Deck 24: The Nature and Creation of Money

Question 1

The unit-of-account function of money means that money is used

A)as a consistent means of measuring the value of things.
B)as the common denominator of future payments.
C)to pay for goods and services.
D)to accumulate purchasing power.

Answer 1

A

Question 2

You spend $20 to buy a used textbook at the college bookstore.What function does money perform here?

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

Answer 2

A

Question 3

When you buy a ticket to the rodeo, you are using money as a

A)source of economic activity.
B)store of value.
C)factor of production.
D)medium of exchange.

Answer 3

D

Question 4

Keeping a $20 bill in your purse to purchase a movie DVD when it comes out next month means that money functions as a

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

Question 5

Money is any item that

A)serves as a medium of exchange for goods and services.
B)can be converted into silver with relatively little loss in value.
C)can be converted into gold with relatively little loss in value.
D)facilitates a connecting link between credit instruments and debt instruments.

Question 6

Which of the following illustrates the medium-of-exchange function of money?

A)writing a check to buy a new Volkswagen
B)noting that the price of a $20,000 Volkswagen is 30,000 German marks
C)keeping $20,000 in cash in your mattress instead of buying a new Volkswagen
D)driving your $20,000 Volkswagen to a friend's house

Question 7

Which of the following best illustrates the unit of account function of money?

A)You list prices for clothing sold on your Web site, www.nattydresser.com, in dollars.
B)You pay for your cruise tickets with dollars.
C)You keep $50 in your backpack for emergencies.
D)You keep your tips earned from your tour guide job in a separate jar at home.

Question 8

The price of a new Nokia cell phone is $90.What is the function of money in this context?

A)a medium of exchange
B)a means of payment
C)a unit of account
D)a measure of quality

Question 9

In the federal penitentiary at Lompoc, California, inmates used packages of mackerel to buy items such as haircuts at the prison barber shop and laundry services.What function do these packages of mackerel serve?

A)They functioned as money.
B)They served as a corruption deterrent.
C)They enabled prison officers to monitor illegal money flows.
D)They forced prisoners to engage in barter.

Question 10

Which of the following describes the medium-of-exchange function of money?

A)noting that Audible.com sells downloadable audio books for $10 per book
B)making a monthly payment toward your car loan
C)paying $30 for a haircut
D)putting away $50 each month into your savings account

Question 11

Which of the following is an advantage of using money as a medium of exchange?

A)It simplifies purchases because all prices are specified in money values.
B)There is no interest charged on using money for purchases.
C)It is easy to mass produce money.
D)It avoids having to rely on barter, the exchange of one good or service for another.

Question 12

Any item that serves as a medium of exchange is called

A)gold.
B)capital.
C)silver.
D)money.

Question 13

Money is essentially defined by

A)the intrinsic value of what is being used as money.
B)the judicial branch.
C)the government.
D)social usage.

Question 14

The function of money illustrated by the prevailing prices of goods and services is the

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

Question 15

When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n)

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

Question 16

When a person makes price comparisons among products, money is being used as a(n)

A)unit of account.
B)standard of quality.
C)medium of exchange.
D)checkable deposit.

Question 17

Which of the following describes the store of value function of money?

A)noting that Audible.com sells downloadable audio books for $10 per book
B)making a monthly payment toward your car loan
C)paying $30 for a haircut
D)putting away $50 each month into your savings account

Question 18

Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services.Why were they willing to accept mackerel in exchange for goods and services?

A)because mackerel is a good source of protein
B)because prison authorities deemed mackerel legal tender
C)because the inmates know that they could use the packages of mackerel to buy other goods and services
D)because the inmates do not wish to consume mackerel

Question 19

Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services.What function do these packages of mackerel perform?

A)They function as a store of value.
B)They function as a medium of exchange.
C)They function as a unit of account.
D)They function as a factor of production.

Question 20

The functions of money are

A)a conductor of economic activity, a medium of exchange, and a store of value.
B)a medium of exchange, a store of value, and a factor of production.
C)a store of value, a medium of exchange, and a determinant of investment.
D)a store of value, a unit of account, and a medium of exchange.

