PRACTICE TEST 19

(Bassam AbuAlFoul)

Chapter 19 The Financial System, Money, and Prices Part I. Multiple Choice: Choose the best answer for the following questions.
1. Other things being equal, when the Central Bank raises the reserve requirement: a. the money supply tends to fall. b. bank reserves tend to expand. c. bank lending tends to increase. d. the money supply is not affected. 2. Suppose the Central Bank in a given country purchases $600 million of government securities from securities dealers who deposit the entire proceeds of the sale into banks. If the reserve requirement is 20%, banks will now have: a. $120 million in required reserves. b. $120 million in excess reserves. c. $480 million in total reserves. d. $720 million in excess reserves. 3. When the Central Bank sells securities in the open market, which of the following is likely to occur? a. Bank required reserves will increase. b. Interest rates will decrease. c. Bank reserves will increase. d. The money supply will decrease. 4. Sarah saves 10% of each paycheck so she can tour Europe two years from now. In this example, money is functioning as: a. a medium of exchange. b. a store of value. c. a unit of account. d. a standard of wealth. 5. Assume Bank A receives a deposit of $4,000. If the required reserve ratio is 15%, how much can Bank A loan out? a. $ 4,000 b. $ 3,400 c. $3,000 d. $600 6. Suppose there are no excess reserves in the banking system. We know that: a. banks can now expand the money supply. b. banks cannot expand the money supply. c. the Central Bank cannot expand the money supply. d. the Central Bank must increase the discount rate in order to curtail bank lending. 7. Suppose the reserve ratio is 10%. There are $100,000 of excess reserves in the banking system. The maximum amount by which the money supply can expand is: a. $10,000. b. $100,000. c. $900,000. d. $1,000,000. 8. Giving up a dirham to purchase an ice cream cone illustrates money's function as: a. a store of wealth. b. a unit of account. c. a medium of exchange. d. a standard of value. 9. For something to be a medium of exchange, it must be: a. legal tender. b. issued by the government. c. a commodity that is as valuable as a commodity as it is as money.

Page 1 of 4

d. generally accepted by people for goods and services. 10. Liquidity: a. is the ease with which an asset can be converted into a medium of exchange. b. measures the amount of income an asset earns. c. exists when net worth is positive. d. is something that only legal tender can possess. 11. Which of the following items is a liability to a bank? a. loans b. reserves c. deposits d. an interest-bearing asset owned by the bank 12. Sarah deposits $1,000 into her bank. The reserve requirement is 15%. If the bank holds no excess reserves: a. its loans will increase by $850, and its required reserves will increase by $150. b. it loans will increase by $150, and its required reserves will increase by $850. c. both its loans and its required reserves will increase by $850. d. both its loans and its required reserves will increase by $150. 13. Money whose acceptability in exchange is guaranteed by government decree rather than by any intrinsic value it may have is called: a. fiat money. b. commodity money. c. liquid money. d. coinage. 14. Which of the following are tools of monetary policy that are used by the Central Bank? a. open market operations b. discount rate policy c. changes in reserve requirements (or required reserve ratio) d. All of the above are tools of the Central Bank. 15. What is the most important function of the Central Bank? a. operating a check-collection system b. supervising and regulating banks c. issuing currency d. conducting the country's monetary policy 16. The paper money we used today in our economy is called a. commodity money. b. fiat money. c. plastic money. d. none of the above.

17. Determining relative prices is made easy and quick due to moneys function as a a. medium of exchange. b. store of value. c. unit of account. d. means of accumulating purchasing power. 18. A double coincidence of wants is necessary whenever exchange takes place in a. a barter economy. b. a money economy. c. barter or money economies. d. economies using a medium of exchange. 19. Modern money has value because a. it is backed by government stores of precious metals. b. it is produced by government and not privately. c. it has general acceptability. d. it serves as a store of value.

