Deck 34: Money, Banking, and Financial Institutions

Question 1

If you place a part of your summer earnings in a savings account, you are using money primarily as a

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

Answer 1

store of value.

Question 2

The amount of money reported as M2

A)is smaller than the amount reported as M1.
B)is larger than the amount reported as M1.
C)excludes coins and currency.
D)includes large ($100,000 or more) certificates of deposit.

Answer 2

is larger than the amount reported as M1.

Question 3

As of February 2016, the supply of money (M1) in the United States was about

A)$2,472 billion.
B)$3,105 billion.
C)$1,359 billion.
D)$12,479 billion.

Answer 3

$3,105 billion.

Question 4

When economists say that money serves as a unit of account, they mean that it is

A)a way to keep wealth in a readily spendable form for future use.
B)a means of payment.
C)a monetary unit for measuring and comparing the relative values of goods.
D)declared as legal tender by the government.

Question 5

Money functions as

A)a store of value.
B)a unit of account.
C)a medium of exchange.
D)a store of value, a unit of account, and a medium of exchange.

Question 6

The paper money used in the United States is

A)National Bank notes.
B)Treasury notes.
C)United States notes.
D)Federal Reserve notes.

Question 7

Stock market price quotations best exemplify money serving as a

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

Question 8

Money market deposit accounts are included in

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

Question 9

When economists say that money serves as a medium of exchange, they mean that it is

A)a way to keep wealth in a readily spendable form for future use.
B)a means of payment.
C)a monetary unit for measuring and comparing the relative values of goods.
D)declared as legal tender by the government.

Question 10

If you are estimating your total expenses for school next semester, you are using money primarily as

A)a medium of exchange.
B)a store of value.
C)a unit of account.
D)an economic investment.

Question 11

Currency in circulation is part of

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

Question 12

A checking account entry is money because it

A)is ensured by the Federal Deposit Insurance Corporation.
B)has been declared as such by the federal government.
C)performs the functions of money.
D)can be sold for currency.

Question 13

Which of the following is not part of the M2 money supply?

A)money market mutual fund balances
B)money market deposit accounts
C)currency
D)large-denominated time deposits

Question 14

Purchasing groceries using a debit card best exemplifies money serving as a

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

Question 15

The M2 money supply includes

A)stock certificates.
B)currency in bank vaults.
C)the cash value of life insurance policies.
D)individual shares in money market mutual funds.

Question 16

Currency (paper money plus coins) constitutes about

A)25 percent of the U.S.M1 money supply.
B)43 percent of the U.S.M1 money supply.
C)57 percent of the U.S.M1 money supply.
D)66 percent of the U.S.M1 money supply.

Question 17

To say that coins are "token money" means that

A)their face value is less than their intrinsic value.
B)their face value is greater than their intrinsic value.
C)their face value is equal to their intrinsic value.
D)they are not legal tender.

Question 18

To say money is socially defined means that

A)money has been defined in a Constitutional amendment.
B)whatever performs the functions of money extremely well is considered to be money.
C)the money supply includes all public and private securities purchased by society.
D)society, acting through Congress, specifies what shall be included in the money supply.

Question 19

In defining money as M1, economists exclude time deposits because

A)the intrinsic value of time deposits is nil.
B)the purchasing power of time deposits is much less stable than that of checkable deposits and currency.
C)they are not directly or immediately a medium of exchange.
D)they are not recognized by the federal government as legal tender.

Question 20

Currency held in the vault of First National Bank is

A)counted as part of M1.
B)counted as part of M2 but not M1.
C)only counted as part of M1 if it was deposited into a checking account.
D)not counted as part of the money supply.

Question 21

Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the

A)M1 money supply will decline.
B)M1 money supply will not change.
C)M2 money supply will decline.
D)M2 money supply will increase.

Question 22

Checkable deposits include

A)both large- and small-denominated time deposits.
B)the deposits of banks and thrifts on which checks can be written.
C)only the checkable deposits of commercial banks.
D)only the checkable deposits of thrift institutions.

Question 23

Currency held in bank vaults The M2 definition of money includes

A)items 2, 3, 4, 6, 7, 8, and 10.
B)items 3, 4, 5, and 6.
C)items 2, 3, 4, 6, 7, and 8.
D)all of the items listed.