Question 21

Which of the following is a store of value and a common medium of exchange?

A)corporate bonds
B)stocks
C)checking account balances
D)Debit cards

Question 22

The Fed's narrowest measure of money supply is

A)M1.
B)M2.
C)credit card balances.
D)balances held in money market funds.

Question 23

Money that some authority has declared legal tender is called

A)fiat money.
B)currency.
C)convertible paper money.
D)commodity money.

Question 24

Which of the following is part of M1?
I.currency in a bank's vault
II.cash in your purse
III.checkable deposits
IV.traveler's checks

A)I, II, III, and IV
B)I, II, and III
C)II and III
D)II, III, and IV

Question 25

Which of the following illustrates the store-of-value function of money?

A)writing a check to buy a new Volkswagen
B)noting that the price of a $20,000 Volkswagen is 30,000 German marks
C)agreeing to repay a bank $400 a month for the next 48 months for a loan to buy a new Volkswagen
D)keeping $20,000 in cash in your mattress instead of buying a new Volkswagen

Question 26

Inflation reduces the ability of money to function as a

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

Question 27

Which of the following is the most liquid asset?

A)season tickets to the Yankee's games
B)the Federal Reserve notes that your Aunt Ursula stuffs in her mattress
C)a $5,000 6-month certificate of deposit (time deposit)
D)one hundred shares of IBM stock

Question 28

Because commodity money is not uniform in quality, there is a tendency

A)for higher quality commodity money to drive lower quality commodity money out of circulation.
B)for lower quality commodity money to drive higher quality commodity money out of circulation.
C)for stable commodity money to drive unstable commodity money out of circulation.
D)for unstable commodity money to drive stable commodity money out of circulation.

Question 29

One disadvantage of commodity money is that

A)it cannot be readily converted to gold.
B)its quantity can fluctuate erratically.
C)its value does not change.
D)it has no value apart from its use as money.

Question 30

M1 include

A)currency only.
B)currency plus checkable deposits.
C)currency in circulation plus checkable deposits.
D)currency in circulation plus checkable deposits plus traveler's checks.

Question 31

Which of the following is part of M1?
I.currency in a bank's vault
II.cash in your purse
III.checkable deposits
IV.savings deposits

A)I, II, III, and IV
B)I, II, and III
C)II and III
D)II, III, and IV

Question 32

Currency in the United States today is

A)fiat money.
B)intrinsic money.
C)backed by gold.
D)quasi- intrinsic.

Question 33

Rank the following items in terms of most liquid to least liquid.

A)checkable deposits, cash, an office building your father owns
B)cash, credit card, money market mutual funds, checkable deposits,
C)cash, checkable deposits, savings deposits, an office building your father owns
D)cash, Microsoft stock certificates you own, checkable deposits

Question 34

Money that has value apart from its use as money is called

A)fiat money.
B)currency.
C)convertible paper money.
D)commodity money.

Question 35

Gresham's Law

A)deals with the theory of regulatory forces in the economy.
B)is the tendency for good money to drive bad money out of circulation.
C)is the tendency for bad money to drive good money out of circulation.
D)was passed in 1913, as part of the Federal Reserve Act.

Question 36

The ease with which an asset can be converted to money is its

A)liquidity.
B)adaptability.
C)accessibility.
D)rigidity.

Question 37

Which of the following statements is true?

A)In Romania under Communist Party rule in the 1980s, Kent cigarettes served as a medium of exchange.This illustrates the use of Kent cigarettes as fiat money.
B)Commodity money has no value apart from its use as money.
C)In Romania under Communist Party rule in the 1980s, Kent cigarettes served as a medium of exchange.This illustrates the use of Kent cigarettes as commodity money.
D)Fiat money must be backed by gold; otherwise it is worthless.

Question 38

The monetary aggregate, M1, increases when

A)an individual cashes a check written by a business.
B)an individual purchases clothes with a debit card.
C)an individual switches funds from a savings account to a checking account.
D)an individual buys groceries with a credit card.

