Deck 17: Money and the Federal Reserve

Question 1

Money serves as a store of value when it

A) rapidly gains and loses value over time.
B) loses a constant amount of value over time.
C) can be used to purchase approximately the same amount of goods over time.
D) encourages a double coincidence of wants.
E) is accepted by all merchants.

Answer 1

can be used to purchase approximately the same amount of goods over time.

Question 2

A major advantage of money over barter is that it is

A) a medium of exchange.
B) fiat money.
C) a unit of account.
D) a store of value.
E) currency.

Answer 2

a medium of exchange.

Question 3

What function of money is highlighted when the price of one product is compared to another?

A) fiat money
B) store of value
C) medium of exchange
D) unit of account
E) commodity money

Answer 3

unit of account

Question 4

Money does NOT function as an)

A) unit of account.
B) medium of exchange.
C) means to buy goods and services.
D) item to barter.
E) store of value.

Question 5

The barter method of exchange isn't more common in the U.S. economy because the

A) double coincidence of wants frequently occurs.
B) level of commodity money is too low.
C) level of commodity money is too high.
D) double coincidence of wants infrequently occurs.
E) amount of money in the economy is easy to measure.

Question 6

In economic terms, how would Gina state what has happened when her neighbor says he is unwilling to help her mow her lawn because Gina is unwilling to help him teach his kids how to speak with a British accent?

A) The medium of exchange was too high.
B) Gina's neighbor's unwillingness to mow her lawn reflects a lack of store of value.
C) The double coincidence of wants was not satisfied.
D) The three functions of money were not satisfied.
E) Gina's unwillingness to provide British-accent tutoring services reflects that too much fiat money is available.

Question 7

Which of the following would be a consequence in an economy where there is no money?

A) There would be no way to save for the future.
B) There would be no way to borrow.
C) Exchanges would occur more quickly.
D) Exchanges would take longer.
E) There would be no more exchange.

Question 8

When a fisherman records the value of a day's catch in terms of an equivalent number of abalones, abalones serve as

A) the medium of exchange.
B) fiat money.
C) a unit of account.
D) a store of value.
E) currency.

Question 9

Money serves as a unit of account when goods

A) have a value expressed in the same currency, thus allowing comparisons.
B) have a value expressed in both a fiat money and a commodity money.
C) have a value expressed in terms of both a commodity money and a commodity-backed money.
D) cannot be assigned a value.
E) have a value that changes over time.

Question 10

Which of the following statements is true?

A) Only a few objects are eligible to be considered a commodity.
B) A commodity money comes into existence through private, not government, decisions.
C) A fiat money represents an object that has intrinsic value.
D) A commodity-backed money and fiat money have the same inherent or intrinsic value.
E) A commodity money is often determined by government bureaucrats.

Question 11

What function of money is highlighted when Sally pays her cell phone bill with cash?

A) fiat money
B) medium of exchange
C) unit of account
D) store of value
E) commodity money

Question 12

For something to be considered money, it must

A) be of low intrinsic value.
B) be of high intrinsic value.
C) have the backing of the government.
D) not be generally accepted as a medium of exchange.
E) be generally accepted as a medium of exchange.

Question 13

When money is acting as a unit of account, it allows someone to

A) speed up the purchase of goods.
B) delay the purchase of goods.
C) measure the value of goods precisely.
D) make exchanges more efficiently.
E) make exchanges less efficiently.

Question 14

What function of money is highlighted when Roland buys flowers for his girlfriend for their eight-day anniversary?

A) medium of exchange
B) fiat money
C) unit of account
D) store of value
E) commodity money

Question 15

Which of the following events could cause inflation in the United States-a country that uses fiat money?

A) There is a discovery of a new silver mine.
B) There has been a decision made to switch from a currency based on the amount of gold a scarce metal) to a currency based on the amount of silver a plentiful metal).
C) Individuals are frustrated by the infrequent occurrence of the double coincidence of wants.
D) The government decides to print more money.
E) The government decides to transition to a commodity-backed money.

