Chapter 5 Exam Questions Policy Makers And The Money Supply

Chapter 5

Policy Makers and the Money Supply

TRUE-FALSE QUESTIONS

1. The output of goods and services in an economy is referred to as the gross domestic product.

Difficulty Level: Easy

Subject Heading: Economic Growth

L.O. 5.1

2. Nations that export more than they import will have a trade deficit.

Difficulty Level: Easy

Subject Heading: Domestic and International Implications

L.O. 5.1

3. High inflation has been a significant problem in the United States during the past decade.

Difficulty Level: Medium

Subject Heading: Price Stability

L.O. 5.1

4. U.S. economic policy actions are directed toward the three general goals of economic growth, high employment, price stability, and balance in international transactions.

Difficulty Level: Medium

Subject Heading: National Economic Policy Objectives

L.O. 5.1

5. Moderate economic growth is one of the three general goals of U.S. economic policy actions.

Difficulty Level: Medium

Subject Heading: National Economic Policy Objectives

L.O. 5.1

6. Moderate employment is one of the three general goals of U.S. economic policy actions.

Difficulty Level: Medium

Subject Heading: National Economic Policy Objectives

L.O. 5.1

7. Price stability is one of the three general goals of U.S. economic policy actions.

Difficulty Level: Medium

Subject Heading: National Economic Policy Objectives

L.O. 5.1

8. Low inflation is one of the three general goals of U.S. economic policy actions.

Difficulty Level: Medium

Subject Heading: National Economic Policy Objectives

L.O. 5.1

9. The United States economy has little influence on the economies of other nations.

Difficulty Level: Medium

Subject Heading: Domestic and International Implications

L.O. 5.1

10. The relationship between the money supply and demand affects the level of prices and economic activity in our market economy.

Difficulty Level: Easy

Subject Heading: National Economic Policy Objectives

L.O. 5.1

11. The relationship between the money supply and demand affects the level of prices and economic activity in our market economy.

Difficulty Level: Easy

Subject Heading: National Economic Policy Objectives

L.O. 5.1

12. The relationship between the money supply and demand affects the level of prices and economic activity in our market economy.

Difficulty Level: Easy

Subject Heading: National Economic Policy Objectives

L.O. 5.1

13. The Federal Reserve System was not able to regulate money and credit until after World War II.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.1

14. Although unemployment represents a loss of potential output, most economists agree that the real costs of unemployment to an economy are minimal.

Difficulty Level: Medium

Subject Heading: High Employment

L.O. 5.1

15. Inflation occurs when an increase in the price of goods or services is more than offset by an increase in quality.

Difficulty Level: Medium

Subject Heading: Price Stability

L.O. 5.1

16. Commercial banks are one of the four policy making groups.

Difficulty Level: Easy

Subject Heading: Four Policy Making Groups

L.O. 5.2

17. The Federal Reserve System is one of the four policy making groups.

Difficulty Level: Easy

Subject Heading: Four Policy Making Groups

L.O. 5.2

18. Congress is one of the four policy making groups.

Difficulty Level: Easy

Subject Heading: Four Policy Making Groups

L.O. 5.2

19. The president is one of the four policy making groups.

Difficulty Level: Easy

Subject Heading: Four Policy Making Groups

L.O. 5.2

20. The government body primarily responsible for monetary policy is Congress.

Difficulty Level: Easy

Subject Heading: Four Policy Making Groups

L.O. 5.2

21. The branch of government primarily responsible for the formulation of fiscal policy is the U.S. Senate.

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.2

22. Since World War II, 12 individuals served as president of the United States.

Difficulty Level: Medium

Subject Heading: Ethical Behavior in Government

L.O. 5.2

23. The four groups of policy makers that are actively involved in achieving the nation’s economic policy objectives are the Federal Reserve System, the President, Congress, and the U.S. Treasury.

Difficulty Level: Medium

Subject Heading: Figure 5.1

L.O. 5.2

24. The branch of government primarily responsible for the formulation of fiscal policy is the President and his Council of Economic Advisors.