Question 24

If the price index rises from 200 to 250, the purchasing power value of the dollar

A)may either rise or fall.
B)will rise by 25 percent.
C)will fall by 25 percent.
D)will fall by 20 percent.

Question 25

Small-denominated time deposits, by definition

A)mature in one month or less.
B)mature in one year or less.
C)are less than $100,000.
D)are held by state and local banks only.

Question 26

Paper money (currency) in the United States is issued by the

A)U.S.Mint.
B)Federal Reserve Banks.
C)U.S.Treasury.
D)national banks.

Question 27

Currency held in bank vaults The M1 definition of money includes item(s)

A)6 only.
B)3, 4, and 6.
C)3 and 6.
D)3, 6, and 10.

Question 28

The difference between M1 and M2 is that

A)the former includes time deposits.
B)the latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances.
C)the latter includes negotiable government bonds.
D)the latter includes cash held by commercial banks and the U.S.Treasury.

Question 29

Currency held in bank vaults Which of the following are considered to be near monies?

A)items 2, 5, 8, and 9
B)all items except for 3
C)items 2, 4, 7, and 8
D)items 1, 5, and 10

Question 30

Coins held in commercial bank vaults are

A)included in M1 but not in M2.
B)included both in M1 and in M2.
C)included in M2 but not in M1.
D)not part of the nation's money supply.

Question 31

Near monies

A)include all financial and real assets that can be easily converted into currency.
B)are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.
C)are excluded from M2 because they are highly liquid.
D)are defined as monetary balances that are immediately available, at zero cost, for household and business transactions.

Question 32

The near-money components of M2 are

A)equally liquid as the M1 components of M2.
B)more liquid than the M1 components of M2.
C)less liquid than the M1 components of M2.
D)highly illiquid.

Question 33

Suppose that the federal government suddenly declared that wheat was to be used as money.What is a possible outcome of that decision?

A)The value of the "wheat dollar" would be unstable depending on crop yields from year to year.
B)Farmers would replace corn and soy crops with wheat.
C)Wheat would function as money so long as people accept it in exchange for goods and services.
D)All of these are possible outcomes.

Question 34

Time deposits of $100,000 or more are

A)a component of M1.
B)a component of M2 but not of M1.
C)a component of M1 but not of M2.
D)not a component of M1 or M2.

Question 35

If the price index rises from 100 to 120, the purchasing power value of the dollar

A)may either rise or fall.
B)will rise by one-sixth.
C)will fall by one-sixth.
D)will rise by 20 percent.

Question 36

"Near monies" are included in

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

Question 37

The largest component of the money supply (M1) is

A)currency in bank vaults.
B)currency in circulation.
C)checkable deposits.
D)stock certificates.

Question 38

A $20 bill is a

A)gold certificate.
B)Treasury note.
C)Treasury bill.
D)Federal Reserve note.

Question 39

Currency held within banks is part of

A)both the M1 and M2 definitions of the money supply.
B)the M2 definition of the money supply only.
C)the M1 definition of the money supply only.
D)neither the M1 nor the M2 definition of the money supply.

Question 40

Coins in people's pockets and purses are

A)included in M1 but not in M2.
B)included both in M1 and in M2.
C)included in M2 but not in M1.
D)excluded from M1 and M2 because people can exchange them for Federal Reserve notes.

Question 41

Which of the following statements best describes the 12 Federal Reserve Banks?

A)They are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S.Treasury securities.
B)They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry.
C)They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.
D)They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners.

Question 42

Banks lost money during the mortgage default crisis because

A)of defaulted loans to investors in mortgage-backed securities.
B)they held mortgage-backed securities they had purchased from investment firms.
C)homebuyers defaulted on mortgages held by the banks.
D)of all of these reasons.

Question 43

When banks bundled mortgage loans and sold the resulting mortgage-backed securities,

A)they insulated the banking system from any risk associated with mortgage defaults.
B)they greatly reduced the overall risk of mortgage defaults.
C)buyers of these securities assumed all of the risk of mortgage defaults.
D)they reduced their direct exposure to mortgage default risk but were still exposed through loans to investors in mortgage-backed securities.

Question 44

The Federal Open Market Committee (FOMC) is made up of

A)the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks.
B)the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank.
C)the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers.
D)the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis.

Question 45

Commercial banks and thrift institutions

A)differ because thrifts cannot make loans.
B)differ because thrifts cannot offer checkable deposits.
C)have become less similar in recent years.
D)have become increasingly similar in recent years.

