Money & Banking Questions

The Federal Reserve’s surveys of bank loan officers contain questions about

• All of the answers given are correct
• The interest rates being charged
• The supply of and demand for loans
• The quantity and quality of loans

“If central bankers raise the interest rate, the asset-price channel of monetary policy implies

• Stock prices will decrease
• Stock prices will remain the same but bond prices will increase
• Bond prices will remain flat
• Stock prices will increase and bond prices will remain flat

An open market sale of securities by the central bank to banks usually will

• Diminish the inclination of banks to make loans
• Induce the banks to make more loans since their revenue will decrease if they do nothing
• Increase the amount of deposits in the banking system
• Increase the banks’ willingness and ability to make loans

The relationship between real estate markets and interest rates is:

• Inverse, higher interest rates drive down real estate prices and vice versa
• Nonexistent
• Complex; cuts in the short-term interest rate lead to increases in long-term rates and higher real estate prices.
• Direct high interest rates lead to high real estate values as people abandon other financial assets

Most economists agree that the target rate of inflation for the central banks should be:

• Above zero for fears of deflation
• Between 7 and 9 percent
• Less than zero
• Something over 3 but less than 6 percent

One monopoly that modern central banks have is in:

• Issuing currency
• Regulating other banks
• Making loans to banks
• Issuing U.S. Treasury securities

The primary objective of most central banks in industrialized economies is:

• Price stability
• High securities prices
• Low unemployment
• A strong domestic currency

Which is a function of modern central banks?

• To control the availability of money and credit
• To control securities markets
• To control the government’s budget
• To manage fiscal policy

What matters most during a bank run is

• The liquidity of the bank
• The number of loans outstanding
• The solvency of the bank
• The size of the bank’s assets

If your stockbroker gives you bad advice and you lose your investment

• The government will not reimburse you for the loss, you are not protected from bad advice by your stockbroker
• The government will reimburse you similar to reimbursing depositors if a bank fails
• These losses would be covered under FDIC insurance
• Your investment would only be covered if the stockbroker was employed by a bank

Rumors of a bank failing, even if not true, can become a self-fulfilling prophecy because’”

• Depositors will rush to the bank to withdraw their deposits and the bank under normal situations would not have sufficient liquid assets on hand
• Regulators will scrutinize the bank heavily looking for something wrong
• Equity investors will not be able to sell the bank s stock
• Customers will not want to obtain loans from this bank

The government regulates bank mergers, sometimes denying the proposed merger.  Often the reason given for the denial is to protect small investors.  What are small investors being protected from?

• Mergers can increase the monopoly power of banks and the bank may seek to exploit this power by raising prices and earning unwarranted profits
• In order to pay for the merger, the bank may seek higher returns putting the depositors’ funds at greater risk
• With a larger bank the bank is likely to take greater risk and may fail
• Bank runs hurt larger banks more than smaller banks

“In the U.S., loans made by Federal Reserve to banks fall in the categories of.”

• Discount loans
• Reserves
• Discount loans and reserves
• Discount loans and foreign exchange reserves

Monetary policy operations for central banks are run through changes in the liability category of:

• Reserves
• Government’s accounts
• Currency
• Gold

Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve.  The Fed’s balance sheet will show: 

• An increase in the asset category of securities and the liability category of reserves by $2 billion
• “no change in the size of the balance sheet, just the composition of assets will change from cash to securities.”
• Only show an increase in the liability of reserves of $2 billion
• Only an increase in the assets of securities of $2 billion

A central bank’s balance sheet will categorize the following as liabilities:

• Currency
• Loans
• Securities
• Foreign exchange reserves

Which of the following would be categorized as an unconventional monetary policy tool?

• Targeted asset purchases
• The interest rate on excess reserves (IOER)
• Federal funds rate target range
• Deposit rate

Quantitative easing is:

• Expansion of the supply of aggregate reserves beyond the amount needed to maintain the policy rate target.
• Statements today about policy targets in the future
• Asset purchases that shift the composition of the Fed’s balance sheet
• Expansion of the demand for aggregate reserves to drive down the IOER

“The conventional policy tools available to the Fed include each of the following, except the:”

• Currency-to-deposit ration
• Discount rate
• Target federal funds rate range
• Reserve requirement

The Taylor rule is:

