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Key to Exercise Four

Key to Exercise Four
Key to Exercise Four

Key to Exercise Four

1.The monetary base is equal to

(c)all currency in circulation plus reserves held by banks.

2. Reserves equal

(c)deposits with the central bank plus vault cash.

3. Regulation Q was intended to

(a)maintain banks’ profitab ility by limiting competition for funds.

4. A bank lending depositors’ money to a local business and a pension fund

(b)both involve funds being channeled from savers to borrowers through financial intermediaries.

5. An automobile loan is likely to be a (an)

(b)intermediate-term debt instrument.

6 . In comparing money market instruments to capital market instruments we can say that

(d) money market instruments tend to be less risky, but more liquid than capital market instruments.

7. The percentage of deposits that banks must hold as reserves is called the

(b)required reserve ratio.

8. What is the most direct method a central bank uses to change the monetary base?

(a)Open market operations

9. If a central bank buys securities worth $10 million, then

(d)the sum of bank reserves and currency in circulation will increase by $10 million.

10.If the central bank purchases securities worth $10 million from a commercial bank, the banking system’s balance sheet will show

(c)a decrease in securities held of $10 million and an increase in bank reserves of $10 million.

11. If a central bank makes a discount loan of $2 million to a commercial bank, the central bank’s balance sheet will show

(a)an increase in discount loans of $2 million and an increase in bank reserves of $2 million.

12. Although open market operations and discount loans both change the monetary base, the central bank

(a) has greater control over open market operations than over discount loans.

13. Which of the following statements is correct?

(c)The central bank completely controls the volume of open market operations.

14. If a central bank purchases $50,000 in T-bills from a bank, by how much will the bank’s excess reserves increase?

(a)By $50,000

15. Holding other things constant, the currency-deposit ratio will

(b)decrease as income or wealth increases.

16. Required reserves are equal to

(d)the required reserve ratio times checkable deposits.

17. The money supply process focuses on the monetary base rather than on bank reserves because

(b)the central bank has better control of the monetary base than it does bank reserves.

18. Suppose a bank with no excess reserves buys Treasury securities from the Fed. In order to raise the additional funds necessary to meet its reserve requirements the bank may

(c)sell Treasury securities to another bank.

19.According to the equation of exchange, the velocity of money is equal to

(b)PY/M.

20. Suppose Acme Widget issues a one-year discount bond with a face value of $10,000, and received $9434, repaying $10,000 after one year. The interest rate on this bond would be

(c)6%.

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