Question 39

Which of the following items serve as a store of value?
I.cash in your pocket
II.the balance in your checking account
III.an original Picasso painting
IV.a $1,000 corporate bond

A)I and II
B)I, II, and III
C)I, II, and IV
D)I, II, III, and IV

Question 40

Money that some authority, generally a government, has ordered to be accepted as a medium of exchange is called _______ money.

A)fiat
B)intrinsic
C)commodity
D)debt

Question 41

If you withdraw currency from your savings account, you are

A)increasing M1, decreasing M2.
B)increasing both M1 and M2.
C)increasing M1 but not affecting M2.
D)decreasing both M1 and M2.

Question 42

Debit cards are

A)counted as money because they perform the medium of exchange function of money.
B)not considered money because they merely show that their owners have a relationship to money.
C)are counted as a part of M2 but not M1.
D)counted as money because they provide access to their owners' checkable deposits.

Question 43

Which of the following is not an example of a financial intermediary?

A)a pension fund
B)an insurance company
C)a commercial bank
D)the New York Stock Exchange

Question 44

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

A)currency
B)demand deposits
C)small-denomination time deposits
D)debit cards

Question 45

Why might monetary policy authorities be concerned that since the early 1970s, non-bank financial intermediaries account for a growing share of the economy's financial assets?

A)Monetary policy authorities fear that this situation might erode the value of the U.S.dollar in foreign exchange markets.
B)Monetary policy authorities are concerned that this situation might promote income inequality since high income individuals are more likely to use the services of non-bank financial intermediaries, compared to low-income individuals.
C)Monetary policy authorities fear that this situation might lessen their ability to control money supply because non-bank financial intermediaries are not as heavily regulated as banks.
D)It will be more difficult for monetary policy authorities to monitor those assets that are most closely related to the level of economic activity.

Question 46

Credit cards are

A)not money.
B)not money, because they can't be used to purchase goods and services.
C)considered to be money.
D)counted as a part of M2 but not M1.

Question 47

Which of the following statements is false about M1 and M2?

A)M2 is a broader measure of the money supply than M1.
B)M2 contains assets that are less liquid than those in M1.
C)All the assets included in M1 are also included in M2.
D)All the assets included in M2 are also included in M1.

Question 48

Which of the following is an example of a bank's assets?

A)reserves borrowed from the Fed
B)loans made to customers
C)checkable deposits
D)savings deposits

Question 49

The largest component of M1 is

A)checkable deposits.
B)credit card balances.
C)currency.
D)savings deposits.

Question 50

Between the early 1970s and the mid-2000s, banks' share of the U.S.credit market financial assets

A)has increased significantly as banks merged and consolidated their assets.
B)has diminished significantly as nonbank financial intermediaries started to offer more and more services that were previously offered exclusively by banks.
C)has increased steadily at the same rate as the growth in the economy's potential output.
D)has decreased steadily as more and more large U.S.firms moved production abroad to low-wage countries.

Question 51

Freema withdraws $1,000 from her checking account to purchase a $1,000 time-deposit.
As a result of her transaction,

A)M1 and M2 decrease.
B)M1 decreases and M2 increases.
C)M1 decreases and M2 is unaffected.
D)M1 and M2 are unaffected.

Question 52

A financial institution that accepts deposits, makes loans, and offers checking accounts is

A)an insurance company.
B)the Federal Deposit Insurance Corporation.
C)the Federal Reserve System.
D)a commercial bank.

Question 53

An institution that collects funds from lenders and distributes these funds to borrowers is called

A)a financial intermediary.
B)the Federal Reserve System.
C)a mercantile exchange.
D)a currency market.

Question 54

Which of the following is an example of the public's liabilities?

A)cash held by the public
B)their mortgage loans
C)checkable deposits
D)their holdings of U.S.government bonds

Question 55

An activity performed by commercial banks that is not performed by insurance companies is

A)functioning as financial intermediaries.
B)creating financial obligations against themselves.
C)accepting deposits and offering checking accounts.
D)allocating financial resources between borrowers and lenders.

