Deck 13: Money and Banks

Question 1

Which of the following is true about the quantity of money in the U.S.economy?

A)It is equal to the amount of currency in circulation.
B)It is much greater than the amount of currency in circulation.
C)It is equal to the value of the government's gold reserves.
D)It is equal to the total amount of income.

Answer 1

It is much greater than the amount of currency in circulation.

Question 2

Trusted money does all of the following except

A)Reduce the efficiency with which market exchanges take place.
B)Serve as a mechanism for transforming current income into future purchases.
C)Promote efficient division of labor.
D)Facilitate the continuous series of exchanges that characterizes a market economy.

Answer 2

Reduce the efficiency with which market exchanges take place.

Question 3

A bank account that permits direct payment to a third party is a

A)Savings account.
B)Transactions account.
C)Money market mutual fund.
D)Traveler's check.

Answer 3

Transactions account.

Question 4

Which of the following gave the U.S.federal government permanent authority to issue money?

A)The Constitution of the United States in 1779.
B)The National Banking Act of 1863.
C)The creation of the FDIC and FSLIC in 1933.
D)The Monetary Control Act of 1980.

Question 5

When money is used to acquire goods and services,it is functioning as a

A)Medium of exchange.
B)Store of value.
C)Standard of account.
D)Equation of value.

Question 6

Which of the following is an example of barter?

A)Jordan buys eggs with Canadian dollars from Ryan's Grocery,and Ryan buys gas from Jordan's Gas Station with Japanese yen.
B)Nicki uses her mom's credit card to purchase her textbooks online.
C)Keisha takes care of the neighbor's children,and the neighbor mows Keisha's yard as repayment.
D)Natalie buys gum at a convenience store and tells the cashier to keep the dollar change.

Question 7

Which of the following is not included in the narrowest definition of the money supply or M1?

A)Currency in circulation.
B)Transactions account balances.
C)Credit card balances.
D)Traveler's checks.

Question 8

Which of the following is not correct about the money kept in transactions accounts?

A)It permits direct payment to a third party.
B)It is backed by gold held by the government.
C)It is part of the basic money supply.
D)It is a good substitute for cash in many cases.

Question 9

Money is functioning as a standard of value when you

A)Use it to compare two houses that are different prices.
B)Buy jeans at the mall.
C)Buy a rare baseball card that you expect will increase in value.
D)Trade a cup of sugar for two eggs.

Question 10

Which of the following statements is not correct about the U.S.monetary system?

A)The federal government did not print paper money until the Civil War.
B)Between 1789 and 1865,paper money was issued by hundreds of state-chartered banks.
C)Credit cards are the most common form of money today.
D)Early in U.S. history, the money supply consisted of items such as tobacco and bullets.

Question 11

Money is functioning as a store of value when you

A)Use it to compare the cost of tuition 10 years ago to the cost today.
B)Take out a student loan to buy books.
C)Save your cash to pay for tuition next semester.
D)Pay your tuition in installments rather than all at one time.

Question 12

The basic money supply or M1 includes

A)Currency in circulation,transactions accounts,and traveler's checks.
B)Currency in circulation,transactions accounts,and savings accounts.
C)Currency in circulation,transactions accounts,traveler's checks,and money market mutual funds.
D)Currency in circulation, savings accounts, and credit card balances.

Question 13

When money serves as a mechanism for transforming current income into future purchases,it is functioning as a

A)Medium of exchange.
B)Store of value.
C)Standard of account.
D)Standard of value.

Question 14

The majority of the basic money supply (M1)in the United States is in the form of

A)Savings accounts and currency in circulation.
B)Certificates of deposit and transactions accounts.
C)Transactions accounts and currency in circulation.
D)Gold and traveler's checks.

Question 15

Barter

A)Is the direct exchange of one good for another.
B)Is considered to be an efficient process for an economy.
C)Makes market transactions easier and less time-consuming.
D)Requires that gold be used to assess value.

Question 16

Which of the following is not a transactions account?

A)A share draft account.
B)A savings account.
C)A NOW account.
D)A checking account.

Question 17

Which of the following is not a characteristic of money?

A)Mechanism for barter.
B)Medium of exchange.
C)Store of value.
D)Standard of value.

Question 18

The direct exchange of one good for another

A)Is barter.
B)Is most efficient for an economy.
C)Facilitates specialization in production.
D)Facilitates market exchanges.

Question 19

Farmer Brown wants some bacon for breakfast.He gets the bacon from Farmer Hernandez by giving her a dozen eggs.This type of transaction is referred to as

A)A farm transaction.
B)A money exchange.
C)Barter.
D)An efficient exchange of resources.

