1. Total Deposits Are $500,000 and Required Reserves Are $100,000. the Required Reserve

Practice Quiz 3 Chapters 11-13

Chapter 11

1. Total deposits are $500,000 and required reserves are $100,000. The required reserve ratio is:

A. 10%

B. 0.05

C. 0.15

D. 5%

E. 0.2

2. The bank has a required reserve ratio of 5%, and deposits of $50,000. The bank has $10,000 in total reserves.

A. The bank has excess reserves of $2,500

B. This bank has zero excess reserves

C. The bank has excess reserves of $7,500

D. This bank is not meeting its reserve requirement

E. All of their reserves are excess reserves

3. To reduce financial instability (such as bank failures), banks can ______while government can ______.

A. create the FDIC; increase their holdings of excess reserves

B. pursue conservative lending practices; introduce deposit guarantees

C. create the FDIC; introduce deposit guarantees

D. pursue conservative lending practices; loan money more carefully

4. Total reserves minus required reserves =

A. Loans

B. Excess reserves

C. Deposits

D. Required reserve ratio

5. In the absence of currency, which does NOT describe trade in the economy:

A. double coincidence of demand

B. debased money

C. goods-for-goods exchange

D. a barter system

6. Which is in M2 (but not in M1):

A. M3

B. Traveler’s checks

C. Checking accounts

D. Savings accounts

E. Currency in circulation

7. Gresham’s Law says ______will drive ______out of usage for exchanges in the economy.

A. currency; debased

B. gold coins; fiat money

C. debased; paper money

D. fiat money; paper money

E. debased; gold coins

8. The required reserve ratio is 10%

The banks are holding (at all times) 7% of deposits in excess reserves

The public is holding 8% of their loans borrowed in the form of cash

If there is $1 million newly deposited, the change in M1 after all rounds of lending are complete is:

A. $80,000

B. $800,000

C. $4 million

D. $10 million

E. $5 million

Chapter 12

9. If the holders of U.S. treasury bonds start to think we have a hard time repaying that debt, so they sell massive amounts of these bonds on the open market, the result will be that interest rates in the U.S. will:

A. Increase

B. Decrease

10. If the deposit multiplier is 15, what should the Fed do to increase money supply by $300 billion?

A. Sell $20 million in bonds

B. Buy $20 million in bonds

C. Buy $20 billion in bonds

D. Buy $300 billion in bonds

E. Sell $300 billion in bonds

11. Which is fixed on a given bond?

A. Quantity purchased

B. Bond price

C. Effective current interest rate

D. Yield

E. Coupon Payment

12. Which is a characteristic of the Fed that differs from all other government regulatory agencies?

A. The Fed Chairman is confirmed (approved for the position) by the U.S. Senate

B. Some Board members are appointed by the President

C. One of the goals of the Fed is the overall health of the economy

D. Some District Bank Board members are chosen by banks

13. If the Taylor Rule is being used and GDP falls 4% below potential, the Fed Funds Rate will:

A. Rise 6%

B. Fall 2%

C. Fall 4%

D. Rise 4%

E. Rise 2%

14. The rate the Fed charges banks directly for borrowing is called the:
A. Fed Funds Rate

B. Margin Requirement on stocks

C. Interest Rate

D. Discount Rate

E. Yield

15. Which is a general power of the Fed?

A. Length limits on mortgage loans

B. Open market operations

C. Margin requirement on stocks

D. Interest rate limits on savings accounts

16. Which is a specific power of the Fed

A. Buying and selling bonds

B. Setting the overall interest rate target

C. Interest rate limits on mortgage loans

D. Required Reserve Ratio

E. Open Market Operations

Chapter 13

17. The rule of thumb is that if productivity is increasing at 7% per year, and nominal wage growth is 5% per year, inflation will be:

A. -2%

B. 3%

C. 11%

D. -4%

E. -11%

18. Velocity of money is NOT:

A. Impacted by the number of ATM machines and debit cards in the economy

B. the number of times a dollar circulates, on average, in a year

C. The amount of real GDP supported by a given amount of Money

D. Nominal GDP divided by M1

19. Monetarists and institutional theorists can both agree on:

A. The idea that the economy is extremely competitive

B. Incomes policy

C. The equation of exchange being a useful tool

D. Minimizing unemployment as the top priority

E. Generally favoring low interest rates over high rates

20. Which is not an obstacle for the Fed as it enacts a loose money policy?

A. Currency held by public increases

B. Implementation lag

C. Recognition lag

D. Velocity is rising

E. Excess reserves increase

21. Quantity Theorists hold that a 5% increase in money supply results in:

A. a 5% increase in M1

B. a 5% increase in Velocity

C. a 5% increase in Prices

D. a 5% increase in RGDP

22. Institutional theorists are most likely to support:

A. Incomes policy

B. Inflation hawks

C. Monetarism

D. Quantity Theory

E. Rules-based monetary policy

23. The central bank of a developing country, when facing inflation in an election year, may print money, buy bonds, and lower interest rates even though they believe they should do the opposite due to the fact they:

A. Believe expansionary policies will raise borrowing costs

B. Lack independence

C. Lack dependence

D. Have credibility

24. If people act in such a way to confirm the economists’ consensus estimates of inflation, this is called ______expectations.

A. Historical

B. Extrapolative

C. Adaptive

D. Rational

25. Which is not a problem facing the Fed during a recession:

A. Cost-push inflation

B. Deflation

C. Debit card usage increases

D. Liquidity trap

E. Stagflation

26. The Keynesian concept of “pushing on a string” means that in a recession, ______policy will be ineffective at restoring full-employment GDP:

A. Contractionary monetary

B. Expansionary fiscal

C. Contractionary fiscal

D. Expansionary monetary

Answers:

10C

11E

12D

13B

14D

15B

16C

17A

18C

19C

20D

21C

22A

23B

24D

25C

26D