FINC 409 – Chapter 5 – Practice Problems

True or False: The relationship between the money supply and demand affects the level of prices and economic activity in our market economy.
True
True or False: The output of goods and services in an economy is referred to as the gross domestic product.
True
True or False: The United States economy has little influence on the economies of other nations.
False
True or False: Nations that export more than they import will have a trade deficit.
False
True or False: Traditionally, the federal government should provide services that cannot be provided as efficiently by the private sector.
True
True or False: A government raises funds to pay for its activities in only two ways: levies taxes or prints money for its own use.
False
True or False: Monetizing the debt occurs when the Fed increases the money supply by purchasing government securities.
True
True or False: Commercial banks are one of the four policy making groups.
False
True or False: The President of the United States and the Fed formulate a program of fiscal policy.
False
True or False: The U.S. Treasury has primary responsibility for management of the federal debt.
True
True or False: The President of the United States formulates budgetary and fiscal policy, but Congress must enact legislation to implement these policies.
True
True or False: Although the Treasury has vast power to affect the supply of money and credit, the Treasury largely limits its actions to taxing, borrowing, paying bills, and refunding maturing obligations.
True
True or False: The Treasury’s primary checkable deposit accounts for day-to-day operations are kept at several commercial banks in large cities.
False
True or False: The Fed closely monitors the Treasury account and takes any changes into consideration in conducting daily open market operations in order to minimize the effect on bank reserves.
True
True or False: The U.S. government may influence monetary and credit conditions indirectly through taxation and expenditure programs.
True
True or False: Unemployment and welfare benefits are examples of transfer payments for which no current productive services are given in return.
True
True or False: A primary Treasury objective is to maintain satisfactory conditions in the government securities market through maintaining investor confidence.
False
True or False: The Fed can increase the money supply to help offset the demand for increased funds to finance the deficit.
True
True or False: In the fractional reserve system, banks must hold, with the Fed, reserves equal to a certain percentage of their deposits.
True
True or False: The deposit of a check drawn on the Fed is a derivative deposit because it adds new reserves to the bank where deposited and to the banking system.
False
True or False: The U.S. Treasury is responsible for refinancing the outstanding debt of the government.
True
True or False: The money multiplier indicates the maximum increase in deposits (and money supply) that can result from a given increase in excess reserves.
True
True or False: If required reserves are larger than the total reserves of an institution, the difference is called excess reserves.
False
True or False: One of the reasons open market operations are conducted virtually every business day is to implement changes in the money supply called for by the Federal Open Market Committee.
True
True or False: The monetary base is the banking system reserves, plus currency held by the public.
True
True or False: The velocity of money is expressed as the average number of times each dollar is spend on purchases of goods and services, and it is calculated as real GDP divided by M1.
False
True or False: The U.S. Treasury has little power to influence money markets.
False
True or False: The President of the United States has no influence over the Federal Reserve System nor exerts any pressure on the Fed.
False
True or False: The Fed plays a significant role in tax policy.
False
True or False: Aggregate demand refers to total spending in the economy.
True
True or False: Tax receipts tend to increase during economic downturns.
False
True or False: Transfer payments are income payments for which no current productive service is rendered.
True
True or False: High inflation has been a significant problem in the United States during the past decade.
False
True or False: The fiscal policy effects of a tax cut occur more slowly than an increase in government spending.
False
True or False: “Crowding out” caused by deficit financing can result in tighter credit conditions and higher interest rates.
True
True or False: Required reserves are the minimum amount of total reserves that a depository institution must hold.
True
True or False: The velocity of money measures the rate at which wire transfers can be transmitted to overseas banks.
False
True or False: U.S. economic policy actions are directed toward the four general goals of economic growth, high employment, price stability, and balance in international transactions.
True
True or False: Inflation occurs when an increase in the price of goods or services is more than offset by an increase in quality.
False
True or False: The four groups of policy makers that are actively involved in achieving the nation’s economic policy objectives are the Federal Reserve System, the President, Congress, and the U.S. Treasury.
True
True or False: The government body primarily responsible for monetary policy is Congress.
False
True or False: The branch of government primarily responsible for the formulation of fiscal policy is the President and his Council of Economic Advisors.