Question 46

The members of the Federal Reserve Board

A)serve seven-year terms.
B)are appointed by the American Economic Association.
C)are elected by votes of the 12 presidents of the Federal Reserve Banks.
D)are appointed for 14-year terms.

Question 47

The Federal Reserve System

A)has the same status as the Supreme Court.
B)is basically an independent agency.
C)has the status of a congressional committee.
D)is an agency of the executive branch of the federal government.

Question 48

The central authority of the U.S.banking system is the

A)Federal Open Market Committee (FOMC).
B)Board of Governors of the Federal Reserve.
C)Federal Monetary Authority.
D)Council of Economic Advisers.

Question 49

Which of the following is the basic economic policy function of the Federal Reserve Banks?

A)holding the deposits or reserves of commercial banks
B)acting as fiscal agents for the federal government
C)controlling the supply of money
D)collecting or clearing checks among commercial banks

Question 50

Stabilizing a nation's price level and the purchasing power of its money can be achieved

A)only with fiscal policy.
B)only with monetary policy.
C)with both fiscal and monetary policy.
D)with neither fiscal nor monetary policy.

Question 51

The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is the

A)Federal Deposit Insurance Corporation (FDIC).
B)Federal Bond Sale Authority.
C)Council of Economic Advisers.
D)Federal Open Market Committee (FOMC).

Question 52

The purchasing power of the dollar

A)has been increasing in recent years because of economic growth.
B)varies directly with the cost-of-living index.
C)is inversely related to the level of aggregate demand.
D)is the reciprocal of the price level.

Question 53

In the financial industry, "securitization" refers to

A)increasing insurance protection on bank deposits.
B)requiring greater down payments on home purchases to reduce mortgage default risk.
C)bundling groups of loans, bonds, mortgages, and other financial debts into new securities.
D)increasing collateral requirements on loans.

Question 54

Research involving industrially advanced countries suggests that

A)the more independent the central bank, the lower the average annual growth of real GDP.
B)the more independent the central bank, the higher the average annual growth of real GDP.
C)there is no relationship between the degree of independence of a country's central bank and the growth rate of its real GDP.
D)the less independent the central bank, the higher the average annual rate of inflation.

Question 55

Approximately how many commercial banks are now (2016) operating in the United States?

A)about 7,300
B)about 6,000
C)about 8,500
D)about 6,800

Question 56

During periods of rapid inflation, money may cease to work as a medium of exchange

A)unless it has been designated legal tender.
B)unless it is backed by gold.
C)because it is too scarce for everyone to have enough for transactions.
D)because people and businesses will not want to accept it in transactions.

Question 57

An important routine function of the Federal Reserve Bank is to

A)supervise the liquidation of the assets of bankrupt state banks.
B)help large commercial banks develop correspondent relationships with smaller commercial banks.
C)advise commercial banks as to the most profitable ways of reinvesting profits.
D)provide facilities by which commercial banks and thrift institutions may collect checks.

Question 58

What are "mortgage-backed securities"?

A)company stock shares for financial institutions that lend to home buyers
B)bonds backed by mortgage payments
C)Treasury bills and savings bonds that banks sold to maintain liquidity during the mortgage default crisis
D)insurance against mortgage loan defaults

Question 59

The Board of Governors of the Federal Reserve has members.

A)5
B)7
C)9
D)14

Question 60

In the U.S.economy, the money supply is controlled by the

A)U.S.Treasury.
B)Federal Reserve System.
C)Senate Committee on Banking and Finance.
D)Congress.

Question 61

Which of these pairs of financial institutions are most alike in terms of their main lines of business?

A)commercial banks and thrifts
B)insurance companies and mutual fund companies
C)thrifts and securities firms
D)pension fund companies and commercial banks

Question 62

TARP and other lender-of-last-resort programs implemented by the Fed in response to the financial crisis of 2007 and 2008

A)severely depleted the assets of the Federal Reserve.
B)have been little used and therefore are ineffective.
C)increased the moral hazard problem by limiting losses from bad financial decisions.
D)were designed to offset the moral hazard created by the TARP and other bailout programs.

Question 63

Between September 2007 and September 2009,

A)the Fed oversaw the conversion of all thrifts into commercial banks.
B)the FDIC closed more than 200 U.S.banks and shifted their deposits to other banks.
C)the Fed increased capital requirements for larger financial institutions in an effort to reduce moral hazard.
D)the FDIC paid out more than $500 billion to depositors who held money in failed banks.

