Money and Banking

Practice Questions: Macro Test #3

1. The M1 measure of U.S. money supply is defined as

a. currency

b. currency, demand deposits, and fractional money

c. currency, demand deposits and all time deposits

d. currency, demand deposits and all near money

2. The formula for the equation of money is MV=PQ. Which of the following would most likely cause P to increase?

a. an increase in the money supply

b. an increase in the output of goods and services

c. a decline in the speed at which money circulates

d. a decline in the money supply

3. An increase in aggregate demand when the economy is at full employment will most likely result in

a. rise in real GNP

b. a decline in real GNP

c. deflation

d. inflation

4. After a sharp rise in this type of inflation, politicians say that labor unions must bear the blame. What type of inflation is the politician implying has incurred?

a. demand-pull inflation

b. cost-push inflation

c. new inflation

d. none of the above

5. One way that time deposits differ from demand deposits is that

a. advance warning must always be given before withdrawing money from time deposits.

b. time deposits are in no way liquid, nor can they become liquid

c. demand deposits earn interest, time deposits do not

d. time deposits usually cannot be drawn on by personal check

6. Which individual would be hurt most by a period of deflation?

a. a debtor

b. a creditor

c. a retired person living on a fixed pension

d. a worker with a secure job and income protected by a union contract

7. If there is a high inflation and low unemployment, which of the following actions should the Federal Reserve take to help correct inflation?

a. lower the discount rate

b. lower the reserve requirement

c. sell government securities on the open market

d. decrease the income tax

8. Which of the following is most likely to happen to GNP and to interest rates if the Federal Reserve increases the reserve requirement?

a. interest rates and GNP will both decrease

b. interest rates will decrease and GNP will increase

c. interest rates will increase and GNP will decrease

d. interest rates and GNP will both increase

9. Which of the following would be considered an asset to a commercial bank?

a. the stock that was issued to investors to start the bank

b. demand deposits

c. money it has borrowed from the Fed

d. the loans it has made to investors who need money

10. In today's "fractional reserve" banking system in the United States, the reserve requirement imposed on commercial banks

a. are becoming obsolete because actual reserves greatly exceed required reserves

b. are essentially averages of the amounts needed to meet the public's demand for money

c. are in excess of what is normally needed, in case people become uneasy

d. are primarily intended to set a limit on the total money supply

11. Demand deposits are

a. not usually considered part of the country's money supply

b. not currency but still represent as acceptable medium of exchange

c. not so widely used as NOW accounts as a form of money

d. backed by gold, but not convertible into it

12. To counteract a recession, the Fed should

a. raise the reserve requirement and the discount rate

b. sell securities on the open market and lower the discount rate

c. sell securities on the open market and raise the discount rate

d. buy securities on the open market and raise the discount rate

e. buy securities on the open market and lower the discount rate

13. If the Federal Reserve wished to pursue contractionary policy, it could

a. raise the discount rate

b. lower the discount rate

c. purchase government securities on the open market

d. lower the reserve requirement

14. The following is the one tool the Federal Reserve is least likely to use because it is the most powerful

a. the discount rate

b. open market operations

c. altering the reserve ratio

d. moral suasion

e. the margin requirement

15. If the Fed sold government bonds on the open market, it would be attempting to

a. raise cash

b. contract the money supply

c. expand the money supply

d. lower interest rates

16. The principal reason for requiring banks to maintain reserve deposits with the Federal Reserve is that these balances

a. provide the maximum amount of money the bank would ever need.

b. give the Fed more control over the money creating operations of banks.

c. ensure that banks do not make excessive profits.

d. assist the Treasury in refinancing the government debt.

17. Which of the following fiscal and monetary policies are coordinated to stimulate growth in national income?

a. a tax increase and the purchase of government bonds by the Fed.

b. a tax increase and the sale of government bonds by the Fed.

c. a tax cut and the sale of government bonds by the Fed

d. a tax cut and an increase in the discount rate.

e. a tax cut and a decrease in the reserve requirement.

18. The purchase of securities on the open market by the Fed will

a. increase the supply of money.

b. increase interest rates.

c. increase the discount rate.

d. decrease the number of Federal Reserve Notes in circulation.

e. decrease the reserve requirement.

19. Which of the following policies would most likely be recommended in an economy with an annual inflation rate of 3% and an unemployment rate of 11%?

a. An increase in transfer payments and an increase in the reserve requirement.

b. An increase in defense spending and an increase in the discount rate.

c. An increase in income tax rates and a decrease in the reserve requirement.

d. A decrease in government spending and the open market sale of securities.

e. A decrease in the tax rate on corporate profits and a decrease in the discount rate.

20. Commercial banks are able to create money by

a. printing it.

b. creating a demand deposit as it extends a loan.

c. maintaining reserves.

d. issuing checks to its depositors.

e. foreclosing on bad loans.

21. Assume a legal reserve requirement of 10%. If a single bank in a system of many banks has demand deposit liabilities and $2 million of reserves. The bank may

lend at most

a. $1.8 million

b. $20 million

c. $18 million

d. $2 million

e. $.2 million.

22. Which of the following actions on the part of the Fed represents the most expansionary monetary policy?

a. sells securities, raises the discount rate, decreases the reserve requirement

b. sells securities, raises the discount rate, increases the reserve requirement

c. sells securities, lowers the discount rate, decreases the reserve requirement

d. buys securities, lowers the discount rate, decreases the reserve requirement

e. buys securities, raises the discount rate, increases the reserve requirement

23. Purchases of government securities by the Fed are most likely to produce inflationary pressure in the economy when

a. tax rates are high.

b. imports are increasing.

c. exports are decreasing.

d. full employment exists.

e. the government reduces the deficit.

24. What are the time lags associated with fiscal policy?

25. What are the time lags associated with monetary policy?

26. What limitations may exist that could reduce the effectiveness of monetary policy?

27. What is the Federal Funds Rate?

28. How do people become members of the Federal Reserve Board of Governors?

29. How is money created?

30. What is the difference between asset demand for money and transaction demand for money?

31. Suppose the reserve requirement is 15%, what is the money multiplier? Given that money

multiplier, what is the maximum amount of new money that could be created by the banking

system after an initial deposit of $1,000?

32. How can the Fed use each of the following tools to decrease the supply of money?

EXPLAIN!

* The reserve requirement

* The discount rate

* Open market operations

33. Suppose the following situation exists:

- Economic Growth 1%

- Inflation 2%

- Unemployment 7.5%

a) Illustrate the situation on an AS/AD diagram.

b) List two appropriate fiscal policy actions

c) List two appropriate monetary policy actions

d) How will these actions influence

- Aggregate demand

– Inflation

– Unemployment

- Short run output

- Interest rates