Question 16

When money is acting as a medium of exchange, it

A) stops you from reselling goods once they are purchased.
B) allows you to delay the purchase of goods.
C) allows you to measure the value of goods precisely.
D) allows you to make exchanges more efficiently.
E) allows you to make exchanges less efficiently.

Question 17

Money eliminated the need for the double coincidence of wants through its role as

A) fiat money.
B) a unit of account.
C) a store of value.
D) a medium of exchange.
E) currency.

Question 18

Which of the following is an example of barter where the double coincidence of wants may not always occur?

A) An individual uses tobacco to buy everything, and tobacco is an item that all merchants willingly accept.
B) An individual uses fiat money to buy everything, and fiat money is an item all merchants willingly accept.
C) An individual wants to buy a new set of tires using seashells from a merchant who needs seashells, and not all merchants accept seashells.
D) All merchants price goods in terms of number of seashells.
E) All merchants price goods in terms of amount of fiat money.

Question 19

Which of the following is NOT a characteristic of fiat money?

A) generally acceptable as a medium of exchange
B) provides a way to store wealth over time
C) serves as a unit of account
D) changes in value over time as the amount of fiat money changes
E) always backed by something of high intrinsic value

Question 20

What function of money is highlighted if someone puts cash under his or her mattress to have on hand for unexpected emergencies?

A) fiat money
B) store of value
C) medium of exchange
D) unit of account
E) commodity money

Question 21

The value of money ________ when the price level increases.

A) increases
B) decreases
C) initially increases but then decreases
D) initially decreases but then increases
E) does not change

Question 22

If Susan were to give cash to her father for his birthday and he deposited the cash into his savings account, which of the following changes would take place?

A) M1 and M2 would remain unchanged.
B) M1 would decrease; M2 would increase.
C) M1 and M2 would increase.
D) M2 would be unchanged.
E) M1 would increase; M2 would decrease.

Question 23

When an economy experiences inflation, the value of money

A) increases.
B) decreases.
C) initially increases but then decreases.
D) initially decreases but then increases.
E) does not change.

Question 24

Which of the following would NOT decrease the supply of money in a fiat money economy?

A) The Federal Reserve sells gold.
B) The Federal Reserve decides to sell existing Treasury securities.
C) The Federal Reserve increases the required reserve ratio.
D) The Federal Reserve increases the discount rate.
E) Fewer deposits are made in banks.

Question 25

If Ralph were to receive cash from his sister and he deposited it into his checking account, which of the following changes would occur?

A) M1 and M2 would remain unchanged.
B) M1 would decrease; M2 would increase.
C) Both M1 and M2 would increase.
D) Both M1 and M2 would decrease.
E) M1 would increase; M2 would decrease.

Question 26

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 800,500,000 \\\text { Currency } & \$ 340,000,000 \\\text { Traveler's checks } & \$ 10,000,000 \\\text { Money market mutual funds } & \$ 78,000,000 \\\text { Small time deposits } & \$ 15,000,000 \\\text { Savings deposits } & \$ 252,000,000\end{array}$$

-What is the value of M1?

A) $1,150,500,000
B) $1,495,500,000
C) $93,000,000
D) $345,000,000
E) $78,000,000

Question 27

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 800,500,000 \\\text { Currency } & \$ 340,000,000 \\\text { Traveler's checks } & \$ 10,000,000 \\\text { Money market mutual funds } & \$ 78,000,000 \\\text { Small time deposits } & \$ 15,000,000 \\\text { Savings deposits } & \$ 252,000,000\end{array}$$

-What is the value of M2 that is not part of M1?

A) $1,150,500,000
B) $1,495,500,000
C) $93,000,000
D) $345,000,000
E) $78,000,000

Question 28

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 12,500,000 \\\text { Currency } & \$ 34,000,000 \\\text { Traveler's checks } & \$ 1,000,000 \\\text { Money market matual funds } & \$ 10,000,000 \\\text { Small time deposits } & \$ 7,000,000 \\\text { Savings deposits } & \$ 500,000\end{array}$$

-What is the value of M2?

