Reference no: EM13139480

1. When commercial banks use excess reserves to buy government securities from the public,
A. commercial bank reserves increase.
B. new money is created.
C. checkable deposits decline.
D. the money supply falls.

2. When shares of stock are sold for more than they're purchased, the difference received by the seller is referred to as
A. a capital gain.
B. a dividend.
C. economic profit.
D. interest.

3. Which one of the following statements about open-market operations is correct?
A. Open-market operations refer to central bank lending to commercial banks.
B. Open-market operations refer to the specifying of loan maximums on stock purchases.
C. Open-market operations refer to the purchase or sale of government securities by the Fed.
D. Open-market operations refer to purchases of stocks in the New York Stock Exchange.

4. When economists say that money serves as a unit of account, they mean that it's
A. declared as legal tender by the government.
B. a way to keep wealth in a readily spendable form for future use.
C. a monetary unit for measuring and comparing the relative values of goods.
D. a means of payment.

5. During periods of rapid inflation, money may cease to work as a medium of exchange
A. because people and businesses won't want to accept it in transactions.
B. because it's too scarce for everyone to have enough for transactions.
C. unless it's backed by gold.
D. unless it has been designated legal tender.

6. George buys an antique car for $20,000 and sells it five years later for $24,000. George's per year rate of return is
A. 20 percent.
B. 12 percent.
C. 4 percent.
D. 10 percent.

7. Most modern banking systems are based on
A. 100 percent reserves.
B. money of intrinsic value.
C. fractional reserves.
D. commodity money.

8. What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?
A. Real rate of interest
B. Compound interest
C. Future value
D. Present value

9. Paper money (currency) in the United States is issued by the
A. United States Mint.
B. national banks.
C. Federal Reserve Banks.
D. United States Treasury.

10. In the U.S. economy, the money supply is controlled by the
A. Federal Reserve System.
B. U.S. Treasury.
C. Senate Committee on Banking and Finance.
D. Congress.

11. Which one of the following institutions is least likely to default on a bond?
A. The U.S. Federal government
B. A large corporation
C. A local government
D. A small corporation

12. If the quantity of money demanded exceeds the quantity supplied,
A. the supply-of-money curve will shift to the left.
B. the demand-for-money curve will shift to the right.
C. the interest rate will fall.
D. the interest rate will rise.

13. The reserve ratio refers to the ratio of a bank's
A. checkable deposits to its total liabilities.
B. capital stock to its total assets.
C. reserves to its liabilities and net worth.
D. required reserves and vault cash to its checkable deposits.

14. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for
A. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the
term auction facility, and a budgetary deficit.
B. buying government securities, raising the reserve ratio, raising the discount rate, reducing reserves available through the term
auction facility, and a budgetary surplus.
C. buying government securities, reducing the reserve ratio, raising the discount rate, reducing reserves available through the term
auction facility, and a budgetary deficit.
D. selling government securities, raising the reserve ratio, lowering the discount rate, increasing reserves available through the
term auction facility, and a budgetary surplus.

15. Which one of the following is presently a major deterrent to bank panics in the United States?
A. Deposit insurance
B. The legal reserve requirement
C. The gold standard
D. The fractional reserve system

16. The primary purpose of the legal reserve requirement is to
A. provide a means by which the monetary authorities can influence the lending ability of commercial banks.
B. provide a dependable source of interest income for commercial banks.
C. prevent commercial banks from earning excess profits.
D. prevent banks from hoarding too much vault cash.

17. The process by which investors seek to profit by simultaneously selling an asset with a lower rate of return and buying an otherwise identical asset with a higher rate of return is known as
A. passive fund management.
B. portfolio balancing.
C. arbitrage.
D. hedging the market.

18. In prosperous times, banks are likely to hold very small amounts of excess reserves because
A. the Federal Reserve Banks don't pay interest on bank reserves.
B. it's very costly to transfer funds between commercial banks and the central banks.
C. the Federal Reserve Banks want to minimize their interest payments on such deposits.
D. the Fed wants commercial banks to increase the money supply during economic expansions.

19. The Security Market Line depicts the relationship between the
A. average expected rate of return on stocks and the average expected rate of return on bonds.
B. risk level of a financial asset and the prime interest rate.
C. average expected rate of return and risk level of a financial asset.
D. average expected rate of return of a financial asset and the discount rate.

20. In 1999 and 2000 the Fed increased the federal funds rate several times. The Fed's purpose was to
A. prevent rising inflation.
B. stimulate economic growth.
C. reduce the unemployment rate.
D. strengthen the international value of the dollar.