Download Money functions as:

PRACTICE TEST, MACRO, FALL 2006 CHAPTERS 8,9,11,13,14,15
Money functions as:
A) a store of value.
Answer: D
B) a unit of account.
C) a medium of exchange.
D) all of the above.
If you place a part of your summer earnings in a savings account, you are using money primarily as a:
A) medium of exchange. B) store of value. C) unit of account. D) standard of value.
Answer: B
Which of the following is not part of the M2 money supply?
A) money market mutual fund balances
B) money market deposit accounts
Answer: D
C) currency
D) large ($100,000 or more) time deposits
The M2 money supply includes:
A) stock certificates.
B) corporate bond certificates.
C) the cash value of life insurance policies.
D) individual shares in money market mutual funds.
Answer: D
A $20 bill is a:
A) gold certificate. B) Treasury note. C) Treasury bill.
Answer: D
D) Federal Reserve Note.
If the quantity of money demanded exceeds the quantity supplied:
A) the supply-of-money curve will shift to the left.
B) the demand-for-money curve will shift to the right.
C) the interest rate will rise.
D) the interest rate will fall.
Answer: C
The reserves (both required and excess) of a commercial bank consist of:
A) the amount of money market funds it holds.
B) deposits at the Federal Reserve Bank and vault cash.
C) government securities that the bank holds.
D) the bank's net worth.
Answer: B
The primary purpose of the legal reserve requirement is to:
A) prevent banks from hoarding too much vault cash.
B) provide a means by which the monetary authorities can influence the lending ability of commercial banks.
C) prevent commercial banks from earning excess profits.
D) provide a dependable source of interest income for commercial banks.
Answer: B
Most modern banking systems are based on:
A) money of intrinsic value.
B) commodity money.
Answer: D
C) 100 percent reserves.
D) fractional reserves.
Money is destroyed when:
A) loans are made.
B) checks written on one bank are deposited in another bank.
C) loans are repaid.
D) the net worth of the banking system declines.
Answer: C
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 deposits.
C) difference between actual reserves and loans.
D) difference between actual reserves and required reserves.
Answer: D
When a commercial bank has excess reserves:
A) it is in a position to make additional loans.
B) its actual reserves are less than its required reserves.
C) it is charging too high an interest rate on its loans.
D) its reserves exceed its assets.
Answer: A
A bank's actual reserves can be found by:
A) adding its required and excess reserves.
B) subtracting its required reserves from its excess reserves.
C) multiplying its excess reserves by the reserve ratio.
D) multiplying its checkable deposits by the reserve ratio.
Answer: A
Overnight loans from one bank to another for reserve purposes entail an interest rate called the:
A) prime rate. B) discount rate. C) Federal funds rate. D) treasury bill rate.
Answer: C
If the monetary authorities want to reduce the monetary multiplier, they should:
A) lower the legal reserve ratio.
C) increase bank reserves.
B) raise the required reserve ratio.
D) lower interest rates.
Answer: B
Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics of 1930-1933?
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
Answer: C
Reserves must be deposited in the Federal Reserve Banks by:
A) only commercial banks which are members of the Federal Reserve System.
B) all depository institutions, that is, all commercial banks and all other types of banks including credit unions
C) state chartered commercial banks only.
D) federally chartered commercial banks only.
Answer: B
Open-market operations refer to:
A) purchases of stocks in the New York Stock Exchange.
B) the purchase or sale of government securities by the Fed.
C) central bank lending to commercial banks.
D) the specifying of loan maximums on stock purchases.
Answer B
Open-market operations change:
A) the size of the monetary multiplier, but not commercial bank reserves.
B) commercial bank reserves, but not the size of the monetary multiplier.
C) neither commercial bank reserves nor the size of the monetary multiplier.
D) both commercial bank reserves and the size of the monetary multiplier.
Answer: B
When the reserve requirement is increased:
A) required reserves are changed into excess reserves.
B) the excess reserves of member banks are increased.
C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D) the excess reserves of member banks are reduced.
