Deck 13: Money and the Banking System

Question 1

Which of the following is not a component of the M1 money supply?

A)demand deposits
B)large-denomination (more than $100) bills
C)interest-earning checking deposits
D)outstanding balances on credit cards

Answer 1

outstanding balances on credit cards

Question 2

Fiat money is money

A)that has little intrinsic value and is not backed by a commodity.
B)that is not included as part of the M1 money supply.
C)that is backed by gold or silver held on reserve by the government.
D)such as coins that are made from metal.

Answer 2

that has little intrinsic value and is not backed by a commodity.

Question 3

Money is

A)valuable because it is backed by gold.
B)whatever is generally accepted in exchange for goods and services.
C)anything that is a liability of a commercial bank
D)an object to be consumed.

Answer 3

whatever is generally accepted in exchange for goods and services.

Question 4

Ordinary commercial banks can expand the supply of money by

A)printing up currency when they need it.
B)buying and selling government bonds to the general public.
C)using a portion of their deposits to extend additional loans.
D)reducing their vault cash and increasing their deposits with the Fed.

Question 5

In the United States, the purchasing power of money is determined by

A)the underlying precious metals that back each unit of currency.
B)the value of U.S.treasury bonds that back each unit of currency.
C)Federal Reserve policy, which controls the money supply.
D)Congress, which controls the money supply.

Question 6

If money were not used as a medium of exchange,

A)the gains from trade would be severely limited.
B)our standard of living would probably improve.
C)the transaction costs of exchange would be lower.
D)economic efficiency would increase.

Question 7

Though many assets can be used as a store of value, money is a particularly attractive method to store value because

A)it increases in value as prices rise.
B)its purchasing power does not decline when prices rise.
C)it is the most liquid of all assets.
D)it is backed by gold.

Question 8

Money is

A)whatever is generally accepted in exchange for goods and services.
B)an object to be consumed.
C)a highly illiquid asset.
D)widely used in a barter economy.

Question 9

The primary benefit of a monetary system of exchange compared to a barter system is the increased

A)ability to record transactions.
B)time necessary to find trading partners.
C)time devoted to shopping.
D)efficiency in arranging transactions.

Question 10

Which of the following is the best definition of money?

A)anything generally accepted as a payment for goods or repayment of debt
B)anything that is a liability of the federal government
C)anything that is a liability of a commercial bank
D)the outstanding balances of households on credit cards

Question 11

When the Federal Reserve sells government bonds to the public, it directly

A)increases the M1 money supply and increases the reserves of the commercial banking system.
B)increases the M1 money supply, while reducing the reserves of the commercial banking system.
C)reduces the M1 money supply, while increasing the reserves of the commercial banking system.
D)reduces the M1 money supply and decreases the reserves of the commercial banking system.

Question 12

In order for barter trades to occur, there must be a

A)singularity of interests.
B)bargaining intermediary.
C)double coincidence of wants.
D)sufficient supply of cash.

Question 13

If the Fed wanted to use all four of its major monetary control tools to decrease the money supply, it would

A)buy bonds, reduce the discount rate, reduce reserve requirements, and reduce the interest rate paid on excess reserves.
B)sell bonds, reduce the discount rate, reduce reserve requirements, and reduce the interest rate paid on excess reserves.
C)sell bonds, increase the discount rate, increase reserve requirements, and increase the interest rate paid on excess reserves.
D)buy bonds, increase the discount rate, increase reserve requirements, and increase the interest rate paid on excess reserves.

Question 14

Why did the monetary base increase rapidly during the economic crisis of 2008?

A)The Fed sold financial assets and extended fewer loans.
B)The Fed increased both its purchase of assets and quantity of loans extended.
C)The Fed increased its purchases of assets, but offset this with an increase in the reserve requirement.
D)The Fed sold financial assets, but offset this with a reduction in the reserve requirement.

Question 15

Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a

A)$100 million decrease in the money supply.
B)$100 million increase in the money supply.
C)$200 million increase in the money supply.
D)$500 million increase in the money supply.

