Monetary Policy and Central Banking

The accounts that show international transactions involving currently produced goods and services are called the ___________

• capital account.
• balance of payments.
• current account.
• trade balance.

The Federal Reserve usually keeps the discount rate _____________

• equal to zero.
• equal to the target federal funds rate.
• above the target federal funds rate
• blow the target federal funds rate.

Which of the following statements is false?

• Checkable deposits include NOW accounts.
• Checkable deposits are usually the lowest cost source of bank funds
• Checkable deposits are payable on demand
• Checkable deposits are the primary source of bank funds

The quantity theory of money is a theory of how _______________________

• the money supply is determined.
• interest rates are determined.
• the real value of aggregate income is determined.
• the nominal value of aggregate income is determined.

Which of the following is NOT a disadvantage to inflation targeting?

• Inflation targets could impose a rigid rule on policymakers.
• There is a delayed signal about the achievement of the target.
• There is a lack of transparency.
• There is potential for larger output fluctuations.

Which of thevis not included in the five autonomous factors (factors independent of income) that shift the aggregate demand function?

• Changes in taxes
• Changes in government spending
• Changes in planned investment spending
• Changes in autonomous consumer spending

Under monetary targeting, a central bank announces an annual growth rate target for ________.

• the monetary base
• GDP
• a reserve aggregate
• a monetary aggregate

This refers to paper money and coins.

• Currency

Of the three players in the money supply process, most observers agree that the most important player is

• The Office of Thrift Supervision.
• The FDIC.
• The Federal Reserve System.
• The United States Treasury.

One way to derive aggregate demand is by looking at its four component parts, which are:

• consumer expenditures, planned investment spending, government spending, and taxes.
• consumer expenditures, actual investment spending, government spending, and net exports.
• consumer expenditures, planned investment spending, government spending, and net exports.
• consumer expenditures, planned investment spending, government spending, and gross exports.

It is the average price of goods and services in an economy.

• Aggregate output
• Aggregate demand
• Aggregate price level
• Business level

Which of the following are reported as assets on a bankʹs balance sheet?

• Reserves
• Borrowings
• Savings deposits
• Bank capital

The Keynesian theory of money demand emphasizes the importance of ________________

• irrational behavior on the part of some economic agents.
• interest rates on the demand for money.
• expectations.
• a constant velocity.

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called ____________

• a money neutral foreign exchange intervention.
• an exchange rate feedback rule.
• an unsterilized foreign exchange intervention.
• a sterilized foreign exchange intervention

It is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans.

• arbitrage
• computerization
• securitization
• diversification

Which is not included in six basic goals that are continually mentioned by personnel at the Federal Reserve?

• a. stability in foreign exchange markets
• b. stability of financial markets
• c. High unemployment
• d. High employment

Currency includes

• a. paper money, coins, checks, and savings deposits.
• b. paper money, coins, and checks
• c. paper money and checks
• d. paper money and coins

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called _____

• return on assets
• return on equity
• return on capital
• return on investment

Price stability is desirable because ____________________

• inflation creates uncertainty, making it difficult to plan for the future.
• it guarantees full employment.
• everyone is better off when prices are stable.
• price stability increases the profitability of the Fed.

The demand for money as a cushion against unexpected contingencies is called the ___________________

• insurance motive.
• speculative motive.
• precautionary motive.
• transactions motive.

Which of the following can be described as direct finance

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

Today 1 euro can be purchased for $1.10. This is the __________

• financial exchange rate.
• spot exchange rate.
• fixed exchange rate.
• forward exchange rate.

This is an economic theory that suggests that rapid changes in the money supply are the main cause of economic instability.

• Monetarism

The money market is in equilibrium ________.

• only at the intersection of the IS and LM curves
• at any point on the IS curve
• at any point on the LM curve
• at only one point on the LM curve

Because ________ are less liquid for the depositor than ________, they earn higher interest rates.

• a. passbook savings; checkable deposits
• b. checkable deposits; passbook savings
• c. passbook savings; time deposits
• d. money market deposit accounts; time deposits

A disadvantage of ________ is that it is very heavy and hard to transport from one place to another.

