Deck 29: Money and the Banking System

Question 1

The composition of M2 as of April 2010 includes saving deposits at savings banks and credit unions.

Answer 1

True

Question 2

Most observers nowadays see monetary policy as much less important than fiscal policy.

Answer 2

False

Question 3

When you pay for some purchase with a check, cash must be transferred to another account to pay for the check.

Answer 3

False

Question 4

When prices for goods and services are quoted in money terms, this is an example of money being used as a store of value.

Question 5

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

Question 6

On the Micronesian island of Yap, it is easier to make purchases with stone wheel currency than it is to make purchases with paper currency including the U.S.dollar.

Question 7

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

Question 8

Barter transactions typically take place between two individuals with the same goods to supply.

Question 9

The only major disadvantage of paper money is that it is hard to divide into smaller denominations.

Question 10

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

Question 11

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

Question 12

The main advantage of money market deposit accounts over traditional checking accounts is the ease of check writing.

Question 13

Gold and silver have historically been the most common form of commodity money.

Question 14

In September 2007 the British bank Northern Rock which specialized in home mortgages experienced a noteworthy bank run.

Question 15

The U.S.government will probably return soon to a system of paper money backed by gold.

Question 16

The new $20 bills were designed with features to make counterfeiting more difficult.

Question 17

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

Question 18

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

Question 19

A bank run involves a large inflow of money into commercial banks.

Question 20

Barter transactions involve a double coincidence of wants.

Question 21

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

Question 22

E-cash cards are considered a major portion of the modern money supply.

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

Liquidity refers to the ability of an asset to hold its value in periods of inflation.

Question 28

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

Question 29

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

Question 30

Fractional reserve banking began as a result of the search for additional profits.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

To a bank, an asset is an obligation that it owes to someone else.

Question 37

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

Question 38

Net worth increases in the same proportion as liabilities increase.

Question 39

Banks try to keep their excess reserves at a maximum in order to maximize profits.

Question 40

Banks in the United States may create new money equal to their amount of required reserves.

Question 41

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 42

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 43

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 44

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 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

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 47

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 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 the above are correct.

Question 49

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 50

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 the above are correct.

Question 51

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 52

Which of the following are reasons 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 the above are correct.

Question 53

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 54

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 the above are correct.

Question 55

Bank failures in the U.S.

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

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

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 the above

Question 58

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 59

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 60

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

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

Question 61

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 62

Which of the following assets is most liquid?

A) short-term government bonds
B) savings accounts
C) checking accounts
D) currency and coins

Question 63

In a monetary system, people will exchange a good for

A) another good.
B) a service.
C) money.
D) gold or other precious metals.

Question 64

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 65

In comparison to commodity money, paper money

A) is not portable.
B) has no intrinsic value.
C) is not divisible.
D) cannot be stored.
E) All of the above are correct.

Question 66

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 the above are correct.

Question 67

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 68

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 69

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

A) divisible.
B) storable.
C) portable.
D) All of the above are correct.

Question 70

One inconvenience of commodity money is the need for

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

Question 71

Currently in the United States, money is backed by

A) silver in the IMF vaults.
B) Federal Reserve notes in banks.
C) gold in Fort Knox.
D) everyone's willingness to accept it.

Question 72

Although a variety of commodities have been used as money, the most commonly used have been

A) stones and cattle.
B) shells and beads.
C) gold and silver.
D) cigarettes and candy bars.

Question 73

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 74

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 75

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 76

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

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

Question 77

Fiat money is money

A) backed by land.
B) backed by gold or silver.
C) that can be converted to gold or silver.
D) because a government says it is.

Question 78

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 79

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 80

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 the above are correct.