Deck 13: Money and the Financial System

Question 1

Before specialization:

A) families were largely self-sufficient.
B) families produced much more than they could each consume.
C) there was a great need for exchange between families.
D) families consumed much more than they could each produce.
E) families exchanged only goods, not services.

Answer 1

families were largely self-sufficient.

Question 2

The greater the degree of specialization in the economy, the:

A) easier it is to discover a double coincidence of wants.
B) more feasible is a barter system.
C) less likely it is that monetary exchange will develop.
D) harder it is to negotiate an exchange rate between all pairs of goods.
E) more likely it is that individual consumers are self-sufficient.

Answer 2

harder it is to negotiate an exchange rate between all pairs of goods.

Question 3

Specialization of labor means that:

A) production requires a special kind of labor.
B) the overall skill level of labor is increasing.
C) individuals produce goods other than those they want to consume.
D) individuals achieve self-sufficiency in production.
E) exchange within an economy consists of trading in services.

Answer 3

individuals produce goods other than those they want to consume.

Question 4

The three important functions of money are _____.

A) medium of exchange, facilitation of trade, and unit of account
B) unit of account, facilitation of trade, and store of value
C) store of value, facilitation of trade, and double coincidence of wants
D) facilitation of trade, medium of exchange, and unit of account
E) medium of exchange, unit of account, and store of value

Question 5

Which of the following statements is true of a barter system?

A) In a barter system economy, no rates of exchange are defined.
B) In a barter system economy, there are as many different rates of exchange as there are pairs of goods to trade.
C) In a barter system economy, rates of exchange are expressed in goods per dollar.
D) In a barter system economy, rates of exchange are expressed in dollars per good.
E) In a barter system economy, rates of exchange are denominated in gold or silver.

Question 6

Which of the following best illustrates the double coincidence of wants?

A) Both Tom and Jerry would like to purchase the same good.
B) Tom has something he's willing to trade with Jerry; Jerry has something he's not willing to trade with Tom.
C) Tom and Jerry have very similar tastes; hence, Tom's wants coincide with Jerry's.
D) Tom has something he's willing to trade with Jerry, who wants it; Jerry has something he's willing to trade with Tom, who wants it.
E) Tom has something Jerry wants; Jerry has nothing Tom wants.

Question 7

The more specialized labor becomes, the:

A) less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
B) less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
C) more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
D) more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
E) more likely it is that the individual is producing only what he or she wants to consume.

Question 8

Which of the following statements is true of a barter system?

A) In a barter system, an individual offers one good or service to get another good or service.
B) In a barter system, an individual offers money to get a good or service.
C) In a barter system, an individual offers a good or service to get money.
D) In a barter system, different kinds of money are exchanged for one another.
E) In a barter system, all individuals are self-sufficient.

Question 9

The first step in the evolution of money involved the use of _____.

A) physical commodities
B) barter
C) pieces of paper representing claims on physical commodities
D) pieces of paper with no intrinsic value
E) electronic entries representing claims on pieces of paper with no intrinsic value

Question 10

Identify the statement which is true of a barter system?

A) In a barter system, trade will only occur if there is a double coincidence of wants.
B) In a barter system, an individual offers coins to get a good or service.
C) In a barter system, an individual offers a commodity money to get fiat money.
D) In a barter system, different kinds of money are exchanged for one another.
E) In a barter system, individuals are self-sufficient.

Question 11

Barter works best when:

A) there is an absence of a double coincidence of wants.
B) many different products are available in the economy.
C) money is readily available to establish relative prices.
D) each trader has what the other wants and wants what the other has.
E) highly developed economies achieve extensive specialization of labor.

Question 12

Barter is the direct exchange of goods and services for:

A) any kind of money.
B) other goods and services.
C) either goods or money.
D) commodity money.
E) foreign currency.

Question 13

The greater the number of different goods available in an economy, the:

A) less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
B) less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
C) more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop.
D) more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop.
E) more likely it is that individuals are producing only goods they want to consume.

Question 14

Which of the following statements is true of a barter system?

A) In a barter system, it is difficult to keep track of the relative values of goods and services.
B) In a barter system, an individual offers money to import goods and services.
C) In a barter system, an individual offers currency notes to get coins.
D) In a barter system, different kinds of money are exchanged for one another.
E) In a barter system, individuals are self-sufficient.

