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MONEY, BANKING AND MONETARY POLICY 1. If the quantity of

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MONEY, BANKING AND MONETARY POLICY
1. If the quantity of money demanded exceeds the quantity supplied,

A. the interest rate will rise.

B. the interest rate will fall.

C. the supply-of-money curve will shift to the left.

D. the demand-for-money curve will shift to the right.



2. Which one of the following statements about present value is correct?

A. Present value is best defined as the expected future value of a financial asset purchased today.
B. Present value is best defined as the worth in the future of a current flow of returns or costs.
C. Present value is best defined as the worth today of future expected returns or costs.

D. Present value is best defined as the current worth of a financial asset purchased in the past.

3. Commercial banks and thrifts usually hold only small amounts of excess reserves because

A. the Fed doesn't want commercial banks and thrifts to be too liquid.

B. the presence of such reserves tends to boost interest rates and reduce investment.

C. the Fed constantly uses open market operations to eliminate excess reserves.

D. the Fed doesn't pay interest on reserves.


4. In the U.S. economy, the money supply is controlled by the

A. U.S. Treasury.

B. Senate Committee on Banking and Finance.

C. Congress.

D. Federal Reserve System.



5. 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. hedging the market.

C. arbitrage.

D. portfolio balancing.


6. The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the

A. Security Market Line.

B. Risk Premium Line.

C. Risk-Return Line.

D. Beta Line.


7. During periods of rapid inflation, money may cease to work as a medium of exchange

A. because it's too scarce for everyone to have enough for transactions.

B. because people and businesses won't want to accept it in transactions.

C. unless it has been designated legal tender.

D. unless it's backed by gold.


8. Commercial banks monetize claims when they

A. collect checks through the Federal Reserve System.

B. accept repayment of outstanding loans.

C. borrow from the Federal Reserve Banks.

D. make loans to the public.


9. Which one of the following statements about default is correct?

A. "Default" occurs when stocks are not federally insured.

B. "Default" occurs when bond purchasers fails to pay full price for a bond.

C. "Default" occurs when corporations go bankrupt and stock becomes worthless.

D. "Default" occurs when bond issuers fails to make promised payments.


10. Firms whose central business is to offer security advice and buy and sell individual stocks and bonds for clients are known as

A. insurance companies.

B. pension fund companies.

C. securities firms.

D. thrifts.


11. Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank

A. can safely lend out $5 million.

B. can safely lend out $500,000.

C. can safely lend out $50,000.

D. can't safely lend out more money.


12. Michelle buys a bond for $5,000. Every year that she holds the bond, she'll receive interest payments of $250. The interest rate on the bond is

A. 5 percent.

B. 20 percent.

C. 40 percent.

D. 2 percent.


13. 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. 10 percent.

B. 12 percent.

C. 20 percent.

D. 4 percent.


14. When shares of stock are sold for more than they're purchased, the difference received by the seller is referred to as

A. economic profit.

B. a capital gain.

C. a dividend.

D. interest.


15. Which one of the following statements is correct?

A. A $20 bill is a Federal Reserve Note.

B. A $20 bill is a gold certificate.

C. A $20 bill is a Treasury note.

D. A $20 bill is a Treasury bill.


16. Which one of the following statements about diversification is correct?

A. Investors diversify portfolios because diversified portfolios pay the highest rates of return.

B. Investors diversify portfolios to guarantee minimum returns on their investment.

C. Investors diversify portfolios to reduce the risk of losing their investment.

D. Investors diversify portfolios because diversified portfolios are guaranteed not to lose money.


17. Most modern banking systems are based on

A. fractional reserves.

B. commodity money.

C. 100 percent reserves.

D. money of intrinsic value.


18. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for

A. buying government securities, raising the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary surplus.
B. buying government securities, reducing the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary deficit.
C. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing 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

19. The interest rate at which the Federal Reserve Banks lend to commercial banks is called the _______ rate.

A. short-term

B. discount

C. prime

D. federal funds


20. Which one of the following statements about the money supply is correct?

A. The money supply is backed dollar-for-dollar with gold and silver.

B. The money supply is backed by government bonds.

C. The money supply is backed dollar-for-dollar with gold bullion.

D. The money supply is backed by the government's ability to control the supply of money and therefore to keep its value relatively stable.
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