Deck 13: Money and the Financial System

Question 1

The Fed can make loans to the general public at the discount rate.​

Answer 1

False

Question 2

Money does not solve the double coincidence of wants problem unless it is generally acceptable.​

Answer 2

True

Question 3

In general,the more money in existence,the better it functions as a store of value.​

Answer 3

False

Question 4

People came to accept fiat money because they believed that others would accept it as well.​

Question 5

Banks earn a profit by offering loans at higher interest rates than they pay savers.​

Question 6

​The only money that can be used as a standard of value is fiat money.

Question 7

The U.S.dollar is backed by gold.​

Question 8

The chair of the Board of Governors of the Fed must resign when a new president is elected.​

Question 9

​The twelve district banks of the Federal Reserve System were created to decentralize power and to respond to the public's fears of the monopoly power of a single central bank such as the Bank of England or the Bank of Japan.

Question 10

Under a fractional reserve banking system,banks have reserves of only a fraction of their total deposits.​

Question 11

Inflation is impossible in a commodity money system.​

Question 12

Barter is the exchange of goods and services without the use of money.​

Question 13

The chair of the Board of Governors of the Fed is appointed by the president.​

Question 14

Only Federal Reserve banks can issue paper currency in the United States,and their power to do so is virtually unlimited.​

Question 15

The Federal Reserve provides gold in exchange for Federal Reserve notes.​

Question 16

The U.S.dollar is a good example of fiat money.​

Question 17

One characteristic of cattle that makes them unsuitable as a medium of exchange is that they are not easily divisible.​

Question 18

The first checks were probably notes written to a goldsmith asking him to transfer ownership of some designated amount of gold from the writer of the note to its bearer.​

Question 19

Paper money is a good example of commodity money.​

Question 20

​To say that money serves as a store of value is to say that money is a useful way to store wealth for future use.

Question 21

Thousands of U.S.banks failed in the 1930s because the Fed loaned too many reserves to member banks.​

Question 22

​Deregulation of banks and other depository institutions allowed the FDIC to open bank branches of its own.

Question 23

The first step in the evolution of money involved the use of _____.​

A)physical commodities
B)barter
C)pieces of paper representing claims on physical commodities
D)pieces of paper with no intrinsic value
E)electronic entries representing claims on pieces of paper with no intrinsic value

Question 24

​The emergence of mortgage-backed securities provided mortgage brokers with an incentive to seek out only the most creditworthy borrowers.

Question 25

Specialization of labor means that:​

A)production requires a special kind of labor.
B)the overall skill level of labor is increasing over time.
C)individuals produce goods that they are relatively good at producing and trade for those that they do not produce.
D)individuals achieve self-sufficiency in production by producing all the goods that they require.
E)exchange within the economy consists of trading in services.

Question 26

​Exchange is necessary in an economy if:

A)output is to be produced.
B)output is to be consumed.
C)individuals are self-sufficient.
D)families are self-sufficient.
E)labor is specialized.

Question 27

The Federal Open Market Committee was established to give the Fed the power to change reserve requirements.​

Question 28

Many banks in the U.S.failed in the 1930s,not because they were poorly managed,but because they could not survive the panicky withdrawal of funds by their depositors.​

Question 29

​The emergence of the subprime mortgage market following the recession of 2001 made it increasingly difficult for low-income individuals to obtain a mortgage.

Question 30

​The earliest type of exchange involved _____.

A)coins
B)barter
C)commodity money
D)fiduciary money
E)fiat money

Question 31

​The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the Federal Reserve the authority to establish a reserve requirement for all financial institutions.

Question 32

Each member of the Federal Reserve's Board of Governors is appointed for life.​

Question 33

Before specialization:​

A)families were largely self-sufficient.
B)families produced much more than they could each consume.
C)there was a great need for exchange between families.
D)families consumed much more than they could each produce.
E)families exchanged only goods,not services.

