Deck 16: Money and the Banking System

Question 1

As inflation rates increase, money becomes less useful as a

A)unit of account.
B)store of value.
C)medium of exchange.
D)double coincidence of wants.

Answer 1

store of value.

Question 2

The stored value of money over time should not change significantly as long as the level of inflation is

A)high.
B)low.
C)adjusted by the government.
D)less than your pay increases.

Answer 2

low.

Question 3

In the _______ increases in the supply of money will _______.

A)short run; raise total demand and output
B)long run; raise total demand and output
C)long run; lead to lower prices
D)short run; decrease total demand and output

Answer 3

short run; raise total demand and output

Question 4

When money is accepted as payment for a good or service, it is being used as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)a mechanism for transforming current purchases into future purchases.

Question 5

If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a

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

Question 6

Money that has no intrinsic value and is created by a government decree is called

A)barter money.
B)commodity money.
C)fiat money.
D)asset money.

Question 7

Money is

A)anything that is regularly used and generally accepted in economic transactions or exchanges.
B)necessary to conduct economic transactions.
C)facilitates specialization in production.
D)anything the government declares to have value.

Question 8

Which of the following are examples of ʺmediums of exchangeʺ?

A)money for goods
B)goods for goods
C)pigs for chickens
D)all of the above

Question 9

What gives money value under a fiat system?

A)Fiat money is backed by gold.
B)The supply of fiat money is controlled by the government.
C)Fiat money is also a commodity.
D)Fiat money is the same as Treasury bonds.

Question 10

When money is used to express the value of goods and services, it is functioning as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)store of purchasing power.

Question 11

If the prices of goods and services were expressed in terms of carved wooden beads, then the carved wooden beads would be serving as a

A)medium of exchange.
B)store of value.
C)unit of account.
D)mechanism for transforming present purchases into future purchases.

Question 12

M1

A)is the sum of currency plus travelerʹs checks.
B)is the narrowest definition of the money supply.
C)includes small time deposits.
D)includes credit cards.

Question 13

Currency is included in

A)M1 only.
B)M2 only.
C)neither M1 nor M2.
D)both M1 and M2.

Question 14

Money solves the dilemma of a double coincidence of wants by serving as a

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

Question 15

Travelerʹs checks are included in

A)M1 only.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 16

Which of the following can be used as money?

A)checks
B)cigarettes
C)precious stones
D)all of the above

Question 17

In order for a barter transaction to be successful, there must be a

A)market for the goods.
B)high demand for a certain item.
C)double coincidence of wants.
D)federal tax law in effect.

Question 18

Checking account balances are included in

A)M1 only.
B)M2 only.
C)both M1 and M2.
D)neither M1 nor M2.

Question 19

The supply of money in the U.S. economy is determined primarily by

A)decisions made by the Federal Reserve and the U.S. Treasury.
B)the actions of the Federal Reserve and the banking system.
C)consumers and the banking system.
D)the demand for money in the economy.

Question 20

Suppose after the semester ends, you take a trip to a tropical island. Upon arriving at the island, you make a stop at one of the markets and notice that everyone is carrying around jars full of little turtles. You also notice the person in line in front of you just paid for a bottle of rum with 6 turtles. Someone else just bought a straw hat for two turtles. Thinking back to your economics class as painful as that may be), you would conclude that

A)this is a barter economy.
B)those little turtles are serving the function of money.
C)turtles are valueless.
D)turtle soup is a delicacy.

Question 21

Which of the following is NOT included in M1 or M2?

A)checking account balances
B)currency in circulation outside of commercial banks
C)travelerʹs checks
D)credit card balances

Question 22

Before they can be used in regular exchanges, the assets that make up M2 must often

A)have their interest computed.
B)be converted to M1 assets.
C)be paid off if they are credit cards.
D)have reached term if they are insurance policies.

Question 23

Along with currency not in banks and deposits in checking accounts, what is another component of the M1 measure of money?

A)credit cards
B)debit cards
C)travelerʹs checks
D)prepaid accounts

Question 24

About 51 percent of M1 is composed of

A)demand deposits.
B)savings deposits.
C)money market mutual funds.
D)currency held by the public.

Question 25

Financial monetary assets which often cannot be readily used in commercial exchanges are included in

A)M1.
B)M2.
C)credit cards.
D)prepaid accounts.