• a. commodity money
• b. paper money
• c. electronic money
• d. fiat money

This is a plan to increase the amount of money in circulation.

• Expansionary monetary policy

The difference between merchandise exports and imports is called the ________ balance.

• trade
• official reserve transactions
• current account
• capital account

30) The share of checkable deposits in total bank liabilities has _______

• expanded dramatically over time.
• remained virtually unchanged since 1960
• shrunk over time
• expanded moderately over time.

What is the exchange rate?

• the change in the value of money over time.
• the value of a currency relative to inflation.
• the price of one currency relative to gold.
• the price of one currency relative to another.

Goal independence is the ability of ________ to set monetary policy ________.

• congress; goals
• congress; instruments
• the central bank; instruments
• the central bank; goal

Banks acquire the funds that they use to purchase income-earning assets from such sources as

• a. reserves.
• b. deposits at other banks.
• c. cash items in the process of collection
• d. savings accounts.

This is a plan to reduce the amount of money in circulation.

• Tight money policy

What type of spending is the total demand for consumer goods and services (hamburgers, stereos, rock concerts, visits to the doctor, and so on):

• Consumer spending
• Consumer expenditure
• Government expenditure
• Planned speeding

Which of the following is not a nontransaction deposit?

• a. ) Certificate of deposit
• b. Negotiable order of withdrawal accounts
• c. Savings accounts
• d. Small-denomination time deposits

Bank capital is listed on the ________ side of the bankʹs balance sheet because it represents a ________ of funds.

• asset; use
• asset; source
• liability; use
• liability; source

Both ________ and ________ are Federal Reserve assets.

• government securities; discount loans
• government securities; reserves
• currency in circulation; reserves
• currency in circulation; government securities

Exchange rates are determined in _________

• the money market.
• the stock market.
• the capital market.
• the foreign exchange market.

A hard currency is backed only by gold or silver.

• True
• False

Which of the following is NOT an entity of the Federal Reserve System?

• The Board of Governor
• The Federal Open Market Committee
• Federal Reserve Banks
• The Comptroller of the Currency

The World Bank is an international organization that:

• helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West.
• makes loans to countries to finance projects such as dams and roads.
• promotes the growth of trade by setting rules for how tariffs and quotas are set by countries.
• makes loans to countries with balance of payment difficulties.

Countries with the highest inflation rates are likely to have _______________

• small budget deficits relative to GDP.
• the lowest interest rates.
• the highest rates of money growth.
• non accommodating monetary policy.

Dennis notices that jackets are on sale for $99. In this case money is functioning as a ________.

• payments-system ruler
• medium of exchange
• store of value
• unit of account

The total production of goods and services is also called _______

• Aggregate output
• Aggregate demand
• Production rate
• business production

This is the Federal Reserve's actions that change the money supply to influence the economy

• Federal funds rate

Which of the following is an entity of the Federal Reserve System?

• The U.S. Treasury Secretary
• The Comptroller of the Currency
• The FDIC
• The FOMC

The primary goal of the European Central Bank is ________

• interest rate stability.
• exchange rate stability.
• price stability.
• high employment.

A credit union is a non profit organization

• True
• False

Bank reserves include

• a. deposits at the Fed and short-term treasury securities.
• b. deposits at other banks and deposits at the Fed.
• c. vault cash and short-term Treasury securities.
• d. vault cash and deposits at the Fed.

Under a fixed exchange rate regime, if a countryʹs central bank runs out of international reserves, it cannot keep its currency from ____________

• appreciating.
• inflating.
• deflating.
• depreciating.

According to aggregate demand and supply analysis, inflation is caused by _____________________

• expansionary fiscal policies.
• rising prices.
• supply shocks.
• expansionary monetary policies.

Which of the following would Fed consider eliminating?

• primary credit lending.
• its lender of last resort function
• secondary credit lending.
• seasonal credit lending.

Fiat money is a legal tender proclaimed to be money by law

• True
• False

Which of the following is not an element of inflation targeting?

