Deck 18: An Introduction to Money, Banks, and the Financial System

Question 1

A barter economy refers to a situation in which goods and services are traded for other goods and services, with no money involved in transactions. The major shortcoming of a barter economy is

A) transactions cannot take place without money.
B) the requirement of a double coincidence of wants.
C) government has no way of collecting taxes.
D) goods and services have no way of storing value.

Answer 1

the requirement of a double coincidence of wants.

Question 2

By making exchange ________, money allows for specialization and higher ________.

A) more difficult; costs
B) more difficult; productivity
C) easier; costs
D) easier; productivity

Answer 2

easier; productivity

Question 3

When Starbucks accepts your $10 bill for two Grande Lattes and one Tall Caramel Macchiato, the $10 bill serves as a

A) medium of exchange.
B) store of value.
C) standard of value.
D) commodity money.

Answer 3

medium of exchange.

Question 4

Which of the following functions of money would prove rather useless if inflation were extremely high?

A) medium of exchange
B) store of value
C) standard of value
D) all of the above

Question 5

A school teacher gets paid today in money, but plans to spend the money in six months on a vacation. This illustrates which function of money?

A) medium of exchange
B) store of value
C) standard of value
D) serving as a commodity

Question 6

The statement, "My Hello Kitty Limited Edition Vespa scooter is worth $5,500"represents money's function as a

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

Question 7

If the prices of goods and services were expressed in terms of coconuts, then coconuts would be serving as a

A) medium of exchange.
B) store of value.
C) standard of value.
D) fiat money.

Question 8

Money is a convenience that makes the economic pie bigger.

Question 9

Money's ability to store value depends on how fast prices in the economy are increasing.

Question 10

Money's medium of exchange function helps to compute the real value of labor.

Question 11

Anything that is commonly acceptable as a payment for goods and services is called ________.

Question 12

Which part or parts of the following statement describe each of the three functions of money?"A pair of prescription glasses costs $250. I am spending $250 on one pair right now, and am saving $250 to buy a second pair in 6 months when the new styles are introduced."

Question 13

Representative commodity money retained its value because

A) it was an actual commodity.
B) it was a fiat money.
C) it was backed by the government.
D) it could be exchanged for an actual commodity.

Question 14

Scenario 18.1: Curly, Moe, Larry, and Shemp are the four inhabitants of a small island. Moe has 200 gold coins, the only money on the island. He takes the coins to Curly, a goldsmith, for storage and Curly issues Moe a receipt for the 200 coins he has deposited with Curly. Larry comes to Curly to borrow 100 gold coins, signing a legally binding promise to repay the coins, and Curly issues Larry a receipt saying that Larry now has 100 gold coins on deposit. Upon finding out that Larry borrowed gold coins from Curly, Shemp comes to Curly to borrow 200 gold coins. Since Curly has 200 actual gold coins on deposit, he gets Shemp to sign a legally binding promise to repay the 200 coins and then issues Shemp a receipt saying that Shemp now has 200 gold coins on deposit.

-Refer to Scenario 18.1. When Curly made the loans to Larry and Shemp, the money supply

A) did not change.
B) decreased by 300 coins.
C) increased by 300 coins.
D) increased by 500 coins.

Question 15

Scenario 18.1: Curly, Moe, Larry, and Shemp are the four inhabitants of a small island. Moe has 200 gold coins, the only money on the island. He takes the coins to Curly, a goldsmith, for storage and Curly issues Moe a receipt for the 200 coins he has deposited with Curly. Larry comes to Curly to borrow 100 gold coins, signing a legally binding promise to repay the coins, and Curly issues Larry a receipt saying that Larry now has 100 gold coins on deposit. Upon finding out that Larry borrowed gold coins from Curly, Shemp comes to Curly to borrow 200 gold coins. Since Curly has 200 actual gold coins on deposit, he gets Shemp to sign a legally binding promise to repay the 200 coins and then issues Shemp a receipt saying that Shemp now has 200 gold coins on deposit.

-Refer to Scenario 18.1. When Curly made the loans to Moe, Larry, and Shemp, there were 500 coins' worth of receipts, so in total, the receipts were ________ backed by gold.

A) 20%
B) 40%
C) 50%
D) 100%

Question 16

Scenario 18.1: Curly, Moe, Larry, and Shemp are the four inhabitants of a small island. Moe has 200 gold coins, the only money on the island. He takes the coins to Curly, a goldsmith, for storage and Curly issues Moe a receipt for the 200 coins he has deposited with Curly. Larry comes to Curly to borrow 100 gold coins, signing a legally binding promise to repay the coins, and Curly issues Larry a receipt saying that Larry now has 100 gold coins on deposit. Upon finding out that Larry borrowed gold coins from Curly, Shemp comes to Curly to borrow 200 gold coins. Since Curly has 200 actual gold coins on deposit, he gets Shemp to sign a legally binding promise to repay the 200 coins and then issues Shemp a receipt saying that Shemp now has 200 gold coins on deposit.

-Refer to Scenario 18.1. When Curly made the loans to Moe, Larry, and Shemp, there were 500 coins' worth of receipts. These receipts are best described as

A) commodity money.
B) representative commodity money.
C) partially backed representative commodity money.
D) fiat money.

Question 17

A $100 bill is a

A) commodity money.
B) fiat money.
C) representative commodity money.
D) partially representative commodity money.

Question 18

Which of the following information about fiat money is false?

A) It must be issued by a sanctioned monetary authority.
B) It serves as a medium of exchange.
C) It has virtually no intrinsic value.
D) All of the above statements about fiat money are true.

Question 19

Commodity money has intrinsic value.

