Multiple Choice Questions:
Question 1
Bank capital is equal to
a. the value of the capital originally invested in the bank by its owners.
b. the value of everything the bank owns.
c. the difference between the value of the bank's assets and the value of its liabilities.
d. the value of the buildings and other physical assets the bank owns.
Question 2
Which of the following things do banks do with the funds they acquire from savers?
a. invest in corporate stock
b. invest in corporate bonds
c. make loans to individuals
d. all of the above
Question 3
Short-term loans between banks are called
a. federal funds.
b. repurchase agreements.
c. repos.
d. discount loans.
Question 4
Collateral is
a. the interest rate that banks charge high-quality borrowers.
b. assets pledged to the bank in the event the borrower defaults.
c. the difference between the value of a bank's assets and the value of a bank's liabilities.
d. required reserves minus excess reserves.
Question 5
Bank borrowing from the Fed is referred to as:
a. federal funds
b. discount loans
c. repurchase agreements
d. reverse repurchase agreements
Question 6
Congress created the Federal Reserve System
a. to serve as a lender of last resort
b. to process the receipt of taxes received by the Internal Revenue Service.
c. to regulate the value of the U.S. dollar against foreign currencies.
d. to provide a source of mortgage loans to the residential housing market.
Question 7
The original intention of the Fed's role as lender of last resort was to make loans to banks that were
a. not illiquid nor insolvent.
b. illiquid, but not insolvent.
c. insolvent, but not illiquid.
d. both illiquid and insolvent.
Question 8
Why might a nation seek to maintain a pegged exchange rate?
a. It makes business planning easier for firms involved in the global economy.
b. It removes the need to intervene in the foreign exchange market.
c. It ensures that the exchange rate will remain at its equilibrium.
d. It makes their currency more attractive on the foreign exchange market.
Question 9
Sovereign debt refers to
a. debt owned by the government.
b. bonds issued by the government.
c. debt owed to the government.
d. debt only issued by nations with kings or queens.
Question 10
What happened to consumer prices as measured by the CPI between 1929 and 1933?
a. rose by more than 20%
b. didn't change
c. declined by about 25%
d. declined by about 80%
Question 11
Which of the following is NOT considered one of the four groups in the Federal Reserve System?
a. Federal Reserve banks
b. Federal Deposit Insurance Corporation
c. Board of Governors
d. Federal Open Market Committee
Question 12
Federal Reserve district banks perform all of the following roles EXCEPT
a. managing checking clearing in the payments system.
b. performing regulatory functions.
c. setting the federal funds rate.
d. managing currency in circulation by issuing new Federal Reserve Notes.
Question 13
The Fed does not have to go through the normal congressional appropriations process because
a. its expenses are very small.
b. it was given enough funds at the time of its founding to provide for its expenses indefinitely.
c. it is self financing.
d. it is not part of the legislative branch of the federal government.
Question 14
The main argument in favor of Fed independence is that
a. interest rates would probably be lower if Congress controlled the Fed; thus hurting savers.
b. the Constitution requires it.
c. monetary policy is too important and too technical to be determined in the political arena.
d. congressional control of the Fed was tried during the 1960s and did not work well.
Question 15
Which of the following is the most common goal for central banks of industrialized countries?
a. high employment
b. high economic growth
c. low interest rates
d. low inflation
Question 16
The monetary base is equal to
a. all currency in circulation plus all deposits in financial institutions.
b. all currency in circulation plus checkable deposits in financial institutions.
c. all currency in circulation plus reserves held by banks.
d. checkable deposits in depository institutions plus reserves held by banks.
Question 17
If the Fed purchases $50,000 in T-bills from a bank, by how much will the bank's excess reserves increase?
a. by $50,000
b. by $50,000 times the required reserve ratio
c. by $50,000 divided by the required reserve ratio
d. Not enough information has been provided to answer the question.
Question 18
What is the maximum amount a bank can lend?
a. its total reserves
b. its excess reserves
c. its excess reserves divided by the required reserve ratio
d. the value of its checkable deposits times the required reserve ratio
Question 19
If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?
a. rise by $1 million
b. decline by $1 million
c. rise by $8 million
d. rise by $12.5 million
Question 20
Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the BANKING SYSTEM can lend out?
a. $8,000
b. $10,000
c. $40,000
d. $50,000