Deck 18: Money and the Federal Reserve System

Question 1

A barter economy is one in which:

A) money serves as a medium of exchange.
B) only precious metals are accepted as money.
C) goods are traded directly for other goods.
D) paper money is backed by gold.

Answer 1

C

Question 2

For barter to occur, traders must have a:

A) unit of account.
B) coincidence of wants.
C) medium of exchange.
D) central banking facility.

Answer 2

B

Question 3

Barter is the:

A) direct exchange of goods and services.
B) exchange of goods, but not services.
C) system that does not depend on a coincidence of wants.
D) system used in advanced economies.

Answer 3

A

Question 4

If every person is willing to accept money in payment, rather than goods and services, money serves as a:

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

Question 5

What is the "medium of exchange" function of money?

A) a common measurement of the relative value of different goods and services
B) the ability of money to hold value over time
C) the quality of money not to be hoarded because of its commodity value
D) the function of money to be widely accepted I exchange for goods and services

Question 6

Which of the following correctly describes the difference between commodity money and fiat money?

A) Fiat money has value based on the material from which it is made, while commodity money is accepted by law and not because of its tangible value.
B) Commodity money is either made out of a valuable commodity like silver or gold, or is redeemable for a valuable commodity. Fiat money is not.
C) Commodity money can only be used to buy commodities such as grains or lumber, while fiat money can be used to buy anything.
D) Fiat money is used during times of emergency, such as hurricanes or war, when the existing stock of commodity money is inadequate to purchase needed goods and services.

Question 7

Comparing how many dollars it takes to attend college each year to annual earnings on a job represents the use of money as a:

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

Question 8

What is the "unit of account" function of money?

A) a common measurement of the relative value of different goods and services
B) the ability of money to hold value over time
C) the quality of money not to be hoarded because of its commodity value
D) the function of money to be widely accepted I exchange for goods and services

Question 9

Though many assets can be used as a store of value, money is a particularly attractive method to store value because:

A) it increases in value as prices rise.
B) its purchasing power does not decline when prices rise.
C) it is the most liquid of all assets.
D) it is backed by gold.

Question 10

What is the "store of value" function of money?

A) a common measurement of the relative value of different goods and services
B) the ability of money to hold value over time
C) the quality of money not to be hoarded because of its commodity value
D) the function of money to be widely accepted I exchange for goods and services

Question 11

Fiat money is money:

A) accepted by law regardless of its intrinsic value.
B) that is not included as part of the M1 money supply.
C) that is backed by gold or silver held on reserve by the government.
D) such as coins that are made from metal.

Question 12

A direct exchange of fish for corn is an example of:

A) storing value.
B) a modern exchange method.
C) barter.
D) a non-coincidence of wants.

Question 13

The primary functions of money are:

A) velocity, liquidity, and transactions.
B) speculative demand, measure of value, and precautionary demand.
C) a medium of exchange, a unit of account, and a store of value.
D) a store of value, heterogeneity, and a medium of exchange.

Question 14

In the United States, the purchasing power of money is determined by:

A) the underlying precious metals that back each unit of currency.
B) the value of U.S. treasury bonds that back each unit of currency.
C) its acceptability.
D) Congress, which controls the money supply.

Question 15

Are outstanding credit card balances counted as part of the money supply?

A) Yes; they are used to purchase things, and therefore, they are included in the money supply figures.
B) No; money is an asset, while the credit card balances are a liability. Thus, they are not included in the money supply figures.
C) Partly; credit card balances of $100 or less are included in the M1 money supply, but the money supply figures do not include balances in excess of $100.
D) Partly; credit card balances are included in the M1 money supply, but not the M2 money supply.

Question 16

The statement that ABC Co.'s profits totaled $500 million last year represents the use of money as a:

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

Question 17

Compared to a barter economy, using money increases efficiency by reducing:

A) transaction costs.
B) the need to exchange goods.
C) the need to specialize.
D) inflation.