Question 26

Table 16.1
$\begin{array}{|l|c|}\hline \text { Currency held by the public } & \$ 450 \text { billion } \\\hline \text { Demand deposits } & 220 \text { billion } \\\hline \text { Other checkable deposits } & 170 \text { billion } \\\hline \text { Traveler's checks } & 2 \text { billion } \\\hline \text { Savingsdeposits } & 800 \text { billion } \\\hline \text { Small time deposits } & 50 \text { billion } \\\hline \text { Money market mutualfunds } & 170 \text { billion }\\\hline\end{array}$


-According to the information in Table 16.1, M1 is equal to

A)$620 billion.
B)$672 billion.
C)$842 billion.
D)$1,012 billion.

Question 27

Economists use different definitions of money because

A)there are differences in the frequency with which depositors use their accounts.
B)deposits can be domestic or international.
C)deposits may be held at banks or savings and loans.
D)it is not always clear which assets are used primarily as money.

Question 28

Which of the following appears in M2 and NOT M1?

A)currency
B)checking account balances
C)money market mutual funds
D)travelerʹs checks

Question 29

Small time deposits of $100,000 or less are classified as

A)part of M1.
B)part of M2.
C)FDIC insured.
D)highly liquid.

Question 30

Which of the following is NOT included in M1?

A)savings accounts
B)deposits in checking accounts
C)deposits in checking accounts that pay interest
D)travelerʹs checks

Question 31

Money market mutual funds are included in

A)M1.
B)M2.
C)both M1 and M2.
D)neither M1 nor M2.

Question 32

Table 16.1
$\begin{array}{|l|c|}\hline \text { Currency held by the public } & \$ 450 \text { billion } \\\hline \text { Demand deposits } & 220 \text { billion } \\\hline \text { Other checkable deposits } & 170 \text { billion } \\\hline \text { Traveler's checks } & 2 \text { billion } \\\hline \text { Savingsdeposits } & 800 \text { billion } \\\hline \text { Small time deposits } & 50 \text { billion } \\\hline \text { Money market mutualfunds } & 170 \text { billion }\\\hline\end{array}$


-According to the information in Table 16.1, M2 is equal to

A)$840 billion.
B)$1,062 billion.
C)$1,692 billion.
D)$1,862 billion.

Question 33

Checking accounts that pay interest are included in the

A)ʺdemand depositsʺ part of M1.
B)ʺother checkable depositsʺ part of M1.
C)ʺsavings depositsʺ part of M2.
D)ʺmoney market mutual funds depositsʺ part of M2.

Question 34

In the 1980s, a new category entitled _______ was added to M1.

A)travelerʹs checks
B)demand deposits
C)other checkable deposits
D)money market mutual fund deposits

Question 35

Which of the following is included in M2?

A)commercial paper
B)U.S. Treasury bonds
C)savings accounts
D)stocks

Question 36

Deposits in savings accounts are included in

A)M1.
B)M2.
C)both M1 and M2.
D)neither M1 nor M2.

Question 37

A reason that economists keep an eye on both M2 and M1 is because

A)M2 is more accurate than M1.
B)both fluctuate widely and frequently in total dollar value.
C)money market accounts are sometimes used like checking accounts and sometimes like savings accounts.
D)during a recession, M1 is meaningless.

Question 38

The smallest single component of M1 is

A)demand deposits.
B)savings account balances.
C)other checkable deposits.
D)travelerʹs checks.

Question 39

The largest single component of M2 is

A)demand deposits.
B)savings deposits.
C)money market mutual funds.
D)currency held by the public.

Question 40

In the United States economy, what is the basic measure of money?

A)wealth
B)M1
C)disposable income
D)commodities

Question 41

Money market mutual funds are hard to classify because they are used both for making transactions and savings.

Question 42

Recall the Application about the cities, school boards, and companies that issued their own currency
during the Great Depression to answer the following question(s).
According to this Application, at its peak in the 1930s, about $1 billion in currency issued by cities was in circulation during the Great Depression. If people using the currency had enough confidence in this privately-issued scrip to hold onto it for use in future transactions, the currency was acting as a

A)medium of exchange
B)unit of account.
C)store of value.
D)commodity money.

Question 43

Credits cards are NOT a part of the M1 or M2 money supply.

Question 44

In the United States today, the government will exchange gold or silver for paper money.

Question 45

Define ?money.?

Question 46

M1 is larger than M2.

