Deck 28: The Financial Sector and the Economy

Question 1

The U.S. central bank is a financial institution that:

A)has the sole right to accept deposits and make loans.
B)has the sole right to issue currency.
C)sets borrowing and lending in a country.
D)determines what assets will back a currency.

Answer 1

has the sole right to issue currency.

Question 2

A high-risk premium makes default more likely.

Answer 2

True

Question 3

As long as money serves as a medium of exchange, it also serves as a store of wealth.

Answer 3

True

Question 4

The financial sector is very important to the economy.

Question 5

The Federal Reserve Bank is the U.S. central bank:

A)whose liabilities serve as cash in the United States.
B)whose assets serve as cash in the United States.
C)who holds, in reserve, all financial assets of banks.
D)who holds, in reserve, all financial liabilities of banks.

Question 6

The risk that all loans will default at the same time is called:

A)systemic risk.
B)diversified risk.
C)liquid risk.
D)security risk.

Question 7

In practice, the Fed focuses on changing reserves to change the total money supply.

Question 8

Money can be many things, but it is not:

A)a financial liability.
B)a financial asset.
C)liquid.
D)illiquid.

Question 9

What allows a Federal Reserve note to function as money?

A)Regulation
B)Government
C)Social convention
D)Banks

Question 10

If the reserve ratio is 0.10, the money multiplier is equal to 5.

Question 11

In the real world, policy makers apply the money multiplier to reserves to predict the amount of money in the economy.

Question 12

Cash is an example of a liquid financial asset.

Question 13

The U.S. dollar bills you sometimes have in your wallet are:

A)liabilities of the Federal Reserve.
B)assets of the Federal Reserve.
C)liabilities of the Federal Reserve until it is spent.
D)your liabilities if you hold that note.

Question 14

Money doesn't have to have any inherent value to function as a medium of exchange.

Question 15

When a bank creates loans, it also creates money.

Question 16

The financial sector makes the real sector in a modern economy possible.

Question 17

A financial asset is liquid:

A)if it can be carried easily from one place to another.
B)if it can be readily exchanged for another asset or good.
C)only if it takes the form of cash.
D)if it is held by the public and earning interest.

Question 18

Holding money for the speculative motive is holding cash for unexpected events.

Question 19

The financial sector channels savings back into the spending stream.

Question 20

The Fed is the only formal and legal organization that can create money.

Question 21

Money facilitates trade because it:

A)does not require a double coincidence of wants among individuals.
B)requires a double coincidence of wants among individuals.
C)does not require a medium of exchange.
D)requires carrying other goods around for barter.

Question 22

When a clerk gives you a pair of jeans for your $50 bill, money is serving which function?

A)Medium of exchange
B)Store of real assets
C)Unit of account
D)Store of wealth

Question 23

During periods of high inflation, money becomes:

A)more useful as a unit of account.
B)more useful as a store of value.
C)more useful as a medium of exchange.
D)less useful as a unit of account.

Question 24

When you stuff dollar bills under your mattress, knowing that they will be there next year to help buy your next major purchase, money is serving which function?

A)Medium of exchange
B)Store of real assets
C)Unit of account
D)Store of wealth

Question 25

The financial liability that makes the real economy function smoothly for its liquidity and its acceptability is called:

A)bonds.
B)money.
C)mortgages.
D)stocks.

Question 26

In Book 23 of Homer's Iliad are these words: "The winner was to acquire a fire-straddling tripod valued at twelve oxen by the Akhaians. As for the loser, in their midst Akhilleus placed a woman versatile at crafts, whose value was four oxen." What does this passage tell us about economics in the Iliad?

A)Oxen were used as the unit of account.
B)Oxen were used as the medium of exchange.
C)Oxen were the best way to store wealth.
D)Oxen were used as legal tender.

Question 27

In order to function as a medium of exchange, money must:

A)be backed by gold.
B)maintain a constant value over an extended period of time.
C)be backed by some precious commodity.
D)be generally accepted in exchange for goods and services.

Question 28

People living in the town of Norwich, England, have begun a system of trade called the LETS, which allows people to enter into exchanges without using the British pound. Members offer a particular service, such as babysitting, gardening, and plumbing for which they get Croy credits. They can then use these Croys to buy services from other people. Does this system represent what economists call barter?

A)No, to be true barter, the exchange rate between the Croy and the British pound must be flexible.
B)No, this group has merely replaced one money, the pound, with a less flexible medium of exchange that they call the Croy.
C)Yes, because it does not use the true money, the British pound.
D)Yes, because the Croy is not real money but just a bookkeeping account.

Question 29

Which of the following is not one of the functions of money?

A)Medium of exchange
B)Unit of account
C)Standard of well-being
D)Store of wealth

Question 30

When money is used to set the value of goods such as cars, and TVs, money is serving as a:

A)medium of exchange.
B)unit of account.
C)store of wealth.
D)unit of wealth.