• A public announcement of medium term numerical targets for inflation
• An institutional commitment to price stability as the primary long-run goal
• An information-inclusive approach in which only monetary aggregates are used in making decisions about monetary policy
• Increased accountability of the central bank for attaining its inflation objectives

The most common type of discount lending, ________credit loans, are intended to help healthy banks with short-term liquidity problems that often result from temporary deposit outflows.

• secondary
• seasonal
• primary
• temporary

This refers to the monetary policy tool most used by the Federal Reserve to adjust the money supply.

• Federal funds rate

In an agreement to exchange dollars for euros in three months at a price of $0.90 per euro, the price is the __________

• fixed exchange rate.
• money exchange rate.
• spot exchange rate
• forward exchange rate.

The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier

• equity ratio
• asset ratio
• asset multiplier
• equity multiplier

An agreement to exchange dollar bank deposits for euro bank deposits in one month is a ___________

• forward transaction.
• future transaction.
• deposit transaction.
• spot transaction.

The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.

• quantity theory of money
• theory of money neutrality
• law of one price
• theory of purchasing power parity

Money is defined as

• a. the unrecognized liability of governments
• b. a risk-free repository of spending power
• c. bills of exchange.
• d. anything that is generally accepted in payment for goods and services or in the repayment of debt.

A bank is insolvent when ______

• its liabilities exceed its assets.
• its capital exceeds its liabilities
• its assets exceed its liabilities
• its assets increase in value

VISA is also known as Mastercard

• True
• False

The discount rate refers to the interest rate on _________

• seasonal credit.
• secondary credit.
• federal funds.
• primary credit.

A negative supply shock causes ________ to ________.

• aggregate demand; decrease
• short-run aggregate supply; increase
• short-run aggregate supply; decrease
• aggregate demand; increase

When does inflation occur?

• the price level rises.
• the money supply increases.
• the price level rises continuously over a period of time.
• the price level falls continuously over a period of time.

Which of the following statements are true?

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

Introduction of checks into the payments system reduced the costs of exchanging goods and services. Another advantage of checks is that

• a. they are more widely accepted than currency
• b. they provide convenient receipts for purchases
• c. the funds from a deposited check are available for use immediately.
• d. they can never be stolen

While the discount rate is ʺestablishedʺ by the regional Federal Reserve Banks, in truth, the rate is determined by __________

• The president of the United States.
• The Senate.
• The Board of Governors.
• Congress.

Which set of goals can, at times, conflict in the short run?

• High employment and price level stability.
• Interest rate stability and financial market stability.
• Exchange rate stability and financial market stability.
• High employment and economic growth.

The rate of change of the price level, usually measured as a percentage change per year.

• Aggregate output level
• Hyperinflation rate
• Inflation rate
• Aggregate output rate

A debit card differs from a credit card in that

• A credit card is a loan while for a debit card purchase, payment is made immediately.
• A debit card is a loan while for a credit card purchase, payment is made immediately.
• A credit card is a long-term loan while a debit card is a short-term loan.
• A debit card is a long-term loan while a credit card is a short-term loan.

A nominal anchor promotes price stability by __________

• keeping inflation expectations low.
• outlawing inflation.
• stabilizing interest rates.
• keeping economic growth low.

When banks borrow money from the Federal Reserve, these funds are called ____________

• discount loans
• federal loans
• treasury funds
• federal funds

An important financial institution that assists in the initial sale of securities in the primary market is the ____

• Commercial Bank
• Brokerage House
• Investment Bank
• Stock Exchange

Points on the IS curve satisfy ________ market equilibrium.

• money
• bond
• stock
• goods

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.

• a. fed funds; source
• b. discount loans; use
• c. fed funds; use
• d. discount loans; source

Which of the following is an advantage to money targeting?

• There is an immediate signal on the achievement of the target.
• It does not rely on a stable money-inflation relationship.
• It implies lack of transparency.
• It implies smaller output fluctuations.

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant.

• sale; purchase
• purchase; purchase
• sale; sale
• purchase; sale

Which of the following statement is true? Automated teller machines ______

• are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs
• cost less than human tellers, so banks may encourage their use by charging less for using ATMs
• cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs
• cost nothing to use, so banks provide their services free of charge

This is the central bank of the United States.