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.3

25. Traditionally, the federal government provides services that cannot be provided as efficiently by the private sector.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

26. The President of the United States has no influence over the Federal Reserve System nor exerts any pressure on the Fed.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

27. A government raises funds to pay for its activities in two ways: levies taxes or prints money for its own use.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

28. There are four ways a government raises funds to pay for its activities.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

29. The President of the United States formulates budgetary and fiscal policy, but Congress must enact legislation to implement these policies.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

30. The U.S. Treasury has little power to influence money markets.

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.3

31. Monetizing the deficit occurs when the Fed increases the money supply by purchasing government securities.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

32. The President of the United States and the Fed formulate a program of fiscal policy.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

33. The U.S. Treasury has primary responsibility for management of the federal debt.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

34. The U.S. Treasury is responsible for refinancing the outstanding debt of the government.

Difficulty Level: Medium

Subject Heading: Government Influence on the Economy

L.O. 5.3

35. Fannie Mae was on the verge of financial insolvency and possible collapse in mid-2008.

Difficulty Level: Easy

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

36. Freddie Mac was on the verge of financial insolvency and possible collapse in mid-2008.

Difficulty Level: Easy

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

37. Aggregate demand refers to total spending in the economy.

Difficulty Level: Easy

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

38. Transfer payments are income payments for which no current productive service is rendered.

Difficulty Level: Easy

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

39. Unemployment and welfare benefits are examples of transfer payments for which no current productive services are given in return.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

40. Automatic stabilizers include trade deficits, budget deficits, and floating exchange rates.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

41. Unemployment is an automatic stabilizers.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

42. Welfare payments are an automatic stabilizers.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

43. Progressive income tax is an automatic stabilizers.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

44. Tax cuts are an automatic stabilizers.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

45. Although the Treasury has vast power to affect the supply of money and credit, the Treasury largely limits its actions to taxing, borrowing, paying bills, and refunding maturing obligations.

Difficulty Level: Medium

Subject Heading: Treasury Cash and General Management Responsibilities

L.O. 5.4

46. The Treasury’s primary checkable deposit accounts for day-to-day operations are kept at several commercial banks in large cities.

Difficulty Level: Medium

Subject Heading: Managing the Treasury’s Cash Balances

L.O. 5.4

47. The Fed plays a significant role in tax policy.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

48. Tax receipts tend to increase during economic downturns.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

49. Social Security tax receipts tend to increase during economic downturns.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

50. The U.S. government may influence monetary and credit conditions indirectly through taxation and expenditure programs.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

51. The fiscal policy effects of a tax cut occur more slowly than an increase in government spending.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

52. When income taxes are cut, disposable income is slowly increased under our system of tax withholding.

Difficulty: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

53. “Crowding out” caused by deficit financing can result in tighter credit conditions and higher interest rates.

Difficulty Level: Medium

Subject Heading: Treasury Deficit Financing and Debt Management Responsibilities

L.O. 5.5

54. The Fed closely monitors the Treasury account and takes any changes into consideration in conducting daily open market operations in order to minimize the effect on bank reserves.

Difficulty Level: Medium

Subject Heading: Managing the Treasury’s Cash Balances

L.O. 5.5

55. The U.S. national debt is the total debt owed by the government and consists of debt held by the public.

Difficulty Level: Medium

Subject Heading: Treasury Deficit Financing and Debt Management Responsibilities

L.O. 5.5

56. Fund deficits and refinance maturing debt as quickly as possible is one of three debt management goals for the Treasure.

Difficulty Level: Medium

Subject Heading: Treasury Deficit Financing and Debt Management Responsibilities

L.O. 5.5

57. To manage Treasury’s cash flow is one of three debt management goals for the Treasure.

Difficulty Level: Medium

Subject Heading: Treasury Deficit Financing and Debt Management Responsibilities

L.O. 5.5

58. In the fractional reserve system, banks must hold, with the Fed, reserves equal to a certain percentage of their deposits.

Difficulty Level: Medium

Subject Heading: Changing the Money Supply

L.O. 5.6

59. The deposit of a check drawn on the Fed is a derivative deposit because it adds new reserves to the bank where deposited and to the banking system.

Difficulty Level: Medium

Subject Heading: Changing the Money Supply

L.O. 5.6

60. If required reserves are larger than the total reserves of an institution, the difference is called excess reserves.

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

61. Primary deposits are deposits that add new reserves to a bank while secondary deposits are deposits that were borrowed from the reserves of primary deposits.

