III. A medium of exchange




Theme 6. Money and Banking

Directions: Each of the questions or incomplete statements below is followed by four or five suggested answers or completions. Select the one that is the best in each case.

If you find any mistake please send us a message on icef.macro.1year@gmail.com. Thank you!

Money and its Functions

1. Money is defined as

(A) Bills of exchange

(B) Anything that is generally accepted in payment for goods and services or in the repayment of debt

(C) A riskless repository of spending power

(D) The unrecognized liability of governments

(E) Whatever valuable

 

2. The difference between money and income is that

(A) Money is a flow and income is a stock

(B) Money is a stock and income is a flow

a. Income is something which comes to a h/h each moth/year/certain period, so it’s a flow variable. Money is counted as a cumulative indicator. We can count the money stock on a given date so it’s a stock variable.

(C) There is no difference - money and income are both stocks

(D) There is no difference - money and income are both flows

(E) None of the above is true

 

3. Whatever a society uses as money, the distinguishing characteristic is that

(A) It must be completely inflation proof

(B) It must be generally acceptable as payment for goods and services or in the repayment of debt

(C) It must contain gold

(D) It must be produced by the government

(E) It must be difficult for imitation

C-E not necesserity, even my cell phone can serve as money since I can exchange it for another good

 

4. There is no single precise definition of money or the money supply for economists because

(A) The government considers money supply statistics to be confidential and refuses to publish them

(B) Deciding what is generally accepted in payment for goods and services or in the repayment of debt is difficult to determine

(C) Economists cannot agree if currency should be considered money

(D) Of each of the above

(E) Of both (A) and (B) of the above

 

5. The conversion of a barter economy to one that uses money increases efficiency by reducing

(A) The need to exchange goods

(B) The need to specialize

(C) The need to employ team production methods

(D) Transactions costs

Transactions are easier when all use unique monetary system => its easier to exchange goods => transactions costs are much lower

(E) Prices

 

6. Money that has no value other than as money is called:

(A) Fiat money

(B) Intrinsic money

(C) Commodity money

(D) Government money

(E) Currency

 

7. Money as a measure of value provides

(A) Its holder with perfect liquidity

(B) A common denominator for measuring value

It means that money helps us to compare totally different goods.

(C) A mechanism for allocating resources and distributing output

(D) A medium for exchanging final output

(E) A medium for repayment of debts

 

8. If a currency is legal tender in a country, then

(A) The government will readily exchange it for gold

(B) The government will not accept it in payment of taxes

(C) It is the only legal form of wealth

(D) It is widely accepted as a means of payment, and creditors are required to accept it in settlement of debts

(E) It could not be used for illegal activities

 

9. The following functions of money are provided by a unique set of financial assets:

(A) Medium of exchange, store of value and unit of account

(B) Store of value, unit of account and standard of deferred value

(C) Unit of account, standard of deferred value and medium of exchange

There are 4 functions of money: 3 are above + store of value. Those which are above are best “performed” by money. But money is not the best way of storing value since it pays no interest + due to inflation money can loose its value => financial securities serve as a better way of storing value.

(D) Standard of deferred value, medium of exchange and store of value

(E) Not enough information to answer

 

10. Money functions as

I. A store of value

II. A measure of value

III. A medium of exchange

(A) I and II are true

(B) Only I is true

(C) I, II, and III are true

Measure of value is the same as unit of account.

(D) Only III is true

(E) II and III are true

 

11. Kevin wants shoes and grows turnips. Lisa wants turnips and makes sheet metal. Bob wants sheet metal and makes shoes. Which function of money will cater most directly to the situation at hand?

(A) Store of value.

(B) Unit of account.

(C) Medium of exchange.

Money as a medium of exchange will simplify the transaction of people who possess different assets and have different needs.

(D) Means of deferred payment.

(E) Standard measure.

 

12. All of the following are components of the money supply in the United States, except:

(A) Paper money

(B) Gold bullion

(C) Checkable deposits

(D) Coins

(E) Demand deposits

 

13. Which of the following would be an example of fiat money?

(A) Cigarettes used as money in prisons.

(B) Dollar bills.

(C) Gold Coins.

(D) Arrowheads used as a medium of exchange.

(E) Chickens used for bartering.

 

14. People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is

(A) Extremely liquid

Главное достоинство денег – ликвидность, даже если они обесцениваются из-за инфляции, это все равно самый удобный способ оплаты товаров и услуг.

(B) A unique good for which there are no substitutes

(C) The only thing accepted in economic exchange

(D) All of the above

(E) None of the above

 

15. Which of the following are true statements?

(A) Money or the money supply is defined as anything that is generally accepted in payments for goods and services and repayment of debts.

