Deck 15: Money and the Monetary System

Question 1

One of the functions of money is to serve as a:

A) store of value.
B) valuation tool.
C) equality enhancer.
D) sole way to make payments.

Answer 1

store of value.

Question 2

The main reason barter is extremely inefficient is that:

A) you have to find someone who both has what you want and wants what you have.
B) it can have very high transactions costs associated with it.
C) people and firms have to spend a lot of time looking for mutually agreeable trades.
D) All of these are true.

Answer 2

All of these are true.

Question 3

Money has replaced the need to barter, which is:

A) a certain amount of purchasing power that it retains over time.
B) something you can use to purchase goods and services.
C) something you can directly offer, like any good or service, in exchange for some good or service you want.
D) a standard unit of comparison.

Answer 3

something you can directly offer, like any good or service, in exchange for some good or service you want.

Question 4

Money is:

A) the set of all assets that are regularly used to directly purchase goods and services.
B) represented only by the amount of dollars and coins in our economy.
C) controlled by the supply and demand of goods and services on which our money is spent.
D) anything that we use to buy goods and services as long as it is not a good itself.

Question 5

When deciding what to use as money, one characteristic to look for is its:

A) convenience.
B) exchange value.
C) intrinsic value.
D) shape.

Question 6

We say that money is a unit of account because it represents:

A) a certain amount of purchasing power held over time.
B) something you can use to purchase goods and services.
C) something you can directly offer, like any good or service, in exchange for some good or service you want.
D) a standard unit of comparison.

Question 7

We say that money is a medium of exchange because it represents:

A) a certain amount of purchasing power held over time.
B) something you can use to purchase goods and services.
C) something you can directly offer, like any good or service, in exchange for some good or service you want.
D) a standard unit of comparison.

Question 8

When deciding what to use as money, one characteristic to look for is the:

A) stability of value.
B) shape.
C) intrinsic value.
D) exchange value

Question 9

The set of all assets that are regularly used to directly purchase goods and services is called:

A) money.
B) consumption income.
C) disposable income.
D) fungible goods.

Question 10

Assets that are used for money that have intrinsic value generally keep:

A) a more steady value than those that don't.
B) just as steady a value as those that don't.
C) a less steady value than those that don't.
D) a value that is not comparable to other assets.

Question 11

We say that money is a store of value because it represents:

A) a certain amount of purchasing power held over time.
B) something you can use to purchase goods and services.
C) something you can directly offer, like any good or service, in exchange for some good or service you want.
D) a standard unit of comparison.

Question 12

One reason we use paper money instead of gold coins in the Unites States today is because it:

A) is more convenient.
B) has no intrinsic value.
C) is easier to control its worth.
D) has a more stable value.

Question 13

Bartering is:

A) very efficient compared to using money.
B) slightly inefficient compared to using money.
C) just as efficient as using money.
D) extremely inefficient compared to using money.

Question 14

An example of a good that can be used for money that has intrinsic value is:

A) cigarettes.
B) fish.
C) gold.
D) All of these have intrinsic value.

Question 15

When goods that have intrinsic value are used as money, if their value as money falls, the good:

A) is still useful to people for other reasons.
B) loses its intrinsic value.
C) is no longer useful to people for other reasons.
D) tends to gain in intrinsic value.

Question 16

An example of a good that can be used for money that has no intrinsic value is:

A) gold.
B) paper dollar bills.
C) cigarettes.
D) Hershey kisses.

Question 17

One of the functions of money is to serve as a:

A) valuation tool.
B) medium of exchange.
C) sole way to make payments.
D) completely fixed unit of measure.

Question 18

Wide acceptance of money without intrinsic value comes largely from the fact that it:

A) has a stable value.
B) is convenient to use.
C) is hard to counterfeit.
D) can be used domestically and internationally.

Question 19

Holding money is:

A) nearly always the most convenient way to hold onto wealth over time.
B) almost never the most convenient way to hold onto wealth over time.
C) nearly always the least convenient way to hold onto wealth over time.
D) rarely the most convenient way to hold onto wealth over time.