Question 34

A mortgage-backed security is a bundle of hundreds of mortgages which represents a claim on the monthly payments made on those mortgages.​

Question 35

The emergence of the subprime mortgage market following the recession of 2001 set off a boom in the housing industry.​

Question 36

​Barter may be the only alternative:

A)if the supply of money dries up.
B)if the price system is not allowed to function properly.
C)if disinflation sets in.
D)if hyperinflation sets in.
E)if fiat money is discontinued.

Question 37

Interest rate ceilings resulted in great profitability for banks in the 1970s.​

Question 38

The United States has a dual banking system consisting of state banks and national banks.​

Question 39

The Federal Deposit Insurance Corporation (FDIC)insures the total value of all deposits in banks that are members of the Fed.​

Question 40

​Specialization of labor means that:

A)production requires a special kind of labor.
B)the overall skill level of labor is increasing.
C)individuals produce goods other than those they want to consume.
D)individuals achieve self-sufficiency in production.
E)exchange within an economy consists of trading in services.

Question 41

​In order for something to be used as money,it must be _____.

A)issued by the government
B)issued by banks
C)declared to be money
D)generally acceptable
E)made of something valuable

Question 42

​The more specialized labor becomes,the:

A)less likely it is that a double coincidence of wants will exist,and the less likely it is that monetary exchange will develop.
B)less likely it is that a double coincidence of wants will exist,and the more likely it is that monetary exchange will develop.
C)more likely it is that a double coincidence of wants will exist,and the less likely it is that monetary exchange will develop.
D)more likely it is that a double coincidence of wants will exist,and the more likely it is that monetary exchange will develop.
E)more likely it is that the individual is producing only what he or she wants to consume.

Question 43

​Barter works best when:

A)there is an absence of a double coincidence of wants.
B)many different products are available in the economy.
C)money is readily available to establish relative prices.
D)each trader has what the other wants and wants what the other has.
E)highly developed economies achieve extensive specialization of labor.

Question 44

​Which of the following statements is true of a barter system?

A)In a barter system,an individual offers one good or service to get another good or service.
B)In a barter system,an individual offers money to get a good or service.
C)In a barter system,an individual offers a good or service to get money.
D)In a barter system,different kinds of money are exchanged for one another.
E)In a barter system,all individuals are self-sufficient.

Question 45

​The greater the degree of specialization in the economy,the:

A)easier it is to discover a double coincidence of wants.
B)more feasible is a barter system.
C)less likely it is that monetary exchange will develop.
D)harder it is to negotiate an exchange rate between all pairs of goods.
E)more likely it is that individual consumers are self-sufficient.

Question 46

​As the variety of goods and services increases,barter becomes:

A)easier because the chance of there being a double coincidence of wants increases.
B)harder because the chance of there being a double coincidence of wants increases.
C)easier because the chance of there being a double coincidence of wants decreases.
D)harder because the chance of there being a double coincidence of wants decreases.
E)easier because people have more options to choose from.

Question 47

​Which of the following statements is true of a barter system?

A)In a barter system,it is difficult to keep track of the relative values of goods and services.
B)In a barter system,an individual offers money to import goods and services.
C)In a barter system,an individual offers currency notes to get coins.
D)In a barter system,different kinds of money are exchanged for one another.
E)In a barter system,individuals are self-sufficient.

Question 48

​Which of the following was the earliest type of money?

A)Coins
B)Barter
C)Commodity money
D)Token money
E)Fiat money

Question 49

​Which of the following best illustrates the double coincidence of wants?

A)Both Tom and Jerry would like to purchase the same good.
B)Tom has something he's willing to trade with Jerry; Jerry has something he's not willing to trade with Tom.
C)Tom and Jerry have very similar tastes; hence,Tom's wants coincide with Jerry's.
D)Tom has something he's willing to trade with Jerry,who wants it; Jerry has something he's willing to trade with Tom,who wants it.
E)Tom has something Jerry wants; Jerry has nothing Tom wants.