Difficulty Level: Medium

Subject Heading: Changing the Money Supply

L.O. 5.6

62. The money multiplier indicates the maximum increase in deposits (and money supply) that can result from a given increase in excess reserves.

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

63. One of the reasons open market operations are conducted virtually every business day is to implement changes in the money supply called for by the Federal Open Market Committee.

Difficulty Level: Medium

Subject Heading: Federal Reserve System Transactions

L.O. 5.7

64. Required reserves are the minimum amount of total reserves that a depository institution must hold.

Difficulty Level: Easy

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

65. The velocity of money is expressed as the average number of times each dollar is spend on purchases of goods and services, and it is calculated as real GDP divided by M1.

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

66. The velocity of money measures the rate at which wire transfers can be transmitted to overseas banks.

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

67. The monetary base is the banking system reserves, plus currency held by the public.

Difficulty Level: Easy

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

68. The M1 definition of the money supply is the monetary base multiplied by the money multiplier.

Difficulty Level: Easy

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

MULTIPLE-CHOICE QUESTIONS

69. Our country’s economic policy actions are directed toward all of the following goals except

a. balance in the federal budget.

b. high employment.

c. price stability.

d. economic growth.

Difficulty Level: Medium

Subject Heading: National Economic Policy Objectives

L.O. 5.1

70. A country’s economic policy actions are directed toward which of the following goals?

a. No change in the GDP

b. High employment

c. Maintaining high inflation

d. Zero trade deficit or surplus

Difficulty Level: Medium

Subject Heading: National Economic Policy Objectives

L.O. 5.1

71 Price inflation

a. is relatively unimportant to individuals

b. is considered to be acceptable in the nation’s quest for high levels of employment

c. causes inequities and discourages investment by increasing the uncertainty about future returns

d. is almost always due to financing wars

Difficulty Level: Medium

Subject Heading: Price Stability

L.O. 5.1

72. The U.S. Treasury is primarily responsible for

a. monetary policy.

b. debt management.

c. fiscal policy.

d. the money supply.

Difficulty Level: Easy

Subject Heading: Four Policy Maker Groups

L.O. 5.2

73. Primary groups of policy makers that are actively involved in achieving U.S. economic policy objectives include which of the following?

a. Commercial banks

b. The president

c. State legislatures

d. Foreign governments

Difficulty Level: Medium

Subject Heading: Four Policy Maker Groups

L.O. 5.2

74. U.S. debt management is generally designed to

a. lower interest rates.

b. stimulate economic activity.

c. encourage orderly economic growth and stability.

d. complement Federal Reserve monetary policy.

Difficulty Level: Medium

Subject Heading: Four Policy Maker Groups

L.O. 5.2

75. During the 2007-2009 financial crisis, many major financial institutions and business corporations were on the verge of collapse or failure; however, some of the very largest corporations and financial institutions were deemed as being ________ because their failure would cause cascading negative repercussions throughout the U.S. and many foreign economies.

a. toxic firms

b. boat rockers

c. too large to ignore

d. too big to fail

Difficulty Level: Medium

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

76. In fall 2008, the U.S. Congress and President George W. Bush responded to the financial crisis with the passage of the _____________ in early October of that year.

a. Economic Stimulus Act

b. Economic Recovery Act

c. Economic Stabilization Act

d. Economic Booster Act

Difficulty Level: Medium

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

77. A primary focus of the Economic Stabilization Act of 2008, which became known as the ___________________________, was to allow the U.S. Treasury purchase up to $700 billion of troubled or toxic assets held by financial institutions.

a. Troubled Asset Relief Program (TARP)

b. Toxic Asset Recovery Program (TARP)

c. Troubled Area Relief Program (TARP)

d. Toxic Area Recovery Program (TARP)

Difficulty Level: Medium

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

78. In an effort to stimulate economic activity, Congress and the president passed the $787 billion _________________________________ in February, 2009 with the funds to be used to provide tax relief, appropriations, and direct spending.

a. American Reconstruction and Reconfiguration Act of 2009

b. American Real Estate and Reconstruction Act of 2009

c. American Real Estate Reinvestment Act of 2009

d. American Recovery and Reinvestment Act of 2009

Difficulty Level: Medium

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

79. The “perfect financial storm” that developed in 2008, which put the U.S. economy was on the verge of collapse was characterized by which of the following?

a. The housing price “bubble” burst in 2006 and began a sharp decline.

b. Stock market prices began a sharp increase.

c. Many of the mortgage-related debt securities originated and sold to others, or held, by banks became easy to value during the perfect financial storm.

d. Individuals and businesses were defaulting on loans and home mortgages in increasing numbers due to increasing home prices.