Question 56

Which of the following is an example of a bank's liabilities?

A)its reserves
B)its loans
C)checkable deposits
D)its holdings of U.S.government bonds

Question 57

Which of the following would lead to a change in the money measure, M1?

A)a customer's cash withdrawal from an ATM
B)a customer withdraws funds from her checking account to purchase a 6-month time deposit
C)depositing a paycheck drawn against Bank of America into your checking account in Wells Fargo Bank
D)interest payments by the Treasury on its debt

Question 58

How does the Fed decide which monetary measure it should keep track of?

A)The Fed would like to track a monetary measure that is most closely related to the market interest rate.
B)The Fed would like to track a monetary measure that is most closely related to the quantity of money demanded by economic agents.
C)The Fed would like to track a monetary measure that is most closely related to the level of real GDP and the price level.
D)The Fed would like to track a monetary measure that is most closely related to government spending.

Question 59

When her $1,000 time deposit expires, Suneeta decides not to renew the time deposit and opts to cash out.As a result of her transaction

A)M1 and M2 increase.
B)M1 increases and M2 decreases.
C)M1 is unaffected and M2 decreases.
D)M1 increases and M2 is unaffected.

Question 60

The non-bank public chooses among various financial assets in deciding in what form it wants to hold liquidity.It thereby increases or decreases
I.the M1 measure of money supply.
II.the reserves of commercial banks.
III.the reserves that commercial banks are required to hold.

A)none of the above since only the Fed can alter the money supply
B)I, II, and III
C)I and II only
D)I only

Question 61

A bank that has no excess reserves

A)cannot create loans.
B)is not in equilibrium.
C)is on the brink of bankruptcy.
D)has no required reserves.

Question 62

A bank is "loaned up" when

A)legal reserves are zero.
B)excess reserves are zero.
C)primary reserves are zero.
D)required reserves are zero.

Question 63

Which of the following is an example of a bank's reserves?

A)currency held in the vaults of the bank
B)demand deposits with other member banks
C)U.S.Treasury bills
D)U.S.Treasury bonds

Question 64

Which of the following equations is correct?

A)assets = liabilities − net worth
B)assets = liabilities + net worth
C)liabilities = assets + net worth
D)net worth = liabilities + assets

Question 65

Any reserves that banks hold in excess of required reserves are called

A)excess reserves.
B)margin reserves.
C)federal reserves.
D)surplus reserves.

Question 66

A bank has $100,000 in checkable deposits and $30,000 in reserves.If the required reserve ratio is 10%, what is the amount of excess reserves?

A)$0
B)$10,000
C)$20,000
D)$30,000

Question 67

Nita deposits a check for $750 drawn against Home Federal Bank into her account at Village Bank.Which pair of the T-accounts below shows this transaction on the respective bank's balance sheets?

A) $$\begin{array} { | c c | l l l | } \hline { \text { Viliage Bank } } && { \text { Home Federal Bank } } \\\hline \text { Assets } & \text { Liabilities } & \text { Assets } & { \text { Liabilities } } \\\hline \text { Reserves } + 750 & \text { Checkable } & \text { Reserves } - 750 & \text { Checkable } \\& \text { deposits } + 750 & & \text { deposits } - 750 \\\hline\end{array}$$
B) $$\begin{array} { | c c | l l l | } \hline { \text { Viliage Bank } } && { \text { Home Federal Bank } } \\\hline \text { Assets } & \text { Liabilities } & \text { Assets } & { \text { Liabilities } } \\\hline \text { Reserves } + 750 & \text { Checkable } & \text { Reserves } + 750 & \text { Checkable } \\& \text { deposits } - 750 & & \text { deposits } - 750 \\\hline\end{array}$$

