At the time of the South Korean financial crisis, the merchant banks were

At the time of the South Korean financial crisis, the merchant banks were

A) almost virtually unregulated.
B) subject to heavy government regulation.
C) engaged in long-term lending to the corporate sector.
D) restricted to long-term foreign borrowing.

Answer: A

At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________.

At the time of the South Korean financial crisis, the government allowed many chaebol owned finance companies to convert to merchant banks. Finance companies ________ allowed to borrow abroad and merchant banks ________.

A) were not; could borrow abroad
B) were not; could not borrow abroad
C) were; could borrow abroad
D) were; could not borrow abroad

Answer: A

The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by

The chaebols encouraged the Korean government to open up Korean financial markets to foreign capital. The Korean government responded by 

A) allowing unlimited short-term foreign borrowing but maintained quantity restrictions on long-term foreign borrowing by financial institutions.
B) allowing unlimited short-term and long-term foreign borrowing by financial institutions.
C) maintaining quantity restrictions on short-term foreign borrowing but allowing unlimited long-term foreign borrowing by financial institutions.
D) not allowing any foreign borrowing by financial institutions.

Answer: A

Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were

Before the South Korean financial crisis, sales by the top five chaebols (family-owned conglomerates) were 

A) nearly 50% of GDP.
B) about 10% of GDP.
C) almost 90% of GDP.
D) nearly 25% of GDP.

Answer: A

The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as

The economic hardship resulting from a financial crises is severe, however, there are also social consequences such as 

A) increased crime.
B) difficulty getting a loan.
C) currency devaluations.
D) loss of output.

Answer: A

A feature of debt markets in emerging-market countries is that debt contracts are typically ________.

A feature of debt markets in emerging-market countries is that debt contracts are typically ________.

A) very short term
B) long term
C) intermediate term
D) perpetual

Answer: A

Argentina's financial crisis was due to

Argentina's financial crisis was due to

A) poor supervision of the banking system.
B) a lending boom prior to the crisis.
C) fiscal imbalances.
D) lack of expertise in screening and monitoring borrowers at banking institutions.

Answer: C

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include

A) rise in interest rates abroad.
B) bankers' lack of expertise in screening and monitoring borrowers.
C) deterioration of banks' balance sheets because of increasing loan losses.
D) stock market decline.

Answer: A

Factors that led to worsening financial market conditions in East Asia in 1997-1998 include

Factors that led to worsening financial market conditions in East Asia in 1997-1998 include

A) weak supervision by bank regulators.
B) a rise in interest rates abroad.
C) unanticipated increases in the price level.
D) increased uncertainty from political shocks.

Answer: A

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include

Factors that led to worsening conditions in Mexico's 1994-1995 financial markets include

A) failure of the Mexican oil monopoly.
B) the ratification of the North American Free Trade Agreement.
C) increased uncertainty from political shocks.
D) decline in interest rates.

Answer: C

The key factor leading to the financial crises in Mexico and the East Asian countries was

The key factor leading to the financial crises in Mexico and the East Asian countries was

A) a deterioration in banks' balance sheets because of increasing loan losses.
B) severe fiscal imbalances.
C) a sharp increase in the stock market.
D) a sharp decline in interest rates.

Answer: A

A sharp depreciation of the domestic currency after a currency crisis leads to

A sharp depreciation of the domestic currency after a currency crisis leads to 

A) higher inflation.
B) lower import prices.
C) lower interest rates.
D) decrease in the value of foreign currency-denominated liabilities.

Answer: A

In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency

In emerging market countries, many firms have debt denominated in foreign currency like the dollar or yen. A depreciation of the domestic currency 

A) results in increases in the firm's indebtedness in domestic currency terms, even though the value of their assets remains unchanged.
B) results in an increase in the value of the firm's assets.
C) means that the firm does not owe as much on their foreign debt.
D) strengthens their balance sheet in terms of the domestic currency.

Answer: A

Severe fiscal imbalances can directly trigger a currency crisis since

Severe fiscal imbalances can directly trigger a currency crisis since

A) investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency.
B) the government may stop printing money.
C) the government may have to cut back on spending.
D) the currency must surely increase in value.

Answer: A

The two key factors that trigger speculative attacks on emerging market currencies are

The two key factors that trigger speculative attacks on emerging market currencies are 

A) deterioration in bank balance sheets and severe fiscal imbalances.
B) deterioration in bank balance sheets and low interest rates abroad.
C) low interest rates abroad and severe fiscal imbalances.
D) low interest rates abroad and rising asset prices.