• An approximation that seeks to explain how the FOMC sets their target
• The monetary policy setting formula followed explicitly by the FOMC
• An explicit tool used by the ECB but no the Fed
• A rule adopted by Congress to make the Fed’s monetary policy more accountable to the public

The portfolio demand for money reflects

• The portion of wealth people desire to hold in the form of money
• The money we hold for our everyday transactions
• The money we hold to purchase stocks and bonds and other financial securities
• The money we hold for our everyday transactions and the money we hold to purchase stocks and bonds and other financial securities

A decline in the yields earned by bonds should:

• Increase the demand for money
• Not impact the demand for money since money doesn’t earn any interest
• Also decrease the demand for money
• Increase the velocity of money

“In high inflation countries, inflation rates can exceed the rate of growth of money because.”

• All of the answers given are correct
• Money loses value quickly with inflation
• High rates of inflation increase the opportunity cost of holding money
• High inflation increases the velocity of money

“Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the.”

• Money growth rate
• Unemployment rate
• Real economic growth rate
• Productivity of labor

A unit bank is a bank that

• Has no branches
• “provides a myriad of financial services, so customers get all or most of their financial needs taken care of at the bank.”
• Only offers savings accounts
• “only makes one type of loan (i.e., home mortgages)”

“In order for insurance companies to generate predictable payouts, they need to.”

• Spread the risk across many policies
• Accept policyholders from a very specific geographic area
• “focus on insuring only specific events, for example only fire.”
• Offer only life insurance

Universal banks are:

• Firms that engage a wide array of financial and non-financial activities
• Firms that engage in banking services across many countries
• Banks that make direct investment in non-financial firms
• Multinational corporations that own U.S. banks

The Gramm-Leach-Bliley Act:

• Repealed the Glass-Steagall Act’s prohibition of mergers between commercial banks and insurance or securities firms
• Repealed the Riegle-Neal Interstate Banking and Branching Efficiency Act
• Repealed the McFadden Act’s restriction on bank branching
• Reinforced the Glass-Steagall Act’s limitation on commercial banks’ availability to merge with insurance or securities firms by increasing the penalties for doing so

One way inflation reduces aggregate demand is by:

• Reducing real balances
• Increasing nominal GDP
• Increasing velocity
• Increasing wealth

A decrease in taxes would cause:

• The dynamic aggregate demand curve to shift to the right
• A movement up and along the existing dynamic aggregate demand curve
• A movement down and along the existing dynamic aggregate demand curve
• The dynamic aggregate demand curve to shift to the left

The slope of the monetary policy reaction curve is determined by:

• How aggressively policymakers change interest rates in response to deviations between current and target inflation rates
• How strongly the inflation rate impacts people’s decisions
• How strongly the economy reacts to changes in the nominal interest rate
• People’s expectations for inflation

“In the short run, the point on the aggregate demand curve where an economy will end up depends on.”

• The short-run aggregate supply curve
• Potential output
• The long-run rate of inflation
• The money supply

“When faced with negative supply shocks, policymakers.”

• Face a trade-off because they cannot simultaneously stabilized both output and inflation.
• Cannot stabilize output so they trend to focus on inflation
• Will always focus on stabilizing output
• Will stabilize both inflation and output

Which of the following would be classified as a negative supply shock?

• An increase in the legal minimum wage
• A decrease in the price of oil
• An increase in government purchases
• An increase in demand for exports

Stagflation is a term that usually describes an economy experiencing:

• High inflation coupled with low growth
• Low inflation
• Low inflation coupled with low growth
• Low unemployment rates and low inflation rates

Globalization and trade:

• All of the answers provided are correct
• Provide an opportunity to reduce inflation permanently
• Shifts both the short-run and long-run aggregate supply curves to the right
• Expands economic potential in a similar fashion to productivity enhancing technological progress

Member banks of the Federal Reserve System include:

• Nationally chartered banks and state chartered banks that decide to join
• Only nationally chartered banks
• All state chartered banks with assets exceeding $100 million
• Nationally chartered banks and all state chartered banks

One reason it took so long to have a central bank in the United States is that:

• States feared centralization of power
• It wasn’t needed
• State currencies worked fine
• All of the answer options are correct

The Reserve Banks of the Federal Reserve System are owned by:

• The commercial banks in their districts
• The taxpayers in their districts
• The U.S. Treasury
• The Board of Governors

The Agreement to form a European monetary union was formalized in the Treaty of

• Maastricht
• Paris
• Amsterdam
• Milan