Deck 12: Money,banking,and the Financial System

Question 1

Money evolved out of the self-interested actions of

A) economists.
B) governments.
C) a few kings and queens.
D) individuals.

Answer 1

individuals.

Question 2

M1 is comprised of currency held outside banks + traveler's checks + __________.

A) credit cards
B) savings deposits
C) gold
D) checkable deposits
E) money market mutual funds

Answer 2

checkable deposits

Question 3

Which of the following illustrates a barter transaction?

A) A bushel of oranges is traded for a bushel of apples.
B) Someone buys a pizza for the special price of $4.
C) Someone buys a house for $100,000.
D) b and c
E) a,b,and c

Answer 3

A bushel of oranges is traded for a bushel of apples.

Question 4

If a person uses money to buy a pair of shoes,money is functioning as

A) a unit of account.
B) a store of value.
C) a medium of exchange.
D) none of the above

Question 5

Historically,which of the following goods have evolved into money?

A) gold
B) salt
C) cattle
D) cocoa beans
E) all of the above

Question 6

A unit of account is

A) a bank account.
B) a savings account.
C) a common measurement in which values are expressed.
D) the same as a medium of exchange.
E) none of the above

Question 7

Which of the following is a correct listing of money's functions?

A) source of credit,value of transaction costs,unit of barter
B) medium of barter,medium of exchange,medium of transactions
C) unit of barter,unit of account,a unit of income
D) store of value,store of exchange,measure of account
E) store of value,medium of exchange,unit of account

Question 8

The requirement of a "double coincidence of wants" is the chief __________ of the __________ exchange system.

A) advantage;barter
B) advantage;monetary
C) disadvantage;barter
D) disadvantage;monetary

Question 9

Money's basic advantage as compared to barter is that

A) everybody has money but not everyone has the opportunity to barter.
B) a money system relies on a double coincidence of wants.
C) money reduces transaction costs.
D) money is the only medium you can use to store your wealth.

Question 10

Barter is

A) the exchange of money for goods and then the exchange of those goods for money.
B) the exchange of money for money,or the exchange of money for stocks and bonds.
C) the exchange of goods and services for goods and services without the use of money.
D) any exchange,with or without the use of money,in which the participants negotiate (or barter)the price of the goods to be exchanged.

Question 11

Your neighbor has knowledge of economics and you would like her to share it with you.You own a car,a CD player and a new pair of running shoes.You wish to make a trade,but the neighbor does not want what you have.The problem can be stated as follows: You are not satisfying the

A) rule of transaction costs.
B) double coincidence of wants.
C) law of marketability.
D) terms of a common denominator.

Question 12

If peanuts were widely accepted for purposes of exchange,then

A) peanuts would be money.
B) peanuts would be less valuable than they are currently.
C) we would observe people using peanuts to purchase cars.
D) a and c
E) a and b

Question 13

In the Yap civilization of the South Pacific prior to 1920,large,heavy stones in the shape of a wheel were used as money.Which function of money was probably least served by this form of money?

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

Question 14

Compared to barter,money __________ transaction costs,making transactions __________ time-consuming.

A) increases;more
B) increases;less
C) reduces;more
D) reduces;less

Question 15

In which situation are transaction costs most likely to be the lowest?

A) Rodney buys antiques;he is currently looking for an eighteenth-century table.
B) Cathy is looking for someone who is willing to trade accounting services (in return)for law services.
C) Rodriguez wants to buy a house with two master bedrooms.
D) Melinda wants to buy a McDonald's Big Mac (she will not be asking for a special order).

Question 16

According to the text,the good that emerged as money in World War II POW camps was

A) tinned beef.
B) toilet paper.
C) cigarettes.
D) cheese.

Question 17

To an economist,money is a synonym for which of the following?

A) income
B) credit
C) wealth
D) salary
E) none of the above

Question 18

Which of the following statements is true?

