Deck 13: Money and Our Banking System  

Question 1

When Corrina and Sam use dollars to compare the worth of their respective cars, money is serving
As a(n)

A) unit of accounting.
B) absolute standard.
C) relative standard.
D) medium of exchange.

Answer 1

unit of accounting.

Question 2

Which one of the following is FALSE?

A) Money facilitates exchange by reducing transaction costs.
B) By serving as a unit of accounting, money allows consumers to compare the relative values of different goods.
C) The use of money as a medium of exchange means that the distribution of money in an economy mirrors the distribution of wealth.
D) The use of money as a medium of exchange permits more specialization in an economy.

Answer 2

The use of money as a medium of exchange means that the distribution of money in an economy mirrors the distribution of wealth.

Question 3

Why is barter being used more frequently?

A) Because people have lost confidence in money as a medium of exchange
B) Because there is not enough money in the economy to facilitate all the exchanges going on
C) Because a system of barter allows for more specialization of labor than does a monetary system
D) Because the internet has reduced the cost of finding a coincidence of wants

Answer 3

Because the internet has reduced the cost of finding a coincidence of wants

Question 4

For barter to occur there has to be

A) a commodity to serve as a medium of exchange.
B) a formal market where prices are quoted.
C) a coincidence of wants.
D) a chain of middlemen facilitating the exchange.

Question 5

Which of the following would be considered the most liquid asset you can own?

A) Money
B) Gold
C) Silver
D) Stocks and bonds

Question 6

Which of the following items has the most liquidity?

A) Real estate
B) A checking account
C) A diamond ring
D) Season tickets to Chicago Cubs games

Question 7

Which one of the following statements is TRUE?

A) A fiduciary monetary system uses fiat money.
B) Checkable deposit balances are not money, but currency is.
C) Currency is money, but checkable deposit balances are not.
D) The value of the dollar in exchange is independent of the price level.

Question 8

The ease of exchange arranged by internet communications means that

A) money is losing its value.
B) barter is becoming more common.
C) money is becoming more liquid.
D) money is becoming less liquid.

Question 9

The money supply in the United States is backed by

A) trust in its acceptability.
B) gold.
C) silver.
D) government policy.

Question 10

United States coins and currency are backed by

A) silver.
B) gold.
C) the Congress.
D) nothing.

Question 11

Table 13.1


-Based on the information in Table 13.1, the value of M1 is

A) $2,100.
B) $1,700.
C) $3,000.
D) $3,100.

Question 12

Table 13.1


-Using the information in Table 13.1, the value of M2 is

A) $3,500.
B) $2,100.
C) $4,500.
D) $5,400.

Question 13

If $10 million is withdrawn from the nation's money market deposit accounts and is deposited in various checkable deposit accounts, then

A) M1 and M2 will remain unchanged.
B) M1 and M2 will increase.
C) M1 will increase, M2 will decrease.
D) M1will increase and M2 will remain unchanged.

Question 14

If $5 million is withdrawn from money market deposit accounts and is used to purchase traveler's checks, then

A) M1 will increase by $5 million and M2 will remain unchanged.
B) M1 will increase by $5 million and M2 will decrease by $5 million.
C) M1 will decrease by $5 million and M2 will increase by $5 million.
D) M1 will remain unchanged and M2 will decrease by $5 million.

Question 15

M1 is money held for

A) investment purposes.
B) liquidity purposes.
C) transaction purposes.
D) security purposes.

Question 16

M2 is money held for

A) investment purposes.
B) liquidity purposes.
C) transaction purposes.
D) security purposes.

Question 17

Which one of the following is included in M2 but NOT in M1?

A) Coins and currency
B) Checkable deposits
C) Traveler's checks
D) Money market mutual funds

Question 18

Which of the following is TRUE?

A) M2 is always larger than M1.
B) M1 is always larger than M2.
C) M2 is the narrowest definition of the money supply.
D) Credit card accounts are included in M1 but not in M2.