Question 15

The earliest type of exchange involved _____.

A) coins
B) barter
C) commodity money
D) fiduciary money
E) fiat money

Question 16

Barter was more feasible in primitive societies than in modern societies because:

A) there was no inflation in primitive societies.
B) there were many goods available for trade in primitive societies, so people could always find the goods that they wanted.
C) specialization was limited and thus there were few goods available for trade in primitive societies.
D) specialization was limited and thus there were many goods available for trade in primitive societies.
E) people in primitive societies had limited wants.

Question 17

As the variety of goods and services increases, barter becomes:

A) easier because the chance of there being a double coincidence of wants increases.
B) harder because the chance of there being a double coincidence of wants increases.
C) easier because the chance of there being a double coincidence of wants decreases.
D) harder because the chance of there being a double coincidence of wants decreases.
E) easier because people have more options to choose from.

Question 18

Exchange is necessary in an economy if:

A) output is to be produced.
B) output is to be consumed.
C) individuals are self-sufficient.
D) families are self-sufficient.
E) labor is specialized.

Question 19

Specialization of labor means that:

A) production requires a special kind of labor.
B) the overall skill level of labor is increasing over time.
C) individuals produce goods that they are relatively good at producing and trade for those that they do not produce.
D) individuals achieve self-sufficiency in production by producing all the goods that they require.
E) exchange within the economy consists of trading in services.

Question 20

Barter may be the only alternative:

A) i f the supply of money dries up.
B) if the price system is not allowed to function properly.
C) if disinflation sets in.
D) if hyperinflation sets in.
E) if fiat money is discontinued.

Question 21

An important function of commercial banks is to _____.

A) print new currency
B) issue fiat money
C) mint coins
D) redeem currency for precious metals
E) make loans

Question 22

Identify the correct statement regarding a fractional reserve banking system.

A) Only a fraction of the banks in the system are allowed to create money.
B) Only a fraction of the banks in the system have reserves.
C) The claims outstanding against the bank are only a fraction of the bank's total reserves.
D) Each bank must deposit a fraction of its reserves with the Federal Reserve Bank.
E) Bank reserves represent only a fraction of bank deposits.

Question 23

When silver and gold were used as money, both their quantity and quality were open to question. The solution was _____.

A) seashells
B) seigniorage
C) token money
D) coinage
E) fiat money

Question 24

Suppose an ocean liner sinks and the passengers are stranded on a lush tropical island. Which of the following could most likely be used as money in the economy that develops among the survivors?

A) The life jackets they put on when leaving the ship
B) The beads from the necklaces that were given out as party favors on the night the ship sank
C) The coconuts growing on the island
D) The fish in the sea around the island
E) The sand on the island's beaches

Question 25

Any bank that uses deposits to make loans:

A) operates on a 100 percent reserve system.
B) operates on a fractional reserve system.
C) does not operate on a reserve system.
D) does not keep reserves in its vaults.
E) charges an interest rate determined by the reserve ratio.

Question 26

_____ were the first bankers.

A) Seigniors
B) Governments
C) Savings and loan institutions
D) Farmers
E) Goldsmiths

Question 27

The reserve ratio is the ratio of:

A) Federal Reserve member banks to nonmember banks.
B) Federal Reserve nonmember banks to member banks.
C) Federal Reserve member banks to all U.S. banks.
D) a bank's total deposits to its reserves.
E) a bank's reserves to its total deposits.

Question 28

In order for something to be used as money, it must be _____.

A) issued by the government
B) issued by banks
C) declared to be money
D) generally acceptable
E) made of something valuable

Question 29

How does money function as a unit of account?

A) Money has intrinsic worth as a commodity.
B) Money is convertible into commodities that have intrinsic worth.
C) The prices of all goods and services are measured in terms of money.
D) Things that function as money can do so because people know there is a standard of value that ultimately backs the money even if it is only faith.
E) Bank accounts make it easy for people to store their wealth.

Question 30

Goldsmiths are considered to be the forerunners of modern banks because they:

A) had safes to keep gold secure.
B) issued gold coins.
C) created money by lending out gold reserves.
D) created legal tender.
E) verified the quality of money.

