Question

1. Which is MOST liquid?

a. a mortgage loan

b. checkable deposits in a bank

c. a new truck

d. a diamond

2. An illiquid bank is one that:

a. borrows in the market for federal funds.

b. borrows at the discount window.

c. has more short-term liabilities than short-term assets.

d. has more long-term assets than liabilities.

3. As the reserve ratio rises:

a. a bank's opportunity cost of holding reserves rises.

b. the interest rate on money will fall.

c. the money multiplier will decrease.

d. more loans will be extended.

4. When the Fed set up its Term Auction Facility in 2007–2008, its goal was to:

a. inject a certain quantity of reserves into banks.

b. set the discount rate to a certain percentage.

c. tighten control on legal requirements on banks.

d. decrease bank reserves.

5. As market interest rates rise:

a. a bank's opportunity cost of holding reserves rises.

b. fewer loans will be extended since they are now more costly to banks.

c. the money multiplier falls.

d. the reserve ratio required by the Fed also rises

6. To reduce the money supply in the economy, the Fed would:

a. increase the discount rate.

b. carry out open market purchases.

c. carry out open market sales and/or lower the discount rate.

d. carry out open market purchases and/or lower the discount rate.

7. A money market mutual fund invests in:

a. short-term debt and government securities.

b. long-term debt and government securities.

c. stocks.

d. real estate.

8. In the United States, the amount of cash per capita is about $4,000. This figure:

a. shows how much currency each American holds in their checking accounts.

b. misrepresents actual currency holdings in the United States because a lot of dollars are held outside the country.

c. accurately represents the size of the underground economy in the United States.

d. shows how much the world depends on the U.S. monetary system.

Answer 1

1. b. checkable deposits in a bank

Depositor can withdraw money at any time from bank.

2. d. has more long-term assets than liabilities.

3. c. the money multiplier will decrease.

Multiplier = 1/Reserve requirement

There is inverse relationship between reserve requirement and multiplier.

4. a. inject a certain quantity of reserves into banks.

5. a. a bank's opportunity cost of holding reserves rises.

Foregone interest rate of holding money in reserve increases which leads to increase in opportunity cost.

6. a. increase the discount rate.

This reduces lending in banks and thus decreases money supply.

7. a. short-term debt and government securities.

Money market mutual fund is an open-ended mutual fund that invests in short-term debt securities.