Principles of Money and Banking Test Bank
Course Introduction
Principles of Money and Banking introduces students to the fundamental concepts and functions of money, banking, and financial institutions within modern economies. The course explores the role of money in facilitating trade, the process of money creation, and various types of financial instruments and institutions, including central banks and commercial banks. Students will analyze the mechanics of monetary policy, interest rate determination, and the influence of banking structures on economic stability and growth. Emphasis is placed on understanding how monetary and banking systems interact with broader economic policy, current events, and international financial markets.
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MandB 3 3rd Edition by Dean Croushore
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Page 2
Chapter 1: Money and the Financial System
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Sample Questions
Q1) The Federal Reserve creates money by
A)printing bills and circulating them in public meetings.
B)giving dollar bills to banks to circulate.
C)changing a number in its computer system.
D)spending money on government purchases.
Answer: C
Q2) Economic policy affects
A)only the amount of money in the economy.
B)only the lending policy of financial intermediaries.
C)the entire financial system.
D)how financial securities are traded and no other part of the financial system.
Answer: C
Q3) The nominal interest rate minus the expected inflation rate equals the A)potential interest rate.
B)natural interest rate.
C)true interest rate.
D)real interest rate.
Answer: D
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3
Chapter 2: The Financial System and the Economy
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Q1) In the United States, the biggest issuers of debt securities are A)households.
B)business firms.
C)governments.
D)financial intermediaries.
Answer: D
Q2) A treasury bond issued by the U.S.government
A)does not have a maturity date.
B)makes periodic payments of specific amounts.
C)pays dividends to the bond holders.
D)is a short-term debt security.
Answer: B
Q3) The ratio of debt to equity in the United States is about A)2.
B)2.5.
C)3.
D)3.5.
Answer: A
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Chapter 3: Money and Payments
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Q1) Fedwire is called a(n)______ payment system.
A)real-time
B)real-good
C)inside
D)fiat
Answer: A
Q2) Suppose your bank lowers its minimum balance requirement by $500.So you take $500 out of your checking account and put it into a money market deposit account.What is the overall effect on M1 and M2?
A)M1 falls by $500, M2 rises by $500.
B)M1 is unchanged, M2 is unchanged.
C)M1 falls by $500, M2 is unchanged.
D)M1 is unchanged, M2 rises by $500.
Answer: C
Q3) Costs of trading are referred to as______ costs.
A)trading
B)menu
C)shoe-leather
D)transactions
Answer: D
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Chapter 4: Present Value
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Q1) The present value of a series of future payments is
A)inversely related to the future value.
B)unrelated to the discount factor.
C)inversely related to the rate of discount.
D)directly related to the discount factor.
Q2) John spends $4,000 on a perpetuity that pays $150 each year.The yield to maturity of this perpetuity is
A)1.5%.
B)3.75%.
C)6.2 %.
D)15%.
Q3) Which of the following options would you choose to have if the rate of discount is 20 percent?
A)$300 in one year
B)$350 in two years
C)$420 in three years
D)$1500 in ten years
Q4) Consider a one-year discount bond that pays $2,000 one year from now.If the annual rate of discount is 3 percent, calculate the present value of the bond.
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Chapter 5: The Structure of Interest Rates
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Q1) An inverted yield curve indicates that
A)an economic expansion has just begun.
B)an economic expansion has been going on for several years.
C)a recession is about to begin.
D)a recession is nearly over.
Q2) Which of the following is true of the analysis of the term structure of interest rates?
A)It assumes that investors in longterm securities face high transaction costs.
B)It assumes that investors can predict shortterm interest rates accurately.
C)It assumes that the yield curve is always flat.
D)It assumes that investors in bonds have a preferred habitat.
Q3) Suppose that a risk-neutral investor has a choice between buying a one-year bond paying 4 percent today, a two- year bond paying 5 percent today, a three-year bond paying 5.3 percent today, or a four-year bond paying 5.8 percent today.The investor would buy
A)a one-year bond today.
B)a two-year bond today.
C)a three-year bond today.
D)a four-year bond today.
Q4) What do steep upward-sloping yield curves indicate about the business cycle?
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Chapter 6: Real Interest Rates
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Q1) In recessions, the short-term expected real interest rate usually
A)rises by about 4 percentage points.
B)rises by about 2 percentage points.
C)declines by about 2 percentage points.
D)declines by about 4 percentage points.
Q2) If your after-tax expected real interest rate is 3 percent on a one-year bond that pays 4 percent interest, what is the expected inflation rate if you face a tax rate of 20 percent?
A)0.0 percent
B)0.2 percent
C)2.0 percent
D)20.0 percent
Q3) Another name for the expected real interest rate is the
A)securitized real interest rate.
B)realized real interest rate.
C)ex-post real interest rate.
D)ex-ante real interest rate.
Q4) Explain why inflation risk is a problem for investors.
Q5) How can the expected inflation rate be measured?
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Chapter 7: Stocks and Other Assets
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Q1) The average amount by which the returns on stocks exceeds the return on debt securities is referred to as
A)beta coefficient.
