Deck 15: Banking and the Money Supply

Question 1

M1,the money supply narrowly defined,consists of coins,paper currency,checkable deposits,travelers checks,and certificates of deposit (CDs).

Answer 1

False

Question 2

Currency held by the nonbank public is a medium of exchange.

Answer 2

True

Question 3

Which of the following make up the money supply as it is most narrowly defined?

A)coins and currency held by the nonbank public,traveler's checks,and savings deposits
B)all coins and currency held by the nonbank public
C)coins and currency held by the nonbank public,checking deposits,and traveler's checks
D)coins and currency held by the nonbank public,checking deposits,and savings deposits
E)checking deposits,savings deposits,and money market mutual fund accounts

Answer 3

C

Question 4

M1 includes currency held in shoeboxes by people distrustful of banks.

Question 5

Narrowly defined,the M1 money supply consists primarily of

A)coins and currency
B)gold
C)gold and silver
D)certificates of deposit
E)checkable deposits

Question 6

In the United States,paper money is redeemable for gold.

Question 7

M1 is the narrowest measure of the money supply.

Question 8

Demand deposits are

A)long-term,high-interest savings accounts
B)accounts into which banks can require depositors make regular deposits
C)checkable deposits held by commercial banks that earn no interest
D)negotiable order of withdrawal accounts
E)loans from the Fed

Question 9

The narrowest definition of the money supply includes only currency held by the nonbank public.

Question 10

Narrowly defined,the M1 money supply consists primarily of

A)coins
B)currency
C)cash held by banks
D)checkable deposits
E)money market mutual fund accounts

Question 11

M1 includes currency held in bank vaults.

Question 12

Of the following,which is not included in the narrowest definition of money,M1

A)coins and currency in bank vaults
B)currency in the hands of the nonbank public
C)coins in the hands of the nonbank public
D)traveler's checks
E)checkable deposits

Question 13

Coins in the United States are manufactured and distributed by the

A)Federal Reserve
B)U.S.Mint
C)U.S.Treasury
D)FBI
E)Controller of the Currency

Question 14

Currency held by banks is not included in the money supply.

Question 15

Which of the following are included in the narrowest definition of the money supply?

A)cash in bank vaults
B)savings deposits
C)money market mutual fund accounts
D)negotiable certificates of deposit
E)checkable deposits

Question 16

The M1 money supply is defined as

A)one-dollar bills
B)currency and coins held by the nonbank public,checkable deposits,and traveler's checks
C)M3 minus M2
D)all currency and checkable deposits
E)coins and currency held by the nonbank public

Question 17

Which of the following is not true of Federal Reserve notes?

A)They are fiat money.
B)They are a liability of the Fed.
C)They are redeemable for other Federal Reserve notes.
D)They are redeemable for gold.
E)They are counted as currency in the money supply.

Question 18

Which of the following is not legal tender in the United States?

A)a $2 bill
B)a fifty-cent piece
C)a $100 bill
D)a $5 Federal Reserve Note
E)a check

Question 19

The M1 money supply consists of

A)coins and currency held by the nonbank public
B)coins and currency held by the nonbank public and currency held in banks
C)coins and currency held by the nonbank public,checkable deposits,and traveler's checks
D)coins and currency held in banks and checkable deposits
E)paper currency

Question 20

Of the following,which is not included in the narrowest definition of money,M1

A)coins in the hands of the nonbank public
B)currency in the hands of the nonbank public
C)gold and silver
D)traveler's checks
E)checkable deposits

Question 21

Currently,M2 is approximately

A)equal to M1
B)twice the size of M1
C)half the size of M1
D)ten times the size of M1
E)three times the size of M1

Question 22

Banks earn a profit on the difference between

A)interest charged to depositors and interest offered to borrowers
B)interest charged on loans and interest paid on deposits
C)deposit and loan balances
D)liabilities and deposits
E)dividends and interest

Question 23

Banks create money when they make loans.

Question 24

Banks create money when they accept deposits.

Question 25

The largest component of M1 is

A)currency
B)checkable deposits
C)traveler's checks
D)money market mutual fund accounts
E)savings accounts

Question 26

Net Worth on a bank's balance sheet is

A)equal to assets plus liabilities
B)sometimes called the owners' equity
C)equal to assets minus reserves
D)the same thing as net profits
E)on the asset side of the balance sheet

Question 27

Banks act as financial intermediaries by

A)bringing together car buyers and auto dealers
B)bringing together real estate brokers and home buyers
C)printing money for all to use
D)serving the credit needs of borrowers and the security needs of savers
E)selling shares of stock to investors

Question 28

M2 is defined as

A)M1 plus savings accounts,small time deposits,and money market mutual funds
B)coins,currency,and checkable deposits
C)all near moneys
D)M1 plus time deposits
E)M1 plus money market mutual funds

Question 29

Usually,a commercial bank's depositors and its owners are the same individuals.