False
True or False: The branch of government primarily responsible for the formulation of fiscal policy is the U.S. Senate.
False
True or False: Automatic stabilizers include trade deficits, budget deficits, and floating exchange rates.
False
True or False: When a government borrows to finance budget deficits, crowding out may occur, which results in a restriction of available funds for private sector borrowers due to public sector demand.
True
True or False: Primary deposits are deposits that add new reserves to a bank while secondary deposits are deposits that were borrowed from the reserves of primary deposits.
False
The U.S. Treasury is primarily responsible for:
a. monetary policy
b. debt management
c. fiscal policy
d. the money supply
debt management
Examples of automatic stabilizers are:
a. open market operations
b. changes in the discount rate
c. unemployment insurance
d. issuance of currency
unemployment insurance
Automatic stabilizers include all of the following except:
a. unemployment insurance
b. social security
c. welfare
d. pay-as-you-go tax system
social security
Almost all Treasury disbursements are made by:
a. checks drawn directly on the U.S. Treasury
b. check drawn against deposits at commercial banks in large cities
c. drafts drawn on member banks
d. checks drawn against deposits at Federal Reserve Banks
checks drawn against deposits at Federal Reserve Banks
When the United States Treasury makes a payment to an individual or business, it usually takes the form of a:
a. check drawn on a Federal Reserve Bank
b. check drawn directly against the U.S. Treasury
c. special Treasury voucher
d. check drawn against a bank in which tax balances are held
check drawn on a Federal Reserve Bank
When the United States Treasury makes a payment to an individual or business, it usually takes the form of a:
a. check drawn on the Central Bank of China
b. check drawn directly against the U.S. Treasury
c. special Treasury voucher
d. check drawn against a bank in which tax balances are held
e. none of the above
none of the above
The budget-making process is carried out by:
a. Congress
b. U.S. Treasury
c. the President
d. U.S. Treasury in cooperation with the Fed
e. both a and c
both a and c
Congress & the President
Budgetary deficits always have the effect of:
a. creating inflationary pressures
b. crowding out private lenders
c. forcing the Federal Reserve to buy government securities
d. creating governmental competition for private investment funds
creating governmental competition for private investment funds
U.S. debt management, which is an important function of the Treasury, is generally designed to:
a. lower interest rates
b. stimulate economic activity
c. encourage orderly economic growth and stability
d. all three of the above, a, b, and c
encourage orderly economic growth and stability
Price inflation:
a. is relatively unimportant to individuals
b. is considered to be acceptable in the nation’s quest for high levels of employment
c. courages investment by increasing the uncertainty about future returns
d. is almost always due to financing wars
courages investment by increasing the uncertainty about future returns
Price inflation:
a. is relatively unimportant to individuals
b. is considered to be acceptable in the nation’s quest for high levels of employment
c. encourages investment by reducing the uncertainty about future returns
d. is almost always due to financing wars
e.none of the above
none of the above
The federal government pays for the services it provides primarily through:
a taxation
b. creating money
c. borrowing
d. selling assets owned by the government
taxation
The federal government pays for the services it provides primarily through:
a. service fees
b. creating money
c. borrowing
d. selling assets owned by the government
e.none of the above
none of the above
Federal Reserve open market operations, setting reserve requirement, and lending to depositories are:
a. usually conducted simultaneously
b. all designed to have their effect by influencing the reserves of depository institutions
c. of equal importance in their effort
d. functions shared with the U.S. Treasury
all designed to have their effect by influencing the reserves of depository institutions
Federal Reserve open market operations, setting reserve requirement, and lending to depositories are:
a. usually conducted simultaneously
b. designed to improve the federal deficit
c. of equal importance in their effort
d. functions shared with the U.S. Treasury
e . none of the above
none of the above
Open Market operations differ from discounting operations in that they are”
a. initiated by member depository institutions.
