Deck 14: Money and the Banking System

Question 1

The U.S. money supply consists of gold and silver bullion, checking account deposits, coins, and Federal Reserve notes.

Answer 1

False

Question 2

Without a medium of exchange, people would have to trade their goods or services directly for other goods or services, a practice known as barter.

Answer 2

True

Question 3

Money serves as a unit of account when people state the price of goods and services in terms of money.

Answer 3

True

Question 4

During periods of deflation, the store-of-value function of money is eroded.

Question 5

Economists widely consider credit cards to be money because they are a convenient form of financing transactions.

Question 6

When shopping for a credit card, one should be concerned about the annual percentage rate, grace period, over-limit fee, and late payment fee.

Question 7

The U.S. Treasury is the major issuer of paper currency in the United States.

Question 8

In the United States, all paper money and coins are legal tender.

Question 9

Federal Reserve notes constitute the largest component of the M₁ money supply.

Question 10

A negotiable order of withdrawal (NOW) account is a type of checking account that pays interest and typically requires a larger minimum balance than a demand deposit.

Question 11

Checking accounts that are issued by credit unions are called NOW accounts.

Question 12

Certified checks, cashier's checks, money orders, and traveler's checks tend to ensure a higher probability of payment than demand deposits.

Question 13

Gold and silver were removed from the U.S. monetary system decades ago and therefore no longer provide "backing" for the dollar.

Question 14

When the U.S. government designates coins and paper money as legal tender, it mandates their acceptance in transactions and requires that they be used in payment of taxes.

Question 15

The M₁ money supply emphasizes money as a temporary store of value.

Question 16

The M₁ money supply consists of demand deposits, savings deposits, currency, and traveler's checks in the hands of the public.

Question 17

Banks are financial institutions that issue a variety of checking or savings accounts and use the funds to make consumer, business, and mortgage loans.

Question 18

Credit cards perform the same functions as currency so they are considered money.

Question 19

Checking accounts perform the same functions as currency so they are considered money.

Question 20

A money market deposit account pays a higher interest rate than a demand deposit account.

Question 21

Although a bank may allow you to withdraw your checking funds from an ATM, a fee is frequently charged.

Question 22

With interest compounding, a bank pays interest on the interest you've already earned in your deposit.

Question 23

Vault cash, mortgage loans, and checking deposits are assets of a bank.

Question 24

By law, all banks are required to hold a certain percentage of their checking deposits on reserve either in the form of vault cash or deposits at the Federal Reserve.

Question 25

Concerning a bank, its required reserves equal its excess reserves minus its actual reserves.

Question 26

To find the maximum amount of money that the banking system can generate with each dollar of excess reserves, we use the money multiplier.

Question 27

The money multiplier equals 1 + required reserve ratio.

Question 28

The Comptroller of the Currency insures savings deposits and demand deposits up to $100,000 in virtually all U.S. banks.

Question 29

When the Federal Deposit Insurance Corporation deals with failed banks, it always closes them down right away and pays off the depositors.

Question 30

Visa and MasterCard accounts typically offer a grace period built into their payment schedule.

Question 31

Credit cards are actually loans, so they are not part of the M₁ money supply.

Question 32

The largest denomination Federal Reserve note is the $100 bill.

Question 33

The Federal Reserve is the nation's second largest check clearinghouse.

Question 34

Actual reserves equals required reserves plus excess reserves.

Question 35

The Federal Reserve does not charge any fees for the check processing services it offers to banks

Question 36

The U.S. money supply includes all of the following except

A) Federal Reserve notes
B) checking account deposits
C) nickels, dimes, and quarters
D) gold and silver bullion

Question 37

Money has all of the following functions except that it

A) is a unit of account
B) is a medium of exchange
C) earns income for its holders
D) is a store of value

Question 38

When people save money to use to make purchases later, money serves as a

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

Question 39

In our economy, stores of value for households include all of the following except

A) gold
B) real estate
C) money
D) car loans

Question 40

Which of the following is not considered money?