Question 30

Which of the following is true of credit cards?

A)They have eliminated the use of money.
B)They are currently the most popular means of payment in the United States.
C)They are included in the narrow definition of money,M1.
D)They are near money.
E)They are a way of postponing the payment of money.

Question 31

Stores need not accept your check but must accept currency because

A)currency is backed by gold
B)checks are not money but currency is
C)currency is legal tender; checks are not
D)currency is easier to handle
E)currency is a medium of exchange; checks are not

Question 32

The Federal Reserve's narrowest definition of money is

A)M3
B)M2
C)M1
D)near money
E)money market mutual funds

Question 33

If you returned a $5 Federal Reserve note to the Fed,you could receive

A)$5 in silver
B)$5 in gold
C)5 one-dollar bills
D)10 one-dollar bills
E)a small gold bar

Question 34

The distinction between M1 and M2 has blurred over time because

A)M1 is now larger than M2
B)depositors can transfer funds between accounts so easily
C)the Federal Reserve has defined them less precisely
D)M1 is becoming less liquid
E)banks are offering time deposits

Question 35

The Federal Reserve's narrowest definition of money is

A)M3
B)M2
C)currency in the hands of the public plus checkable deposits plus traveller's checks
D)near money
E)money market mutual funds

Question 36

A 2005 quarter is called token money because

A)it is legal tender
B)its metal value exceeds it face value
C)there is less than a quarter's worth of metal in it
D)it can be used in the subway
E)it is not generally accepted in exchange

Question 37

What proportion of M1 is accounted for by checkable deposits and traveler's checks?

A)about 10%
B)about 25%
C)about 40%
D)about 55%
E)about 75%

Question 38

Which of the following is not included in M2.

A)small time deposits
B)coins,currency,and checkable deposits
C)savings accounts
D)gold and silver
E)money market mutual funds

Question 39

All of the following are part of M2 except one.Which is the exception?

A)money market deposit accounts
B)coins
C)travelers checks
D)large denomination time deposits
E)savings deposits

Question 40

From a bank's point of view,its deposits are liabilities,not assets.

Question 41

In banking,Assets equal Liabilities plus Net Worth.

Question 42

Asymmetric information in financial markets exists when one party to the transaction has more information than the other regarding risks,alternatives,and other relevant details.

Question 43

A bank's assets include all but one of the following.Which one is the exception?

A)checkable deposits
B)loans
C)securities
D)mortgages
E)cash

Question 44

Banks have more expertise than individual households in making loans because banks

A)lend larger amounts of money
B)are regulated by the government
C)also pay interest to savers
D)are subject to severe penalties if they make bad loans
E)make many more loans than individual households do

Question 45

If a bank has $1 million in assets and $50,000 in net worth,its liabilities must equal

A)$50,000
B)$1,050,000
C)$50 million
D)$1,000,000
E)$950,000

Question 46

Asymmetric information in financial markets exists when borrowers know more about their ability to repay loans than lenders do.

Question 47

As a lender,a bank holds an advantage over any individual person because

A)individuals do not diversify their asset holdings
B)individuals are better at enforcing loan contracts
C)banks have to engage in extensive and costly searches for potential borrowers
D)banks develop expertise in evaluating borrowers' loan applications
E)individuals have extensive knowledge of and experience in writing loan contracts

Question 48

In banking,Assets minus Net Worth equals Liabilities.

Question 49

Banks help to overcome the problem of asymmetric information by

A)lending only to students
B)acquiring expertise in evaluating the credit histories of borrowers
C)threatening borrowers
D)offering only one type of loan
E)providing information to lenders

Question 50

Banks are financial intermediaries because they

A)receive new Federal Reserve notes from the Fed and put them into circulation
B)bring together the two sides of the market-savers and borrowers
C)bring different savers into contact with each other
D)bring about the merger of smaller banks to make larger ones
E)resolve disputes between stock brokers,mortgage companies,insurance agencies,and other financial institutions

Question 51

Which of the following is not a function of a depository institution?

A)serving as a financial intermediary
B)providing expertise on loans
C)acting as a stockbroker
D)reducing the risk of savers
E)linking savers and borrowers

Question 52

The practice of reducing risk through diversification could be summed up by the phrase

A)a penny saved is a penny earned
B)neither a borrower nor a lender be
C)buy low; sell high
D)don't put all your eggs in one basket
E)a fool and his gold are soon parted

Question 53

What do commercial banks and thrifts attempt to maximize?