• Federal Reserve System

This is the nation's main monetary authority.

• Monetary policy

Inflation results in ______________

• difficulty interpreting relative price movements.
• ease of planning for the future.
• ease of comparing prices over time.
• lower nominal interest rates.

The World Bank was established to aid in the reconstruction of post-World War II Europe.

• True
• False

Which of the following is an advantage of the Fedʹs ʺjust do itʺ approach to monetary policy?

• a. It is simplistic and has clarity.
• b. There is an immediate signal if the target has been achieved.
• c. There is increased accountability of central bankers.
• d. It does not rely on the money-inflation relationship.

Of moneyʹs three functions, the one that distinguishes money from other assets is its function as a _______.

The interest rate on seasonal credit is equal to _______

• the federal funds rate.
• an average of the federal funds rate and rates on certificates of deposits.
• the primary credit rate.
• the secondary credit rate.

_______ is a flow of earnings per unit of time

• Money
• Currency
• Wealth
• Income

There are ________ members of the Board of Governors of the Federal Reserve System.

• a. 7
• b. 19
• c. 5
• d. 12

The ________ describes the points for which the goods market is in equilibrium.

• investment schedule
• IS curve
• LM curve
• consumption function

Which is true during hyperinflations?

• middle-class savers benefit as prices rise.
• moneyʹs value remains fixed to the price level; that is if prices double so do the value of money
• money no longer functions as a good store of value and people may resort to barter transactions on a much larger scale
• the value of money rises rapidly.

When money prices are used to facilitate comparisons of value, money is said to function as a ________.

• a. medium of exchange.
• b. payments-system ruler.
• c. store of value.
• d. unit of account.

Which of the following is NOT an advantage of inflation targeting?

• There is an immediate signal on the achievement of the target.
• Inflation targeting reduces the effects of inflation shocks.
• There is simplicity and clarity of the target.
• Inflation targeting does not rely on a stable money-inflation relationship.

When inflation is defined to be a condition of a continually rising price level, ________ economists agree with Milton Friedmanʹs proposition that inflation is a monetary phenomenon.

• almost all
• no
• about half of practicing
• very few

His analysis started with the recognition that the total quantity demanded of an economyʹs output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports.

• Sir John Hicks
• Milton Friedman
• John Maynard Keynes
• Paul A. Samuelson

Bank capital is equal to ________ minus ________.

• total assets; total reserves
• total liabilities; total borrowings
• total liabilities; total assets
• total assets; total liabilities

The Glass Stegall Act of 1933, allows commercial bank to sell new offerings of government securities or from engaging in brokerage activities.

• True
• False

The Fed does not tightly control the monetary base because it does not completely control

• borrowed reserves.
• the discount rate.
• open market sales.
• open market purchases.

Which of the following is not a source of borrowings for a bank?

• a. Transaction deposits
• b. Eurodollars
• c. Discount loans
• d. Federal funds

The difference between money and income is that ______

• There is no difference. Money and income are both flows.
• Money is a stock and income is a flow
• There is no difference. Money and income are both stocks.
• Money is a flow and income is a stock

Which of the following is not an operating instrument?

• a. Federal funds interest rate
• b. Monetary base
• c. Discount rate
• d. Non-borrowed reserves

Budget deficits are important because deficits

• a. can result in higher rates of monetary growth.
• b. always cause interest rates to fall.
• c. always cause prices to fall.
• d. cause bank failures.

This is the fraction of a bank's deposits, determined by the Federal Reserve, that it must keep in reserve so that it can loan out money.

• Required reserve ratio

This refers to the Federal Reserve's sale and purchase of federal government securities.

• Open market operations

Which of the following is NOT a disadvantage of the Fedʹs ʺjust do itʺ approach to monetary policy?

• a. It relies on a stable money-inflation relationship.
• b. This type of policy relies on the policy-makers in charge.
• c. There is low accountability for central bankers.
• d. There is low transparency of policy.

The long-run aggregate supply curve is ___________

• a vertical line through the non-inflationary rate of output.
• a vertical line through the natural rate level of output.
• a horizontal line through the current level of output.
• a vertical line through the current level of output.