Answer: A

Factors likely to cause a financial crisis in emerging market countries include

Factors likely to cause a financial crisis in emerging market countries include

A) fiscal imbalances.
B) decreases in foreign interest rates.
C) a foreign exchange crisis.
D) too strong oversight of the financial industry.

Answer: A

The mismanagement of financial liberalization in emerging market countries can be understood as a severe ________.

The mismanagement of financial liberalization in emerging market countries can be understood as a severe ________. 

A) principal/agent problem
B) asymmetric information problem.
C) lemons problem.
D) free-rider problem.

Answer: A

In emerging market countries, the deterioration in bank's balance sheets has more ________ effects on lending and economic activity than in advanced countries.

In emerging market countries, the deterioration in bank's balance sheets has more ________ effects on lending and economic activity than in advanced countries.

A) negative
B) positive
C) affirming
D) advancing

Answer: A

Financial crises generally develop along two basic paths:

Financial crises generally develop along two basic paths:

A) mismanagement of financial liberalization/globalization and severe fiscal imbalances.
B) stock market declines and severe fiscal imbalances.
C) mismanagement of financial liberalization/globalization and stock market declines.
D) stock market declines and unanticipated declines in the value of the domestic currency.

Answer: A

The government bailout of troubled financial institutions occurred in the U.S. and many other countries. Which country saw their banking system collapse requiring the government to take over its three largest banks?

The government bailout of troubled financial institutions occurred in the U.S. and many other countries. Which country saw their banking system collapse requiring the government to take over its three largest banks?

A) Iceland
B) England
C) Germany
D) Belgium

Answer: A

The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis. These provisions included all of the following except

The Economic Recovery Act of 2008 had several provisions to promote recovery from the subprime financial crisis. These provisions included all of the following except

A) guaranteed all the deposits of the commercial banks.
B) purchase of subprime mortgage assets from troubled financial institutions by the Treasury.
C) temporarily raised the limit of the federal deposit insurance from $100,000 to $250,000.
D) guarantee of par value for money market mutual fund shares for one year by the Treasury.

Answer: A

Credit market problems of adverse selection and moral hazard increased as a result of all of the following except

Credit market problems of adverse selection and moral hazard increased as a result of all of the following except

A) increase in housing market prices.
B) increased uncertainty from the failures of financial institutions.
C) deterioration in financial institutions' balance sheets.
D) decline in the stock market of over 40% from its peak.

Answer: A

The largest bank failure in U.S. history was ________ which went into receivership by the FDIC on September 25, 2008.

The largest bank failure in U.S. history was ________ which went into receivership by the FDIC on September 25, 2008.

A) Washington Mutual
B) Bank of America
C) J.P. Morgan
D) Wells Fargo

Answer: A

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?

A) Lehman Brothers
B) Merrill Lynch
C) Bear Stearns
D) Goldman Sachs

Answer: A

Like a CDO, a structured investment vehicle pays off cash flows from pools of assets, however, rather than long-term debt the structured investment vehicle backs

Like a CDO, a structured investment vehicle pays off cash flows from pools of assets, however, rather than long-term debt the structured investment vehicle backs

A) commercial paper.
B) Treasury notes.
C) corporate bonds.
D) municipal bonds.

Answer: A

Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in

Although the subprime mortgage market problem began in the United States, the first indication of the seriousness of the crisis began in 

A) Europe.
B) Australia.
C) China.
D) South America.

Answer: A

When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that

When housing prices began to decline after their peak in 2006, many subprime borrowers found that their mortgages were "underwater." This meant that 

A) the value of the house fell below the amount of the mortgage.
B) the basement flooded since they could not afford to fix the leaky plumbing.
C) the roof leaked during a rainstorm.
D) the amount that they owed on their mortgage was less than the value of their house.

Answer: A

Agency problems in the subprime mortgage market included all of the following except

Agency problems in the subprime mortgage market included all of the following except

A) homeowners could refinance their houses with larger loans when their homes appreciated in value.
B) mortgage originators had little incentives to make sure that the mortgage is a good credit risk.
C) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back.
D) the evaluators of securities , the credit rating agencies, were subject to conflicts of interest.