B)gamma coefficient.
C)return spread.
D)equity premium.
Q2) Which of the following statements correctly identifies a difference between a stock exchange and a stock index?
A)A stock exchange refers to a market where stocks of government-owned enterprises are traded, while a stock index refers to a market where the stocks of privately-owned enterprises are traded.
B)A stock index refers to a market where stocks of government-owned enterprises are traded, while a stock exchange refers to a market where the stocks of privately-owned enterprises are traded.
C)A stock exchange refers to a market where stocks are traded, while a stock index reflects the average price of a collection of stocks.
D)A stock index refers to a market where stocks are traded, while a stock exchange reflects the average price of a collection of stocks.
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Chapter 8: How Banks Work
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Q1) A bank is said to have_____ when its average costs decline as its volume of sales increases.
A)economies of scope.
B)economies of scale.
C)cost diminution.
D)decreasing returns to scale.
Q2) Suppose a bank's excess reserves are equal to $100 million.The bank is required to hold $50 million as reserves.The bank currently holds _____as reserves.
A)$50 million
B)$100 million
C)$150 million
D)$200 million
Q3) If a bank has assets with the same time to maturity as its liabilities, then
A)the interest rate on assets changes faster than the interest rate on liabilities.
B)the interest rate on liabilities changes faster than the interest rate on assets.
C)changes in interest rates will not affect the bank's overall portfolio.
D)changes in interest rates puts the bank at a high risk of default.
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Chapter 9: Governments Role in Banking
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Q1) A credit union that obtains a federal charter obtains its charter from which government agency?
A)The Federal Savings and Loan Insurance Corporation
B)The National Credit Union Administration
C)The Federal Deposit Insurance Corporation
D)The Office of the Comptroller of the Currency
Q2) Which of the following illustrates a difference between the Federal Reserve and the Federal Deposit Insurance Corporation?
A)The Fed supervises most of the largest banks whereas the Federal Deposit Insurance Corporation has mostly very small banks under its supervision.
B)The Fed supervises state banks that do are not the members of the Federal Reserve System whereas the Federal Deposit Insurance Corporation supervises all financial holding companies.
C)The Fed supervises national banks that are not in Financial Holding Companies or bank holding companies whereas the Federal Deposit Insurance Corporation supervises bank holding companies.
D)The Fed supervises credit unions whereas the Federal Deposit Insurance Corporation supervises thrift institutions.
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11
Chapter 10: Economics Growth and Business Cycles
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Q1) Which of the following is likely to cause a recession according to real business cycle theorists?
A)A fall in fuel prices
B)A fall in aggregate demand
C)A sudden fall in productivity
D)A fall in money supply
Q2) The growth rate of output and employment in a country started declining after rising sharply for three years.In which stage of the business cycle is the country currently operating?
A)Peak
B)Trough
C)Expansion
D)Depression
Q3) Explain how a sudden change in productivity could lead to a change in economic output.Give an example.
Q4) The long boom period in the U.S.occurred from A)1929 1949.
B)1949 1970.
C)1970 1982.
D)1983 2007.
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Chapter 11: Modeling Money
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Sample Questions
Q1) Suppose, the money-demand equation is given by M<sup>D</sup> = P × [(0.25 × Y) ? (15 × i)], where P is the price level, Y is the level of output in billions, and i is the interest rate in percentage points.Initially, P= 2, Y = $500, and i = 3.If Y rises to $600 and the price level does not change, by how much should the Fed change the money supply if it wants to keep the nominal interest rate unchanged? Should the money supply rise or fall, and by how much? Use the liquidity-preference framework and show a diagram of this situation.
Q2) A model that does not allow variables to change over time is referred to as a
A)static model.
B)dynamic model.
C)partial-equilibrium model.
D)general-equilibrium model.
Q3) A general-equilibrium model is a model in which
A)all key macroeconomic variables are endogenous.
B)more than one key macroeconomic variable is exogenous.
C)only one macroeconomic variable is exogenous.
D)none of the key macroeconomic variables are endogenous.
Q4) Describe in words the relationships established in the two equations used by the Federal Reserve to forecast the demand for M2.
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Chapter 12: The Aggregate-Demandaggregate-Supply Model
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Q1) A rise in the real interest rate, everything else remaining unchanged, will cause business investment spending to
A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.
Q2) The_____ believe that an economy will adjust on its own without any government policy interventions.
A)Keynesians
B)classical economists
C)monetarists
D)institutional economists
Q3) When all capital and labor are fully utilized, the economy is said to be
A)at the peak of the business cycle.
B)experiencing an expansion.
C)at full employment.
D)sustainable.
Q4) Describe the arguement put forward by the Nobel laurete Robert E.Lucas about the flaws in the large structural macroeconomic models.
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Chapter 13: Modern Macroeconomic Models
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Q1) Which of the following is the third step in the procedure of conducting a research by researchers using a DSGE model?
A)To match up the model with economic data, using statistical techniques to calculate the size of shocks that occur.