Question 19

Which of the following assets are counted in M1?

A) Checkable deposits
B) Mutual market mutual funds
C) Credit card accounts
D) Money market deposit accounts

Question 20

Which of the following assets are counted in M2?

A) Gold
B) Mutual market mutual funds
C) Credit card accounts
D) Real estate

Question 21

When the Federal Reserve injects new reserves into the banking system,

A) the money supply will expand by more than the amount of the new reserves.
B) banks will hold more reserves, but the money supply will remain unchanged.
C) banks will loan out the reserves, but the money supply will remain unchanged.
D) the money supply will expand only if the reserves support commercial loans, rather than consumer loans.

Question 22

Which governing body determines the future growth of the U.S. money supply?

A) The U.S. Treasury
B) The U.S. Congress
C) The Federal Open Market Committee
D) The Economic Policy Committee, a body composed of the President, Treasury Secretary, and Commerce Secretary

Question 23

The Board of Governors of the Federal Reserve System has

A) fourteen members appointed by the U.S. Treasury secretary.
B) fourteen members appointed by the House of Representatives.
C) seven members appointed by the House of Representatives.
D) seven members appointed by the U.S. President.

Question 24

The Federal Reserve serves the following functions EXCEPT

A) providing a system for check collection and clearing.
B) setting the course of fiscal policy.
C) supplying the economy with paper currency and coins.
D) regulating the money supply.

Question 25

Who holds required reserve balances for depository institutions?

A) The Office of the Senate Finance Committee
B) The Office of Management and Budget
C) The Federal Reserve district banks
D) The U.S. Treasury

Question 26

The Federal Reserve System

A) does not have any control over the money supply.
B) consists of 8 Federal Reserve districts.
C) regulates the U.S. fiscal policy.
D) serves as the U.S. central bank.

Question 27

The Federal Reserve controls the money supply by

A) determining how much currency to print.
B) setting the price level with a system of price controls.
C) telling banks how much they can accept in the way of deposits.
D) changing the amount of reserves in the banking system.

Question 28

The Federal Reserve

A) is the most important regulatory agency in the U.S. monetary system.
B) controls the distribution of income in the U.S.
C) controls the distribution of wealth in the U.S.
D) affects the money supply by setting wage levels.

Question 29

The size of the money multiplier depends on

A) the size of M1.
B) the required reserve ratio.
C) the level of reserves in the banking system.
D) the current price level.

Question 30

Which of the following is TRUE?

A) Fractional reserve banking is still in its experimental phase, and it may prove to be not viable.
B) In a system of fractional reserve banking, some depositors will find their bank accounts are of no value.
C) Banks make new loans when they have excess reserves.
D) Banks choose to hold the highest level of reserves possible.

Question 31

Money makes an economy more efficient by

A) making the distribution of income more equal.
B) allowing consumers to purchase all the goods they would like to have.
C) guaranteeing producers a profit.
D) allowing for a greater specialization of labor.

Question 32

Cigarettes served as money in some prisoner of war camps during World War II. Given this, we would have observed that

A) no one ever smoked a cigarette in the camps.
B) people resorted to barter rather than use cigarettes as money.
C) prices of other goods were expressed in terms of cigarettes.
D) only government-issued cigarettes were accepted as money.

Question 33

When defining money as M1, you are looking at those assets that

A) can be used in transactions.
B) serve as a medium of exchange but are not liquid.
C) are liquid but do not serve as a medium of exchange.
D) earn interest.

Question 34

Money market deposit accounts are

A) included in M1 but not in M2.
B) included in M2 but not in M1.
C) included both in M1 and M2.
D) included neither in M1 nor M2.

Question 35

Traveler's checks are

A) included in M1 but not in M2.
B) included in M2 but not in M1.
C) included both in M1 and M2.
D) included neither in M1 nor M2.