A) $13,500,000
B) $46,500,000
C) $47,500,000
D) $57,500,000
E) $65,000,000

Question 29

Which of the following would NOT increase the supply of money in a fiat money economy?

A) The Federal Reserve decides to purchase existing Treasury securities.
B) The Federal Reserve decreases the required reserve ratio.
C) The Federal Reserve decreases the discount rate.
D) There is a discovery of gold.
E) The Federal Reserve decides to link the value of money to water a commodity).

Question 30

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 12,500,000 \\\text { Currency } & \$ 34,000,000 \\\text { Traveler's checks } & \$ 1,000,000 \\\text { Money market matual funds } & \$ 10,000,000 \\\text { Small time deposits } & \$ 7,000,000 \\\text { Savings deposits } & \$ 500,000\end{array}$$

-What is the value of M2 that is not part of M1?

A) $13,500,000
B) $17,500,000
C) $47,500,000
D) $57,500,000
E) $64,500,000

Question 31

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 12,500,000 \\\text { Currency } & \$ 34,000,000 \\\text { Traveler's checks } & \$ 1,000,000 \\\text { Money market matual funds } & \$ 10,000,000 \\\text { Small time deposits } & \$ 7,000,000 \\\text { Savings deposits } & \$ 500,000\end{array}$$

-What is the value of M1?

A) $13,500,000
B) $46,500,000
C) $47,500,000
D) $57,500,000
E) $64,500,000

Question 32

Traveler's checks are

A) included in M1 but not M2.
B) considered a savings deposit.
C) not money.
D) part of M1 and M2.
E) considered a checkable deposit.

Question 33

If Ann were to convert some of her checkable deposits into a certificate of deposit, which of the following changes would take place?

A) M1 would decrease and then increase; M2 would increase and then decrease.
B) There would be no changes to M1 or M2.
C) M1 would decrease; there would be no change in M2.
D) M1 would increase; M2 would increase.
E) M1 would decrease; M2 would decrease.

Question 34

If the government were to print more money, which of the following would occur?

A) There would be no changes to M1 or M2.
B) M1 would decrease; M2 would increase.
C) Both M1 and M2 would increase.
D) Both M1 and M2 would decrease.
E) M1 would increase; M2 would decrease.

Question 35

If Brian were to give cash to his mother for her birthday and she kept the cash under her mattress, which of the following changes would take place?

A) M1 and M2 would remain unchanged.
B) M1 and M2 would increase.
C) M1 and M2 would decrease.
D) M1 would increase; M2 would decrease.
E) M1 would decrease; M2 would increase.

Question 36

What function of money is highlighted when someone deposits a portion of his or her paycheck into a savings account to pay for his or her child's future education?

A) fiat money
B) medium of exchange
C) unit of account
D) store of value
E) commodity money

Question 37

Which of the following is NOT a component of M1?

A) coins
B) traveler's checks
C) checking accounts
D) savings accounts
E) paper currency

Question 38

In a fiat money economy, M1 includes currency as well as

A) certificates of deposit.
B) money market mutual funds.
C) checkable deposits.
D) savings deposits.
E) gold holdings.

Question 39

Sasha is about to leave on a trip and she has used cash to buy traveler's checks. Which of the following changes have occurred?

A) M1 has increased; M2 has decreased.
B) M1 has decreased; M2 has increased.
C) Both M1 and M2 have increased.
D) Both M1 and M2 have decreased.
E) There have been no changes to M1 or M2.

Question 40

Frank decides to use his credit card to purchase a new television. The immediate consequence of this purchase would be

A) a decrease in M1 and an increase in M2.
B) an increase in M1 and an increase in M2.
C) no changes to M1 or M2.
D) a decrease in M1 and a decrease in M2.
E) an increase in M1 and a decrease in M2.