The stability of financial markets is also fostered by ________________, because fluctuations in interest rates create great uncertainty for financial institutions.

• a. economic growth
• b. interest-rate stability
• c. structural unemployment
• d. price stability

One of the attractions for a bank of funding a client through a bank bill facility is that the security can be sold into the money markets.

• True
• False

A breakdown of financial markets can result in _____

• Rapid economic growth
• Political instability
• Stable Prices
• Financial stability

Every financial market has the following characteristic:

• It channels funds from lenders-savers to borrowers-spenders.
• It allows loans to be made.
• It allows common stock to be traded.
• It determines the level of interest rates.

Because inflation was not a serious problem during the Great Depression, Keynesʹs analysis assumed ____________________

• that the price level was fixed.
• that the money supply was fixed.
• that unemployment also was not a problem.
• that monetary policy is not effective.

The rate of inflation tends to remain constant when ____________

• the unemployment rate is above the NAIRU.
• the unemployment rate equals the NAIRU.
• the unemployment rate is below the NAIRU.
• the unemployment rate increases faster than the NAIRU increases.

Bankʹs make their profits primarily by issuing ________.

• a. equity
• b. negotiable CDs
• c. loans
• d. NOW accounts

All ________ are required to be members of the Fed.

• state-chartered bank
• banks with assets less than $500 million
• banks with assets less than $100 million
• nationally chartered banks

An individualʹs annual salary is her _____

• Liabilities
• Wealth
• Income
• Money

An exchange rate is the rate at which goods are traded between two states.

• True
• False

It is a monetary phenomenon because it cannot occur without the monetary authorities pursuing an accommodating policy of a higher rate of money growth.

• Demand-pull inflation
• Cost-demand inflation
• Cost-push inflation
• Demand push inflation

Which of the following bank assets is the most liquid?

• Cash items in process of collection
• Consumer loans
• U.S. government securities
• Reserves

What is the equation of exchange?

• M × P = V × Y
• M + V = P + Y
• M × V = P ×Y
• M + Y = V + P

Which of the following is not a disadvantage of inflation targeting?

• Too much rigidity
• Potential for decreased output fluctuations
• Delayed signaling
• Low economic growth

The ability of a central bank to set monetary policy goals is ____________

• a. instrument independence.
• b. goal independence.
• c. policy independence.
• d. political independence.

________ policy involves decisions about government spending and taxation.

• a. Fiscal
• b. Financial
• c. Monetary
• d. Systemic

Fiat money must be backed by a specific amount of gold and silver

• True
• False

The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is ___________

• monetary targeting.
• exchange-rate targeting.
• inflation targeting.
• the implicit nominal anchor.

The rate of inflation increases when _________

• a. the unemployment rate equals the NAIRU
• b. the unemployment rate is less than the NAIRU.
• c. the unemployment rate exceeds the NAIRU.
• d. the unemployment rate increases faster than the NAIRU increases.

Devaluation of a state's currency tends to increase imports into the state.

• True
• False

The condition of a continually rising price level is defined as _____________

• inflation.
• stagnation.
• stagflation.
• disinflation.

The aggregate demand curve is the total quantity of an economyʹs __________________

• final goods and services demanded at different price levels.
• final goods and services demanded at a particular price level.
• intermediate goods demanded at all price levels.
• intermediate goods demanded at a particular price level.

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles ________________

• velocity falls by 50 percent.
• nominal incomes fall by 50 percent.
• nominal income doubles.
• velocity doubles.

Secondary reserves include

• a. deposits at Federal Reserve Banks.
• b. state and local government securities
• c. deposits at other large banks
• d. short-term Treasury securities

A bimetallic standard is a monetary standard based only on gold

• True
• False

Everything else held constant, if a central bank makes a sterilized purchase of foreign assets, then the domestic currency will ________.

• appreciate
• not be affected
• either appreciate, depreciate, or remain constant
• depreciate

Long-term debt has a maturity that is ________.

• Between one and ten years
• Ten years or longer
• Between five and ten years
• Less than a year.