(B) The average price of goods and services in an economy is called the inflation rate.

(C) The aggregate price level is measured as the rate of change in the inflation rate.

(D) All of the above are true statements.

(E) Only (A) and (B) of the above are true statements.

 

16. Checkable deposits are money because

(A) Federal regulations mandate that they be so considered

(B) They serve the functions of money

(C) Only banks, and not savings and loan associations, can issue checkable deposits

(D) Of both (A) and (B) of the above

(E) Of both (A) and (C) of the above

 

17. In the United States, paper currency issued by the Federal Reserve

(A) Is backed by gold but is not convertible into gold

(B) Has no intrinsic value but is backed by gold

(C) Has no intrinsic value

Это означает, что сама бумага никакой ценности не имеет. Если бы ФРС не сказали, что это деньги и они стоят столько-то, но они бы не имели под собой ничего. Это вам не золотой слиток, который ценен сам по себе.

(D) Has no value in exchange

(E) Has value in exchange, because has intrinsic value

 

Money Supply Aggregates

18. Currency includes

(A) Paper money and coins

Чеки и депозиты уже к наличным деньгам не относятся, т.к. они менее ликвидны. То же самое касается золота.

(B) Paper money, coins, and checks

(C) Paper money and checks

(D) Paper money, coins, checks, and savings deposits

(E) Golden coins and bars

 

19. Which of the following is the most liquid?

(A) Traveler’s check.

(B) Overnight repurchase agreement.

(C) Time deposit.

(D) Treasury bill.

(E) Demand deposit.

Это обычный депозитный вклад до востребования, он возвращается вкладчику полностью или частично по первому его требованию. Поэтому он самый ликвидный. Остальные инструменты имеют ограничения по снятию и превращению их в наличные деньги.

 

20. The Ml definition of money is the sum of

(A) Currency outside banks and checking deposits

(B) Currency outside banks, checking deposits and travelers checks

(C) Currency outstanding and checking deposits

(D) Currency outstanding, checking deposits and money market deposit accounts

(E) Currency outstanding, checking deposits and time deposits

 

21. In defining money as Ml economists exclude time deposits on the grounds that

(A) They are not directly or immediately a medium of exchange

Time deposit – это срочный вклад, по которому устанавливается определённый срок хранения. По срочным вкладам не допускается пополнение или частичное изъятие денежных средств. За досрочное изъятие средств на вкладчика налагается штраф или по условиям договора процент по возвращаемому вкладу снижается до минимального значения. Поэтому он и не такой ликвидный, как М1, которым в отличие от срочного вклада можно сразу расплачиваться.

(B) The purchasing power of time deposits is much less stable than that of demand deposits and currenc.

(C) The intrinsic value of time deposits is zero

(D) They are not recognized by the Federal government as legal tender

(E) They are quantitatively negligible as compared to checkable deposits

 

 

22. The average Ml balance held for transactions is

(A) Negatively related to the length of the pay period and positively related to the income level

(B) Positively related to both the length of the pay period and the income level

M1 – грубо говоря, это наличные деньги и то, что лежит на обычных дебетовых счетах. Чем больше у нас доход, тем более будет денег. С другой стороны, чем больше период оплаты транзакций, тем больше активных, доступных денег надо держать на руках. Так что связь положительная.

(C) Negatively related to both the length of the pay period and the income level

(D) Positively related to the length of the pay period and negatively related to the income level

(E) Positively related to the length of the pay period, but doesn’t depend on the income level

 

23. Which of the following assets would not be included in a theoretical definition of the money supply?

(A) Currency.

(B) Checking account deposits.

(C) Traveler's checks.

(D) Coins.

(E) Corporate bonds.

Это финансовый актив, не деньги.

 

24. Currency is contained in

(A) M1

(B) M2

(C) M3

(D) All of the above

(E) None of the above

Карренси – самый ликвидный актив, часть M0 (монетарная база), включается во все последующие агрегаты.

 

25. In the United States, the M1 money supply consists of

(A) Paper currency and coins

(B) Paper currency, coins, and check-writing deposits

(C) Paper currency, coins, check-writing deposits, and savings deposits

(D) Paper currency, coins, check-writing deposits, savings deposits, and certificates of deposit

(E) No true answer

Checking-writing – это чековая книжка, входит в demand deposits. Saving deposit – сберегальный вклад, уже менее ликвидный, так как есть период предварительного уведомления банка о предстоящем изъятии. Это часть M2. certificates of deposit – депозитный сертификат, вид срочного вклада (time deposit), в зависимости от размера может входить как в M2, так и в M3.