Question 20

If money has intrinsic value, it has value:

A) unrelated to its use as money.
B) only as its use as money.
C) that sets its value as money.
D) based on how often people use it for payment.

Question 21

The ratio of the total amount of demand deposits at a bank to the amount kept as cash reserves is known as the:

A) reserve ratio.
B) demand deposit ratio.
C) demand-reserve ratio.
D) federal funds rate.

Question 22

Funds held in bank accounts that can be withdrawn by depositors at any time without advance notice are called:

A) demand deposits.
B) required reserves.
C) free funds.
D) flow funds.

Question 23

If the reserve ratio was 100 percent, then:

A) no lending would occur using deposits.
B) maximum lending would occur.
C) banks would create money in the economy.
D) banks would lend all of their deposits.

Question 24

If there were no fractional reserve banking, then:

A) the reserve ratio must be 0percent.
B) banks would not create money in the economy.
C) there would be a very small amount of lending using deposits.
D) banks would not be able to create as much money as they desired.

Question 25

We know how many dollars banks create using the:

A) money multiplier.
B) federal funds.
C) demand deposits.
D) interest rate.

Question 26

Because a bank earns money when it makes a loan to a borrower it:

A) has an incentive to loan out as much of each deposit as it can.
B) has an incentive to borrow from the government as much as it can to loan out.
C) needs to loan out more than it takes in through deposits to make money.
D) has more of an incentive to loan out money than take money in through deposits.

Question 27

The ratio of money created by the lending activities of the banking system to the money created by the government's central bank is called the:

A) money multiplier.
B) reserve ratio.
C) federal funds.
D) demand deposits.

Question 28

In the United States, the dollar was commodity backed:

A) until 1971.
B) until the Civil War.
C) Until financial crisis of 2008.
D) until World War II.

Question 29

If there was only full-reserve banking:

A) the financial system would work better.
B) absolutely no lending using deposits would be able to occur.
C) banks would make more money lending deposits.
D) The money multiplier would be at maximum.

Question 30

Banks create money in the economy by:

A) loaning out part of each deposit, which will be redeposited by someone else.
B) charging higher interest on loans than savings.
C) charging higher interest on savings than loans.
D) loaning out all of their deposits to borrowers.

Question 31

Commodity-backed money is:

A) any form of money that can be legally exchanged into a fixed amount of an underlying commodity.
B) money created by rule.
C) money used for the exchange of large commodities.
D) any form of money that also has a role as a commodity.

Question 32

If fractional reserve banking exists, then:

A) banks need only keep a portion of each deposit on hand.
B) the money multiplier is equal to 1.
C) money cannot be created in the economy through banks.
D) lending would be curtailed to nearly zero.

Question 33

The primary way that banks earn money is:

A) through lending funds and collecting interest on those loans.
B) through the accumulation of deposits.
C) by lending money to the government.
D) by the government paying them to regulate the financial system.

Question 34

Modern banks in the United States can keep reserves as:

A) commodity money only.
B) a deposit at the Federal Reserve.
C) gold.
D) in accounts with other banks.

Question 35

Any amount that a bank chooses to keep on hand beyond what it is required to is called:

A) excess reserves.
B) excess deposits.
C) federal funds.
D) extra holdings.

Question 36

The amount that the bank is legally required to keep on hand is called the:

A) required reserves.
B) demand deposits.
C) federal funds.
D) reserve ratio.

Question 37

The cash that a bank keeps in its vault is called its:

A) reserves.
B) deposits.
C) loans.
D) savings.

Question 38

The money multiplier is approximated as being equal to:

A) one divided by the reserve ratio.
B) one divided by the federal funds.
C) demand deposits multiplied by the interest rate.
D) demand deposits multiplied by the reserve ratio.