Difficulty Level: Hard

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

80. During the 2007-2009 financial crisis, some of the very largest financial institutions were deemed as being “too big to fail” because their failure would cause cascading negative repercussions throughout the U.S. and many foreign economies. As a result, the Federal Reserve

a. moved to reduce liquidity in the monetary system and increased its target federal funds rate.

b. worked with the U.S. Treasury to help facilitate the merging of financially weak institutions with institutions that were financially stronger.

c. increased reserve requirements

d. sold bond through open market operations

Difficulty Level: Hard

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

81. During the 2007 - 2009 financial crisis, ___________ and __________, who were major participants in the secondary mortgage markets, were on the verge of financial insolvency and possible collapse in mid-2008.

a. Fannie Mae; Freddie Mac

b. the Federal Treasury; the Federal Reserve

c. Morgan Stanley; Smith Barney

d. Washington Mutual; Lehman Brothers

Difficulty Level: Hard

Subject Heading: Government Reaction to the Perfect Financial Storm

L.O. 5.3

82. A government raises funds to pay for its activities in three ways. Which is not one of those ways?

a. Taxes

b. Borrows

c. Increases the federal budget

d. Prints money

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.3

83. Annual revenue and expenditure plans that reflect fiscal policy objectives concerning government influence on economic activity.

a. Federal budget

b. Budget surplus

c. Budget deficit

d. Treasure budget

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.3

84. Occurs when tax revenues are more than expenditures.

a. Federal budget

b. Budget surplus

c. Balanced budget

d. Monetizing the debt

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.3

85. Occurs when tax revenues are less than expenditures.

a. Federal budget

b. Budget surplus

c. Budget deficit

d. Balanced budget

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.3

86. Fed buys government securities to help finance a budget deficit and to add to bank reserves and increase the money supply.

a. Quantitative easing

b. Budget surplus

c. Budget deficit

d. Monetizing the debt

Difficulty Level: Easy

Subject Heading: Government Influence on the Economy

L.O. 5.3

87. In September, 2008 ____________ was acquired by Bank of America and _____________ declared bankruptcy when no viable financial alternatives surfaced.

a. Bank of America; Washington Mutual

b. Merrill Lynch; Lehman Brothers

c. Citicorp; Smith Barney

d. Morgan Stanley; Chase

Difficulty Level: Hard

Subject Heading: Financial Crisis Related Activities

L.O. 5.4

88. Continuing federal programs that stabilize economic activity are called

a. transfer payments.

b. automatic stabilizers.

c. social insurance programs.

d. safety net programs.

Difficulty Level: Easy

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

89. Temporary federal programs that stabilize economic activity are called

a. transfer payments.

b. leveling programs.

c. social insurance programs.

d. discretionary policies.

Difficulty Level: Easy

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

90. Examples of automatic stabilizers are (choose one)

a. open market operations.

b. changes in the discount rate.

c. unemployment insurance.

d. issuance of currency.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

91. Automatic stabilizers include all of the following except

a. unemployment insurance

b. social security

c. welfare

d. pay-as-you-go tax system

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

92. The budget-making process rests with the

a. Congress.

b. U.S. Treasury.

c. President’s Council of Economic Advisors.

d. U.S. Treasury in cooperation with the Fed.

Difficulty Level: Easy

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

93. The government entity responsible for fiscal policy is

a. the U.S. Treasury.

b. the Federal Reserve.

c. the Congress.

d. the Commerce Department.

Difficulty Level: Medium

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

94. Various programs of the federal government help stabilize disposable income, and in turn, economic activity in general. In so doing,

a. income tax rates may be lowered during periods of prosperity and increased during slack economic periods.

b. some programs act on a continuing basis and are described as automatic stabilizers.

c. the timing of sale of U.S. savings bonds is instrumental in accomplishing this objective.

d. these programs seldom attain their goals.

