Deck 16: Understanding Money and the Role of Banking

Question 1

Any object can serve as money if it is portable,divisible,durable,and stable.

Answer 1

True
Explanation:These characteristics make money able to be used for trade instead of bartering with actual goods.

Question 2

Through the Federal Deposit Insurance Corporation,a deposit in a member bank is currently insured up to $50,000.

Answer 2

False
Explanation:They are actually insured up to $250,000.

Question 3

In order to save money on transactional costs,the U.S.Treasury is moving to electronic fund transfers for payments rather than issuing checks.

Answer 3

True
Explanation:The U.S. Treasury reports that it costs $1.03 to issue a check payment, but only $0.105 to issue an EFT payment.

Question 4

A banker's acceptance requires payment by a specified date.

Question 5

One of the daily responsibilities of the Federal Reserve System is to regulate the current federal funds rate.

Question 6

Due to privacy issues,anti-terrorist policies enacted in the early 2000s have had few significant repercussions on banking practices.

Question 7

Banks create money through contracts with the government to mint bills and coins.

Question 8

In mutual savings banks,all depositors are considered owners of the bank.

Question 9

Banks are subject to prosecution when they fail to maintain systems for identifying and reporting suspicious activities.

Question 10

The reason why a savings account is not considered a component of the M-1 money supply is that it bears interest.

Question 11

The Federal Reserve System has been instrumental in providing interbank clearing of electronic payments for the nation's financial institutions.

Question 12

The Federal Reserve Bank has the responsibility of ensuring the reasonableness of the interest rates for business and personal loans within the United States.

Question 13

Like most of the federal government,the governors of the Federal Reserve System are democratically elected by the citizens of the United States.

Question 14

Open-market operations are often a more effective method for the Federal Reserve System to expand the money supply than is minting more dollars and coins.

Question 15

An example of a point-of-sale (POS)terminal is making a payment at the grocery store and having the system transfer funds from your account to the store's account.

Question 16

As the government's bank,the Fed produces the nation's paper currency and lends money to the government.

Question 17

The M-2 money supply includes everything that is in the M-1 money supply.

Question 18

Individual retirement accounts can be opened only by self-employed people such as doctors,small business owners,and consultants.

Question 19

The divisibility characteristic of money is illustrated by a financial company's ability to divide its monetary assets among several investments.

Question 20

Savings and loan associations began primarily to loan money to small and medium-sized businesses.

Question 21

At any given time,there may be up to 15 different discount rates set by the Federal Reserve System for loaning money to commercial banks.

Question 22

Which of the following terms refers to the percentage of its deposits a bank must hold,in cash or on deposit,with a Federal Reserve bank?

A) discount rate
B) key rate
C) prime rate
D) federal insurance premium
E) reserve requirement

Question 23

The one area that the Federal Reserve System has very little control over is the strength of the U.S.dollar against other currencies.

Question 24

Toyota,based in Japan,would like to build a new factory and a new retail distribution center.Both or either of these may be built in the United States and in Canada.Currently,the U.S.dollar is weak compared to the Canadian dollar.Assuming the decision does not affect the number of cars sold,which of the following arrangements would be MOST profitable?

A) build the cars in Canada and sell them in the United States
B) build the cars in the United States and sell them in Canada
C) build the cars in Canada and sell them in both countries
D) build the cars in the United States and sell them in both countries
E) build the cars in both countries and sell them in both countries

Question 25

In international payments,equal money inflows and outflows can result in no money being transferred between countries.

Question 26

Which of the following indices indicates the relative strength of the currencies of two countries?

A) trade rate
B) exchange rate
C) trade balance
D) relative gross national products
E) international loan rate

Question 27

The Federal Deposit Insurance Corporation is the government agency that regulates American banks.

Question 28

A very strong euro in comparison to the U.S.dollar would benefit American businesses more than European businesses in the global economy.

Question 29

The overall value of the U.S.M-2 has grown considerably since 1979 due primarily to the increased use of credit cards and debit cards.

