Deck 16: Understanding Money and the Role of Banking

Question 1

The reason why a savings account is not considered a component of the M-1 money supply is that it bears interest.

Answer 1

False
Explanation:It is not considered as a component because M-1 includes only the most liquid forms of money-cash, checks, and checking accounts.

Question 2

What are the components of the M-2 money supply?

Answer 2

The M-2 money supply includes everything that is in the M-1 money supply (currency, checks, and checking accounts). In addition, M-2 includes time deposits, money market mutual funds, and savings accounts. M-2 includes everything in M-1 plus other forms of money that are not quite as liquid.

Question 3

Which of the three functions of money does a time deposit account MOST exemplify?

Answer 3

By definition, a time deposit account has a fixed term, at the end of which it has accrued a much higher value than the original investment. Thus, investment in a time deposit is a method to store (and gain) value. A time deposit less exemplifies the other two main functions of money, as a medium of exchange and a measure of worth.

Question 4

What measure of the money supply is most often used by businesses and governments for economic planning?

A) M-2
B) Currency
C) Demand deposits
D) Liquidity
E) M-1

Question 5

Money frees society from a system of barter. In doing so, money is performing which of the following functions?

A) Store of value
B) Measure of worth
C) Unit of account
D) Determination factor
E) Medium of exchange

Question 6

The divisibility characteristic of money is illustrated by a financial company's ability to divide its monetary assets among several investments.

Question 7

Which of the following affects the value of money?

A) How much currency is in circulation
B) How many units the currency can be divided into
C) How portable the form of currency is
D) How durable the form of currency is
E) How much currency has been saved

Question 8

Which of the following is NOT part of the M-1 supply?

A) Currency at hand
B) Currency amount of written checks
C) Currency available through a debit card
D) Currency in checking accounts
E) Currency value of time deposits

Question 9

Which of the following is NOT part of the M-2 money supply?

A) Debit card account
B) Time deposits
C) Money market mutual funds
D) Savings account
E) Credit card account

Question 10

Why are savings accounts not considered a component of M-1, whereas checking accounts are?

Question 11

Any object can serve as money if it is portable, divisible, durable, and stable.

Question 12

Which of the following BEST describes the durability characteristic of money?

A) Units of money do not expire after a certain time limit.
B) Units of money can be matched with the value of goods.
C) Units of money allow people to measure the relative value of goods and services.
D) Units of money of different nations are easily converted to other units of money.
E) Units of money have lasting value.

Question 13

Which of the following is a consequence of the divisibility characteristic of money?

A) Units of money do not expire after a certain time limit.
B) Units of money can be accurately matched with the value of goods.
C) Units of money are easily carried.
D) Units of money have relatively stable value.
E) Units of money of different nations are easily converted to other units of money.

Question 14

Why are credit cards excluded from the measure of the nation's money supply?

A) Because debt continues to accrue as the credit card is used
B) Because money is not moved until the debt is paid
C) Because there are few spending controls on credit cards
D) Because credit cards represent a convenience, not a service
E) Because only the interest paid on the credit card is considered liquid money

Question 15

Which of the following BEST describes the portability characteristic of money?

A) If it wears out, it can be replaced.
B) Units of money can be matched with the value of goods.
C) It can be exchanged across national borders.
D) It allows people to measure the relative value of goods and services.
E) It is light and easy to handle.

Question 16

A check is an order to a bank to withdraw funds at any time.

Question 17

What are the components of the M-1 money supply?

Question 18

Which of the following banking instruments has a fixed term?

A) Demand deposits
B) Time deposits
C) Money market mutual funds
D) Credit card accounts
E) Savings accounts

Question 19

The overall value of the U.S. M-2 has grown considerably since 1979 due primarily to the increased use of credit cards and debit cards.

Question 20

Which of the following BEST describes the stability characteristic of money?

A) Units of money do not expire after a certain time limit.
B) Units of money of different nations are easily converted to other units of money.
C) Units of money can be matched with the value of goods.
D) Units of money allow people to measure the relative value of goods and services.
E) Units of money have relatively constant value.

Question 21

In mutual savings banks, all depositors are considered owners of the bank.

Question 22

What type of nondeposit institution will buy and sell stocks and bonds on behalf of clients?

A) Insurance companies
B) Pension and trust services
C) Finance companies
D) Pension funds
E) Securities investment dealers

Question 23

How does an automated teller machine aid in the customer's ability to conduct transactions whenever needed?

