1. Which of the following is included in M2 but not in M1? a. currency b. small-
ID: 1108777 • Letter: 1
Question
1. Which of the following is included in M2 but not in M1?
a. currency
b. small-denomination time deposits
c. demand deposits
2. Which of the following is true?
a. A bank is solvent when its deposits become positive.
b. A bank is insolvent when its reserves become negative
c. A bank is insolvent when its net worth becomes negative.
3. When a member bank borrows reserves from the Fed,
a. it pays an interest rate equal to the federal funds in the reserves market
b. it pays an interest rate called the discount rate.
c. it pays no interest rate but is required to repay the loan within the stipulated period.
4. The discount rate
a. is set by the Board of Governors.
b. is determined by markets forces of demand and supply in the market for bank reserves.
c. is determined by investment banks.
5. Open market transactions involve which of the following activities?
I. issuing new Federal Reserve notes
II. buying or selling newly issued government bonds to raise funds for the government
III. buying or selling previously issued government bonds to change the volume of bank reserves
a. II only
b. II and III only
c. I only
d. III only
6. If the Fed buys U.S. government bonds from the public, it
a. decreases the volume of reserves in the banking system and the money supply tends to fall.
b. increases the volume of reserves in the banking system and the money supply tends to grow.
c. increases the volume of reserves in the banking system and the money supply tends to fall.
7. The Fed can increase the federal funds rate by
a. buying government securities which decreases bank reserves.
b. selling government securities which decreases bank reserves.
c. buying government securities which increases bank reserves.
Explanation / Answer
1> b. small-denomination time deposits.
Reason
Time deposit is part of near money but it not as liquid as M1.
2> b. A bank is insolvent when its reserves become negative.
Reason
If the reserve is negative, it can no longer pay back the loan and thus the bank will turn insolvent.
3> b. it pays an interest rate called the discount rate
Reason
The discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve's discount window.
4> a. is set by the Board of Governors.
Reason
The government has full regulation over the federal or reserve bank.
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