Deck 13: Money and the Banking System

Question 1

The Federal Reserve System:

A) is different than the central bank of the United States.
B) implements fiscal policy.
C) includes 12 district federal reserve banks.
D) is a private profit- making commercial banking system.

Answer 1

includes 12 district federal reserve banks.

Question 2

Which of the following is a function of the Federal Reserve?

A) conduct monetary policy
B) to act as a lender of last resort
C) supply currency to the economy
D) All of the above are correct.

Answer 2

All of the above are correct.

Question 3

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following
questions:
According to Application 4, which insurance company did the Fed take an 80 percent stake in and made an $85 billion loan to?

A) Bank of America
B) Bear Stearns
C) Geico
D) AIG

Answer 3

AIG

Question 4

First National Trust has assets of $900,000 and liabilities of $600,000. First National Trust's owners' equity is:

A) $900,000.
B) $600,000.
C) $300,000.
D) $0.

Question 5

If Bob withdraws $100 from his checking account and the reserve requirement is 10 percent, then:

A) the money supply can decrease by as much as $1000, if banks hold some excess reserves.
B) the money supply can increase by as much as $1000, if banks hold no excess reserves.
C) the money supply can decrease by as much as $100, if banks hold some excess reserves.
D) the money supply can decrease by as much as $1000, if banks hold no excess reserves.

Question 6

The central bank of the United States is known as the:

A) Federal Reserve System.
B) Federal Deposit Insurance Corporation.
C) Federal Savings and Loan Insurance Corporation.
D) Department of the Treasury.

Question 7

Third National Bank has $750 million in deposits. The required reserve ratio is 15%. Third National Bank must keep _______ in reserves.

A) $60.5 million
B) $160.5 million
C) $112..5 million
D) $150.5 million

Question 8

Suppose that Bob had $500 in travelers checks unused from his trip to Italy and he decides to deposit the checks to his checking account. This transaction will:

A) increase M1 and M2.
B) keep M1 unchanged and increase M2.
C) keep M1 and M2 unchanged.
D) decrease M1 and M2.

Question 9

Any transaction that involves exchanging one good for another without using money is considered a:

A) token exchange.
B) deferred payment.
C) barter transaction.
D) liquidity transaction.

Question 10

Bank of Sim City has $500 million in deposits. The required reserve ratio is 25%. Bank of Sim City must keep _______ in reserves.

A) $125 million
B) $140 million
C) $160 million
D) $700 million

Question 11

Which of the following is included in M2 but not included in M1?

A) currency held outside banks
B) savings accounts
C) other checkable deposits
D) demand deposits

Question 12

Which of the following is considered a liability to a bank?

A) the bank's loans
B) customer deposits
C) the bank's buildings and equipment
D) reserves

Question 13

Prior to the 1980s, which of the following assets did not pay interest?

A) savings accounts
B) time deposits
C) checking accounts
D) All of the above paid interest prior to the 1980s.

Question 14

The Federal Reserve System consists of _______ Federal Reserve Banks.

A) 8
B) 14
C) 10
D) 12

Question 15

If a bank chooses to keep reserves more than what is required by law, then these are called:

A) bank equity.
B) required reserves.
C) excess reserves.
D) supplemental reserves.

Question 16

If the money multiplier is 4, the required reserve ratio is:

A) 25%.
B) 50%.
C) 20%.
D) 2%.

Question 17

Refer to Table 13.4. If the required reserve ratio is 5%, First Charter Bank:

A) is meeting its required reserve ratio and has no excess reserves.
B) has excess reserves of $100,000.
C) has too few reserves on hand.
D) has no excess reserves.

Question 18

The chairperson of the Board of Governors of the Federal Reserve has terms of what length?

A) 7 years
B) 10 years
C) 14 years
D) 4 years

Question 19

Refer to Table 13.4. First Charter Bank will have zero excess reserves if the required reserve ratio is:

A) 10%.
B) 20%.
C) 30%.
D) 15%.

Question 20

Jamie transfers $150 from his money market fund to his checking account. This transaction will:

A) decrease M2 and increase M1.
B) decrease M1 and increase M2.
C) increase M1, but leave M2 unchanged.
D) decrease both M1 and M2.

Question 21

Refer to Table 13.2. The required reserve ratio is 20%. If the First Charter Bank is meeting its reserve requirement and has no excess reserves, its loans equal:

A) $460.
B) $550.
C) $760.
D) $710.

Question 22

How many governors are included in the Board of Governors of the Federal Reserve?

A) 7
B) 10
C) 12
D) 8

Question 23

Traveler's checks are:

A) included only in M1.
B) not included in M1.
C) not included in M2.
D) included in M2.

