Question 1

Modern U.S. commercial banks perform all of the following functions EXCEPT

Accepted Answer

Commercial banks in the United States do not issue paper currency, as that is the responsibility of the Federal Reserve System.

Question 2

The balance owed on credit cards in the United States in 2014 was $880 billion. When consumers pay off this balance in full,

Accepted Answer

When consumers pay off credit card balances in full, the money is transferred from one account to another within the same bank. Therefore, there is no change in the overall money supply or the measures of money, M1 and M2.

Question 3

Sarah buys shares from a financial institution that uses her funds together with other funds to purchase U.S. treasury bills. Sarah has deposited her money into a ________.

Accepted Answer

Sarah has invested her money in a money market mutual fund, which pools the funds of many investors to purchase highly liquid, low-risk securities such as U.S. treasury bills. The other options (savings bank, credit union, savings and loan association) do not typically offer investment opportunities involving purchasing U.S. treasury bills.

Question 4

Which of the following is considered a depository institution?
I.the U.S. Treasury
II.a commercial bank like Citibank
III.a credit union for federal government employees

Accepted Answer

A depository institution is a financial institution that obtains funds primarily by accepting deposits from the public. Commercial banks like Citibank and credit unions for federal government employees both accept deposits from the public, making them depository institutions. The U.S. Treasury does not accept deposits from the public, so it is not a depository institution. Therefore, the correct answer is II and III.

Question 5

A money market mutual fund is

Accepted Answer

A money market mutual fund is a depository institution that sells shares and uses the proceeds to buy securities such as U.S. Treasury bills. It is not the same as a checking account (A), nor is it a time deposit of a specific amount (B and C).

Question 6

Money market mutual funds

Accepted Answer

Money market mutual funds allow shareholders to write checks on their funds, making them a more convenient option for handling cash reserves. Option A is incorrect as money market mutual funds are not provided by the Federal Reserve. Option B is partially incorrect because while there are restrictions on withdrawals, they are generally less strict compared to other types of mutual funds. Option C is incorrect as some money market mutual funds do provide limited checking services.

Question 7

Credit cards were introduced in 1959. In 2014, the U.S. credit card balance was $880 billion. Which of the following is TRUE?

Accepted Answer

Credit card balances are not counted in M1 or M2 because they represent credit extended by banks, not actual money in circulation or deposits.

Question 8

A depository institution is a firm that takes deposits from ________ and makes loans to ________.

Accepted Answer

Depository institutions take deposits from both households and firms and make loans to both households and firms as well.

Question 9

Examples of thrift institutions include

Accepted Answer

Thrift institutions are financial institutions that primarily offer savings and mortgage lending services. The most common thrift institutions include savings and loan associations, savings banks, and credit unions. Therefore, choice C provides the correct examples of thrift institutions. Choices A, B, and D are incorrect because they include other financial institutions that are not classified as thrift institutions.

Question 10

Which of the following explains why a bank holds reserves?
I.Banks are required by law to hold reserves.
II.To meet depositors' currency withdrawals
III.To use them to make loans to households

Accepted Answer

Banks hold reserves both because they are legally required to (to ensure they have enough liquidity to meet their obligations) and to meet the demands of depositors who wish to withdraw currency. Reserves themselves are not directly used to make loans; instead, they are the portion of deposits not lent out.

Question 11

The major role of a commercial bank is to

Accepted Answer

The primary function of commercial banks is to receive deposits from customers and use those deposits to make loans to other customers, thereby generating profit through interest on those loans. While commercial banks may also offer mortgage loans in addition to other types of loans, this is not their main function. Selling shares to buy stocks is the domain of investment banks and brokerage firms, not commercial banks. Additionally, commercial banks do not generally have a role in restraining the growth of the quantity of money; this is typically the domain of central banks.

Question 12

Which of the following is TRUE regarding money market mutual funds?
I.Money market mutual funds buy highly liquid assets like Treasury bills.
II.Shareholders can obtain loans from money market mutual funds.

Accepted Answer

Money market mutual funds typically buy highly liquid assets like Treasury bills, commercial paper, and certificates of deposit to provide stability and low risk to their shareholders. However, shareholders cannot obtain loans from money market mutual funds as they are designed for short-term investments and not for lending.

Question 13

Commercial banks do NOT

Accepted Answer

Commercial banks do not determine what assets are money. This responsibility lies with the central bank of the country.

Question 14

A credit union is

Accepted Answer

A credit union is a type of depository institution that is owned by its members, who typically share a common social or economic bond such as being employees of a certain company or members of a certain organization. Credit unions offer many of the same services as banks, such as checking and savings accounts, loans, and credit cards, but are not-for-profit organizations that exist to serve their members rather than maximize profits for shareholders.

Question 15

The fact that money can be exchanged for goods reflects money's role as a

Accepted Answer

Money's role as a medium of exchange means that it facilitates transactions by being a widely accepted instrument to purchase goods and services. The fact that money can be exchanged for goods reflects its ability to serve this purpose. Money also serves as a unit of account for measuring value and a store of value for holding wealth. However, these roles are not specifically related to the exchange of money for goods as in the given statement.

Question 16

A savings bank is a depository institution that ________.

Accepted Answer

Savings banks primarily focus on accepting savings deposits and making mortgage loans, especially for home purchases. They are known for their role in helping individuals save money and finance homes.

Question 17

Which of the following institutions is NOT a depository institution?

Accepted Answer

The U.S. Treasury is a government agency and is not classified as a depository institution. Depository institutions are financial institutions that obtain funds mainly by accepting deposits from the public, such as commercial banks, thrift institutions, and credit unions. Money market mutual funds are also considered depository institutions as they allow individuals to invest money in short-term securities.

Question 18

Money market mutual funds invest in

Accepted Answer

Money market mutual funds invest in highly liquid assets, such as short-term government and corporate securities, certificates of deposit, and commercial paper. This allows investors to earn a higher yield than a traditional savings account, while still maintaining a relatively low level of risk.

Question 19

Depository institutions

Accepted Answer

Depository institutions make profit by earning interest on loans they give out, which is higher than the interest paid on deposits they receive from customers. This difference is called the "spread" and is the main source of income for depository institutions.

Question 20

Which of the following is NOT a function of money?

Accepted Answer

Barter is not a function of money. Barter is a system of exchange where goods or services are directly exchanged for other goods or services without the use of money. Money serves as a medium of exchange, unit of account, and store of value.

Quiz 8: Money, the Price Level, and Inflation