macroeconomics quiz 3

1. Which one of the following is presently a major deterrent to bank panics in the United States? A. the legal reserve requirement B. the fractional reserve system C. the gold standard D. deposit insurance of the FDIC

2. Which of the following statements is correct? A. The total (actual) reserves of a commercial bank equal its excess reserves minus its required reserves. B. A bank's liabilities plus its net worth equal its assets. C. When borrowers repay bank loans, the supply of money increases. D. A single commercial bank can safely lend a multiple amount of its excess reserves.

A bank that has assets of $85 billion and a net worth of $10 billion must have: A. liabilities of $75 billion. B. excess reserves of $10 billion. C. liabilities of $10 billion. D. excess reserves of $75 billion.

The claims of the owners of a firm against the firm's assets are called: A. working capital. B. assets. C. net worth. D. liabilities.

Which of the following are all assets to a commercial bank? A. demand deposits, stock shares, and reserves B. vault cash, property, and reserves C. vault cash, property, and stock shares D. vault cash, stock shares, and demand deposits

The reserves of a commercial bank consist of: A. the amount of money market funds it holds. B. deposits at the Federal Reserve Bank and vault cash. C. government securities that the bank holds. D. the bank's net worth.

The primary purpose of the required (legal) reserve requirement is to: A. prevent banks from hoarding too much vault cash. B. provide a means by which the monetary authorities can influence the lending ability of commercial banks. C. prevent commercial banks from earning excess profits. D. provide a dependable source of interest income for commercial banks.

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves: A. are $1,000,000. B. are $10,000. C. are $20,000.

When a check is drawn and cleared, the A. reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction. B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check. C. bank receiving the check loses reserves and deposits equal to the amount of the check. D. bank against which the check is cleared acquires reserves and deposits equal to the amount of the check

Excess reserves refer to the: A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. B. minimum amount of total (actual) reserves a bank must keep on hand to back up its customers deposits. C. difference between total (actual) reserves and loans. D. difference between total (actual) reserves and required reserves.

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's total (actual) reserves? A. $16,000 B. $84,000 C.$24,000 D. $20,000

. The reserve ratio refers to the ratio of a bank's: A. reserves to its liabilities and net worth. B. capital stock to its total assets. C. checkable deposits to its total liabilities. D. required reserves to its checkable-deposit liabilities.

A commercial bank can expand its excess reserves by: A. demanding and receiving payment on an overdue loan. B. buying bonds from a Federal Reserve Bank. C. buying bonds from the public. D. paying back money borrowed from a Federal Reserve Bank.

Commercial banks create money when they: A. accept cash deposits from the public. B. purchase government securities from the central banks. C. create checkable deposits in exchange for IOUs. D. raise their interest rates.

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction: A. the supply of money is increased by $5,000. B. the supply of money declines by the amount of the loan. C. a claim has been "demonetized." D. the Metro Bank acquires reserves from other banks.

A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of: A. $1,250. B. $120,000. C. $5,000. D. $3,750.

if the reserve requirement is 10 percent, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank? A. $450 B. $400 C. $5,000 D. $550

Which of the following is correct? A. Required reserves minus total (actual) reserves equal excess reserves. B. Required reserves equal excess reserves minus actual reserves. C. Required reserves equal actual reserves plus excess reserves. D. Actual reserves minus required reserves equal excess reserves.

When commercial banks use excess reserves to buy government securities from the public: A. new money is created. B. commercial bank reserves increase. C. the money supply falls. D. checkable deposits decline.

Overnight loans from one bank to another for reserve purposes entail an interest rate called the: A. prime rate. B. discount rate. C. Federal funds rate. D. treasury bill rate.

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of: A. the MPS. B. its actual reserves. C. its excess reserves. D. the reserve ratio.

The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that: A. reserves lost by any particular bank will be gained by some other bank. B. the central banks follow policies that prevent reserves from falling below the level required by law. C. the MPC of borrowers is greater than zero, but less than 1. D. the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

Other things equal, if the required reserve ratio was lowered: A. banks would have to reduce their lending. B. the size of the monetary multiplier would increase. C. the actual reserves of banks would increase. D. the Federal funds interest rate would rise.

When a bank loan is repaid the supply of money: A. is constant, but its composition will have changed. B. is decreased. C. is increased. D. may either increase or decrease.

The transactions demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by: A. a line parallel to the horizontal axis. B. a vertical line. C. a downsloping line or curve from left to right. D. an upsloping line or curve from left to right.

