Unit 3 Test

Question 1

Traditional Individual Retirement Accounts (IRAs) are taxed:

Answer 1

only when you make withdrawals.

Question 2

Suppose a one-year bond with a face value of $200 is sold for $188. What is the bond’s yield?

Answer 2

6.4%

Question 3

All of the following are functions of money EXCEPT:

Answer 3

as a standard value

Question 4

The demand curve for loanable funds represents _____ and is _____.

Answer 4

investors; downward sloping

Question 5

As the real interest rate falls:

Answer 5

the quantity demanded of loanable funds rises.

Question 6

If a person borrows $2,000 at 5% interest and never makes any payments, how much will the loan balance be after five years?

Answer 6

$2,552.56

Question 7

An interest rate that is low for only a short period of time is called:

Answer 7

a teaser rate.

Question 8

Checking deposits generally have a _____ return on investment than do certificates of deposit because checking deposits are _____.

Answer 8

lower; more liquid

Question 9

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is:

Answer 9

$800

Question 10

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:

Answer 10

falls to $875

Question 11

Liquidity refers to:

Answer 11

how quickly, easily, and reliably an asset can be converted into a medium of exchange.

Question 12

Which statement is correct?

Answer 12

M2 includes M1

Question 13

Which of these is NOT a way financial institutions reduce risk?

Answer 13

guaranteeing a high rate of return for all lenders

Question 14

Which of these will cause the supply of loanable funds curve to shift leftward?

Answer 14

an increase in the government deficit

Question 15

When a financial institution provides a standardized financial product such as a mortgage, it is:

Answer 15

reducing transaction costs

Question 16

If Jack Sparrow buries a chest of gold on a deserted island and plans to come back for it later, then the gold is functioning as a:

Answer 16

store of value

Question 17

Suppose that while households are deciding to increase savings, the demand by firms for investment funds falls. In the market for loanable funds, the real interest rate will _____ and the quantity of loanable funds will _____.

Answer 17

fall; rise, fall, or stay the same

Question 18

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How much money can the banking system create?

Answer 18

$6,000

Question 19

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank’s required reserves?

Answer 19

$375

Question 20

Which statement concerning the structure of the Federal Reserve System is correct?

Answer 20

The Chair and Vice Chair of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years.

Question 21

Which of these is a basic goal of the Federal Reserve System?

Answer 21

full employment

Question 22

If Abigail withdraws $300 cash from her checking account, her bank’s assets then:

Answer 22

fall by $300 and liabilities fall by $300.

Question 23

Open market operations involve the purchase and sale of

Answer 23

government securities

Question 24

When the Fed buys bonds, its demand _____ the price of bonds, _____ nominal interest rates

Answer 24

increases; decreasing

Question 25

Monetary policy, like fiscal policy, is subject to _____ lags.

Answer 25

information, implementation, and decision

Question 26

If the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of:

Answer 26

$5,000

Question 27

If banks increase excess reserves to increase their ability to absorb a higher rate of defaults

Answer 27

the actual multiplier will fall

Question 28

Which list represents monetary policy actions that are consistent with one another?

Answer 28

sell government bonds, raise reserve requirements, raise the discount rate

Question 29

The main policymaking arm of the Fed is the

Answer 29

Federal Open Market Committee

Question 30

The discount rate is:

Answer 30

the rate regional Federal Reserve banks charge depository institutions to borrow reserves.

Question 31

A lower reserve requirement:

Answer 31

increases the ability of banks to make loans.

Question 32

The main tool of monetary policy is

Answer 32

open market operations

Question 33

The Fed announced in September 2013 that it would postpone winding down its monetary stimulus until the economic recovery was stronger. When the Fed does finally begin to reduce bond purchases

Answer 33

interest rates will rise.

Question 34

If the reserve requirement is 25% and a new deposit leads to a potential increase in the money supply of $4,000, the amount of the new deposit must equal:

Answer 34

$1,000