Question 30

The International Monetary Fund seeks to promote stable exchange rates.

Question 31

Which of the following terms refers to the interest level at which member banks can borrow money from the Federal Reserve System?

A) discount rate
B) key rate
C) prime rate
D) federal insurance premium
E) reserve requirement

Question 32

Which of the following BEST describes what is called the "open-market operations" of the Federal Reserve System?

A) the development of new financial opportunities for banks
B) the minting of new money to disperse into the money market
C) the control of interest rates among banks
D) the maintenance of a well-functioning lending system among banks
E) the buying and selling of securities

Question 33

Which of the following agencies guarantees the safety of all of its members' bank accounts?

A) Internal Revenue Service
B) Federal Open Market Committee
C) Federal Reserve Bank
D) Federal Deposit Insurance Corporation
E) Federal Exchange Commission

Question 34

The Norton County Bank performs such tasks as making monthly bill payments,managing investment portfolios,and managing the estates of deceased persons.What are such services called?

A) special banker's services
B) financial advice services
C) public services
D) trust services
E) amalgamation services

Question 35

Money deposited into a commercial bank has the potential of increasing the overall money supply.

Question 36

Which of the following terms refers to the interest level at which commercial banks lend reserves to each other,usually overnight?

A) discount rate
B) key rate
C) prime rate
D) federal insurance premium
E) reserve requirement

Question 37

Which of the following has a fixed term?

A) demand deposits
B) time deposits
C) money market mutual funds
D) credit card accounts
E) savings accounts

Question 38

The international payments process that moves money between buyers and sellers on different continents is subject to worldwide policy systems.

Question 39

An overly large decrease in the reserve requirement by the Federal Reserve System could result in inflation.

Question 40

The increased activity of the financial market in the past five years has resulted in a severe drop in the required premiums for commercial banks to be members of the Federal Deposit Insurance Corporation.

Question 41

Which of the following laws has had significant effects in maintaining bank identity records?

A) the Check Clearing for the 21st Century Act
B) the USA Patriot Act
C) the Bank Secrecy Act
D) the Federal Reserve Act
E) the Emergency Economic Stabilization Act

Question 42

Which of the following statements is TRUE?

A) Since insurance companies generate the vast majority of revenue from investments of premium payments, market fluctuations will not affect one's health care benefits.
B) Since insurance companies generate the vast majority of revenue from premium payments, market fluctuations generally do not affect one's health insurance premium.
C) Since insurance companies also generate revenue from investments of premium payments, market fluctuations may affect one's health insurance premium.
D) Since insurance companies also generate revenue from investments of premium payments, market fluctuations may affect one's health care benefits.
E) Since insurance companies generate revenue from both premium payments and investments thereof, market fluctuations will not generally affect one's health insurance benefits.

Question 43

Which of the following BEST describes the durability characteristic of money?

A) Units of money do not expire after a certain time limit.
B) Units of money can be matched with the value of goods.
C) Units of money allow people to measure the relative value of goods and services.
D) Units of money of different nations are easily converted to other units of money.
E) Units of money have lasting value.

Question 44

Which of the following statements BEST describes why U.S.Treasury securities have always been considered risk-free investments?

A) They are backed by the U.S. government.
B) They have a guaranteed rate of return.
C) They are easily sold.
D) They are readily available for purchase.
E) They earn a great profit on the international money market.

Question 45

Which of the following financial institutions earn profits from loans taken from the funds in each of its depositors' accounts?

A) securities investment firms
B) pension funds
C) credit unions
D) commercial banks
E) mutual savings banks

Question 46

Which of the following political bodies appoints the members of the board of governors for the Federal Reserve System?

A) the Senate
B) the House of Representatives
C) the President of the United States
D) the Council of American Governors
E) the people of the United States

Question 47

Which of the following is NOT part of the M-1 supply?

