To be money, something must be A) backed by the power of the government. B) Most buyers and sellers agree on it. C) easy to find, light, and durable. D) able to be turned into gold. 2. Which of the following is an asset that can be sold quickly? A) Real Estate B) the money C) Treasury bonds with a short term D) stock shares 3. The best way to describe the cost of holding money is as A) the cost of making money. B) the cost that price drops put on people who have money. C) the interest that the U.S. government pays to people who have money. D) the amount of interest that could have been made if the asset had been held in a different way. 4. The best way to describe financial intermediation is as the process by which A) inflation is kept in check. B) Companies make new shares of stock. C) liabilities are liquidated. D) financial institutions accept savings from savers and make loans to investors. 5. Suppose you place your savings in a time deposit at the bank, and that bank lends some \sof those funds to a business that desires a loan. This is an example of\sA) direct finance. B) indirect finance. C) asymmetric information. D) adverse selection. 6. A checkable and debitable account balance held by a depositor at a commercial bank is\sA) a liability to the commercial bank. B) an asset to the commercial bank. C) a liability to the household or firm that has the account. D) an asset for the Federal Reserve System Two people are involved in a borrower/lender situation, and one person has superior\sknowledge of its own current and future prospects over the other person. This is known as\sA) preventable information. B) symmetric information. C) asymmetric information. D) deceptive knowledge. 8. The possibility that a borrower might engage in riskier behaviour after a loan has been \sobtained is called\sA) immoral behaviour. B) adverse behaviour. C) moral hazard. D) financial intermediation. 9. Which of the following is NOT a function of the Fed? A) Regulating the money supply in the economy\sB) Offering checking accounts to the U.S. public\sC) Acting as the federal government s banker D) Providing a system of check collection and clearing for depository institutions 10. Monetary policy actions are determined by the\sA) Federal Open Market Committee. B) Committee of commercial bank presidents. C) President of the United States. D) U.S. Congress. 11. Which of the following is NOT a part of the Federal Reserve System? A) The Twelve District Federal Reserve banks B) The Federal Open Market Committee C) The Federal Deposit Insurance Corporation D) The Board of Governors 12. The Fed is said to be the lender of last resort in that A) it stands ready to lend to any depository institution that it has decided should not fail. B) it makes loans to individuals whom commercial banks do not believe are credit -worthy. C) it charges a higher interest rate to borrowers than does any other bank. D) it functions as the government s bank only when commercial banks fail to do so. 13. Fractional reserve banking refers to a banking system in which\sA) bank deposits are less than bank reserves. B) bank reserves are less than total deposits. C) bank reserves are only a fraction of required reserves. D) bank loans are less than bank reserves Which of the following will limit the expansion of the money supply following a new \sdeposit? A) Failure of banks to voluntarily hold excess reserves B) A strong demand for new loans C) A re-depositing of all loan proceeds D) People hanging onto currency in private safes outside of commercial banks 15. The fact that individuals whose credit worthiness is less than it appears to be are those \swho are most willing to borrow funds at any given interest rate is an example of\sA) adverse selection. B) symmetric information. C) moral bonuses. D) diverse origins. 16. Federal Deposit Insurance Corp. (FDIC) helps prevent\sA) risky behaviour on the part of bankers. B) inflation. C) bank runs. D) risky behaviour on the part of depositors. 17. Due to the existence of the FDIC, banks\sA) may make riskier loans knowing that their depositors are insured. B) have not changed their behaviour even with the existence of insurance. C) become more cautious in making loans. D) are no longer concerned about net worth. 18. If the reserve ratio is 11 percent , what is the potential money \smultiplier 19. The Fed buys $1 million in bonds from a bond dealer. The bond \sdealer deposits the money in a bank account. The reserve ratio \sis 15 percent . How much can the bank lend after taking the deposit 20. True or False. If the potential money multiplier = 4, then the \sreserve ratio = or 25 percent 21. a) Assume a 1 percent reserve ratio. What is the potential money \smultiplier b) What is the ultimate increase in the money supply if the Fed \sbuys $5 million of bonds from the public

22. Use the equation Pb=Ir , where Pb is the consol bond price, I is the annual income, r is the market interest rate to answer the following questions a. Suppose I = $500 and r = 5 percent , what is the bond's current price b. What happens to the bond price if r=10 percent while I stays at $500?

23. Explain what will take place in an AD-AS diagram if the Fed expands the money supply