Basic Finance An Introduction to Financial Institutions, Investments, And Management 11th Edition by Herbert B. Mayo - Test Bank

Basic Finance An Introduction to Financial Institutions, Investments, And Management 11th Edition by Herbert B. Mayo – Test Bank

Instant Download – Complete Test Bank With Answers

Sample Questions Are Posted Below

True / False

1. The power to create money is given by the Constitution to the Federal Reserve.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

2. When commercial banks grant loans to the public, their total reserves are reduced.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

3. When corporations retire (pay off) loans from commercial banks, excess reserves are increased.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

4. When the general public uses money in checking accounts to purchase stock issued by corporations, the required reserves of banks are reduced.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

5. Only large commercial banks are subject to the regulation of the Federal Reserve.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

6. When the Federal Reserve sells securities that are purchased by individuals, the money supply is increased.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

7. When the Federal Reserve buys securities, the reserves of banks are increased.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

8. Open market operations is a more flexible tool of monetary policy than changing the reserve requirements.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

9. Reserve requirements are infrequently changed to affect commercial bank lending.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

10. The Federal Open Market Committee (FOMC) has twelve members that include the Board of Governors.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

11. The presidents of the District Banks elect the Board of Governors of the Federal Reserve.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

12. The federal funds rate is the interest rate the Federal Reserve charges banks when they borrow reserves.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

13. If the Treasury borrows from the Federal Reserve, the lending capacity of banks is reduced.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

14. Deflation is a period of declining prices.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

15. During a period of recession, the Fed sells securities.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

16. The Consumer Price Index (CPI) is a measure of inflation.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

17. The President of the United States appoints the Board of Governors of the Federal Reserve.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

18. Open market operations is a more flexible tool of monetary policy than the discount rate.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

19. Commercial banks may buy and sell reserves in the federal funds market.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

20. If the Treasury issues new bonds that are purchased by the general public, the money supply is reduced if the Treasury deposits the funds in the Federal Reserve.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

21. Recession is a period of falling prices.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

22. The Fed uses the target federal funds rate as a primary tool of monetary policy compared to reserve requirements.
a. True
b. False
ANSWER: True
QUESTION TYPE: True / False

23. The target federal funds rate is set by the supply and demand for commercial bank reserves.
a. True
b. False
ANSWER: False
QUESTION TYPE: True / False

Multiple Choice

24. Withdrawing cash from a checking account does not decrease
a. the money supply
b. demand deposits
c. total reserves
d. excess reserves
ANSWER: a
QUESTION TYPE: Multiple Choice

25. Excess reserves are affected by
1. reserve requirements
2. the repayment of existing bank loans
3. cash withdrawals
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
ANSWER: d
QUESTION TYPE: Multiple Choice

26. When commercial banks grant loans,
a. the money supply is reduced
b. the money supply is increased
c. total reserves increase
d. total reserves decrease
ANSWER: b
QUESTION TYPE: Multiple Choice

27. If deposits are withdrawn from a commercial bank, it may obtain reserves by
a. acquiring an asset
b. borrowing in the federal funds market
c. lending funds in the federal funds market
d. liquidating a liability
ANSWER: b
QUESTION TYPE: Multiple Choice

28. When a commercial bank receives a cash deposit,
1. its required reserves increase
2. its required reserves decrease
3. its total reserves increase
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
ANSWER: a
QUESTION TYPE: Multiple Choice

29. Commercial banks lend excess reserves for one day in the
a. stock market
b. federal funds market
c. reserves market
d. over‑the‑counter market
ANSWER: b
QUESTION TYPE: Multiple Choice

30. The Federal Reserve increases reserves by
a. selling securities
b. buying securities
c. raising reserve requirements
d. raising the discount rate
ANSWER: b
QUESTION TYPE: Multiple Choice

31. The Federal Reserve
a. is part of the U.S. Treasury
b. establishes the target federal funds rate
c. is the nation’s largest commercial bank
d. lends funds to corporations
ANSWER: b
QUESTION TYPE: Multiple Choice

32. By lowering the discount rate, the Federal Reserve
a. discourages commercial banks from lending
b. encourages commercial banks to borrow reserves
c. discourages depositors from withdrawing funds
d. contracts the money supply
ANSWER: b
QUESTION TYPE: Multiple Choice