Question 16

Compared to a barter economy, using money increases efficiency by reducing

A)transaction costs.
B)the need to exchange goods.
C)the need to specialize.
D)inflation.

Question 17

A barter economy is one in which

A)money serves as a medium of exchange.
B)only precious metals are accepted as money.
C)goods are traded directly for other goods.
D)paper money is backed by gold.

Question 18

One advantage of a money system compared to a barter system is that

A)barter never works.
B)money creates the need for banks.
C)money is more efficient.
D)everyone has money.

Question 19

Which of the following compose the reserves of a commercial bank?

A)demand deposits and time deposits
B)vault cash and deposits of the bank with the Federal Reserve
C)U.S.securities and stock equity
D)cash and U.S.securities

Question 20

What restricts the Fed's ability to write checks and purchase U.S. securities?

A)Congress; the Fed must receive a budget allocation from Congress before it can write a check.
B)The gold requirement; the Fed cannot write a check unless it has a sufficient amount of gold to back the expenditure.
C)Reserve requirements; the Fed must maintain 20 percent of its assets in the form of cash against the deposits that it is holding for commercial banks.
D)Nothing; the Fed can create money simply by writing a check on itself.

Question 21

When the monetary authorities expand the supply of money rapidly,

A)its purchasing power tends to increase.
B)holding money is a poor method of storing value.
C)the long-run sustainable real growth rate of the economy will tend to increase.
D)the prices of goods and services will generally decline.

Question 22

Which of the following compose the M2 money supply?

A)currency only
B)currency, demand deposits, other checkable deposits, and traveler's checks
C)M1 plus large denomination time deposits and Eurodollar deposits
D)M1 plus savings deposits, small-denomination time deposits, and money market mutual funds (retail)

Question 23

The M1 money supply

A)is composed of assets that reflect the medium of exchange function of money.
B)is larger than the M2 money supply.
C)includes credit card balances since they are used to purchase things.
D)is composed of only currency.

Question 24

People are likely to want to hold more money if the interest rate

A)increases making the opportunity cost of holding money rise.
B)increases making the opportunity cost of holding money fall.
C)decreases making the opportunity cost of holding money rise.
D)decreases making the opportunity cost of holding money fall.

Question 25

Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies?

A)M1 and M2 are both unchanged.
B)M1 falls by $1,000, and M2 rises by $1,000.
C)M1 is unchanged, and M2 rises by $1,000.
D)M1 falls by $1,000, and M2 is unchanged.

Question 26

Which of the following provides the best explanation of why money is valuable?

A)Money is valuable because it is declared legal tender by the government issuing it.
B)Money is valuable because it is scarce relative to the demand for the services it provides.
C)Money is valuable because it is backed by precious metals, primarily gold and silver.
D)Money is valuable because it has intrinsic value, independent of its use as a means of exchange.

Question 27

Other things being equal, an increase in the rate of interest causes

A)an upward movement along the demand for money curve.
B)a downward movement along the demand for money curve.
C)a rightward shift of the demand for money curve.
D)a leftward shift of the demand for money curve.

Question 28

In the United States, the money supply (M1) consists of

A)paper currency and coins.
B)coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.
C)paper currency, coins, demand deposits, and savings deposits.
D)government bonds, currency, demand deposits, other checkable deposits, and traveler's checks.

Question 29

Money is used as a unit of account. This means

A)money cannot store value for use in the future.
B)money is used to measure the exchange value and costs of goods, services, assets and resources.
C)money has little or no intrinsic value.
D)money is dependent on the quantity of gold held by the Federal Reserve.

Question 30

A decrease in the interest rate, other things being equal, causes

A)an upward movement along the demand curve for money.
B)a downward movement along the demand curve for money.
C)a rightward shift of the demand curve for money.
D)a leftward shift of the demand curve for money.

Question 31

What is meant by the expression, "There is too much money chasing too few goods"?

