Section 5 - The Financial Sector

Section 5 - The Financial Sector Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following assets is the MOST liquid? A. checkable bank deposits B. currency C. stocks D. money market mutual funds E. bonds 2. The narrowest definition of money excludes: A. currency in the vault at the bank. B. traveler's checks. C. currency in circulation. D. checkable bank deposits. E. coins in circulation. 3. The medium-of-exchange function means that money is used: A. as the common denominator of prices. B. as the common denominator of future payments. C. to save and earn interest income. D. to accumulate purchasing power. E. to pay for goods and services. 4. Money that the government has ordered be accepted as money is: A. fiat money. B. currency. C. convertible paper money. D. commodity money. E. barter goods. 5. Bank reserves are: A. the fraction of deposits kept in gold with the Federal Reserve. B. the deposits lent to finance illiquid investments. C. the currency kept in the bank s vault plus deposits with the Federal Reserve. D. gold kept in the bank's vault. E. the mortgages banks make to home buyers. Reserves $20,000 Loans Assets Liabilities Deposits _ Table 25-1: Balance Sheet

6. Use Table 25-1. If the reserve ratio is 25%, deposits are: A. $5,000. B. $15,000. C. $60,000. D. $80,000. E. $100,000. 7. Use Table 25-1. If the reserve ratio is 25%, loans are: A. $5,000. B. $15,000. C. $60,000. D. $80,000. E. $20,000. 8. If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is: A. 5%. B. 10%. C. 12.5%. D. 25%. E. 75%. 9. The required reserve ratio is the: A. proportion of cash and security reserves the bank needs to hold. B. fraction of deposits that the bank is required to hold. C. loan to deposit ratio in the bank's balance sheet. D. money belonging to the bank's largest depositors. E. fraction of deposits that the bank has lent to borrowers. Assets Liabilities Cash in bank vault $2 million Checkable deposits $100 million Deposits at the Federal Reserve $13 million Loans $75 million Property $8 million Bonds $2 million Table 25-2: ABC Bank's Balance Sheet 10. Use Table 25-2. Refer to the balance sheet. If the minimum reserve ratio for ABC Bank is 10%, then the bank is required to maintain minimum reserves of: A. $10 million. B. $15 million. C. $9.5 million. D. $7.5 million. E. $90 million.

11. Use Table 25-2. Using the information in ABC Bank's Balance sheet, the bank is holding excess reserve of: A. $17 million. B. $15 million. C. $5 million. D. $25 million. E. $3 million. 12. Banks create money when they: A. make loans. B. take deposits. C. hold excess reserves. D. pay withdrawals to depositors. E. collect interest on loans. 13. Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by: A. $500. B. $2,500. C. $100. D. $400. E. $300. Scenario 25-2: Money Creation The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. 14. Use Scenario 25-2. Which of the following is an accurate description of the bank's balance sheet immediately after the deposit? A. Reserves increase by $1,000, and demand deposits increase by $1,000. B. Reserves increase by $1,000, and demand deposits decrease by $1,000. C. Reserves decrease by $1,000, and demand deposits decrease by $1,000. D. Reserves decrease by $200, and demand deposits increase by $1,000. E. Reserves increase by $800, and demand deposits increase by $1,000. 15. Use Scenario 25-2. How much of the deposit is the bank required to keep in reserves? A. $1,000 B. $100 C. $200 D. $800 E. $250 16. Use Scenario 25-2. Based on the $1,000 deposit, how much can the bank lend? A. $1,000 B. $200 C. $800 D. $0 E. $900

17. Use Scenario 25-2. What is the maximum expansion in the money supply possible? A. $1,000 B. $1,800 C. $4,000 D. $5,000 E. $10,000 18. The money multiplier and the required reserve ratio are: A. independent of one another. B. are directly related to one another. C. are inversely related. D. both greater than 1. E. both less than 1. 19. If banks were required to keep 100% of deposits in reserves, they could: A. make more loans. B. make no loans. C. create more deposits. D. use excess reserves for loans. E. continue to expand the money supply. 20. In the U.S., the institution that is charged with determining the size of the monetary base and with regulating the banking system is the: A. Treasury Department. B. Commerce Department. C. U.S. Senate Banking Committee. D. Federal Reserve. E. President s Council of Economic Advisors. 21. The Federal Reserve System is the for the United States. A. government entity that collects taxes. B. government-owned bank C. U.S. Treasury Bank D. largest private banking corporation in the world. E. central bank 22. In the Federal Reserve system, there are districts. A. 50 B. 10 C. 7 D. 18 E. 12 23. A _ is when people rush to a bank to withdraw all of their deposits because they feel that the bank could fail. A. depression B. real estate bubble C. bank run D. stock market crash E. hyperinflation

24. All of the following are responsibilities of the Fed EXCEPT: A. control the monetary base. B. set the reserve requirement. C. oversee and regulate the banking system. D. set the discount rate. E. mint bills and coins. 25. The major tools of monetary policy available to the Federal Reserve System include: A. reserve requirements, margin regulations, and moral suasion. B. reserve requirements, open-market operations, and the discount rate. C. open-market operations, margin regulations, and moral suasion. D. the discount rate, margin regulations, and moral suasion. E. tax collections, open-market operations and the discount rate. 26. The tool of monetary policy that involves the Fed's buying and selling of government bonds is: A. moral suasion. B. reserve requirements. C. the discount rate. D. open-market operations. E. setting government transfer payments. 27. Which of the following is a tool used by the Fed in the conduct of monetary policy? A. Changes in the prime rate. B. Issuing new government bonds and retiring old ones. C. Buying and selling corporate bonds. D. Buying and selling federal government bonds. E. Raising and lowering import tariffs. 28. The tools of conducting monetary policy include: A. changes in the reserve requirement. B. changes in the prime rate. C. open market purchases of corporate stock. D. changing tax rates. E. regulating the New York Stock Exchange. 29. If the Fed increases the discount rate: A. the money supply is likely to decrease. B. the money supply is likely to increase. C. the money supply is not likely to change. D. the federal funds rate must decrease. E. nominal interest rates will fall. 30. If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the: A. other member banks and borrow at the federal funds rate. B. Federal Reserve and borrow at the discount rate. C. open market and borrow money there. D. Congress to borrow funds. E. Federal Reserve and borrow at the prime rate.

