ECO 102 WEEK 10 QUIZ
1. Banks minimize the risk of loss to depositors by
a. lending to casino owners
b. making many different loans to different borrowers
c. refusing to lend money to the U.S. government
d. putting all their eggs in one basket
e. making very long-term loans
2. The liquidity of an asset indicates
a. its buying power
b. the ease with which it can be converted into the medium of exchange without a significant loss of value
c. the ease with which it can be converted into another asset
d. how likely people are to convert it into the medium of exchange without a significant loss of value
e. how easy it is to buy with a check
3. Banks create new deposits by
a. lending out excess reserves
b. lending out required reserves
c. raising interest rates on loans
d. calling in loans
e. printing new checks
4. Banks want to minimize their holdings of excess reserves because
a. they will be penalized by the Federal Reserve System if excess reserves are too high
b. required reserves will also be minimized
c. the money multiplier will be larger leading to a greater money supply
d. they want to borrow more on the federal funds market
e. excess reserves earn no interest
5. The ability to convert a store of value into a medium of exchange with little loss of value is known as
6. Banks help to overcome the problem of asymmetric information by
a. lending only to students
b. acquiring expertise in evaluating the credit histories of borrowers
c. threatening borrowers
d. offering only one type of loan
e. providing information to lenders
7. Banks borrow excess reserves from each other on a day-to-day basis in the
a. federal reserve market
b. stock market
c. bond market
d. federal funds market
e. discount window at the Fed
8. Banks are financial intermediaries because they
a. receive new Federal Reserve notes from the Fed and put them into circulation
b. bring together the two sides of the market-savers and borrowers
c. bring different savers into contact with each other
d. bring about the merger of smaller banks to make larger ones
e. resolve disputes between stock brokers, mortgage companies, insurance agencies, and other financial institutions
9. Banks earn a profit on the difference between
a. interest charged to depositors and interest offered to borrowers
b. interest charged on loans and interest paid on deposits
c. deposit and loan balances
d. liabilities and deposits
e. dividends and interest
10. The largest component of the Federal Reserve’s liabilities is in the form of
a. government securities
b. Federal Reserve notes
c. U.S. Treasury deposits
d. bank deposits
11. Over the past 40 years, the most frequent target for the Feds monetary policy has been
a. the prime interest rate
b. the federal funds rate
c. the M1 money supply
d. the M2 money supply
e. the M3 money supply
12. Which monetary policy would be appropriate to close a contractionary gap?
a. a tax cut
b. a decrease in government purchases
c. an increase in reserve requirements
d. the Fed’s purchase of U.S. government securities
e. the Fed’s raising the discount rate
13. What is the opportunity cost of holding money rather than some other financial asset?
a. the forgone interest income
b. the forgone utility
d. the forgone leisure
e. the forgone profit
14. An increase in the price level will
a. shift the money demand curve to the right
b. shift the money demand curve to the left
c. increase the quantity of money people want to hold
d. decrease the quantity of money people want to hold
e. have no impact on the money demand curve
15. In October 1979 the Fed announced that it would focus on
a. stabilizing interest rates
b. specified targets for slowly falling interest rates
c. specified targets for the long-run equilibrium price level
d. specified targets for growth of the money supply
e. stabilizing the long-run equilibrium price level
16. The demand for money is based primarily on money’s role as a(n)
a. store of wealth
b. medium of exchange
c. standard of value
d. interest-bearing asset
e. non-interest-bearing asset
17. In recent years, much of the emphasis of Fed policy has been on
a. controlling short-term interest rates
b. implementing a system of price controls
c. regulating bank managers
d. controlling the money supply
e. making changes in the international financial markets
18. The behavior of the M1 velocity of money in recent years can be explained by
a. stability of interest rates
b. a low and stable rate of inflation
c. monetary policy that has been successful in stabilizing the economy
d. financial innovation creating new substitutes for money M1
e. a large number of banks and savings and loan associations going bankrupt
19. The demand for money
a. d and e are correct
b. all of the following are correct
c. decreases as the average selling price of a unit of output increases
d. increases as GDP increases
e. is increased by credit card usage
20. The The equilibrium interest rate is determined by
a. the Fed
c. the demand for money alone
d. the supply of money alone
e. both the supply of and demand for money
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