Difficulty Level: Hard

Subject Heading: Powers Relating to the Federal Budget and to Surpluses or Deficits

L.O. 5.4

95. Almost all Treasury disbursements are made by

a. checks drawn directly on the U.S. Treasury.

b. check drawn against deposits at commercial banks in large cities.

c. drafts drawn on member banks.

d. checks drawn against deposits at Federal Reserve Banks.

Difficulty Level: Medium

Subject Heading: Managing the Treasury’s Cash Balances

L.O. 5.4

96. When the United States Treasury makes a payment to an individual, it usually takes the form of a

a. check drawn on a Federal Reserve Bank.

b. check drawn directly against the U.S. Treasury.

c. special Treasury voucher.

d. check drawn against a bank in which tax balances are held.

Difficulty Level: Medium

Subject Heading: Managing the Treasury’s Cash Balances

L.O. 5.4

97. When the United States Treasury makes a payment to a business, it usually takes the form of a

a. check drawn on the Central Bank of China.

b. check drawn directly against the U.S. Treasury.

c. special Treasury voucher.

d. check drawn against a bank in which tax balances are held.

Difficulty Level: Hard

Subject Heading: Managing the Treasury’s Cash Balances

L.O. 5.4

98. If a check is written for the full amount of a derivative deposit created by a bank loan and then is sent to a bank in another city for deposit

a. the lending bank would lose all of its excess reserves.

b. the lending bank would still have reserves to lend.

c. the full amount would be added to the receiving bank’s excess reserves.

d. the receiving bank would lose excess reserves.

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.4

99. Budgetary deficits always have the effect of

a. creating inflationary pressures.

b. crowding out private lenders.

c. forcing the Federal Reserve to buy government securities.

d. creating governmental competition for private investment funds.

Difficulty Level: Medium

Subject Heading: Treasury Deficit Financing and Debt Management Responsibilities

L.O. 5.5

100. Government financing of large budgetary deficits

a. absorbs savings and decreases interest rates.

b. may crowd out private borrowers.

c. is known as monetizing the deficit.

d. reduces total consumer spending and demand.

Difficulty Level: Medium

Subject Heading: Treasury Deficit Financing and Debt Management Responsibilities

L.O. 5.5

101. Currently, the backing for Federal Reserve’s notes is primarily in the form of

a. gold certificates.

b. gold bullion.

c. eligible paper (business notes and drafts).

d. the credit of the Federal Reserve.

Difficulty Level: Medium

Subject Heading: Changing the Money Supply

L.O. 5.6

102. Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $20,000. What would be the maximum amount of loan that could be made by the system?

a. $16,000

b. $40,000

c. $80,000

d. $100,000

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

103. Assume that a banking system must keep reserves of 20% against deposits. The bank receives a primary deposit of $10,000. What would be the maximum amount of loan that could be made by the system?

a. $16,000

b. $40,000

c. $80,000

d. $100,000

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

104. The U.S. banking system has the ability to alter the size of the money supply because of the use of

a. a 100% reserve system.

b. a fractional reserve system.

c. the Federal Reserve System’s excess reserves.

d. Federal Reserve notes issued by the U.S. Treasury.

Difficulty Level: Medium

Subject Heading: Changing the Money Supply

L.O. 5.6

105. Which of the following statements is false?

a. The multiplying capacity of primary deposits is helped by cash leakages from the banking system.

b. The monetary base is defined as bank reserves plus currency held by the nonbank public.

c. In contrast to the other transactions that affect reserves in the banking system, open market operations are entirely at the initiative of the Federal Reserve.

d. All the above statements are correct.

Difficulty Level: Medium

Subject Heading: Offsetting or Limiting Factors

L.O. 5.6

106. Which of the following statements is false?

a. The difference between total reserves and the monetary base is currency held by the nonbank public.

b. The ability to alter the money supply and credit is based on the fact that our banking system does not utilize a fractional reserve system.

c. The ability to predict M1 velocity, in addition to money supply changes, is important in achieving successful monetary policy making.

d. A derivative deposit arising out of a loan from Bank A is transferred by check to Bank B, where reserve requirement are again imposed.

