macroeconomics test 1

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1. Which of the following is considered to be money?

A. Google stock
B. credit cards
C. checking account deposits
D. bonds

C. checking account deposits

2. "Tuition at State University this year is $8,000." Which function of money does this statement best illustrate?

A. store of value
B. unit of account
C. means of deferred payment
D. medium of exchange

B. unit of account

3. Money that some authority, generally a government, has ordered to be accepted as a medium of exchange is called _______ money.

A. fiat
B. debt
C. intrinsic
D. commodity

A. fiat

Suppose you find a $50 bill that you put in a coat pocket last winter. If you deposit it in your checking account:

A. M2 increases by $50.
B. M1 increases by $50.
C. M1 and M2 both increase by $50.
D. there is no change in M1 or M2.

D. there is no change in M1 or M2

T/F Money is the most liquid asset in the economy.

true

T/F A debit card is money because it accesses a bank account.

true

When a person makes price comparisons among products, money is being used as a(n):

A. checkable deposit.
B. expander of economic activity.
C. medium of exchange.
D. unit of account.

D. unit of account

When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n):

A. store of value.
B. expander of economic activity.
C. medium of exchange.
D. factor of production.

A. store of value

5. Which of the following assets is the MOST liquid?

A. a $50 Amazon.com gift certificate
B. a $50 bill
C. an economics textbook
D. 100 shares of Microsoft stock

B. a $50 bill

Banks can lend money because:

A. they have so much to lend.
B. there is a high demand for loans.
C. they know not everyone wants their deposits back at the same time.
D. they know how much cash they have in their vault.

C. they know not everyone wants their deposits back at the same time

The government has almost eliminated the possibility of "bank runs" by instituting protective measures. All of the following are such measures EXCEPT:

A. the capital requirements.
B. the loan guarantee.
C. the deposit insurance.
D. the reserve requirements.

B. the loan garantee

The reserve ratio is the:

A. bank's holdings of gold.
B. fraction of deposits the banks hold in their vaults plus their deposits at the Federal Reserve.
C. government's holdings of gold at Fort Knox.
D. ratio of gold to the paper money in the economy.

B. faction of deposits the banks hold in their vaults plus their deposits at the federal reserve

A reserve ratio is the:

A. proportion of cash and security reserves the bank needs to hold.
B. loan to deposit ratio in the bank's balance sheet.
C. money belonging to the bank's largest depositors.
D. fraction of deposits that the bank is required to hold.

D. faction of deposits that the bank is required to hold

Money is:

A. not represented by any of the above.
B. paper money and coins, but not checks.
C. currency and stocks.
D. anything that can easily be used to buy goods and services.

D. anything that can easily be used to buy goods and services

A bond is considered:

A. a liability that is part of the money supply.
B. an asset that is not part of the money supply.
C. M1.
D. M2.

B. an asset that is not part of the money supply

A bank run occurs when:

A. too many people are trying to borrow more at one time.
B. interest rates start to increase.
C. many bank depositors are trying to withdraw their funds from the bank.
D. interest rates are higher than inflation rates.

C. many bank depositors are trying to withdraw their funds from the bank

Among the assets of a bank are:

A. deposits.
B. borrowings.
C. loans.
D. deposits and loans.

C. loans

When we put a price on a meal, money is playing the role of:

A. store of value.
B. unit of account.
C. medium of exchange.
D. barter token.

B. unit of account

Banks don't lend out all of the funds placed in their hands by depositors because:

A. it would not be profitable.
B. they need to reduce their liquidity position.
C. they have to satisfy any depositor who wants to withdraw funds.
D. they need to make more money on interest-bearing deposits.

C. they have to satisfy any depositor who wants to withdraw funds

When we keep part of our wealth in a savings account, money is playing the role of:

A. store of value.
B. medium of exchange.
C. unit of account.
D. barter.

A. store of value

All of the following are examples of bank regulations designed to prevent bank runs EXCEPT:

A. reserve requirements.
B. the federal funds rate.
C. deposit insurance.
D. capital requirements.

B. the federal funds rate

Among the liabilities of banks are:

A. deposits.
B. reserves.
C. loans and reserves.
D. loans.

A. deposits

Bank reserves are:

A. the fraction of deposits kept in gold with the Federal Reserve.
B. the fraction of deposits kept in the form of very liquid assets.
C. the deposits lent to finance illiquid investments.
D. gold kept in the bank's vault.

B. the fraction of deposits kept in the form of very liquid assets

If the Federal Reserve wants to increase the money supply, it will:

A. sell U.S. Treasury bills.
B. lower the reserve requirement.
C. cut taxes across the board.
D. increase the discount rate.

B. lower the reserve requirement

The Fed's main liabilities are:

A. corporate stocks and bonds.
B. U.S. Treasury bills.
C. currency and bank reserves.
D. the facilities of the twelve district banks.