Question 31

If people use quartz as a medium of exchange, then they:

A) have a barter economy.
B) are using commodity money.
C) are using token money.
D) are using legal tender.
E) are using fiat money.

Question 32

Whatever serves as a medium of exchange is:

A) money.
B) money, as long as it is also the best such medium of exchange available.
C) money, as long as it is not also a commodity.
D) money, as long as it is not also legal tender.
E) not money, unless it continues to be backed by its issuing institution.

Question 33

Commitments to make or receive payments in the future are made easier by money's function as a _____.

A) unit of account
B) store of value
C) medium of exchange
D) form of barter
E) commodity

Question 34

Commodity money is something:

A) that has no intrinsic value.
B) that has an intrinsic value.
C) that is based on a valuable metal.
D) whose value never changes.
E) whose value cannot be determined.

Question 35

Which of the following serves as money in many federal prisons in the United States these days?

A) Postage stamps
B) Energy bars
C) Plastic-and-foil pouches of mackerel
D) Cans of tuna
E) Cigarettes

Question 36

The unit of account function of money:

A) means that money should be durable.
B) means that money makes price information more accessible.
C) requires that money be made of something valuable.
D) means that money can be used to save up purchasing power.
E) means that money is more easily counted than goods.

Question 37

Which of the following is true of the unit of account function of money?

A) It makes money durable in nature.
B) It makes the relative values of goods and services more easily known.
C) It implies that money should be made of something valuable.
D) It implies that money can be used to save up purchasing power.
E) It implies that money is more easily counted than goods.

Question 38

Coins were minted with serrated edges:

A) to make it obvious that they were made of cheap alloys.
B) so that cheaper metals did not have to be used.
C) to allow words to be printed on the border.
D) to prevent the coins from being clipped.
E) to make them jingle less when they rub together.

Question 39

Whatever functions as money must be _____.

A) authorized by the government
B) accepted as deposit by banks
C) backed by precious metals like gold or silver
D) completely indestructible
E) limited in supply

Question 40

Which of the following was the earliest type of money?

A) Coins
B) Barter
C) Commodity money
D) Token money
E) Fiat money

Question 41

Which of the following is associated with the problem of hyperinflation?

A) Money is in short supply.
B) The value of money rises dramatically.
C) The government runs out of money.
D) People look for alternatives to using money.
E) People start to hold on to money for long periods of time.

Question 42

Federal Reserve notes are _____.

A) checks
B) commodity money
C) coins
D) backed by gold
E) fiat money

Question 43

Financial institutions are known as financial intermediaries because they serve as go-betweens, which link _____ and _____.

A) the government; the taxpayers through IRAs
B) savers; borrowers
C) employers; employees
D) firms; the government
E) firms; consumers

Question 44

Which of the following is a depository institution?

A) An insurance company
B) A credit union
C) A finance company
D) A pension fund
E) A stock market

Question 45

Which of the following is incorrect regarding financial intermediaries?

A) They link savers and borrowers.
B) They earn profits by loaning money.
C) They offer lower interest rates on savings than they charge on loans.
D) They print money.
E) They accept deposits.

Question 46

The wide acceptance of fiat money is determined by:

A) people's belief that it is worth something.
B) the amount of precious metal that the government holds to back the money.
C) the money's market value as a commodity.
D) the rate of interest, which is the price paid to borrow money.
E) its ability to function as a unit of account.

Question 47

Which of the following is most critical for the maintenance of an efficient and productive economy?

A) Money backed by gold or silver
B) Steadily rising prices
C) An unlimited and unregulated supply of money
D) A properly functioning monetary system
E) A well-organized barter system

Question 48

Fractional reserve banking occurs when:

A) a bank has reserves that exceed its deposits.
B) a bank has reserves that are equal to its deposits.
C) a bank has reserves that are less than its deposits.
D) some depositors lose their deposits through poor bank management.
E) some lenders fail to repay their loans.

Question 49

The value of fiat money is fundamentally determined by the:

A) reputation of the bank that holds it.
B) reputation of the person who holds it.
C) value of the gold or silver for which it can be redeemed.
D) value of the commodities for which it can be traded.
E) value of comparable stocks and bonds.

