Part 1: Multiple Choice

1. Checking accounts (or deposits) at commercial banks are:

(a) money

(b) not money until they are converted into currency or used to purchase something (like at a store).

(c) part of M2 but not M1

(d) considered as part of the bank's assets

(e) 100% insured by the FOMC

2. The primary purpose of setting capital requirements is to:

(a) prevent inflation

(b) increase bank leverage

(c) control the money supply

(d) affect the value of the bank's assets

(e) control systemic risk

3. If nominal GDP is $1,000,000 and the velocity of money is V = 20 , then the quantity of money, M, is

(a) $10,000,000

(b) $50,000

(c) $20,000,000

(d) $1,000,000

(e) undetermined with this information

4. Why do governments create hyperinflations?

(a) To test whether the quantity theory of money is true.

(b) Because they don't understand that in the long run increases in money increase prices.

(c) Because they want to disincentive people from holding monetary assets.

(d) Because they are no longer able to pay for their budget deficits via tax revenue and/or borrowing.

(e) Because the inflation tax is more efficient than other taxes generating tax revenue.

5. A permanent technological change allowing to produce more output with less inputs,

(a) would increase the money supply, shifting it to the right

(b) would increase the money demand, shifting it to the right

(c) would decrease the money supply, shifting it to the left

(d) would decrease the money demand, shifting to the left

(e) none of the above

6. The current chair of the Fed Board is

(a) Milton Friedman

(b) Janet Yellen

(c) Jerome Powell

(d) Alan Greenspan

(e) Ben Bernanke

7. When private banks rely heavily on borrowed money instead of bank capital to increase their assets:

(a) their leverage ratio tends to be low

(b) small variations in the value of their assets produces even smaller variations in the bank capital

(c) a small drop in the value of their assets can produce an amplified drop in the bank capital

(d) the quantity of money increases comparing to a situation where assets are financed just with bank capital

(e) none of the previous alternatives is correct

8. Which one of the following variables is not directly controlled by the Fed:

(a) the discount rate

(b) the interest rate paid on bank reserves

(c) the reserve requirement

(d) the capital requirement

(e) the federal funds rate

9. In a fractional-reserve banking system:

(a) the possibility of a bank run doesn't exist

(b) the money supply is directly controlled by the Fed

(c) bank loans are only financed by either capital or debt

(d) the money multiplier is exactly 1

(e) banks create money by increasing demand deposits

10. The president of the New York Fed

(a) attends FOMC meetings, but does not always have the right to vote

(b) attends FOMC meetings, and always has the right to vote

(c) oversees the necessary open-market operations needed to implement monetary policy

(d) (a) and (b) are correct

(e) (b) and (c) are correct

11. If the Fed conducts open-market purchases,

(a) the money supply increases

(b) interest rates increase

(c) the natural rate of unemployment falls

(d) bank reserves decrease

(e) the money supply decreases

12. If the reserve ratio increases from 20% to 40%, the money multiplier ____ from ____ to

____.

(a) increases; 5; 2.5

(b) decreases; 5; 2.5

(c) increases; 20;40

(d) decreases; 40;20

(e) decreases; 0.05; 0.025

13. The main function of the Federal Open Market Committee (FOMC) is

(a) to regulate and insure the health of the banking system

(b) to conduct monetary policy

(c) to choose the optimal reserve requirement for private banks

(d) to buy gold through open market operations

(e) to choose the presidents of the 12 Federal Reserve Banks

14. Which of the following statements is not correct?

(a) private banks have no reasons to hold excess reserves

(b) in a system of 100-percent-reserve banking, commercial banks do not influence the money supply

(c) in a fractional-reserve system, banks increase the money supply when they lend out reserves

(d) on a bank's T-account, loans are part of its assets and customer deposits are part of its liabilities

(e) if the required reserve ratio is 5%, a new deposit of $500 can create up to $10,000 of new money

15. When Google buys $100 million of U.S. treasury bonds, then

(a) the money supply is reduced in $100 million

(b) the money supply is reduced in at least $100 million

(c) the money supply is increased in $100 million

(d) the money supply is increased in at least $100 million

(e) the money supply does not change