Answer: A

Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created a

Mortgage brokers often did not make a strong effort to evaluate whether the borrower could pay off the loan. This created a 

A) severe adverse selection problem.
B) decline in mortgage applications.
C) call to deregulate the industry.
D) decrease in the demand for houses.

Answer: A

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.

The originate-to-distribute business model has a serious ________ problem since the mortgage broker has little incentive to make sure that the mortgagee is a good credit risk.

A) principal-agent
B) debt deflation
C) democratization of credit
D) collateralized debt

Answer: A

The growth of the subprime mortgage market led to

The growth of the subprime mortgage market led to 

A) increased demand for houses and helped fuel the boom in housing prices.
B) a decline in the housing industry because of higher default risk.
C) a decrease in home ownership as investors chose other assets over housing.
D) decreased demand for houses as the less credit-worthy borrowers could not obtain residential mortgages.

Answer: A

A ________ pays out cash flows from subprime mortgage-backed securities in different tranches, with the highest-rated tranche paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities.

A ________ pays out cash flows from subprime mortgage-backed securities in different tranches, with the highest-rated tranche paying out first, while lower ones paid out less if there were losses on the mortgage-backed securities.

A) Collateralized debt obligation (CDO)
B) Adjustable-rate mortgage
C) Negotiable CD
D) Discount bond

Answer: A

_______ is a process of bundling together smaller loans (like mortgages) into standard debt securities.

_______ is a process of bundling together smaller loans (like mortgages) into standard debt securities.

A) Securitization
B) Origination
C) Debt deflation
D) Distribution

Answer: A

Financial innovations that emerged after 2000 in the mortgage markets included all of the following except

Financial innovations that emerged after 2000 in the mortgage markets included all of the following except

A) adjustable-rate mortgages.
B) subprime mortgages.
C) Alt-A mortgages.
D) mortgage-backed securities.

Answer: A

The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.

The economy recovers quickly from most recessions, but the increase in adverse selection and moral hazard problems in the credit markets caused by ________ led to the severe economic contraction known as The Great Depression.

A) debt deflation
B) illiquidity
C) an improvement in banks' balance sheets
D) increases in bond prices

Answer: A

A possible sequence for the three stages of a financial crisis in the U.S. might be ________ leads to ________ leads to ________.

A possible sequence for the three stages of a financial crisis in the U.S. might be ________ leads to ________ leads to ________.

A) asset price declines; banking crises; unanticipated decline in price level
B) unanticipated decline in price level; banking crises; increase in interest rates
C) banking crises; increase in interest rates; unanticipated decline in price level
D) banking crises; increase in uncertainty; increase in interest rates

Answer: A

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called

A substantial decrease in the aggregate price level that reduces firms' net worth may stall a recovery from a recession. This process is called

A) debt deflation.
B) moral hazard.
C) insolvency.
D) illiquidity.

Answer: A

Debt deflation occurs when

Debt deflation occurs when

A) an economic downturn causes the price level to fall and a deterioration in firms' net worth because of the increased burden of indebtedness.
B) rising interest rates worsen adverse selection and moral hazard problems.
C) lenders reduce their lending due to declining stock prices (equity deflation) that lowers the value of collateral.
D) corporations pay back their loans before the scheduled maturity date.




Answer: A

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n)

If uncertainty about banks' health causes depositors to begin to withdraw their funds from banks, the country experiences a(n) 

A) banking crisis.
B) financial recovery.
C) reduction of the adverse selection and moral hazard problems.
D) increase in information available to investors.

Answer: A

Most U.S. financial crises have started during periods of ________ either after the start of a recession or a stock market crash.

Most U.S. financial crises have started during periods of ________ either after the start of a recession or a stock market crash.

A) high uncertainty
B) low interest rates
C) low asset prices
D) high financial regulation

Answer: A

Many 19th century U.S. financial crises were started by

Many 19th century U.S. financial crises were started by 

A) spikes in interest rates.
B) financial innovation.
C) onerous financial regulations.
D) a strong improvement in banks' balance sheets.

Answer: A

A credit boom can lead to a(n) ________ such as we saw in the tech stock market in the late 1990s.

A credit boom can lead to a(n) ________ such as we saw in the tech stock market in the late 1990s.

A) asset-price bubble
B) liability war
C) decline in lending
D) decrease in moral hazard




Answer: A

When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in

When financial intermediaries deleverage, firms cannot fund investment opportunities resulting in 

A) a contraction of economic activity.
B) an economic boom.
C) an increased opportunity for growth.
D) a call for government regulation.

