Deck 14: Banking and the Money Supply

Question 1

Which of the following is not true of Federal Reserve notes?

A)They are fiat money.
B)They are a liability of the Fed.
C)They are redeemable for other Federal Reserve notes.
D)They are redeemable for gold.
E)They are counted as currency in the money supply

Answer 1

They are redeemable for gold.

Question 2

If you returned a $5 Federal Reserve note to the Fed,you could receive:

A)$5 in silver.
B)$5 in gold.
C)5 one-dollar bills.
D)10 one-dollar bills.
E)a small gold bar.

Answer 2

5 one-dollar bills.

Question 3

A 2005 quarter is called token money because:

A)it is legal tender.
B)its metal value exceeds its face value.
C)there is less than a quarter's worth of metal in it.
D)it can be used in the subway.
E)it is generally not accepted in exchange.

Answer 3

there is less than a quarter's worth of metal in it.

Question 4

Which of the following is a disadvantage of using debit cards?

A)Debit cards are unsafe for use.
B)Debit cards do not provide a grace period between a purchase and required payment.
C)Debit cards delay payments.
D)Debit cards are not not easy to use.
E)Debit cards make purchases more expensive than they actually are.

Question 5

M2 consists of:

A)M1 plus savings accounts,small time deposits,money market mutual funds,and miscellaneous near-monies.
B)coins,currency,and checkable deposits only.
C)only near-monies.
D)M1 plus time deposits only.
E)M1 plus money market mutual funds only.

Question 6

The M1 money supply consists of:

A)only coins and currency held by the nonbank public.
B)certificates of deposit only.
C)coins and currency held by the nonbank public,checkable deposits,and traveler's checks.
D)money market mutual fund accounts,savings accounts,and other miscellaneous near-monies.
E)only paper currency.

Question 7

Which of the following is an advantage of using a credit card?

A)Credit cards help account holders tap directly into their checking account.
B)Credit cards help account holders get a loan from the card issuer.
C)Credit cards require a PIN number,and are therefore safe.
D)Credit card holders can earn a fixed interest on their accounts.
E)Credit cards help eliminate the use of money.

Question 8

Many people prefer debit cards to checks because:

A)checkbooks are not required and direct payments are made.
B)checks are unsafe for use.
C)debit cards delay money payments.
D)using checks is time consuming.
E)debit cards help account holders get a loan from the card issuer.

Question 9

Coins in the United States are manufactured and distributed by the:

A)Federal Reserve.
B)U.S.Mint.
C)International Trade Administration.
D)Federal Bureau of Investigation.
E)Comptroller of the Currency.

Question 10

All of the following are part of M2 except one.Which is the exception?

A)Money market deposit accounts
B)Coins
C)Traveler's checks
D)Large-denomination time deposits
E)Savings deposits

Question 11

Which of the following is true of credit cards?

A)They have eliminated the use of money.
B)They are currently the most popular means of payment in the United States.
C)They are included in the narrow definition of money,M1.
D)They are near-monies.
E)They are used to postpone the payment of money.

Question 12

The distinction between M1 and M2 has blurred over time because:

A)M1 is now larger than M2.
B)depositors can transfer funds between accounts easily.
C)the Federal Reserve has defined them less precisely.
D)M1 is becoming less liquid.
E)banks are now offering time deposits.

Question 13

The M1 money supply consists primarily of:

A)savings deposits.
B)certificates of deposit.
C)miscellaneous near-monies.
D)checkable deposits.
E)money market mutual fund accounts.

Question 14

Banks minimize the risk of loss to depositors by:

A)lending to government officials.
B)making many different loans to different borrowers.
C)refusing to lend money to the U.S.government.
D)lending to the richest 1 percent of the population.
E)making very long-term loans.

Question 15

Which of the following is true of M1?

A)It is equal to M2.
B)It consists of all near-monies.
C)It consists of certificates of deposit.
D)It is the broader definition of money.
E)It is only a fraction of M2.

Question 16

Which of the following is included in the narrow definition of the money supply?