The most common definition that monetary policymakers use for price stability is __________

• low and stable deflation.
• high and stable inflation.
• an inflation rate of zero percent.
• low and stable inflation.

This refers to the interest at which a depository institution lends available funds to another depository institution overnight.

• Central Bank

As a store of value, money

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

Which regulatory body charters national banks?

• The FDIC
• The Comptroller of the Currency
• The Federal Reserve
• The U.S. Treasury

The aggregate supply curve shows the relationship between _____________

• the wage rate and the level of employment.
• the price level and the level of aggregate output supplied.
• the price level and the level of inputs.
• the level of inputs and aggregate output.

Eurodollars are created when deposits in accounts in the U.S are transferred to a bank outside the country and are kept in the form of dollars.

• True
• False

This is also called tight-money policy.

• Contractionary monetary policy

Because it is a unit of account, money _______

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

Actual investment spending is comprised of two components:

• unplanned investment and inventory investment.
• fixed investment and actual inventory investment.
• fixed business investment and fixed housing investment.
• planned investment and fixed investment.

1The interest rate charged on overnight loans of reserves between banks is the _____

• prime rate
• federal funds rate
• treasury bill rate.
• discount rate

A financial market in which previously issued securities can be resold is called a ________ market.

• Secondary
• Primary
• Tertiary
• Used Securities

This refers to the board of seven appointed members that supervises the operations of the Federal Reserve System and sets monetary policy.

• Board of Governors

The most common type of discount lending that the Fed extends to banks is called ____________

• secondary credit.
• primary credit.
• seasonal credit.
• installment credit.

Money is

• a flow of earnings per unit of time.
• always based on a precious metal like gold or silver.
• anything that is generally accepted in payment for goods and services or in the repayment of debt.
• the total collection of pieces of property that are a store of value

Kevin purchasing concert tickets with his debit card is an example of the ________ function of money

• a. medium of exchange
• b. specialization
• c. store of value
• d. unit of account

Duration analysis is based on what is known as ______________, which measures the average lifetime of a security's stream of payments.

• gap analysis
• Macaulay’s concept of duration
• Keynes's concept of duration
• lifetime concept of duration

Due to the lack of timely data for the price level and economic growth, the Fedʹs strategy _________

• a. stabilizes the consumer price index, since the Fed can control the CPI.
• b. targets the exchange rate, since the Fed can control this variable.
• c. targets the price of gold, since it is closely related to economic activity.
• d. uses an intermediate target, such as an interest rate.

If peanuts serve as a medium of exchange, a unit of account, and a store of value, then peanuts are

• a. bank deposits
• b. money
• c. loanable funds
• d. reserves.

It as the advantage of being much lighter than coins or precious metal, but it can be accepted as a medium of exchange only if there is some trust in the authorities who issue it and if printing has reached a sufficiently advanced stage that counterfeiting is extremely difficult.

• Paper currency
• Commodity Money
• Electronic payment
• Check

It is the excess of government expenditures over tax revenues for a particular time period, typically a year.

• Gross domestic
• Budget surplus
• Budget deficit
• Government budget

Which of the following is not a disadvantage of exchange-rate targeting?

• The targeting country is left open for a speculative attack.
• It can weaken the accountability of policymakers.
• It relies on a stable money-inflation relationship.
• The targeting country gives up an independent monetary policy.

The monetary base minus currency in circulation equals _______

• a. discount loans.
• b. reserves.
• c. the non-borrowed base.
• d. the borrowed base.

The share of checkable deposits in total bank liabilities has

• a. expanded dramatically over time
• b. expanded moderately over time
• c. remained virtually unchanged since 1960.
• d. shrunk over time

M1 includes currency and demand deposits but excludes traveler’s checks.

• True
• False

If the money supply is $2 trillion and velocity is 5, then nominal GDP is _____________

• $10 trillion.
• $2 trillion.
• $5 trillion.
• $1 trillion.

Patrick places his pocket change into his savings bank on his desk each evening. By his actions, Patrick indicates that he believes that money is a

• a. unit of specialization.
• b. unit of account
• c. store of value.
• d. medium of exchange.