b. designed to be of significance only to large city banks
c. initiated by the President
d. initiated by Congress
e. none of the above
e. none of the above
Various programs of the federal government help stabilize disposable income, and in turn, economic activity in general. In so doing:
a. income tax rates may be lowered during periods of prosperity and increased during slack economic periods
b. some programs act on a continuing basis and are described as automatic stabilizers
c. the timing of sale of U.S. savings bonds is instrumental in accomplishing this objective
d. these programs seldom attain their goals
b. some programs act on a continuing basis and are described as automatic stabilizers
Various programs of the federal government help stabilize disposable income, and in turn, economic activity in general. In so doing:
a. income tax rates may be lowered during periods of prosperity and increased during slack economic periods
b. these programs waste valuable resources
c. the timing of sale of U.S. savings bonds is instrumental in accomplishing this objective
d. these programs seldom attain their goals
e. none of the above
e. none of the above
Continuing federal programs that stabilize economic activity are called
a. transfer payments
b. automatic stabilizers
c. social insurance programs
d. none of the above
b. automatic stabilizers
Continuing federal programs that stabilize economic activity are called
a. transfer payments
b. leveling programs
c. social insurance programs
d. socialist spending
e. none of the above
e. none of the above
Currently, the backing for Federal Reserves notes is primarily in the form of:
a. gold certificates
b. gold bullion
c. eligible paper (business notes and drafts)
d. none of the above
d. none of the above.
Debt management of the federal government includes:
a. determining which types of refunding to implement
b. determining the types of securities to sell
c. deciding which interest rate patterns to use
d. all the above
d. all of the above
Debt management of the federal government includes:
a. determining which types of refunding to implement
b. determining the types of securities to sell
c. deciding which interest rate patterns to use
d. two of the above
e. answers a, b and c are correct
e. answers a, b, and c are correct
Debt management includes all of the following except:
a. the types of securities to sell
b. the interest rate patterns to use
c. the required reserves ratio
d. all of the above are included in debt management
c. the required reserves ratio
Under required reserves of 20%, the maximum to which the money supply could be expanded by the banking system is: (Pick the closest answer.)
a four times a new primary deposit
b. five times a new primary deposit
c. six times a new primary deposit
d. until all of a new primary deposit has been converted to required reserves
a. four times a new primary deposit
One factor that decreases the volume of bank reserves is a decrease in:
a. the public’s demand for currency to be held outside the banking system
b. the reserve requirement ratio
c. life insurance company reserves
d. Federal Reserve float
d. Federal Reserve float
One factor that decreases the volume of bank reserves is a(n):
a. increase in the public’s demand for currency to be held outside the banking system
b. decrease in the reserve requirement ratio
c. increase in life insurance company reserves
d. increase in Federal Reserve Float
e. none of the above
a. increase in the public’s demand for currency to be held outside the banking system
Bank reserves are increased when the Treasury:
a. sells Treasury bonds to individuals
b. decreases its holding of cash
c. increases its account at a Federal Reserve bank
d. none of the above
b. decreases its holding of cash
Bank reserves are increased when the Treasury:
a. sells Treasury bonds to individuals
b. needs to increase its payment of funds from its accounts at the Reserve Banks
c. increases its account at a Federal Reserve bank
d. increases its holding of cash
e. none of the above
e. none of the above
Which one of the following transactions or operations is entirely at the initiative of the Federal Reserve?
