Economics 203/Quiz 3
Economics 203/Quiz 3
1. The term, “fractional reserve system,” refers to
a. the practice of keeping multiple deposits in a bank vault so that theft of one or some does not mean all deposits are lost
b. the practice of requiring a down payment on most loans
c. the practice of keeping some depos
d. none of the above
2. LIBOR stands for an interest rate on loans
a. issued by large non-financial corporations like GE
b. issued between banks
c. issued by the Federal Reserve System
d. none of the above
3. “Fed Funds” indicate loans
a. issued by the Federal Reserve System
b. issued between banks using funds deposited in the Federal Reserve System
c. issued by the U.S. government to cover its operating deficits
d. none of the above
4. Which of the following is part of the “wholesale” money market?
a. loans between banks
b. bank deposits by households
c. bank deposits by businesses
d. all of the above
5. The power of the Fed to print currency or create money in electronic balances, means that
a. it determines the total dollar amount or value of transactional accounts in the economy
b. it determines where interest rates will be set
c. it has the ability to influence the rate of inflation
d. none of the above
6. The basic equation of insurance (expected payout = probability of event x $ value of event)
a. implies that by insuring against a risk (the event), members of an insurance pool save themselves money over the long run
b. implies that in order for insurance to be appropriately priced and used, the likelihood of events must be estimated accurately
c. implies that by the purchase of insurance lowers the total amount of risk to the economy as a whole
d. none of the above
7. Select the equation below that expresses in a simply way the limits or constraints that the economy faces over time:
a. income(now) + income(future) = consumption(now) + consumption(future)
b. income(now) + debt(future) = consumption(now) + consumption(future)
c. debt(now) + debt(future) = consumption(now) + consumption(future)
d. none of the above
8. Based on the constraints on consumption now and the future, the main role of debt is to
a. increase total consumption over the long run
b. pay for current consumption by passing along payment to future generations
c. smooth out consumption over time even if income is uneven
d. all of the above
9. According to the Friedman video/text, what helped to contribute to the banking crisis and closures in the early 1930s?
a. the fact that banks had never faced panics before
b. the fact that banks held 100% reserves at that time
c. the fact that banks expected lending from the Fed, which they did not receive
d. none of the above
10. In September of 2008, what were some obvious signs that the “wholesale” money market was breaking down?
a. interest rates on 3-month Treasury Bills neared zero percent
b. the difference in interest rates between interbank rates and Treasury Bills became very large
c. some large money market mutual funds could not redeem deposits on a $1 for $1 basis
d. all of the above
11. The U.S. Department of Treasury
a. oversees the Federal Reserve System
b. manages the amount of money in the economy by altering “base money”
c. makes/receives payments for the U.S. and borrows money for the U.S.
d. all of the above
12. What piece of evidence suggests that the Fed played very little role in the increasing amount of debt from 2000 to 2008?
a. very low interest rates
b. inflation rates that were similar to those before 2000
c. the increasing size of the U.S. federal debt
d. none of the above
13. Which of the following contributed to the increasing debt to income ratio in the U.S.?
a. A variety of insurance-type products in financial markets that made the debt seem safer than it was
b. A variety of government initiatives intended to spur home ownership
c. Equity (or capital) standards that did not require enough cash or owners money to be held
d. all of the above
14. Which of the following is an accurate statement:
a. higher percentages of “leverage” in the purchase of an item imply potentially greater losses if the item purchased decreases in value
b. owner’s equity is not relevant for loans as long as income is expected to exceed payments
c. most banks hold about 50% of deposited money on reserve in their vaults or with the Fed
d. all of the above
15. Which of the following is an accurate statement:
a. for an item) to be used and accepted for payment (money), it must be backed by (convertible into) a precious metal like gold or silver
b. after WWI, the expansive printing of new money by Germany increased the wealth in their economy and helped them build a stronger economy
c. if the Fed injects $100 billion in new currency into the economy, the increase in the total amount of transactions accounts will exceed $100 billion; by how much depends on the amount of lending
d. none of the above
Correct answers:
1d, 2b, 3b, 4a, 5c, 6b, 7a, 8c, 9c, 10d, 11c, 12b, 13d, 14a, 15c, 16a