Deck 28: Money and the Banking System

Question 1

A unit of account is the function of money when used as a yardstick to post prices and record debts.

Answer 1

True

Question 2

Modern paper money is fiat money because it is backed only by the faith the holder has in the government that issued it.

Answer 2

True

Question 3

Gold, silver, and cigarettes in a prisoner of war are all examples of commodity money.

Answer 3

True

Question 4

Moral hazard is the idea that when people are insured against the consequences of a risk, they will engage in risker behavior.

Question 5

If R is the reserve ratio, then the money multiplier is given by 1 / (1+ R ).

Question 6

A run on a bank occurs when many depositors withdraw cash from their accounts all at once.

Question 7

Banks create wealth when they lend their excess reserves.

Question 8

Fiat money is money by government decree.

Question 9

If banks decide to hold excess reserves, the multiple expansion of bank deposits will be limited.

Question 10

Inflation increases the use of money as a store of value.

Question 11

The amount of money held in checking accounts is significantly greater than money in the form of currency.

Question 12

The lion's share of purchases and transactions in the U.S. economy are made with coins and paper money.

Question 13

Money that is backed solely by a government decree is referred to as fiat money.

Question 14

A store of value is the function of money when used to transfer purchasing power to the future.

Question 15

When people trade goods for money, money is being used as a medium of exchange.

Question 16

Systemic risks inhere mainly in the largest financial institutions.

Question 17

M2 consists of M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories.

Question 18

Barter transactions involve a double coincidence of wants.

Question 19

Barter is a system of exchange in which people directly trade one good for another, without using money as an intermediate step.

Question 20

Money only consists of coins, paper money, and checkable deposits.

Question 21

M1 consists of currency, demand deposits, traveler's checks, and other checkable deposits.

Question 22

Bank runs are "contagious" in that they often spread to other banks.

Question 23

Systemic risks would be most prevalent at larger banks like Bank of America and Citibank.

Question 24

If you have a checking account at Citibank, the account is a liability of the bank.

Question 25

A banker motivated by profit maximization may make decisions that destabilize the banking system.

Question 26

Many economists believe that the difference between savings accounts and checking accounts is disappearing.

Question 27

Banks cannot influence the money supply if they hold all deposits in reserve.

Question 28

Most bank deposits in the United States are insured by the Federal Deposit Insurance Corporation (FDIC).

Question 29

Unlike recent events in England, the United States has no recent history of bank failures.

Question 30

During a recession, profit-oriented banks would be prone to reduce the money supply by increasing their excess reserves and declining to lend to less creditworthy applicants.

Question 31

The value of the deposit multiplier is increased if individuals hold all their money in cash.

Question 32

Money multiplier is the amount of money the banking system generates with each dollar of reserves.

Question 33

The value of the deposit multiplier is 1 divided by the required reserve ratio.

Question 34

Due to the private nature of bank ownership, there is often a difference between bankers' goals and macroeconomic objectives.

Question 35

Fractional reserve banking has three crucial features: bank profitability, bank discretion over the money supply, and bank exposure to runs.

Question 36

Credit cards are part of the M2 money supply and are valued at the maximum credit limit of the cardholder.

Question 37

The money-multiplier process is based on the principle of fractional reserve banking.

Question 38

Liquidity is the ease with which an asset can be converted into the economy's medium of exchange.

Question 39

Most banks in the United States are owned by the government and operate as nonprofit institutions.

Question 40

Fractional reserve banking is a banking system in which banks hold only a fraction of deposits as reserves.

Question 41

Contraction of the money supply can aggravate a recession.

Question 42

Agraria sends wheat to Cyberia in exchange for computers and technology goods. This is an example of

A) unidirectional trade.
B) joint venture.
C) barter.
D) monetary exchange.

Question 43

Nowadays, most observers believe that monetary policy

A) is less important than fiscal policy.
B) is more important than fiscal policy.
C) and fiscal policy are equally important.
D) and fiscal policy are both unimportant.

Question 44

In a market system, the most dangerous types of bankruptcies involve

A) industrial monopolies.
B) multinational firms.
C) employment agencies.
D) financial institutions.

Question 45

The "efficiency of the payments mechanism" refers to

A) the ease and speed of exchanging money for goods and services.
B) how fast member banks replenish required reserves.
C) how fast banks pay interest on deposit accounts.
D) how fast countries pay off foreign debts.

Question 46

The most common form of trading goods for goods is

A) bilateral trade.
B) government commodity distribution.
C) status-based trades.
D) barter.
E) payments in kind.

Question 47

Bank failures in the United States occurred

A) frequently through the 1960s and declined since then.
B) infrequently through the 1960s and have become more common since then.
C) frequently through the 1930s, declined after that time, and became more common in 2008.
D) infrequently through the 1930s, increased after that time, and became less common in 2008.

Question 48

Barter is a system of

A) trade without the use of money.
B) trading one good for another.
C) the double coincidence of wants.
D) All of these responses are correct.

Question 49

One advantage of a money system compared to a barter system is that

A) barter never works.
B) money creates the need for banks.
C) money is more efficient.
D) everyone has money.