Question 31

Non-liquid assets could perform which of the following functions?

A)Medium of exchange
B)Cash for transactions
C)Store of value
D)Trade without bartering

Question 32

Money is a unit of account because:

A)it is liquid.
B)it is a store of value.
C)goods and assets are priced in terms of it.
D)barter would be impossible without it.

Question 33

When you deposit $200 in your savings account with the objective of withdrawing it later to buy a video game that is about to be offered in the market in the near future, then the $200 is serving which function?

A)Medium of exchange
B)Store of real assets
C)Unit of account
D)Store of wealth

Question 34

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

A)financial asset.
B)financial liability.
C)real asset.
D)real liability.

Question 35

The value and functionality of money are determined by the:

A)lack of credibility in other financial assets.
B)credibility in other financial assets.
C)general acceptability to other people.
D)regulations defined by the Fed.

Question 36

Which of the following is not a necessary characteristic of money?

A)Difficult to counterfeit
B)Available in unlimited supply
C)Durable
D)Divisible

Question 37

In Ithaca, NY, Ithaca Hours, valued at the area's average hourly wage ($10), can be used to buy goods and pay for services. About 5,700 Ithaca Hours are in circulation. Because they are accepted in local stores and accepted by local people as income, Ithaca Hours:

A)although less liquid than Fed Notes, are money because they are accepted as money.
B)are money because they are backed by the local government.
C)are not money because they do not serve as a medium of exchange.
D)are not money because their value depends upon the area's average hourly wage.

Question 38

In POW camps during World War II, nearly everything was traded for cigarettes. For example, one bar of soap cost two cigarettes, and two candy bars cost four cigarettes. During the time of the POW camps, cigarettes:

A)did not serve as money because their value was not backed by government.
B)did not serve as money because no one controlled the supply of cigarettes.
C)served as money for those who smoked.
D)served as money because they served as a unit of account, medium of exchange, and store of wealth.

Question 39

An asset is best able to serve as a medium of exchange if it is:

A)liquid.
B)nonliquid.
C)a store of value.
D)not a store of value.

Question 40

When money is held as an asset, it is serving as a:

A)standard of value.
B)unit of account.
C)medium of exchange.
D)store of wealth.

Question 41

Which of the following components is not included in the M₂ definition of money?

A)M₁
B)Savings and money market accounts
C)Small-denomination time deposits
D)Bonds

Question 42

The M1 measure of money includes which of the following?

A)Currency in circulation
B)Interest payments
C)Savings account deposits
D)Excess reserves

Question 43

The measure of money that best fulfills the medium of exchange function because it is most liquid is:

A)M1.
B)M2.
C)M3.
D)L.

Question 44

M2 includes which of the following?

A)Corporate bonds
B)Government bonds
C)Retail money funds
D)Gold

Question 45

In pre-colonial Central America, the cocoa seed served as a medium of exchange. The use of cocoa seed for transactions was possible because it was:

A)not heavy and bulky.
B)generally accepted among the native Indians.
C)also suitable for eating.
D)easy to grow.

Question 46

When banks store your money in a checking account, they give you checks. These checks:

A)become liabilities to you.
B)become assets of the bank.
C)are another form of money.
D)make your money more liquid.

Question 47

The measure of money most closely correlated with the price level and economic activity is:

A)M1.
B)M2.
C)M3.
D)L.

Question 48

M1 consists primarily of cash in the hands of the public and:

A)savings account balances.
B)commercial paper.
C)checking account deposits.
D)certificates of deposit.

Question 49

Which of the following is not a function of money?

A)Medium of exchange
B)Unit of account
C)Store of wealth
D)Equity instrument

Question 50

In an advertisement for credit cards, the statement is made, "Think of a credit card as smart money." An economist's reaction to this would be that a credit card is:

A)not money.
B)dumb money.
C)simply money.
D)actually better than money.

Question 51

Using a credit card creates a financial:

A)liability for the person using it and a financial asset for the issuer.
B)asset for the person using it and a financial liability for the issuer.
C)liability for both the person using it and issuer.
D)asset for both the person using it and issuer.

Question 52

Checking account balances are:

A)not money.
B)not included in M1.
C)included in M2 but not M1.
D)included in M1 and serve as a medium of exchange.

Question 53

Why do people often hold money instead of bonds?

A)Money is less liquid than bonds.
B)Money is needed for transactions.
C)Bonds pay interest.
D)Of the two, only money is a store of wealth.

Question 54

M1 includes which of the following?

A)Time deposits
B)Checking account deposits
C)Gold certificates
D)Money market mutual funds

Question 55

Which of the following is included in the M₁ definition of money?

A)Checking accounts
B)Time deposits
C)Reserves
D)Savings and money market accounts

Question 56

Which of the following will be affected if consumers take money out of checking accounts to pay their credit cards?