A) currency at hand
B) currency amount of written checks
C) currency available through a debit card
D) currency in checking accounts
E) currency value of time deposits

Question 48

Which of the following actions can the Federal Deposit Insurance Company take in the event of a failure of one of its insured banks?

A) The FDIC can seize the assets of the bank and its investors and settle the bank's debts.
B) The FDIC can allow the bank to stay afloat by granting a loan of federal money.
C) The FDIC can conduct an inquiry into the investors' assets and actions to determine if there was any malfeasance that caused the bank failure.
D) The FDIC can allow another bank to take responsibility for the failed bank's liabilities through sale of the failed bank.
E) The FDIC can settle the bank's debts through its insurance deposit fund and regulate the bank's transactions more strictly.

Question 49

Money frees society from a system of barter.In doing so,money is performing which of the following functions?

A) store of value
B) measure of worth
C) unit of account
D) determination factor
E) medium of exchange

Question 50

Which of the following is NOT part of the M-2 money supply?

A) debit card account
B) time deposits
C) money market mutual funds
D) savings account
E) credit card account

Question 51

Which of the following is NOT a primary tool for controlling the money supply?

A) taxation
B) reserve requirements
C) discount rate controls
D) credit controls
E) open-market operations

Question 52

Which of the following BEST describes the portability characteristic of money?

A) It neither dies nor spoils and if it wears out, it can be replaced.
B) Units of money can be matched with the value of goods.
C) It can be exchanged across national borders.
D) It allows people to measure the relative value of goods and services.
E) It is light and easy to handle.

Question 53

Which of the following BEST describes the stability characteristic of money?

A) Units of money do not expire after a certain time limit.
B) Units of money of different nations are easily converted to other units of money.
C) Units of money can be matched with the value of goods.
D) Units of money allow people to measure the relative value of goods and services.
E) Units of money have relatively constant value.

Question 54

Which of the following statements BEST explains how financial institutions create money?

A) By opening new checking accounts and giving more people access to readily available cash, financial institutions expand the money supply.
B) By issuing money through government contracts, financial institutions expand the money supply.
C) By taking deposits and loaning out these funds, financial institutions expand the money supply.
D) By collecting interest on its accounts through investments, financial institutions expand the money supply.
E) By giving interest from its accounts to its clients, financial institutions expand the money supply.

Question 55

When buying from a supplier in France,LTD,based in Cleveland,Ohio,has arranged for its bank to pay the supplier the cost of the desired material when it has passed customs in the United States.Which of the following terms is this type of bank promise called?

A) banker's acceptance
B) bank trust service
C) certified check
D) letter of credit
E) currency exchange agreement

Question 56

Which of the following BEST describes two of the three primary functions of the Federal Reserve System?

A) developing new financial markets and aiding banks in conducting their business
B) aiding banks in conducting business and managing the U.S. money supply and interest rates
C) managing the U.S. money supply and interest rates and monitoring interbank relationships
D) monitoring interbank relationships and acting as a bank for the federal government
E) acting as a bank for the federal government and developing new financial markets

Question 57

Which of the following affects the value of money?

A) how much currency is in circulation
B) how many units the currency can be divided into
C) how portable the form of currency is
D) how durable the form of currency is
E) how much currency has been saved

Question 58

Which of the following financial institutions are considered to be owned by their depositors?

A) commercial banks and savings and loan associations
B) savings and loan associations and mutual savings banks
C) mutual savings banks and credit unions
D) credit unions and pension funds
E) pension funds and savings institutions

Question 59

Which of the following is a consequence of the divisibility characteristic of money?

A) Units of money do not expire after a certain time limit.
B) Units of money can be accurately matched with the value of goods.
C) Units of money are easily carried.
D) Units of money have relatively stable value.
E) Units of money of different nations are easily converted to other units of money.

Question 60

How are the individual Federal Reserve Banks organized?