33. The purpose of the Federal Reserve is to
a. finance government operations
b. protect investors from bank failures
c. protect deposits from bank failures
d. control the supply of money and credit
ANSWER: d
QUESTION TYPE: Multiple Choice

34. The structure of the Federal Reserve includes
1. all commercial banks
2. the twelve district banks
3. the Board of Governors
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 1, 2, and 3
ANSWER: c
QUESTION TYPE: Multiple Choice

35. The members of the Board of Governors are
a. elected by the member banks
b. appointed by the Senate
c. appointed by the President of the United States
d. elected by the Federal Open Market Committee
ANSWER: c
QUESTION TYPE: Multiple Choice

36. During a period of recession, a federal government surplus should retire debt owed
a. the Federal Reserve
b. commercial banks
c. the general public
d. the Federal Deposit Insurance Corporation
ANSWER: c
QUESTION TYPE: Multiple Choice

37. The Federal Reserve may contract the money supply by
1. selling securities
2. buying securities
3. raising reserve requirements
4. lowering reserve requirements
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
ANSWER: a
QUESTION TYPE: Multiple Choice

38. If the federal government runs a deficit and borrows from commercial banks,
1. total deposits are not affected
2. total deposits are increased
3. excess reserves are reduced
4. excess reserves are decreased
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
ANSWER: d
QUESTION TYPE: Multiple Choice

39. Anticipation of inflation discourages
1. saving
2. borrowing
3. lending
4. purchasing goods
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. 3 and 4
ANSWER: b
QUESTION TYPE: Multiple Choice

40. If the federal government runs a surplus,
a. expenditures exceed taxes
b. receipts exceed disbursements
c. debt must be issued
d. the Federal Reserve buys bonds
ANSWER: b
QUESTION TYPE: Multiple Choice

41. Recession is a period of
a. declining prices
b. declining employment
c. declining unemployment
d. rising interest rates
ANSWER: b
QUESTION TYPE: Multiple Choice

42. The Board of Governors
a. manages the nation’s stock of gold
b. has the substantive control over the money supply
c. controls the U. S. Treasury
d. is appointed by the U. S. Treasurer
ANSWER: b
QUESTION TYPE: Multiple Choice

43. If commercial banks grant loans,
a. the money supply is increased
b. total reserves are increased
c. excess reserves are increased
d. the money supply is reduced
ANSWER: a
QUESTION TYPE: Multiple Choice

44. Commercial banks may borrow reserves from each other in the
a. reserves market
b. stock market
c. bank market
d. federal funds market
ANSWER: d
QUESTION TYPE: Multiple Choice

45. By selling securities to the general public, the FED
a. reduces the money supply
b. raises commercial banks’ deposits
c. increases the money supply
d. increases banks’ excess reserves
ANSWER: a
QUESTION TYPE: Multiple Choice

46. The tools of monetary policy include
a. open market operations
b. the purchase of corporate stock
c. the federal government deficit
d. taxation
ANSWER: a
QUESTION TYPE: Multiple Choice

47. If the federal government runs a deficit,
a. taxes exceed expenditures
b. expenditures exceed taxes
c. receipts exceed taxes
d. taxes exceed revenues
ANSWER: b
QUESTION TYPE: Multiple Choice

48. Anticipation of inflation encourages
a. lending
b. borrowing
c. retiring debt
d. saving
ANSWER: b
QUESTION TYPE: Multiple Choice

49. During a period of recession the Federal Reserve
1. increases the targe federal funds rate
2. buys government securities
3. sells government securities
4. lowers the target federal funds are
a. 1 and 2
b. 1 and 3
c. 2 and 4
d. 3 and 4
ANSWER: c
QUESTION TYPE: Multiple Choice