The total demand for money curve will shift to the right as a result of: A. an increase in nominal GDP. B. an increase in the interest rate. C. a decline in the interest rate. D. a decline in nominal GDP.

It is costly to hold money because: A. deflation may reduce its purchasing power. B. in doing so, one sacrifices interest income. C. bond prices are highly variable. D. the rate at which money is spent may decline.

If the quantity of money demanded exceeds the quantity supplied: A. the supply-of-money curve will shift to the left. B. the demand-for-money curve will shift to the right. C. the interest rate will rise. D. the interest rate will fall.

Which of the following statements is correct? A. Interest rates and bond prices vary directly. B. Interest rates and bond prices vary inversely. C. Interest rates and bond prices are unrelated. D. Interest rates and bond prices vary directly during inflations and inversely during recessions.

Other things equal, if the supply of money is reduced: A. the demand for money will increase. B. the interest rates will fall. C. bond prices will fall. D. investment spending will increase.

The Federal Reserve is responsible for A. setting reserve requirements and holding reserves of banks B. issuing currency in the form of Federal Reserve Notes C. serving as an emergency lender of last resort to banks D. all of the above

The U.S. government purposely established the Federal Reserve as an independent agency of the government. The objective was to protect the Fed from political pressure so that it could effectively control the money supply and maintain price stability. To promote this independence: A. members of the Fed's Board of Governors have terms of office of 14 years B. the Federal Reserve is owned by banks that are members of the Federal Reserve System C. the Fed is self-financing and does not require operating funds from the federal government D. all of the above

Concerning the Federal Reserve System: A. the Federal Reserve is headquartered in New York City B. there are 6 Federal Reserve banks throughout the United States C. the Federal Reserve is the central bank of the United States D. the Federal Reserve insures the deposits of commercial banks, up to $250,000

The Federal Open Market Committee (FOMC) A. directs the Federal Reserve's purchase and sale of government securities in the open market B. sets the reserve requirements for banks that belong to the Federal Reserve System C. serves as the lender of last resort to banks, through the discount window D. supervises the operations of banks to ensure that they are safe and sound

The members of the Federal Reserve's Board of Governors are appointed by A. member banks of the Federal Reserve System B. members of the Federal Open Market Committee C. the U.S. president and confirmed by the Senate D. the presidents of the 12 Federal Reserve banks

To keep the purchasing power of money relatively stable, the Federal Reserve A. buys corporate stock B. employs fiscal policy C. controls the money supply D. uses wage and price controls

Which Federal Reserve Bank carries out the buying/selling of U.S. securities on behalf of decisions made by the Federal Open Market Committee regarding these purchases/sales? A. Federal Reserve Bank of New York B. Federal Reserve Bank of Chicago C. Federal Reserve Bank of San Francisco D. Federal Reserve Bank of Atlanta

The metaphor of _______ is used to explain how monetary policy may be effective in slowing business expansions and controlling inflation, but may be much less reliable in helping the economy get out of a recession. A. "pushing on a string" B. "making a silk purse out of a pig's ear" C. "on the road again" D. "here today, gone tomorrow"

The securities held as assets by the Federal Reserve Banks consist mainly of: A. corporate bonds. B. Treasury bills and Treasury bonds. C. common stock. D. certificates of deposit.

Federal Reserve Notes in circulation are: A. an asset as viewed by the Federal Reserve Banks. B. a liability as viewed by the Federal Reserve Banks. C. neither an asset nor a liability as viewed by the Federal Reserve Banks. D. not part of the M1 money supply.

Which of the following will increase commercial bank reserves? A. the purchase of government bonds in the open market by the Federal Reserve Banks B. a decrease in the reserve ratio C. an increase in the discount rate D. the sale of government bonds in the open market by the Federal Reserve Banks

The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits: A. of commercial banks are unchanged, but their reserves increase. B. and reserves of commercial banks both decrease. C. of commercial banks are unchanged, but their reserves decrease. D. and reserves of commercial banks are both unchanged.

Which of the following is a tool of monetary policy? A. open market operations B. changes in banking laws C. changes in tax rates D. changes in government spending

Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district. As a result: A. commercial bank reserves are increased by $10,000. B. the supply of money automatically declines by $7,500. C. commercial bank reserves are increased by $7,500. D. the supply of money is automatically increased by $10,000

Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of: A. $1,000. B. $2,000. C. $800. D. $5,000.