 

26. The components of the U.S. M1 money supply are only checkable deposits plus

(A) Currency

(B) Currency plus savings deposits

SD – уже часть М2

(C) Currency plus travelers checks

(D) Currency plus travelers checks plus money market deposits

MMD – часть M2 – a deposit that pays interest based on current interest rates in the money markets. Difference id that the interest rates paid are generally higher than those of savings accounts and transaction accounts but some banks require higher minimum balances in money market accounts.

(E) Government bonds

Only T-bills are a part of M3, other gov bonds are not included to money at all and they counted as securities.

 

27. All of the following assets are included in M1 except:

(A) Currency in notes

(B) Currency in coins

(C) Demand deposits

(D) Traveler's checks

(E) Government bonds

 

28. The money supply consists of:

(A) Deposits at banks that people can use on demand for transactions

(B) Currency in the hands of the public

(C) Deposits at banks that people can use on demand for transactions plus currency in the hands of the public

Ms is basically M1.

(D) Banks’ reserves plus outstanding currency

(E) All deposits at commercial banks plus currency in the hands of the public

 

29. Which of the following is included in M2 but not in M1?

(A) Currency

(B) Overnight repurchase agreements

(C) Demand deposits

(D) Traveler's checks

(E) Checking account deposits

РЕПО – сделка купли (продажи) ценной бумаги с обязательством обратной продажи (покупки) через определённый срок по заранее определённой в этом соглашении цене. Overnight – срок короткий, поэтому РЕПО достаточно ликвидны и входят в M2. Но бывают и менее срочные РЕПО, срок которых наступает не через день, и даже не через несколько недель, вот они уже в M3 входят. Короче, в любом случае, никак не M1.

 

30. Which of the following financial assets is not included in the M2 money supply?

(A) Savings deposits.

(B) Large denomination time deposits.

(C) Check-writing deposits.

(D) Overnight repurchase agreements (RPs).

(E) True (B) and (D).

Про С я написала выше, а large time deposits – это в чистом виде M3. Large means $100,000 or greater

 

31. M2 does not include

(A) Currency

(B) Long-term government bonds

(C) Traveler's checks

Часть M1. Платёжный документ, по которому эмитет (тот, кто его выпустил) обязан выплатить обозначенную в чеке сумму владельцу чека, образец подписи которого поставлен на чек в момент продажи.

(D) Demand deposits

(E) Saving deposits

 

32. A difference between Ml and M2 is that

(A) Ml is a first mortgage and M2 is a second mortgage

Никакого отношения к агрегатам. 1st and 2nd mortage are both loans that are financed with a real estate as collateral. The 1st mortgage refers to the original loan a person used to buy a house. A second mortgage is a lien on a property which is subordinate to a more senior mortgage or loan.

(B) M2 is Ml plus assets that are more liquid

Less

(C) M2 includes savings deposits

(D) Ml is larger than M2

Smaller

(E) M2 is always double Ml

 

33. T-bills (3 month Treasury bonds) are contained in

(A) M1

(B) M2

(C) M3

(D) None of the above

In L

(E) All of the above

 

Answer the next four questions on the basis of the following lists of assets:

1. Large time deposits

2. Noncheckable savings deposits

3. Currency (coins and paper money)

4. Small time deposits

5. Government securities

6. Checkable deposits

34. The Ml definition of money comprises items:

(A) 6 only

(B) 3, 4 and 6

(C) 3 and 6

(D) 2, 3, and 6

(E) 3 only

 

35. The M2 definition of money comprises items:

(A) 1, 2, 3, 6

(B) 3, 4, 5, 6

(C) 2, 3, 4, 6

(D) 1, 2, 3, 4

(E) 1, 2

 

36. The M3 definition of money comprises items:

(A) 1, 2, 3, 4, 6

(B) 2, 3, 4, 6

(C) 1, 2, 3, 4, 5

(D) 1, 2, 3, 4, 5, 6

(E) 4, 5, 6

 

37. Which of the following items is not included in any of the three official definitions of money?

(A) 2 (B) 4 (C) 5 (D) 1 (E) None of the above

Gov securities are financial assets not money

 

38. The following question is based on the following data (billions of dollars):

Currency $150
Demand and other checkable deposits $380
Savings deposits $305
Traveler's checks $5

The primary money supply, Ml, equals

(A) $530 (B) $535 (C) $380 (D) $835 (E) $840

M1 = CU+DD+Tch=150+380+5=535

 

39. Which of the following is not a good store of nominal value?

(A) Checking deposit.

(B) Savings deposit.

(C) Demand deposit.

(D) A 2-year bond.

(E) A 3-month certificate of deposit.

2 года – это большой срок, value снизится за это время.

