Deck 25: Money, banks, and the Federal Reserve System

Question 1

Economies cannot function without money.

Answer 1

False

Question 2

If whole tomatoes were money,which of the following functions of money would be the hardest for tomatoes to satisfy?

A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange

Answer 2

B

Question 3

In an economy with ________,there are more prices than in an economy with ________.

A) barter; money
B) money; barter
C) fiat money;commodity money
D) fiat money; barter

Answer 3

A

Question 4

Which of the following information about fiat money is false? Fiat money

A) is backed by gold.
B) serves as a medium of exchange.
C) has little to no value except as money.
D) is authorized by a central bank or governmental body.

Question 5

Your roommate argues that he can think of no better situation than living in a deflationary economy,as prices of goods and services would continuously fall.You disagree and argue that during a deflation,people can be made worse off because

A) the purchasing power of people's incomes would increase.
B) the purchasing power of the currency would decrease.
C) the value of the real interest rate will drop below the nominal interest rate.
D) borrowers will have to pay increasing amounts in real terms over time.

Question 6

Which of the following assets is most liquid?

A) money
B) bond
C) savings account
D) stock

Question 7

The statement,"My iPhone is worth $300" represents money's function as

A) a medium of exchange.
B) a unit of account.
C) a store of value.
D) a standard of deferred payment.

Question 8

Dollar bills in the modern economy serve as money because

A) they are backed by the gold stored in Fort Knox.
B) they can be redeemed for gold by the central bank.
C) they have value as a commodity independent of their use as money.
D) people have confidence that others will accept them as money.

Question 9

Which of the following functions of money would be violated if inflation were high?

A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange

Question 10

Which of the following is one of the most important benefits of money in an economy?

A) Money allows for the exchange of goods and services.
B) Money allows for the accumulation of wealth.
C) Money makes exchange easier, leading to more specialization and higher productivity.
D) Money encourages people to produce all of their own goods (self-sufficiency) and therefore increases economic stability.

Question 11

People hold money as opposed to financial assets because money

A) earns interest.
B) is perfectly liquid.
C) earns no interest.
D) earns a higher return than other financial assets.

Question 12

The major shortcoming of a barter economy is

A) the requirement of a double coincidence of wants.
B) the requirement of specialization and exchange.
C) that goods and services are not traded.
D) that money loses value from inflation.

Question 13

Economies where goods and services are traded directly for other goods and services are called ________ economies.

A) trade
B) barter
C) direct
D) seigniorage

Question 14

Commodity money

A) has value independent of its use as money.
B) has little to no value independent of its use as money.
C) is backed by a valuable commodity such as gold.
D) can be used to purchase commodities, but not services.

Question 15

Which of the following statements regarding the use of gold as money is false?

A) It has standardized quality.
B) It is durable.
C) It has value other than money.
D) It is acceptable to traders.

Question 16

Soldiers in a World War II prisoner-of-war camp

A) used gold as a fiat money.
B) used cowrie shells as money.
C) used cigarettes as money.
D) used U.S. dollars as a commodity money.

Question 17

Silver is an example of a

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

Question 18

Fiat money has

A) little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B) little to no intrinsic value and is authorized by the central bank or governmental body.
C) value, because it can be redeemed for gold by the central bank.
D) a great intrinsic value that is independent of its use as money.

Question 19

According to the U.S.Treasury,

A) the government will not accept cash in payment of taxes.
B) creditors do not have to accept cash in payment of debts.
C) firms do not have to accept cash as payment for goods and services.
D) U.S. dollars must be accepted as payment for any good or service sold in the United States.

Question 20

In economics,money is defined as

A) the total value of one's assets in current prices.
B) the total value of one's assets minus the total value of one's debts, in current prices.
C) the total amount of salary, interest, and rental income earned during a year.
D) any asset people generally accept in exchange for goods and services.

Question 21

You earn $500 a month,currently have $200 in currency,$100 in your checking account,$2,000 in your savings accounts,$3,000 worth of illiquid assets and $1,000 of debt.You have

A) money = $2,300, annual income = $6,000, and wealth = $5,000.
B) money = $300, annual income = $6,000, and wealth = $4,300.
C) money = $200, annual income = $500, and wealth = $4,300.
D) money = $300, annual income = $6,000, and wealth = $5,000.

Question 22

If a person withdraws $500 from his/her checking account and holds it as currency,then M1 will ________ and M2 will ________.

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

Question 23

The most liquid measure of money supply is

A) M0.
B) M1.
C) M2.
D) M3.

Question 24

Economists estimate that ________ of U.S.currency is outside the United States and held primarily by ________.