Question 50

One problem with fiat money, as compared to commodity money, is that:

A) more resources are used to create fiat money.
B) there is frequently too little fiat money available.
C) there is a greater potential for inflation with fiat money.
D) fiat money must be turned in to the government to receive the commodity on which it is based.
E) fiat money is less divisible than commodity money.

Question 51

Fiat money:

A) has value because people accept it.
B) has a high intrinsic value.
C) is backed by commodity reserves.
D) is money because of its metallic content.
E) is frequently clipped.

Question 52

Money that is acceptable because the government requires that it be accepted in payment of debt is _____.

A) legal tender
B) commodity money
C) bad money
D) backed by government's wealth
E) hoarded by the people

Question 53

Fiat money is backed by:

A) gold or silver.
B) fractional reserves.
C) the promise of a bank to redeem it upon presentation.
D) the commodity in which it is denominated.
E) nothing.

Question 54

Money is legal tender if:

A) people willingly accept it in payment of debts.
B) it is backed by gold or silver.
C) it is commodity money.
D) the government says it is.
E) it is in a bank account.

Question 55

Which type of money has the lowest opportunity cost?

A) Silver coins
B) Gold coins
C) Commodity money
D) Diamonds
E) Fiat money

Question 56

Which of the following is true if a nation's official money fails to serve as a medium of exchange?

A) Nothing will replace money to help facilitate exchange.
B) There will be an increase in economic efficiency.
C) Resources will divert from production to exchange.
D) Transactions costs of exchange will decrease.
E) Fewer barter exchanges will be completed.

Question 57

Which of the following is not a depository institution?

A) A commercial bank
B) A thrift institution
C) A pension fund
D) A savings and loan institution
E) A credit union

Question 58

The main source of profit for financial institutions is:

A) their ownership of stocks in commercial corporations.
B) their ownership of real assets received in foreclosures on loans to households.
C) the fees charged for holding and servicing checking accounts.
D) the difference between interest paid on deposits and interest received on loans.
E) the difference between the cost of creating new money and the interest paid on loans.

Question 59

Which of the following are legal tender?

A) A check
B) A Federal Reserve note
C) A bank note issued by a private bank
D) A credit card
E) A traveler's check

Question 60

Which of the following is true of a price level increase in an economy?

A) When the price level increases, the purchasing power of money increases.
B) When the price level increases, the purchasing power of money decreases.
C) When the price level increases, the purchasing power of money remains unchanged.
D) When the price level increases, the purchasing power of money either increases or decreases, depending upon the size of the national debt.
E) When the price level increases, the purchasing power of money either increases or decreases, depending upon the level of government expenditures.

Question 61

Which of the following is not a goal of the Fed?

A) Maintaining a high level of employment
B) Maintaining stability in interest rates
C) Maintaining high prices to encourage production
D) Maintaining stability in financial markets
E) Maintaining stability in foreign exchange markets

Question 62

Which of the following statements is correct regarding the Fed?

A) Under the Federal Reserve System, there is one Federal Reserve Bank, located in Washington D.C.
B) Under the Federal Reserve System, there is one Federal Reserve Bank whose location changes every 14 years.
C) Under the Federal Reserve System, there is a Federal Reserve Bank in each Congressional district.
D) Under the Federal Reserve System, there is a Federal Reserve Bank in each state.
E) Under the Federal Reserve System, there are 12 Federal Reserve banks, one in each of the 12 Federal Reserve districts.

Question 63

Which of the following statements is true of open-market operations?

A) Open-market operations involve clearing checks.
B) Open-market operations involve lending money to member banks.
C) Open-market operations involve accepting deposits from member banks.
D) Open-market operations involve the Fed's purchase and sale of government securities.
E) Open-market operations involve the Fed's purchase and sale of foreign exchange.

Question 64

Which of the following is correct regarding the discount rate?

A) It is the interest rate that commercial banks charge their most creditworthy customers.
B) It is the interest rate that thrift institutions charge for home mortgages.
C) It is the interest rate at which depository institutions can borrow from the Federal Reserve.
D) It is the interest rate set in the market for U.S. Treasury Bills.
E) It is the prime interest rate.