A) In June 2012,of the three components of M1,the checkable deposits component was the largest.
B) M1 is sometimes referred to as the "broad definition of the money supply".
C) Time deposits are a part of M1,but not M2.
D) M1 is a larger dollar amount than M2.

Question 19

Transaction costs are best defined as the

A) various costs of different goods and services.
B) cost of one good in terms of another;that is,the price of apples in terms of oranges.
C) costs involved in borrowing money from someone,that is,the interest that must be paid for the use of someone else's money.
D) costs associated with the time and effort necessary to make an exchange.

Question 20

Which of the following statements is false?

A) Money is the only good that can (or does)serve as a store of value.
B) In a barter economy,there is no good that serves as a unit of account.
C) There are higher transaction costs of making exchanges in a barter economy than in a money economy.
D) Money functions as a medium of exchange,unit of account,and store of value.

Question 21

According to the text,L.Frank Baum,the author of The Wonderful Wizard of Oz,blamed ____________________ for the economic depression of 1893 and the related hardships faced by farmers and workers.

A) the gold standard
B) the silver standard
C) a massive tornado
D) high taxes

Question 22

Because money __________________,people are _________________ likely to specialize in their work in a money economy.

A) is a store of value;less
B) eliminates the double coincidence of wants;more
C) is a unit of account;more
D) eliminates the need for holdings of precious metals;more

Question 23

If checkable deposits in Bank A total $300 million and the required reserve ratio is 10 percent,then required reserves at Bank A equal

A) $3.0 million.
B) $30.0 million.
C) $3.3 million.
D) $300,000

Question 24

A savings account functions as

A) a unit of account.
B) a store of value.
C) a medium of exchange.
D) none of the above

Question 25

Tenth National Bank holds $285 million in checkable deposits and $35 million in reserves.With a required reserve ratio of 11 percent,how much in excess reserves is Tenth National holding?

A) $250 million
B) $3.65 million
C) $35.2 million
D) 3.85 million

Question 26

Fractional reserve banking is a term used to describe a banking system whereby

A) individual banks share a fraction of the total funds deposited in the whole banking system.
B) banks are required to quote interest rates in fractions.
C) banks hold reserves equal to only a fraction of their deposit liabilities.
D) banks hold reserves equal to a multiple of their deposit liabilities;that is,fractional in this case really means multiple.
E) banks are required to maintain a certain fraction of their deposits in the form of checkable deposits,a certain fraction of their deposits in the form of savings deposits,etc.

Question 27

According to the text,in the book version of The Wonderful Wizard of Oz,Dorothy's slippers are

A) gold.
B) silver.
C) ruby.
D) paper.

Question 28

Reserves held beyond the required amount are called __________ reserves.

A) redundant
B) precautionary
C) excess
D) surplus

Question 29

A "money market deposit account" is a(n)

A) checking account that pays no interest.
B) bank account with a specified maturity date.
C) store of Federal Reserve Notes held in bank vaults to cash checkable deposits on demand.
D) checking account created from an automatic transfer from a savings account.
E) interest-earning account at a bank or thrift institution that usually has a minimum balance requirement.

Question 30

In a barter economy,people are _________ to specialize in the production of one good or service,compared to in a money economy.

A) more likely
B) less likely
C) equally likely
D) almost always going

Question 31

Ninth National Bank holds $200 million in checkable deposits and $18,000,000 in total reserves.With a required reserve ratio of 8 percent,how much in excess reserves is Ninth National holding?

A) $1,440,000
B) $218,000,000
C) $17,440,000
D) $16,000,000
E) $2,000,000

Question 32

Total bank reserves equal

A) checkable deposits + vault cash + traveler's checks.
B) vault cash + currency in the hands of the nonbanking public.
C) bank deposits at the Federal Reserve.
D) bank deposits at the Federal Reserve + vault cash.

Question 33

A savings deposit is a type of

A) time deposit that is payable on demand.
B) time deposit that earns interest and allows the depositor to write checks payable to other persons.
C) time deposit that does not earn interest but does offer limited check-writing services.
D) interest-earning account at a bank or thrift institution in which funds can be withdrawn at any time without a penalty payment.
E) checkable deposit that also pays interest.