Question 47

Credit cards are regularly used in economic exchanges, so credit card balances are included in the definition of money.

Question 48

Fiat money refers to a monetary system in which gold backs up paper money.

Question 49

Money solves the problem of double coincidence of wants that would regularly occur under a system of credit.

Question 50

The U.S. government is continually adding security features to its paper currency to help make counterfeit money easier to detect. If counterfeit currency remained undetected, a vast increase in the supply of counterfeit U.S. currency would

A)decrease aggregate demand in the short run.
B)lead to inflation.
C)reduce the amount of M1.
D)lower the nominal income of the average U.S. worker.

Question 51

Summary of the article:
Funny money no laughing matter in recession
By Alex Johnson
msnbc.com
August 7, 2009
According to the U.S. Secret Service, during a three-month period in 2009 as much as $60,000 in counterfeit
currency had been spread throughout central North Carolina. Before being arrested by sheriffʹs deputies, two
teenagers were believed to be responsible for creating hundreds of $100 bills which fooled not only shop
owners and bank tellers, but also were undetectable with counterfeit-detecting iodine pens. Law enforcement
officials have reported an increase in counterfeit currency since the beginning of the most recent recession. In
addition to North Carolina, a number of counterfeit bills have turned up in Pennsylvania, Florida and
Indiana, and Texas.
The Secret Service states that counterfeiting is not a major issue, and estimates that only three-tenths of one
percent of all currency in circulation is counterfeit, but this is three times greater than just ten years ago.
Based on the Secret Service estimates and the Federal Reserveʹs calculation of paper money in circulation in
June 2009, approximately $2.6 billion in U.S. paper currency would be counterfeit. Some believe the number
is even higher since counterfeiters generally produce larger denomination bills, preferring to produce $20s,
$50s, and $100s.
The estimates of counterfeit currency in circulation are strictly estimates, as the Secret Service and law
enforcement officials admit that it is impossible to obtain an exact measurement of counterfeiting, especially
since successful counterfeit bills remain undetected.
Undetected counterfeit currency which is spent and circulated in the marketplace is an example of the counterfeit currency being used as a

A)medium of exchange.
B)commodity money.
C)store of value.
D)bank reserve.

Question 52

Inflation makes money an imperfect store of value.

Question 53

An example of money is

A)a dollar bill.
B)a checking account balance.
C)a travelerʹs check.
D)all of the above

Question 54

In order for money to be an effective medium of exchange, it is important to have it serve as a unit of account.

Question 55

Money is the standard of exchange by which any type of goods can be purchased.

Question 56

Recall the Application about the cities, school boards, and companies that issued their own currency
during the Great Depression to answer the following question(s).
According to this Application, some of the currency issued by cities during the Great Depression looked like regular government-issued money. If this currency had nothing backing its value and was simply created by decree of the issuing city governments, the city-issued money would be considered

A)commodity money.
B)fiat money.
C)barter money.
D)gold standard money.

Question 57

As long as counterfeit U.S. currency remains undetected and in circulation, an increase in the U.S. inflation rate would essentially

A)decrease the real value of the counterfeit currency.
B)increase the real value of the counterfeit currency.
C)decrease the nominal value of the counterfeit currency.
D)increase the nominal value of the counterfeit currency.

Question 58

Summary of the article:
Funny money no laughing matter in recession
By Alex Johnson
msnbc.com
August 7, 2009
According to the U.S. Secret Service, during a three-month period in 2009 as much as $60,000 in counterfeit
currency had been spread throughout central North Carolina. Before being arrested by sheriffʹs deputies, two
teenagers were believed to be responsible for creating hundreds of $100 bills which fooled not only shop
owners and bank tellers, but also were undetectable with counterfeit-detecting iodine pens. Law enforcement
officials have reported an increase in counterfeit currency since the beginning of the most recent recession. In
addition to North Carolina, a number of counterfeit bills have turned up in Pennsylvania, Florida and
Indiana, and Texas.
The Secret Service states that counterfeiting is not a major issue, and estimates that only three-tenths of one
percent of all currency in circulation is counterfeit, but this is three times greater than just ten years ago.
Based on the Secret Service estimates and the Federal Reserveʹs calculation of paper money in circulation in
June 2009, approximately $2.6 billion in U.S. paper currency would be counterfeit. Some believe the number
is even higher since counterfeiters generally produce larger denomination bills, preferring to produce $20s,
$50s, and $100s.
The estimates of counterfeit currency in circulation are strictly estimates, as the Secret Service and law
enforcement officials admit that it is impossible to obtain an exact measurement of counterfeiting, especially
since successful counterfeit bills remain undetected.
Undetected counterfeit U.S. currency being held by the public both at home and abroad will impact the level of

A)the reserve ratio.
B)the money multiplier.
C)M1.
D)commodity money.