A)Cash in bank vaults
B)Savings deposits
C)Money market mutual fund accounts
D)Negotiable certificates of deposit
E)Checkable deposits

Question 17

Stores need not accept your check but must accept currency because:

A)currency is backed by gold.
B)checks are not money but currency is.
C)currency is legal tender,but checks are not.
D)currency is easier to handle.
E)currency is a medium of exchange,but checks are not.

Question 18

Which of the following is not money?

A)Checks
B)Coins
C)Federal reserve notes
D)Debit cards
E)Credit cards

Question 19

Banks have more expertise than individual households in making loans because banks:

A)lend smaller amounts of money.
B)are regulated by the government.
C)also pay interest to savers.
D)are subject to severe penalties if they make bad loans.
E)make many more loans than individual households do.

Question 20

Banks act as financial intermediaries by:

A)bringing together car buyers and auto dealers.
B)bringing together real estate brokers and home buyers.
C)printing money for all to use.
D)serving the credit needs of borrowers and the security needs of savers.
E)selling shares of stock to investors.

Question 21

Suppose a bank has $8,000 in checkable deposits and the required reserve ratio is 0.2.If actual reserves equal $3,000,then excess reserves equal:

A)$1,600.
B)$1,400.
C)$2,400.
D)$5,000.
E)zero.

Question 22

Suppose a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2.If the bank wishes to hold no excess reserves,its actual reserves will be:

A)$4,000.
B)$1,200.
C)$3,000.
D)less than $1,000.
E)$4,800.

Question 23

A bank's net worth is:

A)equal to assets plus liabilities.
B)sometimes called the owners' equity.
C)equal to assets minus reserves.
D)the same thing as net profits.
E)the amount of interest charged by the bank for short-term loans.

Question 24

Banks help to overcome the problem of asymmetric information by:

A)lending to a single rich borrower and not diversifying their portfolio.
B)acquiring expertise in evaluating the credit histories of borrowers.
C)threatening borrowers.
D)offering only one type of loan.
E)providing information to lenders.

Question 25

If a bank has $1 million in assets and $50,000 in net worth,its liabilities must equal:

A)$50,000.
B)$1,050,000.
C)$50 million.
D)$1,000,000.
E)$950,000.

Question 26

When a customer deposits $1,000 in a bank,the deposit is:

A)an asset of the Federal Reserve.
B)included in M1 if it is currently in a commercial bank's vault.
C)a liability to the customer.
D)an asset to a commercial bank if it is currently in the bank's vault.
E)a liability for the bank as the bank owes it to the customer.

Question 27

If a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2,then the bank can lend:

A)$4,000.
B)$16,000.
C)no more than $4,800.
D)no less than $3,000.
E)$1,000.

Question 28

Which of the following is true of banks?

A)Banks reduce the opportunity cost of holding idle cash.
B)Banks act as intermediaries between the government and private investors.
C)Banks can reduce risk by lending to rich borrowers.
D)Banks reduce the transaction costs of borrowing and lending money.
E)Banks can reduce risks by extending more loans.

Question 29

On a bank's balance sheet,the value of its assets must equal:

A)net worth only.
B)liabilities only.
C)owner's equity.
D)the value of its liabilities plus net worth.
E)its revenues minus costs.

Question 30

A bank can legally hold reserves as:

A)gold and coins.
B)gold and checks.
C)cash in its vault and non-interest-bearing reserve deposits at the Fed.
D)gold and non-interest-bearing reserve deposits at the Fed.
E)U.S.government securities and coins.

Question 31

When a customer deposits $100 into a checking account,it:

A)increases the bank's liabilities only.
B)decreases the bank's liabilities only.
C)increases the bank's assets only.
D)decreases both the bank's liabilities and its assets.
E)increases both the bank's liabilities and its assets.

Question 32

Which of the following is a liability for a bank?

A)U.S.government securities owned by the bank
B)Deposits with the Fed
C)Checkable deposits
D)Consumer and business loans
E)Building and furniture owned by the bank

Question 33

If the required reserve ratio is 10 percent and a bank receives a new deposit for $100,000,then the:

A)bank must keep $5,000 in excess reserves.
B)bank's required reserves increase by $45,000.
C)bank's liabilities increase by $100,000.
D)bank can increase its loans by up to $50,000.
E)bank can increase its loans by up to $400,000.

