Final test 1

1. An increase in the interest rate

a. decreases the quantity of money demanded.
b. increases the quantity of money demanded.
c. decreases the demand for money.
d. increases the demand for money.

2. As a store of value, money

a. must be currency.
b. does not earn interest.
c. cannot be a durable asset.
d. is a way of saving for future purchases.

3. When the interest rate changes,

a. the demand curve for bonds shifts to the left.
b. it is because either the demand or the supply curve has
shifted e sections
c. the demand curve for bonds shifts to the right.
d. the supply curve for bonds shifts to the right.

4. Because it is a unit of account, money

a. reduces the number of prices that need to be calculated.
b. does not earn interest.
c. increases transaction costs.
d. discourages specialization.

5. Factors that can cause the supply curve for bonds to

shift to the right include
a. an expansion in overall economic activity.
b. a decrease in government deficits.
c. a business cycle recession.
d. a decrease in expected inflation.

6. Money
a. is only rarely used to pay for transactions today ons
b. consists solely of gold and silver coins.
c. is used to purchase goods and services and to store wealth.
d. consists solely of currency.

7. As compared to a barter economy, a monetary

economy has:
a. Both of the above are correct.
b. None of the above is correct.
c. lower information requirements.
d. lower transaction costs.

8. An increase in the expected inflation rate causes the

supply of bonds to ________ and the supply curve to shift
to the ________, everything else held constant.
a. increase; right
b. increase; left
c. decrease; left
d. decrease; right.

9. If peanuts serve as a medium of exchange, a unit of

account, and a store of value, then peanuts are
a. loanable funds.
b. money.
c. reserves.
d. bank deposits.

10. _________ is the narrowest monetary aggregate that

the central bank reports.
a. Ml
b. M3
c. M2
d. MO

11. _________ is a flow of earnings per unit of time.

a. Income
b. Currency
c. Wealth
d. Money

12. Which of the following can be described as involving

indirect finance?
a. You make a loan to your neighbor.
b. A corporation buys a share of common stock issued by
another corporation in the primary
c. You make a deposit at a bank.
d. You buy a U.S. Treasury bill from the U.S. Treasury

13. Which of the following statements uses the

economists' definition of money?
a. I hope that I have enough money to buy my lunch today.
b. I plan to earn a lot of money over the summer.
c. The job with New Company gave me the opportunity to earn
more money
d. Betsy is rich, she has a lot of money

14. Which of the following can be described as involving

indirect finance?
a. A corporation buys a short-term security issued by another
corporation in the primary market.
b. You buy shares in a mutual fund.
c. You make a loan to your neighbor.
d. You buy a U.S. Treasury bill from the U.S. Treasury

15. Which of the followina is included in both MI and

M2?
a. Savings deposits
b. Money market deposit accounts
c. Small-denomination time deposits
d. Currency

16. Which of the following benefit directly from any

increase in the corporation's profitability?
a. a T-bill holder
b. a shareholder
c. a commercial paper holder
d. a bond holder

17. In the loanable funds/liquidity preference

framework, the _________ is measured on the vertical
axis.
a. interest rate
b. quantity of loanable funds
c. price of bonds
d. quantity of bonds

18. A movement along the bond demand or supply

curve occurs when changes.
a. income
b. bond price
c. expected return
d. wealth
19. When the price of a bond is above the equilibrium
price, there is an excess ________ bonds and price
will________.
a. demand for; fall
b. supply of; fall
c. supply of; rise
d. demand for; rise

20. When the interest rate on a bond is above the

equilibrium interest rate, in the bond market there is
excess_________ and the interest rate will _________
a. supply; fall
b. supply; rise
c. demand; fall
d. demand; rise

22. An individual's annual salary is her

a. money
b. wealth
c.income
d. liabilities.

23. Every financial market has the following

characteristic
a. It allows common stock to be traded.
b. It determines the level of interest rates. tions
c. It channels funds from lenders-savers to borrowers-
spenders.
d. It allows loans to be made

24. Which item below is not one of the five parts of the
Financial System?
a. Central banks
b. Credit cards
c. Financial Markets
d. Money

25. Checks are:

a. not a promise of any kind.
b. money.
c. a means of payment.
d. not acceptable by the U.S. government for payment of taxes

26. Which of the following would be considered a

characteristic of money?
a. It is a store of value.
b. It is in fixed supply.
c. It pays a higher return than most assets.
d. It is legal tender everywhere in the world

27. For a commodity to function effectively as money it

must be
a. easily standardized, making it easy to ascertain its value.
b. hard to carry around
c. deteriorate quickly so that its supply does not become too
large.
d. difficult to make change.