A) by size of financial institution members-small, medium, large, etc.
B) by type of financial institution members-commercial banks, credit unions, etc.
C) by geographical region-Southeast, Northeast, West, etc.
D) by financial purpose-buying, lending, interest controlling, etc.
E) by legislative districts-10th District of Massachusetts, 1st District of Colorado, etc.

Question 61

A senior manager argues that the negative perception associated with mounting credit card debt will affect StarMart.Which of the following would be the MOST effective measure StarMart could take to address this potential problem?

A) offering to forgive all debt more than 90 days old
B) making it clear that StarMart is a different entity than Axiom-Star
C) pointing out the records and practices of the worst-behaved credit companies
D) extending the expiration date of StarMart reward points
E) extending credit only to those who are very likely to be able to pay their bills

Question 62

Which of the following statements BEST describes why an increase in the discount rate often results in a decrease in the money supply?

A) An increase in the discount rate will lower the overall values of loans from the Federal Reserve Banks to individual banks.
B) An increase in the discount rate will lower the overall values of loans from individual banks to other financial institutions.
C) An increase in the discount rate will lower the overall number of banks issuing loans to individuals.
D) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individual banks.
E) An increase in the discount rate will lower the overall number of loans from the Federal Reserve Banks to individuals.

Question 63

Which of the following reasons is the primary motivator for a commercial bank to acquire new depositors?

A) A new deposit account will make more funds available to pay the interest on other deposit accounts.
B) A new deposit account will make more funds available to pay the bank's employees.
C) A new deposit account will make more funds available to give out in loans.
D) A new deposit account will make more funds available to give out in dividends to its investors.
E) A new deposit account will make more funds available to facilitate brokerage transactions.

Question 64

Which of the following transactions is not included among Automated Clearing House payments?

A) ATM deposits
B) business-to-business electronic payments
C) checks
D) Internet-initiated debit card payments
E) local tax payments

Question 65

Which of the following is the main justification for the World Bank to fund national improvements by making loans to build roads and hospitals?

A) The resulting improvements will help stabilize the political situation, and hence the international trade, of certain developing countries.
B) The resulting improvements will help increase the productive capacity, and hence the international trade, of certain developing countries.
C) The resulting improvements will help increase the population morale, and hence the international trade, of certain developing countries.
D) The resulting improvements will help increase the overall quality of life, and hence the international trade, of certain developing countries.
E) The resulting improvements will help increase the value of the currency, and hence the international trade, of certain developing countries.

Question 66

Under which of the following circumstances would the Federal Reserve System want to decrease the money supply by increasing the reserve requirement?

A) The economy is experiencing severe inflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
B) The economy is experiencing severe inflation, yet market activity has been extremely high and erratic.
C) The economy is experiencing severe deflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
D) The economy is experiencing severe deflation, yet market activity has been extremely high and erratic.
E) The economy is experiencing severe deflation, market activity is very low, and most financial institutions are low on M-1 resources.

Question 67

Which of the following financial institutions was taken over by the Federal Housing Finance Agency when it was on the verge of financial failure?

A) Lehman Brothers Holdings
B) JPMorgan Chase
C) Freddie Mac
D) Federal Home Loan Banks System
E) Federal Reserve

Question 68

A jeweler assesses the value of a flawless white diamond as considerably more than that of a rhinestone.Which function of money does this illustrate?

A) foundation of banking
B) medium of exchange
C) store of value
D) measure of worth
E) stabilization of value

Question 69

Which of the following recent events represent the two most significant impacts on changes in the money and banking system since 2000?

A) government intervention to stabilize the U.S. financial system and stricter regulation of the mortgage industry
B) stricter regulation of the mortgage industry and the enactment of anti-terrorist policies
C) the enactment of anti-terrorist policies and creation of the Federal Reserve System
D) the rise of electronic technologies in banking and government intervention to stabilize the U.S. financial system
E) government intervention to stabilize the U.S. financial system and regulate the printing of money

Question 70

Which of the following statements BEST describes why a decrease in reserve requirements often results in an increase in the money supply?

