Deck 13: Money and the Banking System

Question 1

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 1

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

Question 2

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.

Answer 2

efficiency in arranging transactions.

Question 3

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.

Answer 3

double coincidence of wants.

Question 4

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 5

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 6

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 7

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 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

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 10

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 11

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 12

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 13

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 14

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 15

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 16

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 17

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 18

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 prices rise.
D) tends to decline as the money supply expands in relation to the availability of goods and services.

Question 19

Which of the following is the best definition of money?

A) Anything generally accepted as payment for goods or repayment of debt
B) Anything that can be converted to a liquid asset
C) A national currency that is backed by gold or other precious metals
D) Paper or coin currency that is produced by the Federal Reserve

Question 20

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 21

The Fed is institutionally independent. A major advantage of this is that monetary policy

A) is subject to regular congressional scrutiny.
B) will often offset fiscal policy.
C) is not controlled by politicians.
D) is usually coordinated with fiscal policy.

Question 22

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 23

Other things constant, which of the following would cause the M2 money supply to decline?

A) an increase in the quantity of U.S. currency held overseas
B) a shift of funds from interest-earning checking accounts to money market mutual funds
C) a reduction in the general public's holdings of currency outside of banks because debit cards have become more popular and widely accepted
D) a shift of funds from money market mutual funds into stock and bond mutual funds because the fees to invest in the latter have declined

Question 24

In practice, money supply and short-term interest rates are determined by the

A) Treasury and Commerce departments.
B) Federal Open Market Committee.
C) Board of Governors.
D) House and Senate.

Question 25

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 26

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 27

Which of the following is primarily responsible for controlling the money supply in the United States?

A) The U.S. Congress.
B) The Board of Governors of the Federal Reserve System.
C) The U.S. Treasury.
D) The Council of Economic Advisors.

Question 28

Are outstanding credit card balances counted as part of the money supply?

A) No; credit card balances reflect funds that have been borrowed. Unlike money, they cannot be used as a means of payment.
B) Yes; they are used to purchase things and therefore they are included in the money supply figures.
C) They are included in the M1 money supply, but not the M2 figures.
D) They are included in the M2 money supply, but not the M1 figures.

Question 29

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

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

Question 30

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 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

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 33

The main purpose of the Fed is to

A) serve as the bankers' bank for member banks.
B) regulate interest rates.
C) print Federal Reserve Notes.
D) regulate financial institutions.
E) maintain the proper functioning of our money system.

Question 34

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 35

A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is

A) zero.
B) the prime rate.
C) the discount rate.
D) the federal funds rate.
E) the required reserve ratio.

Question 36

Open-market purchases by the Fed make the money supply

A) increase, which tends to increase the value of money.
B) increase, which tends to decrease the value of money.
C) decrease, which tends to decrease the value of money.
D) decrease, which tends to increase the value of money.

Question 37

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 38

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 39

Which of the following items are counted in M2?

A) stock mutual funds
B) money-market mutual funds
C) bond mutual funds
D) all of the above

Question 40

The federal funds rate is the interest rate paid when

A) the Federal Reserve makes loans to member banks.
B) taxpayers pay overdue taxes.
C) one bank borrows reserves from another bank.
D) banks make loans to the federal government.
E) the federal debt is refinanced.

Question 41

Which of the following is responsible for decision making regarding the purchase and sale of bonds by the Fed?

A) The chairman of the Board of Governors of the Federal Reserve System.
B) The Federal Open Market Operations Committee.
C) The U.S. Secretary of Treasury.
D) The president, with the advice and consent of the chairman of the Council of Economic Advisers.

Question 42

The term "open market operations" refers to the

A) loan-making activities of commercial banks.
B) effect of expansionary monetary policy on interest rates.
C) operation of competitive markets in the banking industry as the result of deregulation.
D) buying and selling of government securities by the Federal Reserve.

Question 43

Open market operations is the

A) tool most often used by the Fed to alter the money supply.
B) least effective tool the Fed has to alter the money supply.
C) tool used by the Treasury to raise tax revenues.
D) tool used by the Fed to regulate stock market activities.

Question 44

Which of the following will increase the excess reserves of commercial banks?

A) A reduction in the reserve requirement ratio.
B) An increase in the discount rate.
C) The sale of government bonds by the Fed to the public.
D) The sale of government bonds by the Treasury to the public.

Question 45

If the Fed raises the discount rate, what happens to reserves and the money supply?

A) Reserves increase and the money supply decreases.
B) Both increase.
C) Reserves decrease and the money supply increases.
D) Both decrease.