A) credit cards such as MasterCard and Visa
B) checking account deposits
C) Federal Reserve notes
D) pennies, nickels, and dimes

Question 41

If you use your ______ to make a purchase, you are obtaining a short-term loan from your financial institution.

A) checking account deposit
B) certificate of deposit
C) MasterCard or Visa
D) currency

Question 42

Which type of money carries the official motto of the United States, In God We Trust?

A) checking account deposits
B) traveler's checks
C) bank credit cards
D) dollar bills

Question 43

Today, all of our paper currency is issued by the

A) U.S. Mint
B) U.S. Treasury
C) Federal Reserve
D) Federal Deposit Insurance Corporation

Question 44

A ______ is a checking account that does not pay interest.

A) share draft account
B) negotiable order of withdrawal
C) certificate of deposit
D) demand deposit

Question 45

The type of checkable account that credit unions offer is called a

A) share draft account
B) certificate of deposit
C) demand deposit
D) negotiable order of withdrawal

Question 46

Which type of check generally provides the least certainty of payment?

A) demand deposit
B) certified check
C) cashier's check
D) money order

Question 47

For people who do not maintain a checking account and who prefer not to make payments with cash, a ______ serves the same function as a personal check.

A) certificate of deposit
B) money market deposit account
C) money order
D) passbook savings deposit

Question 48

The largest nationwide processor of "transit checks" that move between different banks is the

A) U.S. Treasury
B) Securities and Exchange Commission
C) Comptroller of the Currency
D) Federal Reserve

Question 49

Suppose your friend asks you "what type of metal backs our money supply?" An appropriate answer would be

A) gold
B) silver
C) iron
D) there is no metallic backing of our money supply

Question 50

Money is anything that

A) earns income for its holder
B) we generally accept as a medium of exchange
C) retains its purchasing power during periods of inflation
D) is made of gold and silver

Question 51

All U.S. currency, including paper money and coins, is designated as ______; that is, the federal government mandates its acceptance in transactions and requires that dollars be used in payment of taxes.

A) medium of exchange
B) generally acceptable
C) legal tender
D) near money

Question 52

The purpose of the legal tender pledge, which applies to paper money and coins, is to

A) ensure that banks maintain sufficient reserves to meet their depositors' needs
B) reinforce the general acceptability of currency
C) prevent the counterfeiting of coins and paper money
D) ensure that currency is made of the highest quality metal or paper

Question 53

The basic money supply, M₁, places primary emphasis on money as a

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

Question 54

The broader definitions of the money supply (M₂ and M₃) emphasize the role of money as a

A) temporary store of value
B) form of legal tender
C) medium of exchange
D) unit of account

Question 55

All of the following are components of the M₁ money supply except

A) traveler's checks
B) demand deposits
C) coin and paper money
D) savings deposits

Question 56

All of the following are part of the M₁ money supply except

A) $100 worth of dollar bills in the vault of American National Bank
B) $50 worth of nickels in the hands of John Miller
C) $500 in the checking account of Helen Smith
D) $40 worth of pennies in the cash register of a Wal-Mart store

Question 57

The largest source of the M₁ money supply is the

A) U.S. Treasury
B) Federal Reserve System
C) Comptroller of the Currency
D) commercial banking system

Question 58

The largest component of the M₁ money supply is

A) coins
B) Federal Reserve notes
C) checking deposits
D) certificates of deposit

Question 59

A commercial bank is a

A) FDIC-owned company
B) government-owned entity
C) non-profit corporation
D) corporation that seeks to make a profit for its stockholders

Question 60

A bank's balance sheet shows "checking deposits" as

A) an asset
B) a liability
C) net worth
D) reserves held at the Federal Reserve Bank

Question 61

Credit unions offer accounts similar to checking accounts called

A) demand deposits
B) NOW accounts
C) time deposits
D) share drafts

Question 62

The largest denomination of paper curency issued in the U.S. today is the ______ bill.

