Deck 24: The Monetary System

Question 1

Which of the following is not a function of money?

A) unit of account
B) store of value
C) medium of exchange
D) open market operations

Answer 1

D

Question 2

Sally uses money to purchase teeshirts at the market. She is using money as a:

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

Answer 2

C

Question 3

Peter, a high school student with a part-time job, saves some money each payday, believing that it will provide him with the purchasing power to buy books and pay tuition when he attends college in two years. He is relying heavily on money as a:

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

Answer 3

B

Question 4

Letitia is doing some comparison shopping by looking at the prices of goods at several stores. When she does this, she is using money as a:

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

Question 5

When an item is used as money, is not made out of material that has value, but simply has value because people believe it has value, then the money is referred to as:

A) fiat money.
B) commodity money.
C) ornamental money.
D) reserve money.

Question 6

When currency is not backed by precious metals but has value simply because people accept it as money, then the country has what type of money system?

A) reserve
B) commodity
C) fiat
D) mitered

Question 7

In which of the following ways are a fiat money system and a commodity money system different?

A) Commodity money is valuable because of the material of which it is made, and fiat money has value because people trust it.
B) Fiat money is valuable because of the material of which it is made, and commodity money has value because people trust it.
C) Commodity money is created by banks through a fractional reserve banking system, and this is not done with fiat money.
D) Commodity money is accepted by the people of the country even though it is not official currency, and fiat money is declared by a government to be the official currency of the country.

Question 8

In a barter exchange system:

A) money is exchanged for goods and services.
B) one country's money is exchanged for another country's money.
C) commodity money is exchanged for fiat money.
D) goods and services are exchanged for goods and services.

Question 9

Joe produces flower pots and wants some apples. If Joe lives where barter exchange (rather than monetary exchange) is used, then he must find a trading partner who both has apples to trade and also wants flower pots. Economists would say that Joe must find a _____ in a trading partner.

A) double fiat match
B) coincidental match
C) fiat condition
D) double coincidence of wants

Question 10

What is the difference between commodity money and fiat money?

A) The value of commodity money is set by the government, and the worth of fiat money is based on the material out of which it is made.
B) Commodity money is paper bills, and fiat money is coins.
C) The value of commodity money is based on the material out of which it is made, and the value of fiat money comes from its acceptance by its users.
D) Commodity money is checking accounts, and fiat money is coins and bills.

Question 11

Mariko goes shopping and compares the price tags on different items as well as the qualities of the items in order to make decisions. As she compares the price tags, Mariko is using which function of money?

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

Question 12

Chau receives a paycheck and immediately uses it for a shopping trip to purchase food for the next week. Chau's actions emphasize her use of what function of money?

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

Question 13

Ricardo keeps some cash at home so that it is available whenever there is an emergency. He has not needed to use it in the past five years, but he feels better knowing that he has this purchasing power available. What is the primary function of money that is represented by Ricardo's action?

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

Question 14

Gold coins used as money are an example of _____ money.

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

Question 15

Countries today use _____ money rather than _____ money.

A) medium; value
B) commodity; fiat
C) fiat; commodity
D) value; medium

Question 16

A country's currency is considered to be legal tender when:

A) the government requires it to be an accepted form of payment.
B) it is issued by a private firm for the government.
C) other countries adopt it as their official currency.
D) lawyers accept it as payment for their services.

Question 17

Which of the following is an example of commodity money?

A) a U.S. dollar bill
B) a euro
C) a gold coin
D) funds in a U.S. checking account

Question 18

What is the difference between a fiat money system and a commodity money system?

A) Fiat money has value because people trust it and not because of its raw material, and commodity money is valuable because of the material out of which it is made.
B) Fiat money is valuable because of the material of which it is made, and commodity money has value because people trust it and not because of its raw material.
C) Banks are able to create commodity money through a fractional reserve banking system, but this is not possible with fiat money.
D) Fiat money is money that a government declares to be the official currency of the country regardless of whether the people accept it as money, and commodity money is money that the people of the country accept regardless of whether it is officially declared as the currency.

Question 19

Sam has been saving for his retirement for twenty years. He has a plan and has estimated how much he needs to save each year to provide the standard of living that he wants in retirement. Sam is emphasizing which of the following functions of money as he saves for retirement?

