Question 1

A $1, 000 price tag on a stereo system is an example of money as a unit of account.

Accepted Answer

Money as a unit of account measures the value of goods and services in a consistent way, such as using dollars to express prices. The $1,000 price tag on a stereo system represents using money as a unit of account to express its value.

Question 2

The maximum amount by which the entire banking system can create money is equal to:

Accepted Answer

The maximum amount by which the entire banking system can create money is equal to a multiple of its excess reserves. This is because banks are required to hold a fraction of their deposits as reserves, either required reserves or excess reserves. The money creation process occurs when banks lend out their excess reserves, and these loans lead to the creation of new deposits. As long as banks have excess reserves, they can continue to create new money through lending. Therefore, the maximum amount of money that can be created by the banking system is a multiple of its excess reserves.

Question 3

Using money as a unit of account lowers information costs compared to barter exchanges.

Accepted Answer

In a barter exchange, each person would have to identify a trading partner who has what he wants and wants what he has. This requires a lot of information, time, and effort. By using money as a unit of account, individuals can more easily compare the value of different goods and services and conduct transactions more efficiently.

Question 4

Which of the following constitutes a currency drain from the banking system?

Accepted Answer

A banking panic, where depositors withdraw large amounts of cash from their accounts, constitutes a currency drain from the banking system. This results in a reduction in the reserves held by banks and a decrease in the amount of money that can be lent out.

Question 5

An increase in the reserve requirement from 20 percent to 25 percent is most likely to:

Accepted Answer

An increase in the reserve requirement from 20 percent to 25 percent would reduce excess reserves that banks can use to create additional loans and deposits. This reduction in excess reserves would lower the deposit expansion multiplier and ultimately decrease total deposits in the banking system. Therefore, option B is the correct answer.

Question 6

The table given below records the amount of new deposits, the value of required reserves, and total amount loaned out by Banks 1, 2, and 3. Table 12.3
 Refer to Table 12.3.If the reserve requirement changed to 8 percent, then total deposits in the economy would be equal to:

Accepted Answer

The answer of The table given below records the amount...

Question 7

Other things equal, when U.S.money moves to other countries to take advantage of better foreign investment opportunities, then:

Accepted Answer

When U.S. money moves to other countries, it leaves the U.S. financial system, causing a decrease in the U.S. money supply. This is because the money that goes abroad is no longer available for banks to lend out or for individuals and businesses to spend within the U.S. economy.

Question 8

When you save $1, 500 for a spring-break vacation in Cancun, you are using money as a standard of deferred payment.

Accepted Answer

Money as a standard of deferred payment refers to using money to settle debts or obligations in the future, not saving for future expenses.

Question 9

The money-creating ability of the banking system may be lowered by:

Accepted Answer

An increase in the reserve requirement would lead to a decrease in the amount of money banks can lend out and thus lower their money-creating ability. This is because banks must hold a portion of their deposits as reserves, and if the reserve requirement is increased, banks must hold more of their deposits in reserve, leaving less available to lend out. Choices A, B, C, and D would not necessarily lower the money-creating ability of the banking system.

Question 10

If the reserve requirement is 33.3 percent, what is the approximate value of deposit expansion multiplier?

Accepted Answer

The deposit expansion multiplier is the reciprocal of the reserve requirement. Therefore, the approximate value of the deposit expansion multiplier is 1/0.333, which equals approximately 3.

Question 11

Stocks and bonds are considered to be highly illiquid assets while real estate is considered to be a liquid asset.

Accepted Answer

This statement is false. Real estate is generally considered to be an illiquid asset, as it can take a significant amount of time to find a buyer and complete a transaction. Stocks and bonds, on the other hand, are typically more liquid as they can be easily bought and sold on public markets.

Question 12

Saltbricks will be considered as money if they are generally acceptable to sellers in exchange for goods and services.

Accepted Answer

According to the concept of "commodity money," any item that is widely accepted as a medium of exchange can be considered as money. If saltbricks are generally accepted by sellers in exchange for goods and services, they can be considered as money.

Question 13

Scarcity and durability characterize the property of money as a medium of exchange.

Accepted Answer

Scarcity and durability are characteristics of money, but they relate to its function as a store of value, not specifically as a medium of exchange. The medium of exchange function is characterized by acceptability and divisibility.

Question 14

If the deposit expansion multiplier is 20, what is the reserve requirement in the banking system?

Accepted Answer

The deposit expansion multiplier is the reciprocal of the reserve requirement ratio. If the multiplier is 20, the reserve requirement is 1/20, which is 5 percent.

Question 15

Suppose that Mr.Chopp withdraws $500 from his checking account.If the reserve requirement is 5 percent, what will be the maximum potential change in the money supply forthcoming from Mr.Chopp's transaction?

Accepted Answer

The answer of Suppose that Mr.Chopp withdraws $500 from his...

Question 16

The higher the rate of inflation in Cuba, the greater the probability that Cuban residents will substitute U.S.currency for Cuban currency.

Accepted Answer

When there is higher inflation in a country, the value of its currency decreases, making it more expensive to purchase goods and services with that currency. Hence, people tend to look for alternative currencies that have stable values, such as the U.S. dollar. Therefore, the higher the rate of inflation in Cuba, the greater the likelihood that Cuban residents will use the U.S. currency as a substitute.

Question 17

The table given below records the amount of new deposits, the value of required reserves, and total amount loaned out by Banks 1, 2, and 3. Table 12.3
 Refer to Table 12.3.If the reserve requirement changed to 8 percent, then total loans in the economy would be equal to _____.

Accepted Answer

To find the total loans in the economy after a change in reserve requirement, we need to first find the total reserves that banks must hold with the new requirement.

With new deposits of $100,000, the required reserves with an 8% reserve requirement would be:
$100,000 x 0.08 = $8,000

So, banks would have $92,000 ($100,000 - $8,000) to loan out.

Bank 1 would be able to loan out:
$40,000 - $3,200 = $36,800

Bank 2 would be able to loan out:
$30,000 - $2,400 = $27,600

Bank 3 would be able to loan out:
$20,000 - $1,600 = $18,400

The total loans in the economy would be:
$36,800 + $27,600 + $18,400 = $82,800

Therefore, the correct answer is B) $115,000.

Question 18

Suppose a bank has demand deposits of $2, 500, excess reserves of $125, and a reserve requirement of 25 percent.What is the loss in the money expansion process of the whole banking system if the bank decides to lend out only $100?

Accepted Answer

The bank can lend out $325 ($125 excess reserves / 0.25 reserve requirement). If it lends out only $100, the loss in the money expansion process is $325 - $100 = $225.

Question 19

If a bank has $500 in excess reserves and the reserve requirement is 20 percent, then the maximum amount by which this individual bank can increase the money supply is _____.

Accepted Answer

The answer of If a bank has $500 in excess...

Question 20

The use of money as a medium of exchange requires a double coincidence of wants.

Accepted Answer

The use of money as a medium of exchange eliminates the need for a double coincidence of wants, as money can be used to exchange goods and services without needing to find someone who wants exactly what you have to offer in return.

Quiz 10: Money and Banking