A)M1
B)M2
C)M3
D)L

Question 57

The chief difference between the M1 and M2 measures of the money supply is:

A)the supply of M1 exceeds the supply of M2.
B)M2 excludes currency.
C)M1 is a broader, more comprehensive measure.
D)M2 includes assets with a lower liquidity than those in M1.

Question 58

Checking account deposits are classified as money because:

A)they earn interest income for the depositor.
B)they are ultimately obligations of the Treasury.
C)banks hold currency equal to their outstanding deposits.
D)they can be readily used to make purchases and pay debts.

Question 59

Small-denomination time deposits are included in:

A)M1.
B)M2.
C)currency.
D)checking accounts.

Question 60

Savings and money market accounts are not included in:

A)M1.
B)M2.
C)M3.
D)L.

Question 61

The process of packaging a variety of loans together and slicing them up into new financial instruments is called:

A)defaulting.
B)diversifying.
C)liquidating.
D)securitization.

Question 62

Credit cards are:

A)financial assets for the holder.
B)financial assets for the issuer.
C)financial liabilities for the issuer.
D)neither financial liabilities nor financial assets.

Question 63

When considering policy, measures of access to credit can often be:

A)measures of individual assets.
B)unimportant to the economy.
C)included in the measures of money.
D)as important as the measure of money.

Question 64

Modern bankers:

A)focus on asset management.
B)focus on liability management.
C)focus on both asset management and liability management.
D)are unconcerned with asset and liability management and instead are concerned with how to make money.

Question 65

Asset management refers to:

A)a bank's handling of how much interest it pays on deposits.
B)a bank's handling of loans and other assets.
C)how a bank attracts deposits and what it pays for them.
D)how a bank manages its accounts payable.

Question 66

The largest component of M1 is:

A)checking accounts.
B)saving and money market accounts.
C)currency.
D)reserves.

Question 67

Credit cards create:

A)financial liabilities for those who use them.
B)financial liabilities for the issuer once they are used by the holder.
C)money for those who use them.
D)money for those who issue them.

Question 68

A bank's required reserves are:

A)a financial asset for the Fed.
B)a financial liability for the bank.
C)counted as money.
D)a financial liability for the Fed.

Question 69

Why do banks package loans into securities?

A)The banking regulations require them to do so.
B)To get around adhering to current banking regulations.
C)To spread the risk of default and increase liquidity.
D)To take advantage of tax breaks passed by the federal government as part of stimulus packages.

Question 70

When the Fed prints and issues bills, it creates:

A)a financial liability for the holder of the IOU.
B)a financial asset for itself.
C)a real asset.
D)money.

Question 71

Early medieval bankers were similar to modern bankers in that they:

A)would also lend a portion of the deposits.
B)could not create money.
C)took deposits in gold.
D)were not subject to any regulation.

Question 72

Credit cards:

A)reduce the value of holding money.
B)create the need to hold highly liquid assets.
C)create money.
D)are financial assets.

Question 73

A commercial bank is a financial institution that:

A)prints and distributes currency.
B)borrows from and lends to individuals and businesses.
C)holds the savings of individuals for a fee until they need them.
D)determines the value of currency.

Question 74

The goldsmith's ability to create money was based on the fact that:

A)gold receipts were rarely exchanged for gold.
B)the goldsmith was required to keep 100 percent gold reserves.
C)consumers preferred to use gold for transactions.
D)withdrawals of gold tended to exceed deposits of gold.

Question 75

If the reserve requirement is 20 percent, and banks keep no excess reserves, an increase in an initial inflow of $100 into the banking system will cause an increase in the money supply of:

A)$20.
B)$50.
C)$100.
D)$500.

Question 76

Bank reserves are:

A)real assets deposited at banks.
B)cash and deposits a bank keeps on hand or at the central bank.
C)loans issued by banks deposited into checking accounts.
D)checks held by depositors.

Question 77

Banks hold people's cash for free, and sometimes even pay for the privilege of holding it, because:

A)they are nice.
B)deposits allow banks to make profitable loans.
C)the Federal Reserve requires that they do so.
D)the cash can be deposited at the Federal Reserve Bank to earn interest.

Question 78

If you purchase a good on credit, you are:

A)exchanging a financial asset for another financial asset.
B)incurring a real liability to acquire a real asset.
C)incurring a financial liability to acquire a real asset.
D)exchanging a financial liability for a real liability.

Question 79

A commercial bank's reserve ratio equals the ratio of its reserves to its:

A)assets.
B)required reserves.
C)deposits.
D)excess reserves.

Question 80

Liability management refers to:

A)a bank's handling of the assets in individual trust funds.
B)a bank's handling of loans and other assets.
C)how a bank attracts deposits and what it pays for them.
D)how a bank manages its accounts receivable.