C. currency and bank reserves

All of the following are responsibilities of the Fed EXCEPT:

A. control the monetary base.
B. set the discount rate.
C. mint bills and coins.
D. oversee and regulate the banking system.

C. mint bills and coins

The tool of monetary policy that involves the Fed's buying and selling of government bonds is:

A. the discount rate.
B. open-market operations.
C. moral suasion.
D. reserve requirements.

B. open-market operations

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.
Reference: Ref 25-04

(Scenario: Money Creation) What is the maximum expansion in the money supply possible?

A. $4,000
B. $5,000
C. $1,800
D. $1,000

A. $4000

The Federal Reserve Bank of the United States is:

A. a purely private central bank.
B. is not exactly part of the U.S. government but not really a private institution either.
C. a purely public central bank.
D. is part of the U.S. government.

B. is not exactly part of the US gov. but not really a private institution either

Which of the following actions would allow banks to lend out more money?

A. an increase in the required reserve ratio
B. an increase in the required reserve ratio coupled with an increase in the federal funds rate
C. a decrease in the discount rate
D. an increase in the federal funds rate

C. a decrease in the discount rate

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. 25%.
C. 10%.
D. 12.5%.

B. 25%

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. a decrease of $8 million.
B. a decrease of $50 million.
C. an increase of $10 million.
D. a decrease of $10 million.

B. a decrease of $50 million

The discount rate is the interest rate the Fed charges on loans to:

A. consumers.
B. banks.
C. the federal government.
D. state governments.

B. banks

Suppose that the Federal Reserve sells $500 in U.S. Treasury bills, and as a result the money supply falls by $5,000. The reserve ratio is:

A. 100.
B. 0.1.
C. 10.
D. 0.5.

B. 0.1

Federal funds are:

A. government tax receipts.
B. bank deposits at the Federal Reserve.
C. loans between banks.
D. government expenditures.

C. loans between banks

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 increase by $100 million.
B. The money supply would increase by more than $100 million.
C. The money supply would stay the same.
D. The money supply would decrease by $100 million.

B. the money supply would increase by more than $100 million

The Fed's main assets are:

A. corporate stocks and bonds.
B. U.S. Treasury bills.
C. currency in circulation and bank reserves.
D. the facilities of the twelve district banks.

B. US treasury bills

Reserve requirements:

A. set the maximum amount of reserves a bank must hold.
B. are set by the American Bankers Association.
C. are established by Congress.
D. set the minimum amount of reserves a bank must hold

D. set the minimum amount of reserves banks must hold

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. a decrease of $50 million.
B. a decrease of $8 million.
C. a decrease of $10 million.
D. an increase of $10 million.

A. a decrease of $50 million

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 increase by more than $100 million.
B. The money supply would increase by $100 million.
C. The money supply would stay the same.
D. The money supply would decrease by $100 million.

A. the money supply would increase by more than $100 million

The Fed's main liabilities are:

A. U.S. Treasury bills.
B. corporate stocks and bonds.
C. currency and bank reserves.
D. the facilities of the twelve district banks.

C. currency and bank reserves

The Fed's main assets are:

A. U.S. Treasury bills.
B. corporate stocks and bonds.
C. the facilities of the twelve district banks.
D. currency in circulation and bank reserves.

A. US treasury bills

Suppose the Fed buys bonds. We can expect this transaction to:

A. reduce the money supply, reduce bond prices, and increase interest rates.
B. reduce the money supply, increase bond prices, and lower interest rates.
C. increase the money supply, raise bond prices, and lower interest rates.
D. increase the money supply, lower bond prices, and lower interest rates.

C. increase the money supply, raise bond prices, and lower interest rates

The money demand curve shows the relationship between the:

A. aggregate price level and the nominal quantity of money demanded.
B. interest rate and the nominal quantity of money demanded.
C. real GDP and the nominal quantity of money demanded.
D. the money supply and the quantity of money demanded.

B. interest rate and the nominal quantity of money demanded

We hold money to:

A. reduce transaction costs.
B. increase transaction costs
C. protect our purchasing power.
D. earn interest.

A. reduce transaction costs

A sale of bonds by the Fed:

A. raises interest rates and reduces the money supply.
B. lowers interest rates and increases the money supply.
C. raises interest rates and increases the money supply.
D. lowers interest rates and reduces the money supply.

A. raises interest rates and reduces the money supply

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect:

A. an upward movement along a fixed money demand curve.
B. the money demand curve to shift outward.
C. a downward movement along a fixed money demand curve.
D. the money demand curve to shift inward.

D. the money demand curve to shift inward

The money supply curve is:

A. vertical.
B. upward rising.
C. horizontal.
D. downward sloping.

A. vertical

Which of the following does NOT cause the money demand curve to shift?

