Money and Banking Final Exam Review Sheet 1. What is the definition of money, fu
ID: 1130297 • Letter: M
Question
Money and Banking
Final Exam Review Sheet
1. What is the definition of money, functions of money? Which functions does inflation hurt?
2. Who are the players in the financial system?
3. What is traded in the financial markets?
4. If you buy a company's share, you are ___________, but If you buy a company's bond you are ____________
5. Payments to bond holders are called ____________, while payments to shareholders are called ______________
6. When interest rate is higher than equilibrium rate of borrowing loanable funds then financial system has
A. short-term funds
B. long-term funds
C. surplus of funds
D. deficit of funds
7. The left Shift of demand curve in loanable funds market to down and to left then there must be
A. Increases equilibrium interest rate
B. decreases in funds traded
C. increase in funds traded
D. rise of international funds
8. Which equation shows the total change in output resulting from a change in government spending policy?
A. (change in government purchases) * 1 / (1 - MPC)
B. (change in government purchases) / (MPC)
C. (change in government purchases) / (1 + MPC)
D. (change in government purchases) * (MPC)
9. What is the effect of expansionary fiscal policy on the interest rate?
A. Decreases it
B. It depends
C. Does not affect it
D. Increases it
10. Which of the following statements is true regarding the interest rate in the market for loanable funds, other things constant?
A. The equilibrium interest rate is determined at the point where the supply of loanable funds equals the demand for loanable funds.
B. If there is a shortage in the loanable funds market, the interest rate will tend to rise.
C. If there is a surplus in the loanable funds market, the interest rate will tend to fall.
D. These are all true regarding the market for loanable funds.
11. within the loanable funds framework, if the market interest rate exceeds the equilibrium interest rate, then
A. the volume of loanable funds demanded exceeds the volume of loanable funds supplied and interest rates will tend to fall.
B. the volume of loanable funds supplied exceeds the volume of loanable funds demanded and interest rates will tend to increase.
C. the volume of loanable funds demanded exceeds the volume of loanable funds supplied and interest rates will tend to increase.
D. the volume of loanable funds supplied exceeds the volume of loanable funds demanded and interest rates will tend to fall.
12. If investors anticipate an economic expansion in the near future, this will result in
A. the demand curve for bonds to increase.
B. the demand for loanable funds to increase.
C. a downward movement from left to right along the demand curve for bonds.
D. an increase in the supply of loanable funds.
13. ABC Bank has total assets of $160,000 and total liabilities of $80,000. What is the amount of ABC's owner's equity?
14. What is generally true of the relationship between risk and return in financial assets, other things constant?
A. Risk and return are generally unrelated.
B. Risk and return have a strong positive correlation, as assets that carry high risks often have high potential returns.
C. Risk and return have a strong negative correlation, as assets that carry high risks often have low potential returns.
D. Private equities generally involve little to no risk and extremely low returns.
15. Assume that the reserve requirement is 15% and a member bank receives a new checking account deposit of $200. Which of the following are likely to occur on the bank's balance sheet?
A: Liabilities increase by 200 and Required reserves increase by 170
B: Liabilities increase by 200 and Required reserves decrease by 170
C: Liabilities increase by 200 and Required reserves increase by 30
D: Liabilities increase by 200 and Required reserves decrease by 30
E: Liabilities decrease by 200 and Required reserves decrease by 30
16.. Financial assets are also called:
A. physical assets.
B. real assets.
C. securities.
D. tangible assets.
17. When interest rate is lower than equilibrium rate of borrowing loanable funds then financial system has ________
18. When the central bank sells securities in the open market, which of the following sets of actions will happen?
A: The money supply will increase, nominal interest rates will fall, increase in aggregate demand
B: The money supply will increase, nominal interest rates will fall, decrease in aggregate demand
C: The money supply will decrease, nominal interest rates will increase, decrease in aggregate demand
D: The money supply will decrease, nominal interest rates will increase, increase in aggregate demand
E: Increase in interest rates, increase in budget deficit, and a trade surplus
19. Suppose that the economy of country X is experiencing inflation and the central bank wants to cool down the economy. Which of the following is likely to occur?
A: Higher interest rates
B: Selling of bonds to member banks
C: unemployment
D: a and b
E: a, b, and c
20. Which of the following policies can the central bank complete to decrease the money supply?
A: Increase the reserve ratio
B: lower the discount rate
C: buy bonds in the open market
D: raise the fed funds rate
E: increase payroll taxes
21. If the Federal Reserve raises interest rates to combat rapid inflation, what might be a negative
outcome?
A. Unemployment rates would rise
B. taxes will rise
C. The government would put a freeze on prices
D. international trade would stop
22. The level of national income will fall when
A. leakages > injections
B. leakages < injections
C. leakages = injections
D. government spending exceeds taxes
23. If the economy in a recession, one reason might be that leakages is _______ injections
A. equal
B. less than
C. greater than
D. less or greater than
24- What is the impact of the following factors on the loanable funds (LF) market?
- higher disposable income
- Recession
- People expect their income to rise in the future
- Fed lowers RRR
Explanation / Answer
1. Money is a medium of exchange ( as it used in exchange of goods and services, a unit of account ( gives values for goods) and store of value ( money can be stored for future use). Inflation affects all three functions. As a medium of exchange, money has reduced purchasing power. As a unit of account, the value of goods depreciates. As a store of value, the future worth of money stored will also be reduced.
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