Question 1

Statement I: Until 1980 only commercial banks were legally allowed to issue checking deposits.
Statement II: Commercial banks,unlike insurance companies and pension funds,cannot be considered financial intermediaries.

Accepted Answer

Statement I is true, as prior to the Depository Institutions Deregulation and Monetary Control Act of 1980, only commercial banks were allowed to issue checking deposits. 
Statement II is false, as commercial banks can be considered financial intermediaries, as they accept deposits from savers and lend those funds to borrowers, acting as a middleman between the two parties.

Question 2

Statement I: Banks require a minimum balance of checking accounts because it cost them money to process each check.
Statement II: The American Bankers Association has successfully beaten back attempts to pass legislation requiring banks to provide free check-cashing services to the poor.

Accepted Answer

Both statements are true. Banks often require a minimum balance for checking accounts to offset the costs associated with processing checks. Additionally, the American Bankers Association has historically opposed legislation that would mandate banks to offer free check-cashing services, particularly to low-income individuals, arguing against the financial and regulatory burdens such mandates would impose on banks.

Question 3

The transactions demand for money is related to money functioning as a

Accepted Answer

The transactions demand for money is the amount of money people hold to buy goods and services or to make transactions. Hence, it is related to money's function as a medium of exchange.

Question 4

Under a fractional reserve banking system

Accepted Answer

Under a fractional reserve banking system, banks are only required to keep a fraction of their deposits on reserve, meaning that their total deposits (liabilities) exceed their total reserves. This allows banks to lend out more money than they actually have on hand, which can increase the money supply and stimulate economic growth. However, it also means that banks are vulnerable to runs and other forms of systemic risk, since they may not have enough cash on hand to meet all of their depositors' withdrawal requests at once.

Question 5

Interstate banking

Accepted Answer

Interstate banking used to be illegal under the 1956 Bank Holding Company Act, but it became legal after the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This act allowed banks to expand across state lines and acquire other banks in different states. Therefore, the best choice is B.

Question 6

Which one of the following is in M2,but not in M1?

Accepted Answer

Small denomination time deposits are included in M2 but not M1. M1 only includes the most liquid forms of money such as physical currency and checking account balances, while M2 includes M1 plus slightly less liquid assets such as savings account balances and small denomination time deposits.

Question 7

The value of money varies

Accepted Answer

The value of money varies inversely with the average price level, meaning as the average price level increases (inflation), the value of money decreases, and vice versa. This is because when prices increase, each unit of currency buys fewer goods and services.

Question 8

Money is NOT

Accepted Answer

Money is not the exclusive means of holding wealth because other assets, such as property or investments, can also serve as a store of value. However, money is still essential for transactions and as a standard of value for pricing goods and services.

Question 9

Which of the following is an advantage of money over barter?

Accepted Answer

Money offers all the advantages listed. It allows for specialization of labor, as people can focus on producing goods and services that they are most efficient at and then use money to exchange for other goods and services they need. Money eliminates the requirement of a double coincidence of wants between the trading parties, meaning people do not need to find someone who wants exactly what they are offering and has exactly what they want to trade. Money can also reduce transactions and storage costs, as it is easier to transport and store than goods and services.

Question 10

Which is the most accurate statement?

Accepted Answer

The savings and loan debacle was largely due to risky real estate loans made in the early 1980s, which led to significant financial losses.

Question 11

About how many commercial banks are operating in the United States?

Accepted Answer

As of my last update in 2023, there are approximately 4,800 commercial banks operating in the United States, making all the provided options incorrect. However, the closest incorrect option given is A) 8,000, which overestimates the actual number.

Question 12

Statement I: Welfare banks are check-cashing outlets.
Statement II: To cash a check at a check-cashing outlet,you usually have to pay a fee of one to three percent of the value of the check.

Accepted Answer

Welfare banks, which are banks that provide financial services to people receiving government assistance or welfare, often serve as check-cashing outlets for their clients. It is true that to cash a check at a check-cashing outlet, one usually has to pay a fee of one to three percent of the value of the check. Hence, both statements are true.

Question 13

In a fractional reserve banking system

Accepted Answer

In a fractional reserve banking system, commercial banks are required to hold a certain fraction of their deposits in reserves, which means they can lend out the remaining portion of their deposits. This allows for the creation of money in the economy through the process of credit creation. Option A is incorrect because commercial banks hold their own reserves, not savings accounts in other banks. Option C is incorrect because if all deposits were held in reserves, banks would not be able to lend any money and the economy would stagnate. Option D is incorrect because commercial banks must hold reserves to ensure they have sufficient funds to meet withdrawal demands from their depositors.

Question 14

Precautionary cash balances

Accepted Answer

Precautionary cash balances are held to cover unexpected expenses, such as medical bills or home repairs. They are not directly related to investments or credit lines, and while classical writers may have discussed the importance of cash balances, this is not unique to their theories.

Question 15

A financial intermediary is

Accepted Answer

A financial intermediary is a firm that collects funds from savers and then channels them to borrowers such as individuals and firms who need funds. This intermediary plays a key role in facilitating the borrowing and lending of funds in the economy.

Question 16

A main function of money is to avoid the problem of double coincidence of wants.This is the

Accepted Answer

The main function of money to avoid the problem of double coincidence of wants is the medium of exchange function. Money acts as an intermediary between buyers and sellers, allowing for the exchange of goods and services without the need for direct bartering. The other functions of money, such as unit of account, store of value, standard of deferred payment, and standard of credit, are important as well but are not directly related to solving the problem of double coincidence of wants.

Question 17

Statement I: Welfare banks are set up by the federal government to provide financial services to people receiving public assistance.
Statement II: The people who can least afford it have to pay the most for financial services.

Accepted Answer

Statement I is false because there is no such thing as a welfare bank set up by the federal government. Statement II is true because people who are financially struggling often turn to alternative financial services such as payday lenders, which have high-interest rates and fees.

Question 18

Which of the following is not a function of money?

Accepted Answer

Money is not meant to generate income, but rather serve as a means of exchange, a standard of value, and a store of value.

Question 19

In the fractional reserve banking system

Accepted Answer

In the fractional reserve banking system, banks are required to hold only a fraction of their liabilities as reserves to meet withdrawals at any one time. This means that they can use the remaining funds to create loans and increase the money supply. Therefore, option B is the correct statement. Option A is not fully correct as it implies that only a fraction of bank assets are used to create money, whereas it is a fraction of liabilities. Option C is incorrect as it does not accurately describe how the reserve system works. Option D includes all options, but only option B is correct.

Question 20

The precautionary demand for money originates in

Accepted Answer

The precautionary demand for money arises from people's uncertainty about the future and their desire to have liquid assets available for unforeseen needs or emergencies, often referred to as "mad money."

Quiz 13: Money and Banking

Statement I: Until 1980 only commercial banks were legally allowed to issue checking deposits. Statement II: Commercial banks,unlike insurance companies and pension funds,cannot be considered financial intermediaries.

Statement I: Banks require a minimum balance of checking accounts because it cost them money to process each check. Statement II: The American Bankers Association has successfully beaten back attempts to pass legislation requiring banks to provide free check-cashing services to the poor.