a. open market operations
b. change in float
c. change in bank borrowings
d. change in Treasury cash holdings
a. open market operations
The monetary base:
a. equals the money supply
b. consists of checkable and noncheckable deposits
c. consists of bank reserves, plus currency held by the public
d. equals the money multiplier, plus bank reserves
c. consists of bank reserves, plus currency held by the public
Changes in the growth rates for money supply and money velocity affect the growth rate in:
a. real economic activity
b. the rate of inflation
c. the turnover of goods and services
d. both a and b
d. both a and b
If a check is written for the full amount of a derivative deposit created by a bank loan and then is sent to a bank in another city for deposit:
a. the lending bank would lose all of its excess reserves
b. the lending bank would still have reserves to lend
c. the full amount would be added to the receiving bank’s excess reserves d. both a and c
a. the lending bank would lose all of its excess reserves
Total reserves in the banking system consist of:
a. vault cash held at commercial banks and other depository institutions
b. reserve deposits held at Federal Reserve banks
c. currency in circulation
d. both a and b
a. both a and b
When a customer demands additional currency by cashing a check for $500, all of the following occur except:
a. the deposits of the bank are reduced $500
b. required reserves are reduced
c. Federal Reserves notes decrease
d. additional reserves must be acquired if the bank has no excess reserves
c. Federal Reserves notes decrease
Bank reserves are not affected by:
a. the purchase of government bonds by the Fed
b. changes in reserve requirements
c. the sale of government bonds by the Fed
d. changes in the level of deposits of foreign banks at the Federal Reserve banks
e. all of the above affect bank reserves
a. the purchase of government bonds by the Fed
In our financial system, the money multiplier:
a. is not affected by the Federal Reserve
b. can fluctuate over time
c. is not affected by the nonbank public
d. is not affected by the U.S. Treasury
b. can fluctuate over time
The U.S. banking system has the ability to alter the size of the money supply because of the use of:
a. a 100% reserve system
b. a fractional reserve system
c. the Federal Reserve System’s excess reserves
d. Federal Reserve notes issued by the U.S. Treasury
b. a fractional reserve system
Assume that a bank receives a primary deposit of $1,000, and the reserve requirement is 15%. Which of the following would reflect the asset side of the balance sheet after a maximum loan amount has just been made (i.e. before the check on the new loan is deposited in another bank)?
a. reserves of $1,000
b. deposits of $1,000
c. reserves of $1,000 and loans of $150
d. reserves of $1,000 and loans of $850
d. reserves of $1000 and loans of $850
Which of the following statements is most correct?
a. Bank reserves are not affected by transactions involving the Treasury.
b. Derivative deposits occur when reserves created from primary deposits are made available through bank
loans to borrowers who leave them on deposit in order to write checks against the funds.
c. Total bank reserves in the banking system consist of bank’s member bank deposits held in Federal Reserve Banks, plus non-member banks vault cash.
d. Federal Reserve notes have been increasingly backed by gold certificates and eligible paper in recent years.
b. Derivative deposits occur when reserves created from primary deposits are made available through bank loans to borrowers who leave them on deposit in order to write checks against the funds
Which of the following statements is most correct?
a. A monetary base of $5 million and a money multiplier of 5 means that the money supply will be $1 million.
b. The magnitude of the money multiplier today is in the 8 to 9 range.
c. The money multiplier is influenced by the public’s switching between checkable and noncheckable deposits
at their banks.
d. The monetary base multiplied by the money multiplier calculates the amount of required reserves for the banking system as a whole.
c. The money multiplier is influenced by the public’s switching between checkable and non checkable deposits at their banks.
Which of the following statements is false?
a. The multiplying capacity of primary deposits is hindered by cash leakages from the banking system.
b. The monetary base is defined as bank reserves plus currency held by the nonbank public.
c. In contrast to the other transactions that affect reserves in the banking system, open market operations are
entirely at the initiative of the Federal Reserve. d. All the above statements are correct.
d. all the above statements are correct
Which of the following statements is false?
a. The difference between total reserves and the monetary base is currency held by the nonbank public.
b. The ability to alter the money supply and credit is based on the fact that our banking system does not utilize
a fractional reserve system.
c. The ability to predict M1 velocity, in addition to money supply changes, is important in achieving successful monetary policy making.
d. A derivative deposit arising out of a loan from Bank A is transferred by check to Bank B, where reserve requirement are again imposed.
b. The ability to alter the money supply and credit is based on the fact that our banking system does not utilize a fractional reserve system
To equal M1 money supply, the monetary base:
a. is multiplied by the money multiplier
b. is added to by the money multiplier
c. is subtracted from the money multiplier
d. none of the above
a. is multiplied by the money multiplier
Total bank reserves do not include which of the following?