 

Demand for Money

40. The demand for money increases when national income increases because

(A) Spending on goods and services increases

Это транзакционный спрос на деньги (k*Y)

(B) Interest rates increase

(C) The budget deficit increases

(D) The money supply increases

(E) The public becomes more optimistic about the future

 

41. The demand for money is

(A) Positively related to the income level and the rate of interest

(B) Negatively related to the income level and the rate of interest

(C) Negatively related to the income level and positively related to the rate of interest

(D) Positively related to the income level and negatively related to the rate of interest

Md = k*Y – h*i

Transaction and speculative demand for money

(E) Positively related to the income level and independent to the interest rate

 

42. Suppose the money supply and price level are constant, and the demand for money is a function of income and the rate of interest. When the income level increases, there is

(A) An increase in the quantity of money demanded and an increase in the rate of interest

Y goes up => shift of Md curve to the right

(B) An increase in the quantity of money demanded and a decrease in the rate of interest

(C) A decrease in the quantity of money demanded and a decrease in the rate of interest

(D) A decrease in the quantity of money demanded and an increase in the rate of interest

(E) An increase in the quantity of money demanded, but no change in the rate of interest

 

43. When there is an opportunity cost in holding Ml balances, the average Ml balance held is negatively related to the return on

(A) Currency

(B) Travelers checks

(C) Money market deposit accounts

(D) Demand deposits

(E) Checking deposits

ABDE – это и так части M1. А вот MMD – гораздо менее ликвидный актив, но прибыльный. Чем больше прибыль (то есть чем выше ставка по MMD), тем меньше людей будут предпочитать менее ликвидный, но более доходный инструмент MMD => M1 будет падать, так как наличка и депозиты будут использоваться для покупки MMD.

 

44. Which of the following statements is incorrect?

(A) The precautionary demand for money is unrelated to income.

Total amount of money held to meet both precautionary and transaction demand for money is viewed primarily as a function of level of income. So the statement is incorrect.

(B) There is a precautionary demand for money because of uncertainty about the receipt of future income.

(C) The precautionary demand for money is affected by the opportunity cost of holding Ml balances.

(D) There is a precautionary demand for money because of unexpected expenditures.

(E) All the above statements are correct.

 

45. According to Keynes, there is a speculative demand for money because

(A) People like to speculate in the stock market

(B) There is considerable risk in holding Ml balances

(C) Money, at times, may be a better store of value than long-term bonds

Money also has a store of value function, but the higher is the interest rate of bonds the lower will be the amount of money people hold.

(D) Money always provides a certain, higher return than long-term bonds

(E) All of the above

 

46. The opportunity cost of holding money

(A) Is zero because money is not an economic resource

(B) Varies inversely with the interest rate

(C) Varies directly with the interest rate

The higher is the interest rate the higher is the opp cost of holding money (its better to buy some security or put money on deposit)

(D) Varies inversely with the level of economic activity

(E) Does not depend on the level of economic activity

 

47. The total demand for money curve will shift to the right as a result of

(A) An increase in nominal GDP

(B) An increase in real GDP

(C) An increase in the interest rate

(D) A decline in the interest rate

(E) A decline in nominal GDP

 

48. The asset demand for money:

(A) Is unrelated to both the interest rate and the level of GDP

(B) Varies inversely with the rate of interest

The amount of assets that are held as cash, which will be low when interest rates are high and will be high when interest rates are low.

(C) Varies inversely with the level of real GDP

(D) Varies directly with the level of nominal GDP

(E) Varies directly with the rate of interest

 

49. Households tend to increase their demand for real money balances if there is an increase in

(A) Interest rates

Movement along the curve up, quantity of money demanded decreased

(B) Prices

Prices have no influence on real Md

(C) Real output

More goods, more money needed

(D) Unemployment

Real output falls, less goods, less money demanded

(E) Velocity of money

MV=PY

When velocity rises (V), Md will fall if real outpu (PY) is const

 

50. Which of the following portfolio allocation decisions represents the best individual response to an increase in the interest rate on non-monetary assets?

(A) Sell some stocks and use the money to buy bonds.

(B) Sell some bonds and use the money to buy stocks.

(C) Trade some money for non-monetary assets.

If non-monetary assets have a higher return, you should buy them. Simple logic

(D) Sell some land and use the money to buy non-monetary assets.

Land is also a non-monetary asset, so no need to sell it, better use money

(E) Reduce your assets and increase your liabilities.

