Download Macroeconomics Instructor Miller Practice Problems

Macroeconomics
Instructor Miller
Practice Problems Money, Banks, and the Federal Reserve
1. In economics, money is defined as
A) the total value of one's assets in current prices.
B) the total value of one's assets minus the total value of one's debts, in current prices.
C) the total amount of salary, interest, and rental income earned during a year.
D) any asset people generally accept in exchange for goods and services.
2. The major shortcoming of a barter economy is
A) the requirement of a double coincidence of wants.
B) the requirement of specialization and exchange.
C) that goods and services are not traded.
D) that money loses value from inflation.
3. Which of the following is one of the most important benefits of money in an economy?
A) Money allows for the exchange of goods and services.
B) Money allows for the accumulation of wealth.
C) Money makes exchange easier, leading to more specialization and higher productivity.
D) Money encourages people to produce all of their own goods (self-sufficiency) and therefore
increases economic stability.
4. The statement, "My iPhone is worth $300" represents money's function as
A) a medium of exchange.
B) a unit of account.
C) a store of value.
D) a standard of deferred payment.
5. If whole tomatoes were money, which of the following functions of money would be the
hardest for tomatoes to satisfy?
A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange
6. Dollar bills in the modern economy serve as money because
A) they are backed by the gold stored in Fort Knox.
B) they can be redeemed for gold by the central bank.
C) they have value as a commodity independent of their use as money.
D) people have confidence that others will accept them as money.
7. The M1 measure of the money supply equals
A) paper money plus coins in circulation.
B) currency plus checking account balances.
C) currency plus checking account balances plus traveler's checks.
D) currency plus checking account balances plus traveler's checks plus savings account balances.
8. The M2 measure of the money supply equals
A) savings account balances plus small-denomination time deposits plus traveler's checks.
B) savings account balances plus small-denomination time deposits plus noninstitutional money
market fund shares.
C) M1 plus savings account balances plus small-denomination time deposits.
D) M1 plus savings account balances plus small-denomination time deposits plus
noninstitutional money market fund shares.
9. Credit card balances are
A) part of M1.
B) part of M2.
C) part of M3.
D) not part of the money supply.
10. A bank will consider a car loan to a customer ________ and a customer's checking account
to be ________.
A) a liability; an asset
B) an asset; a liability
C) a liability; a liability
D) an asset; an asset
11. Which of the following best describes how banks create money?
A) Banks charge higher interest rates on loans than they pay on deposits.
B) Banks charge fees for providing financial advice.
C) Banks create checking account deposits when making loans from excess reserves.
D) Banks make loans from reserves.
Scenario: Imagine that Kristy deposits $10,000 of currency into her checking account deposit at
Bank A and that the required reserve ratio is 20%.
12. Refer to the above scenario. As a result of Kristy's deposit, Bank A's reserves immediately
increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
13. Refer to the above scenario. As a result of Kristy's deposit, Bank A's required reserves
increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
14. Refer to the above scenario. As a result of Kristy's deposit, Bank A's excess reserves
increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
15. Refer to the above scenario. As a result of Kristy's deposit, Bank A can make a maximum
loan of
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
16. Refer to the above scenario. As a result of Kristy's deposit, checking account deposits in
the banking system as a whole (including the original deposit) could eventually increase up to a
maximum of
A) $8,000.
B) $10,000.
C) $50,000.
D) $100,000.
17. The Federal Reserve was established in 1913 to
A) prevent inflation by decreasing the money supply.
B) stimulate the economy by increasing bank reserves.
C) stop bank panics by acting as a lender of last resort.
D) prevent bad loans by requiring banks to hold reserves.
18. The three traditional monetary policy tools used by the Federal Reserve to manage the money
supply are
A) interest rates, tax rates, and government spending.
B) tax rates, government purchases, and government transfer payments.
C) open market operations, discount policy, and reserve requirements.
D) open market operations, the exchange rate of the dollar against foreign currencies, and
government purchases.
19. The main tool that the Federal Reserve uses to conduct monetary policy is
A) open market operations.
B) discount policy.
C) setting reserve requirements.
D) acting as the lender of last resort.
20. To increase the money supply, the Federal Reserve could
A) raise the discount rate.
B) decrease income taxes.
C) raise the required reserve ratio.
D) conduct an open market purchase of Treasury securities.
21. To decrease the money supply, the Federal Reserve could
A) lower the discount rate.
B) raise income taxes.
C) lower the required reserve ratio.
D) conduct an open market sale of Treasury securities.
22. Which of the following is not a major function of the Federal Reserve System?
A) lender of last resort
B) clearing checks between banks
C) setting income tax rates
D) controlling the money supply
23. Which of the following is not a tool the Fed uses to manage the money supply?
A) open market operations
B) setting the discount rate
C) expanding and contracting deposit insurance
D) setting reserve requirements for deposits in the banking system
24. Open market operations refer to the buying and selling of ________ by the ________ to
control the money supply.
A) Treasury securities; Treasury Department
B) Treasury securities; Federal Reserve
C) stocks and bonds; Treasury Department
D) stocks and bonds; Federal Reserve
25. The discount rate is
A) the interest rate banks charge each other for overnight loans.
B) the interest rate banks charge their best customers.
C) the interest rate the Fed charges to banks for loans from the Fed.
D) the interest rate the U.S. Treasury pays on Treasury Bills.
26. If the Fed buys U.S. Treasury securities, then this
A) increases reserves, encourages banks to make more loans, and increases the money supply.
B) decreases reserves, causes banks to reduce their loans, and decreases the money supply.
C) decreases reserves, causes banks to reduce their loans, and increases the money supply.
D) increases reserves, causes banks to reduce their loans, and increases the money supply.
27. Which of the following tools of monetary policy is used least often?
A) open market operations
B) setting the required reserve ratio
C) setting the discount rate
D) acting as a lender of last resort
1. D
2. A
3. C
4. B
5. B
6. D
7. C
8. D
9. D
10. B
11. C
12. C
13. A
14. B
15. B
16. C
17. C
18. C
19. A
20. D
21. D
22. C
23. C
24. B
25. C
26. A
27. B