A) By processing payments in real time, electronically
B) By allowing a customer to have a line of credit until business can be conducted within regular banking hours
C) By taking deposits and making loans on demand
D) By allowing electronic account related activities every day of the week, 24 hours a day
E) By transferring funds from the Reserve Bank to meet transaction needs

Question 24

Which of the following terms represents a promise by the bank to pay a firm on behalf of another firm, if specified conditions are met?

A) Banker's acceptance
B) Bank trust service
C) Certified check
D) Letter of credit
E) Currency exchange agreement

Question 25

What is the interest rate offered by banks to only their most creditworthy commercial customers?

A) Fixed
B) Prime
C) Variable
D) Prime plus 1
E) Below prime

Question 26

Which of the following financial institutions earn profits from loans taken from the funds in each of its depositors' accounts?

A) Securities investment firms
B) Pension funds
C) Credit unions
D) Commercial banks
E) Mutual savings banks

Question 27

The management of assets or investments offered by a commercial bank on behalf of an individual can be conducted by a bank through

A) trust services.
B) letters of credit.
C) banker's acceptance notes.
D) individual retirement accounts.
E) securities investments deals.

Question 28

If a U.S. firm wishes to buy products from an overseas supplier, what would the firm use to guarantee payment on a certain date?

A) Currency exchange guarantee
B) Letter of credit
C) Brokerage service
D) Banker's acceptance
E) Security intermediary

Question 29

What types of firms lend to businesses needing capital or long-term funds?

A) Insurance companies
B) Pension and trust services
C) Finance companies
D) Pension funds
E) Securities investment dealers

Question 30

Savings and loan associations began primarily to loan money to small and medium-sized businesses.

Question 31

What is the difference between a public pension fund and a private pension fund?

Question 32

Which of the following reasons is the primary motivator for a commercial bank to acquire new depositors?

A) A new deposit account will make more funds available to pay the interest on other deposit accounts.
B) A new deposit account will make more funds available to pay the bank's employees.
C) A new deposit account will make more funds available to give out in loans.
D) A new deposit account will make more funds available to give out in dividends to its investors.
E) A new deposit account will make more funds available to facilitate brokerage transactions.

Question 33

Which of the following represents a pool of managed funds that provide retirement income for members?

A) Insurance companies
B) Finance companies
C) Securities investment dealers
D) Nondeposit institutions
E) Pension funds

Question 34

According to reports, what can the subprime crisis of 2008 be traced to?

A) Overly relaxed credit standards
B) Home foreclosures
C) Defaults on credit payments
D) High unemployment levels
E) Prime mortgage rates

Question 35

Banks offer a variety of services for customers, including banker's acceptances. Which type of service offered by a bank would include a banker's acceptance option?

A) Pension services
B) International services
C) Financial advice
D) Electronic funds transfer
E) Automated teller machines

Question 36

Which type of pension trust service includes tax-deferred funds that wage earners and their spouses can use to supplement their retirement funds?

A) Trust services
B) Securities investment deals
C) Pension funds
D) Individual retirement accounts (IRAs)
E) Savings

Question 37

Which of the following allows a bank's customers to conduct account related activities any time they choose to?

A) Bank acceptance notes
B) Letters of credit
C) Commercial banks
D) Electronic funds transfers
E) Automated teller machines

Question 38

Individual retirement accounts can be opened only by self-employed people such as doctors, small business owners, and consultants.

Question 39

Which of the following financial institutions are considered to be owned by their depositors?

A) Commercial banks and savings and loan associations
B) Savings and loan associations and mutual savings banks
C) Mutual savings banks and credit unions
D) Credit unions and pension funds
E) Pension funds and savings institutions

Question 40

In order to save money on transactional costs, the U.S. Treasury is moving to electronic fund transfers for payments rather than issuing checks.

Question 41

Money deposited into a commercial bank has the potential of increasing the overall money supply.

Question 42

Over the past ten years, there has been increased belief that unethical behavior in the banking industry is the result of what?

A) Increased social media use
B) Corporate culture
C) Increased regulation
D) Stricter enforcement by the FDIC
E) Increased stability of the industry

Question 43

Banks create money through contracts with the government to mint bills and coins.

Question 44

Which of the following statements BEST explains how financial institutions create money?

A) By opening new checking accounts and giving more people access to readily available cash, financial institutions expand the money supply.
B) By issuing money through government contracts, financial institutions expand the money supply.
C) By taking deposits and loaning out these funds, financial institutions expand the money supply.
D) By paying interest on its accounts and investments, financial institutions expand the money supply.
E) By giving interest from its accounts to its clients, financial institutions expand the money supply.

