Macro Practice test 4 1. Money functions as: A) a store of value. B) a unit of account. C) a medium of exchange. D) all of the above.

2. If you are estimating your total expenses for school next semester, you are using money primarily as: A) a medium of exchange. B) a store of value. C) a unit of account. D) an economic investment.

3. If you place a part of your summer earnings in a savings account, you are using money primarily as a: A) medium of exchange. B) store of value. C) unit of account. D) standard of value.

4. Stock market price quotations best exemplify money serving as a: A) store of value. B) unit of account. C) medium of exchange. D) index of satisfaction.

5. Purchasing common stock by writing a check best exemplifies money serving as a: A) store of value. B) unit of account. C) medium of exchange. D) index of satisfaction.

Page 1

6. When economists say that money serves as a medium of exchange, they mean that it is: A) a way to keep wealth in a readily spendable form for future use. B) a means of payment. C) a monetary unit for measuring and comparing the relative values of goods. D) declared as legal tender by the government.

7. When economists say that money serves as a unit of account, they mean that it is: A) away to keep wealth in a readily spendable form for future use. B) a means of payment. C) a monetary unit for measuring and comparing the relative values of goods. D) declared as legal tender by the government.

8. The money supply is backed: A) by the government's ability to control the supply of money and therefore to keep its value relatively stable. B) by government bonds. C) dollar-for-dollar with gold and silver. D) dollar-for-dollar with gold bullion.

9. The value of money varies: A) inversely with the price level. B) directly with the volume of employment. C) directly with the price level. D) directly with the interest rate.

10. Nearly one-half the money in the U.S. economy is created by: A) the receipt of gold bullion through international trade and finance. B) commercial banks and thrift institutions. C) the Federal mint. D) the Federal Treasury.

11. The purchasing power of money and the price level vary: A) inversely. B) directly during recessions, but inversely during inflations. C) directly, but not proportionately. D) directly and proportionately.

12. The M2 money supply includes: A) stock certificates. B) corporate bond certificates. C) the cash value of life insurance policies. D) individual shares in money market mutual funds.

13. A checking account entry is money because it: A) is ensured by the Federal Deposit Insurance Corporation. B) has been declared as such by the Federal government. C) performs the functions of money. D) can be sold for currency.

14. Money market deposit accounts are included in: A) M1 only. B) both M1 and M2. C) both M2 and M3. D) M3 only.

15. Checkable deposits are: A) included in M1. B) not included in either Ml or M2. C) considered to be a near money. D) also called time deposits.

Page 3

16. The amount of money reported as M2: A) is smaller than the amount reported as M1. B) is larger than the amount reported as M1. C) excludes coins and currency. D) includes large ($100,000 or more) certificates of deposit.

17. Coins in people's pockets and purses are: A) included in M1, but not in M2. B) included in both M1 and in M2. C) included in M2, but not in M1. D) excluded from M1 and M2 because people can exchange them for Federal Reserve notes.

18. Checkable deposits include: A) both large and small time deposits. B) the deposits of banks and thrifts on which checks can be written. C) only the checkable deposits of commercial banks. D) only the checkable deposits of thrift institutions.

19. Large time deposits of $100,000 or more are: A) a component of M1. B) a component of M2 but not of M1. C) a component of M3 but not of M2. D) not a component of M1, M2, or M3.

20. Currency and coins held within banks are part of: A) the M3 definition of the money supply. B) the M2 definition of the money supply. C) the M1 definition of the money supply. D) none of the above definitions of the money supply.

21. The asset demand for money: A) is unrelated to both the interest rate and the level of GDP. B) varies inversely with the rate of interest. C) varies inversely with the level of real GDP. D) varies directly with the level of nominal GDP.

22. It is costly to hold money because: A) deflation may reduce its purchasing power. B) in doing so one sacrifices interest income. C) bond prices are highly variable. D) the velocity of money may decline.

23. In the U.S. economy the money supply is controlled by the: A) U.S. Treasury. B) Federal Reserve System. C) Senate Committee on Banking and Finance. D) Congress.

24. The seven members of the Board of Governors of the Federal Reserve System are: A) appointed by the President with the confirmation of the Senate. B) elected by Congress from a slate of nominees provided by the President. C) appointed by the Senate Finance Committee. D) appointed by the presidents of the twelve Federal Reserve Banks.