Question 18

Which of the following provides the best explanation of why money is valuable?

A) Money is valuable because it is indivisible.
B) Money is valuable because it is scarce.
C) Money is valuable because it is backed by precious metals, primarily gold and silver.
D) Money is valuable because it has intrinsic value, independent of its use as a means of exchange.

Question 19

Which of the following is the most liquid store of purchasing power?

A) a dollar bill
B) common stock
C) gold
D) real estate

Question 20

Buying a cup of coffee with a dollar bill represents the use of money as a:

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

Question 21

Which of the following is not a component of the M1 money supply?

A) demand deposits
B) large-denomination (more than $100) bills
C) interest-earning checking deposits
D) outstanding balances on credit cards

Question 22

What is money? What are the two definitions of money in the United States?

Question 23

In the United States, the money supply (M1) consists of:

A) paper currency and coins.
B) coins, paper currency and checkable deposits .
C) paper currency, coins, checkable deposits, and savings deposits.
D) government bonds, currency, and checkable deposits.

Question 24

The characteristics that money should have include:

A) portability, durability, and flexibility.
B) durability, flexibility and stability.
C) durability, portability, and non-homogeneity.
D) scarcity, portability, and divisibility.

Question 25

Which of the following forms of money is the least liquid?

A) dollars
B) checking account deposits
C) passbook savings
D) certificates of deposit

Question 26

M1 money includes all but which one of the following?

A) checkable deposits
B) savings accounts
C) paper money
D) coins

Question 27

Economists who prefer a broader definition of money prefer the:

A) M1 measure of the money supply to the M4 measure.
B) M2 measure of the money supply to the M1 measure.
C) M5 measure of the money supply to the M2 measure.
D) M1 measure of the money supply to the M2 measure.

Question 28

Which one of the following is the largest component of the money supply (M1) in the United States?

A) checkable deposits
B) gold certificates
C) credit cards and traveler's checks
D) Federal Reserve notes

Question 29

Which of the following compose the M2 money supply?

A) currency only
B) currency, checkable deposits, and traveler's checks
C) M1 plus large denomination time deposits and Eurodollar deposits
D) M1 plus savings deposits and small-denomination time deposits

Question 30

Which of the following assets is most liquid?

A) funds in a checking account
B) a car
C) a home
D) a municipal bond

Question 31

M2 refers to:

A) the most narrowly defined money supply definition.
B) currency held by the public minus checking account balances.
C) the value of the gold held by the government .
D) M1 plus near monies.

Question 32

Which of the following is not counted as part of M1?

A) coins
B) Federal Reserve notes or " paper money"
C) passbook savings deposits
D) checkable deposits

Question 33

M1 refers to:

A) Federal Reserve Notes and gold certificates.
B) currency held by the public plus checking account balances.
C) the broadest of the money-supply definitions .
D) bank loans.

Question 34

Which one of the following is part of the official money supply in the United States?

A) Federal Reserve notes
B) gold bars
C) common stock
D) credit card balances

Question 35

Which one of the following is part of the M2 definition of the money supply, but not part of M1?

A) checkable deposits
B) currency held in banks
C) currency in circulation
D) small time deposits of less than $100,000

Question 36

Which definition of the money supply includes credit cards?

A) M1.
B) M2.
C) M3.
D) Credit card balances are not included in money supply.

Question 37

The M1 money supply is defined to be the sum of currency, and

A) checkable deposits.
B) Treasury bonds.
C) savings accounts.
D) large time deposits.

Question 38

Gold is a perfect medium of exchange and measure of value because of its:

A) divisibility, portability, scarcity, and homogeneity .
B) divisibility and durability.
C) durability and relative scarcity.
D) durability and homogeneity.

Question 39

The currency of the United States is:

A) backed dollar for dollar by gold.
B) backed by a gold cover of 50 percent.
C) not backed by any precious metal.
D) backed by the government's silver reserves.