Question 65

Each member of the Board of Governors of the Fed:

A) is from the minority of the FOMC.
B) can have twelve presidential appointments.
C) is authorized to set reserve requirements by the Bank Acts of 1933 and 1935.
D) serves one nonrenewable term.
E) is elected by the member banks which own the Federal Reserve.

Question 66

Which of the following is not a thrift institution?

A) A savings and loan association
B) A commercial bank
C) A mutual savings bank
D) An employee credit union
E) A college credit union

Question 67

The chair of the Board of Governors of the Fed serves:

A) a two-year term that coincides with that of members of Congress.
B) a four-year term.
C) a seven-year term.
D) a fourteen-year term.
E) a six-year term.

Question 68

The members of the Board of Governors of the Fed are:

A) elected by the member banks.
B) chosen by the state governors.
C) elected for seven-year terms.
D) all replaced after each Presidential election.
E) appointed by the president with the approval of the Senate.

Question 69

The Board of Governors of the Fed consists of:

A) seven elected members.
B) seven members appointed by the president.
C) a representative from each of the 12 district banks.
D) 12 elected members.
E) 12 members appointed by the president.

Question 70

Which of the following statements is true?

A) The Federal Reserve System was established by the U.S. Constitution.
B) The Federal Reserve System was established immediately after the Civil War.
C) The Federal Reserve System was established in 1913.
D) The Federal Reserve System was established during the Great Depression.
E) The Federal Reserve System was established immediately following World War II.

Question 71

Monetary policy is:

A) controlled by the president, who appoints the members of the Board of Governors.
B) controlled by the president, who appoints the members of the Open Market Committee.
C) insulated from politics since the term of only two members of the Board of Governors expires during the tenure of any modern president of the U.S.
D) insulated from politics because the Federal Reserve Board is the bankers' bank.
E) controlled by the department of finance of the United States.

Question 72

To minimize the effect of short-term political pressure on the Fed's Board of Governors, the governors are all appointed to their terms:

A) in different years, and their terms are long.
B) in different years, and their terms are short.
C) in the same year, and their terms are long.
D) in the same year, and their terms are short.
E) in the same year, and their terms are shorter than that of the chairman of the Federal Reserve Board.

Question 73

The law that established the Federal Reserve System is the _____.

A) Federal Reserve Act of 1913
B) National Banking Act of 1863
C) Banking Act of 1933
D) National Banking Act of 1813
E) Federal Reserve Act of 1963

Question 74

Which of the following is not performed by the Fed?

A) Holding member bank reserves on deposit
B) Making loans to member banks
C) Issuing bank notes
D) Serving as bankers to other banks
E) Holding deposits of households and firms

Question 75

Which of the following is true of depository institutions?

A) Depository institutions seek to maximize profits.
B) Depository institutions do not seek to maximize profits.
C) Depository institutions do not make loans.
D) Depository institutions make loans.
E) Depository institutions receive funds primarily through customer deposits

Question 76

Each member of the Board of Governors of the Fed serves:

A) a four-year term that begins at the same time as that of the newly elected president.
B) a four-year term that does not coincide with the term of the current president.
C) until a new president is elected.
D) a fourteen-year term.
E) a six-year term.

Question 77

The discount rate is the interest rate that:

A) banks charge on large loans.
B) banks charge on loans to other banks.
C) the Fed charges on loans to branches of the U.S. government.
D) the Fed charges on loans to depository institutions.
E) the Fed charges on loans to the public.

Question 78

Some financial institutions are classified as depository institutions based on:

A) the way they acquire funds.
B) the number of customers they have.
C) the number of loans they make.
D) the size of the loans they make.
E) the amount of reserves they hold.

Question 79

Identify the correct statement about the Fed.

A) When the Federal Reserve System was established, all banks were required to become members.
B) When the Federal Reserve System was established, only federally chartered banks were allowed to join.
C) When the Federal Reserve System was established, only federally chartered banks were required to join.
D) When the Federal Reserve System was established, most banks joined even though none were required to join.
E) When the Federal Reserve System was established, membership was required for all banks in some states, but not in others.

Question 80

The Federal Reserve System has the power to:

A) raise or lower federal income tax rates.
B) balance the federal government budget.
C) increase or decrease federal government spending.
D) compete with commercial banks in making loans to business firms.
E) buy and sell federal government securities.