Deck 7: Money, Financial Institutions, and the Federal Reserve

Question 1

Money is BEST defined as something that:

A) can be accumulated as wealth.
B) measures the value of goods and services.
C) is generally acceptable as a medium of exchange.
D) has a high intrinsic value, or can be exchanged for gold or silver.

Answer 1

is generally acceptable as a medium of exchange.

Question 2

Money:

A) is a nation's medium of exchange.
B) has, in different societies and nations, included such things as gold coins, beer, and feathers.
C) is the "thing" that is generally acceptable in a nation as payment for resources, goods, and services.
D) all of the above.

Answer 2

all of the above.

Question 3

For something to be a medium of exchange, it must:

A) have high intrinsic value.
B) be officially declared to be money by a government commission.
C) be generally acceptable as payment for goods, services, and resources.
D) all of the above.

Answer 3

be generally acceptable as payment for goods, services, and resources.

Question 4

The most important function of money is to serve as a:

A) measure of value.
B) medium of exchange.
C) standard for deferred payment.
D) method for holding wealth for future use.

Question 5

Which of the following is a function of money?

A) Measure of value.
B) Medium of exchange.
C) Method for storing wealth.
D) All of the above.

Question 6

Which of the following was identified in the text as money?

A) Cigarettes.
B) Snail shells.
C) Round stones with their centers removed.
D) All of the above.

Question 7

Which of the following was NOT identified in the text as a medium of exchange?

A) Feathers.
B) Boar tusks.
C) Cows' milk.
D) Porpoise teeth.

Question 8

Which of the following is NOT a function of money?

A) Measure of value.
B) Promoter of barter.
C) Medium of exchange.
D) Method for storing wealth.

Question 9

The value of money is measured by:

A) the goods, services, and resources it can purchase.
B) the amount of time over which it can be held as savings.
C) the amount of gold, silver, or other metal that backs the money.
D) people's willingness to accept it in payment for goods, services, and resources.

Question 10

When an economy experiences inflation, the value of its money:

A) increases.
B) decreases.
C) changes in no predictable way.
D) remains the same if the rate of inflation grows at a constant rate.

Question 11

If the general level of prices in the U.S. fell, the value of money would:

A) increase.
B) decrease.
C) remain unchanged.
D) decrease, and then increase due to demand-pull inflation.

Question 12

If the general level of prices in the U.S. decreased:

A) the value of money would increase.
B) the economy would move to a barter system.
C) money would become more of a medium of exchange.
D) money would become a less effective measure of the value of goods and services.

Question 13

Suppose that currently in the United States, the price of gold increased at the same time that the general level of prices was rising. Under these circumstances, the value of U.S. money would:

A) increase.
B) decrease.
C) remain unchanged.
D) increase or decrease, depending on whether the price of gold went up faster or slower than the general level of prices.

Question 14

The value of an economy's money:

A) increases when the general level of prices in the economy increases.
B) decreases when the general level of prices in the economy increases.
C) is not affected by either increases or decreases in the economy's general level of prices.
D) is the main force causing increases or decreases in the economy's general level of prices.

Question 15

Changes in the value of money are:

A) directly related to changes in the general level of prices.
B) inversely related to changes in the general level of prices.
C) established by the monetary authority and are the cause of changes in the general level of prices.
D) directly related to changes in the general level of prices during inflation, and inversely related during deflation.

Question 16

The value of money:

A) increases over time.
B) is constant over time.
C) increases with inflation.
D) decreases with inflation.

Question 17

The term economists use to describe the direct exchange of goods or services without the use of money is:

A) barter.
B) swapping.
C) disintermediation.
D) nonmarket transactions.

Question 18

A barter system:

A) is a system of direct exchange of goods and services.
B) is the typical system of exchange in advanced economies.
C) is a system of exchange where the government trades new money for old money.
D) occurs when a government replaces free market decision making with the decisions of bureaucrats.

Question 19

A problem associated with barter is:

A) goods can be exchanged, but services cannot.
B) what individuals want to trade must coincide for exchange to occur.
C) inflation occurs whenever goods and services are directly exchanged for one another.
D) individuals are not interested in possessing goods and services, they only want to possess money.

Question 20

Without money:

A) all exchange would cease.
B) saving would be impossible.
C) individuals would have to consume everything they produce.
D) the amount of time and information required to undertake exchanges would dramatically increase.

Question 21

Which of the following is NOT a characteristic of money?

A) It provides a way for storing wealth.
B) It is generally acceptable as a medium of exchange.
C) It provides a way to measure the value of goods and services.
D) It is always backed by something of high intrinsic value, such as a precious metal.

Question 22

If an economy experienced chronic and severe inflation where prices were adjusted upward on a daily basis:

A) people would want to save more of their incomes than previously.
B) money's ability to serve as a method for accumulating wealth would not be affected.
C) lenders would be less willing to make loans since the value of money would be lower when the loans were repaid.
D) all of the above.

Question 23

Chronic inflation damages an economy by:

A) discouraging saving.
B) eroding the purchasing power of money.
C) encouraging nonproductive activities to protect one against inflationary losses.
D) all of the above.

Question 24

According to Application 7.1, "Fixed Assets, Or: Why a Loan in Yap Is Hard to Roll Over,"major purchases in Yap are paid for with:

A) U.S. dollars.
B) stone wheels.
C) bars of crystal salt.
D) necklaces of stone beads or sea shells.

Question 25

Which of the following statements concerning Application 7.1, "Fixed Assets, Or: Why a Loan in Yap Is Hard to Roll Over," is TRUE?

A) The Yapese use large stone wheels to make major purchases like a house.
B) The people of Yap have recently moved from using dollars to using circular stones as money.
C) Buildings in Yap are constructed of large stone wheels in order to protect the money supply.
D) All of the above are true.

Question 26

The narrowest definition of the U.S. money supply is:

A) M1.
B) M2.
C) M3.
D) currency in circulation.

Question 27

M1:

A) is money that is used to transact exchange.
B) is the narrowest definition of the money supply.
C) consists of currency, nonbank-issued traveler's checks, demand deposits and other checkable deposits.
D) all of the above.

Question 28

Which of the following is included in M1?

A) Nonbank-issued traveler's checks.
B) Coins and paper money in circulation.
C) Demand deposits at commercial banks.
D) All of the above.

Question 29

In the U.S., a penny is token money because the value of the metal in the penny is:

A) equal to 1 cent.
B) less than 1 cent.
C) greater than 1 cent.
D) determined by the supply and demand for pennies.

Question 30

When the value of the metal in a penny became greater than one cent:

A) pennies disappeared from circulation.
B) the government declared that the penny was worth more than one cent.
C) the value of the metal fell to the point where the penny again contained one cent worth of metal.
D) all of the above.

Question 31

Included in the U.S. money supply are coins and paper money:

A) in circulation in the general public.
B) warehoused in U.S. Treasury vaults.
C) warehoused in bank and Federal Reserve vaults.
D) all of the above.

Question 32

Federal Reserve Notes:

A) constitute almost all of the U.S. paper money in circulation.
B) are not part of the M1 money supply because they are U.S. government securities.
C) represent the smallest component of the money supply.
D) have been created by the U. S. Treasury as a means of trading Federal Reserve bonds for cash.

Question 33

Which of the following constitutes currency?

A) Coins and demand deposits.
B) Paper money and demand deposits.
C) Coins and paper money.
D) Nonbank-issued traveler's checks, demand deposits, coins, and paper money.

Question 34

Which of the following statements about traveler's checks is true?

A) Traveler's checks are not money.
B) Traveler's checks are excluded from M1 but included in M2.
C) There is a separate category in M1 for nonbank-issued traveler's checks.
D) Traveler's checks are included in the other checkable deposits category of M1.

Question 35

Demand deposits are:

A) checking account balances.
B) certificates of deposit payable in less than 30 days.
C) savings accounts plus credit union share drafts.
D) any type of account or deposit that can be kept at a commercial bank.

Question 36

Which of the following statements about demand deposits is FALSE?

A) They are bookkeeping numbers.
B) They are accounts kept primarily at commercial banks.
C) The paper checks people use to make payments from these accounts are, themselves, money.
D) Checks can be used to transfer demand deposits from one account to another.

Question 37

The main difference between other checkable deposits and demand deposits is that other checkable deposits:

A) are not part of the M1 money supply, but demand deposits are.
B) are not available through credit unions, but demand deposits are.
C) pay interest on the balance in the account, but demand deposits do not.
D) account for the smallest percentage of the money supply, while demand deposits account for the largest percentage.

Question 38

Which of the following would NOT be classified as an "other checkable deposit?"

A) An interest bearing account at a credit union.
B) A demand deposit account at a commercial bank.
C) An interest bearing account at a commercial bank.
D) An interest bearing account at a savings association.

Question 39

Interest-bearing accounts at commercial banks, credit unions and other financial depository institutions are examples of:

A) currency.
B) demand deposits.
C) commercial paper.
D) other checkable deposits.

Question 40

Demand deposits and other checkable deposits:

A) provide records of payment.
B) offer an element of safety if checks are lost or stolen.
C) are more convenient than currency for transacting large or complicated payments.
D) all of the above.

Question 41

Which of the following money supply components have experienced great growth since 2000?

A) Currency.
B) Demand deposits.
C) Traveler's checks.
D) Other checkable deposits.

Question 42

Which of the following has been the largest single component of the M1 money supply since 2000?

A) Demand deposits.
B) Coins and paper money.
C) Other checkable deposits.
D) Nonbank-issued traveler's checks.

Question 43

In any given year the size of the economy's M1 money supply:

A) is equal to the dollar value of GDP.
B) is less than the dollar value of GDP.
C) is greater than the dollar value of GDP.
D) may be equal to, less than, or greater than the dollar value of GDP.

Question 44

The velocity of money is:

A) how fast money comes off the printing presses.
B) the number of times the money supply is turned over in a year relative to GDP.
C) the number of times the money supply is turned over in a year relative to taxes.
D) the number of times the money supply is used in a year for household purchases.

Question 45

The velocity of money measures:

A) the ratio of demand deposits to other checkable deposits.
B) the rate of growth of the money supply from year to year.
C) the average number of times the money supply is turned over in a year relative to GDP.
D) the rate at which the money supply adjusts to policy decisions by the monetary authority.

Question 46

During the course of a year, the velocity of money is tends to be:

A) volatile because it is highly sensitive to changes in the interest rate.
B) constant because the monetary authority strictly controls the money supply.
C) volatile because there are major variations in income and expenditures from month to month.
D) constant because there is little variation in income and expenditures from month to month.

Question 47

The average number of times the money supply turns over in a year relative to GDP is the:

A) M1 adjustor.
B) velocity of money.
C) output-turnover ratio.
D) GDP implicit price deflator.

Question 48

Generally speaking, from 1980 through 2010, the velocity of money:

A) has remained fairly stable at about 7.2.
B) frequently fluctuated up and down over a wide range.
C) was fairly stable at about 7.0 up to the late 1990s, and then increased to 9.0 and over since 2000.
D) dropped almost every year until 1995, and then grew almost every year from 1995 through 2010.

Question 49

Which of the following statements is FALSE?

A) The velocity of money has increased since 2000.
B) Currency is the largest component of M1.
C) M1 as a percentage of GDP typically ranges from 50 to 75%.
D) Deamnd deposits and other cehckable deposits are balances in accounts.

Question 50

Someone arguing that M2 is a better definition of the money supply than M1 might state that:

A) M2 includes money market and other accounts that are readily available to spend.
B) M2 is more comprehensive than M1 because it includes all money and real assets of households and businesses.
C) M2 gives a better measure of real GDP since it does not include demand deposits and other checkable deposits.
D) M1 includes only accounts at commercial banks, whereas M2 includes accounts at savings associations and credit unions.

Question 51

To determine M2 you must:

A) add time deposits and other deposit accounts to M1.
B) subtract time deposits and other deposit accounts from M1.
C) add stocks, savings bonds, and treasury securities to M1.
D) subtract commercial paper, savings bonds, and treasury securities from M1.

Question 52

An account at a commercial bank or thrift institution that pays interest and allows limited checking privileges is a:

A) currency account.
B) limited-access account.
C) demand deposit account.
D) money market deposit account.

Question 53

The ease of converting an asset to its value in cash or spendable funds is its:

A) velocity.
B) liquidity.
C) cash-equivalence.
D) conversion factor.

Question 54

Liquidity refers to:

A) the ability to convert an asset to its value in cash.
B) the problem that arises when non-cash assets quickly lose their value.
C) the ability of financial institutions to offer new types of deposit accounts.
D) none of the above.

Question 55

Which of the following is most liquid?

A) A short-term U.S. Treasury security.
B) A savings deposit at a thrift institution.
C) A demand deposit at a commercial bank.
D) All of the above are equally liquid.

Question 56

Currently the U.S. is on a:

A) paper monetary standard.
B) commodity monetary standard.
C) paper monetary standard for domestic transactions and commodity monetary standard for international transactions.
D) commodity monetary standard for domestic transactions and paper monetary standard for international transactions.

Question 57

A paper monetary standard:

A) is the worst monetary standard an economy can have.
B) exists when an economy's money is not backed by something of tangible value, like gold.
C) can succeed only if there is a reserve of a commodity available to back the money supply if needed.
D) is one where money is backed by something of high intrinsic value, but the public cannot redeem its money for the item used as backing.

Question 58

A commodity monetary standard:

A) is the worst monetary standard an economy can have.
B) exists when an economy's money is not backed by something of tangible value, like gold.
C) can succeed only if it is supplemented by a sizeable paper money supply.
D) is one where money is backed by something of intrinsic value.

Question 59

A system where the money supply is backed by something tangible is called a:

A) barter standard.
B) reserve standard.
C) paper monetary standard.
D) commodity monetary standard.

Question 60

A system where the money supply is not backed by anything tangible is called a:

A) barter standard.
B) reserve standard.
C) paper monetary standard.
D) commodity monetary standard.

Question 61

A major advantage of a gold standard system is:

A) people have more faith in the money supply.
B) the money supply is less volatile than it would be on a paper standard.
C) money supply administrators have less ability to make unsuitable decisions.
D) all of the above.

Question 62

A problem with a commodity monetary standard is:

A) nothing tangible backs the currency.
B) the money supply is not tied to the conditions and needs of the economy.
C) the ability to convert currency to gold or silver causes large amounts of perfectly good money to disappear from circulation.
D) all of the above.

Question 63

A major problem with a paper monetary standard is:

A) money supply administrators have wide latitude in their decisions.
B) the money supply cannot be tied to the conditions and needs of the economy.
C) the ability to convert currency to gold or silver gives people more faith in their money.
D) all of the above.

Question 64

Which of the following statements about U.S. monetary standards is FALSE?

A) Prior to the 1930s, the U.S. was on a gold-coin standard where gold freely circulated in the hands of the public.
B) During the 1930s, the U.S. went on a gold-bullion standard in which gold backed the money supply but was not generally available to the public.
C) The gold supply was frozen in the early 1970s and the dollar was no longer converted to gold for either domestic or international transactions.
D) The payment of the national debt in gold and the redemption of foreign money for gold diminished the U.S. gold supply during the 1980s and 1990s.

