Deck 12: Money Banking and the Financial System

Question 1

In direct finance, funds are loaned and borrowed through a financial intermediary.

Answer 1

False

Question 2

The term federal reserve notes refers to coins minted by the U.S. Treasury.

Answer 2

False

Question 3

A moral hazard problem occurs before a loan is made, and the adverse selection problem occurs after a loan is made.

Answer 3

False

Question 4

Reserves equal bank deposits at the Fed plus vault cash.

Question 5

The Federal Reserve began paying interest on reserves in 2008.

Question 6

A financial system is a means of bringing together savers and borrowers.

Question 7

Required reserves are a set percentage of total reserves that must be held in cash in a bank's vault or in the bank's reserve account at the Fed.

Question 8

The Fed pays banks interest on bank deposits held on reserve at the Fed.

Question 9

Money is an invention of government.

Question 10

The Chinese government has prohibited anyone in China from dealing with bitcoin exchanges.

Question 11

Changing from a barter economy to a money economy can reduce transaction costs.

Question 12

Moral hazard occurs when the parties on once side of the market, who have information not known to others, self select in a way that adversely affects the parties on the other side of the market.

Question 13

To a bank, checkable deposits are classified as a liability.

Question 14

Bank capital equals assets minus liabilities.

Question 15

There was an economic depression in the U.S in 1893 that some people blamed on the gold standard.

Question 16

To economists, credit cards are a widely accepted form of money.

Question 17

To an economist, the terms "money" and "wealth" are synonyms.

Question 18

The existence and use of the Internet has lowered the transaction costs of making some exchanges.

Question 19

Small-denomination time deposits are part of M2, but not part of M1.

Question 20

Excess reserves are the amount by which total reserves exceed required reserves.

Question 21

According to the textbook, the good that emerged as money in World War II POW camps was

A)tinned beef.
B)toilet paper.
C)cigarettes.
D)cheese.

Question 22

If a person uses money to buy a pair of shoes, money is functioning as

A)a unit of account.
B)a store of value.
C)a medium of exchange.
D)none of the above

Question 23

Compared to barter, money __________ transaction costs, making transactions __________ time-consuming.

A)increases; more
B)increases; less
C)reduces; more
D)reduces; less

Question 24

To an economist, money is a synonym for which of the following?

A)income
B)credit
C)wealth
D)salary
E)none of the above

Question 25

The balance in a banking customer's checkable deposit account is the amount the bank owes the customer.

Question 26

If peanuts were widely accepted for purposes of exchange, then

A)peanuts would be money.
B)peanuts would be less valuable than they are currently.
C)we would observe people using peanuts to purchase cars.
D)a and c
E)a and b

Question 27

A unit of account is

A)a bank account.
B)a savings account.
C)a common measurement in which values are expressed.
D)the same as a medium of exchange.
E)none of the above

Question 28

Barter is

A)the exchange of money for goods and then the exchange of those goods for money.
B)the exchange of money for money, or the exchange of money for stocks and bonds.
C)the exchange of goods and services for goods and services without the use of money.
D)any exchange, with or without the use of money, in which the participants negotiate (or barter) the price of the goods to be exchanged.

Question 29

Money's basic advantage as compared to barter is that

A)everybody has money but not everyone has the opportunity to barter.
B)a money system relies on a double coincidence of wants.
C)money reduces transaction costs.
D)money is the only medium you can use to store your wealth.

Question 30

In which situation are transaction costs most likely to be the lowest?

A)Rodney buys antiques; he is currently looking for an eighteenth-century table.
B)Cathy is looking for someone who is willing to trade accounting services (in return) for law services.
C)Rodriguez wants to buy a house with two master bedrooms.
D)Melinda wants to buy a McDonald's Big Mac (she will not be asking for a special order).

Question 31

In the Yap civilization of the South Pacific prior to 1920, large, heavy stones in the shape of a wheel were used as money. Which function of money was probably least served by this form of money?

A)medium of exchange
B)store of value
C)unit of account
D)store of wealth

Question 32

Demand deposits are checking accounts that pay no interest.

Question 33

Which of the following is a correct listing of money's functions?

A)source of credit, value of transaction costs, unit of barter
B)medium of barter, medium of exchange, medium of transactions
C)unit of barter, unit of account, a unit of income
D)store of value, store of exchange, measure of account
E)store of value, medium of exchange, unit of account

Question 34

Which of the following statements is false?

A)Money is the only good that can (or does) serve as a store of value.
B)In a barter economy, there is no good that serves as a unit of account.
C)There are higher transaction costs of making exchanges in a barter economy than in a money economy.
D)Money functions as a medium of exchange, unit of account, and store of value.

Question 35

Money evolved out of the self-interested actions of

A)economists.
B)governments.
C)a few kings and queens.
D)individuals.

Question 36

A bank's business is to turn its liabilities into assets.

Question 37

Which of the following illustrates a barter transaction?