 

51. A situation in which a party issuing a debt instrument is unable to make its interest payments is called a

(A) Failure

London is the capital of Great Britan! Провал

(B) Deception

Обман

(C) Insolvency

Банкротство

The distinction between insolvensy and default has to do with the inolvement of a legal authority. Default is when a debtor fails to pay a debt he or she is required to pay at a certain moment in time. Thus, a company, person, or country can default by failing to pay at a specified time. Default is a specific event, where an entity fails to meet this obligation. Insolvency (or bankruptcy) is a legal process, where creditors work with legal authorities to oversee the finances of an entity which is in default. Bankrupcty is the process through which creditors collect the debts owed to them.

(D) Devaluation

Девальвация

Official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

(E) Default

 

52. Of the motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?

(A) The transactions motive.

(B) The precautionary motive.

(C) The speculative motive.

(D) The altruistic motive.

(E) All these motives, by Keynes, are not sensitive to interest rates at all.

 

53. Keynes's liquidity preference theory indicates that the demand for money

(A) Is purely a function of income, and interest rates have no effect on the demand for money

(B) Is purely a function of interest rates, and income has no effect on the demand for money

(C) Is both a function of income and interest rates

Md = k*Y – h*i

(D) Is both a function of government spending and income

(E) Is both a function of government spending and interest rates

 

54. An increase in the price level will

(A) Increase real money balances

(B) Decrease real money balances

(Md/P) falls when P increases

(C) Increase nominal money balances

(D) Decrease nominal money balances

(E) None of the above

 

55. When the rate of inflation is higher than the rate of money growth, the real money supply

(A) Rises

(B) Falls

(Ms/P) – real money supply

ΔP (=π) > ΔMs (=m) => Ms/P decreases

(C) Remains constant

(D) May rise, fail, or remain constant, depending on interest sensitivity of money supply

(E) There is no link between the rate of inflation and real money supply

 

56. In the Keynesian model the quantity of money demanded is ________related to income and _________related to the interest rate.

(A) Positively; positively

(B) Positively; negatively

(C) Negatively; negatively

(D) Negatively, positively

(E) No relation to the interest rate

 

57. As interest rates rise, the opportunity cost of holding money __________ and the demand for money _________.

(A) Rises; rises

(B) Rises; falls

Frankly speaking not fully correct since when i increases opportunity cost of holding money and QUANTITY OF MONEY DEMANDED falls, not demand itself. But its AP, baby! -_-

(C) Falls; rise.

(D) Falls; falls

(E) Stays the same; falls

 

 

58. Households tend to seek increases in nominal versus real balances of money because

(A) An increase in real money balances buys less than a similar increase in nominal balances

(B) They suffer from money illusion

Типа дх глупые, поэтому и кладут деньги на депозит особо не задумываясь об ожидаемом уровне инфляции. О, ставка 12%, я кладу денежки, возьмите. Но это же номинальная ставка! А если инфляция будет 15%? То ли дело фирмы, как мы знаем, они умные, и при инвестировании сравнивают реальную ставку r и внутреннюю норму доходности проекта IRR. Именно поэтому у нас на loanable funds market фирмы демандерс, дх в демандерсах нет, тк они-то свои кредиты на денежном рынке берут.

(C) Increases in nominal money balances are taxed at a lower rate than increases in real balances

(D) People are concerned with the real value of their assets

(E) Households normally have deflationary expectations

 

59. The interest rate is

(A) The price of using money

(B) The price of using loanable funds

(C) Expressed in percentage terms

(D) Determined by the demand for and the supply of loanable funds

(E) All of the above

 

60. The interest rate charged on a loan depends on

(A) The risk of the loan

(B) The maturity of the loan

(C) The administrative cost and competitive conditions of the loan

(D) All of the above

(E) True answers are (A) and (B)

 

61. Which of the following is most likely to increase if the public decides to increase its holdings of currency?

(A) The interest rate

Cr increases, less money in circulation, Ms decreases, i increases.

(B) The price level

(C) Disposable personal income

(D) Employment

(E) The reserve requirement

 

62. When consumers hold money rather than bonds because they expect the interest rate to increase in the future, they are holding money for which of the following purposes?

(A) Exchange.

(B) Speculation.

(C) Liquidity.

(D) Transactions.

(E) Unforeseen expenditures.

 

63. The practice of buying at a low price and selling at a high price for a certain profit is called

(A) Arbitrage

(B) Skimming

An electronic method of capturing a victim's personal information used by identity thieves (credit cards data usually).

(C) Price fixing

An agreement between participants on the same side in a market to buy or sell a product only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.

(D) Price discrimination

Hello, micro!

(E) Predatory pricing

A risky and dubious pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors (also undercutting).