Answer: D
The discount rate is the interest:
A) rate at which the central banks lend to the U.S. Treasury.
B) rate at which the Federal Reserve Banks lend to commercial banks.
C) yield on long-term government bonds.
D) rate at which commercial banks lend to the public.
Answer: B
The discount rate is the rate of interest at which:
A) Federal Reserve Banks lend to commercial banks.
B) savings and loan associations lend to some builders.
C) Federal Reserve Banks lend to large corporations.
D) commercial banks lend to large corporations.
Answer: A
Changes in the discount rate are:
A) the most powerful and useful tool of monetary policy.
B) less frequent than changes in the reserve requirement.
C) more important than open-market operations.
D) less important than open-market operations in implementing monetary policy.
Answer: D
If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:
A) sell government securities, raise reserve requirements, and raise the discount rate.
B) buy government securities, raise reserve requirements, and raise the discount rate.
C) sell government securities, lower reserve requirements, and lower the discount rate.
D) sell government securities, raise reserve requirements, and lower the discount rate.
Answer: A
. A contraction of the money supply:
A) increases the interest rate and decreases aggregate demand.
B) increases both the interest rate and aggregate demand.
C) lowers the interest rate and increases aggregate demand.
D) lowers both the interest rate and aggregate demand.
Answer: A
If the Fed were to purchase government securities in the open market, we would anticipate:
A) lower interest rates, an expanded GDP, and depreciation of the dollar.
B) lower interest rates, an expanded GDP, and appreciation of the dollar.
C) higher interest rates, a contracted GDP, and depreciation of the dollar.
D) lower interest rates, a contracted GDP, and appreciation of the dollar.
Answer: A
If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:
A) selling government securities, raising the reserve ratio, lowering the discount rate, and a budgetary surplus.
B) buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.
C) buying government securities, raising the reserve ratio, raising the discount rate, and a budgetary surplus.
D) buying government securities, reducing the reserve ratio, raising the discount rate, and a budgetary deficit.
Answer: B
A recession is a period in which:
A) cost-push inflation is present.
B) nominal domestic output falls.
Answer: D
C) demand-pull inflation is present.
D) real domestic output falls.
The United States' economy is considered to be at full employment when:
A) 90 percent of the total population is employed.
B) 90 percent of the labor force is employed.
C) about 5 percent of the labor force is unemployed.
D) 100 percent of the labor force is employed.
Answer: C
The natural rate of unemployment is the:
A) unemployment rate experienced at the depth of a depression.
B) full-employment unemployment rate.
C) unemployment rate experienced by the least-skilled workers in the economy.
D) unemployment rate experienced by the most-skilled workers in the economy.
Answer: B
Suppose the economy's saving schedule shifts from S1 to S 2 as shown in the above diagram. We can say that its:
A) MPC has increased.
B) MPS has increased.
C) APS has increased at all levels of disposable income.
D) APS has decreased at all levels of disposable income.
Answer: B
The multiplier effect means that:
A) consumption is typically several times as large as saving.
B) a change in consumption can cause a larger increase in investment.
C) an increase in investment can cause GDP to change by a larger amount.
D) a decline in the MPC can cause GDP to rise by several times that amount.
Answer: C
The average propensity to consume is defined as income divided by consumption.
Answer: False
The greater the MPC, the greater the multiplier.
Answer: True
. (I) Fiscal policy encompasses those actions that alter the money supply
(II) Monetary policy involves altering government tax and spending policies
a.
b.
c.
d.
Both are true
Both are false
I is true, II is false
I is false, II is true
. Which of the following would be the best Keynesian policy to follow if the economy were at full employment and
inflationary?
a. increase taxes and increase government spending by an equal amount
b. increase taxes and keep government spending at the same level
c. decrease government spending and decrease taxes by a greater amount
d. decrease government spending and decrease taxes by the same amount
. Which of the following would be an appropriate fiscal policy in a recession?
a. increase taxes
b. increase the discount rate
c. increase reserve requirements
d. increase government buying
. Discretionary fiscal policy is so named because it:
A) is undertaken at the option of the nation's central bank.
