Deck 16: Money, banks, and the Federal Reserve System

Question 1

According to the U.S.Treasury

A)the government will not accept cash in payment of taxes.
B)creditors do not have to accept cash in payment of debts.
C)firms do not have to accept cash as payment for goods and services.
D)U)S.dollars must be accepted as payment for any good or service sold in the United States.

Answer 1

firms do not have to accept cash as payment for goods and services.

Question 2

Your roommate argues that he can think of no better situation than living in a deflationary economy,as prices of goods and services would continuously fall.You disagree and argue that during a deflation,people can be made worse off because

A)the purchasing power of people's incomes would increase.
B)the purchasing power of the currency would decrease.
C)the value of the real interest rate will drop below the nominal interest rate.
D)borrowers will have to pay increasing amounts in real terms over time.

Answer 2

borrowers will have to pay increasing amounts in real terms over time.

Question 3

If whole tomatoes were money,which of the following functions of money would be the hardest for tomatoes to satisfy?

A)unit of account
B)store of value
C)certificate of gold
D)medium of exchange

Answer 3

store of value

Question 4

Which of the following assets is most liquid?

A)money
B)bond
C)savings account
D)stock

Question 5

The major shortcoming of a barter economy is

A)the requirement of a double coincidence of wants.
B)the requirement of specialization and exchange.
C)that goods and services are not traded.
D)that money loses value from inflation.

Question 6

Soldiers in a World War II prisoner-of-war camp

A)used gold as a fiat money.
B)used cowrie shells as money.
C)used cigarettes as money.
D)used U.S.dollars as a commodity money.

Question 7

In an economy with ________,there are more prices than in an economy with ________.

A)barter; money
B)money; barter
C)fiat money; commodity money
D)fiat money; barter

Question 8

Which of the following statements regarding the use of gold as money is false?

A)It has standardized quality.
B)It is durable.
C)It has value other than money.
D)It is acceptable to traders.

Question 9

Economies where goods and services are traded directly for other goods and services are called ________ economies.

A)trade
B)barter
C)direct
D)seigniorage

Question 10

In economics,money is defined as

A)the total value of one's assets in current prices.
B)the total value of one's assets minus the total value of one's debts, in current prices.
C)the total amount of salary, interest, and rental income earned during a year.
D)any asset people generally accept in exchange for goods and services.

Question 11

Which of the following is one of the most important benefits of money in an economy?

A)Money allows for the exchange of goods and services.
B)Money allows for the accumulation of wealth.
C)Money makes exchange easier, leading to more specialization and higher productivity.
D)Money encourages people to produce all of their own goods (self-sufficiency)and therefore increases economic stability.

Question 12

Which of the following information about fiat money is false? Fiat money

A)is backed by gold.
B)serves as a medium of exchange.
C)has little to no value except as money.
D)is authorized by a central bank or governmental body.

Question 13

Dollar bills in the modern economy serve as money because

A)they are backed by the gold stored in Fort Knox.
B)they can be redeemed for gold by the central bank.
C)they have value as a commodity independent of their use as money.
D)people have confidence that others will accept them as money.

Question 14

People hold money as opposed to financial assets because money

A)earns interest.
B)is perfectly liquid.
C)earns no interest.
D)earns a higher return than other financial assets.

Question 15

Fiat money has

A)little to no intrinsic value but is backed by the quantity of gold held by the central bank.
B)little to no intrinsic value and is authorized by the central bank or governmental body.
C)value, because it can be redeemed for gold by the central bank.
D)a great intrinsic value that is independent of its use as money.

Question 16

The statement,"My iPhone is worth $300" represents money's function as

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

Question 17

Commodity money

A)has value independent of its use as money.
B)has little to no value independent of its use as money.
C)is backed by a valuable commodity such as gold.
D)can be used to purchase commodities, but not services.

