Question 1

If many banks fail, this is likely to:

Accepted Answer

When many banks fail, people tend to withdraw their money and hold onto it as currency rather than keeping it in the banks. This increases the amount of currency relative to deposits, thus increasing the ratio of currency to deposits.

Question 2

A bank balance sheet consists of only the following items:
$$\begin{array} { l r } 
\text { Deposits } & \$ 1,000 \
\text { Reserves } & \$ 100 \
\text { Securities } & \$ 400 \
\text { Debt } & \$ 500 \
\text { Loans } & \$ 2,000
\end{array}$$
What is the value of bank capital?

Accepted Answer

Bank capital is calculated as total assets minus total liabilities. Assets are reserves ($100), securities ($400), and loans ($2,000), totaling $2,500. Liabilities are deposits ($1,000) and debt ($500), totaling $1,500. Thus, bank capital is $2,500 - $1,500 = $1,000.

Question 3

The value of banks owners' equity is called bank:

Accepted Answer

The owners' equity in a bank is referred to as capital. Deposits represent the funds that customers have entrusted to the bank, reserves are a portion of deposits set aside to cover potential losses, and liquidity refers to the ability of a bank to meet its financial obligations.

Question 4

The amount of capital that banks are required to hold depends on the:

Accepted Answer

The capital that banks are required to hold depends on the riskiness of their assets, as determined by regulators. The riskier the assets, the higher the capital requirements. The purpose of the capital requirements is to ensure that banks have a sufficient buffer to absorb losses and remain solvent in the event of unexpected losses. A higher capital requirement will make it more difficult for banks to take on excessive risk, as it will increase the cost of doing so.

Question 5

If many banks fail, this is likely to:

Accepted Answer

When many banks fail, surviving banks tend to become more conservative and risk-averse. As a result, they tend to raise their ratios of reserves to deposits in order to maintain their liquidity and financial stability. Therefore, choice B is the best answer.

Question 6

$$\text { Question }$$ In the portfolio theory of money demand, all of the following economic factors play a direct role except:

Accepted Answer

The unemployment rate does not directly influence the demand for money in portfolio theory, which focuses on returns, inflation, and wealth.

Question 7

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base and the currency-deposit and reserve-deposit ratios both .

Accepted Answer

During this period, the monetary base actually increased because the Federal Reserve increased bank reserves, but the currency-deposit and reserve-deposit ratios both rose as well. People withdrew their money from banks and held onto it due to fear of bank failures, which increased the currency-deposit ratio. Banks, fearing further withdrawals and being cautious about lending, held onto reserves rather than lending them out, which increased the reserve-deposit ratio.

Question 8

A shortage of bank capital in 2008 and 2009 led to:

Accepted Answer

A shortage of bank capital resulted in decreased bank lending because banks had to restrict their lending activities to maintain adequate capital levels. This decrease in lending impaired credit availability for consumers and businesses, which in turn affected economic growth and recovery.

Question 9

According to portfolio theories of money demand, increases in wealth the demand for money, and increases in the expected inflation rate the demand for money.

Accepted Answer

According to portfolio theories of money demand, as wealth increases, people have more resources to allocate, which can increase the demand for money. However, if the expected inflation rate increases, the demand for money decreases because people prefer to hold assets that are not losing value due to inflation.

Question 10

Transaction theories of money demand emphasize the role of money as a:

Accepted Answer

Transaction theories of money demand focus on the function of money as a medium of exchange, meaning that people hold money primarily to make transactions (e.g. buying goods and services) rather than as a store of value, unit of account, or standard for making deferred payments.

Question 11

The use of borrowed funds to supplement existing funds for purposes of investment is called:

Accepted Answer

The use of borrowed funds to supplement existing funds for purposes of investment is known as leverage. Leverage allows investors to increase their potential return on investment but also exposes them to higher risks if the investment does not perform well. Arbitrage refers to taking advantage of price differences between two markets, convergence is the process of coming together or merging, and intermediation refers to the process of banks and other financial institutions connecting borrowers and lenders.

Question 12

The quantity theory of money assumes that the demand for real money balances:

Accepted Answer

The quantity theory of money, particularly in its classical form, assumes that the demand for real money balances is proportional to income, as represented by the equation MV = PY, where V (velocity) is constant.

Question 13

Portfolio theories of money demand emphasize the role of money as a:

Accepted Answer

Portfolio theories of money demand focus on money's role as a store of value, where individuals hold money as part of their portfolio of assets, balancing liquidity and returns.

Question 14

The only tax that those in the underground economy probably cannot evade is the:

Accepted Answer

The inflation tax is not a literal tax but rather the loss of purchasing power due to inflation, which affects everyone, including those in the underground economy.

Question 15

According to portfolio theories of money demand, increases in the expected return on stock the demand for money, and increases in the expected return on bonds the demand for money.

Accepted Answer

According to portfolio theories of money demand, when the expected return on stocks or bonds increases, people are more likely to invest in these assets rather than hold money, leading to a decrease in the demand for money.

Question 16

$$\begin{array}{l}
\text { Table: Bank Balance Sheet }\
\begin{array} { l r l r } 
\hline \text { Assets } & & { \text { Liabilities \& Net Worth } } \
\hline \text { Reserves } & \$ 10,000 & \text { Deposits } & \$ 100,000 \
\text { Loans } & 100,000 & \text { Debt } & 20,000 \
\text { Securities } & 40,000 & \text { Equity } & 30,000
\end{array}
\end{array}$$ Reference: Ref 19-1
 
(Table: Bank Balance Sheet) Based on the table, owners' equity will fall to zero if loan defaults reduce the value of total assets by percent.