Question 34

Banks earn a profit on the difference between:

A)the interest charged from depositors and the interest offered to borrowers.
B)the interest charged on loans and the interest paid on deposits.
C)the deposit and loan balances.
D)liabilities and deposits.
E)dividends and interest.

Question 35

If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits,then its:​

A)required reserves are $500,000.
B)required reserves are $20,000.
C)assets are $500,000.
D)liabilities are $500,000.
E)net worth is $500,000.

Question 36

Suppose the required reserve ratio is 0.1 and Linda deposits $4,000 in cash at the College State Bank.If the bank held no excess reserves before Linda's deposit and now increases its reserves by $500,which of the following is true?

A)The bank must have lent out an additional $4,000.
B)$500 is the value of the bank's required reserves.
C)The bank now has excess reserves of $100.
D)Both the bank's assets and its liabilities rise by $500.
E)The bank now has $500 in excess reserves.

Question 37

Suppose the First National Bank acquires $500,000 in new deposits and the required reserve ratio is 12 percent.Which of the following is true?

A)Required reserves on the new deposits are $12,000.
B)Excess reserves on the new deposits are $500,000.
C)Required reserves on the new deposits are $60,000.
D)Excess reserves on the new deposits are $12,000.
E)Total reserves on the new deposits are $440,000.

Question 38

Asymmetric information in financial markets exists when:

A)borrowers reveal their financial details to banks before borrowing funds.
B)borrowers know more about their ability to repay loans than lenders do.
C)lenders know more about borrowers than borrowers know about themselves.
D)borrowers pay off a loan before it is due.
E)borrowers and lenders have equal information about borrower creditworthiness.

Question 39

The United Bank of Glassen only lent money to a limited number of big business houses.After a financial crisis,the bank went out of business.Which of the following reasons could have contributed to the collapse of this bank?

A)Their decision not to lend funds to the Federal Reserve
B)Their decision not to diversify their asset portfolio
C)Their decision to extend loans to a diversified pool of borrowers
D)Their decision to extend mainly short-term loans
E)Their decision to unnecessarily scrutinize each borrower's details

Question 40

Which of the following is an asset to a bank?

A)Checkable deposits
B)Transaction deposits
C)Credit cards
D)Loans
E)Borrowings from the Fed

Question 41

The table below shows the balance sheet of Eubank which holds no excess reserves.Assume that the required reserve ratio is 10%.If a student deposits $10,000 in cash into his checkable deposit account,Eubank will have _____ in excess reserves?
Table 14.1
?
EUBANK
?
$$\begin{array} { | l | r | r | r | } \hline \text { Assets } & { \text { Liabilities and Net Worth } } & \\\hline & & & \\\hline \text { Deposits at the Fed } & \$ 40,000 & \text { Checkable deposits } & \$ 500,000 \\\hline \text { Cash } & \$ 10,000 & \text { Net Worth } & \$ 20,000 \\\hline \text { Loans } & \$ 300,000 & & \\\hline \text { Securities } & \$ 150,000 & & \\\hline \text { Fed Stock } & \$ 20,000 & & \\\hline\end{array}$$

A)$10,000
B)$1,000
C)$9,000
D)$60,000
E)$6,000

Question 42

Suppose you borrow $1,000 to purchase a car.Which of the following correctly represents the changes in your personal balance sheet after the bank lends the money,but before you spend it?

A)Assets: loan,+$1,000;Liabilities and net worth: checking deposit,+$1,000
B)Assets: loan,-$1,000,checking deposit,+$1,000;Liabilities and net worth: no change
C)Assets: loan,+$1,000,checking deposit,-$1,000;Liabilities and net worth: no change
D)Assets: checking deposit,+$1,000;Liabilities and net worth: loan,+$1,000
E)Assets: checking deposit,+$1,000;Liabilities and net worth: loan,-$1,000

Question 43

If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent:

A)the bank has $1,000 in additional excess reserves,of which it can lend $800.
B)the bank has $1,000 in additional excess reserves,all of which it can lend out.
C)the bank has lost an asset and must reduce its loans.
D)the bank has lost a liability.
E)there is no change in excess reserves,since net assets do not change.