Subjective Short Answer

50. If the reserve requirement for demand deposits is 10 percent,
what is the maximum change in the money supply that the banking system can create if
a. the Federal Reserve puts $1,000,000 of new reserves in the banking system
b. $1,000,000 in cash is deposited in checking accounts
c. IBM borrows $1,000,000 from an insurance company?
ANSWER: a. new excess reserves: $1,000,000
maximum possible expansion in the money supply:
$1,000,000/.1 = $10,000,000

b. new excess reserves: $1,000,000 ‑ 100,000 = $900,000
maximum possible expansion in the money supply:
$900,000/.1 = $9,000,000

c. new excess reserves: $0
maximum possible expansion in the money supply:
$0/.1 = $0
(Borrowing from the non‑bank public does not affect the banking system’s ability to create new money.)
QUESTION TYPE: Subjective Short Answer

51. What is the effect on (1) demand deposits, (2) required reserves, and (3) excess reserves of banks given the following transactions?
a. The general public transfers funds from savings accounts checking accounts.
b. Corporations borrow from commercial banks.
c. State and local governments issue debt securities that are purchased by commercial banks.
d. Homeowners borrow from commercial banks to finance home improvements. (Are there any differences on the expansion of the money supply in questions (b), (c), and (d)?)
e. A bank in California with excess reserves lends these funds through the federal funds market to a bank in Maine that has insufficient reserves.
f. Corporations issue short‑term securities that are purchased by the general public.
g. Corporations retire (i.e., pay off) loans from commercial banks.
h. The Federal Reserve buys Treasury bills that are sold by the general public.
i. The Federal Reserve raises the discount rate, and banks retire debt owed the Federal Reserve.
j. The Federal Reserve raises the reserve requirement on demand deposits.
k. The Treasury borrows from the banks to finance payments.
l. The federal government runs a deficit and borrows the funds from the general public.
m. The federal government runs a deficit and borrows the funds from the Federal Reserve.
ANSWER: a. Demand deposits ‑ increase
Required reserves ‑ increase
Excess reserves ‑ decrease

b. Demand deposits ‑ increase
Required reserves ‑ increase
Excess reserves ‑ decrease

c. Demand deposits ‑ increase
Required reserves ‑ increase
Excess reserves ‑ decrease

d. Demand deposits ‑ increase
Required reserves ‑ increase
Excess reserves ‑ decrease

These three questions (b, c, and d) illustrate that from the viewpoint of the banking system, it does not matter if the banks acquire debt issued by firms, governments, or households. To acquire the debt, the banks must have excess reserves. After they have used their excess reserves, the money supply is expanded, and the excess reserves become required reserves.

e. Demand deposits ‑ no change
Required reserves ‑ no change
Excess reserves ‑ no change

Unlike in the previous questions, the lending of excess reserves from one bank to another does not in the aggregate increase or decrease the reserves of the banking system.

f. Demand deposits ‑ no change
Required reserves ‑ no change
Excess reserves ‑ no change

Loans between members of the non‑bank general public do not affect banks’ reserves and thus do not affect their capacity to lend.

g. Demand deposits ‑ decrease
Required reserves ‑ decrease
Excess reserves ‑ increase

While the creation of new loans uses the banks’ excess reserves and creates new money, the retiring of loans from commercial banks reduces demand deposits and restores excess reserves (i.e., increases excess reserves).

h. Demand deposits ‑ increase
Required reserves ‑ increase
Excess reserves ‑ increase

i. Demand deposits ‑ no change
Required reserves ‑ no change
Excess reserves ‑ decrease

j. Demand deposits ‑ no change
Required reserves ‑ increase
Excess reserves – decrease

Questions i and j illustrate two monetary tools, the reserve requirement and the discount rate. Notice that changing the discount rate and the reserve requirements do not in themselves change demand deposits. Their impact is on reserves, and the effect of this impact may lead to a change in the supply of money.

k. Demand deposits ‑ increase
Required reserves ‑ increase
Excess reserves ‑ decrease

l. Demand deposits ‑ no change
Required reserves ‑ no change
Excess reserves ‑ no change

m. Demand deposits ‑ increase
Required reserves ‑ increase
Excess reserves ‑ increase

During a period of inflation, a policy that contracts the money supply and the capacity of banks to lend is desirable. The opposite situation would apply during a recession. If there were a deficit during a period of recession, it is desirable to increase the money supply and the capacity of the banks to lend. Hence n is better than m.
QUESTION TYPE: Subjective Short Answer