Question 18

One reason Zimbabwe suffered from hyperinflation is that the government had decided to pay for all of its expenses by

A)selling Treasury bonds to foreign governments.
B)selling its government-run oil company to a private company, which then defaulted on its payment.
C)raising interest rates to attract foreign direct investment, then nationalizing the foreign-owned facilities.
D)printing more and more money.

Question 19

Silver is an example of a

A)commodity money.
B)barter money.
C)fiat money.
D)representative money.

Question 20

Which of the following functions of money would be violated if inflation were high?

A)unit of account
B)store of value
C)certificate of gold
D)medium of exchange

Question 21

Which is not one of the criteria necessary for a commodity to make a suitable medium of exchange?

A)It should be durable.
B)It should be of standardized quality.
C)It should be valuable relative to its weight.
D)It should have intrinsic value.

Question 22

Which of the following criteria would make gold a poor medium of exchange?

A)its value depends on its purity, and its purity is not easy to visibly identify
B)durability so that value is not lost by spoilage
C)value relative to its weight so that amounts large enough to be useful in trade can be easily transported
D)divisibility because different goods are valued differently

Question 23

Liquidity is defined as

A)the ease with which a given asset can be converted to a store of value.
B)the ease with which a given asset can be converted to a unit of account.
C)the ease with which a given asset can be converted to a medium of exchange.
D)the ease with which a given asset can be converted to a standard of deferred payment.

Question 24

A farm worker gets paid today in money,but plans to spend the money next week.This illustrates which function of money?

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

Question 25

Gold is an example of

A)commodity money.
B)fiat money.
C)barter money.
D)M1.

Question 26

Which of the following is a function that money serves?

A)medium of exchange
B)unit of account
C)store of value
D)All of the above are correct.

Question 27

A major source of inefficiency in barter economies is that they require

A)a standard of deferred payment to make trade possible.
B)a double coincidence of wants in exchange.
C)more liquid stores of value than do monetary economies.
D)All of the above are correct.

Question 28

Among potential stores of value,money

A)offers the highest rate of return.
B)increases in value during periods of inflation.
C)has the advantage of being the most liquid asset.
D)provides more services than the other assets.

Question 29

Fiat money

A)has no or very little value except as money.
B)is rarely used in modern economies.
C)functions well only if can be redeemed for gold or other precious metals.
D)serves well as a medium of exchange, but not as a store of value.

Question 30

When a grocery store accepts your $5 bill in exchange for bread and milk,the $5 bill serves as a

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

Question 31

Which of the following is the most liquid asset?

A)a Renoir painting
B)bonds
C)a car
D)money

Question 32

By making exchange ________,money allows for ________ and higher ________.

A)harder; specialization; costs
B)easier; specialization; productivity
C)harder; generalization; productivity
D)easier; specialization; costs

Question 33

Paper currency is a

A)commodity money.
B)fiat money.
C)barter money.
D)bond.

Question 34

Commodity money is a good

A)used as money that has no secondary use.
B)that is designated as money by law.
C)used as money that also has value independent of its use as money.
D)used as money that has no intrinsic value.

Question 35

A barter economy is an economy where

A)goods and services are exchanged for money.
B) money is exchanged for goods and services.
C)goods and services are exchanged for other goods and services.
D)goods and services are exchanged for liabilities.

Question 36

A car dealer sells you a car today in exchange for money in the future.This illustrates which function of money?

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

Question 37

Money is

A)an asset that people are willing to accept in exchange for goods and services.
B)a liability that people are willing to accept in exchange for goods and services.
C)the income one earns over a period of time.
D)one's assets net of one's liabilities at any point in time.

Question 38

During World War II,prisoners of war used ________ as money.

A)bullets
B)cowrie shells
C)chocolate
D)cigarettes

Question 39

The statement "This Dell laptop costs $1,200" illustrates which function of money?

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

Question 40

Fiat money is generally issued by

A)private banks.
B)central banks.
C)brokerage firms.
D)major multinational corporations.

Question 41

Money cannot serve as a medium of exchange unless it also serves as a store of value.Is this statement true or false? Explain.