Difficulty Level: Hard

Subject Heading: Changing the Money Supply

L.O. 5.6

107. Deposits that add new reserves to the bank where they are deposited are called

a. primary deposits.

b. derivative deposits.

c. secondary deposits.

d. Special Drawing Rights.

Difficulty Level: Easy

Subject Heading: Changing the Money Supply

L.O. 5.6

108. Assume that a bank receives a primary deposit of $1,000, and the reserve requirement is 15%. Which of the following would reflect the asset side of the balance sheet after a maximum loan amount has just been made?

a. reserves of $1,000

b. deposits of $1,000

c. reserves of $1,000 and loans of $150

d. reserves of $1,000 and loans of $850

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

109. If the reserve requirement is 25% and $5,000 is injected into the banking system, the maximum expansion in the money supply would be

a. $1,250.

b. $20,000.

c. $6,667.

d. $4,000.

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

110. If a customer makes new deposits of $10,000 to a bank and the reserve requirement is 15%, then excess reserves will be

a. $1,500.

b. $8,500.

c. $10,000.

d. $6,666.

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

111. A customer of a bank needs additional currency and cashes a check for $10,000. The reserve requirement is 20%. The bank has no excess reserves. It must

a. refuse the check.

b. get an additional $8,000 of reserves.

c. get an additional $2,000 of reserves.

d. transfer $10,000 of reserves to the Fed.

Difficulty Level: Medium

Subject Heading: Checkable Deposit Expansion

L.O. 5.6

112. The percentage of deposits that must be held as reserves is called

a. excess reserves

b. required reserves

c. required reserves ratio

d. transfer deposits

Difficulty Level: Easy

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

113. Federal Reserve open market operations

a. usually conducted simultaneously.

b. designed to improve the federal deficit.

c. is the buying and selling of bonds to affect bank reserves.

d. functions shared with the U.S. Treasury.

Difficulty Level: Medium

Subject Heading: Changes in the Demand for Currency

L.O. 5.7

114. Open market operations differ from discounting operations in that they are

a. initiated by member depository institutions.

b. designed to be of significance only to large city banks.

c. initiated by the Federal Reserve.

d. initiated by the U.S. Treasury.

Difficulty Level: Medium

Subject Heading: Changes in the Demand for Currency

L.O. 5.7

115. Open market operations differ from setting reserve requirements in that they are

a. initiated by member depository institutions.

b. designed to be of significance only to large city banks.

c. initiated by the President.

d. used daily.

Difficulty Level: Medium

Subject Heading: Changes in the Demand for Currency

L.O. 5.7

116. One factor that decreases the volume of bank reserves is a decrease in

a. bank holdings of loans and securities.

b. time and savings deposits.

c. life insurance company reserves.

d. Federal Reserve float.

Difficulty Level: Medium

Subject Heading: Monetary Policy

L.O. 5.7

117. Bank reserves are increased when the Treasury

a. sells government bonds to individuals

b. decreases its holding of cash

c. increases its account at a Federal Reserve bank

d. increases its holding of cash

Difficulty Level: Medium

Subject Heading: Federal Reserve System Transactions

L.O. 5.7

118. Bank reserves are not affected by

a. currency in circulation.

b. changes in reserve requirements.

c. open market operation.

d. changes in the level of deposits of foreign banks at the Federal Reserve banks.

Difficulty Level: Medium

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

119. One factor that increases the volume of bank reserves is a decrease in

a. reserve requirements.

b. time and savings deposits.

c. life insurance company reserves.

d. the level of cash holdings.

Difficulty Level: Hard

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

120. Bank reserves are decreased when the Treasury

a. is in recess.

b. writes checks.

c. decreases its account at a Federal Reserve bank.

d. reduces its holding of cash.

Difficulty Level: Hard

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

121. Assume that a bank must keep reserves of 20% against deposits. The bank receives a primary deposit of $50,000. What amount of excess reserves can the bank safely lend?

a. $10,000

b. $20,000

c. $40,000

d. $50,000

Difficulty Level: Hard

Subject Heading: Changes in the Demand for Currency

L.O. 5.7

122. When a customer demands additional currency and cashes a check for $500, all of the following occur except

a. the deposits of the bank are reduced $500.

b. required reserves are reduced.

c. Federal Reserves’ notes decrease.

d. additional reserves must be acquired if the bank has no excess reserves.