Question 50

​The unit of account function of money:

A)means that money should be durable.
B)means that money makes price information more accessible.
C)requires that money be made of something valuable.
D)means that money can be used to save up purchasing power.
E)means that money is more easily counted than goods.

Question 51

​Which of the following is true of the unit of account function of money?

A)It makes money durable in nature.
B)It makes the relative values of goods and services more easily known.
C)It implies that money should be made of something valuable.
D)It implies that money can be used to save up purchasing power.
E)It implies that money is more easily counted than goods.

Question 52

​Barter was more feasible in primitive societies than in modern societies because:

A)there was no inflation in primitive societies.
B)there were many goods available for trade in primitive societies,so people could always find the goods that they wanted.
C)specialization was limited and thus there were few goods available for trade in primitive societies.
D)specialization was limited and thus there were many goods available for trade in primitive societies.
E)people in primitive societies had limited wants.

Question 53

​The greater the number of different goods available in an economy,the:

A)less likely it is that a double coincidence of wants will exist,and the less likely it is that monetary exchange will develop.
B)less likely it is that a double coincidence of wants will exist,and the more likely it is that monetary exchange will develop.
C)more likely it is that a double coincidence of wants will exist,and the less likely it is that monetary exchange will develop.
D)more likely it is that a double coincidence of wants will exist,and the more likely it is that monetary exchange will develop.
E)more likely it is that individuals are producing only goods they want to consume.

Question 54

​The three important functions of money are _____.

A)medium of exchange,facilitation of trade,and unit of account
B)unit of account,facilitation of trade,and store of value
C)store of value,facilitation of trade,and double coincidence of wants
D)facilitation of trade,medium of exchange,and unit of account
E)medium of exchange,unit of account,and store of value

Question 55

​Barter is the direct exchange of goods and services for:

A)any kind of money.
B)other goods and services.
C)either goods or money.
D)commodity money.
E)foreign currency.

Question 56

​Identify the statement which is true of a barter system?

A)In a barter system,trade will only occur if there is a double coincidence of wants.
B)In a barter system,an individual offers coins to get a good or service.
C)In a barter system,an individual offers a commodity money to get fiat money.
D)In a barter system,different kinds of money are exchanged for one another.
E)In a barter system,individuals are self-sufficient.

Question 57

​How does money function as a unit of account?

A)Money has intrinsic worth as a commodity.
B)Money is convertible into commodities that have intrinsic worth.
C)The prices of all goods and services are measured in terms of money.
D)Things that function as money can do so because people know there is a standard of value that ultimately backs the money even if it is only faith.
E)Bank accounts make it easy for people to store their wealth.

Question 58

​Which of the following statements is true of a barter system?

A)In a barter system economy,no rates of exchange are defined.
B)In a barter system economy,there are as many different rates of exchange as there are pairs of goods to trade.
C)In a barter system economy,rates of exchange are expressed in goods per dollar.
D)In a barter system economy,rates of exchange are expressed in dollars per good.
E)In a barter system economy,rates of exchange are denominated in gold or silver.

Question 59

​If people use quartz as a medium of exchange,then they:

A)have a barter economy.
B)are using commodity money.
C)are using token money.
D)are using legal tender.
E)are using fiat money.

Question 60

​Commodity money is something:

A)that has no intrinsic value.
B)that has an intrinsic value.
C)that is based on a valuable metal.
D)whose value never changes.
E)whose value cannot be determined.

Question 61

​Coins were minted with serrated edges:

A)to make it obvious that they were made of cheap alloys.
B)so that cheaper metals did not have to be used.
C)to allow words to be printed on the border.
D)to prevent the coins from being clipped.
E)to make them jingle less when they rub together.

Question 62

​Whatever serves as a medium of exchange is:

A)money.
B)money,as long as it is also the best such medium of exchange available.
C)money,as long as it is not also a commodity.
D)money,as long as it is not also legal tender.
E)not money,unless it continues to be backed by its issuing institution.