Question 34

If checkable deposits in Bank A total $620 million and the required reserve ratio is 9 percent,then required reserves at Bank A equal

A) $564.2 million.
B) $468 million.
C) $28.8 million.
D) $55.8 million.
E) $558 million.

Question 35

The amount of required reserves a bank holds depends on the

A) required reserve ratio.
B) demand-deposit ratio.
C) excess-reserve ratio.
D) currency ratio.

Question 36

M2 is comprised of

A) small-denomination time deposits + savings deposits + money market accounts.
B) small-denomination time deposits + credit cards + money market accounts + gold deposits.
C) M1 + small-denomination time deposits + savings deposits + retail money market mutual funds.
D) M1 + small denomination time deposits + credit cards + money market accounts.

Question 37

In the history of banking,warehouse receipts refer to receipts

A) that goldsmiths once issued acknowledging that they held a customer's gold.
B) for storing furniture in a warehouse.
C) goldsmiths issued to each other when they borrowed gold.
D) for storing food and other perishables in a warehouse.

Question 38

The first bankers were

A) sheriffs.
B) goldsmiths.
C) clergy.
D) innkeepers.
E) economists.

Question 39

According to the text,The Wonderful Wizard of Oz is alleged to be a story about

A) the California gold strikes of 1849.
B) the end of the gold standard in 1934.
C) the presidential election of 1896.
D) the financial panic of 1907.

Question 40

Required reserves are the amount of

A) reserves a bank must hold against its deposits as mandated by the Federal Reserve.
B) cash a bank must hold against its deposits as mandated by the Federal Reserve.
C) checkable deposits a bank must hold against all other deposits as mandated by the U.S.Treasury.
D) reserves a bank must hold against all its assets as mandated by the Federal Reserve.

Question 41

A bank has $7 million in checkable deposits and $1.2 million in total reserves.If the required reserve ratio is 10 percent,then the bank has

A) required reserves of $700,000.
B) excess reserves of $500,000.
C) excess reserves of $1,080,000.
D) required reserves of $120,000.
E) a and b

Question 42

A medium of exchange is

A) anything that is generally accepted in exchange for goods and services.
B) a common measurement in which relative values are expressed.
C) an item's ability to hold value over time.
D) the exchange of goods and services for other goods and services.
E) both a and d

Question 43

Bank A has checkable deposits of $900,000 and total reserves of $112,000.If the required reserve ratio is 12 percent,the bank has excess reserves of

A) $4,000.
B) $44,000.
C) $13,440.
D) $2,000.

Question 44

Which of the following is not included in M1?

A) retail money market mutual funds
B) checkable deposits
C) traveler's checks
D) all of the above

Question 45

Total reserves are

A) equal to required reserves plus excess reserves.
B) equal to vault cash plus bank deposits at the Federal Reserve.
C) an asset to banks.
D) both b and c
E) all of the above

Question 46

The M2 money supply

A) includes M1.
B) is commonly referred to as the broad definition of the money supply.
C) includes savings deposits.
D) is larger than M1.
E) all of the above

Question 47

Which of the following is true?

A) Reserves = required reserves - excess reserves.
B) Reserves - required reserves = excess reserves.
C) Reserves = required reserves + excess reserves.
D) b and c
E) a and b

Question 48

A unit of account is

A) anything that is generally accepted in exchange for goods and services.
B) a common measurement in which relative values are expressed.
C) an item's ability to hold value over time.
D) the exchange of goods and services for other goods and services.
E) both a and d

Question 49

According to the text,many people believe that the character Dorothy,in the book The Wonderful Wizard of Oz,represents

A) presidential candidate Barry Goldwater.
B) President Abraham Lincoln.
C) President William McKinley.
D) presidential candidate William Jennings Bryan.