Question 45

Explain the need for restricting banks to lending out only 90 percent of their deposit funds.

Question 46

There is discussion of a bill raising insurance premiums on bank deposits. Why would these premiums need to be raised?

Question 47

Through the Federal Deposit Insurance Corporation, a deposit in a member bank is currently insured up to $50,000.

Question 48

The sum actions of employees in an organization is known as what?

A) Ethics
B) Regulation
C) Culture
D) Vision
E) Focus

Question 49

Which of the following terms refers to the interest level at which member banks can borrow money from the Federal Reserve System?

A) Discount rate
B) Key rate
C) Prime rate
D) Federal insurance premium
E) Reserve requirement

Question 50

Which of the following agencies guarantees the safety of all of its members' bank accounts?

A) Internal Revenue Service
B) Federal Open Market Committee
C) Federal Reserve Bank
D) Federal Deposit Insurance Corporation
E) Federal Exchange Commission

Question 51

Which of the following terms refers to the percentage of its deposits a bank must hold, in cash or on deposit, with a Federal Reserve bank?

A) Discount rate
B) Key rate
C) Prime rate
D) Federal insurance premium
E) Reserve requirement

Question 52

Why would a consumer utilize trust services offered by commercial banks?

Question 53

The increased activity of the financial market in the past five years has resulted in a severe drop in the required premiums for commercial banks to be members of the Federal Deposit Insurance Corporation.

Question 54

The inquiry has discovered that the bank involved has been selling its riskiest mortgage accounts to the insurance company, which in turn has been selling these accounts packaged with other more stable loans at a sharply discounted price to other banks. Gavin asks his aides why this would be a beneficial relationship between the two institutions. What would his aides say?

Question 55

Explain how current financial institutions can create $342 out of a deposit of $200.

Question 56

Why does the government take an active role in the regulation of the U.S. financial system?

A) Commercial banks are essential in paying for international trade.
B) To generate fees in addition to those paid to the FDIC.
C) To help commercial banks dispose of assets.
D) Commercial banks are essential to the creation of money and to the protection of American citizens.
E) To allow commercial banks to settle debt.

Question 57

When a bank's assets are sold to settle debt during a bank failure, what happens to the resulting gain?

A) Remaining funds are added to the insurance deposit funds.
B) Remaining funds are deducted to those paid by the insurance deposit funds.
C) Remaining funds are used to buy and consolidate smaller banks.
D) Remaining funds are dispersed to depositors to help offset losses.
E) Remaining funds are returned to the bank to aid in recovery.

Question 58

What recourse is available to the FDIC when a bank fails?

A) Funds can be taken from the insurance deposit fund to pay off creditors.
B) Employee behavior is monitored and analyzed to ensure ethical behavior.
C) Interest rates can be raised to offset the cost of payouts.
D) Other banks are purchased to cover the cost of the failure.
E) Bank assets can be disposed of in order to pay off debt.

Question 59

Which of the following actions can the Federal Deposit Insurance Company take in the event of a failure of one of its insured banks?

A) The FDIC can seize the assets of the bank and its investors and settle the bank's debts.
B) The FDIC can allow the bank to stay afloat by granting a loan of federal money.
C) The FDIC can conduct an inquiry into the investors' assets and actions to determine if there was any malfeasance that caused the bank failure.
D) The FDIC can allow another bank to take responsibility for the failed bank's liabilities through sale of the failed bank.
E) The FDIC can settle the bank's debts through its insurance deposit fund and regulate the bank's transactions more strictly.

Question 60

The Federal Deposit Insurance Corporation is the government agency that regulates American banks.

Question 61

How does the Fed's monetary policy influence banks' willingness to loan money?

Question 62

How are the individual Federal Reserve Banks organized?

A) By size of financial institution members-small, medium, large, etc.
B) By type of financial institution members-commercial banks, credit unions, etc.
C) By geographical region-Southeast, Northeast, West, etc.
D) By financial purpose-buying, lending, interest controlling, etc.
E) By legislative districts-10th District of Massachusetts, 1st District of Colorado, etc.

Question 63

Like most of the federal government, the governors of the Federal Reserve System are democratically elected by the citizens of the United States.

Question 64

What happens to demand and price during times of inflation?

Question 65

As the government's bank, the Fed produces the nation's paper currency and lends money to the government.

Question 66

Under which of the following circumstances would the Federal Reserve System want to decrease the money supply by increasing the discount rate?