Question 20

U.S. paper currency is considered representative commodity money because it can be redeemed for gold by the U.S. government.

Question 21

Most of the world's currencies are backed by some type of commodity.

Question 22

Explain the differences between commodity money, representative commodity money, and partially backed representative commodity money.

Question 23

Money that is backed by nothing but the faith and confidence that if you accept it in exchange for something, you will be able to exchange it for something else, is referred to as ________.

Question 24

When a bank takes money that you put in your checking account and gives it to someone else, at a cost, for a period of time, it is said to be

A) making a loan.
B) making a deposit.
C) internalizing an externality.
D) creating commodity money.

Question 25

Loans issued by banks for the purpose of purchasing real estate or buildings are called

A) peer-to-peer loans.
B) payday loans.
C) bonds.
D) mortgage loans.

Question 26

A central bank accepts deposits from

A) the federal government and commercial banks.
B) commercial banks and private businesses.
C) private businesses and individuals.
D) individuals, private businesses, commercial banks, and the federal government.

Question 27

Which of the following is true of central banks?

A) They are responsible for issuing currency.
B) They control the amount of money in circulation.
C) They have considerable influence over the level of interest rates.
D) all of the above

Question 28

The two functions that are critical to the key role that commercial banks play in stabilizing the economy are accepting deposits and making loans.

Question 29

All central banks are controlled by government.

Question 30

In terms of accepting deposits and making loans, explain the differences between commercial banks and a central bank.

Question 31

In an economy, newly-issued money originates from

A) the central bank.
B) commercial banks.
C) the sale of stocks and bonds.
D) the deposits of individuals.

Question 32

In our modern financial system, money is created

A) only by central banks.
B) only by the banking system.
C) by central banks and the banking system.
D) only by federal governments.

Question 33

The largest proportion of M1 is made up of

A) currency.
B) checkable deposits.
C) traveler's checks.
D) savings deposits.

Question 34

The M2 measure of the money supply equals

A) savings account balances plus small certificates of deposit.
B) savings account balances plus small certificates of deposit plus money market mutual fund balances.
C) M1 plus savings account balances plus small certificates of deposit.
D) M1 plus savings account balances plus small certificates of deposit plus money market mutual fund balances.

Question 35

If Veronica withdraws $1,500 from her savings account and deposits it in her checking account, then M1 will ________ and M2 will ________.

A) increase; decrease
B) increase; not change
C) not change; decrease
D) not change; not change

Question 36

If Veronica withdraws $1,500 from her checking account and holds it as currency, then M1 will ________ and M2 will ________.

A) increase; decrease
B) increase; not change
C) not change; decrease
D) not change; not change

Question 37

If Veronica withdraws $1,500 from her checking account and deposits it in her savings account, then M1 will ________ and M2 will ________.

A) decrease; increase
B) increase; not change
C) decrease; not change
D) not change; not change

Question 38

Table 18.1 : Consider the information above for a small economy. Assume there are no traveler's checks.

-Refer to Table 18.1. M1 in this simple economy equals

A) $500.
B) $550.
C) $1,050.
D) $4,550.

Question 39

Table 18.1 : Consider the information above for a small economy. Assume there are no traveler's checks.

-Refer to Table 18.1. M2 in this simple economy equals

A) $1,050.
B) $4,050.
C) $4,550.
D) $5,100.

Question 40

The central bank is the only authorized institution with the power to issue currency.

Question 41

Currency held inside the banking system is included in the M1 measure of the money supply.

Question 42

Of all the components of the M1 and M2 measures of the money supply, the largest is savings deposits.

Question 43

What will happen to the sizes of the M1 money supply and the M2 money supply if the following transactions take place?
a. Tasha withdraws $3,000 from her checking account and holds it as currency.
b. Arturo withdraws $3,000 from his savings account and deposits it in his checking account.
c. Benjamin withdraws 3,000 from his savings account and puts it in a certificate of deposit (CD).
d. Marisol withdraws $3,000 from her home safe and deposits it in her savings account.

Question 44

Why must the M2 measure of the money supply always be larger than the M1 measure?

Question 45

________ are financial assets that represent partial ownership of a corporation.

A) Stocks
B) Financial markets
C) Bonds
D) Certificates of deposit

Question 46

Financial securities that represent promises to repay a specified amount of money at a particular point in the future are

A) bonds.
B) stocks.
C) commodities.
D) mutual funds.

Question 47

The price a borrower must pay for the use of other people's money is called

A) a dividend.
B) financial capital.
C) liquidity.
D) interest.

Question 48

Spreading wealth across multiple investments is called

A) diversification.
B) arbitrage.
C) speculation.
D) asset liquification.

Question 49

Janae purchased 10 Bitcoins in February with the intention of holding them until October and then selling them at a higher price. Janae was engaged in

A) diversification.
B) arbitrage.
C) speculation.
D) asset liquification.

Question 50

Mortgage-backed securities are large blocks of mortgages which have been repackaged into ________ and sold to pension funds and other large investors.

A) stocks
B) bonds
C) mutual funds
D) certificates of deposit

Question 51

Financial capital is money raised by business owners to fund new business ventures.

Question 52

A stock is an IOU and a bond represents ownership in a company.

Question 53

One reason people store wealth is to help smooth consumption over time.

Question 54

Mutual funds are diversified financial instruments that represent a large number of stocks, bonds, and/or other financial assets.

Question 55

________ are documents that represent agreements between two or more parties about rights to payments of money.

Question 56

What are four functions of financial instruments?

Question 57

One of the major functions of financial markets is to help people reduce risk. Describe two financial methods people can use to reduce their exposure to risk.