A. a change in the interest rate
B. a change in the price level
C. a change in technology
D. a change in real GDP

A. a change in the interest rate

A decrease in the demand for money would result from:

A. a decrease in the price level.
B. an increase in real GDP.
C. an increase in nominal GDP.
D. an increase in income.

A. a decrease in the price level

U.S. banks did not offer interest on checking accounts, until the beginning of the 1980s. Then banking regulations changed, allowing banks to pay interest on checking account funds, as a result:

A. the demand for money fell and shifted the money demand curve to the left.
B. the supply of money rose and shifted the money demand curve to the right.
C. the supply for money fell and shifted the money demand curve to the left.
D. the demand for money rose and shifted the money demand curve to the right.

D. the demand for money rose and shifted the money demand curve to the right

When an individual decides to hold money instead of other assets:

A. that individual is not affected by unanticipated inflation.
B. that individual becomes more likely to suffer from money illusion.
C. that individual is able to maintain a higher standard of living.
D. that individual is giving up the interest that could have been earned by holding other types of assets.

D. that individual is giving up the interest that could have been earned by holding other types of assets

An increase in the supply of money, with no change in demand for money, will lead to _______ in the equilibrium quantity of money and _______ in the equilibrium interest rate.

A. a decrease; a decrease
B. an increase; an increase
C. a decrease; an increase
D. an increase; a decrease

D. an increase; a decrease

The money demand curve is _________ because a lower interest rate ___________.

A. downward-slopping; decreases the opportunity cost of holding money
B. upward-slopping; decreases the opportunity cost of holding money
C. downward-slopping; increases the opportunity cost of holding money
D. upward-slopping; increases the opportunity cost of holding money

A. downward-sloping; decreases the opportunity cost of holding money

In a graph of a money demand curve, which of the following variables is plotted on the vertical axis?

A. the rate of return in the stock market
B. the rate of price inflation
C. the interest rate on 30-year Treasury bills
D. the interest rate on liquid assets, like short-term CDs

D. the interest rate on liquid assets, like short-term CDs

Treasury bills:

A. usually pay higher interest rates than other short-term assets because they are scarce compared to all other assets.
B. usually pay lower interest rates than other short-term assets because they are scarce compared to all other assets.
C. usually pay higher interest rates than other short-term assets because they are riskier than other assets.
D. usually pay lower interest rates than other short-term assets because they are less risky than other assets.

D. usually pay lower interest rates than other short term assets because they are less risky than other assets

An increase in the demand for money, with no change in the supply of money, will lead to _______ in the equilibrium quantity of money and _______ in the equilibrium interest rate.

A. no change; a decrease
B. an increase; a decrease
C. no change; an increase
D. a decrease; an increase

D. a decrease; an increase

The loanable funds market maximizes:

A. the gains from trade between lenders and borrowers.
B. the amount of investment spending in the economy.
C. the interest rate to savers.
D. the rate of return by borrowers.

A. the gains from trade between lenders and borrowers

When the government runs a budget deficit, all of the following happen EXCEPT:

A. the total amount of borrowing decreases.
B. private investment spending is crowded out.
C. the interest rate rises.
D. the government becomes a borrower in the market for loanable funds.

A. the total amount of borrowing decreases

In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and savers wish to save $125 million. We would expect:

A. the interest rate to rise as there is currently a surplus of loanable funds.
B. the interest rate to rise as there is currently a shortage of loanable funds.
C. the interest rate to fall as there is currently a shortage of loanable funds.
D. the interest rate to fall as there is currently a surplus of loanable funds.

D. the interest rate to fall as there is currently a surplus of loanable funds

The demand curve for loanable funds slopes:

A. upward, because higher rates of return are necessary to cover higher costs.
B. downward, because there are fewer potential projects that yield 10% than for those that yield 5%.
C. downward, because there are more potential projects that yield 10% than yield 5%.
D. upward, since it takes a higher rate of return to get more funds.

B. downward, because there are fewer potential projects that yield 10% than for those that yield 5%

A shift away from taxing asset income towards taxing consumption would lead to:

A. a larger supply of loanable funds, a lower interest rate, and faster economic growth.
B. a larger government budget deficit and slower economic growth.
C. a larger demand for loanable funds, a higher interest rate, and slower economic growth.
D. a smaller supply of loanable funds, a higher interest rate, and faster economic growth.

A. a larger supply of loanable funds, a lower interest rate, and faster economic growth

The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

A. downward; investors; increasing
B. upward; savers; decreasing
C. upward; savers; increasing
D. upward; investors; decreasing

B. upward; savers; decreasing

If private savings increase:

A. the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.
B. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.
C. the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.
D. the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.

B. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase

A firm does NOT want to borrow money for a project when:

A. the interest rate is greater than the rate of return on the project.
B. the rate of return on the project is positive.
C. the interest rate is positive.
D. the interest rate is less than the rate of return on the project.

A. the interest rate is greater than the rate of return on the project

The price determined in the market for loanable funds is:

A. the margin call.
B. the interest rate.
C. the profit rate.
D. the transaction fee.

B. the interest rate

If there is an increase in the government budget deficit:

A. the supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.
B. the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.
C. the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase.
D. the demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease.

C. the demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase

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