Deck 13: Money and the Banking System

Question 1

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. The U.S. government is continually adding security features to its paper currency to help make counterfeit money easier to detect. If counterfeit currency remained undetected, a vast increase in the supply of counterfeit U.S. currency would

A) decrease aggregate demand in the short run.
B) lead to inflation.
C) reduce the amount of M1.
D) lower the nominal income of the average U.S. worker.

Answer 1

lead to inflation.

Question 2

Money that has no intrinsic value and is created by a government decree is called

A) barter money.
B) commodity money.
C) fiat money.
D) asset money.

Answer 2

fiat money.

Question 3

Suppose after the semester ends, you take a trip to a tropical island. Upon arriving at the island, you make a stop at one of the markets and notice that everyone is carrying around jars full of little turtles. You also notice the person in line in front of you just paid for a bottle of rum with 6 turtles. Someone else just bought a straw hat for two turtles. Thinking back to your economics class (as painful as that may be), you would conclude that

A) this is a barter economy.
B) those little turtles are serving as money.
C) turtles are valueless.
D) turtle soup is a delicacy.

Answer 3

those little turtles are serving as money.

Question 4

When money is used to express the value of goods and services, it is functioning as a

A) medium of exchange.
B) store of value.
C) unit of account.
D) store of purchasing power.

Question 5

If the prices of goods and services were expressed in terms of carved wooden beads, then the carved wooden beads would be serving as a

A) medium of exchange.
B) store of value.
C) unit of account.
D) mechanism for transforming present purchases into future purchases.

Question 6

Which of the following can be used as money?

A) checks
B) cigarettes
C) precious stones
D) all of the above

Question 7

Which of the following are examples of "mediums of exchange"?

A) money used to buy goods
B) goods used to obtain other goods
C) pigs used to obtain chickens
D) all of the above

Question 8

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit currency which is spent and circulated in the marketplace is an example of the counterfeit currency being used as a

A) medium of exchange.
B) commodity money.
C) store of value.
D) bank reserve.

Question 9

Money solves the dilemma of a double coincidence of wants by serving as a

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

Question 10

The supply of money in the U.S. economy is determined primarily by

A) decisions made by the Federal Reserve and the U.S. Treasury.
B) the actions of the Federal Reserve and the banking system.
C) consumers and the banking system.
D) the demand for money in the economy.

Question 11

The stored value of money over time should not change significantly as long as the level of inflation is

A) high.
B) low.
C) adjusted by the government.
D) less than your pay increases.

Question 12

When money is accepted as payment for a good or service, it is being used as a

A) medium of exchange.
B) store of value.
C) unit of account.
D) a mechanism for transforming current purchases into future purchases.

Question 13

What gives money value under a fiat system?

A) Fiat money is backed by gold.
B) The supply of fiat money is controlled by the government.
C) Fiat money is also a commodity.
D) Fiat money is the same as Treasury bonds.

Question 14

In order for a barter transaction to be successful, there must be a

A) market for the goods.
B) high demand for a certain item.
C) double coincidence of wants.
D) federal tax law in effect.

Question 15

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. As long as counterfeit U.S. currency remains undetected and in circulation, an increase in the U.S. inflation rate would essentially

A) decrease the real value of the counterfeit currency.
B) increase the real value of the counterfeit currency.
C) decrease the nominal value of the counterfeit currency.
D) increase the nominal value of the counterfeit currency.

Question 16

In the ________ increases in the supply of money will ________.

A) short run; raise total demand and output
B) long run; raise total demand and output
C) long run; lead to lower prices
D) short run; decrease total demand and output

Question 17

As inflation rates increase, money becomes less useful as a

A) unit of account.
B) store of value.
C) medium of exchange.
D) double coincidence of wants.

Question 18

Money is

A) anything that is regularly used and generally accepted in economic transactions or exchanges.
B) necessary to conduct economic transactions.
C) facilitates specialization in production.
D) anything the government declares to have value.

Question 19

M1

A) is the sum of currency plus traveler's checks.
B) is the narrowest definition of the money supply.
C) includes small time deposits.
D) includes credit cards.

Question 20

If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a

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

Question 21

Which of the following is NOT included in M1 or M2?

A) checking account balances
B) currency in circulation outside of commercial banks
C) traveler's checks
D) credit card balances

Question 22

Checking accounts that pay interest are included in the

A) "demand deposits" part of M1.
B) "other checkable deposits" part of M1.
C) "savings deposits" part of M2.
D) "money market mutual funds deposits" part of M2.

Question 23

Which of the following is NOT included in M1?

A) savings accounts
B) deposits in checking accounts
C) deposits in checking accounts that pay interest
D) traveler's checks

Question 24

About 46 percent of M1 is composed of

A) demand deposits.
B) savings deposits.
C) money market mutual funds.
D) currency held by the public.

