Quiz 13

Questions from Previous Versions of Quiz 13

1. The one person in our increasingly globalized economy wielding the greatest economic influence is almost certainly the: (a) Chairperson of the Joint Economic Committee of the United States Congress. (b) President of the World Bank. (c) head of the International Monetary Fund. (d) Treasurer of the United States. (e) Chairman of the Federal Reserve System.

2. If the Fed buys $1 million worth of Treasury bonds from the Bean Counters Credit Union, and the Credit Union holds 20 percent of demand deposits as reserves, the Credit Union is likely to: (a) loan $1 million to private borrowers because, from the credit union’s perspective, the Fed is merely retiring loans that the credit union had made to the federal government. (b) reduce loans by at least $1 million because of decreases in interest rates. (c) distribute the $1 million to credit union members, in proportion to their ownership shares. (d) loan an additional $5 million to private borrowers because of the money multiplier effect. (e) reduce private loans by $4 million because of the monetary contraction effect.

3. The monetary base is: (a) currency in circulation plus legal reserves in the banking system. (b) increased when the reserve requirement ratio is cut. (c) the gold and silver stored at Fort Knox. (d) determined primarily by discounting operations. (e) synonymous with the M1 money supply.

4. The Fed might try (probably ineffectively) to directly limit stock market speculation by changing: (a) reserve requirements ratios. (b) margin requirements. (c) discount rates. (d) federal funds rates. (e) the ceiling on interest rates applied to credit cards purchases.

5. Not among the arguments for independence of the Federal Reserve is the belief that: (a) a politically insulated Fed is more likely to be concerned with long-run objectives and thus be a defender of a sound dollar and a stable price level. (b) subjecting the Fed to more political pressures would impart a inflationary bias to monetary policy. (c) putting the Fed under the control of the President may put it under pressure to facilitate Treasury financing of large budget deficits by buying more Treasury bonds. (d) the Federal Reserve System needs the freedom to offset irresponsible fiscal policies that are enacted by Congress and that may cause political business cycles.

6. The characteristic of money that eliminates the need to measure the value of every good in terms of the value of every other good is that money functions as a: (a) medium of exchange. (b) store of value. (c) standard unit of account. (d) standard of deferred payment. (e) method of diversification.

7. According to Gresham’s Law: (a) bad money drives out good money. (b) inflation drives up interest rates. (c) demand creates its own supply. (d) good money drives out bad money. (e) unemployed people hoard money.

8. The proportion of the transaction you would lose if you bought an asset and immediately sold it is positively related to the asset’s: (a) net present value. (b) illiquidity. (c) par value. (d) abandonment cost. (e) transactions ratio.

9. Fiat money has value because it is: (a) backed by gold or silver. (b) made of a precious metal. (c) accepted as a medium of exchange. (d) valueless as a commodity.

10. The profit government makes when it prints currencies whose face values exceed their production costs is known as: (a) seignorage. (b) commodity money. (c) fiat money. (d) the liquidity surplus. (e) mediums from exchange.

11. Alexa and Chandra were destitute before they loaded five ATM machines from three shopping malls into their rented U-Haul truck, escaped, and broke the machines open. The immediate result of their crime spree is an increase in the: (a) Keynesian spending multiplier. (b) money supply. (c) government budget deficit. (d) potential money multiplier. (e) reserves in the banking system.

12. The economists’ term for money held in checking accounts is: (a) credit mobilizer. (b) demand deposits. (c) supply deposits. (d) government liabilities. (d) required reserves.

13. Banks can create money out of their: (a) excess reserves. (b) required reserves. (c) vault cash. (d) currency reserves.

14. A 20-percent legal reserve requirement ratio yields a: (a) balanced budget multiplier of 5. (b) potential money multiplier of 5. (c) realized money multiplier of 5. (d) full-strength Keynesian spending multiplier of 5.

15. The actual money multiplier is negatively related to the: (a) percentage of excess reserves held by banks. (b) marginal propensity to consume. (c) open market operations ratio. (d) monetary base.

16. Relative to economies based on monetary transactions, a barter economy encounters higher: (a) degrees of specialization and exchange. (b) transaction costs in exchange. (c) rates of economic growth and development. (d) comparative advantage in specialization.

17. Money without value except for its acceptability as money is: (a) commodity money. (b) wampum. (c) fiat money. (d) faux money. (e) liquid money.

18. Currency in the hands of the non-banking public plus total reserves in the banking system equals the: (a) money supply. (b) monetary base. (c) low-powered money. (d) financial base. (e) liquidity base.