Question 46

When the required reserve ratio is lowered,

A) the money multiplier increases, and the amount of excess reserves increases in the banking system.
B) the money multiplier decreases, and the amount of excess reserves increases in the banking system.
C) the money multiplier decreases, and the amount of excess reserves decreases in the banking system.
D) the money multiplier increases, and the amount of excess reserves decreases in the banking system.
E) there is no change in either the money multiplier or the amount of excess reserves in the banking system.

Question 47

Which of the following would cause the money supply in the United States to decrease?

A) An increase in reserve requirements.
B) A decrease in the discount rate.
C) A purchase of bonds by the Federal Reserve.
D) An increase in the world supply of gold.

Question 48

The primary source of revenue for the Federal Reserve is

A) the interest earned on the bonds held by the Fed.
B) its annual appropriation from Congress.
C) the interest earned on discount loans to banks.
D) the dividends earned on the stocks held by the Fed.

Question 49

If the Fed lends to member banks, what happens to reserves and the money supply?

A) Reserves increase and the money supply decreases.
B) Both increase.
C) Reserves decrease and the money supply increases.
D) Both decrease.

Question 50

The Federal Reserve System is owned by

A) federal government agencies such as the Treasury.
B) the Congress of the United States.
C) the banks that are members of the Federal Reserve System.
D) anyone who buys stock over the counter.
E) people who have deposits in member banks.

Question 51

Suppose the Fed bought $150 million of U.S. securities from the public. The reserve requirement is 20 percent, and there are no initial excess reserves. A few weeks later, if the public's holdings of currency are constant and the banks have loaned all excess reserves, the money supply will increase by

A) $150 million.
B) $300 million.
C) $600 million.
D) $750 million.

Question 52

If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?

A) It will give the bank new reserves.
B) It will write the bank a check.
C) It will transfer cash to the bank's vault.
D) It will take reserves from another bank.

Question 53

When reserve requirements are increased, the

A) excess reserves of commercial banks will decrease.
B) excess reserves of commercial banks will increase.
C) U.S. Treasury will have to borrow additional funds.
D) money supply will rise.

Question 54

Suppose the Fed sells $100 million of U.S. securities to 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.
B) $500 million increase.
C) $500 million decrease.
D) $100 million increase.

Question 55

In response to the recession of 2008-2009, the Fed doubled its asset holdings from $925 billion at mid-year 2008 to more than $2 trillion by mid-year 2009. This policy

A) reduced the reserves available to banks, leading to a larger money supply.
B) reduced the reserves available to banks, causing the money supply to decline.
C) increased the reserves available to banks, leading to a larger money supply.
D) increased the reserves available to banks, causing the money supply to decline.

Question 56

The major overall purpose of the Federal Reserve System is to

A) keep the discount rate flexible.
B) insure the deposits of persons holding funds with banking institutions.
C) regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
D) regulate the levels of excess reserves held by member banking institutions.

Question 57

If the required reserve ratio were decreased,

A) the money supply would tend to decrease, but the outstanding loans of banks would tend to increase.
B) both the money supply and the outstanding loans of banks would tend to decrease.
C) the money supply would tend to increase, but the outstanding loans of banks would tend to decrease.
D) both the money supply and the outstanding loans of banks would tend to increase.

Question 58

Which of the following is the primary tool the Fed uses to control the supply of money?

A) The discount rate.
B) The reserve requirements.
C) Open market operations.
D) The 30-year home-mortgage interest rate.

Question 59

Which of the following would cause the money supply in the United States to expand?

A) A decrease in reserve requirements.
B) An increase in the discount rate.
C) The sale of bonds by a Federal Reserve bank.
D) An increase in the world supply of gold.

Question 60

Concerning monetary policy, which of the following is correct?

A) The Federal Reserve is responsible for conducting monetary policy.
B) The U.S. Treasury controls the money supply through its buying and selling of U.S. securities.
C) The Treasury is a monetary agency with responsibilities very similar to those of the Fed.
D) The Federal Reserve System issues U.S. securities.

Question 61

If the Fed purchases government securities from the public, the

A) money supply will decrease.
B) reserves of commercial banks will decrease.
C) required reserves ratio will increase.
D) monetary base will increase.

Question 62

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?

A) Sell some of its holdings of government bonds.
B) Decrease government expenditures.
C) Urge the Treasury to sell more U.S. securities.
D) Reduce the reserve requirements.

Question 63

Suppose the Fed purchases $100 million of U.S. government securities from the public. How will this affect the money supply and the national debt?

A) The money supply will increase; the national debt will decline.
B) The money supply will decline; the national debt will increase.
C) The money supply will increase; the national debt will be unaffected.
D) The money supply will decrease; the national debt will be unaffected.

