Assignment

1. Which one of the following statements about open-market operations is correct?

A. Open-market operations refer to the specifying of loan maximums on stock purchases.
B. Open-market operations refer to central bank lending to commercial banks.
C. Open-market operations refer to purchases of stocks in the New York Stock Exchange.
D. Open-market operations refer to the purchase or sale of government securities by the Fed.

2. Which one of the following statements about the Fed is correct?

A. The Fed directly sets both the federal funds rate and the prime interest rate.
B. The Fed directly sets the prime interest rate but not the federal funds rate.
C. The Fed directly sets neither the federal funds rate nor the prime interest rate.
D. The Fed directly sets the discount rate and the prime interest rate.

3. Commercial banks and thrifts usually hold only small amounts of excess reserves because

A. the Fed doesn't pay interest on reserves.
B. the presence of such reserves tends to boost interest rates and reduce investment.
C. the Fed doesn't want commercial banks and thrifts to be too liquid.
D. the Fed constantly uses open market operations to eliminate excess reserves.

4. Which one of the following statements about risky investments is correct?

A. Riskier investments tend to sell for prices directly correlated with expected rates of return.
B. Riskier investments tend to sell for lower prices so they provide a higher expected rate of return to compensate for risk.
C. Riskier investments tend to sell for higher prices; that is why they are considered to be riskier.
D. Riskier investments tend to sell for higher prices so they provide a higher expected rate of return to compensate for risk.

5. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for

A. buying government securities, raising the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary surplus.
B. selling government securities, raising the reserve ratio, lowering the discount rate, increasing reserves available through the term auction facility, and a budgetary surplus.
C. buying government securities, reducing the reserve ratio, raising the discount rate, reducing reserves available through the term auction facility, and a budgetary deficit.
D. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the term auction facility, and a budgetary deficit.

6. Paper money (currency) in the United States is issued by the

A. Federal Reserve Banks.
B. national banks.
C. United States Mint.
D. United States Treasury.

7. A bank temporarily short of required reserves may be able to remedy this situation by

A. shifting some of its vault cash to its reserve account at the Federal Reserve.
B. borrowing funds in the federal funds market.
C. buying bonds from the public.
D. granting new loans.

8. The primary purpose of the legal reserve requirement is to

A. prevent banks from hoarding too much vault cash.
B. prevent commercial banks from earning excess profits.
C. provide a means by which the monetary authorities can influence the lending ability of commercial banks.
D. provide a dependable source of interest income for commercial banks

9. Other things equal, an excessive increase in the money supply will

A. decrease the purchasing power of each dollar.
B. increase the purchasing power of each dollar.
C. have no impact on the purchasing power of the dollar.
D. reduce the price level

10. George buys an antique car for $20,000 and sells it five years later for $24,000. George's per year rate of return is

A. 4 percent.
B. 20 percent.
C. 12 percent.
D. 10 percent.

11. If a corporation goes bankrupt,

A. neither stockholders nor bondholders receive any money.
B. bondholders get paid from the sale of company assets before stockholders do.
C. stockholders get paid from the sale of company assets before bondholders do.
D. stockholders must honor the debts to bondholders out of personal assets if necessary.

12. Which one of the following is presently a major deterrent to bank panics in the United States?

A. The fractional reserve system
B. The legal reserve requirement
C. The gold standard
D. Deposit insurance

13. The line that depicts the relationship between the average expected rate of return and the risk level of a financial asset is known as the

A. Beta Line.
B. Risk Premium Line.
C. Risk-Return Line.
D. Security Market Line.

14. Denny buys a rare coin for $200 and sells the coin 1 year later for $220. Denny's rate of return is

A. 91 percent.
B. 10 percent.
C. 20 percent.
D. 110 percent.

15. Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank

A. can't safely lend out more money.
B. can safely lend out $50,000.
C. can safely lend out $500,000.
D. can safely lend out $5 million.

16. The four main tools of monetary policy are

A. tax rate changes, changes in government expenditures, open-market operations, and the term auction facility.
B. the discount rate, the reserve ratio, the term auction facility, and open-market operations.
C. changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate.
D. tax rate changes, the discount rate, open-market operations, and the federal funds rate.

17. The Standard and Poor's 500 Index measures prices of the 500

A. largest bonds trading in the United States.
B. stocks of the largest companies in the United States.
C. largest index funds trading in the United States.
D. most-purchased consumer goods in the United States.

18. Most modern banking systems are based on

A. money of intrinsic value.
B. commodity money.
C. 100 percent reserves.
D. fractional reserves.

19. Which one of the following statements about default is correct?

A. "Default" occurs when bond issuers fails to make promised payments.
B. "Default" occurs when bond purchasers fails to pay full price for a bond.
C. "Default" occurs when corporations go bankrupt and stock becomes worthless.
D. "Default" occurs when stocks are not federally insured.