A) over half; households and firms in countries where there is little confidence in the local currency
B) over half; foreign banks and foreign governments
C) less than one quarter; households and firms in countries where there is little confidence in the local currency
D) less than one quarter; foreign banks and foreign governments

Question 25

If a person withdraws $500 from his/her savings account and puts it in his/her checking account,then M1 will ________ and M2 will ________.

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

Question 26

The M1 measure of the money supply equals

A) paper money plus coins in circulation.
B) currency plus checking account balances.
C) currency plus checking account balances plus traveler's checks.
D) currency plus checking account balances plus traveler's checks plus savings account balances.

Question 27

Which of the following is not one of the problems associated with the U.S.penny?

A) It subjects consumers to a "rounding tax."
B) Its face value is less than its cost of production.
C) Its seigniorage is negative.
D) Inflation has degraded its worth to where it essentially useless.

Question 28

If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account,then M1 will ________ and M2 will ________.

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

Question 29

The M2 measure of the money supply equals

A) savings account balances plus small-denomination time deposits plus traveler's checks.
B) savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.
C) M1 plus savings account balances plus small-denomination time deposits.
D) M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.

Question 30

If gold is used as money in an economy,the money supply is easy to control.

Question 31

Although gold is highly valued by most people,it is difficult to use as a medium of exchange.Explain.

Question 32

The largest proportion of M1 is made up of

A) currency.
B) checking account deposits.
C) traveler's checks.
D) savings account deposits.
E) time deposits.

Question 33

Would the invention of money,as opposed to barter,increase the growth rate of real GDP in a country over time? Why or why not?

Question 34

What are the four functions of money? Can something be considered money if it does not fulfill all four functions?

Question 35

The Federal Reserve's narrowest definition of the money supply is

A) M0.
B) M1.
C) M2.
D) M3.

Question 36

As recently as 2007,the amount of seigniorage on a U.S.penny is ________,and the amount of seigniorage U.S.paper fiat money is ________.

A) positive; negative
B) negative; zero
C) negative; positive
D) zero; positive

Question 37

Which of the following is not counted in M1?

A) checking account balances
B) credit card balances
C) coins in circulation
D) currency in circulation
E) traveler's check balances

Question 38

If the current penny was made worth five cents rather than its current value of one cent,what would be the effect on M1?

A) It would rise.
B) It would fall.
C) M1 would rise, and M2 would remain constant.
D) It would only affect M2.

Question 39

Money's most narrow definition is based on its function as a

A) store of value.
B) unit of account.
C) standard of deferred payment.
D) medium of exchange.
E) standard of barter.

Question 40

Money will fail to serve as a medium of exchange if it ceases to be a store of value.

Question 41

If households and firms decide to hold less of their money in checking account deposits and more in currency,then the money supply

A) will not change.
B) will increase.
C) will decrease.
D) may increase or decrease.

Question 42

Refer to Scenario 25-2.As a result of Kristy's deposit,Bank A's excess reserves increase by

A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.

Question 43

Banks can make additional loans when required reserves are

A) greater than total reserves.
B) less than total reserves.
C) less than total deposits.
D) less than total loans.

Question 44

Refer to Scenario 25-1.M2 in this simple economy equals

A) $3,000.
B) $8,000.
C) $14,000.
D) $21,000.

Question 45

The amount of national income in an economy equals the money supply in an economy.

Question 46

The largest liability on the balance sheet of most banks is its

A) loans.
B) holdings of securities.
C) deposits with the Federal Reserve.
D) checking account and savings account deposits of its customers.
E) vault cash.

Question 47

Bank reserves include

A) vault cash and deposits with the Federal Reserve.
B) loans to bank customers and deposits with the Federal Reserve.
C) vault cash and loans to bank customers.
D) customer checking accounts and vault cash.
E) deposits with the Federal Reserve and holdings of securities.

Question 48

Suppose you withdraw $1,000 from your savings account and put it in your checking account.Briefly explain how this will affect M1 and M2.

Question 49

Suppose you withdraw $1,000 from your savings account and put it under your mattress.Briefly explain how this will affect M1 and M2.

Question 50

The required reserves of a bank equal its ________ the required reserve ratio.

A) deposits divided by
B) deposits multiplied by
C) loans divided by
D) loans multiplied by

Question 51

The major assets on a bank's balance sheet are its

A) checking and savings account deposits.
B) loans, and checking and savings account deposits.
C) reserves, loans, and holdings of securities.
D) reserves, checking and savings account deposits.
E) reserves, loans, and checking account deposits.

Question 52

Liquidity increases as we move from the M1 to the M2 definition of the money supply.

Question 53

Refer to Scenario 25-2.As a result of Kristy's deposit,checking account deposits in the banking system as a whole (including the original deposit)could eventually increase up to a maximum of

A) $8,000.
B) $10,000.
C) $50,000.
D) $100,000.