Question 40

Which of the following statements is false ?

A) Round stones with holes in the center can serve as money.
B) Money eases the process of exchanging goods and services in a modern economy.
C) Money serves as a measure of value only when it is backed by gold or silver.
D) Money is used as a measure of the relative value of goods and services in an economy.

Question 41

Which of the following is not part of the Federal Reserve System?

A) Council of Economic Advisors
B) Board of Governors
C) Federal Open Market Committee
D) 12 Federal Reserve District Banks

Question 42

Which of the following is responsible for controlling the money supply in the United States?

A) U.S. Congress
B) Board of Governors of the Federal Reserve System
C) U.S. Treasury
D) Council of Economic Advisors

Question 43

The Federal Reserve System was founded in:

A) 1913.
B) 1929.
C) 1933.
D) 1935.

Question 44

The Federal Reserve System is owned by:

A) federal government agencies such as the Treasury.
B) the Congress of the United States.
C) the banks that are members of the Federal Reserve System.
D) anyone who buys stock over the counter.

Question 45

When M1 is expanded to M2, the money supply:

A) almost doubles.
B) more than triples.
C) goes up tenfold in size.
D) changes very little.

Question 46

M2 is equal to M1 plus:

A) savings deposits, money market deposit accounts, small time deposits, and eurodollars.
B) savings deposits, money market deposit accounts, money market mutual funds, and eurodollars.
C) small time deposits, money market deposit accounts, money market mutual funds, and eurodollars.
D) savings deposits and small time deposits of less than $100,000.

Question 47

The seven members of the Board of Governors serve 14-year terms to:

A) reduce political influence.
B) provide steady employment.
C) inhibit independent decisions.
D) prevent illegal appointments.

Question 48

The difference between M1 and M2 is given by which of the following?

A) M1 includes currency, coins, gold and silver, whereas M2 does not contain gold and silver.
B) M1 is made up of currency and money in checkable accounts, whereas M2 contains M1 plus savings deposits and time deposits.
C) M1 is limited to currency, whereas M2 contains M1 plus money in checkable accounts.
D) M1 includes currency, whereas M2 contains M1 plus money in checking accounts.

Question 49

Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies?

A) M1 and M2 are both unchanged.
B) M1 falls by $1,000, and M2 rises by $1,000.
C) M1 is unchanged, and M2 rises by $1,000.
D) M1 falls by $1,000, and M2 is unchanged.

Question 50

Decisions to buy or sell securities at the Fed are made by the:

A) Congress.
B) Federal Open Market Committee.
C) Federal Deposit Insurance Corporation.
D) President's Council of Economic Advisors.

Question 51

With respect to controlling the money supply, the law requires the Fed to take orders from:

A) the President.
B) the Speaker of the House.
C) the Secretary of the Treasury.
D) no one ⎯ the Fed is an independent agency.

Question 52

In its function of controlling the money supply, the Fed does not do which one of the following?

A) Controls the money supply.
B) Clears checks.
C) Regulates banks.
D) Offer checking accounts to the public.

Question 53

The money supply known as M2:

A) includes large denomination time deposits.
B) excludes interest-earning checking accounts in savings and loans.
C) does not include money market mutual accounts.
D) includes savings accounts and small denomination time deposits.

Question 54

The number of presidentially appointed members who sit on the Federal Reserve Board of Governors is:

A) none.
B) seven.
C) nine.
D) twelve.

Question 55

The Federal Reserve System:

A) was created by and is owned by the government.
B) pursues independent fiscal policy at the behest of Congress.
C) never acts to control inflation.
D) pursues an independent monetary policy which can conflict with the government's economic policy.

Question 56

Which of the following is not considered part of M2?

A) small time deposits of less than $100,000
B) money market mutual fund shares
C) savings deposits
D) large time deposits of more than $100,000

Question 57

The Fed:

A) has little control over the money supply.
B) serves as the central bank for the United States.
C) often uses a mix of lower taxes in its fiscal policy.
D) ensures commercial bank profitability.