 

64. The nominal demand for money is proportional to

(A) GDP deflator

(B) Real income

(C) The nominal interest rate

(D) The nominal interest rate on money

(E) The price level

Mn=Mr*P

Please note that such notions are not used usually. Nominal deman is MD, real – (M/P)D

 

65. Which of the following will most likely occur in an economy if more money is demanded than is supplied?

(A) The amount of investment spending will increase.

(B) Interest rates will increase.

Excess demand for money => people sell bonds, supply of bonds increases, Price of bonds decreases, interest rate increases

(C) Interest rates will stay the same.

(D) Interest rates will decrease.

(E) The demand curve for money will shift to the right.

 

66. The Keynesian theory of money demand emphasizes the importance of

(A) A constant velocity

(B) Irrational behavior on the part of some economic agents

(C) Interest rates on the demand for money

(D) Inflation

(E) All of the above

 

67. People hold money even during inflationary episodes when other assets prove to be better stores of value. This can be explained by the fact that money is

(A) Extremely liquid

(B) A unique good for which there are no substitutes

(C) The only thing accepted in economic exchange

(D) Are the mean to maintain wealth

(E) All of the above

 

68. Investors A, B and C each have $1000 to invest in the bond market. Investors A, B, and C believe the long-run normal rate of interest is 12%, 8%, and l0%, respectively. If the current market rate of interest is 9%, then

(A) Investor A will purchase bonds

(B) Investors A and B will purchase bonds

(C) Investors B and C will purchase bonds

(D) Investor B will purchase bonds

He believes that in future the interest rate will fall, meaning that the price of bonds will rise => so he will buy bonds now for future sale (arbitrage)

(E) Investors A, B, and C hold money for speculative purposes

 

69. Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by

(A) the supply and demand for loanable funds

(B) the supply and demand for money

liquidity preference is about nominal interest rates, thus its about money market

(C) the supply and demand for labor

(D) aggregate supply and aggregate demand

(E)

 

70. When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate

(A) increases the quantity demanded of money

(B) increases the demand for money

(C) decreases the quantity demanded of money

(D) decreases the demand for money

(E) None of the above

 

71. When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level

(A) shifts money demand to the right and increases the interest rate

(B) shifts money demand to the left and increases the interest rate

(C) shifts money demand to the right and decreases the interest rate

(D) shifts money demand to the left and decreases the interest rate

(E) None of the above

 

Banking System

72. Banks are important to the study of money and the economy because they

(A) Provide a channel for linking those who want to save with those who want to invest

(B) Have been a source of rapid financial innovation that is expanding the alternatives available to those wanting to invest their money

(C) Play an important role in determining the quantity of money in the economy

(D) Do each of the above

(E) Do onlyandof the above

 

73. The primary liabilities of a commercial bank are

(A) Bonds

(B) Mortgages

(C) Deposits

(D) Commercial paper

(E) Loans

 

74. Commercial banks can create money by

(A) Transferring depositors' accounts at the Federal Reserve for conversion to cash

(B) Buying Treasury bills from the Federal Reserve

(C) Sending vault cash to the Federal Reserve

(D) Maintaining a 100 percent reserve require­ment

(E) Lending excess reserves to customers

 

75. If the reserve requirement is 20 percent, the exis­tence of $100 worth of excess reserves in the banking system can lead to a maximum expan­sion of the money supply equal to

(A) $20 (B) $100 (C) $300 (D) $500 (E) $750

Delta M = delta Rex * 1/rrreq = 100/0.2=500

 

76. If the public's desire to hold money as currency increases, what will the impact be on the banking system?

(A) Banks would be more able to reduce unem­ployment.

(B) Banks would be more able to decrease aggre­gate supply.

(C) Banks would be less able to decrease aggre­gate supply.

(D) Banks would be more able to expand credit.

(E) Banks would be less able to expand credit.

cr increases, deposits decreases, less funds for loans

 

77. Suppose the required reserve ratio is 20 percent and a single bank with no excess reserves receives a $100 deposit from a new customer. The bank now has excess reserves equal to

(A) $20 (B) $80 (C) $100 (D) $400 (E) $500

Rex = D-Rreq = D-D*rrreq=100-100*0.2=80

 

78. Having a fractional reserve banking system means that

(A) No single loan can be larger than 20 percent of the bank's holdings

(B) The central bank reserves the right to audit any bank at any time

(C) The central bank holds a certain fraction of GDP on reserve at all times

(D) The central bank must approve loans over $1 million

(E) A bank cannot lend out all of its deposit

A part of D is stored in the CB as a required R, the other (Rex) can be lent out

 

79. On a bank's balance sheet, which of the following is considered a liability?

(A) Required reserves.

(B) Excess reserves.

(C) Loans.

(D) Deposits.

(E) Reserve ratio.