The theory of purchasing power parity cannot fully explain exchange rate movements because ___________

• some goods are not traded between countries.
• monetary policy differs across countries.
• fiscal policy differs across countries.
• all goods are identical even if produced in different countries.

The sum of the Fedʹs monetary liabilities and the U.S. Treasuryʹs monetary liabilities is called __________

• bank reserves.
• the monetary base.
• currency in circulation.
• the money supply.

A budget ________ occurs when government expenditures exceed tax revenues for a particular time period

• lead to lower interest rates
• lead to a slower rate of money growth.
• lead to higher bond prices
• ultimately lead to higher inflation

According to Keynesʹs theory of liquidity preference, velocity increases when ___________

• brokerage commissions increase.
• income increases.
• wealth increases.
• interest rates increase.

A decrease in ________ increases the money supply since it causes the ________ to rise.

• margin requirements; money multiplier
• margin requirements; monetary base
• reserve requirements; monetary base
• reserve requirements; money multiplier

The velocity of money is defined as ____________

• nominal GDP divided by the money supply.
• real GDP times the money supply.
• nominal GDP times the money supply.
• real GDP divided by the money supply.

When money prices are used to facilitate comparisons of value, money is said to function as a _____

• Unit of account
• Store of value
• Medium of exchange
• Payment system

Because inflation in Germany after World War I sometimes exceeded 1,000 % per month, one can conclude that the German economy suffered from __________

• disinflation
• superdeflation
• hyperinflation
• deflation

The type of monetary policy that is used in Canada, New Zealand, and the United Kingdom is _________

• interest-rate targeting.
• monetary targeting.
• targeting with an implicit nominal anchor.
• inflation targeting.

Which of the following is a disadvantage to monetary targeting?

• It relies on a stable money-inflation relationship.
• There is a delayed signal about the achievement of a target.
• It implies a lack of transparency.
• It implies larger output fluctuations.

A financial market in which only short-term debt instruments are traded is called the ________ market.

• Bond
• Capital
• Money
• Stock

A monetary policy strategy that uses a fixed exchange rate regime that ties the value of a currency to the currency of a large, low inflation country is called ________ targeting.

• inflation
• exchange-rate
• monetary
• currency

The monetary policy strategy that relies on a stable money-income relationship is ________________

• monetary targeting.
• inflation targeting.
• exchange-rate targeting.
• the implicit nominal anchor.

The theory of asset demand suggests that the most important factor affecting the demand for domestic and foreign assets is ____________________

• the level of trade and capital flows.
• the liquidity of these assets relative to one another.
• the riskiness of these assets relative to one another.
• the expected return on these assets relative to one another.

This refers to the interest rate that banks charge their best customers.

• Prime rate

Paper currency that has been declared legal tender but is not convertible into coins or precious metals is called ________ money.

• a. fiat
• b. electronic
• c. commodity
• d. funny

Which of the following are reported as liabilities on a bankʹs balance sheet?

• Checkable deposits
• Loans
• Reserves
• Deposits with other banks

What is hyperinflation?

• a period of anxiety caused by rising prices.
• a period of extreme inflation generally greater than 50% per month.
• an increase in output caused by higher prices.
• impossible today because of tighter regulations.

A disadvantage of virtual banks (clicks) is that ______

• Customers worry about the security of online transactions
• They are less convenient than physical banks
• They are more costly to operate than physical bank
• Their hours are more limited than physical banks

Loophole mining refers to financial innovation designed to ________

• conceal transactions from the Treasury Department
• hide transactions from the IRS
• get around regulations
• conceal transactions from the SEC

Which of the following are not reported as assets on a bankʹs balance sheet?

The most important types of multinational corporations are financial corporations.

• True
• False

A nominal variable, such as the inflation rate or the money supply, which ties down the price level to achieve price stability is called ________ anchor.

• an intermediate
• a nominal
• an operating
• a real

Automated Teller Machine is a form of Electronic Banking facility.

• True
• False

A major objective of the BSP is to regulate and control the supply of money and the availability of credit.

• True
• False

When tax revenues are greater than government expenditures, the government has a budget ________.