Accepted Answer

The total assets are $150,000. A 20% reduction in assets ($30,000) would reduce the assets to $120,000, which equals the liabilities ($100,000 deposits + $20,000 debt), leaving equity at zero.

Question 17

The demand for money as a medium of exchange is best explained by theories of money demand, while the demand for money as a store of value is best explained by theories of money demand.

Accepted Answer

The demand for money as a medium of exchange is related to transaction demand, while the demand for money as a store of value is related to portfolio demand. Therefore, theories of money demand that focus on transaction demand (such as the quantity theory of money) are best for explaining the demand for money as a medium of exchange, while theories that focus on portfolio demand (such as the theory of rational expectations) are best for explaining the demand for money as a store of value. Choice D is the only option that correctly pairs transaction demand with theories of money demand and portfolio demand with theories of money demand.

Question 18

Portfolio theories of the demand for money are based on money's function as a , while transaction theories of the demand for money are based on money's function as a .

Accepted Answer

The answer of Portfolio theories of the demand for money...

Question 19

In 2008 and 2009, the U.S. Treasury put public funds in some banks in an attempt to restore bank lending to more normal levels. This infusion of funds initially increased what item on the banks' balance sheets?

Accepted Answer

When the U.S. Treasury put public funds in the banks, it increased the banks' capital, which is the money that banks use to absorb losses and maintain solvency. This infusion of funds helped banks improve their balance sheets and increase their lending activities.

Question 20

The minimum amount of owner's equity in a bank mandated by regulators is called a requirement.

Accepted Answer

The minimum amount of owner's equity in a bank mandated by regulators is referred to as capital requirements. This is crucial for a bank's stability and solvency in the face of potential losses.

Quiz 19: A Macroeconomic Theory of the Open Economy

If many banks fail, this is likely to:

A bank balance sheet consists of only the following items: $\begin{array} { l r } \text { Deposits } & \$ 1,000 \\\text { Reserves } & \$ 100 \\\text { Securities } & \$ 400 \\\text { Debt } & \$ 500 \\\text { Loans } & \$ 2,000\end{array}$ What is the value of bank capital?

The value of banks owners' equity is called bank:

The amount of capital that banks are required to hold depends on the:

If many banks fail, this is likely to:

$\text { Question }$ In the portfolio theory of money demand, all of the following economic factors play a direct role except:

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base and the currency-deposit and reserve-deposit ratios both .

A shortage of bank capital in 2008 and 2009 led to:

According to portfolio theories of money demand, increases in wealth the demand for money, and increases in the expected inflation rate the demand for money.

Transaction theories of money demand emphasize the role of money as a:

The use of borrowed funds to supplement existing funds for purposes of investment is called:

The quantity theory of money assumes that the demand for real money balances:

Portfolio theories of money demand emphasize the role of money as a:

The only tax that those in the underground economy probably cannot evade is the:

According to portfolio theories of money demand, increases in the expected return on stock the demand for money, and increases in the expected return on bonds the demand for money.

The demand for money as a medium of exchange is best explained by theories of money demand, while the demand for money as a store of value is best explained by theories of money demand.

Portfolio theories of the demand for money are based on money's function as a , while transaction theories of the demand for money are based on money's function as a .

In 2008 and 2009, the U.S. Treasury put public funds in some banks in an attempt to restore bank lending to more normal levels. This infusion of funds initially increased what item on the banks' balance sheets?

The minimum amount of owner's equity in a bank mandated by regulators is called a requirement.

Quiz 19: A Macroeconomic Theory of the Open Economy

If many banks fail, this is likely to:

The value of banks owners' equity is called bank:

The amount of capital that banks are required to hold depends on the:

If many banks fail, this is likely to:

Question \text { Question } Question In the portfolio theory of money demand, all of the following economic factors play a direct role except:

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base and the currency-deposit and reserve-deposit ratios both .

A shortage of bank capital in 2008 and 2009 led to:

According to portfolio theories of money demand, increases in wealth the demand for money, and increases in the expected inflation rate the demand for money.

Transaction theories of money demand emphasize the role of money as a:

The use of borrowed funds to supplement existing funds for purposes of investment is called:

The quantity theory of money assumes that the demand for real money balances:

Portfolio theories of money demand emphasize the role of money as a:

The only tax that those in the underground economy probably cannot evade is the:

According to portfolio theories of money demand, increases in the expected return on stock the demand for money, and increases in the expected return on bonds the demand for money.

The demand for money as a medium of exchange is best explained by theories of money demand, while the demand for money as a store of value is best explained by theories of money demand.

Portfolio theories of the demand for money are based on money's function as a , while transaction theories of the demand for money are based on money's function as a .

In 2008 and 2009, the U.S. Treasury put public funds in some banks in an attempt to restore bank lending to more normal levels. This infusion of funds initially increased what item on the banks' balance sheets?

The minimum amount of owner's equity in a bank mandated by regulators is called a requirement.

$\text { Question }$ In the portfolio theory of money demand, all of the following economic factors play a direct role except: