Deck 25: Monetary Institutions

Question 1

In general,a bank that held excess reserves would earn lower profits as a result.

Answer 1

True

Question 2

New loans create money directly,but they also create excess reserves in other banks,which leads to still further increases in both loans and the supply of money.

Answer 2

True

Question 3

Credit cards should be included in M1 because they are just like checks.

Answer 3

False

Question 4

If the government requires banks to keep 100 percent of their deposits on reserve,a $1,000 deposit in a checking account would lead to a $100,000 increase in the money supply.

Question 5

People continue to value money because they have confidence in its convertibility into goods and services.

Question 6

Deposit insurance and government's willingness to help distressed banks have virtually eliminated the potential for serious bank runs.

Question 7

When a person pays a loan back to a bank by writing a check for the amount due,demand deposits decline and the money supply is reduced.

Question 8

The higher the interest rate paid on certificates of deposit and other nontransaction deposits,other things being equal,the less people would be expected to hold in demand deposits.

Question 9

Banks create money when they increase demand deposits through the process of creating loans.

Question 10

The more widely held and accepted credit cards are,the more money people would be expected to hold in the form of currency.

Question 11

M1 includes currency,checkable deposits,traveler's checks,and savings deposits.

Question 12

A reserve requirement of 10% implies a money multiplier of 10 and a reserve requirement of 15% implies a money multiplier of 15.

Question 13

When the U.S.banking system collapsed during 1929-1933,the money supply declined dramatically.

Question 14

Money functioning as a medium of exchange results in an increase in transactions costs.

Question 15

Paper money is fiat money because it has been declared by government as a means of exchange.

Question 16

If a person buries his money in his backyard,he is using money as a medium of exchange.

Question 17

Savings accounts are the most liquid of all assets because they can be quickly and easily transferred.

Question 18

Money is a more efficient store of value than wheat,especially when there is not rapid inflation.

Question 19

The existence of inflation and other possible uncertainties reduces the usefulness of money as a store of value.

Question 20

Reserve requirements exist primarily to prevent bank failures.

Question 21

One point virtually all economists agree on when defining money is that:

A) money must be spendable.
B) money must be liquid.
C) money must be accepted as payment.
D) all of the above are correct.

Question 22

One major problem with some commodity monies is that:

A) to be useful, money must be divisible.
B) to be useful, money must be storable.
C) to be useful, money must be of uniform quality.
D) all of the above are problems with commodity monies.

Question 23

M1 includes:

A) cash and travelers' checks.
B) cash, checking account balances, and travelers' checks.
C) cash, travelers checks', and bank deposits
D) cash, checking account balances, and saving account balances.

Question 24

Paper money in the U.S.is:

A) fiat money.
B) more than half of M2.
C) only partially backed by gold and silver in Fort Knox.
D) convertible into specie (gold or silver) at the holder's request.

Question 25

The problem of double coincidence of wants is associated with:

A) paper money.
B) insurance.
C) credit cards.
D) barter system.

Question 26

Which of the following is not one of the functions of money?

A) unit of account
B) means of deferred payment
C) encouraging people to barter
D) medium of exchange

Question 27

Which of the following is an example of money serving as a medium of exchange?

A) John buys a cup of coffee and a roll at the faculty dining room.
B) Steve puts a five-dollar bill in his money belt.
C) Scott deposits cash into a savings account.
D) Roland puts his coins into a piggy bank.

Question 28

Barter system is less desirable than using money for exchange because:

A) it is a more inefficient and a time-consuming process.
B) gold and silver are risky and inconvenient to transport.
C) it tends to promote inflation.
D) gold and silver are relatively scarcer than other commodities.

Question 29

Which of the following is not included in the M1 category?

A) Currency
B) Checkable deposits
C) Traveler's checks
D) Savings deposits

Question 30

Using money as a store of value rather than wheat is:

A) safer.
B) less expensive.
C) both safer and less expensive.
D) neither safer nor less expensive.

Question 31

The difference between M1 and M2 is significant.Which of the following best describes the difference?

A) M1 is nearly three times as large as M2.
B) M2 is made up mostly of demand and checkable deposits.
C) M2 is substantially larger than M1.
D) None of the above.

Question 32

Fiat money has value because:

A) it is backed by gold.
B) it is divisible.
C) it can be used to buy things.
D) it can be exchanged for a commodity backing it.

Question 33

Which of the following assets is most liquid?

A) funds in a checking account
B) a car
C) ten acres of land
D) a television

Question 34

Money almost always serves as the standard unit for quoting prices.This is another way of saying money serves as a:

A) medium of exchange.
B) store of value.
C) standard of value.
D) commodity itself.

Question 35

The primary benefit of monetary exchange compared to barter exchange is:

A) the possibility of tracking trade for tax purposes.
B) increased time devoted to finding trade partners.
C) increased time devoted to shopping for what we want.
D) increased efficiency in arranging transactions.

Question 36

Which of the following is not a form of money?

A) checkable deposits
B) travelers' checks
C) currency
D) credit cards

Question 37

One reason why gold and silver coins have historically served as money is that:

A) they are easily portable.
B) they can be made of uniform size and quality.
C) they can be divided if necessary for low prices.
D) all of the above are correct.

Question 38

Which of the following is not a correct statement about money?

A) Money serves as a medium of exchange.
B) The value of money generally fluctuates much more than the prices of individual commodities like oil or wheat.
C) Money serves as a store of value.
D) Money serves as a means of deferred payment.

Question 39

The idea behind money as a standard of value is that use of money allows:

A) greater efficiency in exchange.
B) receipt of income to be separated from spending.
C) persons to hold spending power for some period of time.
D) prices quoted in money terms.

Question 40

"Near monies" are:

A) included in the M1 definition of the money supply.
B) highly liquid assets that are close substitutes for money.
C) stocks, bonds, and real estate.
D) U.S. notes and Federal Reserve notes.

Question 41

A depositor cannot directly write checks against:

A) demand deposits.
B) transaction deposits.
C) nontransaction deposits.
D) money market mutual fund accounts.

Question 42

A gold standard is:

A) a measurement of the importance of a good; it indicates high quality.
B) the basis for monetary exchange internationally.
C) an internationally recognized means for defining currency exchange rates.
D) a system where currency (e.g., the dollar) was defined as equivalent in value to a certain amount of gold.

Question 43

The process of money creation can be reversed:

A) when a person pays a loan back to a bank.
B) when the government passes a law against it.
C) when customers begin to deposit money into banks.
D) when loans are extended to customers.

Question 44

Which of the following is included in M2 but is not included in M1?

A) Eurodollar deposits
B) savings accounts
C) traveler's checks
D) checkable deposits

Question 45

With the invention of banking,one important aspect of money was that:

A) individuals have no discretion over the money supply.
B) government lost all control over the money supply.
C) banks have some discretion over the money supply.
D) banks have full control over the money supply.

Question 46

Which of the following is the best definition of money?

A) anything generally accepted as a payment for goods or repayment of debt
B) anything that is a liability of the federal government
C) anything that is a liability of a commercial bank
D) coins and currency in the hands of the public

Question 47

Which of the following backs our money supply?

A) The words "This note is legal tender."
B) The faith in the government
C) The faith that people will take it in exchange for goods and services
D) Precious metals

Question 48

If individuals will no longer accept a currency,is it still considered to be money?

A) No, because one of the main characteristics necessary for something to serve as money is that it must be generally acceptable.
B) No, because of Gresham's Law.
C) Yes, because the government identifies it as legal tender.
D) Yes, because one of the main characteristics necessary for something to serve as money is that it must be generally acceptable.

Question 49

Money lowers the transaction cost when:

A) the economy is experiencing rapid inflation.
B) its value is stable.
C) the rate of inflation is uncertain.
D) there is widespread deflation

Question 50

Can bankers create money?

A) No, they do not have this power.
B) No, unless they have a special charter which permits it.
C) Yes, through multiple deposit creation.
D) Yes, by printing checks for customers.

Question 51

If the reserve requirement is 15 percent and a customer makes a new cash deposit of $50,000,how much new excess reserves are created?

A) $7,500
B) $33,000
C) $67,500
D) $42,500

Question 52

Which of the following observations is true of nontransaction deposits?

A) depositor can use them directly as a means of payment
B) they do not pay any interest
C) depositor cannot directly write checks against them
D) they generally pay lower interest rates than transaction deposits

Question 53

Rapid inflation makes holding a large amount of money:

A) wiser, because you will generally need more and more to buy the goods and services you want.
B) less wise, because the opportunity cost of holding money is high.
C) less wise, because someone might steal it, or it might be destroyed.
D) wiser, because the opportunity cost of holding money is high.

Question 54

A single bank is severely limited in its ability to create money because:

A) the FDIC will not permit it to create money unless the Resolution Trust Corporation guarantees the loans.
B) loan recipients usually take the proceeds of the loan in cash.
C) the funds loaned probably will be deposited in another bank.
D) recent federal legislation prohibits banks from creating money except to finance international trade.

Question 55

Which of the following is included in both M1 and M2?

A) traveler's checks
B) checkable deposits
C) currency
D) all of the above.

Question 56

An important effect of fractional reserve banking is that:

A) bankers' choices about how much to lend can affect the money supply.
B) the commercial banking system has complete control over total reserves.
C) bankers always turn every dollar of excess reserves into loans.
D) a new bank deposit allows a bank to extend loans of the same amount to borrowers.

Question 57

Fractional reserve banking takes its name from the fact that:

A) banks hold only a fraction of their reserves at the bank itself.
B) banks keep only a fraction of total deposits on reserve.
C) banks reserve only a fraction of their activity for lending.
D) all of the above

Question 58

A decrease in currency in circulation combined with an equal increase in savings account deposits would:

A) increase both M1 and M2.
B) increase M1 but have no effect on M2.
C) decrease both M1 and M2.
D) decrease M1 but have no effect on M2.

Question 59

A bank's capital is:

A) the value of all its assets, including loans.
B) the value of all its assets, excluding loans.
C) the value of its physical plant, including buildings, computers, and automatic teller machines.
D) the difference between its assets and liabilities.

Question 60

From a new deposit in a checking account potential money creation is:

A) excess reserves times money multiplier.
B) initial deposit times money multiplier.
C) actual reserves times required reserve ratio.
D) required reserves times money multiplier.

Question 61

Which of the following observations concerning money market mutual funds is not true?

A) They are interest-earning accounts provided by brokers.
B) They are considered to be near money.
C) Depositors are allowed to write checks against their accounts.
D) These funds are invested in long-term securities.

Question 62

The predominant liability item for most banks is:

A) deposits.
B) bonds.
C) loans.
D) federal cash reserves.

Question 63

Loans are:

A) assets of banks, liabilities of borrowers.
B) liabilities of banks, assets of borrowers.
C) assets of banks and their borrowers.
D) liabilities of banks and their borrowers.

Question 64

If a bank had demand deposits of $50 million and it faced a 25 percent required reserve ratio,it would be required to have how many reserves?

A) $50 million
B) $37.5 million
C) $25 million
D) $12.5 million

Question 65

If a bank had demand deposits of $80 million and it faced a 25 percent required reserve ratio,it would be able to have a maximum amount of how many dollars worth of loans?

A) $20 million
B) $40 million
C) $60 million
D) $80 million

Question 66

Exhibit 25-1 A bank's assets consist of $500,000 in total reserves,$1,600,000 in loans,and a building worth $1,200,000.Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital.
Refer to Exhibit 25-1.If the required reserve ratio is 20 percent,what is the level of the bank's excess reserves? How much could it loan out as a result?

A) $100,000; $100,000
B) $100,000; $400,000
C) $400,000; $500,000
D) $400,000; $2,000,000

Question 67

The largest asset item for most banks is:

A) cash.
B) bonds.
C) loans.
D) federal cash reserves.