19. Banks can increase the money supply by: (a) raising the excess reserve ratio. (b) debasing the supply of currency. (c) lending excess reserves as demand-deposit money. (d) selling Treasury bills directly to the public. (e) behaving in accord with Gresham’s law.

20. The Federal Reserve System controls the money supply primarily through: (a) open market operations. (b) reserve requirement changes. (c) jawboning. (d) discounting operations.

21. The major economic purpose of any financial system is to: (a) channel savings to their most productive uses. (b) collect taxes to support government spending. (c) generate monopoly profits for Wall Street. (d) provide checking and savings accounts. (e) balance surpluses between business and government.

22. In the long run, changes in the Fed’s discounting operations alter the money supply primarily through changes in the: (a) size only of the monetary base alone. (b) value of the actual money multiplier alone. (c) monetary base and actual money multiplier. (d) buying and selling of U.S. bonds.

23. The Federal Reserve System sets a legal floor on the percentage of a bank’s deposits that must be held in reserves. This tool is known as the: (a) reserve-requirement ratio. (b) discount rate. (c) margin requirement. (d) moral suasion coefficient.

24. The Federal Reserve System usually pays for the government securities it buys from banks by: (a) printing currency. (b) increasing the banks’ reserve accounts at Fed district banks. (c) charging it on a Fed credit card. (d) releasing gold from Fort Knox.

25. Monetary policy makers may reduce inflationary pressure by: (a) decreasing the reserve requirements ratio. (b) decreasing the discount rate. (c) selling government securities to banks. (d) lowering margin requirements.

26. The MOST important function of money is its use as a: (a) medium of exchange. (b) store of value. (c) unit of account. (d) standard of deferred payment. (e) means of production.

27. Introduction of money into a barter economy facilitates: (a) double coincidences of wants for all goods and people. (b) exhaustion of natural resources. (c) inequality in the income distribution. (d) specialized production and lower transaction costs. (e) self sufficiency for individual families.

28. An asset's relative "liquidity" is negatively related to the: (a) relative transaction costs in dealing in the asset. (b) time it takes to convert it to cash. (c) "backing" behind a financial instrument. (d) property rights to buy or sell it.

29. Which of the following items cannot reasonably serve as a store of value? (a) Money (b) Stocks and bonds (c) Houses (d) Credit cards

30. Central banking functions in the United States are performed by the: (a) Bank of the United States. (b) Department of the Treasury. (c) U.S. Congress. (d) Federal Reserve System. (e) Comptroller of the Currency.

31. Excess reserves in banks are: (a) primarily held to accommodate outflows of funds. (b) currency held by the nonbanking public. (c) included in required reserves. (d) deposited daily at other commercial banks. (e) positively related to the inflationary gap.
32. A bank's total required reserves are equal to: (a) those set by the Senate Banking Committee. (b) actual reserves plus excess reserves. (c) one divided by the reserve requirements ratio. (d) demand deposits times the reserve requirements ratio.
33. The FED's most effective and efficient tool is its: (a) reserve requirement ratio. (b) discount operations. (c) margin requirements. (d) open market operations. (e) ability to change the federal funds rate.
34. The FED can increase the money supply by: (a) increasing the discount rate. (b) increasing the reserve requirement ratio. (c) buying bonds from commercial banks. (d) persuading the nonbanking public to hold more currency. (e) running a budget deficit.
35. When the FED buys a Treasury bond for $5,000 from a bank, the bank's excess reserves initially: (a) fail to meet margin requirements. (b) are subject to a penalty discount. (c) expand by $5,000. (d) are counted as part of M1. (e) decline by $5000 x the reserve requirement ratio.
36. The FED usually pays for the government securities it buys from banks by: (a) printing currency. (b) increasing the banks' reserve accounts at FED district banks. (c) charging it on a FED credit card. (d) releasing gold from Fort Knox. (e) making profits from its loans to member banks.
37. The monetary base will increase if the: (a) FED sells securities. (b) discount rate is increased. (c) reserve requirement is raised. (d) FED buys US Treasury bonds. (e) margin requirement is reduced.
38. The effect on Aggregate Demand of the FED's open market sale of government securities is likely to be: (a) inflationary because unemployment will rise. (b) contractionary because the money supply will shrink. (c) countercyclical in a recessionary period. (d) expansionary because the money supply will grow.

39. Raising margin requirements might represent an attempt to reduce: (a) federal budget deficits. (b) stock market speculation. (c) bank profitability. (d) income redistribution.

40. Socially efficient and appropriate goals in regulating financial institutions do NOT include: (a) economic efficiency in financial intermediation. (b) ensuring the economic profitability of commercial banks. (c) minimizing differences between interest rates borrowers pay and those received by the ultimate lenders. (d) protection of savers. (e) macroeconomic stability.