Question 42

A good can serve as money only if

A)government mandates that the good must be accepted in payment of debts.
B)it is declared by authorities to be legal tender.
C)it has intrinsic value or if it is backed by precious metals.
D)citizens accept the good as a means of payment for transactions and debts.

Question 43

Because Federal Reserve Notes (paper currency)are legal tender,

A)U)S.workers must accept them as payment for labor services.
B)U)S.creditors must accept them in payment of debts.
C)U)S.firms must accept them as payment for goods and services.
D)All of he above are correct.

Question 44

Economists estimate that ________ of U.S.currency is outside the United States and held primarily by ________.

A)over half; households and firms in countries where there is little confidence in the local currency
B)over half; foreign banks and foreign governments
C)less than one quarter; households and firms in countries where there is little confidence in the local currency
D)less than one quarter; foreign banks and foreign governments

Question 45

In an economy with money,as opposed to barter,people are more likely to specialize in the production of goods and services.

Question 46

The largest proportion of M1 is made up of

A)currency.
B)checking account deposits.
C)traveler's checks.
D)savings account deposits.
E)time deposits.

Question 47

The most liquid measure of money supply is

A)M0.
B)M1.
C)M2.
D)M3.

Question 48

Economies cannot function without money.

Question 49

Would the invention of money,as opposed to barter,increase the growth rate of real GDP in a country over time? Why or why not?

Question 50

If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money supply,what would be the effect on M1 or M2?

A)M1 would rise.
B)M1 would fall.
C)M1 would rise and M2 would remain constant.
D)M2 would rise but M1 would remain constant.

Question 51

Although gold is highly valued by most people,it is difficult to use as a medium of exchange.Explain.

Question 52

The supply of money is easier to control with commodity money than it is with fiat money.

Question 53

If gold is used as money in an economy,the money supply is easy to control.

Question 54

Using the five criteria in the book,explain how U.S.currency is suitable to use as a medium of exchange.

Question 55

The M1 measure of the money supply equals

A)paper money plus coins in circulation.
B)currency plus checking account balances.
C)currency plus checking account balances plus traveler's checks.
D)currency plus checking account balances plus traveler's checks plus savings account balances.

Question 56

Which of the following is not counted in M1?

A)checking account balances
B)credit card balances
C)coins in circulation
D)currency in circulation
E)traveler's check balances

Question 57

Money will fail to serve as a medium of exchange if it ceases to be a store of value.

Question 58

An economy without money would have no exchanges of goods and services.

Question 59

What are the four functions of money? Can something be considered money if it does not fulfill all four functions?

Question 60

The Federal Reserve's narrowest definition of the money supply is

A)M0.
B)M1.
C)M2.
D)M3.

Question 61

Most payments in the United States for goods and services are made using

A)currency.
B)checking account deposits.
C)traveler's checks.
D)gold.

Question 62

M2 includes M1 plus

A)currency in circulation, checking account deposits in banks, and holdings of traveler's checks.
B)savings account balances, money market deposit accounts in banks, small-denomination time deposits, and noninstitutional money market fund shares.
C)checking account deposits, large-denomination time deposits, and noninstitutional money market fund shares.
D)currency in circulation, savings account balances, and small-denomination time deposits.

Question 63

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts,this will initially

A)decrease M1 and increase M2.
B)decrease M1 and decrease M2.
C)decrease M1 and not change M2.
D)increase M1 and decrease M2.

Question 64

If credit card balances rise in the economy,then M1 will ________ and M2 will ________.

A)increase; increase
B)not change; increase
C)decrease; increase
D)not change; not change
E)increase; decrease

Question 65

If households and firms decide to hold less of their money in checking account deposits and more in currency,then the money supply

A)will not change.
B)will increase.
C)will decrease.
D)may increase or decrease.

Question 66

In the United States,currency includes

A)gold, silver, and paper money.
B)checking and savings account deposits.
C)paper money and coins in circulation.
D)traveler's checks.

