Multiple choices
1. Banks face liquidity risk because
A) they can have difficulty meeting their depositor's demands to withdraw money.
B) they are unable to borrow from the Federal Reserve.
C) households and businesses may seek to borrow a large number of funds in a short period of time.
D) governments tend to run high budget deficits.
2. The original intention of the Fed's role as lender of last resort was to make loans to banks that were
A) not illiquid nor insolvent.
B) illiquid, but not insolvent.
C) insolvent, but not illiquid.
D) both illiquid and insolvent.
3. Why might a nation seek to maintain a pegged exchange rate?
A) It makes business planning easier for firms involved in the global economy.
B) It removes the need to intervene in the foreign exchange market.
C) It ensures that the exchange rate will remain at its equilibrium.
D) It makes their currency more attractive on the foreign exchange market.
4. Suppose a country pegs its currency. If investors start to believe the peg will collapse and the currency is going to depreciate, as the government defends the peg the interest rate will
A) Not move as interest rates must remain constant in a peg
B) Increase to maintain the peg
C) Decrease to maintain the peg
D) It depends on the inflation rate is low or high compared to the country to which the currency is pegged.
5. When the Fed extends loans to depository institutions
A) increases the level of reserves.
B) it decreases the level of reserves.
C) it reduces the total value of the assets on its balance sheet.
D) it reduces the total value of the liabilities on its balance sheet.
6. If the Fed buys securities worth $10 million, then
A) bank reserves will increase by $10 million.
B) bank reserves will decrease by $10 million.
C) currency in circulation will increase by $10 million.
D) bank holdings of securities increased by $10 million.
7. If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million
A) if the public holds the proceeds as currency.
B) if the public deposits the proceeds as checkable deposits.
C) if the public deposits the proceeds with the Treasury in a monetary base account.
D) whether the public holds the proceeds as currency or deposits them as checkable deposits.
8. The aggregate M1 consists of
A) currency plus all deposits in financial institutions.
B) currency plus savings deposits in financial institutions.
C) currency plus checkable deposits in financial institutions.
D) currency.
9. If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?
A) rise by $1 million
B) decline by $1 million
C) rise by $8 million
D) rise by $12.5 million
10. Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. Suppose Wells Fargo didn't have excess reserves, then by how much is Wells Fargo able to increase its loans?
A) $8 million
B) $92 million
C) $100 million
D) $1.25 billion
11. If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals
A) $550 million.
B) $1.54 billion.
C) $1.9 billion
D) $15 billion.