Question 68

Exhibit 25-1 A bank's assets consist of $500,000 in total reserves,$1,600,000 in loans,and a building worth $1,200,000.Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital.
Refer to Exhibit 25-1.If the required reserve ratio is 20 percent,what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

A) $100,000; $100,000
B) $400,000; $400,000
C) $100,000; $500,000
D) $400,000; $2,000,000

Question 69

A decrease in the excess reserves banks want to hold,together with people taking currency out of their demand deposit accounts,would:

A) increase the money supply.
B) decrease the money supply.
C) leave the money supply unchanged.
D) have an indeterminate effect on the money supply.

Question 70

Exhibit 25-1 A bank's assets consist of $500,000 in total reserves,$1,600,000 in loans,and a building worth $1,200,000.Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital.
Refer to Exhibit 25-1.If the required reserve ratio is 25 percent,what is the level of the bank's excess reserves? How much could it loan out as a result?

A) zero; zero
B) $500,000; $500,000
C) $500,000; $2,000,000
D) $250,000; $1,000,000

Question 71

If a bank had demand deposits of $80 million and it faced a 25 percent required reserve ratio,it would be required to have how many reserves?

A) $20 million
B) $40 million
C) $60 million
D) $80 million

Question 72

Demand deposits are:

A) assets of banks, liabilities of depositors.
B) liabilities of banks, assets of depositors.
C) assets of banks and their depositors.
D) liabilities of banks and their depositors.

Question 73

U.S.government bonds held by commercial banks are:

A) government assets and commercial bank assets.
B) government assets and commercial bank liabilities.
C) government liabilities and commercial bank assets.
D) government liabilities and commercial bank liabilities.

Question 74

If a bank had demand deposits of $50 million and it faced a 25 percent required reserve ratio,it would be able to have a maximum amount of how many dollars worth of loans?

A) $50 million
B) $37.5 million
C) $25 million
D) $12.5 million

Question 75

Say the required reserve ratio is 10 percent.If you pay back a loan of $20,000 a bank had previously made to you,the act of paying back the loan:

A) adds $2,000 in bank reserves.
B) adds $20,000 in bank reserves.
C) eliminates $2,000 in bank reserves.
D) eliminates $20,000 in bank reserves.

Question 76

Exhibit 25-1 A bank's assets consist of $500,000 in total reserves,$1,600,000 in loans,and a building worth $1,200,000.Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital.
Refer to Exhibit 25-1.If the required reserve ratio is 10 percent,what is the level of the bank's excess reserves? How much could it loan out as a result?

A) $200,000; $200,000
B) $200,000; $2,000,000
C) $300,000; $300,000
D) $300,000; $3,000,000

Question 77

Exhibit 25-1 A bank's assets consist of $500,000 in total reserves,$1,600,000 in loans,and a building worth $1,200,000.Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital.
Refer to Exhibit 25-1.If the required reserve ratio is 10 percent,what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

A) $200,000; $200,000
B) $200,000; $2,000,000
C) $300,000; $300,000
D) $300,000; $3,000,000

Question 78

A bank may hold secondary reserves,such as U.S.government securities because:

A) they pay higher interest rates than deposits at the Fed, and are easily converted into cash assets.
B) they pay higher interest rates than deposits at the Fed, even though they are hard to convert assets.
C) they pay lower interest rates than deposits at the Fed, but are more easily converted into cash assets.
D) they pay lower interest rates than deposits at the Fed, and are hard to convert into cash assets.

Question 79

Exhibit 25-1 A bank's assets consist of $500,000 in total reserves,$1,600,000 in loans,and a building worth $1,200,000.Its liabilities and capital consist of $2,000,000 in demand deposits and $1,300,000 in capital.
Refer to Exhibit 25-1.If the required reserve ratio is 25 percent,what is the level of the bank's excess reserves? How much money could the excess reserves be used to create in the banking system as a result?

A) zero; zero
B) $500,000; $500,000
C) $500,000; $2,000,000
D) $250,000; $1,000,000

Question 80

Say the required reserve ratio is 20 percent.If you pay back a loan of $10,000 a bank had previously made to you,the act of paying back the loan:

A) adds $2,000 in bank reserves.
B) adds $10,000 in bank reserves.
C) eliminates $2,000 in bank reserves.
D) eliminates $10,000 in bank reserves.