Question 1

Which of the following is not legal tender in the United States?

Accepted Answer

A)  a $2 bill
B)  a fifty-cent piece
C)  a $100 bill
D)  a $5 Federal Reserve Note
E)  a checkF) All of the above
G) B) and C)

Question 2

A single bank can increase the money supply by the increase in its excess reserves times the simple money multiplier.

Accepted Answer

A) True 
 B)False

Question 3

Suppose the Fed wishes to make only a small change in the money supply. Which of its policy tools is it most likely to use?

Accepted Answer

A)  the prime interest rate
B)  loans made to the public
C)  Fed Fund Rate
D)  open market operations
E)  the required reserve ratioF) B) and D)
G) B) and E)

Question 4

The actual money multiplier is smaller than the simple money multiplier because

Accepted Answer

A)  the actual multiplier involves M2 rather than M1
B)  cash withdrawals reduce the amount banks can lend out
C)  withdrawals from checkable deposits increase the amount of excess reserves each bank receives
D)  the Fed wants to reduce the money supply
E)  the actual multiplier uses a different measure of reserve requirementsF) B) and C)
G) A) and E)

Question 5

Suppose that the First National Bank acquires $500,000 in new deposits and the required reserve ratio is 12 percent. Which of the following is true?

Accepted Answer

A)  The First National Bank can increase the money supply by $500,000.
B)  The First National Bank can increase the money supply by $400,000.
C)  The First National Bank can increase the money supply by $440,000.
D)  The entire banking system can increase the money supply by no more than $500,000 if the First National Bank lends out its excess reserves.
E)  The entire banking system can increase the money supply by no more than $440,000 if the First National Bank lends out its excess reserves.F) A) and E)
G) None of the above

Question 6

The largest component of M1 is

Accepted Answer

A)  currency
B)  checkable deposits
C)  traveler's checks
D)  money market mutual fund accounts
E)  savings accountsF) B) and D)
G) All of the above

Question 7

Which of the following is not money?

Accepted Answer

A)  check
B)  coin
C)  currency
D)  debit card
E)  credit cardF) D) and E)
G) All of the above

Question 8

Exhibit 15-1 
-Refer to Exhibit 15-1. If the interest rate on loans is 10 percent, the annual cost to Eubank of holding excess reserves is

Accepted Answer

A)  10 percent of $500,000
B)  10 percent of net worth
C)  10 percent of excess reserves
D)  $10,000
E)  0F) A) and B)
G) A) and C)

Question 9

When the Fed buys U.S. government securities from a bank, that bank's required reserves and total reserves increase but excess reserves decrease.

Accepted Answer

A) True 
 B)False

Question 10

Exeter Bank has $100 million in checkable deposits and $10 million in net worth. With a 10% reserve requirement, Exeter Bank must maintain ______ in reserves.

Accepted Answer

A)  $1 million
B)  $2 million
C)  $5 million
D)  $10 million
E)  $11 millionF) B) and D)
G) D) and E)

Question 11

If people choose to hold some of a newly received loan as cash instead of keeping it in a checking account, the money supply

Accepted Answer

A)  will not increase as a result of that loan
B)  decreases as a result of that loan
C)  will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal increases excess reserves
D)  will not increase as much from that point on as it would if borrowers redeposited all of the money because cash is not included in the money supply
E)  will not increase as much from that point on as it would if borrowers redeposited all of the money because the cash withdrawal decreases excess reservesF) A) and B)
G) A) and D)

Question 12

The money supply expands when banks make loans.

Accepted Answer

A) True 
 B)False

Question 13

The Fed primarily uses the reserve requirement to control the money supply.

Accepted Answer

A) True 
 B)False

Question 14

By holding highly liquid assets to guard against sudden large withdrawals, banks

Accepted Answer

A)  sacrifice safety
B)  sacrifice profitability
C)  increase profitability
D)  hold less cash in their vaults
E)  earn more interest than they could on business loansF) B) and E)
G) A) and B)

Question 15

Usually, a commercial bank's depositors and its owners are the same individuals.