Answer: A

When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called

When the value of loans begins to drop, the net worth of financial institutions falls causing them to cut back on lending in a process called

A) deleveraging.
B) releveraging.
C) capitulation.
D) deflation.

Answer: A

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a

When financial institutions go on a lending spree and expand their lending at a rapid pace they are participating in a

A) credit boom.
B) credit bust.
C) deleveraging.
D) market race.

Answer: A

In emerging economies, government fiscal imbalances may cause fears of

In emerging economies, government fiscal imbalances may cause fears of

A) debt deflation.
B) default on government debt.
C) stock price declines.
D) lower interest rates.

Answer: B

In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firms' and households' interest payments, thereby ________ their cash flow.

In addition to having a direct effect on increasing adverse selection problems, increases in interest rates also promote financial crises by ________ firms' and households' interest payments, thereby ________ their cash flow.

A) increasing; increasing
B) increasing; decreasing
C) decreasing; decreasing
D) decreasing; increasing

Answer: B

A bank panic can lead to a severe contraction in economic activity due to

A bank panic can lead to a severe contraction in economic activity due to

A) a decline in international trade.
B) the losses of bank shareholders.
C) the losses of bank depositors.
D) a decline in lending for productive investment.

Answer: D

In a bank panic, the source of contagion is the

In a bank panic, the source of contagion is the 

A) free-rider problem.
B) too-big-to-fail problem.
C) transactions cost problem.
D) asymmetric information problem.

Answer: D

Factors that lead to worsening conditions in financial markets include:

Factors that lead to worsening conditions in financial markets include:

A) declining interest rates.
B) unanticipated increases in the price level.
C) the deterioration in banks' balance sheets.
D) increases in bond prices.

Answer: C

If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in

If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in 

A) a decline in a firm's net worth.
B) an increase in a firm's net worth.
C) a decrease in adverse selection and moral hazard.
D) an increase in willingness to lend.

Answer: A

An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firms' assets. The result is

An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firms' assets. The result is 

A) that net worth in real terms declines.
B) that adverse selection and moral hazard problems are reduced.
C) an increase in the real net worth of the borrowing firm.
D) an increase in lending.

Answer: A

A sharp stock market decline increases moral hazard incentives

A sharp stock market decline increases moral hazard incentives

A) since borrowing firms have less to lose if their investments fail.
B) because it is immoral to profit from someone's loss.
C) since lenders are more willing to make loans.
D) reducing uncertainty in the economy and increasing market efficiency.

Answer: A

A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.

A sharp decline in the stock market means that the ________ of corporations has fallen making lenders ________ willing to lend.

A) net worth; less
B) net worth; more
C) liability; less
D) liability; more

Answer: A

A serious consequence of a financial crisis is

A serious consequence of a financial crisis is 

A) a contraction in economic activity.
B) an increase in asset prices.
C) financial engineering.
D) financial globalization.

Answer: A

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system 

A) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds efficiently.
B) allows for a more efficient use of funds.
C) increases economic activity.
D) reduces uncertainty in the economy and increases market efficiency.

Answer: A

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

A major disruption in financial markets characterized by sharp declines in asset prices and firm failures is called a

A) financial crisis.
B) fiscal imbalance.
C) free-rider problem.
D) "lemons" problem.

Answer: A

The increase in the currency ratio during World War II was due to

The increase in the currency ratio during World War II was due to

A) bank panics.
B) a drop in the rate of interest paid on checking deposits.
C) the spread of ATMs.
D) high taxes and illegal activities.

Answer: D

The factor accounting for the steepest rise in the currency ratio since 1892 is

The factor accounting for the steepest rise in the currency ratio since 1892 is

A) taxes.
B) bank panics.
C) illegal activity.
D) an increase in wealth

Answer: B

The steepest increase in the currency ratio since 1892 occurred during

The steepest increase in the currency ratio since 1892 occurred during

A) World War II.
B) the Great Depression.
C) the interwar years.
D) the past twenty years.

Answer: B

The increase in the availability of ATM's has caused the cost of acquiring currency to ________ which will cause the currency ratio to ________, everything else held constant.