Question 20

Which of the following is not true about M1?

A)It includes the most liquid forms of money.
B)It is the narrowest definition of the money supply.
C)Savings accounts makes up approximately one-third of it.
D)Currency in circulation makes up approximately half of it.

Question 21

Which of the following is not considered to be a private depository institution?

A)The Federal Reserve.
B)Mutual savings banks.
C)Savings and loan associations.
D)Commercial banks.

Question 22

Suppose Megan withdraws $75 from her savings account and deposits it into her checking account.This transaction causes M1 to

A)Increase by $75 and M2 to remain the same.
B)Decrease by $75 and M2 to remain the same.
C)Increase by $75 and M2 to decrease by $75.
D)Remain the same and M2 to increase by $75.

Question 23

The different components of the money supply reflect

A)Variations in liquidity and accessibility of assets.
B)Whether deposits are domestic or international.
C)How often depositors use their accounts.
D)Whether the deposits are earned or inherited.

Question 24

Which of the following is included in M2?

A)Treasury bills.
B)Commercial paper.
C)Savings accounts.
D)Overnight Eurodollars.

Question 25

Transactions account balances are included in

A)M1 only.
B)M2 only.
C)Both M1 and M2.
D)None of the choices are correct.

Question 26

Which of the following is not included in transactions accounts?

A)A checking account at a commercial bank.
B)A money market mutual fund.
C)A credit union share draft.
D)A demand deposit account at a mutual savings bank.

Question 27

Traveler's checks are included in which of the following?

A)Both M1 and M2.
B)M1 only.
C)M2 only.
D)None of the choices are correct.

Question 28

Bradley digs out $50 from his cookie jar and deposits it in his checking account.The immediate result of this transaction is that M1 has

A)Not changed.
B)Increased by more than $50.
C)Increased by less than $50.
D)Increased by $50.

Question 29

One of the main functions of banks is

A)Borrowing money and lending to savers.
B)Creating money.
C)Ownership of projects in which they invest.
D)Maintaining a constant money supply.

Question 30

Savings accounts are included in

A)M1 only.
B)M2 only.
C)M1 and M2.
D)None of the choices are correct.

Question 31

The various money supply measures (M1 and M2)are used to distinguish the

A)Rate at which money flows through the economy.
B)Liquidity and accessibility of assets.
C)Speed with which banks transfer funds between savings and checking accounts.
D)Speed with which banks transfer funds between themselves.

Question 32

When a bank makes a loan,it

A)Reduces the amount of money in the monetary system.
B)Creates a transactions account balance for the borrower.
C)Is insured against losses from borrowers who fail to pay off their loans.
D)Must hold deposits of an equal amount to offset the loan.

Question 33

Which of the following is not included in any of the measures of the money supply?

A)Credit union share drafts.
B)Cash in the vault of a commercial bank.
C)Currency in circulation outside of commercial banks.
D)Transactions account balances at mutual savings banks.

Question 34

NOW and ATS accounts are included in

A)M1 only.
B)M2 only.
C)Both M1 and M2.
D)None of the choices are correct.

Question 35

Suppose Oscar withdraws $100 from his checking account and deposits it into his savings account.This transaction causes M1 to

A)Increase by $100 and M2 to remain the same.
B)Decrease by $100 and M2 to remain the same.
C)Decrease by $100 and M2 to increase by $100.
D)Remain the same and M2 to increase by $100.

Question 36

Currency in circulation is included in

A)M1 only.
B)M2 only.
C)Both M1 and M2.
D)None of the choices are correct.

Question 37

One of the essential functions a bank performs is that of

A)Creating money by lending required reserves.
B)Participating in the stock market.
C)Transferring money from savers to borrowers.
D)Purchasing government bonds.

Question 38

Which of the following appears in M2 but not in M1?

A)Savings accounts.
B)NOW and ATS accounts.
C)Traveler's checks.
D)Credit union share drafts.

Question 39

Deposit creation occurs when

A)A bank lends money.
B)A person takes money out of one bank and puts it in another bank.
C)A bank borrows dollars from the Federal Reserve.
D)A person takes money out of the banking system and holds it as cash.

Question 40

Suppose Jason takes $150 he had in his wallet and deposits it into his checking account.The immediate result of this transaction is that M1

A)Increases by $150 and M2 remains the same.
B)Decreases by $150 and M2 remains the same.
C)And M2 do not change.
D)Remains the same and M2 increases by $150.

