Macroeconomics ECO121
Practice Test For Selected Topics
Chapter 13
Money and Banking

The following questions have been altered and are the property of William Walstad in connection with the text of McConnell & Brue, Macroeconomics 12th edition, McGraw Hill, 1993.

If you can answer the following questions, you are on your way to a successful exam. If you can't answer some of them don't be intimidated. It is our job to understand why the correct answer is correct before we sit for the exam. Come and ask me for help or ask in class.

1. Which definition(s) of the money supply includes only items which are directly and immediately usable as a medium of exchange?
(a) M1
(b) M2
(c) M3
(d) M1 and M2

2. If bond prices decrease, then the:
(a) interest rate will decrease.
(b) interest rate will increase.
(c) transactions demand for money will decrease.
(D) transactions demand for money will increase.

3. A bank borrows money from another bank on an overnight basis to meet reserve requirements. This money would be borrowed in the:
(a) stock market.
(b) bond market.
(c) Federal funds market.
(d) U.S. Treasury bill market.

4. Large time deposits are included in:
(a) M1.
(b) M2.
(c) M3
(d) none of the above.

1. Money Market Mutual Funds
2. Non checkable savings deposits
3. Large time deposits
4. Currency in circulation (held by public)
5. Small denomination time deposits
6. Checkable deposits
7. Money market Deposit accounts

5. Refer to the above table. The M1 money supply is composed of items:
(a) 5 and 6.
(b) 4 and 6.
(c) 6 and 7.
(d) 5,6 and 7

6. The U.S. money supply is backed by:
(a) gold.
(b) silver.
(c) control over the money supply designed to keep the value of money stable over time.
(d) pledging physical assets, such as land, resources and public buildings as collateral for outstanding currency.

7. An increase in nominal income (GDP or NI) , will:
(a) decrease in the holdings of money as financial assets.
(b) decrease in the transactions demand for money.
(c) an increase in the transactions demand for money.
(d) decrease the transactions demand for money and decrease the asset demand for money.

8. As interest rates increase, the quantity demanded of money (liquidity preference):
(a) decreases.
(b) increases.
(c) does not change.
(d)will be greater than the quantity supplied.

9. A disequilibrium in the money market is corrected mainly by a change in:
(a) bond prices.
(b) the price level.
(c) savings levels.
(d) the money supply.

10. The Federal Reserve banks are owned by:
(a) the federal government.
(b) the Board of Governors.
(c) the U.S. Treasury.
(d) the member banks.

11. The Federal Open Market Committee of the Federal Reserve system (FED) is the committee which:
(a) provides advice on banking policy to the Fed.
(b) monitors regulatory banking laws for member banks.
(c) sets the policy on the sale and purchase of government bonds by the FED.
(d) follows the actions and operations of Financial markets to keep them open and competitive.

12. Members of the Federal Reserve system Board of Governors:
(a) are appointed by congress in staggering 14 year terms.
(b) areselected by the Federal Open market Committee.
(c) are appointed by the president for staggering 14 year terms.
(d) are selected by the member banking institutions.

13. The main function of the Federal Reserve system is to:
(a) serve as the fiscal agent of the federal government.
(b) supervise the operation of member banks.
(c) clear checks from member banks.
(d) control the money supply.

14. The Federal Reserve system:
(a) is basically and independent agency.
(b) has the same status as the Supreme court.
(c) has the status of a congressional committee.
(d) is an agency of the executive branch of the federal government.

15. The Depository Institution's Deregulation and Monetary Control Act of 1980:
(a) created larger distinctions between banks that are members and nonmembers.
(b) decreased the degree of competition between commercial banks and thrift institutions such as saving and loans.
(c) allowed all thrift institutions to offer checkable deposits, but required these institutions to be subject to the same reserve requirements as commercial banks.
(d) prohibited thrift institutions from offering checkable deposits.

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