MBA 505 Chapter 26 Quiz
1. The Federal Reserve System was instituted in
a. 1776 as part of the U.S. Constitution to create a national banking system.
b. 1933 by the U.S. Treasury to deal with money shortages during the Great Depression.
c. 1929 by decree of the president to combat the stock market crash.
d. 1913 by an act of Congress to overcome repeated bank panics.
e. 1980 by the Depository Institutions Deregulation and Monetary Control Act to permit interstate banking.
2. Which of the following is not a function of the Fed?
a. Lending funds to private businesses
b. Making loans to banks
c. Regulating the money supply
d. Providing currency
e. Acting as a banker for the federal government
3. The equation of exchange is defined as
a. MV = PQ.
b. MQ = PV.
c. MP = VQ.
d. V = PQ.
e. V = PM.
4. Suppose  M increases 5 percent while the velocity of money is constant. The quantity theory of money predicts that
a. nominal GDP will rise by 5 percent. 
b. the price level will fall by 5 percent. 
c. the quantity of output will fall by 5 percent. 
d. nominal GDP will remain unchanged. 
e. nominal GDP will fall by 5 percent.
5. According to the quantity theory of money, an increase in the money supply in an economy operating below full capacity will shift the aggregate demand curve
a. to the right, thereby raising prices and real GDP. 
b. to the right, thereby lowering prices and raising real GDP. 
c. to the right, thereby raising prices but leaving real GDP unchanged. 
d. to the left, thereby reducing prices and real GDP. 
e. to the left, thereby leaving prices and real GDP unchanged.
6. Suppose a bank has $600 in vault cash and a deposit in the Fed of $1,000. If the bank's required reserves equal $500, then the bank has excess reserves of
a. $100. 
b. $1,100. 
c. $500. 
d. $900. 
e. $400.
7. When the Federal Reserve decreases the reserve requirement, this will
a. decrease aggregate demand. 
b. increase the money supply. 
c. decrease excess reserves. 
d. increase the discount rate. 
e. increase legal reserves.
8. The federal funds rate is the interest rate charged by
a. a commercial bank for a loan to another commercial bank. 
b. the Federal Reserve for a loan to a commercial bank. 
c. the Federal Reserve for a loan to the federal government. 
d. a commercial bank for a loan to its best corporate customers. 
e. the Federal Reserve for a loan to an individual.
9. If the FOMC purchases government bonds priced at $5,000 from a bond dealer who banks at National Bank and if the reserve requirement is 20 percent, then the required reserves of National Bank
a. increase by $5,000. 
b. increase by $4,000. 
c. increase by $1,000. 
d. decrease by $5,000. 
e. decrease by $1,000.
10. To decrease the money supply, the Fed would not
a. increase the discount rate. 
b. sell government bonds. 
c. increase the reserve requirement. 
d. try to decrease the excess reserves of banks. 
e. decrease the federal funds rate.
11. If the interest rate is below the equilibrium level in the money market, then people will
a. buy bonds, driving interest rates down. 
b. buy bonds, driving interest rates up. 
c. sell bonds, driving interest rates up. 
d. sell bonds, driving interest rates down. 
e. sell bonds, with the demand for money shifting to the right.
Answers
1d,2a,3a,4a,5a,6b,7b,8a,9c,10e,11c.