 

80. The formula for the money multiplier is

(A) 1/(1-MPC)

(B) 1/(1 - Required reserve ratio)

(C) MPC/Required reserve ratio

(D) 1/Required reserve ratio

It’s correct if cr and rrex are 0

(E) (1-MPC)/MPC

 

81. If the public's desire to hold money as currency increases, what will the impact be on the banking system?

(A) Banks would be more able to reduce unemployment.

(B) Banks would be more able to decrease aggregate supply.

(C) Banks would be less able to decrease aggregate supply.

(D) Banks would be more able to expand credit.

(E) Banks would be less able to expand credit.

Check 78

 

82. When the reserve ratio is 25% and individuals choose to reduce the amount of cash they hold in their pocket by 100 million dollars:

(A) Due to the deposit multiplier, the public will become richer

(B) The provision of loans will increase by 400 million dollars

(C) The provision of deposits and loans will rise by 400 million dollars

(D) The provision of loans will rise by 300 million dollars

(E) The provision of deposits and loans will rise by 300 million dollars

D=100

Rreq = 25, Rex = 75

Delta M = 75/0.25=300

 

83. If the money GDP is $500 mln. And on the average, each dollar is spent two times per year, then the amount of money demanded for transactions purposes will be:

(A) $1800 mln (B) $1000 mln (C) $600 mln (D) $250 mln (E) $50 mln

MV=PY => M*2=500 => M=250

84. Equilibrium in the money sector means that:

(A) The quantity of bonds demanded equals the quantity of money supplied

(B) The nominal quantity of money demanded equals the nominal quantity of bonds supplied

(C) Demand for money is always inelastic

(D) The real quantity of money demanded equals the real quantity of money supplied

(E) The quantity of money people want to save is equal to the quantity of money people want to invest

 

85. The value of money varies:

I. Inversely with the price level

II. Directly with the volume of employment

III. Directly with the interest rate

(A) Only I is true

The higher is P, the lower is the value of money (M/P decreases)

Employment increases, Y increases, P increases, M/P decreases – 2 is incorrect

i rises, M falls

(B) Only II is true

(C) Only III is true

(D) I and II are true

(E) No true answer

 

86. Which of the following statements is true?

(A) Fiat money refers to all near moneys.

Near money is a non-cash assets that are highly liquid, such as bank deposits.

(B) The only source of money in the market economy is Central Bank.

No, there are other types of money, not only CU printed by CB

(C) Checkable deposits held in saving and loan institutions, mutual savings banks, and credit unions are part of the Ml definition of the money supply.

No, M1 = CU, demand deposits and traveler’s checks only

(D) The asset demand for money varies inversely with the nominal GDP.

Varies directly

Asset demand = transaction demand

(E) Bond prices and interest rates are directly or positively related.

Negatively

 

87. If borrowers take a portion of their loans as currency rather than demand deposits, the maximum amount by which the commercial banking system can increase the money supply by lending will:

(A) Decrease because the legal reserve ratio varies directly with the amount of currency in circulation

(B) Increase because currency is the basis for all demand-deposit creation

(C) Decrease because the amount of reserves transferred to other banks will diminish

(D) Increase because commercial banks can lend by the reciprocal of the amount of currency in circulation

(E) Nothing will change

 

88. Suppose the bank gets $100 as a deposit. If the required reserve ratio is 10% by what amount the bank can increase its landing in cash?

(A) 0 (B) $10 (C) $90 (D) $100 (E) $1000

100-100*0.1=90

 

89. Which of the following is most likely to decrease if the public decides to decrease its holding of currency?

(A) Interest rates.

Cr decreases, D increases, Ms increases, i decreases

(B) Employment.

Above => I increases => AD increases, Y increases, employment increases

(C) The price level.

Above => P increases

(D) The reserve requirements.

Const (it’s a CB decision)

(E) The supply of money.

Above => increases

 

90. In a system with fractional-reserve banking:

(A) All banks must hold reserves equal to a traction of their loans

(B) No banks can make loans

(C) Loans extended are equal to deposits

(D) The banking system completely controls the size of the money supple

(E) All banks must hold reserves equal to a fraction of their deposits

=rrreq < 100%

 

91. The banking system creates

(A) Welfare (B) Wealth (C) Jobs (D) Liquidity (E) Currency

CU is created by CB, but commercial banks attribute to the creation of Ms (liquidity)

 

92. Banks hold some deposits on reserve at the Fed because:

(A) The Fed pays a higher interest rate than banks can get in the private market

(B) The Fed will insure those deposits, but will not insure regular bank deposits

(C) These are membership dues for being a member bank

(D) These deposits meet the reserve requirements of the Fed

(E) The Fed will not allow them to hold all bank deposits at the Fed; banks have to make some loans