Question 44

Banks differ from other types of businesses because banks:

A)earn profits.
B)combine economic resources to produce services.
C)can go out of business.
D)can create money.
E)are regulated by the government.

Question 45

The least liquid of the assets listed below is:

A)real estate.
B)currency.
C)traveler's checks.
D)oil.
E)checkable deposits.

Question 46

In order to meet a deficiency of required reserves,a bank could:

A)buy securities.
B)deposit vault cash with the Fed.
C)turn some of its deposits at the Fed into cash.
D)close some checking accounts.
E)borrow from another bank in the federal funds market.

Question 47

When the Fed buys U.S.government securities from a member bank,_____.

A)there is a decrease in its assets
B)there is an increase in its assets
C)there is a decrease in its liabilities
D)there is an increase in its liabilities
E)its total assets and liabilities remain unchanged

Question 48

Suppose you bank at Bank A and you write a check to your friend,who banks at Bank B.After the check clears,_____.

A)both Bank A's and Bank B's assets increase
B)both Bank A's and Bank B's assets decrease
C)Bank A's assets increase and Bank B's assets decrease
D)Bank A's assets decrease and Bank B's assets increase
E)there is an increase in the Federal Reserve's assets

Question 49

If a bank has $50,000 in excess reserves at the end of a business day and the required reserve ratio is 20 percent,the bank can increase its profits by:

A)keeping the excess reserves.
B)loaning out $40,000.
C)loaning out $50,000 to another bank.
D)borrowing $50,000 to remove the excess reserves.
E)keeping $10,000 and depositing $40,000 with the Fed.

Question 50

The table below shows the balance sheet of Eubank.If Eubank is holding no excess reserves,its required reserve must be:
?Table 14.1
?
EUBANK
?
$$\begin{array} { | l | r | r | r | } \hline \text { Assets } & { \text { Liabilities and Net Worth } } & \\\hline & & & \\\hline \text { Deposits at the Fed } & \$ 40,000 & \text { Checkable deposits } & \$ 500,000 \\\hline \text { Cash } & \$ 10,000 & \text { Net Worth } & \$ 20,000 \\\hline \text { Loans } & \$ 300,000 & & \\\hline \text { Securities } & \$ 150,000 & & \\\hline \text { Fed Stock } & \$ 20,000 & & \\\hline\end{array}$$

A)5 percent
B)4 percent
C)10 percent
D)20 percent
E)2 percent

Question 51

To maximize its profit,a bank will:

A)minimize the number transactions it engages in.
B)maximize required reserves.
C)minimize excess reserves.
D)maximize excess reserves.
E)minimize required reserves.

Question 52

Banks want to minimize their holdings of excess reserves because:

A)they will be penalized by the Federal Reserve System if excess reserves are too high.
B)required reserves are also minimized when banks minimize their holdings of excess reserves.
C)the money multiplier becomes too large if the excess reserves are high.
D)they want to borrow more on the federal funds market.
E)excess reserves earn no interest.

Question 53

A bank finds itself short of required reserves and therefore borrows from another commercial bank.The interest rate on this loan is:

A)zero.
B)the prime rate.
C)the discount rate.
D)the federal funds rate.
E)the required reserve ratio.

Question 54

When a check is cleared against Bank A after being deposited at Bank B,_____.

A)both Bank A's and Bank B's liabilities increase
B)both Bank A's and Bank B's liabilities decrease
C)Bank A's liabilities increase and Bank B's liabilities decrease
D)Bank A's liabilities decrease and Bank B's liabilities increase
E)there is an increase in the liabilities of the Federal Reserve

Question 55

By holding highly liquid assets to guard against sudden large withdrawals,banks:

A)sacrifice safety.
B)sacrifice profitability.
C)increase profitability.
D)diversify their portfolio.
E)earn more interest than they could on business loans.

Question 56

Suppose a bank lends you $1,000 to purchase a car.Which of the following correctly represents the changes in the bank's balance sheet before you spend the money?

