Question 1

The major role of a commercial bank is to
A) make mortgage loans.
B) sell shares and use the proceeds to buy stocks.
C) receive deposits and make loans.
D) restrain the growth of the quantity of money.

Accepted Answer

Commercial banks primarily engage in receiving deposits from the public and extending loans to individuals and businesses, facilitating financial transactions and credit in the economy.

Question 2

Which of the following is TRUE regarding money market mutual funds?
I. Money market mutual funds buy highly liquid assets like Treasury bills.
II. Shareholders can obtain loans from money market mutual funds.
A) I only
B) II only
C) both I and II
D) neither I nor II

Accepted Answer

Money market mutual funds invest in highly liquid, short-term securities such as Treasury bills, making statement I true. However, shareholders cannot obtain loans from money market mutual funds, making statement II false.

Question 3

The balance owed on credit cards in the United States in 2014 was $880 billion. When consumers pay off this balance in full,
A) M1 will decrease by $880 billion.
B) M1 will remain unchanged but M2 will decrease by $880 billion.
C) neither M1 nor M2 will change.
D) M1 will increase by $880 billion.

Accepted Answer

Paying off credit card balances involves transferring money from one type of account (e.g., checking accounts, which are part of M1) to another (the credit card company's account). This action does not change the total amount of money in the economy; it merely reallocates existing funds. Therefore, neither M1 nor M2, which include broader forms of money, will change in total amount.

Question 4

Which of the following explains why a bank holds reserves?
I. Banks are required by law to hold reserves.
II. To meet depositors' currency withdrawals
III. To use them to make loans to households
A) I only
B) II only
C) I and II
D) I, II, and III
E) I and III

Accepted Answer

Banks are required by law to hold reserves as a safety measure to ensure they have enough liquidity to meet depositors' demands for currency withdrawals. Reserves are not directly used to make loans; instead, they are held to meet withdrawal demands and regulatory requirements.

Question 5

Sarah buys shares from a financial institution that uses her funds together with other funds to purchase U.S. treasury bills. Sarah has deposited her money into a
A) savings bank.
B) credit union.
C) money market mutual fund.
D) savings and loan association.

Accepted Answer

Sarah has invested in a money market mutual fund, which pools money from many investors to purchase low-risk government securities like U.S. treasury bills.

Question 6

Examples of thrift institutions include
A) savings and loans associations, money market mutual funds and credit unions.
B) commercial banks, savings and loan associations, and credit unions.
C) savings and loan associations, savings banks, and credit unions.
D) money market mutual funds, commercial banks, and credit unions.

Accepted Answer

Thrift institutions are financial entities focused on savings and real estate lending, including savings and loan associations, savings banks, and credit unions, but not commercial banks or money market mutual funds.

Question 7

Which of the following is considered a depository institution?
I. the U.S. Treasury
II. a commercial bank like Citibank
III. a credit union for federal government employees
A) I only
B) I and II
C) II and III
D) I, II and III

Accepted Answer

Depository institutions are financial entities that accept deposits from customers and provide loans. Both commercial banks, like Citibank, and credit unions, including those for federal government employees, fit this definition. The U.S. Treasury, however, does not function as a depository institution; it is a government department responsible for managing government revenue, issuing currency, and other financial and monetary matters.

Question 8

Depository institutions
A) make profit from the spread between the interest rate they pay on deposits and the interest rate they receive on loans.
B) make a profit according to how much the Federal Reserve pays them.
C) make their profit by charging the government for their services.
D) make zero profit but receive compensation by the government because their services are so valuable.

Accepted Answer

Depository institutions, such as banks and credit unions, primarily make their profit from the difference between the interest rates they pay on deposits and the interest rates they charge on loans. This difference is known as the interest rate spread.

Question 9

Credit cards were introduced in 1959. In 2014, the U.S. credit card balance was $880 billion. Which of the following is TRUE?
A) The $880 billion balance is part of M2 but not part of M1.
B) The $880 billion balance is part of both M1 and M2.
C) Only that portion of the $800 billion actually charged in 2014 is counted in M1 and M2.
D) No part of the $880 billion balance is counted in M1 and M2.

Accepted Answer

Credit card balances are not considered part of the money supply (M1 or M2) because they represent credit, not actual money.

Question 10

Money market mutual funds invest in
A) residential mortgages.
B) commercial real estate.
C) long-term government securities.
D) highly liquid assets.

Accepted Answer

Money market mutual funds primarily invest in highly liquid assets such as short-term debt securities, making them a safer and more liquid investment option.

Question 11

A credit union is
A) a combination of credit card corporations.
B) a depository institution owned by a social or economic group.
C) a thrift institution that issues credit cards.
D) a commercial bank owned by its depositors.

