I. Multiple Choice Section (30 points).

7. If all commercial banks were forced to keep 100 percent reserves on checking and saving accounts:
A) no financial institution would make loans.
B) multiple money creation would not be possible.
÷ C) people could not have the modern convenience of check writing.
D) all of the above would be true.
E) none of the above would be true.
8. Demand deposits are included as a form of money because:
A) the government or central bank authorizes their use.
B) there is gold to back them.
C) people believe there is gold to back them.
D) people can buy goods with them.
E) people are ordered to accept them.
9. The money-supply multiplier assumes that:
A) all new money is deposited in checking accounts.
B) individuals do not retain cash balances.
C) banks do not hold excess reserves.
D) all of the above.
÷ E) none of the above.
10. The real rate of interest is the rate of interest:
A) paid on a loan after all other bank fees have been deducted.
B) paid on a loan inclusive of all other bank fees and charges.
C) banks charge their largest and most credit-worthy customers.
÷ D) banks pay on deposits over $100,000.
E) found by subtracting the inflation rate from the nominal rate.
11. A Fed open-market purchase:
A) increases only banks' liabilities.
B) increases only banks' assets.
÷ C) increases banks' assets and reduces their liabilities.
D) increases banks' assets and liabilities together.
E) has no effect banks' balance sheets.
12. The link from monetary policy to changes in real macroeconomic variables is one that:
A) depends not at all on the interest rate.
B) depends only upon the sensitivity of investment to changes in the interest rate.
C) depends only upon the sensitivity of demand for money to changes in the interest rate.
÷ D) depends upon the sensitivity of both investment and the demand for
money to changes in the interest rate.
E) is direct, and works automatically within the walls of American banks.
13. Required reserve ratios:
A) exist primarily to ensure that deposits are safe.
B) exist to penalize banks that are members of the Federal Reserve System.
C) exist primarily to help the Fed control the money supply.
D) exist for all of the above reasons.
E) exist for none of the above reasons.
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