Question 64

Collateralized default swaps

A)helped reduce the losses from the mortgage default crisis.
B)involve exchanging high-risk mortgages for low-risk mortgage-backed securities.
C)are loans to investors in mortgage-backed securities.
D)insured holders of loan-backed securities in case the underlying loans were not repaid.

Question 65

(Consider This) Credit cards are

A)the fastest-growing component of the M1 money supply.
B)near monies that are part of the M2 money supply but not the M1 money supply.
C)not money, as officially defined.
D)also known as time deposits.

Question 66

How much did the U.S.Congress allocate to the Troubled Asset Relief Program in 2008?

A)$170 billion
B)$700 billion
C)$787 billion
D)$885 billion

Question 67

Wells Fargo, J.P.Morgan Chase, and Citibank are all primarily

A)commercial banks.
B)mutual fund companies.
C)insurance companies.
D)securities firms.

Question 68

In 2009, approximately how much of the money on deposit was held by the three largest U.S.banks?

A)30 percent
B)50 percent
C)70 percent
D)90 percent

Question 69

Which of the following financial institutions declared bankruptcy as a result of the financial crisis of 2007 and 2008?

A)Merrill Lynch
B)Lehman Brothers
C)Goldman Sachs
D)AIG

Question 70

Charter One, Pentagon Federal Credit Union, and Boeing Employees Credit Union are all primarily

A)commercial banks.
B)thrifts.
C)insurance companies.
D)pension funds.

Question 71

Firms whose central business is to offer security advice and buy and sell individual stocks and bonds for clients are known as

A)thrifts.
B)pension fund companies.
C)securities firms.
D)insurance companies.

Question 72

The "shadow banking system" refers to

A)the provision of credit through the underground economy when the financial crisis of 2007 and 2008 occurred.
B)the process by which securities exchanges provide credit for personal and business needs apart from traditional bank lending.
C)the series of illegal financial transactions that precipitated the financial crisis of 2007 and 2008.
D)mortgage loans made to homebuyers who are poor credit risks.

Question 73

New York Life, Prudential, and Hartford are all primarily

A)commercial banks.
B)mutual fund companies.
C)insurance companies.
D)securities firms.

Question 74

TARP, created in 2008, stands for

A)Toxic Asset Relief Program.
B)Troubled Asset Recovery Plan.
C)Toxic Asset Reinvestment Policy.
D)Troubled Asset Relief Program.

Question 75

TIAA-CREF, Teamsters' Union, and CalPERS are all primarily

A)commercial banks.
B)thrifts.
C)insurance companies.
D)pension funds.

Question 76

Which of the following statements is true as a result of Federal Reserve efforts to rescue the financial industry from the financial crisis of 2007 and 2008?

A)From February 2008 to May 2009, the Fed oversaw the consolidation of 20 major financial institutions into fewer than a dozen.
B)From March 2008 to February 2009, the Fed experienced a 50 percent decline in the value of assets held.
C)From February 2008 to March 2009, Fed assets more than doubled to nearly $2 trillion.
D)From February 2008 to March 2009, Fed lending caused the U.S.public debt to rise by over $1 trillion.

Question 77

Firms whose central business is providing individual account shares of a group of stocks, bonds, or both are known as

A)insurance companies.
B)thrifts.
C)commercial banks.
D)mutual fund companies.

Question 78

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in

A)mutual fund companies and pension fund companies.
B)thrifts and insurance companies.
C)commercial banks and thrifts.
D)securities firms and insurance companies.

Question 79

Which of the following statements is true about the high rate of mortgage defaults that contributed to the financial crisis of 2007 and 2008?

A)High interest rates on mortgage loans were the primary cause of defaults.
B)The high rate of defaults occurred despite the efforts of government to discourage new home ownership and slow the growth of the housing bubble.
C)Prior to the rise in defaults, banks had become lax in their lending practices, resulting in a large number of bad loans.
D)The high rate of defaults resulted primarily from the two years of recession preceding the mortgage default crisis.

Question 80

TD Ameritrade, Charles Schwab, and Merrill Lynch are all primarily

A)investment banks.
B)mutual fund companies.
C)insurance companies.
D)securities firms.