25. The M2 money supply is larger than the M1 money supply. A) True B) False

26. The twelve Federal Reserve Banks are governmentally owned but privately controlled. A) True B) False

Page 5

27. The higher the interest rate, the larger will be the amount of money demanded for transaction purposes. A) True B) False

28. The asset demand for money varies inversely with the nominal GDP. A) True B) False

29. Currency and coins held by banks are part of the M1 definition of money supply. A) True B) False

30. Thrifts are known as "banker's banks" because they lend money to commercial banks. A) True B) False

31. The primary purpose of the legal reserve requirement is to: A) prevent banks from hoarding too much vault cash. B) provide a means by which the monetary authorities can influence the lending ability of commercial banks. C) prevent commercial banks from earning excess profits. D) provide a dependable source of interest income for commercial banks.

32. Checkable deposits are also called: A) checking accounts. B) high-powered money. C) savings balances. D) Federal Reserve Notes.

33. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves: A) are $30,000. B) are $10,000. C) are $20,000. D) cannot be determined from the given information.

34. Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves? A) $16,000 B) $84,000 C) $24,000 D) $20,000

35. A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of: A) $1,250. B) $120,000. C) $5,000. D) $3,750.

36. If the reserve requirement is 10 percent, how much excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank? A) $450 B) $550 C) $5000 D) $500

Page 7

37. The amount of reserves that a commercial bank is required to hold is equal to: A) the amount of its checkable deposits. B) the sum of its checkable deposits and time deposits. C) its checkable deposits multiplied by the reserve requirement. D) its checkable deposits divided by its total assets.

38. Which of the following is correct? A) Required reserves minus actual reserves equal excess reserves. B) Required reserves equal excess reserves minus actual reserves. C) Required reserves equal actual reserves plus excess reserves. D) Actual reserves minus required reserves equal excess reserves.

39. The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that: A) reserves lost by any particular bank will be gained by some other bank. B) the central banks follow policies that prevent reserves from falling below the level required by law. C) the MPC of borrowers is greater than zero, but less than 1. D) the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities.

40. A bank temporarily short of required reserves may be able to remedy this situation by: A) borrowing funds in the Federal funds market. B) granting new loans. C) shifting some of its vault cash to its reserve account at the Federal Reserve. D) buying bonds from the public.

41. The market for immediately available reserve balances at the Federal Reserve is known as the: A) money market. B) long-term bond market. C) short-term bond market. D) Federal funds market.

42. The Federal funds market is the market in which: A) banks borrow from the Federal Reserve Banks. B) U.S. securities are bought and sold. C) banks borrow reserves from one another on an overnight basis. D) Federal Reserve Banks borrow from one another.

43. The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of: A) the MPS. B) its actual reserves. C) its excess reserves. D) the reserve ratio.

44. If the monetary authorities want to reduce the monetary multiplier, they should: A) lower the legal reserve ratio. B) raise the legal reserve ratio. C) increase bank reserves. D) lower interest rates.

45. Excess reserves are the amount by which required reserves exceed actual reserves. A) True B) False

46. Actual reserves equal required reserves plus excess reserves. A) True B) False

47. If the reserve requirement is 10 percent, the monetary multiplier will be 10. A) True B) False

48. The higher the reserve requirement, the lower is the monetary multiplier. A) True B) False
Page 9

49. Which of the following is a tool of monetary policy? A) open market operations B) changes in banking laws C) changes in tax rates D) changes in government spending

50. Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for them by drawing checks. As a result, commercial bank reserves will: A) increase by $10 billion. B) remain unchanged. C) decrease by $2 billion. D) increase by $2 billion.

51. The Federal Reserve System regulates the money supply primarily by: A) controlling the production of coins at the United States mint. B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. C) altering the reserves of commercial banks, largely through sales and purchases of government bonds. D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply.

52. Open-market operations change: A) the size of the monetary multiplier, but not commercial bank reserves. B) commercial bank reserves, but not the size of the monetary multiplier. C) neither commercial bank reserves nor the size of the monetary multiplier. D) both commercial bank reserves and the size of the monetary multiplier.

53. When the required reserve ratio is increased, the excess reserves of member banks are: A) reduced, but the multiple by which the commercial banking system can lend is unaffected. B) reduced and the multiple by which the commercial banking system can lend is increased. C) increased and the multiple by which the commercial banking system can lend is increased. D) reduced and the multiple by which the commercial banking system can lend is reduced.

54. A decrease in the reserve ratio increases the: A) amount of actual reserves in the banking system. B) amount of excess reserves in the banking system. C) number of government securities held by the Federal Reserve Banks. D) ratio of coins to paper currency in the economy.

55. An increase in the reserve ratio: A) increases the size of the spending income multiplier. B) decreases the size of the spending income multiplier. C) increases the size of the monetary multiplier. D) decreases the size of the monetary multiplier.