41. The Federal Reserve Act was passed in 1913, and the FED was established in 1914 primarily to: (a) print money to cover deficit spending. (b) ensure the profitability of commercial banks. (c) act as a "lender of last resort." (d) establish a stable medium of exchange. (e) cure imbalances in international payments.

42. Currency in the hands of the non-banking public + funds in checkable accounts equals: (a) M1. (b) M2. (c) M3. (d) liquidity.

43. If all currency is held in bank vaults and each bank loans exactly 80 percent of its total reserves, then there will be: (a) "runs" on banks. (b) five times as much money as reserves. (c) excess liquidity. (d) inflation. (e) financial collapse.

44. The FED's reserve requirement ratio: (a) is its most powerful monetary tool. (b) helps stabilize the actual money multiplier. (c) limits the actual money multiplier. (d) limits the money supply relative to the monetary base. (e) All of the above.

45. If the money supply doubled, the crude Quantity Theory of Money predicts a doubling in the: (a) demand for real money balances. (b) level of real GDP. (c) price level. (d) velocity of money.

46. The actual money multiplier (MS/MB) is positively related to the: (a) amount of currency held by the public. (b) proportion of excess reserves in banks. (c) fear people have that banks might collapse. (d) potential money multiplier.

47. When the FED raises the discount rate, banks will tend to: (a) borrow less from the FED. (b) make more and bigger loans. (c) decrease their excess reserves. (d) increase the actual money multiplier. (e) exceed the potential money multiplier.

48. The belief that changes in the money supply influence interest rates, which then influence investment, and ultimately income and output is associated most closely with: (a) classical economists. (b) Keynesian economists. (c) modern monetarists. (d) supply‑side economics. (e) rational expectations economists.

49. The FED most actively controls the money supply through: (a) open market operations. (b) discounting operations. (c) reserve requirement changes. (d) jawboning.

50. The most powerful (but seldom used) tool at the FED's disposal is its ability to change: (a) reserve requirement ratios. (b) the discount rate. (c) open market operations. (d) margin requirements.

51. If the FED buys $100,000 worth of U.S. bonds from the Junk Dealers Credit Union, which keeps 20% of demand deposits as reserves, the Credit Union could be expected to: (a) lend $100,000 privately because this merely exchanges a loan to the government for a private loan, with no change in the credit union's liabilities. (b) contract private loans by $80,000. (c) privately lend an additional $20,000. (d) reduce private loans by $100,000.

52. Introduction of money into a barter economy reduces: (a) specialization of labor. (b) standards of living. (c) transaction costs. (d) real GDP and income.

53. Money is not a: (a) medium of exchange. (b) store of value. (c) unit of account. (d) standard of deferred payment. (e) form of economic capital.

54. The use of money as a standard unit of account: (a) makes relative prices unimportant. (b) serves as a relatively risk‑free way of holding wealth. (c) reduces the information needed to make good market decisions. (d) equals 1/CPI.

55. The idea that bad money drives out good is known as: (a) Rabbit's Redux. (b) Hume's Imperative. (c) Classical Drivel. (d) Say's Law. (e) Gresham's Law.

56. Government profits from printing or minting money are known as: (a) largesse revenues. (b) fiat returns. (c) legal tender. (d) seignorage. (e) pure economic rents.
57. The basic functions of money include its use as a: (a) standard unit of account, medium of exchange, and store of value. (b) standard of wealth, insurer of stability, and measure of productivity. (c) transfer payment, investment incentive, and interpersonal comparison. (d) measure of debt, interest premium, and exchange rate mechanism. (e) scoring system, relative price mechanism, and liability index.
58. Demand deposits are: (a) coins and currency. (b) based on gold deposits with the FED. (c) funds in checking accounts. (d) synonyms for time deposits. (e) measures of available credit.
59. A loan automatically deposited in your checking account by the financial institution that issued it is: (a) backed by new corporate stock. (b) possible only in a 100% reserve banking system. (c) new money. (d) part of M2 but not M1. (e) credit liquidity.

60. The Federal Reserve System could increase the money supply by: (a) selling U.S. bonds. (b) reducing reserve requirements. (c) increasing marginal tax rates. (d) raising discount rates.

61. Open market operations affect the money supply primarily through changes in the: (a) actual money multiplier. (b) amounts of reserves in the banking system. (c) amount of gold backing each dollar. (d) Dow Jones stock market index. (e) government expenditures multiplier.

62. Primary tools of the FED do not include: (a) open market operations. (b) reserve requirement ratios. (c) discounting operations. (d) usury ceilings and consumer credit controls.

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