Macroeconomics : money, banking and monetary policy.

SStudent ID: 21784984 Exam: 050475RR – MONEY, BANKING AND MONETARY POLICY

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Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page break, so be sure that you have seen the entire question and all the answers before choosing an answer.

1. The primary purpose of the legal reserve requirement is to A. provide a dependable source of interest income for commercial banks. B. provide a means by which the monetary authorities can influence the lending ability of commercial banks. C. prevent banks from hoarding too much vault cash. D. prevent commercial banks from earning excess profits.

2. If the Federal Reserve System buys government securities from commercial banks and the public A. the money supply will contract. B. it will be easier to obtain loans at commercial banks. C. commercial bank reserves will decline.

D. commercial bank reserves will be unaffected.

3. Which one of the following statements about default is correct? A. “Default” occurs when bond purchasers fails to pay full price for a bond. B. “Default” occurs when stocks are not federally insured. C. “Default” occurs when corporations go bankrupt and stock becomes worthless. D. “Default” occurs when bond issuers fails to make promised payments.

4. An important routine function of the Federal Reserve Bank is to A. advise commercial banks as to the most profitable ways of reinvesting profits. B. supervise the liquidation of the assets of bankrupt state banks. C. help large commercial banks develop correspondent relationships with smaller commercial banks. D. provide facilities by which commercial banks and thrift institutions may collect checks.

5. It’s costly to hold money because A. deflation may reduce its purchasing power. B. bond prices are highly variable. C. in doing so, one sacrifices interest income. D. the rate at which money is spent may decline.

6. To say that the Federal Reserve Banks are quasi-public banks means that A. they deal only with banks of foreign nations and don’t have direct business contact with U.S. banks.B. they deal only with commercial banks, and not the public. C. they’re publicly owned, but privately managed. D. they’re privately owned, but managed in the public interest.

7. During periods of rapid inflation, money may cease to work as a medium of exchange A. because people and businesses won’t want to accept it in transactions. B. unless it has been designated legal tender. C. unless it’s backed by gold.

D. because it’s too scarce for everyone to have enough for transactions. 8. George buys an antique car for $20,000 and sells it five years later for $24,000. George’s per year rate

of return is A. 4 percent. B. 10 percent. C. 20 percent. D. 12 percent.

9. Commercial banks and thrifts usually hold only small amounts of excess reserves because A. the Fed doesn’t pay interest on reserves. B. the Fed constantly uses open market operations to eliminate excess reserves. C. the presence of such reserves tends to boost interest rates and reduce investment.

D. the Fed doesn’t want commercial banks and thrifts to be too liquid.

10. Denny buys a rare coin for $200 and sells the coin 1 year later for $220. Denny’s rate of return is A. 91 percent. B. 20 percent. C. 10 percent.

D. 110 percent.

11. Which one of the following statements is correct? A. A $20 bill is a Treasury note. B. A $20 bill is a gold certificate. C. A $20 bill is a Federal Reserve Note.

D. A $20 bill is a Treasury bill.

12. Other things equal, if the supply of money is reduced, A. investment spending will increase. B. bond prices will fall. C. the interest rates will fall.

D. the demand for money will increase.

13. Firms whose central business is to offer security advice and buy and sell individual stocks and bonds for clients are known as

A. insurance companies. B. pension fund companies. C. thrifts. D. securities firms.

14. If a corporation goes bankrupt, A. bondholders get paid from the sale of company assets before stockholders do. B. neither stockholders nor bondholders receive any money. C. stockholders must honor the debts to bondholders out of personal assets if necessary. D. stockholders get paid from the sale of company assets before bondholders do.

15. Paper money (currency) in the United States is issued by the A. Federal Reserve Banks. B. United States Treasury. C. United States Mint.

D. national banks.

16. Which one of the following statements about open-market operations is correct? A. Open-market operations refer to central bank lending to commercial banks. B. Open-market operations refer to purchases of stocks in the New York Stock Exchange. C. Open-market operations refer to the purchase or sale of government securities by the Fed.

D. Open-market operations refer to the specifying of loan maximums on stock purchases.

17. The four main tools of monetary policy are A. tax rate changes, the discount rate, open-market operations, and the federal funds rate. B. tax rate changes, changes in government expenditures, open-market operations, and the term auction facility. C. changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate. D. the discount rate, the reserve ratio, the term auction facility, and open-market operations.

18. Most modern banking systems are based on A. 100 percent reserves. B. money of intrinsic value. C. commodity money.

D. fractional reserves. 19. If the Fed wants commercial banks to borrow and expand their reserves by a specific amount, what

monetary policy tool best guarantees that it will happen? A. Term auction facility B. Reserve ratio C. federal funds rate

D. Open-market operations

20. When economists say that money serves as a medium of exchange, they mean that it’s A. a means of payment. B. declared as legal tender by the government. C. a monetary unit for measuring and comparing the relative values of goods.

D. a way to keep wealth in a readily spendable form for future use.

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