56. A commercial bank can add to its actual reserves by: A) lending money to bank customers. B) buying government securities from the public. C) buying government securities from a Federal Reserve Bank. D) borrowing from a Federal Reserve Bank.

57. The interest rate at which the Federal Reserve Banks lend to commercial banks is called the: A) prime rate. B) short-term rate. C) discount rate. D) Federal funds rate.
Page 11

58. The discount rate is the rate of interest at which: A) Federal Reserve Banks lend to commercial banks. B) savings and loan associations lend to some builders. C) Federal Reserve Banks lend to large corporations. D) commercial banks lend to large corporations.

59. Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called the: A) prime rate. B) Federal funds rate. C) Treasury bill rate. D) discount rate.

60. If the Fed were to purchase government securities in the open market, we would anticipate: A) lower interest rates, an expanded GDP, and depreciation of the dollar. B) lower interest rates, an expanded GDP, and appreciation of the dollar. C) higher interest rates, a contracted GDP, and depreciation of the dollar. D) lower interest rates, a contracted GDP, and appreciation of the dollar.

61. The purpose of a tight money policy is to: A) alleviate recessions. B) raise interest rates and restrict the availability of bank credit. C) increase aggregate demand and GDP. D) increase investment spending.

62. Which of the following best describes the cause-effect chain of a tight money policy? A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D) An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.

63. An increase in the money supply will: A) lower interest rates and lower the equilibrium GDP. B) lower interest rates and increase the equilibrium GDP. C) increase interest rates and increase the equilibrium GDP. D) increase interest rates and lower the equilibrium GDP.

64. A tight money policy is designed to shift the: A) aggregate demand curve rightward. B) aggregate demand curve leftward. C) aggregate supply curve rightward. D) aggregate supply curve leftward.

65. The sale of government bonds by the Federal Reserve Banks to commercial banks will: A) increase aggregate supply. B) decrease aggregate supply. C) increase aggregate demand. D) decrease aggregate demand.

66. Which of the following has bolstered the case for active monetary policy? A) budget surpluses B) increasing globalization of financial markets C) the success of monetary policy in helping the economy emerge from the 1990-1991 recession and sustain economic growth through the 1990s D) a decreasing role of banks and thrifts in the financial industry
Page 13

67. The problem of cyclical asymmetry refers to the idea that: A) a tight money policy can force a contraction of the money supply, but an easy money policy may not achieve an expansion of the money supply. B) the monetary authorities have been less willing to use an easy money policy than they have a tight money policy. C) cyclical downswings are typically of longer duration than cyclical upswings. D) an easy money policy can force an expansion of the money supply, but a tight money policy may not achieve a contraction of the money supply.

68. An easy money policy may be less effective than a tight money policy because: A) the Federal Reserve Banks are always willing to make loans to commercial banks which are short of reserves. B) fiscal policy always works at cross purposes with an easy money policy. C) changes in exchange rates complicate an easy money policy more than it does a tight money policy. D) commercial banks may not be able to find loan customers.

69. A tight money policy could be offset by: A) a deterioration in the profit expectations of businesses. B) a budget surplus. C) a decline in the velocity of money. D) an increase in the velocity of money.

70. Monetary policy is thought to be: A) equally effective in moving the economy out of a depression as in controlling demand-pull inflation. B) more effective in moving the economy out of a depression than in controlling demand-pull inflation. C) more effective in controlling demand-pull inflation than in moving the economy out of a depression. D) only effective in moving the economy out of a depression.

71. The Fed directly sets: A) the prime interest rate but not the Federal funds rate. B) both the Federal funds rate and the prime interest rate. C) neither the Federal funds rate nor the prime interest rate. D) the discount rate and the prime interest rate.

72. The Fed reduces interest rates mainly by selling government securities. A) True B) False

73. The Fed increases interest rates mainly by selling government securities. A) True B) False

74. An easy money policy is one that reduces the supply of money. A) True B) False

75. Changes in the interest rate are more likely to affect investment spending than consumer spending. A) True B) False

76. Other things equal, an easy money policy will shift the economy's aggregate demand curve to the right. A) True B) False

77. A tight money policy reduces investment spending and shifts the economy's aggregate demand curve to the right. A) True B) False

Page 15

Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. D C B B C B C A A B A D C C A B B B C D B B B A A B B B B B B A C C D A C D A A D C D B B A A A

49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77.

A C C B D B D D C A D A B B B B D C A D D C C B A B A A B

Page 17