C) $$\begin{array} { | c c | l l l | } \hline { \text { Viliage Bank } } && { \text { Home Federal Bank } } \\\hline \text { Assets } & \text { Liabilities } & \text { Assets } & { \text { Liabilities } } \\\hline \text { Reserves } - 750 & \text { Checkable } & \text { Reserves } - 750 & \text { Checkable } \\& \text { deposits } - 750 & & \text { deposits } - 750 \\\hline\end{array}$$

D) $$\begin{array} { | c c | l l l | } \hline { \text { Viliage Bank } } && { \text { Home Federal Bank } } \\\hline \text { Assets } & \text { Liabilities } & \text { Assets } & { \text { Liabilities } } \\\hline \text { Reserves } + 750 & \text { Checkable } & \text { Reserves } + 750 & \text { Checkable } \\& \text { deposits } + 750 & & \text { deposits } + 750 \\\hline\end{array}$$

Question 68

A bank's reserves are

A)the minimum value of assets it must have.
B)the amount of gold it is required to have as reserves against loans.
C)the value of federal securities it is required to have as reserves against loans.
D)deposits that banks have accepted from customers but have not loaned out.

Question 69

A system in which banks hold reserves whose value is less than the sum of claims on those reserves is called

A)speculative banking.
B)leveraged banking.
C)fractional reserve banking.
D)international banking.

Question 70

In the banking system today, the reserves banks hold against their deposit liabilities must take one of two forms.They are

A)vault cash and deposits at the Fed.
B)vault cash and checkable deposits.
C)currency in circulation and checkable deposits.
D)gold and vault cash.

Question 71

Suppose you deposit $1,000 cash in your checking account at a bank.If the bank is loaned up and if the required reserve ratio is 10%, the maximum amount that the bank can lend now, following your deposit is

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

Question 72

The law requires banks to maintain

A)fractional reserves in the form of deposit liabilities against their liquid assets.
B)fractional reserves in the form of federal securities against their outstanding loans.
C)fractional reserves in the form of cash in their vaults or deposits with the central bank against their deposit liabilities.
D)legal reserves in the form of gold against their outstanding loans.

Question 73

Which of the following is an example of a bank's reserves?

A)demand deposits with other banks
B)deposits with the Federal Reserve
C)Treasury bonds and bills
D)state bonds of the state in which the bank is located but not state bonds of other states.

Question 74

If banks were required to keep 100% of deposits in reserves, they could

A)make more loans.
B)make no loans.
C)create more deposits.
D)only use required reserves for loans.

Question 75

A bank has $100,000 in checkable deposits and $30,000 in reserves.If the required reserve ratio is 20%, what is the maximum amount of loans this bank can create?

A)$0
B)$10,000
C)$20,000
D)$30,000

Question 76

Which of the following is an example of a bank's assets?

A)reserves borrowed from the Fed
B)checkable deposits
C)vault cash
D)savings deposits

Question 77

The principle of fractional reserve banking makes it possible for a

A)bank to make loans.
B)bank to print currency.
C)bank to avoid reserve requirements.
D)bank to sell securities.

Question 78

The quantity of reserves that banks must hold against deposits is called

A)the reserve ratio.
B)excess reserves.
C)total reserves.
D)required reserves.

Question 79

A bank has $100,000 in checkable deposits and $30,000 in reserves.If the required reserve ratio is 10%, what is the amount of required reserves?

A)$0
B)$10,000
C)$20,000
D)$30,000

Question 80

Linda sells her Economics textbook to Ejere for $40.Ejere pays Linda with a check, which she deposits in her checking account in West Bank.Which statement below describes the check-clearing process?

A)Linda's bank gains $40 in checkable deposits and loses $40 in reserves.Ejere's bank gains $40 in reserves and loses $40 in deposits.
B)Linda's bank loses $40 in checkable deposits and gains $40 in reserves.Ejere's bank gains $40 in checkable deposits and loses $10,000 in reserves.
C)Ejere's bank loses $40 in both reserves and checkable deposits.Linda's bank gains $40 in both checkable deposits and reserves.
D)Ejere's bank loses $40 in reserves and gains $10,000 in checkable deposits.Linda's bank loses $40 in both reserves and checkable deposits.