Multiple Choice Answers

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 1. A bond is a:
A) Share in a private company.
B) Promise to repay borrowed funds.
C) Certification that a bank has met the Fed’s reserve requirement.
D) License to use the Fed’s discount window.
2. The actual deficit equals the sum of:
A) The structural and cyclical deficits.
B) The structural, cyclical, and frictional deficits.
C) The structural and fiscal deficits.
D) The cyclical and fiscal deficits.

3. Discounting refers to the Fed’s practice of:
A) Selling securities at the federal funds rate.
B) Purchasing securities at the lowest available federal funds rate.
C) Lending reserves to private banks.
D) Lending at the prime rate.

4. Money:
A) Facilitates the continuous series of exchanges that characterize a market economy.
B) Is a mechanism for transforming current income into future purchases.
C) Promotes efficient division of labor.
D) All of the above.

5. Which of the following gave the federal government permanent authority to issue money?
A) The Constitution of the United States in 1779.
B) The National Banking Act of 1863.

C) The creation of the FDIC and FSLIC in 1933.
D) The Monetary Control Act of 1980.

6. M1:
A) Includes the most liquid forms of money.
B) Is the narrowest definition of the money supply.
C) Largely consists of transactions-account balances.
D) All of the above.

7. Which of the following is not included in any of the measures of the money supply?
A) Credit-union share drafts.
B) Cash in the vault of a commercial bank.
C) Currency in circulation outside of commercial banks.
D) Transactions-account balances at mutual savings banks.

8. One of the main functions of banks is:
A) Borrowing money and lending to savers.
B) Creating money.

C) Ownership of projects in which they invest.
D) All of the above.

9. Banks make loans to:
A) Businesses for new plant and equipment.
B) Consumers for new homes and cars.

C) The government for its projects.
D) All of the above.

10. Which of the following functions do banks perform?
A) Transferring money from savers to spenders
B) Lending funds held on deposit.

C) Creating money.
D) All of the above.

11. The banking system can lend more than the sum of its excess reserves because:
A) Banks are required to keep only a fraction of deposits on reserve.
B) Bank assets are greater than bank liabilities.
C) Required reserves are a leakage from the banking system.
D) All of the above are true.

12. When the reserve requirement changes, which of the following will change for an individual bank?
A) Transactions-account balances, lending capacity.
B) Transactions-account balances, total reserves, excess reserves.
C) Total reserves, required reserves, excess reserves.
D) Required reserves, excess reserves, lending capacity.

13. Banks are required to keep a minimum amount of funds in reserve:
A) Because depositors may decide to withdrawal funds at any time.
B) Which provides a constraint on the bank’s ability to create money.
C) Which provides a constraint on the bank’s ability to affect aggregate demand.
D) All of the above.

14. For a small bank in a large banking system, excess reserves are equal to the:
A) Amount of money that the Federal Reserve System makes available for loans.
B) The amount of reserves that a bank must hold above the loans that it makes.
C) The amount of loans a bank can make after meeting the reserve requirement.
D) The difference between transactions-account balances and loans.

15. Which of the following is a bank liability?
A) Reserve deposits at the Fed.
B) Securities the bank has purchased.

C) Transactions-account balances.
D) Loans made to customers.

16. Constraints on deposit creation include:
A) The reserve requirement.
B) The willingness of businesses and consumers to accept checks.
C) The willingness of businesses and consumers to borrow from banks.
D) All of the above.

17. Which of the following could cause the money supply to decrease?
A) People and institutions borrow more.
B) The economy emerges from a recession into rapid growth.
C) The society moves to a cashless society.
D) Banks become conservative in making loans.

18. A higher reserve requirement:
A) Further limits deposit creation.
B) Increases the ability of banks to make loans.
C) Lowers the interest rate.
D) Increases the borrowing capability of borrowers.

19. Monetary authorities can change the money supply by:
A) Making discount loans more or less attractive.
B) Changing the level of required reserves.
C) Changing the level of reserves in the banking system.
D) All of the above.

20. If banks do not have enough reserves to satisfy the reserve requirement they can:
A) Borrow additional reserves in the federal funds market.
B) Sell securities.
C) Borrow from the discount window at the Federal Reserve bank.
D) All of the above.

21. In order to decrease the money supply the Fed can:
A) Raise the reserve requirement, increase the discount rate, or sell bonds.
B) Raise the reserve requirement, increase the discount rate, or buy bonds.
C) Lower the reserve requirement, increase the discount rate, or buy bonds.
D) Lower the reserve requirement, decrease the discount rate, or sell bonds.

22. Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?:
A) Changes in the discount rate.
B) Open-market operations.

C) Changes in the required reserve ratio.
D) Foreign-exchange operations.

23. When the Fed buys bonds from the public, it:
A) Decreases the flow of reserves to the banking system.
B) Increases the flow of reserves to the banking system.
C) Decreases the money supply.
D) Decreases the discount rate.

24. For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy, the actual deficit is divided into which of the following components?
A) Automatic stabilizers and autonomous consumption.
B) C, I, G, X, and M.
C) Structural and cyclical deficits.
D) Frictional and seasonal deficits.