Page 2 of 4

20. Which of these assets is not in the Ml definition of the money supply? a. currency held outside banks b. checkable deposits c. travelers checks d. certificates of deposit 21. Suppose you bring $100 in currency to your bank and add it to your checkable deposits. At that moment, Ml _________ and reserves _________ a. rises, rise b. rises, remain unchanged c. remains unchanged, rise d. remains unchanged, fall 22. Center State Bank holds $11,000,000 in checkable deposits and $1,500,000 in reserves. What are the banks required-reserves if a required reserve ratio is 10 percent? a. $1,100,000 b. $500,000 c. $400,000 d. $150,000 23. When a bank makes a loan, it immediately records in a T-account a. a rise in an asset and an equal fall in another asset. b. a rise in a liability and an equal fall in another liability. c. a rise in an asset and an equal rise in a liability. d. a rise in an asset and an equal fall in a liability. 24. Suppose every bank has zero excess reserves under a required-reserve ratio of 10 percent. Ahmed brings $2,000 in currency to Bank A and adds it to his checking account. Bank A makes the largest loan it can to Sarah. She uses the loan to buy a new sofa, and the furniture store deposits her check in Bank B. How much money can Bank B now create? a. $18,000 b. $2,000 c. $1,620 d. $0 25. A required-reserve ratio of 12.5 percent gives rise to a money multiplier of a. 8.0. b. 1.25. c. 0.08. d. 87.5 percent. 26. Suppose every bank has zero excess reserves under a required-reserve ratio of 20 percent. Ali brings $1,000 in currency to his bank and adds it to his checking account. What is the maximum increase in checkable deposits in the economy? a. $20,000 b. $10,000 c. $5,000 d. $2,000 27. The money expansion process is stronger when cash leakages are ________ and banks hold on to ________ excess reserves. a. greater, more b. greater, fewer c. smaller, more d. smaller, fewer 28. Suppose the Central Band hands $6,000 in crisp new currency to Sarah, who deposits it in her checkable deposit. Under a required-reserve ratio of 10 percent, what is the maximum increase in money supply that is brought about by the banking system in the process of making new loans? a. $6,600 b. $16,000 c. $54,000 d. $60,000 29. Suppose Bank C makes a loan. When the borrower spends the money and it goes to Bank D, Bank C will have a T-account showing a. a reduction in loans and an equal reduction in reserves. b. a reduction in reserves and an equal reduction in checkable deposits. c. just a reduction in checkable deposits. d. just a reduction in loans. 30. Ali goes to his bank and withdraws $1,000 in currency from his checking account. If the requiredreserve ratio is 20 percent, then at Alis bank excess reserves a. rise by $800. b. rise by $200. c. fall by $200. d. fall by $800.

Page 3 of 4

31. Sarah goes to her bank and transfers $5,000 from her checking account there to a certificate of deposit account at the same bank. If the reserve requirement is 10 percent against checkable deposits and zero percent against certificates of deposit, does this transaction affect excess reserves at Saras bank? a. They remain unchanged. b. They fall by $500. c. They rise by $500. d. They rise by $4,500.

Part II: Internet:

You are also encouraged to visit the web site for your textbook which is rich in learning resources and materials related to each chapter. In addition, you can test your knowledge with the online quizzes. The internet address was provided in the course syllabus. Here it is again: http://highered.mcgrawhill.com/sites/007712961x/student_view0/index.html

ANSWERS (For Part I):

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. a. the money supply tends to fall. a. $120 million in required reserves. d. The money supply will decrease. b. a store of value. b. $ 3,400 b. banks cannot expand the money supply. d. $1,000,000. c. a medium of exchange. d. generally accepted by people for goods and services. a. is the ease with which an asset can be converted into a medium of exchange. c. deposits a. its loans will increase by $850, and its required reserves will increase by $150. a. fiat money. d. All of the above are tools of the Central Bank. d. conducting the country's monetary policy b fiat money because it does not have an intrinsic value. c With all goods having prices expressed in units of the same money, their prices vis--vis each other follow directly. c Direct exchange of good for good or money for a good requires both traders to have what the other trader wants. c Money is accepted in payment only if the recipient is confident she can use it in turn for payment. d Since certificates of deposit cannot be used in common transactions, say, at the campus bookstore, they are left out of the Ml definition. c Ml, containing currency and checkable deposits, does not change for the moment, but the banking system has more reservesin the form of vault cash. a This is ($11,000,000 x 0.1), with the $1,500,000 irrelevant to the calculation of required reserves. c Loans (an asset) rise, with an equal rise in checkable deposit liabilities. c Bank B has $1,800 added to its reserves and to its checkable deposits, so its excess reserves rise by [$1,800 (0.1 x $1,800)] =$1,620. a The money multiplier is (1/0.125). c The maximum change in checkable deposits is [(1/0.2) x $1,000]. d Under these circumstances, there are more reserves in the banking system, and they support more checkable deposits. c This is the excess reserves at Saras bank ($5,400) times the money multiplier (10). b This happens whenever a bank loses deposits to another bank. d Reserves fall by $1,000, but the bank needs to hold $200 less in reserves since its checkable deposit liabilities have fallen. c The banks reserves are unchanged, but required reserves fall by $500.

Page 4 of 4