A)People spend too much time chasing after money.
B)An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.
C)The value of money will tend to decline when the supply of gold increases.
D)People would be better off if the monetary authorities increased the supply of money more rapidly.

Question 32

When the interest rate decreases, the opportunity cost of holding money

A)increases, so the quantity of money demanded increases.
B)increases, so the quantity of money demanded decreases.
C)decreases, so the quantity of money demanded increases.
D)decreases, so the quantity of money demanded decreases.

Question 33

The demand for money varies

A)directly with both the price level and the level of real GDP.
B)inversely with both the price level and the level of real GDP.
C)inversely with the price level and directly with the level of real GDP.
D)directly with the price level and inversely with the level of real GDP.
E)inversely with the level of nominal GDP.

Question 34

Checking account deposits are counted as part of the M1 money supply because

A)they earn interest income for the depositor.
B)they are widely used as a means of making payment.
C)banks hold currency equal to the value of their outstanding checking account deposits.
D)they are ultimately the obligations of the Treasury.

Question 35

In defining the money supply (M1), economists exclude savings deposits because

A)the purchasing power of savings deposits is much less stable than that of checkable deposits and currency.
B)savings deposits are a form of investment and, thus, a better store of value than money.
C)savings deposits are liabilities of commercial banks, whereas checkable deposits are assets of the banks.
D)savings deposits are not generally used as a means of payment.

Question 36

Are "smart cards" or E-cash cards part of the money supply?

A)Yes, because they can be given away to make a payment.
B)Yes, because they will soon completely replace cash.
C)No, because they are not issued by banks.
D)No, because they are merely means to transfer checking deposits.

Question 37

Demand deposits are

A)deposits held by individuals at one of the twelve Federal Reserve District Banks.
B)interest-earning savings deposits held by individuals at a banking institution.
C)deposits of commercial banks at one of the twelve Federal Reserve District Banks.
D)deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check.

Question 38

Are funds available on a credit card included in a definition of the money supply?

A)Yes, because these funds can be used to pay for goods and services.
B)Yes, because these funds are included in M2.
C)No, because these funds are hard to measure total credit card spending.
D)No, because these funds are not a store of value.

Question 39

The value (purchasing power) of each unit of money

A)is largely independent of the money supply.
B)tends to increase as the money supply expands.
C)increases as the general level of prices rise.
D)is inversely related to the general level of prices.

Question 40

Which one of the following is the largest component of the money supply (M1) in the United States?

A)demand and other checking deposits
B)gold certificates
C)credit cards and traveler's checks
D)Federal Reserve notes

Question 41

Which of the following guarantees the deposits in almost all banks up to a $250,000 limit per account?

A)the Federal Reserve
B)the FDIC
C)the U.S.Treasury
D)Bank of America Corporation

Question 42

Which of the following will be classified as a liability on the balance sheet of a commercial bank?

A)vault cash
B)loans extended to customers
C)checking deposits of customers
D)deposits held at a Federal Reserve bank

Question 43

Which of the following assets can a commercial bank count as reserves?

A)its holdings of U.S.Treasury bills
B)its vault cash and deposits with the Fed
C)its outstanding loans
D)the savings accounts of its depositors

Question 44

A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and increases its excess reserves by $300. What is the legal reserve requirement?

A)10 percent
B)20 percent
C)30 percent
D)60 percent

Question 45

Widespread use of credit cards

A)will increase the M1 money supply figures.
B)will increase the M2 money supply figures but not those for M1.
C)tends to reduce the average quantity of money that people will choose to hold.
D)tends to increase the average quantity of money that people will choose to hold.

Question 46

Which of the following would appear on the liability side of the balance sheet of a commercial bank?

A)demand and other transaction deposits
B)loans outstanding
C)U.S.government securities
D)vault cash

Question 47

Economists who stress the store of value function of money generally

A)argue that M1 is the best measure of the money supply.
B)prefer the M2 measure of the money supply to the M1 measure.
C)argue that M1 is too broad a definition of the money supply.
D)prefer the M1 measure of the money supply to the M2 measure.