Accepted Answer

A) True 
 B)False

Question 16

Tony deposits $2,000 in cash at the Last National Bank and the bank credits Tony's checking account in the amount of $2,000. Which of the following is true immediately after this transaction?

Accepted Answer

A)  The money supply, M1, increases by $2,000.
B)  Only the composition of M1 changes, not its amount.
C)  A $2,000 loan from the Last National Bank is an asset to Tony.
D)  Both the assets and the liabilities of the Last National Bank fall by $2,000.
E)  The immediate effect of this transaction is that M1 increases by $2,000 times the money multiplier.F) B) and C)
G) A) and D)

Question 17

The liquidity of an asset indicates

Accepted Answer

A)  its buying power
B)  the ease with which it can be converted into the medium of exchange without a significant loss of value
C)  the ease with which it can be converted into another asset
D)  how likely people are to convert it into the medium of exchange without a significant loss of value
E)  how easy it is to buy with a checkF) A) and B)
G) A) and C)

Question 18

Bank reserves can be held in the form of

Accepted Answer

A)  loans and cash in the bank's vault
B)  loans and deposits with the Fed
C)  loans and checking accounts
D)  deposits with the Fed and cash in the bank's vault
E)  deposits with the Fed and checking accountsF) C) and E)
G) A) and D)

Question 19

Liquidity refers to the ease with which an asset can be converted into the medium of exchange without a significant loss of value. The least liquid of the assets below is

Accepted Answer

A)  real estate
B)  currency
C)  traveler's checks
D)  oil
E)  checkable depositsF) A) and B)
G) B) and C)

Question 20

Which of the following is a liability for a bank?

Accepted Answer

A)  U.S. government securities
B)  deposits with the Fed
C)  checkable deposits
D)  consumer and business loans
E)  building and furnitureF) A) and E)
G) C) and E)

Exam 16: Banking and the Money Supply

Liquidity refers to the ease with which an asset can be converted into the medium of exchange without a significant loss of value. The least liquid of the assets below is

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The Fed primarily uses the reserve requirement to control the money supply.

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A single bank can increase the money supply by the increase in its excess reserves times the simple money multiplier.

Correct AnswerverifiedShow Answer

Suppose that the First National Bank acquires $500,000 in new deposits and the required reserve ratio is 12 percent. Which of the following is true?

Correct AnswerverifiedShow Answer

Suppose the Fed wishes to make only a small change in the money supply. Which of its policy tools is it most likely to use?

Correct AnswerverifiedShow Answer

The actual money multiplier is smaller than the simple money multiplier because

Correct AnswerverifiedShow Answer

Exeter Bank has $100 million in checkable deposits and $10 million in net worth. With a 10% reserve requirement, Exeter Bank must maintain ______ in reserves.

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If people choose to hold some of a newly received loan as cash instead of keeping it in a checking account, the money supply

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Which of the following is not legal tender in the United States?

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Tony deposits $2,000 in cash at the Last National Bank and the bank credits Tony's checking account in the amount of $2,000. Which of the following is true immediately after this transaction?

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Usually, a commercial bank's depositors and its owners are the same individuals.

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When the Fed buys U.S. government securities from a bank, that bank's required reserves and total reserves increase but excess reserves decrease.

Correct AnswerverifiedShow Answer

The money supply expands when banks make loans.

Correct AnswerverifiedShow Answer

The largest component of M1 is

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By holding highly liquid assets to guard against sudden large withdrawals, banks

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Bank reserves can be held in the form of

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Which of the following is a liability for a bank?

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The liquidity of an asset indicates

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Which of the following is not money?

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Exhibit 15-1 -Refer to Exhibit 15-1. If the interest rate on loans is 10 percent, the annual cost to Eubank of holding excess reserves is

Correct AnswerverifiedShow Answer

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