Question 67

If a person withdraws $500 from his/her savings account and puts it in his/her checking account,then M1 will ________ and M2 will ________.

A)increase; decrease
B)increase; not change
C)not change; increase
D)not change; decrease
E)not change; not change

Question 68

If you liquidate $3,000 of your mutual fund and transfer the funds to your checking account,then initially,M1 will ________ and M2 will ________.

A)not change; decrease
B)increase; decrease
C)increase; not change
D)not change; not change

Question 69

If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account,then M1 will ________ and M2 will ________.

A)increase; increase
B)not change; increase
C)decrease; increase
D)decrease; not change
E)increase; decrease

Question 70

The narrowest official definition of the money supply is

A)M1.
B)M2.
C)M3.
D)L)

Question 71

If you transfer all of your currency to your checking account,then initially,M1 will ________ and M2 will ________.

A)increase; not change
B)not change; increase
C)not change; not change
D)decrease; increase

Question 72

If households in the economy decide to take money out of checking account deposits and hold it as currency,this will initially

A) not change M1 and increase M2.
B)decrease M1 and decrease M2.
C)decrease M1 and not change M2.
D)not change M1 and not change M2.

Question 73

Money's most narrow definition is based on its function as a

A)store of value.
B)unit of account.
C)standard of deferred payment.
D)medium of exchange.
E)standard of barter.

Question 74

The M2 measure of the money supply equals

A)savings account balances plus small-denomination time deposits plus traveler's checks.
B)savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.
C)M1 plus savings account balances plus small-denomination time deposits.
D)M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund shares.

Question 75

Scenario 16-1
$$\begin{array} { l r } \text { Currency } & \$ 1,000 \\\text { Checking Account Balances } & 2,000 \\\text { Savings Account Balances } & 5,000 \\\text { Small-Denomination Time Deposits } & 6,000 \\\text { Noninstitutional Money Market Fund Shares } & 7,000\end{array}$$
Consider the information above for a simple economy. Assume there are no traveler's checks.

-Refer to Scenario 16-1.M1 in this simple economy equals

A)$1,000.
B)$2,000.
C)$3,000.
D)$8,000.

Question 76

M1 includes

A)currency in circulation, checking account deposits in banks, and holdings of traveler's checks.
B)currency in circulation, savings account balances, and checking account deposits in banks.
C)currency in circulation, savings account balances, checking account deposits in banks, and holdings of traveler's checks.
D)coins, savings account balances, traveler's checks.

Question 77

A person's wealth

A)is a measure of how much money the person has.
B)equals the value the person's assets minus his or her liabilities.
C)is measured independent of his or her current and expected future income.
D)All of the above are correct.

Question 78

You earn $500 a month,currently have $200 in currency,$100 in your checking account,$2,000 in your savings accounts,$3,000 worth of illiquid assets and $1,000 of debt.You have

A)money = $2,300, annual income = $6,000, and wealth = $5,000.
B)money = $300, annual income = $6,000, and wealth = $4,300.
C)money = $200, annual income = $500, and wealth = $4,300.
D)money = $300, annual income = $6,000, and wealth = $5,000.

Question 79

Scenario 16-1
$$\begin{array} { l r } \text { Currency } & \$ 1,000 \\\text { Checking Account Balances } & 2,000 \\\text { Savings Account Balances } & 5,000 \\\text { Small-Denomination Time Deposits } & 6,000 \\\text { Noninstitutional Money Market Fund Shares } & 7,000\end{array}$$
Consider the information above for a simple economy. Assume there are no traveler's checks.

-Refer to Scenario 16-1.M2 in this simple economy equals

A)$3,000.
B)$8,000.
C)$14,000.
D)$21,000.

Question 80

If a person withdraws $500 from his/her checking account and holds it as currency,then M1 will ________ and M2 will ________.

A)increase; decrease
B)not change; not change
C)not change; increase
D)decrease; increase
E)decrease: decrease