Question 1

A credit union,unlike a bank,is not a financial intermediary,since it is a cooperative banking venture.

Accepted Answer

A credit union is still considered a financial intermediary because it facilitates financial transactions between savers and borrowers, similar to banks, despite being a cooperative venture.

Question 2

The most important function of money is as a medium of exchangE.

Accepted Answer

Money acts as a medium of exchange that makes transactions easier and transactions are carried out with ease using money. It is a universally accepted medium of exchange that reduces the transaction cost and facilitates trade.

Question 3

A credit union is a cooperative banking venture where the members or owners of the organization have a common employer or union.

Accepted Answer

In a credit union, the members generally have a common employer, union, or other affiliation which provides the basis for their membership.

Question 4

The issue of the appropriate monetary policy target has been resolved to the satisfaction of all policy makers.

Accepted Answer

The issue of the appropriate monetary policy target is an ongoing debate among policy makers and there is no consensus on the optimal target. Therefore, it has not been resolved to the satisfaction of all policy makers.

Question 5

The reserve ratio is the rate of interest charged commercial banks when they borrow from the Federal ReservE.

Accepted Answer

The reserve ratio is the percentage of deposits that banks are required to hold in reserve, not the rate of interest charged by the Federal Reserve for borrowing.

Question 6

Policy actions that affect changes in the growth rate of the money supply to keep interest rates at levels that promote economic stability and growth are called "fine tuning" policies.

Accepted Answer

"Fine tuning" policies refer to the use of monetary policy actions to adjust the growth rate of the money supply to maintain economic stability and growth, particularly by keeping interest rates at desirable levels.

Question 7

The discount rate is the ratio of demand deposits to reserves that banks have to maintain.

Accepted Answer

The discount rate is the interest rate at which banks can borrow from the Federal Reserve. It is not related to the ratio of demand deposits to reserves.

Question 8

The maximum demand deposit creation possible from a new deposit is derived from the equation D = E x 1/r.

Accepted Answer

The equation D = E x 1/r is the formula for calculating the maximum demand deposit creation possible from a new deposit, where D is the maximum amount of demand deposits created, E is the amount of the new deposit, and r is the reserve requirement ratio set by the central bank. Therefore, the statement is true.

Question 9

The key to the Federal Reserve's control over the money supply is its ability to create money by making loans.

Accepted Answer

The Federal Reserve has the ability to create money by making loans through its open market operations, which involve buying or selling government securities in the open market. This action affects the level of reserves in the banking system, which in turn affects the ability of banks to make loans and creates money in the economy.

Question 10

One of the main functions of banks is to create money.

Accepted Answer

Banks create money through the process of fractional reserve banking. They only need to hold a fraction of their customers' deposits as reserves, allowing them to lend out the rest and create new money in the process. This is a key function of modern banking systems.

Question 11

Monetary policyrefers to control of the money supply by the Federal Reserve authorities.

Accepted Answer

Monetary policy refers to actions taken by a country's central bank to influence the money supply, interest rates, and overall economic activity in order to achieve its goals, such as promoting price stability and economic growth.

Question 12

The money supply consists primarily of gold,silver,and other metals held by the government.

Accepted Answer

The money supply consists of various types of money, including coins, paper currency, and digital money. While money may have historically been backed by gold or other metals, modern currencies are generally not tied to a specific commodity.

Question 13

During inflationary periods,the Federal Reserve should buy securities so that commercial banks will have more reserves to loan out.

Accepted Answer

During inflationary periods, the Federal Reserve typically sells securities to reduce the reserves of commercial banks, making it harder for them to loan out money, in an effort to decrease the money supply and combat inflation.

Question 14

A commercial banking system with excess reserves has the ability to create money in the by making loans.

Accepted Answer

When a commercial banking system has excess reserves, it means they have more money than required to meet the reserve ratio set by the central bank. This allows the banks to make loans and create new money in the economy, through a process called fractional reserve banking. The banks can lend out a portion of their excess reserves, while keeping the required reserve amount in hand. As the loan is spent by the borrower, the recipient of the funds may deposit it in another bank, which in turn can use a portion of that deposit as reserves and lend out the rest. This process can be repeated, leading to multiple rounds of money creation and expansion of the money supply.

Question 15

Appropriate Federal Reserve actions to combat inflation are an increase in the discount rate,an increase in the reserve ratio and the sale of government securities.

Accepted Answer

These actions are often used by the Federal Reserve to combat inflation. Increasing the discount rate and the reserve ratio make it more expensive for banks to borrow money, which can lead to a decrease in the money supply and inflation. Selling government securities can also decrease the money supply and increase interest rates, which can reduce inflationary pressures.

Question 16

During inflationary periods,the Federal Reserve should lower the discount rate so that member banks may more easily obtain needed reserves to enable them to increase their loans.

Accepted Answer

During inflationary periods, the Federal Reserve is more likely to increase the discount rate to make borrowing more expensive, which can help reduce the money supply and thus help control inflation. Lowering the discount rate would encourage more borrowing and potentially exacerbate inflation.

Question 17

If the supply of money decreases,the value of a dollar increases.

Accepted Answer

When the supply of money decreases, there is less money available in the economy for purchasing goods and services, which increases the demand for each dollar. As a result, the value of a dollar increases because it can purchase more with the limited supply available.

Question 18

The quantity theory of money states that increases in the money supply cause increases in both the price level and output.

Accepted Answer

The quantity theory of money primarily posits that increases in the money supply lead to proportional increases in the price level, but it does not necessarily claim a direct effect on output in the long term.

Question 19

When a bank makes a loan to one of its customers,it increases its liabilities.

Accepted Answer

When a bank makes a loan to one of its customers, it creates an asset (the loan) and simultaneously creates a deposit in the borrower's account, which is a liability. However, the act of making the loan itself is seen as creating an asset, not increasing liabilities.

Question 20

In the U.S.banking system,the ratio of a bank's reserves and its outstanding deposits is usually less than onE.

Accepted Answer

This is known as the reserve requirement ratio, and it is typically less than one, meaning that banks are not required to hold reserves equal to their total outstanding deposits. The current reserve requirement ratio in the U.S. is 10%, meaning that banks only need to hold 10 cents in reserve for every dollar of deposits they have.

Quiz 12: Money,Banking and the Financial System: Old Problems With New Twists