Question 48

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

A)does not change the money supply.
B)increases the money supply.
C)decreases the money supply.
D)has an indeterminate effect on the money supply.

Question 49

The main source of profit for financial institutions is

A)their ownership of stocks in commercial corporations.
B)their ownership of real assets received in foreclosures on loans to households.
C)the fees charged for holding and servicing checking accounts.
D)the difference between interest paid on deposits and interest received on loans.
E)the difference between the cost of creating new money and the interest paid on loans.

Question 50

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 51

When commercial banks extend loans, they are able to expand the supply of money in the United States because the U.S. has

A)a fiat supply of money.
B)money that is backed by gold.
C)a fractional reserve banking system.
D)a system of federal deposit insurance.

Question 52

The legal requirement that commercial banks hold reserves equal to some fraction of their deposits

A)limits the ability of banks to expand the money supply by extending additional loans.
B)prevents the Fed from controlling the money supply since commercial banks can always offset the actions of the Fed.
C)prevents runs on banks by depositors who fear that banks have insufficient assets to meet the claims of their depositors.
D)limits the ability of the Treasury to expand the national debt.

Question 53

Banks are considered a safer place to deposit money now than they were prior to 1933 because

A)gold reserves have increased.
B)reserve requirements are higher.
C)the creation of the FDIC reduced the likelihood of bank runs.
D)the commercial banks are no longer permitted to extend loans to the Federal Government.

Question 54

If you have a checking account at a local bank, your bank account there is

A)an asset to the bank and an asset to you.
B)a liability of the bank and a liability of yours.
C)a liability of the bank and an asset to you.
D)an asset to the bank and a liability of yours.

Question 55

Which of the following is true?

A)The FDIC sets the reserve requirements for commercial banks.
B)The Federal Reserve System guarantees the deposits in almost all banks up to a $250,000 limit per account.
C)Since the Federal Reserve System was established in 1913, bank failures due to panic withdrawals have been virtually eliminated.
D)If a bank should fail, the FDIC guarantees that depositors can get their funds up to a $250,000 limit per account.

Question 56

The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called

A)excess reserves.
B)fractional reserves.
C)required reserves.
D)certificates of deposit.

Question 57

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 58

A system that permits banks to hold less than 100 percent of their deposits as reserves is called a

A)federal reserve system.
B)fractional reserve banking system.
C)partially funded deposit insurance system.
D)gold standard banking system.

Question 59

Modern bankers

A)expand the money supply by printing currency when they need it.
B)decrease the supply of money when they extend additional loans.
C)hold only a fraction of their assets in the form of reserves against their deposits.
D)can increase their profits by increasing their holdings of excess reserves.

Question 60

The primary source of earnings of commercial banks is income derived from

A)the checking account services provided to customers.
B)the use of deposits to extend loans and undertake investments.
C)vault cash and deposits held with the Fed.
D)services provided to the U.S.Treasury.

Question 61

If a bank has actual reserves of $40,000 and a 20 percent reserve requirement, then the maximum amount of checkable deposits the bank can have if excess reserves are zero is

A)$100,000.
B)$80,000.
C)$300,000.
D)$20,000.
E)$200,000.

Question 62

Regional Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of

A)$100.
B)$900.
C)$1,000.
D)$10,000.

Question 63

If the public decides to hold more currency and fewer deposits in banks, bank reserves

A)decrease and the money supply eventually decreases.
B)decrease but the money supply does not change.
C)increase and the money supply eventually increases.
D)increase but the money supply does not change.

Question 64

Table 13-2

Refer to Table 13-2. If the Hometown Bank is holding $10,000 in excess reserves, then the reserve requirement is

A)2 percent.
B)5 percent.
C)7 percent.
D)10 percent.