Question 41

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 400,000,000 \\\text { Currency } & \$ 340,000,000 \\\text { Traveler's checks } & \$ 4,000,000 \\\text { Money market mutual funds } & \$ 50,000,000 \\\text { Small time deposits } & \$ 6,000,000 \\\text { Savings deposits } & \$ 850,000,000\end{array}$$

-What is the value of M1?

A) $404,000,000
B) $740,000,000
C) $906,000,000
D) $744,000,000
E) $1,650,000,000

Question 42

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 400,000,000 \\\text { Currency } & \$ 340,000,000 \\\text { Traveler's checks } & \$ 4,000,000 \\\text { Money market mutual funds } & \$ 50,000,000 \\\text { Small time deposits } & \$ 6,000,000 \\\text { Savings deposits } & \$ 850,000,000\end{array}$$

-What is the value of M2?

A) $404,000,000
B) $1,650,000,000
C) $740,000,000
D) $906,000,000
E) $744,000,000

Question 43

If a bank increases the amount of cash it has in its vault, its reserves would ________, liabilities
would ________, and owner’s equity would ________.

A) increase; stay the same; increase
B) decrease; stay the same; increase
C) increase; decrease; decrease
D) increase; stay the same; decrease
E) decrease; increase; decrease

Question 44

Which of the following is NOT a component of M2?

A) currency
B) traveler's checks
C) checking accounts
D) savings accounts
E) gold

Question 45

As credit card balances increase, what will be the consequence for M1 and M2?

A) There will be no effect on M1 or M2.
B) M1 will decrease and M2 will increase.
C) M1 will increase and M2 will decrease.
D) M1 and M2 will both decrease.
E) M1 and M2 will both increase.

Question 46

Brenda has a checking account at the local bank, and her sister has a car loan at the same bank. How does each of these appear on the bank's balance sheet?

A) The checking account is a liability, and the car loan is an asset.
B) The checking account is an asset, and the car loan is a liability.
C) Both the checking account and the car loan are assets.
D) Both the checking account and the car loan are liabilities.
E) Both the checking account and the car loan are net worth.

Question 47

Which of the following CANNOT be found on a bank's balance sheet?

A) deposits
B) cash held by individuals
C) owner's equity
D) reserves
E) loans

Question 48

The Coppock Bank began the day with $10,000,000 in its reserve account and ended the day with the same amount. If loans, other assets, and Treasury securities were $3,000,000 and owner's equity was $2,000,000, what is the bank's total amount of assets?

A) $7,000,000
B) $11,000,000
C) $13,000,000
D) $15,000,000
E) There is not enough information to solve this.

Question 49

Using a credit card is most like

A) the money supply increasing.
B) the value of fiat money being reduced.
C) the value of fiat money being increased.
D) a short-term loan from a bank.
E) a short-term deposit at a bank.

Question 50

The local bank needs to borrow funds from a bank in the next town. As a result, the local bank’s
balance sheet would show ________ and ________ owner’s equity.

A) increased borrowings; no change to
B) decreased reserves; increased
C) increased borrowings; increased
D) increased reserves; reduced
E) increased borrowings; reduced

Question 51

If the Federal Reserve determined that banks needed to increase the amount of owner's equity, how could this be achieved?

A) Banks would decrease reserves, but borrowings would not change.
B) Banks would increase reserves, but borrowings would increase.
C) Banks would increase reserves, but borrowings would decrease.
D) Banks would decrease reserves, but borrowings would increase.
E) Banks' reserves would not change, but borrowings would increase.

Question 52

The local bank has decided to double the number of its local branch offices. How will this affect the bank's balance sheet?

A) Total assets will increase.
B) Total liabilities will increase.
C) Total liabilities will decrease.
D) Total assets will decrease.
E) Total assets and total liabilities will both remain unchanged.

Question 53

The Coppock Bank has $34,000,000 in deposits. If borrowings are $7,000,000, reserves are $3,500,000, and owner's equity is $2,000,000, what are the bank's total liabilities and net worth?

