Question

16. Suppose a bank has $2 million in deposits, a required reserve ratio of 20%, and the reserves of $500,000.00. Then it has excess reserves of
a. $100,000.00
b. $200,000.00
c. 300,000.00
d. 500,000.00

17. When money is used to express the value of goods and services, it is functioning as
a. a medium of exchange
b. a store value
c. a unit of account
d. a standard of value
e. all of the above

18. If the Fed wished to decrease the money supply, it could
a. decrease the discount rate
b. reduce the reserve requirements
c. perform an open market sale
d. raise the prime rate
e. perform all of the above

19. The federal funds rate is the interest rate that
a. banks charge on loans to each other
b,. the Federal reserve charges on loans to banks
c. banks charge their most creditworthy customers
d. banks pay on demand and deposits
e. the US government pays it on 30 year treasury bonds

20. The relationship that exists between interest rates and bond prices is
a. a constant relationship
b. a direct relationship
c. an inverse relationship
d. a fractional relationship

Answer 1

16. The bank has to keep 20% of $2 million deposit liability as reserve. Then the reserve requirement is 400,000.00. The bank has already a reserve of 500,000.00. at the federal reserve. Then the excess reserve is 100,000.00.

Answer: a. 100,000.00

17. Money performs the functions like medium of exchange, store of value and measure of value or unit of account. When the value of goods and services expressed in terms of money, it act as a unit of account.

Answer: c. unit of account.

18. When the Fed conduct of open market sale of bonds, the money supply in the economy decrease.

Answer: c. performs an open market sale.

19. Federal fund rate is the interest rate at which the depository institution (banks and credit institution) lend their reserve balance to each other on overnight basis.

Answer: a. banks charge on loans to each other.

20. The relationship between the interest rate and bond price is inverse. When the interest rate increase the bond price decrease and viceversa.

Answer: c. an inverse relationship.