A) The economy is experiencing severe inflation, and market activity is very low, yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
B) The economy is experiencing severe inflation, and most financial institutions have low M-1 resources at their disposal, yet there is a great deal of market activity.
C) The economy is experiencing severe deflation, and market activity is very low, yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
D) The economy is experiencing severe deflation, and most financial institutions have low M-1 resources at their disposal, yet there is a great deal of market activity.
E) The economy is experiencing wild fluctuations, and most financial institutions have low M-1 resources at their disposal.

Question 67

Which of the following political bodies appoints the members of the board of governors for the Federal Reserve System?

A) The Senate
B) The House of Representatives
C) The President of the United States
D) The Council of American Governors
E) The people of the United States

Question 68

Which of the following statements BEST describes why U.S. Treasury securities have always been considered risk-free investments?

A) They are backed by the U.S. government.
B) They have a guaranteed rate of return.
C) They are easily sold.
D) They are readily available for purchase.
E) They earn a great profit on the international money market.

Question 69

A recent report to the House reveals that unemployment continues to be high and that the economy is sluggish. At the same time, the discount rate is very close to zero, and the reserve requirement for banks was recently lowered to an all-time low. What actions might the Federal Reserve System do in order to stimulate the economy?

Question 70

Which of the following BEST describes two of the three primary functions of the Federal Reserve System?

A) Developing new financial markets and aiding banks in conducting their business
B) Aiding banks in conducting business and managing the U.S. money supply and interest rates
C) Managing the U.S. money supply and interest rates and monitoring interbank relationships
D) Monitoring interbank relationships and acting as a bank for the federal government
E) Acting as a bank for the federal government and developing new financial markets

Question 71

Under which of the following circumstances would the Federal Reserve System want to decrease the money supply by increasing the reserve requirement?

A) The economy is experiencing severe inflation, and market activity is very low, yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
B) The economy is experiencing severe inflation, yet market activity has been extremely high and erratic.
C) The economy is experiencing severe deflation, and market activity is very low, yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
D) The economy is experiencing severe deflation, yet market activity has been extremely high and erratic.
E) The economy is experiencing severe deflation, market activity is very low, and most financial institutions are low on M-1 resources.

Question 72

Which of the following statements BEST describes why an increase in the discount rate often results in a decrease in the money supply?

A) An increase in the discount rate will lower the overall values of loans from the Federal Reserve Banks to individual banks.
B) An increase in the discount rate will lower the overall values of loans from individual banks to other financial institutions.
C) An increase in the discount rate will lower the overall number of banks issuing loans to individuals.
D) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individual banks.
E) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individuals.

Question 73

Which of the following BEST describes what is called the "open-market operations" of the Federal Reserve System?

A) The development of new financial opportunities for banks
B) The minting of new money to disperse into the money market
C) The control of interest rates among banks
D) The maintenance of a well-functioning lending system among banks
E) The buying and selling of securities

Question 74

The Federal Reserve Bank has the responsibility of ensuring the reasonableness of the interest rates for business and personal loans within the United States.

Question 75

One of the daily responsibilities of the Federal Reserve System is to regulate the current federal funds rate.

Question 76

An overly large decrease in the reserve requirement by the Federal Reserve System could result in inflation.

Question 77

Open-market operations are often a more effective method for the Federal Reserve System to expand the money supply than is minting more dollars and coins.

Question 78

Which of the following recent events represent the two most significant impacts on changes in the money and banking system since 2000?

A) Government intervention to stabilize the U.S. financial system and stricter regulation of the mortgage industry
B) Stricter regulation of the mortgage industry and the enactment of anti-terrorist policies
C) The enactment of anti-terrorist policies and creation of the Federal Reserve System
D) The rise of electronic technologies in banking and government intervention to stabilize the U.S. financial system
E) Government intervention to stabilize the U.S. financial system and regulate the printing of money

Question 79

Which of the following statements BEST describes why a decrease in reserve requirements often results in an increase in the money supply?

A) A decrease in reserve requirements gives banks more money to better determine their interest rates.
B) A decrease in reserve requirements gives banks more money to pay off their debts.
C) A decrease in reserve requirements gives banks more money to lend out.
D) A decrease in reserve requirements gives banks more money to offset lower interest rates.
E) A decrease in reserve requirements gives banks more money to reward their employees for meritorious financial ventures.

Question 80

Which of the following terms refers to the interest level at which commercial banks lend reserves to each other, usually overnight?

A) Discount rate
B) Key rate
C) Prime rate
D) Federal insurance premium
E) Reserve requirement