A)assets
B)deposits
C)loans
D)profits
E)utility

Question 54

Asymmetric information in financial markets exists when

A)teachers know more about banking than students do
B)borrowers know more about their ability to repay loans than lenders do
C)lenders know more about borrowers than borrowers know about themselves
D)borrowers pay off a loan before it is due
E)borrowers and lenders know more about banking than banks do

Question 55

On a bank's balance sheet,the value of its assets must equal

A)net worth
B)liabilities
C)owner's equity
D)liabilities plus net worth
E)revenues minus costs

Question 56

Banks minimize the risk of loss to depositors by

A)lending to casino owners
B)making many different loans to different borrowers
C)refusing to lend money to the U.S.government
D)putting all their eggs in one basket
E)making very long-term loans

Question 57

A bank that borrows from the Fed at 3 percent annual interest

A)must hold 3 percent of its total reserves as required reserves
B)must hold 97 percent of its total reserves as required reserves
C)will be able to profit by charging less than 3 percent for its loans
D)hopes to charge more than 3 percent for its loans
E)must give up U.S.government securities to secure the loan

Question 58

In financial markets,asymmetric information exists when

A)one party to a transaction has more knowledge of relevant details than the other does
B)both parties to a transaction have less knowledge of relevant details than the Fed does
C)lenders know more about the borrowers than the borrowers know about themselves
D)all parties to a transaction have exactly the same information
E)all the information which the parties have is inaccurate

Question 59

In banking,Assets plus Liabilities must equal Net Worth.

Question 60

Which of the following is not a liability to a bank?

A)checkable deposits
B)NOW accounts
C)net worth
D)borrowings from the Fed
E)deposits with the Fed

Question 61

A $20 Federal Reserve note is

A)an asset of the Federal Reserve
B)included in M1 if it is currently in a commercial bank's vault
C)a liability to you if it is in your wallet
D)an asset to a commercial bank if it is currently in the bank's vault
E)not legal tender because it is not redeemable for silver or gold

Question 62

Banks are permitted to lend all of their reserves.

Question 63

Banks are permitted to lend all of their required reserves.

Question 64

If you know the required reserve ratio and the amount of a bank's deposits,then you know the minimum amount of reserves the bank is required to hold.

Question 65

A bank with $1 million in deposits and $50,000 in excess reserves,facing a required reserve ratio of 20 percent,holds total reserves of $250,000.

Question 66

If a bank's reserves are exactly equal to the required amount of reserves,then it has no excess reserves.

Question 67

If a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2,then the bank can lend

A)$4,000
B)$16,000
C)no more than $4,800
D)no less than $3,000
E)$1,000

Question 68

Banks are required to hold reserves against the total value of all their assets.

Question 69

On a bank's balance sheet,

A)deposits and loans are assets
B)deposits and loans are liabilities
C)deposits are liabilities; loans are assets
D)deposits are assets; loans are liabilities
E)deposits and loans are not listed

Question 70

The ready cash kept on hand by a bank to meet the needs of those who want to withdraw funds does not earn interest for the bank.

Question 71

On a bank's balance sheet,

A)assets are always less than liabilities
B)assets equal liabilities plus net worth
C)assets equal liabilities minus net worth
D)liabilities equal assets plus net worth
E)assets are always larger than liabilities plus net worth

Question 72

If a customer deposits $1,000 cash into her checking account,the bank's

A)assets rise by $1,000 and liabilities fall by $1,000
B)assets fall by $1,000 and liabilities rise by $1,000
C)assets and liabilities both fall by $1,000
D)assets and liabilities both rise by $1,000
E)profits rise by $1,000

Question 73

On a bank's balance sheet,

A)assets = liabilities - net worth
B)assets = liabilities + net worth
C)assets = liabilities
D)assets = net worth
E)net worth = liabilities

Question 74

If the reserve requirement is constant,it is impossible for a bank's excess reserves to fall if its total reserves have not fallen.

Question 75

When a customer deposits $100 into a checking account,the effect is to

A)increase the bank's liabilities
B)decrease the bank's liabilities
C)increase the bank's assets
D)decrease the bank's assets
E)increase both the bank's liabilities and its assets

Question 76

Banks are permitted to lend all of their excess reserves.

Question 77

If you know the required reserve ratio and the total value of a bank's assets,then you know how much the bank is holding in reserves.

Question 78

All depository institutions are subject to the Fed's required reserve ratios.

Question 79

If you know the required reserve ratio,then you know how much each bank is holding in reserves.

Question 80

Which of the following is a liability for a bank?

A)U.S.government securities
B)deposits with the Fed
C)checkable deposits
D)consumer and business loans
E)building and furniture