Question 65

Over its history, the U.S. economy:

A) was always on a paper monetary standard.
B) was always on a commodity monetary standard.
C) began on a paper monetary standard then converted to a commodity standard.
D) began on a commodity monetary standard then converted to a paper standard.

Question 66

Which of the following statements is FALSE?

A) Historically, panics and monetary crises have not occurred with commodity monetary standards.
B) A paper monetary standard must be carefully controlled and managed to avoid serious problems.
C) One advantage of a paper monetary standard is that the money supply can be tied to economic conditions.
D) There are both advantages and disadvantages to a paper monetary standard and a commodity monetary standard.

Question 67

Financial depository institutions can:

A) make loans.
B) create money.
C) accept deposits.
D) all of the above.

Question 68

Money is created:

A) when the U.S. gold supply is increased.
B) only when the U.S. Treasury prints more money.
C) only when the U.S. Secretary of the Treasury decides to do so.
D) when commercial banks and other financial depository institutions make loans.

Question 69

Financial depository institutions create money when they:

A) make loans.
B) print money.
C) earn a profit.
D) accept deposits.

Question 70

Money is created when someone:

A) takes a loan of $1,000 from his mother.
B) borrows $1,000 from a commercial bank.
C) cashes a $1,000 check for $1,000 in paper money.
D) trades $1,000 in coins for 10 new $100 bills at a credit union.

Question 71

In the U.S., the ability to create and destroy money is held:

A) only by Congress.
B) only by the U.S. Treasury.
C) by commercial banks and other financial depository institutions.
D) only by commercial banks that belong to the Federal Reserve System.

Question 72

The financial depository institution that holds and maintains the largest amount of deposits in the M1 money supply is the:

A) credit union.
B) commercial bank.
C) Federal Reserve Bank.
D) savings and loan association.

Question 73

Commercial banks:

A) make loans to businesses and individuals.
B) provide various services, such as selling traveler's checks.
C) offer demand deposit and other accounts to businesses and individuals.
D) all of the above.

Question 74

Commercial banks are:

A) unregulated profit-driven businesses.
B) publicly regulated profit-driven businesses.
C) privately regulated profit-driven businesses.
D) publicly regulated government-run businesses.

Question 75

The term "dual banking system"refers to the fact that:

A) commercial banks accept deposits and make loans.
B) both the federal and state governments can charter commercial banks.
C) commercial banks may or may not belong to the Federal Reserve System.
D) both commercial banks and savings institutions can create and destroy money.

Question 76

When we say the U.S. has a dual banking system, we mean that:

A) both the federal and state governments have the right to charter banks.
B) all state banks are regulated by the Federal Reserve and the Federal Deposit Insurance Corporation.
C) all national banks are regulated by the Federal Reserve and the Federal Deposit Insurance Corporation.
D) commercial banks and savings institutions can perform nearly identical functions since the Monetary Control Act of 1980.

Question 77

Which of the following statements is FALSE?

A) Federal Reserve member banks are insured by the FDIC.
B) There is a very small percentage of banks with uninsured deposits.
C) All federally chartered banks belong to the Federal Reserve System.
D) All banks are required to belong to the Federal Reserve System as member banks.

Question 78

Which of the following statements about national banks is FALSE?

A) They are insured by the FDIC.
B) They must join the Federal Reserve.
C) They are regulated by a federal agency.
D) They are owned and managed by the U.S. government.

Question 79

Membership in the Federal Reserve is required of:

A) national banks.
B) state chartered banks.
C) all financial depository institutions.
D) none of the above.

Question 80

The Federal Deposit Insurance Corporation:

A) insures federal government securities, such as Treasury Bills.
B) is a private corporation that insures deposits in federally chartered banks.
C) is a government agency that insures deposits in commercial banks up to a specified amount.
D) is required by law to insure deposits in every bank, credit union, and other financial depository institution in the U.S.