The increase in the availability of ATM's has caused the cost of acquiring currency to ________ which will cause the currency ratio to ________, everything else held constant.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Answer: C

Everything else held constant, an increase in the interest rate paid on checkable deposits will cause ________ in the amount of checkable deposits held relative to currency holdings and ________ in the currency ratio.

Everything else held constant, an increase in the interest rate paid on checkable deposits will cause ________ in the amount of checkable deposits held relative to currency holdings and ________ in the currency ratio.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: B

Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to ________ and the currency ratio will ________.

Everything else held constant, an increase in wealth will cause the holdings of checkable deposits to the holdings of currency to ________ and the currency ratio will ________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Answer: B

Part of the increase in currency holdings in the 1960s and 1970s can be attributed to

Part of the increase in currency holdings in the 1960s and 1970s can be attributed to

A) increases in income tax rates.
B) the switch from progressive to proportional income taxes.
C) the adoption of regressive taxes.
D) bracket creep due to inflation and progressive income taxes.

Answer: D

Factors causing an increase in currency holdings include

Factors causing an increase in currency holdings include

A) an increase in the interest rates paid on checkable deposits.
B) an increase in the cost of acquiring currency.
C) a decrease in bank panics.
D) an increase in illegal activity.

Answer: D

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.

A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease

Answer: C

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

Everything else held constant, an increase in the excess reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: D

Everything else held constant, an increase in the money market fund ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

Everything else held constant, an increase in the money market fund ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease

Answer: B

Everything else held constant, an increase in the money market fund ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

Everything else held constant, an increase in the money market fund ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: A

Everything else held constant, an increase in the time deposit ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

Everything else held constant, an increase in the time deposit ratio will result in ________ in the M1 money multiplier and ________ in the M2 money multiplier.

A) an increase; an increase
B) no change; an increase
C) a decrease; a decrease
D) no change; a decrease

Answer: B

Everything else held constant, an increase in the time deposit ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

Everything else held constant, an increase in the time deposit ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: A

Everything else held constant, an increase in the required reserve ratio will result in ________ in M1 and ________ in M2.

Everything else held constant, an increase in the required reserve ratio will result in ________ in M1 and ________ in M2.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: D

Everything else held constant, an increase in the required reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

Everything else held constant, an increase in the required reserve ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: D

Everything else held constant, a decrease in the currency ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.

Everything else held constant, a decrease in the currency ratio will mean ________ in the M1 money multiplier and ________ in the M2 money multiplier.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: A

Everything else held constant, an increase in the currency ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

Everything else held constant, an increase in the currency ratio will mean ________ in the M2 money multiplier and ________ in the M2 money supply.

A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Answer: D

The M2 money multiplier is

The M2 money multiplier is

A) negatively related to high-powered money.
B) positively related to the time deposit ratio.
C) positively related to the required reserve ratio.
D) positively related to the excess reserves ratio.

Answer: B

The M2 money supply is represented by

The M2 money supply is represented by

A) M2 = × MB.
B) M2 = × .
C) MB = × M2.
D) MB = × .

Answer: A

In the model of the money supply process for M2, the relationship between checkable deposits and the M2 money supply is represented by

In the model of the money supply process for M2, the relationship between checkable deposits and the M2 money supply is represented by

A) D = 1/(1+c+t+mm) × M2.
B) D = (1 + c + t + mm) × M2.
C) M2 = × D.
D) M2 = .

Answer: A

The equation that represents M2 in the model of the money supply process is

The equation that represents M2 in the model of the money supply process is

A) M2 = C + D.
B) M2 = C + D + T - MMF.
C) M2 = C + D - T + MMF.
D) M2 = C + D + T + MMF

Answer: D

Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States.

Suppose the Bank of China permanently decreases its purchases of U.S. government bonds and, instead, holds more dollars on deposit at the Federal Reserve. Everything else held constant, a open market ________ would be the appropriate monetary policy action for the Fed to take to offset the expected ________ in the monetary base in the United States.

A) purchase; decrease
B) purchase; increase
C) sale; decrease
D) sale; increase

Answer: A

Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause ________ in the monetary base, everything else held constant.

Suppose, while cleaning out its closets, a worker at the Federal Reserve bank branch in Memphis discovers a painting of Elvis (medium: acrylic on velvet) that used to grace the walls of the conference room. Suppose further that, at a public auction, the bank sells the painting for $19.95. This sale will cause ________ in the monetary base, everything else held constant.