Question 65

Marquis decides to bank with First National Bank (FNB). He opens a checking account by depositing $1,000. According to the FNB balance sheet, after this initial $1,000 checkable deposit, there are $1,000 in

A)reserves and $1,000 in checkable deposits.
B)liabilities and $2,000 in checkable deposits.
C)checkable deposits and $0 in assets.
D)assets and $0 in liabilities.
E)reserves and $0 in liabilities.

Question 66

In order to increase the money supply, the banking system must have

A)required reserves.
B)the authority to buy corporate stocks.
C)the authority to print U.S.currency.
D)excess reserves.
E)the authority to engage in interstate banking.

Question 67

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions

A)decreases the money supply by $1,000.
B)decreases the money supply by $200.
C)does not change the money supply.
D)increases the money supply by $200.
E)increases the money supply by $800.

Question 68

Table 13-2

Refer to Table 13-2. The reserve requirement is 10 percent and then someone deposits an additional $50,000 into the bank, then if the bank takes no other action it will

A)have $65,000 in excess reserves.
B)have $55,000 in excess reserves.
C)need to raise an additional $5,000 of reserves to meet the reserve requirement
D)none of the above is correct.

Question 69

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?

A)the reserve requirements mandated by the Fed
B)the number of commercial bank charters issued by the Fed
C)the dollar value of the bonds issued by the U.S.Treasury
D)the federal funds interest rate that commercial banks pay (and receive) for short-term loanable funds

Question 70

If the banking system has $50 billion in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?

A)$250 billion
B)$200 billion
C)$50 billion
D)$25 billion

Question 71

Table 13-2

Refer to Table 13-2. If the reserve requirement is 20 percent, this bank

A)has $10,000 of excess reserves.
B)needs $10,000 more reserves to meet its reserve requirements.
C)needs $5,000 more reserves to meet its reserve requirements.
D)just meets its reserve requirement.

Question 72

A bank that has $10,000 in excess reserves can extend new loans up to a maximum of

A)$1,000.
B)$9,000.
C)$10,000.
D)$100,000.

Question 73

Excess reserves are

A)checking deposits that are included in the M1 money supply but not the M2.
B)savings deposits that are included in the M2 money supply but not the M1.
C)actual reserves held by banks that exceed the legal requirement.
D)the portion of deposits that banks are required by the Fed to hold as reserves against their deposits.

Question 74

Which of the following will limit the money creation process to an amount less than the potential amount?

A)bank pursuit of profits
B)increase in currency holdings by the public
C)business demand for loans
D)increased use of credit cards

Question 75

The money multiplier will be

A)larger if banks hold on to excess reserves but smaller if private citizens hold on to cash.
B)smaller if banks hold on to excess reserves but larger if private citizens hold on to cash.
C)smaller if either banks hold on to excess reserves or private citizens hold on to cash.
D)larger if either banks hold on to excess reserves or private citizens hold on to cash.
E)constant whether or not banks and citizens try to alter their holdings of excess reserves and cash.

Question 76

Table 13-2

Refer to Table 13-2. If the reserve requirement is 10 percent, then this bank

A)is in a position to make a new loan of $15,000.
B)has less reserves than required.
C)has excess reserves of less than $15,000.
D)none of the above is correct.

Question 77

The immediate effect of a member bank's sale of U.S. government securities to the Fed is

A)an increase in that bank's required reserves.
B)a decrease in that bank's required reserves.
C)an increase in that bank's excess reserves.
D)a decrease in that bank's excess reserves.

Question 78

If the public decides to hold less currency and more deposits in banks, bank reserves

A)decrease and the money supply eventually decreases.
B)decrease but the money supply does not change.
C)increase and the money supply eventually increases.
D)increase but the money supply does not change.

Question 79

The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the

A)federal deposit insurance premium.
B)vault cash quota.
C)excess reserve requirement.
D)required reserve ratio.

Question 80

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will

A)decrease and the money supply will eventually decrease.
B)decrease and the money supply will eventually increase.
C)increase and the money supply will eventually decrease.
D)increase and the money supply will eventually increase.