A) A decrease in reserve requirements gives banks more money to better determine their interest rates.
B) A decrease in reserve requirements gives banks more money to pay off their debts.
C) A decrease in reserve requirements gives banks more money to lend out.
D) A decrease in reserve requirements gives banks more money to offer in dividend payments to their clients.
E) A decrease in reserve requirements gives banks more money to reward their employees for meritorious financial ventures.

Question 71

Which of the following describes the requirements that the International Monetary Fund has made on certain developing countries?

A) that the government decrease spending in order to bring inflation under control
B) that private industries decrease prices in order to bring inflation under control
C) that the government increase loans in order to create more money in the local markets
D) that the local banks increase loans in order to create more money in the local markets
E) that the government and private industries partner in creating more jobs in the region

Question 72

Under which of the following circumstances would the Federal Reserve System want to decrease the money supply by increasing the discount rate?

A) The economy is experiencing severe inflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
B) The economy is experiencing severe inflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity.
C) The economy is experiencing severe deflation, and market activity is very low. Yet the financial institutions have a great deal of M-1 resources at their disposal that they are not investing.
D) The economy is experiencing severe deflation, and most financial institutions have low M-1 resources at their disposal. Yet there is a great deal of market activity.
E) The economy is experiencing wild fluctuations, and most financial institutions have low M-1 resources at their disposal.

Question 73

Which of the following statements BEST describes how the Automated Clearing House Network (ACH)maintains its integrity as a processor of electronic payments?

A) The ACH network is an institution within the Federal Bank System and is regulated by strict government standards.
B) The ACH network is a for-profit company and is regulated by its need to make a profit, which it can only do by strictly regulating itself.
C) The ACH network is a financial institution and is thus regulated by its obligations to its investors.
D) The ACH network is a not-for-profit association and is regulated by its independence from outside interests.
E) The ACH network is a professional organization to which all financial institutions are obligated to contribute resources and is regulated by the interests of these institutions.

Question 74

Which of the following institutions simplifies financial settlements between buyers and sellers in different countries?

A) the U.S. State Department
B) the International Monetary Fund
C) the World Bank
D) commercial banks
E) the Internet

Question 75

Regarding the international payments process,which statement is TRUE?

A) In international trade, money will flow from the country with the strongest currency to that of the weakest.
B) The World Bank monitors the trade of its members to insure that money is flowing properly between the various countries.
C) The World Bank monitors the national banks of its members to insure that money is flowing properly between the various countries.
D) By international law, international trade must involve money flowing between two countries.
E) Money does not actually have to flow between two countries.

Question 76

Which of the following pieces of information is not required by the USA Patriot Act for banks to collect for every customer?

A) name
B) address
C) date of birth
D) place of birth
E) tax identification number

Question 77

Which of the following federal laws made transactions between banks significantly more efficient?

A) the Check Clearing for the 21st Century Act
B) the Bank Secrecy Act
C) the USA Patriot Act
D) the Federal Reserve Act
E) the Economic Emergency Recovery Act

Question 78

Suppose a list of all American deposit institutions were created and a name chosen randomly from this list.Which of the following would the chosen institution MOST likely be?

A) a commercial bank
B) a savings institution
C) a savings and loan association
D) a mutual savings bank
E) a credit union

Question 79

David is saving $25 a week toward getting a new truck.Which function of money does this illustrate?

A) stabilization of value
B) foundation of banking
C) medium of exchange
D) store of value
E) measure of worth

Question 80

A senior manager argues that the negative perception associated with mounting credit card debt will affect StarMart.Which of the following would be the LEAST effective measure StarMart could take to address this potential problem?

A) publicizing the company's policies in clear and easy-to-understand language
B) charging no more than the typical interest rate for month-to-month debt
C) ensuring that fees for exceeding credit limits are no higher than necessary
D) increasing the value of the promotional items that attract new credit card customers
E) offering free debt counseling to Axiom-Star customers