Question 24

A commercial bank lists:

A) deposits as liabilities.
B) required reserves as liabilities.
C) excess reserves as liabilities.
D) loans as liabilities.

Question 25

We know that money is an asset that can be used to transport purchasing power from one time period to another. This description of money illustrates its role as a:

A) medium of exchange.
B) store of value.
C) unit of account.
D) liquid asset.

Question 26

First National Bank has liabilities of $1 million and owners' equity of $300,000. First National Bank's assets are:

A) $100,000.
B) $1.3 million.
C) $900,000.
D) $700,000.

Question 27

_______ is a monetary system in which the money has no intrinsic value. In this system, the money is backed by the government.

A) Fiat money
B) The gold standard
C) Commodity money
D) The barter system

Question 28

An account statement for a bank that shows the sources of its funds and the uses of its funds is called:

A) a person's checking account.
B) a bank's balance sheet.
C) a bank's income statement.
D) a bank's profit report.

Question 29

After the 1980s, which of the following assets paid interest?

A) time deposits
B) checking accounts
C) savings accounts
D) All of the above paid interest after the 1980s.

Question 30

Recall Application 2, "The Growth in Excess Reserves" to answer the following questions:
Based on what you learned from the application, the Fed can induce banks to lend more and increase the money supply by:

A) lowering the interest rate for excess reserves.
B) requiring banks to hold on to more excess reserves.
C) raising the interest rate for excess reserves.
D) raising the reserve requirement.

Question 31

The Republic Bank has $2 million in deposits and $250,000 in reserves. If the required reserve ratio is 10%, excess reserves are equal to:

A) $200,000.
B) zero.
C) $450,000
D) $50,000.

Question 32

Money is an imperfect store of value because of:

A) double coincidence of wants.
B) currency devaluations.
C) tax fraud.
D) inflation.

Question 33

The required reserve ratio is 10%. The money multiplier is:

A) 1.
B) 10.
C) 9.
D) 0.1.

Question 34

Recall Application 2, "The Growth in Excess Reserves" to answer the following questions:
According to the application, what was the reason why banks started to hold more excess reserves after September 2008?

A) The Fed allowed banks with little excess reserves to be taken over by banks with a large amount of excess reserves.
B) The Fed lent lots of money to banks, which in turn did not lend any of it.
C) The Fed started paying interest on bank reserves.
D) The Fed required that banks hold excess reserves.

Question 35

Best Buy, a retailer of electronics, has 500 different products in inventory. Best Buy reports its inventory is worth $10 million. This is an example of using money as a:

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

Question 36

The two sides of a banks balance sheet are labeled:

A) assets and liabilities.
B) assets and net worth..
C) deposits and loans.
D) liabilities and net worth.

Question 37

M1 excludes which of the following?

A) demand deposits
B) traveler's checks
C) currency held by the public
D) none of the above

Question 38

Suppose that the required reserve ratio is 0.4. If a customer withdraws $10 million from a bank, then the money supply could potentially:

A) decrease by $40 million.
B) decrease by $25 million.
C) increase by $2.5 million.
D) increase by $40 million.

Question 39

The required reserve ratio is 15%. The money multiplier is:

A) 5.54.
B) 8.12.
C) 5.67.
D) 6.67.

Question 40

Recall Application 3, "The Financial System Under Stress: September 11, 2001," to answer the following questions:
The potentially catastrophic financial impact of the September 11, 2001, terrorist attacks against the United States was due to:

A) the large volume of direct borrowing from the Fed.
B) the forced closing of the New York Stock Exchange.
C) the temporary freezing of the "Federal Reserve float."
D) the risk of massive default, resulting from the forced closing of financial institutions.

Question 41

The required reserve ratio is 10%. If the banks hold excess reserves, then the money multiplier is:

A) zero.
B) less than 0.10.
C) greater than 10.
D) less than 10.

Question 42

The fraction of its reposits that banks keep in the form of reserves as required by law is/are called:

A) federal funds.
B) excess reserves.
C) required reserves.
D) owner's equity.

Question 43

The reason why raw fish is not used as money is because it would perform which property of money most unsatisfactorily?

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

Question 44

Refer to Table 13.3. The required reserve ratio is:

A) 5%.
B) 7%.
C) 6%.
D) 8%.

Question 45

Which of the following assets is the largest component of M1?

A) small time deposits
B) checking deposits
C) currency
D) money market mutual funds

Question 46

Which of the following is included in M1, but not included in M2?

A) travelers checks
B) currency
C) checking deposits
D) All assets in M1 are included in M2.