The Federal Reserve System regulates the money supply primarily by: A. controlling the production of coins at the United States mint. B. altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. C. altering the reserves of commercial banks, largely through sales and purchases of government bonds. D. restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.

An increase in the required (legal) reserve ratio: A. increases the money supply by increasing excess reserves and increasing the monetary multiplier. B. decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. C. increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. D. decreases the money supply by increasing excess reserves and decreasing the monetary multiplier.

Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier? A. open market operations B. the reserve ratio C. the discount rate D. the federal funds rate

The discount rate is the interest: A. rate at which the central banks lend to the U.S. Treasury. B. rate at which the Federal Reserve Banks lend to commercial banks. C. yield on long-term government bonds. D. rate at which commercial banks lend to the public.

Which of the following tools of monetary policy is flexible, and able to affect bank reserves quickly and by relatively specific amounts? A. the discount rate B. the reserve ratio C. open market operations D. the Federal funds rate

Which of the following actions by the Fed will increase commercial bank lending potential? A. Raising the required reserve ratio. B. Increasing the Federal funds rate target. C. Raising the discount rate. D. Buying bonds from commercial banks and the public.

To reduce the Federal funds rate, the Fed can: A. buy government bonds from the public. B. increase the discount rate. C. increase the prime interest rate. D. sell government bonds to commercial banks.

Which of the following best describes the cause-effect chain of a restrictive monetary policy? A. A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. C. An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D. An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.

The Federal funds rate is the interest rate that _______ charge(s) ______. A. banks; other banks. B. the Fed; commercial banks. C. banks; their best corporate customers. D. banks; on federal student loans.

A contraction of the money supply: A. increases the interest rate and decreases aggregate demand. B. increases both the interest rate and aggregate demand. C. lowers the interest rate and increases aggregate demand. D. lowers both the interest rate and aggregate demand.

The sale of government bonds by the Federal Reserve Banks to commercial banks will: A. increase aggregate supply. B. decrease aggregate supply. C. increase aggregate demand. D. decrease aggregate demand.

Monetary policy is thought to be: A. equally effective in moving the economy out of a depression as in controlling demand-pull inflation. B. more effective in moving the economy out of a depression than in controlling demand-pull inflation. C. more effective in controlling demand-pull inflation than in moving the economy out of a recession. D. only effective in moving the economy out of a depression.

The impact of monetary policy on investment spending may be weakened: A. because of the Treasury's desire for high interest rates. B. if the rate at which dollars are spent changes in the same direction as the money supply. C. if the investment-demand curve shifts to the right during inflation and to the left during recession. D. if the investment-demand curve is very flat.

To combat the Great Recession of 2007-2009, the Federal Reserve did all of the following except A. it reduced the Federal Funds rate B. It bought U.S. government securities on the open market C. It raised the required reserve ratio D. it reduced the discount rate

The ______ refers to the minimum downpayment that investors must make when purchasing corporate stock A. reserve requirement B. federal funds rate C. discount rate D. margin requirement

Which of the following is a principle of "supply-side economics"? A. High marginal tax rates severely discourage work, saving, and investment. B. Increases in social security taxes and other business taxes shift the aggregate supply curve to the right. C. The Federal Reserve should adhere to a monetary rule that limits increases in the money supply to a 5 percent annual rate. D. Transfer payments increase incentives to work.

Critics of supply-side economics: A. argue that a tax cut will increase aggregate supply by more than it increases aggregate demand. B. contend that the relationship between tax rates and economic incentives is small and of uncertain direction. C. believe that a decline in tax rates will increase tax revenues. D. point out that tax cuts enable households to substitute work for leisure.

The equation underlying the Keynesian view of macroeconomics is: A. MV = PQ. B.Ca +Ig +Xn +G=GDP. C. S = a - bY. D. GDP = P x Q.

The equation of exchange indicates that: A. MV = PQ. B. other things equal, an increase in the demand for money will increase P and/or Q. C. the velocity and the supply of money vary directly with one another. D. MP = VQ.

If M is $400, P is $4, and Q is 300, then V must be: A. 1.33. B. 3. C. 5.33. D. 100.

According to the equation of exchange, changes in the money supply can affect: A. only the velocity of money. B. both the price level and real output. C. only real output and employment. D. only the price level.

The velocity of money measures the: A. proportion of the money supply held as an asset. B. ratio of the transactions demand to the asset demand for money. C. average annual rate of increase in the money supply. D. number of times per year the average dollar is spent on final goods and services.