Question 36

A fiduciary monetary system

A) is one that does not use a central bank.
B) is one that does not use currency.
C) is one that uses barter.
D) is one in which currency derives its value from its acceptability and predictability.

Question 37

The money supply is

A) the total value of the public's holdings in the stock market.
B) the total value of annual output.
C) the amount of money in circulation.
D) the nominal value of aggregate demand.

Question 38

The assets included in M1 are

A) not liquid.
B) assets of value that do not serve as a medium of exchange.
C) the money that has been created outside the banking system.
D) readily used to conduct marketplace transactions.

Question 39

If money is defined as those assets than can be used in conducting transactions, then the money supply consists of

A) currency only.
B) checkable deposits only.
C) currency and checkable deposits only.
D) currency, checkable deposits, and traveler's checks.

Question 40

The difference between M1 and M2 is

A) M1 includes traveler's checks while M2 does not.
B) M2 includes all paper currency that circulates outside the U.S. while M1 does not.
C) M1 includes all assets that can be easily converted into money while M2 does not.
D) M2 includes near moneys while M1 does not.

Question 41

Something that would be considered near money is

A) an antique car.
B) real estate.
C) a money market deposit account.
D) a share of publicly-traded stock.

Question 42

Which of the following is TRUE?

A) M1 includes those assets that are near moneys.
B) M1 includes those assets held for the purpose of engaging in marketplace transactions.
C) M1 is always larger than M2.
D) M2 is equal to the value of GDP.

Question 43

Which one the following is TRUE?

A) The Federal Reserve regulates the money supply by changing the level of reserves in the banking system.
B) The Federal Reserve regulates the money supply by determining the number of banks that will be allowed to issue loans in any one year.
C) The money multiplier is determined by the current interest rate.
D) The money supply is independent of Federal Reserve actions.

Question 44

What is the formula for the money multiplier?

A) 1 +Required Reserve Ratio
B) 1 - Required Reserve Ratio
C) 1 * Required Reserve Ratio
D) 1 ÷ Required Reserve Ratio

Question 45

If banks choose to hold more than the required level of reserves,

A) then the money supply will not expand in response to an injection of new reserves.
B) then the actual money multiplier will be more than its potential.
C) then the actual money multiplier will be less than its potential.
D) then the actual money multiplier will be zero.

Question 46

New reserves are put into the banking system by

A) Congress.
B) Wall Street brokerage houses.
C) the Federal Reserve.
D) taxpayers.

Question 47

The liquidity approach to measuring the money supply uses

A) M1 only.
B) near moneys only.
C) M1 plus near moneys.
D) M2 plus near moneys.

Question 48

What is the effect of the Federal Reserve increasing the level of reserves in the banking system?

A) People will choose to hold traveler's checks rather than currency.
B) People will choose to hold currency rather than traveler's checks.
C) The money supply will increase.
D) The money supply will decrease.

Question 49

Who are the members of the Federal Reserve System?

A) Taxpayers
B) Banks
C) Brokerage houses
D) Elected legislators

Question 50

What happens if the Federal Reserve decreases the level of reserves in the banking system?

A) People will choose to hold traveler's checks rather than currency.
B) People will choose to hold currency rather than traveler's checks.
C) The money supply will increase.
D) The money supply will decrease.

Question 51

If banks hold excess reserves,

A) they are not engaged in fractional reserve banking.
B) they will raise the actual money multiplier above its potential.
C) they incur an opportunity cost in terms of interest that could be earned on a loan.
D) they are violating regulations of the Federal Reserve System.

Question 52

When banks find themselves with excess reserves, they typically

A) issue new loans.
B) sell the excess reserves to other banks.
C) encourage their customers to cash more checks.
D) encourage the Federal Reserve to raise the required reserve ratio.

Question 53

When you cash a check,

A) you increase M1 and M2.
B) you increase M1 and leave M2 unchanged.
C) you decrease M1 and increase M2.
D) you leave M1 and M2 unchanged.