B)To pose the question to be answered.
C)To simulate the model and compare statistical properties of the model with those of the data.
D)To develop a model containing major elements needed to answer the question, and to analyze the decision that each economic agent must face.
Q2) Describe the general procedures followed by DSGE researchers creating a new model.
Q3) A model that incorporates time and uncertainty in which prices, wages, and interest rates adjust to bring all markets to equilibrium and which allows economic agents to make decisions in their own interest is known as
A)A dynamic, stochastic, generalequilibrium model
B)A structural macroeconomic model
C)A businesscycle model
D)A statistical model
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Chapter 14: Economic Interdependence
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Q1) A correlation of_____between output growth in two regions would mean that output in the two regions are inversely related.
A)0
B)1
C)100
D)less than 0 between output growth in two regions would mean that output in the two regions are
Q2) U.S.citizens invested $10 billion in foreign securities during a certain year and $21 billion in acquiring capital goods in foreign countries while foreigners invested only $27.5 billion in U.S.during that year.The net foreign investment of U.S.during that year was .
A)-$3.5 billion.
B)-$58.5 billion.
C)$1.2 billion.
D)$3.5 billion.
Q3) How should a country respond when foreign investors withdraw investments from that country?
Q4) Explain how a shock in one country can be transmitted to other countries.List three ways this can happen and give an example of each.
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Page 16
Chapter 15: The Federal Reserve System
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Q1) Open-market operations are purchases and sales of
A)government securities in the secondary market.
B)government securities in the primary market.
C)corporate bonds in the secondary market.
D)corporate bonds in the primary market.
Q2) The Beigebook is
A)a report on recent international economic conditions and forecasts for the next two years.
B)a discussion of alternative policy choices and the implications of those choices.
C)a report on local economic conditions.
D)a report on Federal revenue and expenditure.
Q3) Comment on the success of various Fed chairmen in reducing inflation.
Q4) Why isn't the right to vote at FOMC meetings considered to be very important within the Fed?
Q5) What step does the Board of governors of the Fed take to ensure that the Fed does not built itself into an inefficient bureaucracy?
Q6) Describe the Beigebook, the Greenbook, and the Bluebook.
Q7) Describe the roles of the Federal Reserve governors other than the chairman.
Q8) Why are the deliberations of the FOMC kept secret?
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Chapter 16: Monetary Control
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Q1) Since the 2008 financial crisis, what has happened to the M1 and M2 multipliers?
Q2) What are the nontraditional policies suggested by Ben Bernanke for a central bank caught in a liquidity trap?
Q3) If the Fed decides to tighten monetary policy, it uses _____to_____ the money supply.
A)defensive open-market operations; decrease B)dynamic open-market operations; increase C)defensive open-market operations; increase D)dynamic open-market operations; decrease
Q4) If the ratio of currency to transaction accounts is 2, the ratio of nontransaction accounts to transaction accounts is 5, the ratio of retail money-market funds to transaction accounts is 1, the ratio of required reserves to transaction accounts is 0.08, and the ratio of excess reserves to transaction accounts is 0.02, the M2 multiplier is about
A)1.43.
B)2.12.
C)2.83.
D)4.25.
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Page 18
Chapter 17: Monetary Policy: Goals and Tradeoffs
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Sample Questions
Q1) The inflation surprise is defined as
A)the sum of the natural rate of unemployment and the ideal inflation rate.
B)the difference between the actual inflation rate and the expected inflation rate.
C)the expected inflation rate in an economy multiplied by the population of the economy.
D)the non-accelerating inflation rate of unemployment (NAIRU).
Q2) The equation for the Phillips curve in an economy is ? = ?<sup>e</sup> ? 0.5(U ? 5), If the inflation rate is 2 percent and the expected inflation rate is 4 percent, the unemployment rate in the economy must be
A)3.0 percent.
B)4.5 percent.
C)8.0 percent.
D)9.0 percent.
Q3) Describe the three major costs of unanticipated inflation and give an example of each.
Q4) Why is it difficult for policymakers to set policy based on the value of the unemployment rate relative to the natural rate of unemployment?
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19
Chapter 18: Rules for Monetary Policy
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Q1) The central bank of a country follows the Taylor rule to set its interest rate.If the equilibrium real interest rate rises by 1 percentage point, all other variables remaining unchanged,
A)the central bank should raise the nominal interest rate by 1 percentage point.
B)the central bank should lower the nominal interest rate by 1 percentage point.
C)the central bank should raise the nominal interest rate by 0.5 percentage points.
D)the central bank should lower the nominal interest rate by 0.5 percentage points.
Q2) If the money supply is $300 billion, the price level is 1.3, and the real output is 1,300 billion, what is the velocity of money?
A)0.33
B)3
C)5.63
D)300,000
Q3) What challenges do policymakers and researchers face in using the Taylor rule?
Q4) Why does the Taylor rule have such wide appeal?
Q5) Why are policymakers willing to use rules for monetary policy as general guides, but unlikely to follow such rules blindly?
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