Practise Quiz 4

Question 1

Q1 - The money supply consists of:

A - Currency plus reserves
B - Currency plus the monetary base
C - Currency plus demand deposits
D - The monetary base plus demand deposits

Answer 1

C - Currency plus demand deposits

Question 2

Q2 - Liabilities of banks include:

A - Reserves
B - Currency in the hands of the public
C - Loans to customers
D - Demand Deposits

Answer 2

D - Demand Deposits

Question 3

Q3 - In a system with fractional-reserve banking:

A - All banks must hold reserves equal to a fraction of their loans
B - NO banks can make loans
C - The banking system completely controls the size of the money supply
D - All banks must hold reserves equal to a fraction of their deposits

Answer 3

D - All banks must hold reserves equal to a fraction of their deposits

Question 4

Q4 - In a fractional-reserve banking system, banks create money when they:

A - Accept deposits
B - make loans
C - Hold reserves
D - Exchange currency for deposits

Answer 4

B - Make loans

Question 5

Q5 - The use of borrowed funds to supplement existing funds for purposes of investment is called:

A - Arbitrage
B - Leverage
C - Convergence
D - Intermediation

Answer 5

B - Leverage

Question 6

Q7 - The reserve-deposit ratio is determined by:

A - The Federal Reserve
B - Business policies of banks and the laws regulating banks
C - Preferences of households about the form of money they wish to hold
D - The Federal Deposit Insurance Corporation (FDIC)

Answer 6

A - The Federal Reserve

Question 7

Q8 - The currency-deposit ratio is determined by:

A - The federal Reserve
B - Business plicies of banks and the laws regulating banks
C - Preferences of households about the form of money they wish to hold
D - The Federal Deposit Insurance Corporation

Answer 7

C - Preferences of households about the form of money they wish to hold

Question 8

Q10 - If many banks fail, this is likely to:

A - Increase the ratio of currency to deposits
B - Decrease the ratio of currency to deposits
C - Have no effect on the ratio of currency to deposits
D - Decrease the amount of currency in circulation, if the Fed takes no action

Answer 8

A - Increase the ratio of currency to deposits

• This is because if banks are failing, people will have less trust in their banks and choose instead to hold their money in physical form.

Question 9

Q9 - When the FED increases the interest rate paid on reserves, it:

A - Increases the reserve-deposit ratio (rr)
B - Decreases the reserve-deposit ratio (rr)
C - Increases the monetary base (B)
D - Decreases the monetary base (B)

Answer 9

A - Increases the reserve ratio

Question 10

Q11 - If income velocity is assumed to be constant, but no other assumptions are made, the level of ___ is determined by M

A - Prices
B - Income
C - transaction
D - Nominal GDP

Answer 10

D - Nominal GDP

Question 11

Q12 - If the nominal interest rate is 1% and the inflation rate is 5%, the real interest rate is:

A - 1%
B - 6%
C - -4%
D - -5%

Answer 11

C - -4%

Nominal - inflation

Question 12

Q13 - The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

A - Money supply is constant
B - Velocity is constant
C - Inflation rate is constant
D - Real interest rate is constant

Answer 12

D - Real interest rate is constant

Question 13

Q14 - According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____.

A - 1; 5
B - 5; 1
C - 1; 1
D - 5; 5

Answer 13

D - 5; 5

Question 14

Q15 - If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent.

A - 1
B - 3
C - 4
D - 7

Answer 14

D - 7