a. deficit reserves
b. excess reserves
c. required reserves
d. all the above are included in total bank reserves
a. deficit reserves
The government entity responsible for fiscal policy is:
a. the U.S. Treasury
b. the Federal Reserve
c. the Congress
d. the President
e.both c and d
e. both c and d
Government financing of large budgetary deficits:
a. absorbs savings which decreases interest rates
b. may crowd out private borrowers
c. is known as monetizing the deficit
d. increases savings which increases interest rates
b. may crowd out private borrowers
Deposits that add new reserves to the bank where they are deposited are called: A. primary deposits
b. derivative deposits
c. secondary deposits
d. Special Drawing Rights
a. primary deposits
Transactions that affect bank reserves can be initiated by the:
a. nonbank public
b. Federal Reserve System
c. U. S. Treasury
d. all the above
d. all the above
A country’s economic policy actions are directed toward all of the following goals EXCEPT:
a. balance in the federal budget
b. high employment
c. price stability
d. all of the above are primary policy goals
a. balance in the federal budget
A country’s economic policy actions are directed toward all of the following goals EXCEPT:
a. economic growth
b. high employment
c. price stability
d. all of the above are primary policy goals
d. all of the above are primary policy goals
In an effort to stimulate economic activity, Congress and the president passed the $787 billion _________________________________ in February, 2009 with the funds to be used to provide tax relief, appropriations, and direct spending.
a. American Reconstruction and Reconfiguration Act of 2009
b. American Real Estate and Reconstruction Act of 2009
c. American Real Estate Reinvestment Act of 2009
d. American Recovery and Reinvestment Act of 2009
e. none of the above
d. American Recovery and Reinvestment Act of 2009
A primary focus of the Economic Stabilization Act of 2008, which became know as the ___________________________, was to allow the U.S. Treasury purchase up to $700 billion of troubled or toxic assets held by financial institutions.
a. Troubled Asset Relief Program (TARP)
b. Toxic Asset Recovery Program (TARP)
c. Troubled Area Relief Program (TARP)
d. Toxic Area Recovery Program (TARP)
e.none of the above
a. Troubled Asset Relief Program
In fall 2008, the U.S. Congress and President George W. Bush responded to the financial crisis with the passage of the _____________ in early October of that year.
a. Economic Stimulus Act
b. Economic Recovery Act
c. Economic Stabilization Act
d. Economic Booster Act
e.none of the above
c. Economic Stabilization Act
During the 2007 – 2009 financial crisis, ___________ and __________, who were major participants in the secondary mortgage markets, were on the verge of financial insolvency and possible collapse in mid-2008.
a. Fannie Mae and Freddie Mac
b. the Federal Treasury and the Federal Reserve
c. Morgan Stanley and Smith Barney
d. Washington Mutual and Lehman Brothers
e.none of the above
a. Fannie Mae and Freddie Mac
During the 2007 – 2009 financial crisis, some of the very largest financial institutions were deemed as being “too big to fail” because their failure would cause cascading negative repercussions throughout the U.S. and many foreign economies. As a result, the Federal Reserve
a. moved to increase liquidity in the monetary system and reduced its target federal funds rate to below .25 percent.
b. worked with the U.S. Treasury to help facilitate the merging of financially weak institutions with institutions that were financially stronger.
c. both a and b are true
d. none of the above are true
c. both a and b are true
During the 2007 – 2009 financial crisis, many major financial institutions and business corporations were on the verge of collapse or failure; however, some of the very largest corporations and financial institutions were deemed as being ________ because their failure would cause cascading negative repercussions throughout the U.S. and many foreign economies.
a. toxic firms
b. boat rockers.
c. too large to ignore
d. too big to fail
e. none of the above
d. none of the above
The “perfect financial storm” that developed in 2008, which put the U.S. economy was on the verge of collapse was characterized by all of the following EXCEPT:
a. The housing price “bubble” burst in 2006 and began a sharp decline.
b. Stock market prices peaked in 2007 and began a sharp decline.
c. Many of the mortgage-related debt securities originated and sold to others, or held, by banks became
difficult to value during the perfect financial storm and quickly became known as “troubled” or “tonic” assets. d. Individuals and businesses were defaulting on loans and home mortgages in increasing numbers due to the weakening economy and falling home prices.
e.All of the above were factors
e. all of the above were factors
The percentage of deposits that must be held as reserves is called
a. excess reserves
b. required reserves
c. required reserve ratio
d. none of the above
c. required reserve ratio
Primary groups of policy makers that are actively involved in achieving U.S. economic policy objectives include all of the following EXCEPT:
a. the Federal Reserve System
b. the President
c. Congress
d. all of the above are primary policy makers
d. all of the above are primary policy makers