A)A bushel of oranges is traded for a bushel of apples.
B)Someone buys a pizza for the special price of $4.
C)Someone buys a house for $100,000.
D)b and c
E)a, b, and c

Question 38

Transaction costs are best defined as the

A)various costs of different goods and services.
B)cost of one good in terms of another; that is, the price of apples in terms of oranges.
C)costs involved in borrowing money from someone, that is, the interest that must be paid for the use of someone else's money.
D)costs associated with the time and effort necessary to make an exchange.

Question 39

The two types of asymmetric information problems are moral hazard and insolvency.

Question 40

Exchanges take less time in a barter economy than in a money economy because a double coincidence of wants is necessary for a money economy.

Question 41

Historically, which of the following goods have evolved into money?

A)gold
B)salt
C)cattle
D)cocoa beans
E)all of the above

Question 42

M1 is comprised of currency held outside banks + traveler's checks + __________.

A)credit cards
B)savings deposits
C)gold
D)checkable deposits
E)money market mutual funds

Question 43

The first bankers were

A)sheriffs.
B)goldsmiths.
C)clergy.
D)innkeepers.
E)economists.

Question 44

Because money __________________, people are _________________ likely to specialize in their work in a money economy.

A)is a store of value; less
B)eliminates the double coincidence of wants; more
C)is a unit of account; more
D)eliminates the need for holdings of precious metals; more

Question 45

If checkable deposits in Bank A total $300 million and the required reserve ratio is 10 percent, then required reserves at Bank A equal

A)$3.0 million.
B)$30.0 million.
C)$3.3 million.
D)$300,000

Question 46

Fractional reserve banking is a term used to describe a banking system whereby

A)individual banks share a fraction of the total funds deposited in the whole banking system.
B)banks are required to quote interest rates in fractions.
C)banks hold reserves equal to only a fraction of their deposit liabilities.
D)banks hold reserves equal to a multiple of their deposit liabilities; that is, fractional in this case really means multiple.
E)banks are required to maintain a certain fraction of their deposits in the form of checkable deposits, a certain fraction of their deposits in the form of savings deposits, etc.

Question 47

A savings account functions as

A)a unit of account.
B)a store of value.
C)a medium of exchange.
D)none of the above

Question 48

According to the textbook, in the book version of The Wonderful Wizard of Oz, Dorothy's slippers are

A)gold.
B)silver.
C)ruby.
D)paper.

Question 49

Which of the following statements is true?

A)Savings deposits are a part of M2, but not M1.
B)M1 is sometimes referred to as the "broad definition of the money supply".
C)Time deposits are a part of M1, but not M2.
D)M1 is a larger dollar amount than M2.

Question 50

Required reserves are the amount of

A)reserves a bank must hold against its deposits as mandated by the Federal Reserve.
B)cash a bank must hold against its deposits as mandated by the Federal Reserve.
C)checkable deposits a bank must hold against all other deposits as mandated by the U.S.Treasury.
D)reserves a bank must hold against all its assets as mandated by the Federal Reserve.

Question 51

According to the textbook, The Wonderful Wizard of Oz is alleged to be a story about

A)the California gold strikes of 1849.
B)the end of the gold standard in 1934.
C)the presidential election of 1896.
D)the financial panic of 1907.

Question 52

The requirement of a "double coincidence of wants" is the chief __________ of the __________ exchange system.

A)advantage; barter
B)advantage; monetary
C)disadvantage; barter
D)disadvantage; monetary

Question 53

In a barter economy, people are _________ to specialize in the production of one good or service, compared to in a money economy.

A)more likely
B)less likely
C)equally likely
D)almost always going

Question 54

According to the textbook, L. Frank Baum, the author of The Wonderful Wizard of Oz, blamed ____________________ for the economic depression of 1893 and the related hardships faced by farmers and workers.

A)the gold standard
B)the silver standard
C)a massive tornado
D)high taxes

Question 55

Total bank reserves equal

A)checkable deposits + vault cash + traveler's checks.
B)vault cash + currency in the hands of the nonbanking public.
C)bank deposits at the Federal Reserve.
D)bank deposits at the Federal Reserve + vault cash.

Question 56

M2 is comprised of

A)small-denomination time deposits + savings deposits + money market accounts.
B)small-denomination time deposits + credit cards + money market accounts + gold deposits.
C)M1 + small-denomination time deposits + savings deposits + retail money market mutual funds.
D)M1 + small denomination time deposits + credit cards + money market accounts.

Question 57

Your neighbor has knowledge of economics and you would like her to share it with you. You own a car, a CD player and a new pair of running shoes. You wish to make a trade, but the neighbor does not want what you have. The problem can be stated as follows: You are not satisfying the

A)rule of transaction costs.
B)double coincidence of wants.
C)law of marketability.
D)terms of a common denominator.

Question 58

A "money market deposit account" is a(n)

A)checking account that pays no interest.
B)bank account with a specified maturity date.
C)store of Federal Reserve Notes held in bank vaults to cash checkable deposits on demand.
D)checking account created from an automatic transfer from a savings account.
E)interest-earning account at a bank or thrift institution that usually has a minimum balance requirement.