B) occurs automatically as the nation's level of GDP changes.
C) involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.
D) is invoked secretly by the Council of Economic Advisers.
. A tax reduction of a specific amount will be more expansionary, the:
A) smaller is the economy's MPC.
C) smaller is the economy's multiplier.
B) larger is the economy's MPC.
D) less the economy's built-in stability.
. A major advantage of the built-in or automatic stabilizers is that they:
A) simultaneously stabilize the economy and reduce the absolute size of the public debt.
B) automatically produce surpluses during recessions and deficits during inflations.
C) require no legislative action by Congress to be made effective.
D) guarantee that the Federal budget will be balanced over the course of the business cycle.
When the reserve requirement is increased:
A) required reserves are changed into excess reserves.
B) the excess reserves of member banks are increased.
C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D) the excess reserves of member banks are reduced.
Answer: D
Money functions as:
A) a store of value.
Answer: D
B) a unit of account.
C) a medium of exchange.
D) all of the above.
If you place a part of your summer earnings in a savings account, you are using money primarily as a:
A) medium of exchange. B) store of value. C) unit of account. D) standard of value.
Answer: B
Which of the following is not part of the M2 money supply?
A) money market mutual fund balances
B) money market deposit accounts
Answer: D
C) currency
D) large ($100,000 or more) time deposits
The M2 money supply includes:
A) stock certificates.
B) corporate bond certificates.
C) the cash value of life insurance policies.
D) individual shares in money market mutual funds.
Answer: D
A $20 bill is a:
A) gold certificate. B) Treasury note. C) Treasury bill.
Answer: D
D) Federal Reserve Note.
In which of the following situations is it certain that the quantity of money demanded by the public will decrease?
A) nominal GDP decreases and the interest rate decreases
B) nominal GDP increases and the interest rate decreases
C) nominal GDP decreases and the interest rate increases
D) nominal GDP increases and the interest rate increases
Answer: C
If the quantity of money demanded exceeds the quantity supplied:
A) the supply-of-money curve will shift to the left.
B) the demand-for-money curve will shift to the right.
C) the interest rate will rise.
D) the interest rate will fall.
Answer: C
The reserves of a commercial bank consist of:
A) the amount of money market funds it holds.
B) deposits at the Federal Reserve Bank and vault cash.
C) government securities that the bank holds.
D) the bank's net worth.
Answer: B
Type: A Topic: 1 E: 254 MA: 254
9. A commercial bank's reserves are:
A) liabilities to both the commercial bank and the Federal Reserve Bank holding them.
B) liabilities to the commercial bank and assets to the Federal Reserve Bank holding them.
C) assets to both the commercial bank and the Federal Reserve Bank holding them.
D) assets to the commercial bank and liabilities to the Federal Reserve Bank holding them.
Answer: D
The primary purpose of the legal reserve requirement is to:
A) prevent banks from hoarding too much vault cash.
B) provide a means by which the monetary authorities can influence the lending ability of commercial banks.
C) prevent commercial banks from earning excess profits.
D) provide a dependable source of interest income for commercial banks.
Answer: B
Most modern banking systems are based on:
A) money of intrinsic value.
B) commodity money.
Answer: D
C) 100 percent reserves.
D) fractional reserves.
Money is destroyed when:
A) loans are made.
B) checks written on one bank are deposited in another bank.
C) loans are repaid.
D) the net worth of the banking system declines.
Answer: C
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 deposits.
C) difference between actual reserves and loans.
D) difference between actual reserves and required reserves.
Answer: D
When a commercial bank has excess reserves:
A) it is in a position to make additional loans.
B) its actual reserves are less than its required reserves.
C) it is charging too high an interest rate on its loans.
D) its reserves exceed its assets.
Answer: A
A bank's actual reserves can be found by:
A) adding its required and excess reserves.
B) subtracting its required reserves from its excess reserves.
C) multiplying its excess reserves by the reserve ratio.
