In prosperous times, banks are likely to hold very small amounts of excess reserves because A. the Fed wants commercial banks to increase the money supply during economic expansions. B. the Federal Reserve Banks don’t pay interest on bank reserves. C. it’s very costly to transfer funds between commercial banks and the central banks. D. the Federal Reserve Banks want to minimize their interest payments on such deposits. 2. Firms whose central business is providing individual account shares of collections of stocks, bonds, or both are known as A. mutual funds companies. B. commercial banks. C. insurance companies. D. thrifts. 3. Paper money (currency) in the United States is issued by the A. United States Mint. B. national banks. C. United States Treasury. D. Federal Reserve Banks. 4. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for A. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the term auction facility, and a budgetary deficit. 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, raising the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary surplus. D. selling government securities, raising the reserve ratio, lowering the discount rate, increasing reserves available through the term auction facility, and a budgetary surplus. 5. During periods of rapid inflation, money may cease to work as a medium of exchange A. because people and businesses won’t want to accept it in transactions. B. unless it’s backed by gold. C. unless it has been designated legal tender. D. because it’s too scarce for everyone to have enough for transactions. 6. The reserve ratio refers to the ratio of a bank’s A. reserves to its liabilities and net worth. B. capital stock to its total assets. C. checkable deposits to its total liabilities. D. required reserves and vault cash to its checkable deposits. 7. Between March 2001 and November 2002, the Fed reduced the federal funds rate from 5 percent to just above 1 percent. The Fed’s purpose was to A. reduce the public debt. B. prevent rising inflation. C. promote recovery from recession. D. strengthen the international value of the dollar. 8. It’s costly to hold money because A. the rate at which money is spent may decline. B. in doing so, one sacrifices interest income. C. deflation may reduce its purchasing power. D. bond prices are highly variable. 9. Which one of the following statements about risky investments is correct? A. Riskier investments tend to sell for prices directly correlated with expected rates of return. B. Riskier investments tend to sell for higher prices; that is why they are considered to be riskier. C. Riskier investments tend to sell for lower prices so they provide a higher expected rate of return to compensate for risk. D. Riskier investments tend to sell for higher prices so they provide a higher expected rate of return to compensate for risk. 10. Wally owns 100 shares of stock in Mammoth Corporation that he purchased for $20 per share. Every year he has received, from company profits, $1 for each share he owns. If Wally sells all his shares at a price of $30 per share, he’ll receive a A. a capital gain of $30 per share. B. dividend of $10 per share. C. total capital gain of $1,000. D. total capital gain of $10. 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’t safely lend out more money. C. can safely lend out $50,000. D. can safely lend out $500,000. 12. Other things equal, if the supply of money is reduced, A. investment spending will increase. B. the interest rates will fall. C. bond prices will fall. D. the demand for money will increase. 13. Which one of the following statements about the money supply is correct? A. The money supply is backed by government bonds. B. The money supply is backed dollar-for-dollar with gold bullion. C. The money supply is backed dollar-for-dollar with gold and silver. 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. 14. If the Fed wants commercial banks to borrow and expand their reserves by a specific amount, what monetary policy tool best guarantees that it will happen? A. Open-market operations B. Term auction facility C. federal funds rate D. Reserve ratio 15. What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments? A. Compound interest B. Real rate of interest C. Present value D. Future value 16. Checkable deposits are classified as money because A. banks hold currency equal to the value of their checkable deposits. B. they can be readily used in purchasing goods and paying debts. C. they’re ultimately the obligations of the Treasury. D. they earn interest income for the depositor. 17. If the Fed were to increase the legal reserve ratio, we would expect A. higher interest rates, a contracted GDP, and depreciation of the dollar. B. higher interest rates, a contracted GDP, and appreciation of the dollar. C. lower interest rates, an expanded GDP, and depreciation of the dollar. D. lower interest rates, an expanded GDP, and appreciation of the dollar. 18. Which one of the following is presently a major deterrent to bank panics in the United States? A. Deposit insurance B. Thefractional reserve system C. The legal reserve requirement D. The gold standard 19. The amount that a commercial bank can lend is determined by its A. outstanding loans. B. required reserves. C. outstanding checkable deposits. D. excess reserves. 20. If the quantity of money demanded exceeds the quantity supplied, A. the demand-for-money curve will shift to the right. B. the supply-of-money curve will shift to the left. C. the interest rate will rise. D. the interest rate will fall.

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