Chapter 13 test

 1.	Question :
If you are worried about the price of assets such as bonds falling, you may be more inclined to hold money instead. You hold cash for the:

 	Student Answer:	speculative motive.


 2.	Question :
The reason why the banking system can increase checkable deposits by a multiple of initial deposits is that:

 	Student Answer:	borrowers often spend most of a loan, which is then deposited and available for more loans.


 3.	Question :
If the reserve ratio is 0.08, the simple money multiplier is:

 	Student Answer:	 12.5.


 4.	Question :
Excess reserves equal:

 	Student Answer:	 total reserves minus required reserves.


 5.	Question :
Assume the required reserve ratio is 0.20 and individuals hold no cash. Using the multiplier, what is the maximum amount of money that can be created from a $5 million deposit in the banking system?

 	Student Answer:	$20 million.


 6.	Question :
A bank has a reserve requirement of .08. If it has demand deposits of $200,000 and is holding $4,000 in reserves:

 	Student Answer:	the bank is not meeting its reserve requirement.


 7.	Question :
Refer to the graph depicting the market for loanable funds. If the quantity of savings exceeds the quantity of investment, and all savings are not channeled back into investment, the long-term interest rate in this economy is:


 	Student Answer:		 5 percent.


 8.	Question :
When a bank makes a loan, the money supply:

 	Student Answer:	 increases.

 9.	Question :
The formula for the simple money multiplier is:

 	Student Answer:	1/r where r is the reserve ratio.


 10.	Question :
The U.S. central bank is a financial institution that:

 	Student Answer:	has the sole right to issue currency, commonly referred to as notes.


 11.	Question :
The first bankers were:

 	Student Answer: goldsmiths.


 12.	Question :
Holding money for the speculative motive is holding cash because bond prices are falling.

 	Student Answer:		 True


 13.	Question :
For the owner of 500 shares of stock in General Electric, the shares of stock are a:

 	Student Answer:	financial asset.


 14.	Question :
The chief difference between the M1 and M2 measures of the money supply is:

 	Student Answer:	 M2 includes assets with a lower liquidity than those in M1.


 15.	Question :
The following are reasons why people hold cash money except:

 	Student Answer:	cash can earn interest.


 16.	Question :
The fraction of deposits a bank must hold in the form of reserves is called the:

 	Student Answer:	required reserve ratio.


 17.	Question :
A financial asset is liquid:

 	Student Answer:	if it can be readily exchanged for another asset or good.


 18.	Question :
The short-term interest rate is determined in the:

 	Student Answer: money market.


 19.	Question :
If instead of bartering, a person uses money to buy a pair of shoes, money is functioning as:

 	Student Answer:	a medium of exchange.


 20.	Question :
If the Fed printed too much money, the relative price of money would:

 	Student Answer:		 fall, and the money price of goods would rise.