• a. revision
• b. deficit
• c. surplus
• d. crisis

The immediate (two-day) exchange of one currency for another is a ___________

• money transaction.
• forward transaction.
• exchange transaction.
• spot transaction.

The time-inconsistency problem with monetary policy tells us that if policymakers use discretionary policy, there is a higher probability that the ________ will be higher, compared to policymakers following a behavior rule.

• interest rate
• foreign exchange rate
• unemployment rate
• inflation rate

As a store of value, money __________

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

Bank reserves include _________

• vault cash and short-term Treasury securities
• deposits at the Fed and short-term treasury securities
• deposits at other banks and deposits at the Fed
• vault cash and deposits at the Fed

A basic measure of bank profitability is the return on assets (ROA). Which of the following is the correct formula for ROA?

• net profit after taxes divided by liability
• net profit after taxes divided by assets
• assets divided by equity capital
• net profit after taxes divided by equity capital

While the discount rate is ʺestablishedʺ by the regional Federal Reserve Banks, in truth, the rate is determined by _________

• a. The president of the United States.
• b. The Senate.
• c. Congress.
• d. The Board of Governors.

Whatever a society uses as money, the distinguishing characteristic is that it must

• a. be generally acceptable as payment for goods and services or in the repayment of debt.
• b. be produced by the government.
• c. be completely inflation proof.
• d. contain gold.

To an economist, ________ is anything that is generally accepted in payment for goods and services or in the repayment of debt.

• income
• wealth
• credit
• money

What is the discount rate?

• the interest rate the Fed charges on loans to banks.
• the price banks pay the Fed for government securities.
• the interest rate that banks charge their most preferred customers.
• the price the Fed pays for government securities.

This refers to the interest rate that the Federal Reserve charges when it lends money to other banks.

• Discount rate

Of moneyʹs three functions, the one that distinguishes money from other assets is its function as a _______

• Standard of deferred payment
• Unit of account
• Medium of exchange
• Store of value

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature.

• a. negotiable; secondary
• b. negotiable; primary
• c. nonnegotiable; secondary
• d. nonnegotiable; primary

All of the following are necessary criteria for a commodity to function as money except

• a. it must be widely accepted.
• b. it must deteriorate quickly.
• c. it must be easy to carry
• d. it must be divisible.

The most important advantage of the discount policy is that the Fed can use it to __________

• punish banks that have deficient reserve
• control the money supply.
• precisely control the monetary base.
• perform its role as lender of last resort.

Operational risk is hard to quantify

• True
• False

In the Keynesian model, the quantity of money demanded is ________ related to income and ________ related to the interest rate.

• negatively; negatively
• negatively; positively
• positively; negatively
• positively; positively

Bank customers perceive Internet banks as being ______

• a better method for the purchase of long-term savings products.
• prone to many more technical problems
• more secure than physical bank branches.
• better at keeping customer information private.

The fraction of checkable deposits that banks are required by regulation to hold are

• a. total reserves.
• b. required reserves
• c. excess reserves.
• d. vault cash.

A central feature of monetary policy strategies in all countries is the use of a nominal anchor, which is a nominal variable that monetary policymakers use as an ____________

• intermediate target to achieve an ultimate goal such as price stability
• operating target to achieve an ultimate goal such as exchange rate stability.
• operating target, such as the federal funds interest rate.
• intermediate target, such as the federal funds interest rate.

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.

• LM curve
• consumption function
• investment schedule
• IS curve

The monetary base consists of ____________

• reserves and Federal Reserve Notes.
• currency in circulation and reserves.
• currency in circulation and Federal Reserve notes.
• currency in circulation and the U.S. Treasuryʹs monetary liabilities.

Discount policy affects the money supply by affecting the volume of ________ and the ________.

• borrowed reserves; monetary base
• borrowed reserves; money multiplier
• excess reserves; money multiplier
• excess reserves; monetary base

Which of the following statements are true about the bank balance sheet?

• A bankʹs assets are its sources of funds.
• A bankʹs liabilities are its uses of funds.
• A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital.
• A bankʹs balance sheet indicates whether or not the bank is profitable.