Question 1

The Federal Reserve creates money by&#10;A)printing bills and circulating them in public meetings.&#10;B)giving dollar bills to banks to circulate.&#10;C)changing a number in its computer system.&#10;D)spending money on government purchases.

Accepted Answer

The Federal Reserve creates money by changing a number in its computer system, also known as digital or electronic money. While physical currency (bills and coins) are also created by the Federal Reserve, the majority of money created in the modern economy exists as deposits in banks or other financial institutions, which is backed by the central bank’s balance sheet.

Question 2

An equation that relates the interest rate to the output gap and the inflation rate is&#10;A)the Phillips relation.&#10;B)the Sharpe ratio.&#10;C)Okun's law.&#10;D)the Taylor rule.

Accepted Answer

The equation that relates the interest rate to the output gap and the inflation rate is known as the Taylor rule. It is a monetary policy guideline that suggests the central bank can adjust its target interest rate in response to changes in inflation and the deviation of output from its potential level (output gap).

Question 3

Economic policy affects&#10;A)only the amount of money in the economy.&#10;B)only the lending policy of financial intermediaries.&#10;C)the entire financial system.&#10;D)how financial securities are traded and no other part of the financial system.

Accepted Answer

Economic policy affects the entire financial system, including factors such as interest rates, inflation, government spending, and taxation. These policies impact the decisions of financial intermediaries and investors, as well as the overall functioning of financial markets. Therefore, option C is the correct answer. Options A, B, and D are too narrow in scope and do not capture the full extent of the impact of economic policy on the financial system.

Question 4

Earning interest on past interest is referred to as&#10;A)present value.&#10;B)super interest.&#10;C)compounding.&#10;D)discounting.

Accepted Answer

Compounding is the process of earning interest not only on the initial principal but also on the interest accumulated from the previous period. This results in exponential growth of the investment over time.

Question 5

More than half of all U.S.dollars can be found&#10;A)in foreign countries.&#10;B)in the United States.&#10;C)in the underground economy.&#10;D)in bank vaults.

Accepted Answer

More than half of all U.S. dollars are held outside the United States, reflecting the dollar's role as the world's primary reserve currency and its use in international transactions.

Question 6

Interest rates on long-term loans are generally _____than interest rates on short-term loans, partly because______loans are riskier. &#10;A)lower; short-term&#10;B)lower; long-term&#10;C)higher; long-term&#10;D)higher; short-term

Accepted Answer

Interest rates on long-term loans are generally higher because they involve a greater degree of risk for the lender. With longer loan terms, there is a greater chance that the borrower may default or that market conditions may change, increasing the risk for the lender. In contrast, short-term loans typically involve less risk, and therefore lenders can offer lower interest rates.

Question 7

The nominal interest rate minus the expected inflation rate equals the&#10;A)potential interest rate.&#10;B)natural interest rate.&#10;C)true interest rate.&#10;D)real interest rate.

Accepted Answer

The nominal interest rate minus the expected inflation rate equals the real interest rate. This is because the real interest rate is adjusted for inflation, giving a more accurate measure of the return on an investment.

Question 8

Buying stocks gives an investor&#10;A)a very low but safe return.&#10;B)ownership in corporations.&#10;C)the riskiest asset available in the market.&#10;D)a pure and random speculative gamble.

Accepted Answer

Buying stocks gives an investor ownership in corporations. This means that the investor has a say in the company's decision-making process and can benefit from the company's profits and growth. While there may be risks involved in investing in a company's stock, the potential for higher returns outweighs the potential low return in option A. Options C and D are incorrect as they are extreme and not necessarily true for all stocks.

Question 9

In the long run, the only economic variable that the Federal Reserve can affect is&#10;A)inflation.&#10;B)output.&#10;C)unemployment.&#10;D)the exchange rate.

Accepted Answer

In the long run, the Federal Reserve can primarily influence inflation through its monetary policy. While it can have short-term effects on output, unemployment, and the exchange rate, these effects are not sustainable in the long run without leading to inflation or deflation.

Question 10

When the overall level of business activity declines persistently, there is said to be&#10;A)a revolution.&#10;B)a hyperinflation.&#10;C)a recession.&#10;D)an expansion.

Accepted Answer

A decline in overall business activity for a period of time is known as a recession. This can be characterized by a decrease in employment rates, production output, and consumption. The opposite of a recession is an expansion, wherein business activity increases. A revolution implies a major political and social upheaval, while hyperinflation refers to a situation of rapidly rising prices.

Question 11

Americans should not worry about all the dollars held by foreigners because&#10;A)most of the currency is reinvested into America.&#10;B)taxes are lower as a result.&#10;C)interest rates are lower as a result.&#10;D)stock prices are higher as a result.

Accepted Answer

The answer of Americans should not worry about all the...

Question 12

Economists who try to predict recessions find that recessions are&#10;A)easy to predict.&#10;B)difficult to predict.&#10;C)non-existent before the year 2000.&#10;D)non-existent since the year 2000.

Accepted Answer

The answer of Economists who try to predict recessions find...

Question 13

The percentage by which real gross domestic product is above or below its potential level is called the&#10;A)&#8203;inflation rate&#10;B)&#8203;output gap&#10;C)&#8203;real interest rate&#10;D)&#8203;rate of compounding

Accepted Answer

The answer of The percentage by which real gross domestic...

Question 14

During the 2000s, banks became complacent about making mortgage loans because&#10;A)there was not a single bank failure in the decade.&#10;B)bank stocks performed better than the rest of the stock market.&#10;C)the banks counted on housing prices to keep appreciating.&#10;D)the government eliminated the FDIC.

Accepted Answer

The answer of During the 2000s, banks became complacent about...

Question 15

Which policymaking institution determines the money supply, sets the rules for how checks are cleared and how banks obtain new currency, and determines what activities banks may or may not engage in?&#10;A)Treasury Department.&#10;B)Commerce Department.&#10;C)Securities and Exchange Commission.&#10;D)Federal Reserve System.

Accepted Answer

The answer of Which policymaking institution determines the money supply,...

Question 16

Which of the following is NOT a financial policymaker?&#10;A)Securities and Exchange Commission (SEC)&#10;B)Federal Deposit Insurance Corporation (FDIC)&#10;C)Consumer Financial Protection Bureau (CFPB)&#10;D)Federal Reserve System (the Fed)

Accepted Answer

The answer of Which of the following is NOT a...

Question 17

The expected rate of change in prices is known as the&#10;A)forecasted mean CPI.&#10;B)Okun's law coefficient.&#10;C)augmented inflation rate.&#10;D)expected inflation rate.

Accepted Answer

The answer of The expected rate of change in prices...

Deck 1: Money and the Financial System