Question 58

Who runs the Federal Reserve System? Describe the organizational structure of the Fed.

Question 59

What is the length of the term of the members of the Board of Governors of the Federal Reserve System?

A) four years
B) six years
C) fourteen years
D) life or until the member resigns

Question 60

Which of the following types of financial institutions is required to belong to the Federal Reserve System?

A) national banks
B) state-chartered banks
C) savings and loan institutions
D) credit unions

Question 61

Describe the functions of the Federal Reserve System.

Question 62

Prior to the 1980s, financial institutions called thrifts:

A) included commercial banks.
B) were permitted to offer checking accounts and accept savings deposits, and could pay interest on both.
C) could not pay interest on checkable deposits.
D) were permitted to accept only savings deposits with no checking privileges.

Question 63

The Federal Deposit Insurance Corporation (FDIC):

A) insures all demand deposit accounts up to $10 million in banks choosing FDIC protection.
B) was created as a government-owned corporation following the creation of the World Bank and the International Monetary Fund after World War II.
C) was created to reduce the risk of banking by compensating depositors and keeping bank failures from spreading.
D) creates monetary policy in conjunction with the Federal Reserve Board.

Question 64

As a result of the Monetary Control Act of 1980:

A) there was less competition among various financial institutions.
B) fewer institutions were permitted to offer checking account services.
C) savings and loan associations were restricted to offering long-term loans.
D) savings and loans paid higher interest rates on short-term deposits to compete for customers.

Question 65

The Monetary Control Act of 1980 extended the Fed's authority to:

A) impose required-reserve ratios on all depository institutions.
B) control the discount rate.
C) control the federal funds rate.
D) carry out a massive federal bailout of failed savings and loan institutions.

Question 66

Which of the following is not one of the functions of the Federal Reserve?

A) clearing checks
B) printing currency
C) supervising and regulating banks
D) controlling the money supply

Question 67

The Monetary Control Act of 1980:

A) required banks to make home loans.
B) eliminated many forms of competition among financial institutions.
C) created sharper distinctions among various financial institutions.
D) eliminated all interest rate ceilings.

Question 68

The Fed is often considered the bankers' bank because it:

A) demands much more currency than it has available.
B) no longer has a monopoly on printing paper currency.
C) lowers the discount rate in order to restrict the money supply.
D) holds bankers reserves, provides banks with currency and loans, and clears their checks.

Question 69

Which of the following institutions is responsible for supervising the banking system of the United States?

A) The Federal Reserve System
B) The Open Market Committee
C) The U.S. Treasury
D) The Federal Deposit Insurance Corporation

Question 70

The main purpose of the Fed is to:

A) maintain the proper functioning of our money system.
B) regulate interest rates.
C) print Federal Reserve Notes.
D) regulate financial institutions.

Question 71

The Monetary Control Act of 1980:

A) extended the Fed's authority to impose required-reserve ratios on all depository institutions.
B) excluded the required-reserve ratios as an instrument of short-term policy.
C) provided the Fed with the authority to use open market operations.
D) closed or sold ailing savings and loan institutions.

Question 72

The major protection against sudden mass attempt to withdraw cash from banks is the:

A) Federal Reserve.
B) Consumer Protection Act.
C) deposit insurance provided by the FDIC.
D) gold and silver backing the dollar.

Question 73

Which of the following is the most important protection against fears of bank collapse?

A) the Federal Reserve
B) the Federal Reserve Open Market Committee
C) the Federal Deposit Insurance Corporation
D) the gold and silver that backs Federal Reserve notes

Question 74

The Federal Deposit Insurance Corporation:

A) has eliminated bank failures.
B) insures all demand deposits without limit.
C) insures all demand deposits up to $250,000 .
D) includes commercial banks and state-chartered banks as its members.