Question 59

Economists use M2 to measure the amount of money that is regularly used in transactions.

Question 60

Recall the Application about the cities, school boards, and companies that issued their own currency
during the Great Depression to answer the following question(s).
According to this Application, at its peak in the 1930s, about $1 billion in currency issued by cities was in circulation during the Great Depression. When people used this currency to execute transactions, this currency was being used as a

A)medium of exchange.
B)unit of account.
C)store of value.
D)commodity money.

Question 61

Given the following information about AAA bank: $\begin{array}{lr}\text { Bank Deposits } & \$ 200,000 \\\text { Loans } & 100,000 \\\text { Required Reserves } & 40,000 \\\text { Excess Reserves } & 60,000\end{array}$
What is the reserve ratio?

A)50 percent
B)40 percent
C)20 percent
D)10 percent

Question 62

The fraction of deposits that banks are required by law to hold and not lend out are called its

A)reserves.
B)excess reserves.
C)required reserves.
D)net worth.

Question 63

Which one of the following statements is true?

A)Demand deposits are assets of a bank.
B)A bankʹs assets plus its liabilities equals must equal zero.
C)A bankʹs reserves can only be kept as cash in its vault.
D)Assets generate income for a bank.

Question 64

What are the components of M2?

Question 65

What is a commodity money system?

Question 66

Loans are examples of a bankʹs

A)assets.
B)liabilities.
C)net worth.
D)balance sheet.

Question 67

What is a gold standard?

Question 68

Logan finds $10 in his jacket pocket and deposits it into a bank. As a result of this single transaction, M1 has

A)increased by $10.
B)increased by more than $10.
C)increased by less than $10.
D)not changed.

Question 69

Which of the following is a bank asset?

A)demand deposits
B)savings account deposits
C)certificates of deposit held by the public
D)loans made to customers

Question 70

One of the essential functions that a bank performs is

A)purchasing government bonds.
B)creating deposits by lending required reserves.
C)transferring money from savers to lenders.
D)owning assets like real estate.

Question 71

What are the three properties of money?

Question 72

Which of the following is a bank liability?

A)reserve deposits held at the Fed
B)loans made to customers
C)required reserves
D)demand deposit balances

Question 73

Suppose that while vacationing in Switzerland, you won 9,375 Swiss francs, which is the equivalent of $8,000. When you return to the United States, you deposit the $8,000 into your checking account. If the required reserve ratio is 15 percent, this would increase your bankʹs

A)liabilities by $8,000.
B)excess reserves by $8,000.
C)required reserves by $8,000.
D)assets by $1,200.

Question 74

By law, banks are required to

A)hold 100 percent of customer deposits as reserves.
B)hold a fraction of their reserves at the Federal Reserve bank.
C)hold a fraction of demand deposits as reserves.
D)lend out no more than the amount of their required reserves.

Question 75

Given the following information about AAA bank: $\begin{array}{lr}\text { Bank Deposits } & \$ 50,000 \\\text { Loans } & 25,000 \\\text { Required Reserves } & 15,000 \\\text { Excess Reserves } & 10,000\end{array}$
What is the reserve ratio?

A)50 percent
B)30 percent
C)20 percent
D)15 percent

Question 76

Given the following information about Gotham Bank: $\begin{array}{lr}\text { Bank Deposits } & \$ 50,000 \\\text { Loans } & 34,000 \\\text { Reserves } & 12,000 \\\text { Reserve Requirement } & 20 \text { percent }\end{array}$
Gotham Bank is holding _______ in excess reserves.

A)$22,000
B)$12,000
C)$2,000
D)-$2,000

Question 77

A bankʹs reserves

A)are the sum of its excess and required reserves.
B)can be held as cash in its vault.
C)can be held as deposits with the Federal Reserve.
D)all of the above

Question 78

What are the four components of M1?

Question 79

Distinguish M1 from M2.

Question 80

Deposits are examples of a bankʹs

A)assets.
B)liabilities.
C)net worth.
D)balance sheet.