28. A hyperinflation is
a. an increase in output caused by higher prices.
b. a period of extreme inflation generally greater than 50% per
month.
c. impossible today because of tighter regulations.
d. a period of anxiety caused by rising prices.

29. Secondary markets make financial instruments

more
a. liquid.
b. vapid.
c. solid.
d. risky.

30. During a recession, the supply of bonds ___________

and the supply curve shifts to the ________, everything
else held constant.
a. decreases; left
b. increases; left
c. decreases; right
d. increases; right

31. A financial market in which previously issued

securities can be resold is called a _________ market
a. tertiary
b. primary
c. used securities
d. secondary

32. Which of the following statements about financial

markets and securities is true?
a. A debt instrument is intermediate term if its maturity is less
than one year.
b. A bond is a long-term security that promises to make
periodic payments called dividends to the firm's residual
claimants.
c. The maturity of a debt instrument is the number of years
(term) to that instrument's expiration date
d. A debt instrument is intermediate term if its maturity is ten
years or longer.

33. Wealth may be held in the form of:

a. bonds.
b. money.
c. stocks.
d. All of the above are correct

34. When I purchase ,I own a portion of a firm and have

the right to vote on issues important to the firm and to
elect its directors.
a. notes
b. stock
c. bills
d. Bonds

35. High interest rates might ___________ purchasing a

house or car but at the same time high interest rates
might _________ saving.
a. encourage; encourage
b. encourage; discourage
c. discourage; discourage
d. discourage; encourage

36. Which of the following can be described as involving

direct finance?
a. A corporation buys a short-term corporate security in a
secondary market.
b. People buy shares in a mutual fund.
c. A corporation takes out loans from a bank. d. People buy
shares of common stock in the primary markets.

37. Everything else held constant, an increase in the

riskiness of bonds relative to alternative assets causes
the demand for bonds to ___________ and the demand
curve to shift to the __________.
a. fall; left
b. fall; right
c. rise; left
d. rise; right.

38. Which of the following can be described as direct

finance?
a. You take out a mortgage from your local bank.
b. You buy shares of common stock in the secondary market.
c. You borrow $2500 from a friend.
d. You buy shares in a mutual fund.

39. Factors that decrease the demand for bonds include

a. a decrease in the riskiness of stocks.
b. an increase in the volatility of stock prices.
c. a decrease in the expected returns on stocks.
d. a decrease in the inflation rate.

40. A bank is an example of

a. a financial institution
b. None of the above is correct.
c. a financ.ial instrument.
d. a financial market.

41. Which of the following can be described as involving

direct finance?
a. A pension fund manager buys a short-term corporate
security in the secondary market.
b. An insurance company buys shares of common stock in the
over-the-counter markets.
c. A corporation issues new shares of stock.
d. People buy shares in a mutual fund.

42. A disadvantage of ________ is that it is very heavy

and hard to transport from one place to another.
a. electronic money
b. paper money
c. commodity money
d. fiat money.

43. An increase in an asset's expected return relative to

that of an alternative asset, holding everything else
constant, _________ the quantity demanded of the asset.
a. decreases
b. has no effect on
c. increases
d. erases.

44. A liquid asset is

a. always sold in an over-the-counter market.
b. difficult to resell.
c. a share of an ocean resort.
d. an asset that can easily and quickly be sold to raise cash.

45. _________ is the relative ease and speed with which

an asset can be converted into a medium of exchange
a. Specialization
b. Liquidity
c. Deflation
d. Efficiency.

46. Financial markets improve economic welfare

because
a. eliminate the need for indirect finance.
b. they channel funds from savers to investors.
c. they weed out inefficient firms.
d. they allow consumers to time their purchase better.

47. Whatever a society uses as money, the

distinguishing characteristic is that it must
a. contain gold.
b. be produced by the government
c. be completely inflation proof.
d. be generally acceptable as payment for goons and services
or in the repayment of debt.
 Final test 2

1 The total amount of reserves in the banking system is

equal to the excess reserves.
a. ratio between
b. sum of
c. product of
d. difference between

2. A bank is insolvent when

a. its liabilities exceed its assets.
b. its capital exceeds its liabilities.
c. its assets exceed its liabilities.