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

Question 20

Which of the following is NOT included in the M1 measure of the money supply?

A) checking account balances
B) currency
C) savings account balances
D) traveler's checks

Question 21

Which of the following is NOT included in the M2 measure of the money supply?

A) currency
B) stock account balances
C) traveler's checks
D) savings account balances

Question 22

How does M2 differ from M1?

A) M2 includes holdings of gold but excludes currency.
B) M2 is smaller than M1.
C) M2 excludes traveler's checks but includes money market mutual funds.
D) M2 includes M1 plus time deposits.

Question 23

Which is the most liquid asset?

A) a share of Apple stock
B) $100 in cash
C) an ownership deed to a home
D) a thousand-year-old gold coin

Question 24

A demand deposit is the balance:

A) in a checking account.
B) in a savings account.
C) in a stock brokerage account.
D) of a person's share in a money market mutual fund.

Question 25

An asset is liquid when it:

A) is able to be converted into another form of asset over time.
B) appreciates in value over time.
C) can be converted into another form of asset only with notable cost.
D) can be converted into money easily, quickly, and without loss of value.

Question 26

An example of a time deposit is a deposit in a:

A) checking account.
B) stock brokerage account.
C) savings account.
D) traveler's check balance.

Question 27

Nina tells her father that paying for a purchase with her debit card is the same as paying with her credit card. Her father replies that:

A) she is correct that there is no difference.
B) she is correct except that debit card payments are processed more slowly.
C) she is incorrect because a debit card payment transfers funds from her bank account to the seller's bank account but when she pays with a credit card, the card company pays the seller and gives her a temporary loan.
D) she is incorrect because a debit card payment is a cash advance payment and a credit card payment has bank fees attached to it.

Question 28

Which of the following is NOT included in the M1 money supply?

A) demand deposits
B) time deposits
C) currency in circulation
D) traveler's checks

Question 29

M2 equals M1:

A) plus gold reserves.
B) minus gold reserves.
C) plus time deposits.
D) minus time deposits.

Question 30

The monetary base equals:

A) M1 plus commercial bank reserves.
B) M2 minus bank reserves.
C) demand deposits plus time deposits.
D) cash held by general public plus commercial bank reserves.

Question 31

Bank reserves are:

A) not part of M1 or M2.
B) part of M2 but not M1.
C) M1 plus time deposits.
D) part of M1 but not M2.

Question 32

Rather than have a money system of its own, the country Econia adopts the money of the country Macroland as its official currency. This practice is known as:

A) currency borrowing.
B) international reserve action.
C) dollarization.
D) transfer monetization.

Question 33

What connection does the underground economy have to the money supply?

A) The funds used in the underground economy are not part of M1 or M2.
B) The underground economy uses primarily checking accounts and debit cards for transactions.
C) The transactions of the underground economy are subject to more oversight than other transactions.
D) The underground economy often uses currency for its transactions.

Question 34

Cryptocurrency is:

A) a privately issued digital currency that is transferred anonymously.
B) banned in the United States but legal in Europe.
C) money that is deposited in private banks rather than commercial banks.
D) currency that is stored in physical vaults.

Question 35

Which of the following would count as money in the M2 measure of the money supply?

A) stock in General Motors that is worth $10,000
B) a house that sells for $400,000
C) a savings account that has a balance of $20,000
D) bonds that are worth $50,000

Question 36

A banking system has $800 billion in deposits and a reserve requirement of 10%. Total reserves are $90 billion. How much does the banking system have in excess reserves?

A) $8 billion
B) $10 billion
C) $80 billion
D) $90 billion

Question 37

A banking system has $200 billion in deposits and $50 billion in total reserves. The reserve requirement is 20%. How much does the banking system have in excess reserves?

A) $150 billion
B) $70 billion
C) $40 billion
D) $10 billion

Question 38

A banking system has $900 billion in deposits and $20 billion in excess reserves. The reserve requirement is 10%. How much does the banking system have in total reserves?

A) $110 billion
B) $90 billion
C) $22 billion
D) $2 billion

Question 39

Which of the following equations shows how to determine a bank's required reserves?

