Question

1. If China is going to maintain its peg with the dollar despite its trade surplus, what must the Bank of China do if it has no Sovereign Wealth Fund?

a.   Short sell dollars in exchange markets

b.   Reduce its vast holdings of dollars

c.   Increase its holdings of dollars

d.   Raise the value of its currency to discourage export surpluses

e.   Create a new currency

2.

Pick the two answers to the following: What would be the immediate effect on M1 of a bank customer withdrawing $100 from his checking account and keeping it as cash? _________. What is the longer term effect on the money supply of the action described in the preceding question? ___________
a.   M1 will decrease/money supply will decrease
b.   M1 will decrease/money supply will increase
c.   M1 will decrease/money supply will not change
d.   M1 will increase/money supply will decrease
e.   M1 will increase/money supply will increase
f.   M1 will increase/money supply will not change
g.   M1 will not change/money supply will decrease
h.   M1 will not change/money supply will increase
i.   M1 will not change/money supply will not change

3.What was the biggest weakness of the Gold Standard?
a.   It is too expensive to operate
b.   There is too little gold in the world to make it work effectively
c.   Countries are too slow to suspend gold convertibility during a crisis
d.   Countries usually abandon gold convertibility when it is needed most
e.   Big countries have too much power in the gold standard system

4. What was the original purpose of mortgaged backed securities?
a.   screw up the economy
b.   prevent speculation in the housing market
c.   diversify the economy
d.   reduce liquidity in housing markets
e.   increase liquidity in real estate financing markets
f.   provide a basis for derivative development

5. How can a run on banks cause the money supply to contract (decline) even though the Federal Reserve is not trying to reduce the money supply?

a.     a run on banks would force the Federal Reserve to react by reducing the money supply
b. a run on banks is an event that the Federal Reserve is legally prevented from dealing with
c.   a run on banks reduces interest rates and causes dollars to leave the country
d.   a run on banks causes depositors to withdraw funds from banks and banks are then forced to reduce lending
e.   a run on banks causes depositors to move their money from checking accounts to savings accounts, thus reducing the money supply
f.     a run on banks causes lenders to re-finace their loans to longer terms, thus reducing the money supply

6. Borrowing money in China has been described as: Borrow on the short strings, but repay with long strings. Why were there two strings of different length?

a.   This was a way in which bankers and lenders cheated borrowers
b.   This was a way of charging interest on the loan
c.   The short string was for Chinese borrowers, but the long string was for foreign borrowers
d.   The short string was for foreign borrowers, but the long string was for Chinese borrowers
e.   This happened so long ago that there was really no way of accurately measuring the strings

7. When a customer deposits money into a bank in a bank in our fractional reserve banking system, what does the bank do with it?

a.      it keeps it in the vault until the customer returns for it
b.      it deposits the full amount with the Federal Reserve
c.      it lends it all out
d.      it lends out the amount over the reserve requiremet
e.      it lends out am amount equal to the reserve requirement

8.

What is the fundamental benefit or value of a fractional reserve banking system? a.    It runs at a fraction of the cost of full-reserve banking b.    It keeps societies resources safe from speculation c.    It has proven to be a very effective way of collecting savings and channeling it into productive investments d.    It minimizes the reserves e.    It is very safe and free of inherent risks 9. Are well-run and profitable banks immune or safe from a run on the bank? a.    Yes, a well-run bank will never have to deal with a run on its bank as long as the money circulates b.    No, bank runs are something that can happen to any bank during a time of banking panic c.    Yes, profitably banks always have sufficient reserve on hand in the vault to handle any potential bank run d.    Yes, because bank customers will never create a run on a profitable bank

Answer 1

Ans:

1) Option C

Increase its holdings of dollars

China will acquire and hold more dollars using the surplus thus increasing the holdings of dollars.

2) Option H

M1 will not change/money supply will increase

M1 includes cash as well as checking accounts, demand deposits. The long term effect is that this will increase the money supply by the amount which the bank may have kept as reserves if the money is not withdrawn from checking accounts.

3) Option D

Countries usually abandon gold convertibility when it is needed most

The biggest weakness is when the Gold standard is most needed to correct trade imbalances countries would go off the gold standard.Hence it was never there in cases where it is needed most.