Deck 49: Money, Banking, and Credit

Question 1

Whats defention of terms:
-assets

Answer 1

those things owned by the bank or owed to the bank

Question 2

Whats defention of terms:
-legal tender

Answer 2

the paper that must be accepted as payment for all debts

Question 3

Whats defention of terms:
-liabilities

Answer 3

what the banks owe to someone else

Question 4

Whats defention of terms:
-liquid assets

Question 5

Whats defention of terms:
-medium of exchange

Question 6

Whats defention of terms:
-store of value

Question 7

Whats defention of terms:
-unit of account

Question 8

Whats defention of terms:
-excess reserves

Question 9

Whats defention of terms:
-money multiplier

Question 10

Whats defention of terms:
-required reserves

Question 11

List and explain the three functions of money.
-State each function of money. Which function is money's most exclusive function? Why? Which function is money's least exclusive function? Why?

Question 12

List and explain the three functions of money.
-Explain why an index card or a cow does not fulfill all three functions of money.

Question 13

List and explain the three functions of money.
-What are the four "stages" of money? What drove the changes from one stage to the next? Explain.

Question 14

List and explain the three functions of money.
-What was the role of the earliest bankers? Why? How did bankers eventually begin to "create" money.

Question 15

Discuss how credit and interest rates are related to business cycles.
-Why do interest rates rise in expansions and fall in contractions?

Question 16

Discuss how credit and interest rates are related to business cycles.
-Why do interest rates lag at the peak, still rising for a little while (or at least holding steady), while a recession has already started?

Question 17

Discuss how credit and interest rates are related to business cycles.
-Why have many households fallen deeper into debt over the last thirty years?

Question 18

Explain why there are reserve requirements on deposits.
-U.S. banks operate on a "fractional reserve system." What does this mean? How can this cause problems for the banking system and the economy?

Question 19

Explain why there are reserve requirements on deposits.
-Why are bank panics so destructive? What was the response of the government after the Great Depression to try and stop panics?

Question 20

Explain why an initial deposit in the banking system leads to the creation of new deposits.
-Why does a bank make loans?

Question 21

Explain why an initial deposit in the banking system leads to the creation of new deposits.
-How does the bank manage the asset side of its "T" account in order to make money?

Question 22

Calculate the change in deposits or money supply from an initial deposit
-How do changes in the reserve requirement affect the deposit multiplier?

Question 23

Calculate the change in deposits or money supply from an initial deposit
-Given an initial deposit of $100, how much money is created if the reserve requirement is 5%, 10%, 15%?

Question 24

State and explain the meaning of the assumptions made when using the money multiplier and what happens when the assumptions don't hold.
-What happens to the money creation process if banks do not lend out all their excess reserves?

Question 25

State and explain the meaning of the assumptions made when using the money multiplier and what happens when the assumptions don't hold.
-What happens to the money creation process if people do not redeposit all money into the bank?

Question 26

To qualify as "money," a commodity must

A) be valuable.
B) be nonperishable.
C) be accepted as a medium of exchange.
D) be a precious metal such as gold or silver.

Question 27

Precious metals have several virtues as a medium of exchange. Which of the following is not an important reason to use precious metals as a medium of exchange?

A) Precious metals are portable.
B) Precious metals are easily divisible.
C) Precious metals are nonperishable.
D) Precious metals are plentiful and readily available.

Question 28

A major step in the evolution of money is the substitution of paper claims for metallic money. What does this mean?

A) Metallic money was no longer acceptable.
B) People began to use index cards for money.
C) Banks and governments issued paper that could be redeemed in gold.
D) Banks and governments issued paper that could not be redeemed in gold.

Question 29

Today paper money

A) can only be issued by banks.
B) can only be issued by governments.
C) can be converted to gold on demand.
D) is no longer acceptable as a medium of exchange.

Question 30

Early goldsmiths earned income by keeping deposits of coins and gold for safekeeping and issuing receipts for these deposits. From the point of view of the goldsmiths, these receipts were

A) assets
B) wealth
C) liabilities
D) income

Question 31

From the point of view of depositors, receipts issued by goldsmiths in exchange for deposits of coins and gold were considered

A) loans
B) money
C) liabilities
D) debt

Question 32

Goldsmiths became bankers when they created money. How did they create money?

A) printed more receipts.
B) accepted more deposits of coins.
C) found more gold and turned it into coins.
D) made loans in the form of receipts.

Question 33

What is a bank panic?

A) Bankers become very nervous and refuse to take deposits.
B) Everyone rushes to the bank to put his or her money in before closing time.
C) Banks go out of business because they fail to make enough loans.
D) Banks are unable to repay all depositors who want to withdraw their money.

Question 34

The availability of credit makes an economy more financially fragile because

A) Consumers are unable to spend because they cannot get loans.
B) During recessions, consumers and businesses may be unable to repay debt leading to financial difficulties for financial institutions.
C) During recessions, financial institutions become too free and easy with credit leading to too much borrowing.
D) During expansions, many businesses and individuals may go bankrupt from spending too much.

Question 35

What is the prime rate?

A) It is the highest interest rate in the economy.
B) It is the interest rate for long-term loans on real estate.
C) It is the interest rate offered by commercial banks to their best customers.
D) It is the interest rate consumers pay on new car loans.

Question 36

Why does the interest rate typically fall during economic contractions?

A) There is a high demand for loans from consumers.
B) Businesses have more retained profits and do not need to borrow from banks.
C) There is a lower demand for loans from consumers and businesses.
D) Banks are more willing to make loans and offer easier credit terms.

Question 37

What is the relationship between the business cycle and the prime rate?

A) the prime rate rises during a contraction and falls during an expansion.
B) the prime rate rises during an expansion and falls during a contraction.
C) the prime rate rises during an expansion and rises during a contraction.
D) the prime rate initially rises during an expansion and then falls.

Question 38

Assume that the Federal Reserve sets a required reserve ratio of 10%. If a bank receives a deposit of $1000, then

A) it must keep $10 on reserve and can loan out $990.
B) it must keep $100 on reserve and can loan out $900.
C) it must keep $1000 on reserve and cannot make any loans.
D) it must keep $900 on reserve and can loan out $100.

Question 39

Assume that the Federal Reserve sets a required reserve ratio of 5%. Then the money multiplier is

A) 5
B) 20
C) 50
D) 100

Question 40

Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual deposits $1000 in cash into the bank. How much money will eventually be created when all banks are fully loaned out?

A) $800
B) $640
C) $4000
D) $5000

Question 41

Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual deposits $1000 in cash into the bank. From the point of view of the bank,

A) $160 of this deposit will be required reserves; $840 will be excess reserves.
B) $200 of this deposit will be required reserves; $800 will be excess reserves.
C) $128 of this deposit will be required reserves; $872 will be excess reserves.
D) Half of the deposit will be required reserves, half will be excess reserves.

Question 42

How do banks create money?

A) Banks print new money and distribute it in return for deposits of old money.
B) Banks loan money to the Federal Reserve who then prints new money.
C) Banks cannot create money.
D) Banks create money when they make loans.