Question 50

If depositors become worried about the safety of their deposit accounts, they may trigger a

A) deposit surplus.
B) bank run.
C) fiscal policy crisis.
D) required reserve increase.

Question 51

Bankers' business decisions effect the money supply because bankers

A) are respected men and women.
B) have the ability to create money.
C) use a special accounting system developed by the Federal Reserve Board.
D) All of these responses are correct.

Question 52

Which of the following is a reason that banks are so heavily regulated?

A) Governments are concerned about the safety of deposits.
B) The industry is a principal determinant of aggregate demand.
C) Bank failures are contagious.
D) All of these responses are correct.

Question 53

A credit card is a form of money.

Question 54

Bankers' decisions on how much to hold in reserves influence the supply of money.

Question 55

During the 2007-2009 financial crisis, the U.S. government decided that Lehman Brothers was not too big to fail and that AIG was too big to fail.

Question 56

A bank run involves a large flow of money

A) into bank depositors' accounts.
B) into checking and savings accounts.
C) out of depositors' accounts.
D) out of individuals' cash reserves into money market funds.

Question 57

The banking industry is heavily regulated because

A) banking is a monopoly industry.
B) most banks are owned by government agencies.
C) bankers do what is best for their stockholders, not necessarily what is best for the economy.
D) All of these responses are correct.

Question 58

In order for barter trades to occur, there must be a

A) singularity of interests.
B) bargaining intermediary.
C) double coincidence of wants.
D) sufficient supply of cash.

Question 59

In addition to fiscal policy, the other main tool used to affect aggregate demand is

A) trade policy.
B) industrial policy.
C) planning policy.
D) monetary policy.

Question 60

Which of the following was a result of the Dodd-Frank Act?

A) Restricted bank activities
B) Established a new consumer protection agency
C) Tougher regulations for banks
D) All of these responses are correct.

Question 61

Fiat money is

A) always backed by gold or silver.
B) useful in buying Italian cars.
C) only backed by government decree.
D) not as liquid as precious metals.

Question 62

Paper money in the United States is

A) backed by gold in Fort Knox.
B) partially backed by gold and silver.
C) entirely fiat money.
D) fully convertible into gold at fixed prices.

Question 63

Money's principal function is to serve as a

A) standard for making loans.
B) standard for credit reporting.
C) medium of exchange.
D) method for storing wealth.

Question 64

One reason why gold and silver have served as money is that they

A) are easy to produce.
B) are easy to duplicate.
C) are durable.
D) All of these responses are correct.

Question 65

The primary benefit of a monetary system of exchange compared to a barter system is the increased

A) ability to record transactions.
B) time necessary to find trading partners.
C) time devoted to shopping.
D) efficiency in arranging transactions.

Question 66

Agraria uses bushels of wheat to quote prices. In this case, bushels of wheat act as a

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

Question 67

Which of the following is an example of money serving as a medium of exchange?

A) Richard puts money into a piggy bank.
B) Ellen deposits cash into a money market account.
C) Sean puts a new $20 bill into his currency collection.
D) Marian buys a carbo-loaded drink before a marathon.

Question 68

Money is an imperfect store of value when

A) the rate of inflation is high.
B) the unemployment rate is high.
C) gold prices are falling.
D) businesses are failing due to bankruptcy.

Question 69

If fears of a terrorist attack are widespread and people lose faith in money, the economy could revert to a system of

A) cash and checks.
B) double-entry bookkeeping.
C) barter.
D) financial intermediaries.

Question 70

The one disadvantage of paper money is that it is easier to

A) duplicate and counterfeit.
B) carry.
C) divide.
D) store and use at a later time.

Question 71

Money is almost always used to quote prices. This illustrates the function of money as a

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

Question 72

Liquidity refers to the

A) rapidity with which money flows through the economy.
B) ease with which an asset can be converted into cash.
C) ease with which banks move funds from checking to savings accounts.
D) All of these responses are correct.

Question 73

Required reserves of banks are a fixed percentage of their

A) loans.
B) assets.
C) deposits.
D) All of these responses are correct.

Question 74

Which of the following is an example of fiat money?

A) Gold
B) Paper dollars
C) Solid silver coins.
D) None of the above is correct.

Question 75

A major problem with commodity money is that, to be useful, money must be

A) divisible.
B) storable.
C) portable.
D) All of these responses are correct.

Question 76

The concept of money as a "unit of account" involves the use of money to

A) speed transactions.
B) reduce shopping time.
C) protect against inflation.
D) quote prices.

Question 77

Which of the following assets is most liquid?

A) Short-term government bonds
B) Savings accounts
C) Checking accounts
D) Currency and coins

Question 78

____ is an object in use as a medium of exchange, but which also has a substantial value in alternative uses.

A) IOU
B) Commodity money
C) Fiat money
D) Deposit certificate

Question 79

The primary feature of money is that it serves as

A) barter value.
B) a medium of exchange.
C) intrinsic value.
D) commodity value.

Question 80

One inconvenience of commodity money is the need for

A) money to be divisible.
B) uniform quality.
C) portability.
D) All of these responses are correct.