Question 41

Initially a bank has a required reserve ratio of 20 percent and no excess reserves.If $5,000 is deposited into the bank,then initially,ceteris paribus,

A)This bank can increase its loans by $5,000.
B)This bank can increase its loans by $4,000.
C)Total reserves will increase by $4,000.
D)Required reserves will increase by $5,000.

Question 42

Which of the following sets the legal minimum reserve ratio?

A)The commercial banks.
B)The U.S.Treasury.
C)The Federal Reserve.
D)Congress.

Question 43

Suppose a bank has $500,000 in deposits and a required reserve ratio of 10 percent.Then required reserves are

A)$5,000,000.
B)$500,000.
C)$50,000.
D)$10,000.

Question 44

Suppose a bank has $160,000 in deposits and a required reserve ratio of 10 percent.Then required reserves are

A)$16,000.
B)$160,000.
C)$1,600,000.
D)$1,600.

Question 45

A single bank with $20,000 of reserves and a reserve ratio of 5 percent could support total transactions account balances of at most

A)$400,000.
B)$1,000.
C)$100,000.
D)$20,000.

Question 46

Which of the following reflects the concept of fractional reserves?

A)The money multiplier is greater than 1.
B)Excess reserves are equal to 0.
C)Required reserves are equal to total reserves.
D)Banks can lend only their required reserves.

Question 47

Which of the following is a bank liability?

A)Reserve deposits at the Fed.
B)Securities the bank has purchased.
C)Transactions account balances.
D)Loans made to customers.

Question 48

A single bank with $10,000 of reserves and a reserve ratio of 25 percent could support total transactions account balances of at most

A)$10,000.
B)$5,000.
C)$40,000.
D)$25,000.

Question 49

Suppose a bank has $300,000 in deposits and a required reserve ratio of 15 percent.Then required reserves are

A)$4,500.
B)$45,000.
C)$255,000.
D)$300,000.

Question 50

Required reserves represent

A)A leakage from the flow of money.
B)The desire on the part of some banks to hold funds and not lend them out.
C)Dollars that may be lent.
D)A flaw in the banking system.

Question 51

The banking system can lend the sum of its excess reserves because

A)Banks are required to keep only a fraction of deposits on reserve.
B)Bank assets are greater than bank liabilities.
C)Required reserves are a leakage from the banking system.
D)The money multiplier is less than 1.

Question 52

The ratio of a bank's total reserves to its total transactions deposits is known as the

A)Required reserves.
B)Reserve ratio.
C)Excess reserves.
D)Deposit ratio.

Question 53

Excess reserves are

A)Total reserves less required reserves.
B)Total reserves less transactions account balances.
C)Required reserves less demand deposits.
D)Bank reserves in excess of vault cash.

Question 54

Suppose University Bank has zero excess reserves.If the required reserve ratio decreases,the

A)Bank's assets will increase.
B)Bank will not have enough required reserves.
C)Bank will be able to make more loans.
D)Money multiplier will decrease.

Question 55

Banks are required to keep a minimum amount of funds in reserve because

A)Depositors may decide to withdraw funds at any time.
B)The Fed may decide to withdraw funds at any time.
C)The bank may decide to increase aggregate demand at any time.
D)Borrowers may decide to repay loans ahead of schedule.

Question 56

The term fractional reserves refers to

A)The fact that reserves are split among many banks.
B)Reserves being a small fraction of total transactions account balances.
C)The ratio of required reserves to total loans.
D)The ratio of excess reserves to total loans.

Question 57

Which of the following explains why banks try to keep their holdings of excess reserves low?

A)To maximize profits.
B)To keep the money multiplier low.
C)To escape Fed penalties.
D)To please bank examiners.

Question 58

Initially a bank has a required reserve ratio of 10 percent and no excess reserves.If $1,000 is deposited into the bank,then,ceteris paribus,

A)This bank can increase its loans by $900.
B)This bank can increase its loans by $1,000.
C)Total reserves will increase by $900.
D)Required reserves will increase by $1,000.

Question 59

When cash or coins are initially deposited into a bank,

A)Neither the composition nor the size of the money supply changes.
B)The composition of the money supply does not change,but the size of the money supply does change.
C)The composition of the money supply changes,but the size of the money supply does not change.
D)Both the composition and the size of the money supply change.

Question 60

For a small bank in a large banking system,excess reserves are equal to the

A)Amount of money that the U.S.Treasury makes available for loans.
B)The amount of reserves that a bank must hold equal to the loans that it makes.
C)The amount of loans a bank can make after meeting the reserve requirement.
D)The difference between transactions account balances and loans.