31. Which of the following actions would allow banks to lend out more money? A. an increase in the required reserve ratio B. a decrease in the discount rate C. an increase in the federal funds rate D. an increase in the required reserve ratio coupled with an increase in the federal funds rate E. an open market sale of Treasury securities. 32. The discount rate is the interest rate the Fed charges on loans to: A. consumers. B. the federal government. C. state governments. D. banks. E. corporations. 33. To the money supply, the Fed could. A. increase; lower the reserve requirements B. decrease; lower the discount rate C. increase; raise the federal funds rate D. decrease; conduct open-market purchases E. increase; lower income taxes. 34. To the money supply, the Fed could. A. decrease; lower the reserve requirements B. increase; lower the discount rate C. increase; conduct open-market sales D. decrease; lower the federal funds rate E. decrease; raise income taxes. 35. To the money supply, the Fed could. A. increase; decrease the money multiplier B. decrease; lower the reserve requirements C. increase; conduct open-market purchases D. decrease; lower the discount rate E. increase; increase government spending. 36. To decrease the money supply, the central bank could: A. lower the discount rate. B. make open-market sales. C. increase the discount rate. D. lower the federal funds rate spread. E. increase the 30-year mortgage rate. 37. To change the money supply, the Fed most frequently uses: A. changes in the required reserve ratios. B. changes in the discount rate. C. open-market operations. D. changes in the inflation rate. E. moral suasion.

38. If the Fed conducts an open-market purchase: A. bank reserves decrease and the money supply decreases. B. bank reserves increase and the money supply increases. C. bank reserves decrease and the money supply increases. D. bank reserves increase and the money supply decreases. E. bank reserves increase and the money supply does not change. 39. If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the maximum change in the money supply is: A. an increase of $10 million. B. a decrease of $10 million. C. a decrease of $8 million. D. a decrease of $50 million. E. an increase of $50 million. 40. Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. Which of the following would be the end result of such an action? A. The money supply would stay the same. B. The money supply would decrease by $100 million. C. The money supply would increase by $100 million. D. The money supply would increase by more than $100 million. E. The money supply would increase, but by less than $100 million. 41. If the Federal Reserve wants to discourage banks from borrowing directly from the Fed and thus decrease the monetary base, the Fed would likely: A. increase the discount rate. B. increase the federal funds rate. C. increase the reserve requirement. D. sell U.S. Treasury bills in an open market operation. E. increase the tax on investment spending. 42. Suppose the Fed buys $50 million in Treasury bills from commercial banks. If the reserve ratio is 10%, the monetary supply might eventually by _. A. increase; $500 million B. increase; $450 million C. decrease; $450 million D. decrease; $500 million E. increase; $50 million

Figure 28-1: Money Market II 43. Use the Money Market II Figure 28-1. Equilibrium in this money market will occur at interest rate and quantity of money. A. r 2 ; Q 0 B. r 0 ; Q 2 C. r 2 ; Q 2 D. r 1 ; Q 2 E. r 1 ; Q 1 44. Use the Money Market II Figure 28-1. If the interest rate is r 2, there will be an money and the interest rate will. A. excess demand for; rise B. excess supply of; fall C. excess demand for; fall D. excess supply of; rise E. excess supply of; remain the same 45. Use the Money Market II Figure 28-1. If the rate of interest is r 0, there will be an money and the interest rate will. A. excess demand for; rise B. excess supply of; fall C. excess demand for; fall D. excess supply of; rise E. excess supply of; remain the same

Figure 28-2: A Money Market 46. Use the A Money Market Figure 28-2. The accompanying graph shows the money market. In this market, the equilibrium interest rate is: A. r 1. B. r 2. C. r 3. D. M 0. E. r 3 r 1 47. Use the A Money Market Figure 28-2. The accompanying graph shows the money market. In this market, if the current interest rate is r 3, we would expect to see the interest rate _ because there is of money in the market. A. fall; a surplus B. fall; a shortage C. rise; a surplus D. rise; a shortage E. remain constant; equilibrium 48. Use the A Money Market Figure 28-2. The accompanying graph shows the money market. In this market, if the current interest rate is r 1, we would expect to see the interest rate _ because there is of money in the market. A. fall; a surplus B. fall; a shortage C. rise; a surplus D. rise; a shortage E. remain constant; equilibrium 49. Use the A Money Market Figure 28-2. The accompanying graph shows the money market in equilibrium at an interest rate of r 2. Holding money supply constant, which of the following might cause the interest rate in the market to decrease to r 1? A. The inflation rate rises to historically high levels. B. Higher payroll taxes cause employers to pay workers cash under the table. C. There is a recession that decreases real GDP. D. There is a significant increase in value of wealth in the stock market. E. Congress increases ATM fees for withdrawing money.

50. Use the A Money Market Figure 28-2. The accompanying graph shows the money market in equilibrium at an interest rate of r 2. Holding money supply constant, which of the following might cause the interest rate in the market to increase to r 3? A. The inflation rate falls to historically low levels. B. Higher payroll taxes cause employers to pay workers cash under the table. C. There is a recession that decreases real GDP. D. There is a significant increase in value of wealth in the stock market. E. Congress decreases ATM fees for withdrawing money.