A) $46,500,000
B) $21,500,000
C) $24,000,000
D) $43,000,000
E) $43,500,000

Question 54

Refer to the following table to answer the next questions: $$\begin{array} { l l } \text { Checkable deposits } & \$ 400,000,000 \\\text { Currency } & \$ 340,000,000 \\\text { Traveler's checks } & \$ 4,000,000 \\\text { Money market mutual funds } & \$ 50,000,000 \\\text { Small time deposits } & \$ 6,000,000 \\\text { Savings deposits } & \$ 850,000,000\end{array}$$

-What is the value of M2 that is not part of M1?

A) $404,000,000
B) $740,000,000
C) $906,000,000
D) $744,000,000
E) $1,650,000,000

Question 55

If Harold were to deposit cash into his savings account, which of the following changes would take place?

A) M1 would remain the same.
B) M2 would remain the same.
C) M2 would decrease.
D) M1 would increase.
E) M2 would increase.

Question 56

Which of the following is the largest component of M1?

A) savings deposits
B) checking deposits
C) credit cards
D) small time deposits
E) money market mutual funds

Question 57

As financial intermediaries, commercial banks pay their expenses and earn a profit by

A) paying depositors a higher interest rate than they charge borrowers.
B) paying depositors a lower interest rate than they charge borrowers.
C) earning interest from their deposits at the Federal Reserve.
D) investing funds from stockholders in the stock and bond markets.
E) investing funds from depositors in the stock and bond markets.

Question 58

Loans and deposits within a bank are

A) liabilities and assets, respectively, on a bank's balance sheet.
B) assets and liabilities, respectively, on a bank's balance sheet.
C) are not found on a bank's balance sheet.
D) both assets.
E) both liabilities.

Question 59

Which of the following is NOT considered part of M2?

A) currency
B) money
C) traveler's checks
D) credit cards
E) checkable deposits

Question 60

The largest component of M2 is

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

Question 61

How is owner's equity calculated?

A) assets - liabilities - cash held by individuals
B) liabilities - assets
C) assets - liabilities
D) assets - liabilities - U.S. Treasury securities
E) Owner's equity cannot be calculated from the information on a bank's balance sheet.

Question 62

One reason why banks are required to deposit a minimum amount of reserves at the Federal Reserve is so that

A) banks will have more liquidity.
B) banks will be able to make more loans.
C) depositors will feel their deposits are protected.
D) the Federal Reserve can own a portion of all banks they regulate.
E) the Federal Reserve can control the ability of banks to lend money to others.

Question 63

Use the following example to answer the next questions:
Imagine that Stella deposits $25,000 in currency which she had been storing in her closet) into her checking account at the bank. Assume that this institution has a required reserve ratio of 25 percent.
As a result of this deposit, by how much will the bank's required reserves increase?

A) $0
B) $6,250
C) $25,000
D) $31,250
E) $100,000

Question 64

When a bank decided to invest in cash-counting equipment and new cubicles for its loan officers, they were recorded on the bank balance sheet as

A) liabilities.
B) assets.
C) vault cash.
D) deposits.
E) loans.

Question 65

Which of the following would NOT be an asset for a commercial bank?

A) loans
B) cash in the vault
C) deposits at the Federal Reserve
D) U.S. Treasury securities
E) deposits

Question 66

If a local bank decides to convert some of its U.S. Treasury securities into cash, which it will hold in
its vault, reserves will ________, liabilities will ________, and owner’s equity will ________.

A) increase; stay the same; decrease
B) increase; stay the same; stay the same
C) decrease; decrease; decrease
D) decrease; stay the same; decrease
E) stay the same; increase; decrease

Question 67

Use the following example to answer the next questions:
Imagine that Stella deposits $25,000 in currency which she had been storing in her closet) into her checking account at the bank. Assume that this institution has a required reserve ratio of 25 percent.
As a result of this deposit, by how much will the bank's excess reserves increase?