Question 50

Bank A has checkable deposits of $800,000 and total reserves of $200,000.If the required reserve ratio is 0.15,the bank has required reserves of

A) $600,000.
B) $120,000.
C) $90,000.
D) $30,000.

Question 51

A bank has $10,000 in excess reserves and the required reserve ratio is 20 percent.This means the bank could have __________ in checkable deposit liabilities and __________ in total reserves.

A) $80,000,$10,000
B) $100,000,$20,000
C) $50,000,$25,000
D) $100,000,$30,000

Question 52

M2 includes M1 plus all of the following except

A) savings deposits.
B) retail money market mutual funds.
C) short-term U.S.government securities.
D) small-denomination time deposits.

Question 53

The unit of account function of money refers to the

A) fact that money and income are the same thing.
B) common denominator of measurement provided by money.
C) characteristic that all money is intrinsically valuable.
D) all of the above

Question 54

When a bank makes a loan to one of its customers,to the bank the loan is classified as

A) an asset.
B) a liability.
C) neither an asset nor a liability.
D) an asset in some cases and a liability in other cases,depending on the type of loan.

Question 55

Bank A has checkable deposits of $10 million and total reserves of $1 million.The required reserve ratio is 9 percent.The bank has excess reserves of

A) $910,000.
B) $91,000.
C) $100,000.
D) $10,000.
E) There is not enough information provided to answer this question.

Question 56

Bank A holds $1 million in required reserves and the required reserve ratio is 9 percent.It follows that Bank A holds checkable deposit liabilities that total approximately

A) $111 million.
B) $11.11 million.
C) $90 million.
D) $900 million.

Question 57

Money is defined by economists as

A) the market value of an asset.
B) the funds one receives during a specified period of time.
C) any good that is widely accepted in exchange and for the repayment of debts.
D) both b and c
E) all of the above

Question 58

The store of value function of money refers to the ability of money to

A) facilitate the exchange of goods and services.
B) maintain its value over time.
C) express relative scarcity.
D) earn interest over time.
E) increase its value over time.

Question 59

In a barter economy,

A) money is a medium of exchange.
B) coins are used to facilitate trade.
C) money is a store of value.
D) goods and services are traded directly for each other.
E) the money supply consists entirely of coins and currency.

Question 60

"Barter" implies that

A) to get one good or service,an individual offers another.
B) to get one good or service,an individual offers money.
C) to get a check,an individual offers a good or service.
D) different kinds of money are exchanged for each other.
E) none of the above

Question 61

When economists say that banks must hold a percentage of their total deposits in reserve form,what does this mean?

A) It means that banks must hold a fraction of their customers' deposits either as bank deposits at the Federal Reserve,or as vault cash,or both.
B) It means that banks reserve the right to turn away customers a certain percentage of the time.
C) It means that the fraction of vault cash a bank has cannot be greater than the fraction of bank deposits (it has)at the Federal Reserve.
D) Essentially,it means that total reserves are greater than required reserves.
E) none of the above

Question 62

Exhibit 12-1

Refer to Exhibit 12-1.The required reserve ratio is

A) 0.10.
B) 0.15.
C) 0.20.
D) 0.25.
E) 0.30.

Question 63

In June 2012,the largest component of M1 was _________;the smallest was _________.

A) currency (held outside banks);traveler's checks
B) checkable deposits;traveler's checks
C) currency (held outside banks);checkable deposits
D) checkable deposits;overnight Eurodollar deposits
E) none of the above

Question 64

Which set of prices would you expect to see (posted,quoted)in a barter economy?

A) 1 horse = 10 pieces of gold;1 kettle = 1 piece of gold
B) 1 horse = 10 kettles;1 kettle = 1/10 horse
C) 1 horse = $200;1 kettle = $20
D) 1 horse = 10 kettles;1 kettle = 10 apples;1 apple = 1 orange
E) b and d

Question 65

Which of the following is false?