3. The monetary base minus reserves equals

a. the nonborrowed base.
b. currency in circulation.
c. discount loans.
d. the borrowed base.

4 Bank loans from the Federal Reserve are called

________ and represent a ________ of funds.
a. discount loans; source
b. fed funds; use
c. discount loans; use
d. fed funds; source

5 Which of the following is not a nontransaction

deposit?
a. Negotiable order of withdrawal accounts
b. Certificate of deposit
c. Small-denomination time deposits
d. Savings accounts
6 The goals of bank asset management include
a. maximizing risk.
b. minimizing liquidity.
c. lending at high interest rates regardless of risk.
d. purchasing securities with high returns and low risk.

7 Because of their _______ liquidity, ________ U.S.

government securities are called secondary reserves.
a. high; short-term
b. low; long-term
c. high; long-term
d. low; short-term

8 When the central bank extends a discount loan to a

bank, the monetary base _________ and reserves
__________.
a. increases; increase
b. remains unchanged; decrease
c. remains unchanged; increase
d. increases; remain unchanged

9 When a member of the nonbank public withdraws

currency from her bank account,
a. both the monetary base and bank reserves rise.
b. both the monetary base and bank reserves fall.
c. bank reserves fall, but the monetary base remains
unchanged.
d. the monetary base falls, but bank reserves remain
unchanged.

10 Which of the following statements are true?

a. Checkable deposits do not include NOW accounts.
b. Checkable deposits are the primary source of bank funds.
c. Demand deposits are checkable deposits that pay interest.
d. Checkable deposits are payable on demand.

11 _________ theory relates changes in the quantity of

money to changes in aggregate economic activity and
the price level.
a. Systemic
b. Monetary
c. Fiscal
d. Financial

12 Having interest rate stability

a. leads to demands to curtail the Fed's power.
b. allows for less uncertainty about future planning.
c. leads to problems in financial markets.
d. guarantees full employment.

13 Both ________ and _________ are Federal Reserve

assets.
a. currency in circulation; reserves
b. government securities; reserves
c. currency in circulation; government securities.
d. government securities; discount loans.

14 Asset transformation can be described as

a. borrowing short and lending long.
b. borrowing long and lending short.
c. borrowing and lending only for the short term.
d. borrowing and lending for the long term.

15 The Fed uses three policy tools to manipulate the

money supply: ________, which affects reserves and the
monetary base; changes in _________, which affect the
monetary base; and changes in __________, which affect
the money multiplier.
a. open market operations; borrowed reserves; reserve
requirements
b. borrowed reserves; open market operations; reserve
requirements
c. open market operations; borrowed reserves; margin
requirements
d. borrowed reserves; open market operations; margin
requirements

16 A bank failure occurs whenever

a. a bank is not allowed to borrow from the Fed
b. a bank has to call in a large volume of loans.
c. a bank suffers a large deposit outflow.
d. a bank cannot satisfy its obligations to pay its depositors
and have enough reserves to meet its reserve requirements.

17 The specific goals of central banks include each of

the following EXCEPT:
a. high levels of imports.
b. high and stable real growth.
c. low and stable unemployment rates.
d. low and stable inflation.

18 Which of the following bank assets is the most

liquid?
a. Reserves
b. U.S. government securities
c. Consumer loans
d. Cash items in process of collection

19 A central feature of monetary policy strategies in all

countries is the use of a nominal variable that monetary
policymakers use as an intermediate target to achieve
an ultimate goal such as price stability. Such a variable
is called a nominal
a. guideline.
b. anchor.
c. tether.
d. benchmark.

20. Instrument independence is the ability of _________ to

set monetary policy ________
a. Congress; instruments
b. Congress; goals
c. the central bank; instruments
d. the central bank; goals

21. Monetary policy is best described as:

a. one of the most important functions of Congress.
b. attempts to keep inflation constant.
c. determining the denominations and supply of a country's
currency.
d. attempts to keep inflation low and stable and growth high
and stable.

22. Which of the following would a bank not hold as

insurance against the highest cost of deposit outflow-
bank failure?
a. Mortgages
b. Excess reserves
c. Secondary reserves
d. Bank capital