A) an increase of $19.95
B) an increase of more than $19.95
C) a decrease of $19.95
D) a decrease of more than $19.95

Answer: C

An increase in which of the following leads to a decline in the monetary base?

An increase in which of the following leads to a decline in the monetary base?

A) Float
B) Discount loans
C) Foreign deposits at the Fed
D) SDRs

Answer: C

U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base.

U.S. Treasury deposits at the Fed are ________ for the Fed but ________ for the Treasury. Thus an increase in U.S. Treasury deposits ________ the monetary base.

A) a liability; an asset; increases
B) a liability; an asset; decreases
C) an asset; a liability; increases
D) an asset; a liability; decreases

Answer: B

An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.

An increase in U.S. Treasury deposits at the Fed reduces both ________ and the ________.

A) reserves; monetary base
B) Fed liabilities; money multiplier
C) Fed assets; monetary base
D) Fed assets; money multiplier

Answer: A

An increase in Treasury deposits at the Fed causes

An increase in Treasury deposits at the Fed causes

A) the monetary base to increase.
B) the monetary base to decrease.
C) Fed assets to increase but has no effect on the monetary base.
D) Fed assets to decrease but has no effect on the monetary base.

Answer: B

A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other asset is just an open market ________ of these assets, ________ the monetary base.

A Fed purchase of gold, SDRs, a deposit denominated in a foreign currency or any other asset is just an open market ________ of these assets, ________ the monetary base.

A) purchase; raising
B) sale; raising
C) purchase; lowering
D) sale; lowering

Answer: A

When the Fed purchases artwork to decorate the conference room at the Federal Reserve Bank of Kansas City,

When the Fed purchases artwork to decorate the conference room at the Federal Reserve Bank of Kansas City,

A) reserves rise, but the monetary base falls.
B) reserves fall.
C) currency in circulation falls.
D) the monetary base rises.

Answer: D

Which of the following are not liabilities on the Fed's balance sheet?

Which of the following are not liabilities on the Fed's balance sheet?

A) Discount loans
B) Bank deposits
C) Deferred availability cash items
D) U.S. Treasury deposits

Answer: A

Which of the following are not assets on the Fed's balance sheet?

Which of the following are not assets on the Fed's balance sheet?

A) Securities
B) Discount loans
C) Cash items in the process of collection
D) Deferred availability cash items

Answer: D

Which of the following are not assets on the Fed's balance sheet?

Which of the following are not assets on the Fed's balance sheet?

A) Discount loans
B) U.S. Treasury deposits
C) Cash items in the process of collection
D) U.S. Treasury bills

Answer: B

When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a claim on the gold or SDRs, and in turn is credited with deposit balances at the ________.

When the Treasury acquires gold or SDRs, it issues certificates to the ________, which are a claim on the gold or SDRs, and in turn is credited with deposit balances at the ________.

A) Federal Reserve System; Fed
B) Federal Reserve System; IMF
C) International Monetary Fund; Fed
D) International Monetary Fund; IMF

Answer: A

Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions.

Special Drawing Rights (SDRs) are issued to governments by the ________ to settle international debts and have replaced ________ in international transactions.

A) Federal Reserve System; gold
B) Federal Reserve System; dollars
C) International Monetary Fund; gold
D) International Monetary Fund; dollars

Answer: C

The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest rate on these loans, called the

The volume of loans that the Fed makes to banks is affected by the Fed's setting of the interest rate on these loans, called the

A) federal funds rate.
B) prime rate.
C) discount rate.
D) interbank rate

Answer: C

The Fed's holdings of securities consist primarily of ________, but also in the past have included ________.

The Fed's holdings of securities consist primarily of ________, but also in the past have included ________.

A) Treasury securities; bankers' acceptances
B) municipal securities; bankers' acceptances
C) bankers' acceptances; Treasury securities
D) Treasury securities; municipal securities

Answer: A

The two most important categories of assets on the Fed's balance sheet are ________ and ________ because they earn interest.

The two most important categories of assets on the Fed's balance sheet are ________ and ________ because they earn interest.

A) discount loans; coins
B) securities; discount loans
C) gold; coins
D) cash items in the process of collection; SDR certificate accounts

Answer: B

Which is the most important category of Fed assets?

Which is the most important category of Fed assets?

A) Securities
B) Discount loans
C) Gold and SDR certificates
D) Cash items in the process of collection

Answer: A