A) Currency is money,but money is more than simply currency.
B) M1 is a component of M2.
C) Federal Reserve notes make up about 99 percent of the paper money in circulation.
D) Credit cards are money since they are widely accepted for purposes of exchange.
E) Money reduces the transaction costs of making exchanges.

Question 66

Fractional reserve banking originated

A) when the United States Congress passed a law regarding the required reserve ratio.
B) when goldsmiths realized they could issue warehouse receipts beyond gold on deposits.
C) with the establishment of the Federal Reserve System.
D) in the United States with the Clayton Act.

Question 67

In which setting are the transaction costs of making an exchange likely to be the highest?

A) buying cereal at the grocery store
B) buying a house
C) buying a computer over the Internet
D) buying stock in a company
E) buying a Big Mac at McDonald's

Question 68

Banks in the United States operate under a fractional reserve system,which means they must maintain only a fraction of their deposits in the form of

A) debt.
B) loans.
C) an insurance policy.
D) reserves.

Question 69

Inflation does the greatest harm to money's function as a

A) medium of exchange.
B) unit of account.
C) store of value.
D) liquid asset.

Question 70

Consider the following data: currency (held outside banks)= $354 billion,checkable deposits = $250 billion,traveler's checks = $4 billion,small-denomination time deposits = $200 billion,savings deposits = $100 billion,retail money market mutual funds = $160 billion.M1 equals __________ billion and M2 equals __________ billion.

A) $608;$1,068
B) $708;$1,038
C) $708;$948
D) $694;$1,038
E) none of the above

Question 71

When money is used to buy a computer,it is functioning as a

A) unit of account.
B) store of value.
C) medium of exchange.
D) none of the above

Question 72

Bank A has $25,500 in required reserves.The required reserve ratio is 10 percent.Bank A has checkable deposits of

A) $2,550.
B) $255,000.
C) $2,550,000.
D) $25,500.

Question 73

In a barter economy,

A) money trades for goods,goods trade for services,and services trade for money.
B) goods and services trade for other goods and services.
C) some goods are more readily accepted in exchange than others.
D) making exchanges takes less time (on average)than in a money economy.
E) b and c

Question 74

Bank A has $75,000 in total reserves,and zero excess reserves.The required reserve ratio is 12 percent.Bank A has checkable deposits of

A) $84,000.
B) $62,500.
C) $625,000.
D) $6,250,000.
E) $840,000

Question 75

Bank deposits at the Federal Reserve = $40 billion,vault cash = $2 billion,the required reserve ratio = 0.10,and total checkable deposits = $400 billion.It follows that required reserves equal __________ billion, (total)reserves equal __________ billion and excess reserves equal __________ billion.

A) $42;$42;$2
B) $42;$40;$2
C) $2;$40;$38
D) $38;$40;$2
E) $40;$42;$2

Question 76

Exhibit 12-1

Refer to Exhibit 12-1.What dollar value goes in blank (A)?

A) $0.
B) $50
C) $20
D) $10
E) $5

Question 77

A house is $100,000,a computer is $2,000,and a car is $20,000.In this context,money is principally functioning as a

A) unit of account.
B) store of value.
C) medium of exchange.
D) none of the above

Question 78

Bank A has checkable deposits of $10 million and total reserves of $1 million.The required reserve ratio is 9 percent.The bank has required reserves of

A) $910,000.
B) $90,000.
C) $900,000.
D) $1,000,000.
E) There is not enough information provided to answer this question.

Question 79

Saying that it takes twice as many dollars to buy one ticket for a concert than two tickets for a movie refers to the use of money as a

A) medium of exchange.
B) unit of account.
C) store of value.
D) means of achieving the double coincidence of wants.

Question 80

Which of the following represents a double coincidence of wants?

A) Smith has what Jones has and neither wants what the other has.
B) Smith has what Jones wants but Jones doesn't have what Smith wants.
C) Smith has what Jones wants and Jones has what Smith wants.
D) Smith wants what Jones has,Jones wants what Brown has,and Brown wants what Smith has.
E) none of the above