D) multiplying its checkable deposits by the reserve ratio.
Answer: A
Overnight loans from one bank to another for reserve purposes entail an interest rate called the:
A) prime rate. B) discount rate. C) Federal funds rate. D) treasury bill rate.
Answer: C
If the monetary authorities want to reduce the monetary multiplier, they should:
A) lower the legal reserve ratio.
C) increase bank reserves.
B) raise the legal reserve ratio.
D) lower interest rates.
Answer: B
Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics of 1930-1933?
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
Answer: C
Reserves must be deposited in the Federal Reserve Banks by:
A) only commercial banks which are members of the Federal Reserve System.
B) all depository institutions, that is, all commercial banks and thrift institutions.
C) state chartered commercial banks only.
D) federally chartered commercial banks only.
Answer: B
Open-market operations refer to:
A) purchases of stocks in the New York Stock Exchange.
B) the purchase or sale of government securities by the Fed.
C) central bank lending to commercial banks.
E) the specifying of loan maximums on stock purchases.
Answer B
Open-market operations change:
A) the size of the monetary multiplier, but not commercial bank reserves.
B) commercial bank reserves, but not the size of the monetary multiplier.
C) neither commercial bank reserves nor the size of the monetary multiplier.
D) both commercial bank reserves and the size of the monetary multiplier.
Answer: B
When the reserve requirement is increased:
A) required reserves are changed into excess reserves.
B) the excess reserves of member banks are increased.
C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D) the excess reserves of member banks are reduced.
Answer: D
The discount rate is the interest:
A) rate at which the central banks lend to the U.S. Treasury.
B) rate at which the Federal Reserve Banks lend to commercial banks.
C) yield on long-term government bonds.
D) rate at which commercial banks lend to the public.
Answer: B
The discount rate is the rate of interest at which:
A) Federal Reserve Banks lend to commercial banks.
B) savings and loan associations lend to some builders.
C) Federal Reserve Banks lend to large corporations.
D) commercial banks lend to large corporations.
Answer: A
Changes in the discount rate are:
A) the most powerful and useful tool of monetary policy.
B) less frequent than changes in the reserve requirement.
C) more important than open-market operations.
D) less important than open-market operations in implementing monetary policy.
Answer: D
If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:
A) sell government securities, raise reserve requirements, and raise the discount rate.
B) buy government securities, raise reserve requirements, and raise the discount rate.
C) sell government securities, lower reserve requirements, and lower the discount rate.
D) sell government securities, raise reserve requirements, and lower the discount rate.
Answer: A
Type: A Topic: 5 E: 279 MA: 279
67. A contraction of the money supply:
A) increases the interest rate and decreases aggregate demand.
B) increases both the interest rate and aggregate demand.
C) lowers the interest rate and increases aggregate demand.
D) lowers both the interest rate and aggregate demand.
Answer: A
Type: C Topic: 5 E: 278-279 MA: 278-279
68. If the Fed were to purchase government securities in the open market, we would anticipate:
A) lower interest rates, an expanded GDP, and depreciation of the dollar.
B) lower interest rates, an expanded GDP, and appreciation of the dollar.
C) higher interest rates, a contracted GDP, and depreciation of the dollar.
D) lower interest rates, a contracted GDP, and appreciation of the dollar.
Answer: A
If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:
A) selling government securities, raising the reserve ratio, lowering the discount rate, and a budgetary surplus.
B) buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit.
C) buying government securities, raising the reserve ratio, raising the discount rate, and a budgetary surplus.
D) buying government securities, reducing the reserve ratio, raising the discount rate, and a budgetary deficit.
Answer: B
The sale of government bonds by the Federal Reserve Banks to commercial banks will:
A) increase aggregate supply.
C) increase aggregate demand.
B) decrease aggregate supply.
D) decrease aggregate demand.
Answer: D
When the reserve requirement is increased:
A) required reserves are changed into excess reserves.
B) the excess reserves of member banks are increased.
C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves.
D) the excess reserves of member banks are reduced.
Answer: D