The equation of exchange suggests that, if the supply and velocity of money remain unchanged, an increase in the physical volume of goods and services produced will cause: A. the unemployment rate to rise. B. the Federal Reserve Banks to sell securities in the open market. C. a decline in the price level. D. an automatic budget deficit.

During the Great Recession of 2007-2009, the Federal Reserve initiated policies to increase the money supply so as to stimulate the economy. A factor that offset this expansionary policy was: A. increasing velocity of money B. decreasing velocity of money C. increasing aggregate demand D. increasing aggregate supply

Rational expectations theory implies that the: A. aggregate demand curve is vertical. B. long-run aggregate supply curve is vertical. C. long-run aggregate supply curve is horizontal. D. long-run aggregate supply curve is quite flat.

The "monetary rule" of the Monetarists is the idea that: A. the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP. B. the annual rate of increase in the money supply should be equal to the long-term increase in the price level. C. an expansionary fiscal policy should always be accompanied by an easy monetary policy. D. monetary policy only affects the economy 6 to 9 months after the money supply is changed.

The United States' most important trading partner quantitatively is: A. China. B. Canada. C. Mexico. D. Japan.

Which of the following is an example of a land-intensive commodity? A. chemicals B. autos C. watches D. wool

Which of the following is an example of a capital-intensive commodity? A. clothing B. wool C. sunflower seeds D. chemicals

Differences in production efficiencies among nations in producing a particular good result from: A. different endowments of fertile soil. B. different amounts of skilled labor. C. different levels of technological knowledge. D. all of these.

Countries engaged in international trade specialize in production based on: A. relative levels of GDP. B. comparative advantage. C. relative exchange rates. D. relative inflation rates

In order for mutually beneficial trade to occur between two otherwise isolated nations: A. each nation must be able to produce at least one good absolutely cheaper than the other. B. each nation must be able to produce at least one good relatively cheaper than the other. C. each nation must face constant costs in the production of the good it exports. D. one nation's production must be labor-intensive while the other nation's production is capital- intensive.

The primary gain from international trade is: A. increased employment in the domestic export sector. B. more goods than would be attainable through domestic production alone. C. tariff revenue. D. increased employment in the domestic import sector.

In the theory of comparative advantage, a good should be produced in that nation where: A. the production possibilities line becomes vertical. B. its cost is least in terms of alternative goods that might otherwise be produced. C. its absolute cost in terms of real resources used is least. D. its absolute money cost of production is least.

If a nation has a comparative advantage in the production of X, this means the nation: A. cannot benefit by producing and trading this product. B. must give up less of other goods than other nations in producing a unit of X. C. has a production possibilities curve identical to those of other nations. D. is not subject to increasing opportunity costs.

Tariffs: A. may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs). B. are also called import quotas. C. are excise taxes on goods exported abroad. D. are per unit subsidies designed to promote exports.

Country A limits other nation's exports to Country A to 1,000 tons of coal annually. This is an example of a(n): A. protective tariff. B. export subsidy. C. import quota. D. voluntary export restriction.

Suppose the United States eliminates high tariffs on German bicycles. As a result, we would expect: A. the price of German bicycles to increase in the United States. B. employment to decrease in the German bicycle industry. C. employment to decrease in the U.S. bicycle industry. D. profits to rise in the U.S. bicycle industry.

In effect, tariffs on imports are: A. special taxes on domestic producers. B. subsidies to domestic consumers. C. subsidies to foreign producers. D. subsidies for domestic producers.

A protective tariff will: A. increase the sales of foreign exporters. B. increase the price and sales of domestic producers. C. increase the welfare of domestic consumers. D. create an efficiency gain in the domestic economy.

A high tariff on imported good X might reduce domestic employment in industry Y if: A. X is an input used domestically in producing Y. B. X and Y are substitute goods. C. X is an inferior good. D. Y is an inferior good.

Which of the following arguments for trade protection contends that new domestic industries need support to establish themselves and survive? A. the increase-domestic-employment argument B. the cheap-foreign-labor argument C. the diversification-for-stability argument D. the infant-industry argument

Which of the following arguments contends that certain industries need to be protected in the interest of national security? A. the increase-domestic-employment argument B. the cheap-foreign-labor argument C. the diversification-for-stability argument D. the military self-sufficiency argument

"NAFTA" stands for: A. North African Free Trade Area B. North American Free Trade Agreement C. North Asian Free Trade Agreement D. New Zealand-Australia Free Trade Agreement