Question 54

The U.S.government makes a profit from issuing fiat money.

Question 55

Refer to Scenario 25-2.As a result of Kristy's deposit,Bank A's reserves immediately increase by

A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.

Question 56

A bank will consider a car loan to a customer ________ and a customer's checking account to be ________.

A) a liability; an asset
B) an asset; a liability
C) a liability; a liability
D) an asset; an asset
E) an asset; net worth

Question 57

Refer to Scenario 25-1.M1 in this simple economy equals

A) $1,000.
B) $2,000.
C) $3,000.
D) $8,000.

Question 58

Refer to Scenario 25-2.As a result of Kristy's deposit,Bank A's required reserves increase by

A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.

Question 59

If credit card balances rise in the economy,then M1 will ________ and M2 will ________.

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

Question 60

Refer to Scenario 25-2.As a result of Kristy's deposit,Bank A can make a maximum loan of

A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.

Question 61

If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits,the money multiplier will increase.

Question 62

Which of the following best describes how banks create money?

A) Banks charge higher interest rates on loans than they pay on deposits.
B) Banks charge fees for providing financial advice.
C) Banks create checking account deposits when making loans from excess reserves.
D) Banks make loans from reserves.

Question 63

Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent.The maximum loan your bank can made as a direct result of your deposit is

A) $200.
B) $1,800.
C) $2,000.
D) $20,000.

Question 64

If the required reserve ratio (RR)is 20 percent,the simple deposit multiplier is

A) 2.
B) 5.
C) 10.
D) 20.

Question 65

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard.If the required reserve ratio is 10 percent,checking account deposits in the banking system as a whole could drop up to a maximum of

A) $0.
B) $50.
C) $500.
D) $5,000.

Question 66

The more excess reserves banks choose to keep,

A) the larger the deposit multiplier.
B) the smaller the deposit multiplier.
C) the higher the required reserve ratio.
D) the lower the required reserve ratio.

Question 67

Table 25-1

Refer to Table 25-1.Suppose a transaction changes a bank's balance sheet as indicated in the T-account,and the required reserve ratio is 10 percent.As a result of the transaction,the bank has excess reserves of

A) $0.
B) $400.
C) $3,600.
D) $4,000.

Question 68

If households choose to take some fraction of each check they deposit and hold it as currency,then the simple deposit multiplier ________ the real-world multiplier.

A) is greater than
B) is less than
C) is equal to
D) bears no relationship to

Question 69

If banks receive a greater amount of reserves and do not hold all of these reserves as excess reserves,the money supply expands.

Question 70

The real-world money multiplier is greater than the simple money multiplier (1/RR).

Question 71

Suppose the required reserve ratio is 20 percent.If banks are conservative and choose not to loan all of their excess reserves,the real-world deposit multiplier is

A) less than 5.
B) equal to 5.
C) greater than 5.
D) equal to 20.

Question 72

Which of the following determines the amount of money the banking system as a whole can create?

A) the quantity of bank reserves
B) the quantity of vault cash held by banks
C) the gold reserves held by the Federal Reserve
D) the limit on profits by banks imposed by the U.S. Congress

Question 73

If the required reserve ratio is 10 percent,an increase in bank reserves of $1,000 can support an increase in checking account deposits (including the original deposit)in the banking system as a whole of up to

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

Question 74

Suppose you withdraw $1,000 in cash from your checking account.Draw a T-account to show the effect of this transaction on your bank's balance sheet.

Question 75

Table 25-3

Refer to Table 25-3.Consider the following simplified balance sheet for a bank: If the required reserve ratio is 10 percent,the bank can make a maximum loan of

A) $2,000.
B) $5,000.
C) $6,300.
D) $45,000.

Question 76

Why do banks create money? Do they create money to help the Federal Reserve control the money supply or is there a more basic reason?

Question 77

Banks can continue to make loans until their

A) actual reserves equal their required reserves.
B) excess reserves equal their required reserves.
C) actual reserves equal their excess reserves.
D) actual reserves equal their checking account balances.

Question 78

Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank.If the required reserve ratio is 10 percent,what is the maximum change in money supply?

A) -$200 million
B) -$180 million
C) $2 million
D) $180 million
E) $200 million

Question 79

Table 25-2

Refer to Table 25-2.Suppose a transaction changes a bank's balance sheet as indicated in the following T-account,and the required reserve ratio is 10 percent.As a result of the transaction,the bank can make a maximum loan of

A) $0.
B) $800.
C) $7,200.
D) $8,000.

Question 80

Suppose Warren Buffet withdraws $1 million from his checking account at Chase Manhattan Bank.If the required reserve ratio is 20 percent,what is the maximum change in deposits in the banking system?

A) -$5 million
B) -$4 million
C) -$200,000
D) $1 million
E) $5 million