Accepted Answer

Credit unions are member-owned financial cooperatives that provide savings, credit, and other financial services to their members. They are owned and controlled by the people who use their services, who are typically bound by a common bond of association like working for the same employer or living in the same community.

Question 12

Commercial banks do NOT
A) buy U.S. government Treasury bills.
B) accept deposits from their customers.
C) make loans to creditworthy individuals and businesses.
D) determine what assets are money.

Accepted Answer

Commercial banks do not have the authority to determine what assets are considered money. This is typically the role of the central bank or monetary authority of a country.

Question 13

Modern U.S. commercial banks perform all of the following functions EXCEPT
A) accept checking deposits.
B) issue paper currency.
C) make loans to households and business firms.
D) accept savings deposits.

Accepted Answer

Modern U.S. commercial banks do not issue paper currency; this function is performed by the central bank of a country, such as the Federal Reserve in the United States.

Question 14

Which of the following institutions is NOT a depository institution?
A) the U.S. Treasury
B) a commercial bank
C) a money market mutual fund
D) a thrift institution, such as a savings and loan association

Accepted Answer

The U.S. Treasury is not a depository institution because it does not accept deposits from the public.

Question 15

A savings bank is a depository institution that
A) makes mostly personal loans.
B) makes mostly home-purchase loans.
C) is owned by a social or economic group.
D) makes mostly consumer loans.

Accepted Answer

Savings banks primarily focus on accepting savings deposits and making mortgage loans, especially for home purchases. They are known for their role in helping individuals finance the purchase of homes, distinguishing them from other financial institutions that might focus on different types of loans or services.

Question 16

A depository institution is a firm that takes deposits from ________ and makes loans to ________.
A) households and firms; other households and firms
B) firms only; households only
C) households only; firms only
D) firms only; other firms only

Accepted Answer

Depository institutions, such as banks, accept deposits from both households and firms and use those funds to make loans to other households and firms, facilitating financial transactions and economic activity.

Question 17

A money market mutual fund is
A) essentially the same as a checking account.
B) a time deposit of $100,000 or less.
C) a time deposit of more than $100,000.
D) a depository institution that sells shares and buys securities such as U.S. Treasury bills.

Accepted Answer

Money market mutual funds are investment funds that pool money from investors to purchase short-term, high-quality securities like U.S. Treasury bills. They are not the same as checking accounts or time deposits, but rather offer a way to earn returns on cash that might otherwise be sitting idle.

Question 18

Which of the following is NOT a function of money?
A) medium of exchange
B) barter
C) unit of account
D) store of value

Accepted Answer

Barter is not a function of money; it is an alternative system of trade where goods and services are directly exchanged for other goods and services without using money as an intermediary.

Question 19

Money market mutual funds
A) are provided by the Federal Reserve as liquidity for private banks.
B) have no restrictions on shareholder withdrawals.
C) do not provide any checking services to their owners.
D) allow shareholders to write check on their funds.

Accepted Answer

Money market mutual funds often allow shareholders to write checks against their funds, providing a level of liquidity similar to that of a checking account, though there may be limitations on the number of checks or minimum amounts.

Question 20

The fact that money can be exchanged for goods reflects money's role as a
A) cause of inflation.
B) medium of exchange.
C) unit of account.
D) store of value.

Accepted Answer

Money's role as a medium of exchange means it can be used to facilitate transactions for goods and services, making it a universal method of payment.

Quiz 8: Money, the Price Level, and Inflation

The major role of a commercial bank is to

Which of the following is TRUE regarding money market mutual funds? I. Money market mutual funds buy highly liquid assets like Treasury bills. II. Shareholders can obtain loans from money market mutual funds.

The balance owed on credit cards in the United States in 2014 was $880 billion. When consumers pay off this balance in full,

Which of the following explains why a bank holds reserves? I. Banks are required by law to hold reserves. II. To meet depositors' currency withdrawals III. To use them to make loans to households

Sarah buys shares from a financial institution that uses her funds together with other funds to purchase U.S. treasury bills. Sarah has deposited her money into a

Examples of thrift institutions include

Which of the following is considered a depository institution? I. the U.S. Treasury II. a commercial bank like Citibank III. a credit union for federal government employees

Depository institutions

Credit cards were introduced in 1959. In 2014, the U.S. credit card balance was $880 billion. Which of the following is TRUE?

Money market mutual funds invest in

A credit union is

Commercial banks do NOT

Modern U.S. commercial banks perform all of the following functions EXCEPT

Which of the following institutions is NOT a depository institution?

A savings bank is a depository institution that

A depository institution is a firm that takes deposits from and makes loans to .

A money market mutual fund is

Which of the following is NOT a function of money?

Money market mutual funds

The fact that money can be exchanged for goods reflects money's role as a