Question 39

Fiat money is:

A) any form of money that can be legally exchanged into a fixed amount of an underlying commodity.
B) money created by rule.
C) money used for the exchange of large commodities.
D) any form of money that is more readily accepted than commodity-backed money.

Question 40

In the United States, the dollar was commodity backed by:

A) gold.
B) silver.
C) oil.
D) diamonds.

Question 41

The larger is the reserve ratio, the:

A) smaller is the money multiplier, and the less money will be created in the economy.
B) smaller is the money multiplier, and the more money will be created in the economy.
C) larger is the money multiplier, and the less money will be created in the economy.
D) larger is the money multiplier, and the more money will be created in the economy.

Question 42

The amount of money available in the economy:

A) is called the money supply.
B) is managed by the Federal Reserve.
C) varies depending on what is considered money.
D) All of these are true.

Question 43

The definition of M2 includes:

A) cash and checking account balances.
B) hard money and savings account balances.
C) cash, checking account, and savings account balances.
D) cash, checking accounts, savings accounts, and other financial instruments where money is locked away for a specified period of time.

Question 44

If the money multiplier is approximated to be 4, then the reserve ratio must be:

A) 25 percent.
B) 2.5 percent.
C) 5 percent.
D) 4 percent.

Question 45

When banks hold excess reserves the:

A) money multiplier overestimates how much money will be created in the economy.
B) money multiplier underestimates how much money will be created in the economy.
C) reserve ratio is not fully functioning, and should be raised.
D) reserve ratio is not fully functioning, and should be lowered.

Question 46

A bank run is:

A) the situation that arises from fear that the bank is in danger of running out of money.
B) when all depositors from a single bank demand to withdraw all deposits at once.
C) when a bank's reserves are not enough to satisfy all withdrawal demands.
D) All of these are true.

Question 47

If the money multiplier is approximated to be 10, it means:

A) banks create 10 dollars in deposits from each original deposit of a dollar.
B) banks create approximately 10 times the amount of cash in the economy.
C) the economy overall has 10 times the amount of deposits as existing cash.
D) All of these are true.

Question 48

If the reserve ratio is 5 percent, then the money multiplier is approximated to be:

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

Question 49

If people decide to hold some of their cash and not deposit it, then the:

A) money multiplier overestimates how much money will be created in the economy.
B) money multiplier underestimates how much money will be created in the economy.
C) reserve ratio is not fully functioning, and should be raised.
D) reserve ratio is not fully functioning, and should be lowered.

Question 50

Hard money:

A) is the least narrow definition of money.
B) includes cash.
C) cannot always be used in transactions immediately, but is accessible.
D) is not very liquid.

Question 51

The Fed classifies different types of money depending on its:

A) liquidity.
B) resale value.
C) commodity back.
D) intrinsic value.

Question 52

The definition of M1 includes:

A) cash and checking account balances.
B) hard money and savings account balances.
C) cash and savings account balances.
D) cash, checking accounts, savings accounts, and other financial instruments where money is locked away for a specified period of time.

Question 53

The smaller the reserve ratio the:

A) less a bank can loan out.
B) smaller is the money multiplier.
C) less money is created in the economy.
D) greater the money is created in the economy.

Question 54

If the reserve ratio is 20 percent, then the money multiplier is approximated to be:

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

Question 55

The money supply is the amount of money:

A) available in the economy.
B) that banks keep on hand.
C) that banks keep on hand beyond the reserve requirement.
D) available for banks to lend.

Question 56

Liquidity refers to how:

A) easy an asset is to convert immediately to cash without losing value.
B) quickly the same dollar changes hands in the economy.
C) quickly the average household spends its disposable income.
D) easy money converts to assets in an economy.

Question 57

If the money multiplier is approximated to be 2, then the reserve ratio must be:

A) 50 percent.
B) 5 percent.
C) 2 percent.
D) 20 percent.

Question 58

The narrowest definition of money is:

A) hard money.
B) M1.
C) M2.
D) L.

Question 59

The narrowest definition of money:

A) includes the things that can be used in transactions immediately.
B) contains only cash and bank reserves held at the Fed.
C) is referred to as hard money.
D) All of these are true.