 

93. If on receiving a checking deposit of $300 a bank's excess reserves increased by $255, the required reserve ratio must be

(A) 5% (B) 15% (C) 25% (D) 35% (E) 45%

Rex=D(1-rr) => 255=300(1-rr) => 0.15

 

94. The money-creating ability of the banking system will be less than the maximum amount indicated by the money multiplier when

(A) Interest rates are high

(B) The unemployment rate is low

(C) The government's budget is in deficit

(D) The velocity of money is rising

(E) People hold a portion of their money in the form of currency

mm = (cr+1)/cr+rr => cr increases, mm decreases

 

95. If the reserve ratio is 40% and the banks decide to pay interest on current accounts (as well as charging interest on loans) then:

(A) If the current account interest is 6% and the interest on loans is 10%, the bank will make no profits at all

Profit of the bank = Loans*loan interest – deposit*deposit interest (CA interest) = Loans*0.1 – D*0.06 = (D-Rreq)*0.1 – D*0.06 = (D-D*0.4)*0.1-D*0.06=0

(B) The bank will make profits as long as the interest rates on current accounts is smaller than on loans

(C) The deposit multiplier will be 2.5 and the banks will make profits even if the interest on current accounts is greater than the interest on loans

(D) The bank cannot make any profit at all

(E) None of the above

 

96. If the public's demand for currency increased relative to its demand for deposits, the:

(A) Reserve requirement ratio would decrease

(B) Currency-deposit ratio would decrease

(C) Reserve-deposit ratio would increase

(D) Money multiplier would increase

(E) Money multiplier would decrease

 

97. Assume that the reserve requirement is 20%. If a bank initially ahs no excess reserves and $10,000 cash is deposited in the bank, the maximum amount by which this bank may increase its loans is

(A) $50,000 (B) $20,000 (C) $2,000 (D) $8,000 (E) $10,000

10000-0.2*10000=8000

 

98. Assume that the reserve requirement is 15% and that a bank receives a new checking deposit of $200. Which of the following will most likely occur in the bank's balance sheet?

Liabilities Required Reserves
(A) Increase by $200 Increase by $170
(B) Increase by $200 Increase by $30
(C) Not change Increase by $30
(D) Increase by $30 Not change
(E) Decrease by $30 Increase by $30

D is liability -> it will increase by 200

R req = 0.15*200 = 30

 

99. Which of the following is most likely to decrease if the public decides to decrease its holdings of currency?

(A) The price level.

(B) The interest rate.

(C) Disposable personal income.

(D) Employment.

(E) The reserve requirement.

See 89

 

100. Which of the following is most likely to cause an immediate rise in domestic nominal interest rates?

(A) Announcement of a favorable trade balance.

(B) News that creates anticipation of increased inflation.

Anticipation = expectation

i = r+πe

(C) A central-bank purchase of government securities.

(D) A decrease in bank-reserve requirements.

(E) A decrease in demand for new housing.

 

101. Reserve requirements are imposed on banks

(A) To control the amount of check-writing deposits in the economy

(B) To regulate bank profits

(C) To encourage the use of check-writing deposits

(D) To discourage the use of check-writing deposits

(E) All of the above

 

102. When the banking system receives $400 in additional reserves and the reserve requirement is 0.20, maximum check-writing deposit expansion is

(A) $2000 (B) $1600 (C) $1200 (D) $320 (E) $80

please note that it’s not D, its an additional researve => ΔM=ΔRex*1/rrreq = 400*1/0.2=2000

 

103. When a bank makes a loan to a customer, the bank's

(A) Asset account loans increases and its asset account currency decreases

(B) Asset account loans decreases and its asset account currency increases

(C) Asset account loans increases and its liabilityaccount checking deposit increases

(D) Asset account loans increases and its liability account checking deposit decreases

(E) Asset account loans increases and its liability account checking deposit stays unchanged

 

104. A bank's net worth is $2000 when it has

(A) Reserves of $1000, check-writing deposits of $10,000, loans of $19,000, and savings deposits of $8000

(B) Reserves of $ 1000, check-writing deposits of $ 10,000, loans of $ 19,000, and savings deposits of $12,000

(C) Reserves of $4000, check-writing deposits of $ 10,000, loans of $ 19,000, and savings deposits of $8000

(D) Reserves of $1000, check-writing deposits of $10,000, loans of $16,000, and savings deposits of $8000

(E) No true answer

Total assets = Reserves + Loans = 10000+19000=20000

Total liab = CW deposits + Saving Deposits + Bank’s networth = Total assets (bank indentity should hold) => 20000 = 10000+8000+BNW => BNW = 2000

...





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