Question 63

​Any bank that uses deposits to make loans:

A)operates on a 100 percent reserve system.
B)operates on a fractional reserve system.
C)does not operate on a reserve system.
D)does not keep reserves in its vaults.
E)charges an interest rate determined by the reserve ratio.

Question 64

​Goldsmiths are considered to be the forerunners of modern banks because they:

A)had safes to keep gold secure.
B)issued gold coins.
C)created money by lending out gold reserves.
D)created legal tender.
E)verified the quality of money.

Question 65

​Fiat money:

A)has value because people accept it.
B)has a high intrinsic value.
C)is backed by commodity reserves.
D)is money because of its metallic content.
E)is frequently clipped.

Question 66

​Money that is acceptable because the government requires that it be accepted in payment of debt is _____.

A)legal tender
B)commodity money
C)bad money
D)backed by government's wealth
E)hoarded by the people

Question 67

​Whatever functions as money must be _____.

A)authorized by the government
B)accepted as deposit by banks
C)backed by precious metals like gold or silver
D)completely indestructible
E)limited in supply

Question 68

When silver and gold were used as money,both their quantity and quality were open to question.The solution was _____.​

A)seashells
B)seigniorage
C)token money
D)coinage
E)fiat money

Question 69

​Commitments to make or receive payments in the future are made easier by money's function as a _____.

A)unit of account
B)store of value
C)medium of exchange
D)form of barter
E)commodity

Question 70

​_____ were the first bankers.

A)Seigniors
B)Governments
C)Savings and loan institutions
D)Farmers
E)Goldsmiths

Question 71

​Federal Reserve notes are _____.

A)checks
B)commodity money
C)coins
D)backed by gold
E)fiat money

Question 72

​Suppose an ocean liner sinks and the passengers are stranded on a lush tropical island.Which of the following could most likely be used as money in the economy that develops among the survivors?

A)The life jackets they put on when leaving the ship
B)The beads from the necklaces that were given out as party favors on the night the ship sank
C)The coconuts growing on the island
D)The fish in the sea around the island
E)The sand on the island's beaches

Question 73

​Which of the following are legal tender?

A)A check
B)A Federal Reserve note
C)A bank note issued by a private bank
D)A credit card
E)A traveler's check

Question 74

​Fiat money is backed by:

A)gold or silver.
B)fractional reserves.
C)the promise of a bank to redeem it upon presentation.
D)the commodity in which it is denominated.
E)nothing.

Question 75

​The reserve ratio is the ratio of:

A)Federal Reserve member banks to nonmember banks.
B)Federal Reserve nonmember banks to member banks.
C)Federal Reserve member banks to all U.S.banks.
D)a bank's total deposits to its reserves.
E)a bank's reserves to its total deposits.

Question 76

​Fractional reserve banking occurs when:

A)a bank has reserves that exceed its deposits.
B)a bank has reserves that are equal to its deposits.
C)a bank has reserves that are less than its deposits.
D)some depositors lose their deposits through poor bank management.
E)some lenders fail to repay their loans.

Question 77

​An important function of commercial banks is to _____.

A)print new currency
B)issue fiat money
C)mint coins
D)redeem currency for precious metals
E)make loans

Question 78

Which type of money has the lowest opportunity cost?​

A)Silver coins
B)Gold coins
C)Commodity money
D)Diamonds
E)Fiat money

Question 79

​Which of the following serves as money in many federal prisons in the United States these days?

A)Postage stamps​
B)Energy bars
C)Plastic-and-foil pouches of mackerel
D)Cans of tuna
E)Cigarettes

Question 80

Identify the correct statement regarding a fractional reserve banking system.​

A)Only a fraction of the banks in the system are allowed to create money.
B)Only a fraction of the banks in the system have reserves.
C)The claims outstanding against the bank are only a fraction of the bank's total reserves.
D)Each bank must deposit a fraction of its reserves with the Federal Reserve Bank.
E)Bank reserves represent only a fraction of bank deposits.