Question 47

COPING WITH A STOCK MARKET CRASH: BLACK MONDAY, 1987
How did the Fed successfully respond to the major stock market crash in 1987?
On October 19, 1987, known as "Black Monday," the Dow Jones index of the stock market fell a dramatic 22.6 percent in one
day. Similar declines were felt in other indexes and stock markets around the world. These
declines shocked both businesses and investors. In just 24 hours, many people and firms found themselves much less
wealthy. The public began to worry that banks and other financial institutions—to protect their own
loans and investments—would call in borrowers’’ existing loans and stop making new ones. A sharp drop in available credit
could, conceivably, plunge the economy into a deep recession.
Alan Greenspan had just become chairman of the Federal Reserve that year. As a sophisticated economist with historical
knowledge of prior financial crises, he recognized the seriousness of the situation. He quickly issued
a public statement in which he said that the Federal Reserve stood ready to provide liquidity to the economy and the
financial system. Banks were told that the Fed would let them borrow liberally. In fact, the Fed provided liquidity to such an
extent that interest rates even fell. As a result of Greenspan’s action, "Black Monday" did not cause a recession in the United
States.
The dramatic drop in stock values on October 19, 1987, known as "Black Monday," was potentially catastrophic for the economy because:

A) the federal government found itself on the brink of default, so ruining millions of public debt holders.
B) the Fed could not execute any open market operations and the required reserve ratio had been set too low by the previous administration.
C) the value of the U.S. dollar was likely to fall too and that would create a massive trade deficit.
D) banks and financial institutions might have called in existing loans and stop making new ones.

Question 48

Bank of Sim City has $250 million in deposits. Bank of Sim City is meeting its reserve requirement and has no excess reserves. It has $50 million in reserves. Bank of Sim City faces a required reserve ratio of:

A) 1.25%.
B) 37.5%.
C) 4%.
D) 20%.

Question 49

Saving account balances are included in:

A) M2 only.
B) M1 only.
C) neither M1 nor M2.
D) both M1 and M2.

Question 50

Suppose the required reserve ratio is 20%. A $5 million deposit allows commercial banks to create a maximum total of _______ in deposits.

A) $25 million
B) $10 million
C) $20 million
D) $50 million

Question 51

Which of the following was the Fed's primary function when it first was created in 1913?

A) to act as a lender of last resort
B) provide a system of check collection and clearing
C) conduct monetary policy
D) regulate banks

Question 52

The decisions concerning the money supply are made by:

A) the FOMC.
B) the presidents of the district central banks.
C) the Board of Governors.
D) Congress.

Question 53

Which of the following is an example of a commodity money?

A) a $20 bill
B) bonds
C) stocks
D) gold

Question 54

Refer to Table 13.3. People's Bank excess reserves are $ _______ .

A) 20,000
B) 100,000
C) 60,000
D) 40,000

Question 55

Which of the following is a function of the Federal Reserve?

A) collect taxes
B) regulates banks
C) maintains U.S. exchange rate regime.
D) buys mortgages from banks

Question 56

If the required reserve ratio is 10% but the money multiplier is only 7, then:

A) the bank is bankrupt.
B) the banks have zero excess reserves.
C) the banks held reserves less than the required reserves.
D) the banks held excess reserves.

Question 57

Which of the following is not a function of the Federal Reserve?

A) regulate banks
B) conduct monetary policy
C) issue new Treasury bonds
D) provide a system of check collection and clearing

Question 58

The Bank of New York has $4 million in deposits and $350,000 in reserves. If the required reserve ratio is 5%, excess reserves are equal to:

A) $350,000.
B) $50,000.
C) $150,000.
D) $200,000.

Question 59

If Bob withdraws $100 from his checking account and the reserve requirement is 10 percent, then:

A) the money supply will decrease by exactly $100.
B) the money supply can increase by as much as $1000.
C) the money supply will decrease by less than $10.
D) the money supply can decrease by as much as $1000.

Question 60

Which of the following would not be included in M2?

A) credit cards
B) checking accounts
C) demand deposits
D) money market accounts

Question 61

COPING WITH A STOCK MARKET CRASH: BLACK MONDAY, 1987
How did the Fed successfully respond to the major stock market crash in 1987?
On October 19, 1987, known as "Black Monday," the Dow Jones index of the stock market fell a dramatic 22.6 percent in one
day. Similar declines were felt in other indexes and stock markets around the world. These
declines shocked both businesses and investors. In just 24 hours, many people and firms found themselves much less
wealthy. The public began to worry that banks and other financial institutions—to protect their own
loans and investments—would call in borrowers’’ existing loans and stop making new ones. A sharp drop in available credit
could, conceivably, plunge the economy into a deep recession.
Alan Greenspan had just become chairman of the Federal Reserve that year. As a sophisticated economist with historical
knowledge of prior financial crises, he recognized the seriousness of the situation. He quickly issued
a public statement in which he said that the Federal Reserve stood ready to provide liquidity to the economy and the
financial system. Banks were told that the Fed would let them borrow liberally. In fact, the Fed provided liquidity to such an
extent that interest rates even fell. As a result of Greenspan’s action, "Black Monday" did not cause a recession in the United
States.
The potentially catastrophic impact of the dramatic drop in stock values on October 19, 1987, known as "Black Monday," was countered by the Fed through:

A) massive provisions of liquidity.
B) dramatic raising of the discount rate.
C) massive open- market sales of government bonds.
D) dramatic raisings of the required reserve ratio.

