PRACTICE QUIZ       CH.11
THE BANKING SYSTEM
& THE MONEY SUPPLY
1. Which of the following is the most liquid asset? a. a certificate of deposit
b. a government bond
c. a share of corporate stock
d. a checking account balance
e. fine jewelry
 
2. Which of the following general categories of assets is the largest? a. cash in the hands of the public
b. small time deposits
c. savings-type deposits
d. demand deposits
e. large time deposits
 
3. Given the following information, what would be the values of M1 and M2?
Small time deposits $650 billion
Checking deposits $300 billion
Savings-type accounts $750 billion
Money market mutual funds $600 billion
Travelers' checks $ 25 billion
Large time deposits $600 billion
Cash in hand $100 billion a. M1: $400 billion; M2: $2,450 billion
b. M1: $100 billion; M2: $1,075 billion
c. M1: $425 billion; M2: $2,425 billion
d. M1: $425 billion; M2: $3,025 billion
e. M1: $1,175 billion; M2: $1,850 billion


4. Financial intermediaries

a. harm both borrowers and lenders because they pay lenders a lower rate of interest than they charge to borrowers
b. specialize in assembling loanable funds from households and firms, and channeling those funds to other households, firms, and government agencies
c. are all depository institutions
d. increase the risk of lending and borrowing because a financial intermediary has nothing to lose from such transactions
e. reduce efficiency because they add an extra step to many financial transactions


5. According to the text, a bank's most basic service is

a. making money
b. providing checking account services
c. organizing money flowing into accounts
d. providing investment advice
e. increasing the amount of cash the public holds


6. If the Federal Reserve sets a required reserve ratio of 0.2 and a bank has $100 million in loans and $80 million in deposits, what is the level of required reserves for the bank?

a. $100 million
b. $16 million
c. $80 million
d. $20 million
e. $36 million


7. The Federal Reserve System

a. is influenced by the executive and legislative branches through the appointment process
b. is under the jurisdiction of the executive branch
c. is under the control of the private banks that own it
d. is directed in its actions by the U.S. Congress
e. answers only to the judicial branch


8. The Federal Open Market Committee is important because

a. its deliberations are extremely private
b. it sets the course for the nation's money supply
c. it is composed of people who are most knowledgeable about the economy
d. it discusses unemployment and inflation
e. of its influence on fiscal policy


9. The Fed typically increases the money supply by

a. selling government bonds
b. buying government loans
c. selling government loans
d. printing more currency
e. buying government bonds


10. If the reserve requirement is .2 and demand deposits are $800 (assume no earlier loans), the banks can lend out

a. $800
b. $80
c. $640
d. $160
e. $460


11. If the Federal Reserve wishes to increase the money supply by $30,000 and the reserve requirement ratio is 0.4, how big a purchase of bonds will the Fed need to make?

a. $75,000
b. $12,000
c. $1,000
d. $30,000
e. $3,000


12. If the required reserve ratio is 0.25 and the First National Bank holds $10 million in demand deposits and $2.5 million in reserves, how much more money is the bank capable of creating?

a. $0
b. $0.625 million
c. $1.875 million
d. $2.5 million
e. $10 million


13. If the Federal Reserve sells a $2,000 bond to a bond dealer who pays with a check written on an account at Second National Bank, what changes will occur on the bank's balance sheet after the check clears?

a. reserves and total assets will increase by $2,000; demand deposits and total liabilities will decrease by $2,000
b. reserves, demand deposits, total assets, and total liabilities will all increase by $2,000
c. reserves and total assets will decrease by $2,000; demand deposits and total liabilities will increase by $2,000
d. reserves, demand deposits, total assets, and total liabilities will all decrease by $2,000
e. reserves will decrease by $2,000; demand deposits, total assets, and total liabilities will all increase by $2,000


14. The demand deposit multiplier is likely to be smaller than 1/RRR if

a. the public will not want to change its holdings of currency
b. the public holds no currency
c. banks want to hold excess reserves
d. want to hold no excess reserves
e. banks increase the number of loans they offer to make a larger profit


15. One problem with using discount rate changes to influence deposit creation or destruction is that

a. small changes in the rate do not have much impact
b. the discount rate changes are covert
c. banks like to borrow from the Fed, and they will borrow even more after the changes
d. the Fed must change the discount rate each time they meet
e. banks do not have enough control over their demand deposits


16. Because of the history of banking panics in the U.S., one of the Fed's primary functions is to

a. dispel rumors about bank problems
b. act as a lender of last resort
c. hold banks accountable for their actions
d. call in loans
e. increase the profit that each bank makes


17. Which of the following is a reason that the number of bank failures has generally decreased over time?

a. banks have been replaced by savings and loan associations
b. the overall riskiness of bank loans has decreased
c. the Federal Reserve stands ready to inject reserves into the banking system
d. all banks have been in good financial health
e. banks hold most of their assets in the form of reserves
 
18. All cash within the geographical boundaries of the United States is counted as part of the U.S. money supply.
                    (T/F)

19. Which of the following statements is true?

a. the U.S. Treasury deals in newly issued bonds and the Fed deals in previously issued (second-hand) bonds
b. the U.S. Treasury deals in previously issued bonds and the Fed deals in newly issued bonds
c. the U.S. Treasury deals in only newly issued bonds and the Fed deals in both new and second-hand bonds
d. the U.S. Treasury deals in both new and second-hand bonds and the Fed only deals in second-hand bonds
e. both the U.S. Treasury and the Fed deal in both new and second-hand bonds


20. Assuming that households do not change their cash holding and banks loan out all of their excess reserves, if the required reserve ratio (RRR) is 10 percent and the Fed purchases $2,000 worth of bonds from banks, how much money will be eventually created?

a. $1,800
b. $2,000
c. $9,000
d. $18,000
e. $20,000