Unit 4: Financial Sector
Macro · Unit 4 · Paper 2

Financial Sector unit test

A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.

Paper 1Paper 2Paper 3
Each paper is built from this unit’s 57 terms and is the same for everyone, so a teacher can assign “Unit 4, Paper 2” and every student sits the identical test. Multiple choice is marked objectively; the written sections you mark yourself against the model answer and rubric.
Suggested time 34 min 31 points0/17 attempted
1

Why bond prices move opposite to rates

2

Fractional reserve banking

3

Required vs excess reserves

4

Commodity vs fiat money

5

Required reserves

6

How a loan creates money

7

Financial asset vs money

8

What shifts money demand

9

Money supply curve

10

Why bond prices and interest rates move inversely

11

M2

12

Why the reserve requirement is not the working tool

Short answer 1. Define or explain: Your deposit is the bank's liability

3 pts

Short answer 2. Define or explain: Why money supply is vertical

3 pts

Short answer 3. Define or explain: The monetary transmission chain

3 pts

Short answer 4. Define or explain: Money multiplier

3 pts

Free response

7 pts

A commercial bank holds $80,000 in demand deposits and $14,000 in total reserves. The required reserve ratio is 10 percent. (a) Calculate the bank's required reserves and excess reserves. (b) Calculate the maximum amount this single bank can lend, and the maximum increase in the money supply the entire banking system could generate from these excess reserves. Show the multiplier you used. (c) A depositor withdraws $5,000 in cash and keeps it at home. Explain the effect on this bank's excess reserves and on the money supply. (d) The central bank wants to reduce the money supply. Identify one open-market operation it could conduct and explain, step by step, how that action affects the federal funds rate and private investment.

Calculate required and excess reserves.

Calculate maximum single-bank lending and maximum system-wide money creation, showing the multiplier.

Explain the effect of a $5,000 cash withdrawal on excess reserves and the money supply.

Identify a contractionary open-market operation and trace it to the federal funds rate and investment.