A)Assets: loans,+$1,000;Liabilities and net worth: checking deposits,+$1,000
B)Assets: loans,-$1,000,checking deposits,+$1,000;Liabilities and net worth: no change
C)Assets: loans,+$1,000,checking deposits,-$1,000;Liabilities and net worth: no change
D)Assets: checking deposits,+$1,000;Liabilities and net worth: loans,+$1,000
E)Assets: checking deposits,+$1,000;Liabilities and net worth: loans,-$1,000

Question 57

In the federal funds market,_____.

A)banks make loans to the Fed
B)banks make short-term loans to other banks
C)banks make long-term loans to other banks
D)the Fed makes short-term loans to private borrowers
E)the Fed makes long-term loans to commercial banks

Question 58

The immediate effect of a member bank's sale of U.S.government securities to the Fed is a(n):

A)increase in that bank's required reserves.
B)decrease in that bank's required reserves.
C)increase in that bank's excess reserves.
D)decrease in that bank's excess reserves.
E)decrease in the Fed's assets.

Question 59

Suppose the Fed purchases $5,000 in U.S.government securities from the Last National Bank and the Last National Bank's account at the Federal Reserve district bank increases by $5,000.Which of the following is a result of this transaction?

A)The Last National Bank's balance sheet shows a change in the composition of its assets.
B)Both the Last National Bank's assets and its liabilities rise by $5,000.
C)Both the Fed's assets and its liabilities fall by $5,000.
D)Only the Fed's liabilities change,while its assets remain unchanged.
E)This transaction decreases the money supply.

Question 60

The liquidity of an asset indicates:

A)its buying power.
B)the ease with which it can be converted into cash without a significant loss of value.
C)the ease with which it can be converted into another asset.
D)how likely people are to trade it internationally.
E)its intrinsic value.

Question 61

If the required reserve ratio is 0.2,and the Fed buys $3,000 of U.S.government securities,the maximum amount by which the money supply can increase is:

A)$200.
B)$2,000.
C)$600.
D)$15,000.
E)$1,500.

Question 62

The simple money multiplier:

A)equals the reciprocal of the required reserve ratio.
B)assumes banks hold excess reserves.
C)becomes larger as the required reserve ratio increases.
D)equals required reserves plus excess reserves.
E)equals total reserves minus required reserves.

Question 63

Which of the following would likely increase the money supply?

A)The purchase of government securities by one bank from another bank
B)An increase in the required reserve ratio
C)An increase in the reserves of a commercial bank
D)An increase in the discount rate
E)The sale of government securities by a bank to the Fed

Question 64

If the required reserve ratio is 10 percent and the Fed buys a $5,000 security from a depository institution,the money supply:

A)increases by $15,000.
B)increases by $5,000.
C)decreases by $5,000.
D)increases by $50,000.
E)decreases by $50,000.

Question 65

If r is the required reserve ratio,which of the following is the simple money multiplier?

A)r
B)1/(1 - r)
C)1 - r
D)1/r
E)2r

Question 66

Suppose checking deposits increase by $6,000 after all rounds of the money-creation process when the Fed buys $1,200 worth of U.S.government securities.This implies that the maximum value of the required reserve ratio is:

A)5.
B)0.75.
C)0.2.
D)1.2.
E)1.0.

Question 67

The table below shows the balance sheet of Countybank.Which of the following transactions is most likely to have just taken place at Countybank?
Table 14.2
?
COUNTYBANK
?
$\begin{array}{|l|l|l|l|}\hline\text { Assets } && \text { Liabilities and Net Worth } \\\hline & & \\\hline \text { Cash } & \$ 1,000 & \text { Checkable deposits }&\$1,000\\\hline\end{array}$

A)A customer withdrew $1,000 from her checking account.
B)A customer deposited a $1,000 check into her savings account.
C)A customer deposited $1,000 into her checking account.
D)The bank purchased a security with $1,000 cash.
E)The bank borrowed $1,000 from the Federal Reserve.