A) $0
B) $18,750
C) $25,000
D) $31,250
E) $100,000

Question 68

Use the following example to answer the next questions:
Imagine that Stella deposits $25,000 in currency which she had been storing in her closet) into her checking account at the bank. Assume that this institution has a required reserve ratio of 25 percent.
As a result of this deposit, what is the maximum amount the bank can hold as loans?

A) $0
B) $18,750
C) $25,000
D) $31,250
E) $100,000

Question 69

If a bank has a required reserve ratio of 10 percent and has required reserves of $100,000,000, how much does the bank hold in deposits?

A) $10,000,000
B) $110,000,000
C) $1,000,000,000
D) $1,500,000,000
E) There is not enough information to solve this problem.

Question 70

If Carlos decides to deposit $100 in cash into his savings account at the bank, how would this be reflected on the bank's balance sheet?

A) Reserves and deposits would increase by the same amount as the deposit.
B) Reserves and deposits would decrease by the same amount as the deposit.
C) This activity would not be recorded on a bank's balance sheet.
D) Reserves would increase and deposits would decrease by the same amount as the deposit.
E) Reserves would decrease and deposits would increase by the same amount as the deposit.

Question 71

In a fractional reserve banking system, banks

A) can lend all of the deposits that are received.
B) have to purchase gold that has the value of the deposits received.
C) must deposit all cash from depositors with the Federal Reserve.
D) face the risk of not having enough cash to meet withdrawal needs.
E) have to deposit all cash from depositors in their own bank vault.

Question 72

The Coppock Bank has $34,000,000 in deposits. If total liabilities and net worth are $47,000,000, loans are $25,000,000, and borrowings are $7,000,000, what is the amount of assets?

A) $5,000,000
B) $34,000,000
C) $47,000,000
D) $106,000,000
E) $123,000,000

Question 73

________ is/are considered a liability on a bank's balance sheet.

A) Cash in the vault
B) U.S. Treasury securities
C) Property owned by the bank
D) Deposits
E) Loans

Question 74

If a bank has a required reserve ratio of 15 percent and has required reserves of $225,000,000, how much does the bank hold in deposits?

A) $33,750,000
B) $210,000,000
C) $240,000,000
D) $1,500,000,000
E) There is not enough information to solve this problem.

Question 75

Alfie has been given a loan for $10,000, and he deposited the full loan amount into his checking account. How would this be reflected on his bank's balance sheet?

A) Loans would increase by $10,000, but deposits would decrease by less than $10,000.
B) Loans would be unaffected, but deposits would increase by $10,000.
C) Loans and deposits would be unaffected.
D) Loans would decrease and deposits would increase by the same amount as the deposit.
E) Loans and deposits would increase by the same amount as the deposit.

Question 76

If a bank has a required reserve ratio of 20 percent and has required reserves of $300,000,000, how much does the bank hold in deposits?

A) $33,750,000
B) $60,000,000
C) $360,000,000
D) $1,500,000,000
E) There is not enough information to solve this problem.

Question 77

Use the following example to answer the next questions:
Imagine that Stella deposits $25,000 in currency which she had been storing in her closet) into her checking account at the bank. Assume that this institution has a required reserve ratio of 25 percent.
As a result of this deposit, by how much will the bank's reserves increase?

A) $0
B) $6,250
C) $25,000
D) $31,250
E) $100,000

Question 78

Use the following example to answer the next questions:
Imagine that Stella deposits $25,000 in currency which she had been storing in her closet) into her checking account at the bank. Assume that this institution has a required reserve ratio of 25 percent.
As a result of this deposit, what is the maximum amount in loans that can be made by all the banks in the banking system?

A) $0
B) $18,750
C) $25,000
D) $31,250
E) $100,000

Question 79

Which of the following would NOT be an asset for a commercial bank?

A) loans
B) cash in the vault
C) borrowings
D) deposits at the Federal Reserve
E) U.S. Treasury securities

Question 80

One way to increase a bank's amount of required reserves is to

A) decrease deposits.
B) increase loans.
C) increase deposits.
D) decrease loans.
E) decrease owner's equity.