A) $20
B) $100
C) $1,000
D) $10,000

Question 63

All U.S. coins and paper money are designated as

A) legal tender
B) interest-bearing
C) demand deposits
D) insured by the FDIC

Question 64

The process of earning interest on interest, as well as on the principal, is called

A) insuring
B) reserving
C) gouging
D) compounding

Question 65

The assets of a bank include all of the following except

A) savings deposits
B) government securities
C) loans to business
D) cash reserves

Question 66

The liabilities of a bank include all of the following except

A) borrowing from a Federal Reserve bank
B) savings deposits
C) vault cash
D) demand deposits

Question 67

By law, all banks are required to hold a certain percentage of their checking deposits on reserve in the form of

A) corporate stock
B) state and local government securities
C) U.S. government securities
D) vault cash and/or deposits at the Federal Reserve

Question 68

Suppose that Chase Manhattan Bank has $100 million in actual reserves, $50 million in checking deposits, and the required reserve ratio is 20 percent. The bank's excess reserves equal

A) $60 million
B) $70 million
C) $80 million
D) $90 million

Question 69

The required reserve ratio is the percentage of ______ that a bank must keep as vault cash or deposits at the Federal Reserve.

A) checking deposits
B) savings deposits
C) government securities
D) corporate stock

Question 70

The banking system's money multiplier equals

A) 1 - required reserve ratio
B) 1 + required reserve ratio
C) 1 / required reserve ratio
D) 1 x required reserve ratio

Question 71

Which agency of the Federal government insures deposits up to $100,000 in virtually all U.S. banks?

A) U.S. Treasury
B) Comptroller of the Currency
C) Securities and Exchange Commission
D) Federal Deposit Insurance Corporation

Question 72

To prevent bank failure, the Federal Deposit Insurance Corporation sometimes

A) prints new currency to keep the bank flush with funds
B) accepts checking deposits directly from customers
C) arranges for a merger between a failing bank and a sound bank
D) revokes a troubled bank's insurance and lets the customers decide if they want to leave their funds there

Question 73

If the required reserve ratio is 20 percent, and Bill Jones deposits $500 into his checking account, his bank's

A) actual reserves will increase by $500, required reserves will increase by $100, and excess reserves will increase by $400
B) actual reserves will increase by $500, required reserves will increase by $400, and excess reserves will increase by $100
C) actual reserves will increase by $600, required reserves will increase by $400, and excess reserves will increase by $200
D) actual reserves will increase by $600, required reserves will increase by $200, and excess reserves will increase by $400

Question 74

Assume that the required reserve ratio is 20 percent and the commercial banking system initially has no excess reserves. Additional deposits of $40 million into checking accounts will permit the banking system to create a maximum of other new deposits equal to

A) $130 million
B) $140 million
C) $160 million
D) $200 million

Question 75

A single commercial bank can legally increase its loans by an amount up to its

A) actual reserves
B) required reserves
C) excess reserves
D) holdings of government securities

Question 76

Suppose that Wisconsin National Bank has actual reserves of $100,000, checking account deposits of $300,000 and the required reserve ratio is 20 percent. The bank is allowed to increase its loans by

A) $30,000
B) $40,000
C) $50,000
D) $60,000

Question 77

If Debra finds $100 on the street and then deposits it into her bank checking account, the immediate effect on the money supply is

A) a $100 increase
B) a $100 decrease
C) a $200 increase
D) none

Question 78

Suppose the required reserve ratio is 10 percent and the public decides to deposit $50 million cash into checking accounts throughout the banking system. This will allow the banking system to create a maximum amount of additional new deposits equal to

A) $40 million
B) $50 million
C) $450 million
D) $500 million

Question 79

The new dollar coin issued in the United States in 2000 bears the image of

A) Sacagawea
B) Ben Franklin
C) Alan Greenspan
D) Susan B. Anthony

Question 80

Barter is defined as a system that has no

A) gold or silver
B) credit cards
C) money
D) banks