided by the required reserve ratio.
B. a loan of $1 will lead to a change in the money supply by a multiple amount equal to 1
divided by the required reserve ratio.
C. the money multiplier becomes 1 divided by the excess reserves.
D. depositors will have to borrow more in order to increase the money supply.
E. the money multiplier will be larger than 1 divided by the required reserve ratio.
____ 98. If the required reserve ratio rises:
A. the money multiplier will also rise.
B. the banking system will experience a contraction in its level of bank deposits.
C. the amount of reserves in the banking system will decrease.
D. excess reserves will also rise.
E. the money supply will expand.
____ 99. Holding everything else constant, if the required reserve ratio falls, then:
A. the money multiplier increases.
B. a $1 loan can lead to a smaller change in the money supply than before the change in the
required reserve ratio.
C. the amount of excess reserves falls also.
D. the money multiplier decreases.
E. the money supply will decrease.
____ 100. Suppose the required reserve ratio was 10% and then it increased to 20%, this would:
A. result in a drop in the money multiplier from 10 to 5.
B. increase the amount of excess reserves available.
C. result in an increase in the money multiplier from 5 to 10.
D. have no impact on the money multiplier.
E. result in an increase in the money multiplier from 10 to 20.