A) Required reserves = Excess reserves - Total reserves
B) Required reserves = Total reserves × Required reserve ratio
C) Required reserves = Deposits × Required reserve ratio
D) Required reserves = Total reserves + Excess reserves

Question 40

The portion of deposits that a bank is required to hold on reserve is referred to as its:

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

Question 41

Which of the following equations is correct?

A) Total reserves = Required reserves + Excess reserves
B) Required reserves = Reserve requirement × Loans
C) Required reserves = Excess reserves - Total reserves
D) Total reserves = Reserve requirement × Deposits

Question 42

What is fractional reserve banking?

A) Borrowers are required to repay only a fraction of the amount loaned to them.
B) Banks are required to hold only a set proportion of total deposits in reserve.
C) The actual amount that a borrower receives is a fraction of the loan value that must be repaid.
D) Banks are required to hold only a fraction of their reserves at the central bank.

Question 43

Bigtown Bank has total deposits of $900 million and total reserves of $150 million. It is subject to a required reserve ratio of 15%. How much, if anything, does Bigtown Bank have in excess reserves?

A) $15 million in excess reserves
B) $135 million in excess reserves
C) $50 million in excess reserves
D) There are no excess reserves.

Question 44

Bigtown Bank has total deposits of $900 million and total reserve of $150 million. It is subject to a required reserve ratio of 15%. What are Bigtown Bank's required reserves?

A) $22.5 million
B) $15 million
C) $120 million
D) $135 million

Question 45

On a bank's balance sheet, deposits are listed as _____, reserves are listed as _____, and loans are listed as:

A) liabilities; assets; liabilities.
B) assets; liabilities; assets.
C) liabilities; assets; assets.
D) assets; liabilities; liabilities.

Question 46

Bigtown Bank has total deposits of $900 million and total reserve of $150 million. It is subject to a required reserve ratio of 15%. What is the maximum amount of additional loans that Bigtown Bank could lend out today?

A) $150 million
B) $135 million
C) $15 million
D) $90 million

Question 47

Which of the following correctly explains the deposit expansion process of the banking system?

A) When a bank loans out its excess reserves, the loan typically ends up being deposited, increasing the total deposits.
B) When banks receive interest on loans, that extra revenue from interest raises deposits.
C) Commercial banks are issuers of currency. When they print additional currency, the extra funds eventually are deposited.
D) If a bank buys additional gold to store in its vault, then it can make additional loans, which end up as deposits.

Question 48

A banking system has total deposits of $500 billion and total reserves of $130 billion. If the reserve requirement is 20%, what is the maximum possible deposit creation potential of the banking system?

A) $150 billion
B) $130 billion
C) $500 billion
D) $30 billion

Question 49

A banking system has total deposits of $200 billion and total reserves of $50 billion. If the reserve requirement is 20%, what is the deposit creation potential of the banking system?

A) $200 billion
B) $10 billion
C) $20 billion
D) $50 billion

Question 50

A banking system has total deposits of $50 billion and total reserves of $7 billion. If the required reserve ratio is 10%, what is the maximum deposit creation potential of the banking system?

A) $2 billion
B) $14 billion
C) $20 billion
D) $70 billion

Question 51

If the reserve requirement is 10%, what is the size of the money or deposit expansion multiplier?

A) 9
B) 10
C) 11
D) 5

Question 52

The multiplier used to assess the impact of monetary policy on the economy is equal to:

A) excess reserves times the required reserve ratio.
B) total deposits times the required reserve ratio.
C) one divided by the required reserve ratio.
D) the required reserve ratio divided by excess reserves.

Question 53

The required reserve ratio is 20%. What is the maximum possible potential deposit multiplier?

A) 20
B) 5
C) 2
D) 80

Question 54

When a fractional reserve banking system is present, can the banking system impact the money supply?

A) No, policymakers set the level of the money supply, and banks are not free to make decisions that impact the money supply.
B) No, the fractional reserve constraint prevents banks from impacting the money supply.
C) Yes, at the moment that a bank accepts a deposit of cash, the money supply immediately increases.
D) Yes, banks decide how much of their excess reserves to loan out. When the loans are made, the money supply grows.

Question 55

How can the commercial banking system cause the money supply to grow?