Question 59

A savings deposit is a type of

A)time deposit that is payable on demand.
B)time deposit that earns interest and allows the depositor to write checks payable to other persons.
C)time deposit that does not earn interest but does offer limited check-writing services.
D)interest-earning account at a bank or thrift institution in which funds can be withdrawn at any time without a penalty payment.
E)checkable deposit that also pays interest.

Question 60

In the history of banking, warehouse receipts refer to receipts

A)that goldsmiths once issued acknowledging that they held a customer's gold.
B)for storing furniture in a warehouse.
C)goldsmiths issued to each other when they borrowed gold.
D)for storing food and other perishables in a warehouse.

Question 61

The amount of required reserves a bank holds depends on the

A)required reserve ratio.
B)demand-deposit ratio.
C)excess-reserve ratio.
D)currency ratio.

Question 62

Reserves held beyond the required amount are called __________ reserves.

A)redundant
B)precautionary
C)excess
D)surplus

Question 63

M2 includes M1 plus all of the following except

A)savings deposits.
B)retail money market mutual funds.
C)short-term U.S.government securities.
D)small-denomination time deposits.

Question 64

Ninth National Bank holds $200 million in checkable deposits and $18,000,000 in total reserves. With a required reserve ratio of 8 percent, how much in excess reserves is Ninth National holding?

A)$1,440,000
B)$218,000,000
C)$17,440,000
D)$16,000,000
E)$2,000,000

Question 65

The store of value function of money refers to the ability of money to

A)facilitate the exchange of goods and services.
B)maintain its value over time.
C)express relative scarcity.
D)earn interest over time.
E)increase its value over time.

Question 66

When a bank makes a loan to one of its customers, to the bank the loan is classified as

A)an asset.
B)a liability.
C)neither an asset nor a liability.
D)an asset in some cases and a liability in other cases, depending on the type of loan.

Question 67

A bank has $7 million in checkable deposits and $1.2 million in total reserves. If the required reserve ratio is 10 percent, then the bank has

A)required reserves of $700,000.
B)excess reserves of $500,000.
C)excess reserves of $1,080,000.
D)required reserves of $120,000.
E)a and b

Question 68

"Barter" implies that

A)to get one good or service, an individual offers another.
B)to get one good or service, an individual offers money.
C)to get a check, an individual offers a good or service.
D)different kinds of money are exchanged for each other.
E)none of the above

Question 69

According to the textbook, many people believe that the character Dorothy, in the book The Wonderful Wizard of Oz, represents

A)presidential candidate Barry Goldwater.
B)President Abraham Lincoln.
C)President William McKinley.
D)presidential candidate William Jennings Bryan.

Question 70

Money is defined by economists as

A)the market value of an asset.
B)the funds one receives during a specified period of time.
C)any good that is widely accepted in exchange and for the repayment of debts.
D)both b and c
E)all of the above

Question 71

Bank A has checkable deposits of $900,000 and total reserves of $112,000. If the required reserve ratio is 8 percent, the bank has excess reserves of

A)$40,000.
B)$72,000.
C)$13,440.
D)$4,000.

Question 72

Tenth National Bank holds $285 million in checkable deposits and $35 million in reserves. With a required reserve ratio of 11 percent, how much in excess reserves is Tenth National holding?

A)$250 million
B)$3.65 million
C)$35.2 million
D)3.85 million

Question 73

Which of the following is true?

A)Reserves = required reserves - excess reserves.
B)Reserves - required reserves = excess reserves.
C)Reserves = required reserves + excess reserves.
D)b and c
E)a and b

Question 74

Bank A holds $1 million in required reserves and the required reserve ratio is 9 percent. It follows that Bank A holds checkable deposit liabilities that total approximately

A)$111 million.
B)$11.11 million.
C)$90 million.
D)$900 million.

Question 75

If checkable deposits in Bank A total $620 million and the required reserve ratio is 9 percent, then required reserves at Bank A equal

A)$564.2 million.
B)$468 million.
C)$28.8 million.
D)$55.8 million.
E)$558 million.

Question 76

Bank A has checkable deposits of $800,000 and total reserves of $200,000. If the required reserve ratio is 0.11, the bank has required reserves of

A)$600,000.
B)$88,000.
C)$112,000.
D)$22,000.

Question 77

A bank has $10,000 in excess reserves and the required reserve ratio is 20 percent. This means the bank could have __________ in checkable deposit liabilities and __________ in total reserves.

A)$80,000, $10,000
B)$100,000, $20,000
C)$50,000, $25,000
D)$100,000, $30,000

Question 78

The unit of account function of money refers to the

A)fact that money and income are the same thing.
B)common denominator of measurement provided by money.
C)characteristic that all money is intrinsically valuable.
D)all of the above

Question 79

In a barter economy,

A)money is a medium of exchange.
B)coins are used to facilitate trade.
C)money is a store of value.
D)goods and services are traded directly for each other.
E)the money supply consists entirely of coins and currency.

Question 80

Which of the following is not included in M1?

A)retail money market mutual funds
B)checkable deposits
C)traveler's checks
D)all of the above