Question 62

Which of the following is an example of a fiat money?

A) cigarettes
B) gold
C) jewelry
D) a$20 bill

Question 63

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following
questions:
According to Application 4, which investment company was in danger of collapse in March 2008 because the market believed that the company made a lot of investment mistakes?

A) Geico
B) AIG
C) Bank of America
D) Bear Stearns

Question 64

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following
questions:
According to Application 4, the reason why the FED allowed large currency swaps with other central banks was to:

A) provide foreign banks with dollars to lend when needed.
B) provide a system of check collection and clearing.
C) increase the value of the US dollar.
D) pay down the US Federal government's total debt.

Question 65

In the U.S., the Federal Reserve gets directives regarding the conduct of monetary policy from:

A) US Treasury.
B) Congress.
C) the U.S. president.
D) no one, because the Fed makes its own decisions.

Question 66

When the manager of a department store attaches price tags on his products, he is using money as a:

A) unit of transfer.
B) store of value.
C) medium of exchange.
D) unit of account.

Question 67

Which of the following assets is easiest to make transactions with?

A) money market mutual funds
B) checking deposits
C) currency
D) time deposits

Question 68

Commercial banks:

A) are nonprofit organizations that lend and borrow funds.
B) print all the money used in the US.
C) are financial intermediaries that lend funds and accept deposits.
D) conducts monetary policy.

Question 69

Money:

A) includes the value of all coins and currency in circulation at any time only.
B) is anything that is regularly used in exchange.
C) is the same as income.
D) includes the balance of your credit cards.

Question 70

When you pay $12 for the pizza that you ordered for dinner, you are using money as a (an):

A) store of value.
B) medium of exchange.
C) investment good.
D) unit of account.

Question 71

The most basic measure of money in the U.S. is:

A) M4.
B) M1.
C) M2.
D) M3.

Question 72

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following
questions:
According to Application 4, by buying commercial paper or extending short term loans to corporations, the Fed is applying which of its primary functions to private corporations?

A) lender of last resort
B) provide a system of check collection and clearing
C) conduct monetary policy
D) supply currency to the economy

Question 73

Refer to Table 13.1. First Commercial Bank's total loans equal $ _______.

A) 1,200,000
B) 1,250,000
C) 1,150,000
D) 1,050,000

Question 74

Recall Application 4, "Coping with the Financial Chaos Caused by the Mortgage Crisis," to answer the following questions:
According to Application 4, the solution that the Fed came up with to prevent the collapse of Bear Stearns was to:

A) buy an 80 percent stake in the company.
B) sell Bear Sterns to JP Morgan Chase and Co.
C) take over the company.
D) buy commercial paper issued by Bear Sterns.

Question 75

Recall Application 3, "The Financial System Under Stress: September 11, 2001," to answer the following questions:
To avoid a financial crisis after September 11, 2001, any policy by the implemented Fed must:

A) be approved by the President of the United States.
B) decrease the amount of money in circulation.
C) increase the amount of money in circulation.
D) increase the debt of the US treasury.

Question 76

Suppose that the required reserve ratio is 0.25. If a customer withdraws $10 million from a bank, then the money supply could potentially:

A) decrease by $25 million.
B) increase by $40 million.
C) increase by $2.5 million.
D) decrease by $40 million.

Question 77

Suppose the required reserve ratio is 10%. A $10 million deposit allows commercial banks to create a maximum total of _______ in deposits.

A) $10 million
B) $11 million
C) $100 million
D) $1 million

Question 78

Recall Application 2, "The Growth in Excess Reserves" to answer the following questions:
Based on what you learned from the application, the Fed can increase incentives for banks to lend less and decrease the money supply by:

A) raising the interest rate for excess reserves.
B) lowering the reserve requirement.
C) lowering the interest rate for excess reserves.
D) All of the above are correct.

Question 79

How much does a bank earn if it leaves assets in the form of reserves?

A) personal loan lending rate
B) the fed funds rate
C) a small positive rate
D) the discount rate

Question 80

The president of which of the following district banks of the Federal Reserve System is always on the FOMC?

A) Chicago
B) New York
C) Boston
D) all of the above