Question 60

The bigger the money multiplier is the:

A) smaller the reserve ratio must be.
B) less a bank can loan out.
C) less money is created in the economy.
D) greater the amount of private demand for loans.

Question 61

M1 is considered ___________ measure of money compared to M2.

A) a more legitimate
B) a less legitimate
C) just as legitimate a
D) a more stable

Question 62

In the United States, the central bank is the:

A) Federal Reserve.
B) Congressional Budgeting Office.
C) Treasury.
D) National Bank of the United States.

Question 63

If we wanted to consider all the money that had been "multiplied" in the economy, we would think about:

A) hard money.
B) M1.
C) M2.
D) None of these.

Question 64

The cash you have in your wallet would be counted in which measure of money?

A) Hard money
B) M1
C) M2
D) It would be counted in all of these

Question 65

One of the main roles of a central bank is:

A) managing the nation's money demand.
B) coordinating the banking system to ensure a sound economy.
C) accepting deposits from households and other private individuals.
D) funding federal government spending.

Question 66

Your checking account balance would be counted in which measure of money?

A) M1
B) M2
C) Hard money
D) It would be counted in both M1 and M2

Question 67

Central banks:

A) exist in almost every major nation.
B) are common only to industrialized nations.
C) in the United States oversee the U.S. economy, as well as some developing nations who do not have a central bank.
D) stopped being used after events like the Great Depression proved them useless.

Question 68

The Federal Reserve:

A) is the central bank of the United States.
B) sets the budget for the U.S. government.
C) is appointed by the president of the United States.
D) is responsible for funding federal spending.

Question 69

Comparing _____ can give us some sense of what the multiplier actually is in the economy.

A) hard money to M2
B) hard money to M1
C) M1 to M2
D) hard money to fiat money

Question 70

One of the main roles of a central bank is:

A) managing the nation's money supply.
B) coordinating the relationship between banking system and federal government.
C) ensuring that banks provide enough loans.
D) monitoring federal spending.

Question 71

Your savings account balance would be counted in which measure of money?

A) M1
B) M2
C) Hard money
D) It would be counted in both M1 and M2

Question 72

Over time:

A) all three measures of money have increased, in general.
B) hard money spiked up dramatically in 2008 in response to the financial crisis.
C) M2 sped up its rate of increase starting around 1995.
D) All of these are true.

Question 73

Which measure of money would we most likely use if we were interested in looking at spending in the economy?

A) Hard money
B) M1
C) M2
D) Reserves.

Question 74

An essential function of a central bank is to:

A) manage the money supply.
B) collect taxes.
C) issue debt.
D) control and monitor government budgets.

Question 75

The institution ultimately responsible for managing the nation's money supply and coordinating the banking system to ensure a sound economy is called a:

A) central bank.
B) national bank.
C) public banking system.
D) peoples' bank.

Question 76

A Certificate of Deposit would be counted in which measure of money?

A) M1
B) M2
C) Hard money
D) It would be counted in both M1 and M2

Question 77

Which measure of money would we most likely use if we were interested in looking at saving in the economy?

A) Hard money
B) M1
C) M2
D) Reserves

Question 78

The essential functions of any central bank are:

A) managing the money supply, and acting as a lender of last resort.
B) overseeing major business transactions, and managing the money supply.
C) preventing the formulation of monopolies or other market failure, and acting as a lender of last resort.
D) collecting taxes, and managing the supply of money.

Question 79

Over time, the money multiplier:

A) was relatively stable until 2008, when it dropped dramatically.
B) was relatively stable until 2008, when it rose dramatically.
C) has historically followed the business cycle.
D) runs counter cyclic to the business cycle.

Question 80

The Federal Reserve System consists of 12 ___________ and 7 ______________.

A) regional banks; Board of Governor's members
B) Board of Governor's members; regional banks
C) regional banks; member banks
D) member banks; regional banks