Difficulty Level: Hard

Subject Heading: Changes in the Demand for Currency

L.O. 5.7

123. Assume that a bank receives a primary deposit of $1,000. If the reserve requirement is 25%, what will be the amount of excess reserves available for lending purposes?

a. zero

b. $250

c. $750

d. $1,000

Difficulty Level: Hard

Subject Heading: Changes in the Demand for Currency

L.O. 5.7

124. Which of the following statements is most correct?

a. Bank reserves are not affected by transactions involving the Treasury.

b. Derivative deposits occur when reserves created from primary deposits are made available through bank loans to borrowers who leave them on deposit in order to write checks against the funds.

c. Total bank reserves in the banking system consist of bank’s member bank deposits held in Federal Reserve Banks, plus non-member banks vault cash.

d. Federal Reserve notes have been increasingly backed by gold certificates and eligible paper in recent years.

Difficulty Level: Hard

Subject Heading: Changes in the Demand for Currency

L.O. 5.7

125. Which one of the following transactions or operations is entirely at the initiative of the Federal Reserve?

a. Open market operations

b. Change in float

c. Change in bank borrowings

d. Change in Treasury cash holdings

Difficulty Level: Medium

Subject Heading: Federal Reserve System Transactions

L.O. 5.7

126. Transactions that affect U.S. bank reserves cannot be initiated by the

a. nonbank public.

b. Federal Reserve System.

c. U. S. Treasury.

d. tax policies of foreign governments.

Difficulty Level: Medium

Subject Heading: Figure 5.2

L.O. 5.7

127. A depository institution’s vault cash and funds held at its regional Federal Reserve Bank.

a. Required reserves

b. Deficit reserves

c. Bank reserves

d. Excess reserves

Difficulty Level: Easy

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

128. Minimum amount of reserves that a depository institution must hold against its deposit liabilities.

a. Required reserves

b. Deficit reserves

c. Bank reserves

d. Excess reserves

Difficulty Level: Easy

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

129. Amount by which a depository institution’s bank reserves are greater than required reserves.

a. Required reserves

b. Deficit reserves

c. Bank reserves

d. Excess reserves

Difficulty Level: Easy

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

130. Amount by which a depository institution’s bank reserves are less than required reserves.

a. Required reserves

b. Deficit reserves

c. Bank reserves

d. Excess reserves

Difficulty Level: Easy

Subject Heading: Factors Affecting Bank Reserves

L.O. 5.7

131. Changes in the growth rates for money supply and money velocity affect the growth rate in:

a. real economic activity

b. the amount of transfer payments

c. the turnover of goods and services

d. bank borrowing

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

132. In our financial system, the money multiplier

a. is not affected by the Federal Reserve

b. can fluctuate over time

c. is not affected by the nonbank public

d. is not affected by the U.S. Treasury

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

133. To equal M1 money supply, the monetary base

a. is multiplied by the money multiplier

b. is added to by the money multiplier

c. is subtracted from the money multiplier

d. is divided by the money multiplier

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

134. The monetary base

a. equals the money supply.

b. consists of checkable and non-checkable deposits.

c. consists of bank reserves, plus currency.

d. equals the money multiplier, plus bank reserves.

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

135. Which of the following statements is most correct?

a. A monetary base of $5 million and a money multiplier of 5 means that the money supply will be $1 million.

b. The magnitude of the money multiplier today is in the 8 to 9 range.

c. The money multiplier is influenced by the public’s switching between checkable and non-checkable deposits at their banks.

d. The monetary base multiplied by the money multiplier produces the M3 definition of the money supply.

Difficulty Level: Hard

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

136. The Federal Reserve System cannot directly control

a. Treasury security purchases by the public.

b. monetary base.

c. the size of the money supply.

d. commercial bank reserve requirements.

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8

137. Banking system reserves plus currency held by the nonbank public is referred to as the

a. money supply.

b. monetary base.

c. monetary multiplier.

d. monetary requirement.

Difficulty Level: Medium

Subject Heading: The Monetary Base and the Money Multiplier

L.O. 5.8