Question 25

In the United States economy, what is the basic measure of money?

A) wealth
B) M1
C) disposable income
D) commodities

Question 26

Along with currency not in banks and deposits in checking accounts, what is another component of the M1 measure of money?

A) credit cards
B) debit cards
C) traveler's checks
D) prepaid accounts

Question 27

Table 13.1

According to the information in Table 13.1, M1 is equal to

A) $620 billion.
B) $672 billion.
C) $842 billion.
D) $1,012 billion.

Question 28

Checking account balances are included in

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

Question 29

Money market mutual funds are included in

A) M1.
B) M2.
C) both M1 and M2.
D) neither M1 nor M2.

Question 30

Traveler's checks are included in

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

Question 31

In the 1980s, a new category entitled ________ was added to M1.

A) traveler's checks
B) demand deposits
C) other checkable deposits
D) money market mutual fund deposits

Question 32

Currency is included in

A) M1 only.
B) M2 only.
C) neither M1 nor M2.
D) both M1 and M2.

Question 33

Economists use different definitions of money because

A) there are differences in the frequency with which depositors use their accounts.
B) deposits can be domestic or international.
C) deposits may be held at banks or savings and loans.
D) it is not always clear which assets are used primarily as money.

Question 34

Table 13.1

According to the information in Table 13.1, M2 is equal to

A) $840 billion.
B) $1,062 billion.
C) $1,692 billion.
D) $1,862 billion.

Question 35

Deposits in savings accounts are included in

A) M1.
B) M2.
C) both M1 and M2.
D) neither M1 nor M2.

Question 36

The largest single component of M2 is

A) demand deposits.
B) savings deposits.
C) money market mutual funds.
D) currency held by the public.

Question 37

Which of the following is included in M2?

A) commercial paper
B) U.S. Treasury bonds
C) savings accounts
D) stocks

Question 38

Which of the following appears in M2 and NOT M1?

A) currency
B) checking account balances
C) money market mutual funds
D) traveler's checks

Question 39

A reason that economists keep an eye on both M2 and M1 is because

A) M2 is more accurate than M1.
B) both fluctuate widely and frequently in total dollar value.
C) money market accounts are sometimes used like checking accounts and sometimes like savings accounts.
D) during a recession, M1 is meaningless.

Question 40

The smallest single component of M1 is

A) demand deposits.
B) savings account balances.
C) other checkable deposits.
D) traveler's checks.

Question 41

Credits cards are NOT a part of the M1 or M2 money supply.

Question 42

Money solves the problem of double coincidence of wants that would regularly occur under a system of credit.

Question 43

Small time deposits of $100,000 or less are classified as

A) part of M1.
B) part of M2.
C) FDIC insured.
D) highly liquid.

Question 44

Economists use M2 to measure the amount of money that is regularly used in transactions.

Question 45

Credit cards are regularly used in economic exchanges, so credit card balances are included in the definition of money.

Question 46

An example of money is

A) a dollar bill.
B) a checking account balance.
C) a traveler's check.
D) all of the above

Question 47

Recall the Application about the Brazilian city of Silva Jardim that has issued its own local currency to answer the following question(s). In order to entice local residents to spend their money on stores in town, the small city of Silva Jardim in Brazil, hatched a plan for its own currency. The currency is called the capivari and features a picture of a local rodent on the bills. The capivaris are issued by a local bank, which holds one unit of official Brazilian currency for each capivari it issued. Local merchants, however, give discounts for paying in capivaris so that local residents are therefore encouraged to make local purchases.
According to this Application, the small city of Silva Jardim in Brazil has issued its own currency called the capivari. If people using the currency have enough confidence in this locally-issued scrip to hold onto it for use in future transactions, the currency will be acting as a

A) medium of exchange.
B) unit of account.
C) store of value.
D) commodity money.

Question 48

Before they can be used in regular exchanges, the assets that make up M2 must often

A) have their interest computed.
B) be converted to M1 assets.
C) be paid off if they are credit cards.
D) have reached term if they are insurance policies.

Question 49

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit U.S. currency being held by the public both at home and abroad will impact the level of

A) the reserve ratio.
B) the money multiplier.
C) M1.
D) commodity money.

Question 50

In the United States today, the government will exchange gold or silver for paper money.

Question 51

Define "money."

Question 52

Fiat money refers to a monetary system in which gold backs up paper money.

Question 53

M1 is larger than M2.

Question 54

Money is the standard of exchange by which any type of goods can be purchased.

Question 55

Inflation makes money an imperfect store of value.

Question 56

In order for money to be an effective medium of exchange, it is important to have it serve as a unit of account.

Question 57

Financial monetary assets which often cannot be readily used in commercial exchanges are included in

A) M1.
B) M2.
C) credit cards.
D) prepaid accounts.