Question 64

Which of the following indicates the primary mechanism by which the money supply expands?

A) The U.S. Treasury prints additional currency.
B) The Fed purchases additional bonds, which increases the reserves available to the banking system.
C) The public decides to hold more currency rather than checking deposits.
D) The U.S. government purchases additional gold.

Question 65

Other things constant, if the Fed decreased the discount rate,

A) the earnings of the Fed would increase.
B) the incentive of commercial banks to borrow from the Fed would be reduced.
C) the prime interest rate would automatically decline.
D) commercial banks probably would reduce their excess reserves and be more willing to extend additional loans.

Question 66

When the Fed lowers the discount rate, it makes it

A) cheaper for banks to borrow from each other.
B) cheaper for banks to obtain additional reserves by borrowing from the Fed.
C) more difficult for banks to accept deposits.
D) more difficult for banks to extend loans.

Question 67

Suppose that during a period of inflation, the Fed reduced its holdings of U.S. securities from $600 billion to $580 billion. This indicates that the Fed was

A) seeking to reduce the money supply to decrease inflation.
B) trying to force Congress to decrease taxes.
C) expanding the money supply and stimulating employment.
D) expanding the money supply, even though the existing inflation suggested a restrictive policy would be more appropriate.

Question 68

Under current policy, the Fed ties the discount rate to the

A) prime rate.
B) AAA corporate bond rate.
C) federal funds rate.
D) long-term government bond rate.

Question 69

If the Federal Reserve wants to increase the availability of money and credit, it can

A) lower the discount rate.
B) raise the reserve requirements.
C) sell government bonds to the public.
D) encourage banks to increase their prime lending rate.

Question 70

The federal funds market is the market where

A) the federal government raises funds to cover its budget deficit.
B) the Federal Reserve System makes loans to commercial banks.
C) commercial banks with excess reserves make loans to commercial banks seeking reserves.
D) commercial banks make loans to the Federal Reserve.

Question 71

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably

A) selling government securities to banks.
B) selling government securities to the public.
C) buying government securities from the public.
D) encouraging banks to exchange their Fed deposits for currency.

Question 72

Which of the following is correct about the operations of the Federal Reserve?

A) Federal Reserve purchases of securities will increase the reserves available to commercial banks.
B) Federal Reserve purchases of securities exert upward pressure on interest rates in the short run.
C) The Federal Reserve System determines the ratio of currency held by the public to the money supply (M1).
D) Federal Reserve purchases of securities will decrease the reserves available to commercial banks.

Question 73

When a commercial bank borrows from a Federal Reserve bank,

A) the commercial bank's reserves are reduced.
B) the commercial bank's lending ability is increased.
C) the money supply automatically declines.
D) the net worth of the bank will decline, indicating that the bank is having financial difficulties.

Question 74

Commercial banks can borrow reserves directly from the Fed at the

A) prime interest rate.
B) federal funds rate.
C) discount rate.
D) real interest rate.

Question 75

An increase in the discount rate impacts the money supply because it

A) makes it more attractive for commercial banks to borrow from the Federal Reserve.
B) decreases the interest yield on new issues of U.S. securities.
C) reduces the incentive of commercial banks to borrow from the Federal Reserve.
D) increases the Federal Reserve's earnings and, thereby, expands the money supply.

Question 76

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

A) Buy U.S. securities.
B) Force the Treasury to reduce the national debt.
C) Raise the discount rate.
D) Increase the reserve requirements.

Question 77

The sale of government securities by the Fed will cause

A) a decrease in both the monetary base and the money supply.
B) an increase in both the monetary base and the money supply.
C) an increase in the monetary base but no change in the money supply.
D) a decrease in the monetary base but no change in the money supply.

Question 78

The interest rate in the federal funds market

A) is determined by the imposition of price controls imposed by the Fed.
B) will tend to rise when the quantity of funds demanded by banks seeking additional reserves exceeds the quantity supplied by banks with excess reserves.
C) will tend to fall if the Fed sells bonds and, thereby, reduces the reserves available to banks.
D) is an interest rate that is largely unaffected by the policies of the Fed.

Question 79

The discount rate is the interest rate

A) commercial banks charge their low-risk customers for a loan.
B) savings and loan associations pay for using savings deposit funds.
C) the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000 or more.
D) the Federal Reserve charges banking institutions for borrowing its funds.

Question 80

In recent years, the Fed has generally set the discount rate

A) lower than the federal funds rate to help financially troubled banks get more solvent.
B) higher than the interest rate on 30-year fixed-rate mortgage loans.
C) higher than the federal funds rate for most banks.
D) equal to the rate of inflation.