Question 61

Suppose a bank has $1 million in deposits,a required reserve ratio of 25 percent,and total reserves of $600,000.Then it has excess reserves of

A)$250,000.
B)$600,000.
C)$350,000.
D)$1,000,000.

Question 62

Suppose a banking system has a required reserve ratio of 0.10.How much can the money supply increase in response to a $500 increase in excess reserves for the whole banking system?

A)$50.
B)$500.
C)$5,000.
D)$4,500.

Question 63

Refer to Table 13.1.With a required reserve ratio of 12 percent,XYZ Bank would have excess reserves of

A)$100,000.
B)$48,000.
C)$52,000.
D)$12,000.

Question 64

Suppose a bank has $600,000 in deposits,a required reserve ratio of 5 percent,and bank reserves of $90,000.Then the bank can make new loans in the amount of

A)$5,400.
B)$30,000.
C)$60,000.
D)$90,000.

Question 65

Suppose a banking system has $200 million in deposits,a required reserve ratio of 10 percent,and total bank reserves of $35 million.Then the potential increase in deposit creation for the whole banking system is equal to

A)$3 million.
B)$15 million.
C)$150 million.
D)$0.

Question 66

An essential function for a bank is to

A)Maximize its assets.
B)Create money through lending.
C)Lend all of its deposits.
D)Minimize its reserve ratio.

Question 67

If the banking system has demand deposits of $200,000,total reserves equal to $60,000,and a required reserve ratio of 25 percent,the banking system can increase the volume of loans by a maximum of

A)$40,000.
B)$60,000.
C)$10,000.
D)$200,000.

Question 68

If the banking system has demand deposits of $100,000,total reserves equal to $20,000,and a required reserve ratio of 20 percent,the banking system can increase the volume of loans by

A)$0.
B)$20,000.
C)$80,000.
D)$100,000.

Question 69

Suppose a banking system has $100,000 in deposits,a required reserve ratio of 25 percent,and total bank reserves for the whole system of $25,000.Then the potential increase in deposit creation for the whole system is equal to

A)$0.
B)$25,000.
C)$50,000.
D)$100,000.

Question 70

Suppose a bank has $200,000 in deposits,a required reserve ratio of 25 percent,and bank reserves of $100,000.Then this bank can make new loans in the amount of

A)$100,000.
B)$50,000.
C)$25,000.
D)$20,000.

Question 71

Refer to Table 13.1.If XYZ Bank has a required reserve ratio of 10 percent and loan proceeds are not redeposited,it can legally increase its loans by

A)$60,000.
B)$40,000.
C)$20,000.
D)$10,000.

Question 72

Refer to Table 13.2.If ABC Bank has a required reserve ratio of 15 percent,it can legally make a onetime maximum loan of

A)$30,000.
B)$40,000.
C)$50,000.
D)$80,000.

Question 73

Ceteris paribus,the money supply becomes smaller when

A)A loan is repaid to the banking system by a bank customer.
B)An individual deposits currency into her transactions account.
C)The Federal Reserve reduces the reserve requirement.
D)A bank uses its excess reserves to make a loan.

Question 74

If excess reserves are $10,000,demand deposits are $100,000,and the required reserve ratio is 10 percent,then total reserves are

A)$0.
B)$20,000.
C)$10,000.
D)$110,000.

Question 75

If the banking system has demand deposits of $100,000,total reserves equal to $15,000,and a required reserve ratio of 10 percent,the banking system can increase the volume of loans by a maximum of

A)$5,000.
B)$50,000.
C)$85,000.
D)$100,000.

Question 76

Suppose a bank has $200,000 in deposits,a required reserve ratio of 15 percent,and total reserves of $100,000.Then it has excess reserves of

A)$70,000.
B)$30,000.
C)Negative $100,000.
D)$200,000.

Question 77

Refer to Table 13.2.With a required reserve ratio of 10 percent,ABC Bank would have excess reserves of

A)$20,000.
B)$40,000.
C)$60,000.
D)$140,000.

Question 78

Suppose a banking system has a required reserve ratio of 10 percent.What is the maximum possible increase in the money supply in response to a $2 billion increase in excess reserves for the whole banking system?

A)$20 billion.
B)$2 billion.
C)$200 million.
D)$210 million.

Question 79

If excess reserves are $30,000,demand deposits are $100,000,and the required reserve ratio is 15 percent,then total reserves are

A)$45,000.
B)$15,000.
C)$30,000.
D)$130,000.

Question 80

Refer to Table 13.2.With total reserves of $80,000 and a required reserve ratio of 25 percent,ABC Bank could support maximum transactions account balances of

A)$20,000.
B)$320,000.
C)$80,000.