Question 58

Recall the Application about the Brazilian city of Silva Jardim that has issued its own local currency to answer the following question(s). In order to entice local residents to spend their money on stores in town, the small city of Silva Jardim in Brazil, hatched a plan for its own currency. The currency is called the capivari and features a picture of a local rodent on the bills. The capivaris are issued by a local bank, which holds one unit of official Brazilian currency for each capivari it issued. Local merchants, however, give discounts for paying in capivaris so that local residents are therefore encouraged to make local purchases.
According to this Application, the small city of Silva Jardim in Brazil has issued its own currency called the capivari. When people use this currency to execute transactions, this currency is being used as a

A) medium of exchange.
B) unit of account.
C) store of value.
D) commodity money.

Question 59

Money market mutual funds are hard to classify because they are used both for making transactions and savings.

Question 60

Recall the Application about the Brazilian city of Silva Jardim that has issued its own local currency to answer the following question(s). In order to entice local residents to spend their money on stores in town, the small city of Silva Jardim in Brazil, hatched a plan for its own currency. The currency is called the capivari and features a picture of a local rodent on the bills. The capivaris are issued by a local bank, which holds one unit of official Brazilian currency for each capivari it issued. Local merchants, however, give discounts for paying in capivaris so that local residents are therefore encouraged to make local purchases.
According to this Application, the small city of Silva Jardim in Brazil has issued its own currency called the capivari. If this currency had nothing backing its value and was simply created by decree of the issuing city government, the city-issued money would be considered

A) commodity money.
B) fiat money.
C) barter money.
D) gold standard money.

Question 61

Which of the following is a bank asset?

A) demand deposits
B) savings account deposits
C) certificates of deposit held by the public
D) loans made to customers

Question 62

Suppose that while vacationing in Switzerland, you won 9,375 Swiss francs, which is the equivalent of $8,000. When you return to the United States, you deposit the $8,000 into your checking account. If the required reserve ratio is 15 percent, this would increase your bank's

A) liabilities by $8,000.
B) excess reserves by $8,000.
C) required reserves by $8,000.
D) assets by $1,200.

Question 63

What are the components of M2?

Question 64

By law, banks are required to

A) hold 100 percent of customer deposits as reserves.
B) hold a fraction of their reserves at the Federal Reserve bank.
C) hold a fraction of demand deposits as reserves.
D) lend out no more than the amount of their required reserves.

Question 65

Which of the following is a bank liability?

A) reserve deposits held at the Fed
B) loans made to customers
C) required reserves
D) demand deposit balances

Question 66

What are the four components of M1?

Question 67

Distinguish M1 from M2.

Question 68

Given the following information about AAA bank:
Bank Deposits $200,000
Loans 100,000
Required Reserves 40,000
Excess Reserves 60,000
What is the reserve ratio?

A) 50 percent
B) 40 percent
C) 20 percent
D) 10 percent

Question 69

Which one of the following statements is true?

A) Demand deposits are assets of a bank.
B) A bank's assets plus its liabilities equals must equal zero.
C) A bank's reserves can only be kept as cash in its vault.
D) Assets generate income for a bank.

Question 70

A bank's reserves

A) are the sum of its excess and required reserves.
B) can be held as cash in its vault.
C) can be held as deposits with the Federal Reserve.
D) all of the above

Question 71

Loans are examples of a bank's

A) assets.
B) liabilities.
C) net worth.
D) balance sheet.

Question 72

Deposits are examples of a bank's

A) assets.
B) liabilities.
C) net worth.
D) balance sheet.

Question 73

What is a commodity money system?

Question 74

One of the essential functions that a bank performs is

A) purchasing government bonds.
B) creating deposits by lending required reserves.
C) transferring money from savers to lenders.
D) owning assets like real estate.

Question 75

Given the following information about Gotham Bank:
Bank Deposits $50,000
Loans 34,000
Reserves 12,000
Reserve Requirement 20 percent
Gotham Bank is holding ________ in excess reserves.

A) $22,000
B) $12,000
C) $2,000
D) -$2,000

Question 76

What are the three properties of money?

Question 77

Given the following information about AAA bank:
Bank Deposits $50,000
Loans 25,000
Required Reserves 15,000
Excess Reserves 10,000
What is the reserve ratio?

A) 50 percent
B) 30 percent
C) 20 percent
D) 15 percent

Question 78

The fraction of deposits that banks are required by law to hold and not lend out are called its

A) reserves.
B) excess reserves.
C) required reserves.
D) net worth.

Question 79

Logan finds $10 in his jacket pocket and deposits it into a bank. As a result of this single transaction, M1 has

A) increased by $10.
B) increased by more than $10.
C) increased by less than $10.
D) not changed.

Question 80

What is a gold standard?