Question 54

When you withdraw cash from a savings account,

A) you increase M1 and M2.
B) you increase M1 and leave M2 unchanged.
C) you decrease M2 and increase M2.
D) you leave M1 and M2 unchanged.

Question 55

When you deposit traveler's checks into a money market mutual fund,

A) you increase M1 and M2.
B) you increase M1 and leave M2 unchanged.
C) you decrease M1 and leave M2 unchanged.
D) you leave M1 and M2 unchanged.

Question 56

Money is

A) anything that serves as a medium of exchange or unit of accounting.
B) a twentieth-century invention.
C) an asset that never loses value over time.
D) anything of value.

Question 57

When you write a check to deposit funds in your savings account,

A) you increase M1 and M2.
B) you increase M1 and leave M2 unchanged.
C) you decrease M1 and leave M2 unchanged.
D) you leave M1 and M2 unchanged.

Question 58

Why is a smart card less vulnerable to theft than is currency?

A) Because a smart card cannot be used without online authorization from the cardholder's bank
B) Because a smart card cannot be used without a personal code
C) Because a smart card cannot be used without a photo ID of the card holder
D) Because a smart card cannot be used without a fingerprint of the card holder

Question 59

Digital cash

A) offers no advantages over paper currency.
B) cannot function as a medium of exchange.
C) can only be transferred via the internet.
D) will reduce the cost of transferring funds.

Question 60

Digital cash

A) consists of M1 and M2
B) consists of near moneys.
C) consists of funds stored in computer devices and microchips.
D) cannot be used to pay for internet transactions.

Question 61

Smart cards and digital cash

A) cannot serve as a medium of exchange.
B) are more prone to theft than currency is.
C) will increasingly replace checks in many transactions.
D) are only accepted in transactions between banks.

Question 62

Which of the following is FALSE?

A) The most liquid assets are those that earn interest.
B) Without money, exchange in conducted by barter.
C) A medium of exchange is something widely accepted as payment for items of value.
D) Barter requires a coincidence of wants.

Question 63

Which of the following is FALSE?

A) Banks offer free checking because they are required to do so by the Federal Reserve.
B) A fiduciary monetary system uses fiat money.
C) Money facilitates exchange by reducing transaction costs.
D) The internet has reduced the costs of conducting bartered transactions.

Question 64

Which of the following is FALSE?

A) All assets included in M1 are also included in M2.
B) M2 includes near moneys.
C) Near moneys cannot be used in transactions but are very liquid.
D) Credit card balances are included in M1 but not in M2.

Question 65

Which of the following is FALSE?

A) Balances in money market deposit accounts are included in M2 but not in M1.
B) Currency in circulation is included in M1 but not in M2.
C) Checkable deposits are included in M1 and in M2.
D) The Federal Reserve System is the U.S. central bank.

Question 66

Without money, exchange is conducted by _________ .

Question 67

Barter requires a _________ of wants.

Question 68

Money promotes efficiency in an economy by allowing for the _________ of labor.

Question 69

The Federal _________ System is the U. S. central bank.

Question 70

Money is an asset that serves as a _________ _________ _________ and a unit of accounting.

Question 71

Money facilitates exchange by reducing _________ costs.

Question 72

The narrowest definition of money is _________.

Question 73

To the extent that money serves as a _________ _________ _________, it allows for the keeping of financial records.

Question 74

A _________ monetary system uses fiat money.

Question 75

The English word _________ comes from a Latin term meaning trust.

Question 76

Credit card balances are actually short-term _________ .

Question 77

Under _________ reserve banking, banks do not hold all of their deposits as reserves.

Question 78

The Federal Reserve increases the money supply by purchasing _________ _________ in the open market.

Question 79

The Federal _________ _________ Committee governs the growth of the money supply.

Question 80

Smart cards contain microchips that contain more information that a _________ stripe on a credit card.