Question 68

The table below shows the balance sheet of Countybank.If the required reserve ratio is 10 percent,this bank alone can now increase its lending by _____.
Table 14.2
?
COUNTYBANK
?
$\begin{array}{|l|l|l|l|}\hline\text { Assets } && \text { Liabilities and Net Worth } \\\hline & & \\\hline \text { Cash } & \$ 1,000 & \text { Checkable deposits }&\$1,000\\\hline\end{array}$

A)$1,000
B)$10,000
C)$0
D)$90
E)$900

Question 69

If an increase of $10 million in excess reserves increases checkable deposits in the banking system by a maximum of $200 million,the required reserve ratio is:

A)0.
B)5 percent.
C)10 percent.
D)20 percent.
E)2 percent.

Question 70

If the Fed purchases government securities in the open market,_____.

A)the money supply will decrease
B)the money supply will increase only if the seller of those securities is a commercial bank
C)the money demand will increase immediately
D)the money demand will decrease immediately
E)the money supply will increase through the commercial banking system regardless of who the seller is

Question 71

If the simple money multiplier is 5,the required reserve ratio must be equal to _____.

A)5 percent
B)0
C)10 percent
D)50 percent
E)20 percent

Question 72

Which of the following essential factors enables commercial banks to create money?

A)Required reserves
B)Excess reserves​
C)State and local government securities
D)U.S.government securities
E)Net worth

Question 73

The Reserve Bank of Glassen is the apex banking institution in the country of Glassen.Money supply in Glassen will increase when:

A)the Reserve Bank of Glassen buys bonds from commercial banks.
B)the Reserve Bank of Glassen raises the required reserve ratio for commercial banks.
C)the Reserve Bank of Glassen sells government bonds to commercial banks.
D)the Reserve Bank of Glassen raises the discount rate for commercial banks.
E)the Reserve Bank of Glassen prints new checks.

Question 74

If the required reserve ratio is 20 percent and the Fed buys a $10,000 security from a depository institution that currently has no excess reserves,the money supply:

A)decreases by $10,000.
B)increases by $5,000.
C)decreases by $5,000.
D)increases by $50,000.
E)decreases by $50,000.

Question 75

Money expansion stops when new reserves introduced into the banking system have been converted into:

A)excess reserves.
B)securities.
C)deposits.
D)required reserves.
E)loans.

Question 76

The banking system creates money in the sense that it:

A)prints money.
B)creates excess reserves from loans.
C)creates loans from excess reserves.
D)creates required reserves from loans.
E)creates loans from required reserves.

Question 77

In the money and credit expansion process,the total change in checkable deposits is equal to the initial change in excess reserves _____.

A)multiplied by the required reserve ratio
B)plus the change in required reserves
C)divided by the reciprocal of the required reserve ratio
D)multiplied by the reciprocal of the required reserve ratio
E)divided by the change in required reserves

Question 78

Suppose the reserve requirement is 15 percent.Which of the following is true?

A)The simple money multiplier is 15.
B)The simple money multiplier is 1/15.
C)The simple money multiplier is 30,000.
D)The simple money multiplier is 1/30,000.
E)The simple money multiplier is 1/0.15.

Question 79

The table below shows the balance sheet of Eubank.If the interest rate on loans is 10 percent,the annual cost to Eubank of holding excess reserves is:
Table 14.1
?
EUBANK
?
$$\begin{array} { | l | r | r | r | } \hline \text { Assets } & { \text { Liabilities and Net Worth } } & \\\hline & & & \\\hline \text { Deposits at the Fed } & \$ 40,000 & \text { Checkable deposits } & \$ 500,000 \\\hline \text { Cash } & \$ 10,000 & \text { Net Worth } & \$ 20,000 \\\hline \text { Loans } & \$ 300,000 & & \\\hline \text { Securities } & \$ 150,000 & & \\\hline \text { Fed Stock } & \$ 20,000 & & \\\hline\end{array}$$

A)10 percent of $500,000.
B)10 percent of net worth.
C)10 percent of excess reserves.
D)$10,000.
E)0.

Question 80

The money expansion process continues until there are no more:

A)required reserves in the system.
B)demand deposits in the system.
C)excess reserves in the system that banks are willing to lend.
D)liabilities in the system.
E)assets in the system.