A) Every time that a bank accepts a new deposit, the money supply gets larger.
B) When loans end up as deposits, there are more excess reserves that can be lent out, and the money supply can increase.
C) When banks charge interest on loans, that extra revenue to the bank raises the money supply.
D) Banks are the issuers of currency. When they print additional currency, the money supply grows.

Question 56

Banks can impact the size of the money supply because:

A) bank loans usually occur, and this increases the money supply.
B) if a bank buys additional gold to store in its vault, it is allowed to make additional loans that count as part of the money supply.
C) banks charge interest on loans and the interest revenue counts as extra money in the money supply.
D) banks issue currency so they can just print additional currency to raise the money supply.

Question 57

The shadow banking system is:

A) an underground banking system that is largely illegal.
B) a system that is outside the regulation system of commercial banks but provides many of the same banking services.
C) a secondary system of commercial banks that backs up the primary system of commercial banks.
D) the branches of a nation's banks that operate in foreign countries.

Question 58

Deposit insurance helps to reduce the likelihood of:

A) loan defaults.
B) loans.
C) bank runs.
D) money creation.

Question 59

If required reserves (RR) equals 0.2 and there are $5 million of new deposits of currency made (not transfers of deposits), what is the maximum potential impact of these deposits on the country's money supply over time?

A) $20 million
B) $8 million
C) $5 million
D) $25 million

Question 60

A banking system has total deposits of $500 billion and total reserves of $140 billion. If the required reserve ratio is 20%, what is the deposit creation potential of the banking system?

A) $280 billion
B) $500 billion
C) $140 billion
D) $200 billion

Question 61

When banks are required to hold a certain portion of deposits in the vault or on deposit at the Federal Reserve and cannot loan all deposits out to borrowers, we describe this banking system as a ______ banking system.

A) partial reserve
B) fiat
C) monetary target
D) fractional reserve

Question 62

Which of the following descriptions correctly identifies and describes the group that is at the head of the U.S. Federal Reserve System?

A) Each member of the 12-person board of governors is appointed by the outgoing Fed chairperson with the approval of Congress for a four-year term.
B) Each member of the 12-person committee of district Fed bank presidents is elected by the citizens of the district for a four-year term.
C) Each member of the seven-person board of governors is appointed by the U.S. president with the approval of Congress for a 14-year term.
D) Each member of the four-person board of governors is appointed by a congressional committee for a 12-year term.

Question 63

Changes in the money supply and interest rates that are the result of actions taken by a country's central bank are referred to as:

A) deposit creation and destruction actions.
B) financial controls.
C) monetary policy.
D) financial policy.

Question 64

Membership in the eurosystem includes all:

A) countries that are part of the European Union.
B) countries in Europe.
C) members of the European Union that adopted the euro as their official currency.
D) members of the European Union plus other countries that accept euros as payment for their exports.

Question 65

Which is NOT a tool used by the Federal Reserve to control the U.S. money supply?

A) open market operations
B) discount rate lending
C) interest rate on bank reserves
D) deposit insurance

Question 66

A country's central bank typically does NOT:

A) determine the quantity of fiat money in circulation.
B) help to regulate the country's banking system.
C) serve as a bank for banks.
D) serve as a commercial bank for individual depositors.

Question 67

The _____ is a 12-person group that plays an important role in determining the policy of the Federal Reserve System.

A) Board of Governance
B) Federal Open Market Committee
C) U.S. Congress
D) Bank Examiner Committee

Question 68

In most countries, the central bank does NOT:

A) serve as a bank for banks.
B) regulate the banking system.
C) determine the amount of fiat money in circulation.
D) serve as a bank for corporations.

Question 69

What group at the Federal Reserve is responsible for conducting the monetary policy of the United States?

A) Bank Examiner Committee
B) U.S. Congress
C) Board of Governance Congress
D) Federal Open Market Committee

Question 70

The group at the Fed that has great responsibility for determining the amount of fiat money and the level of interest rates is the:

A) Central Bank Council.
B) Federal Open Market Committee.
C) Federal Reserve Board of Examiners.
D) Branch Bank President's Council.

Question 71

Which of the following is correct regarding the discount rate and the federal funds rate?

A) The discount rate is a market equilibrium rate, and the federal funds rate is fixed and unchanging.
B) The discount rate is a reduction in interest rates that is available to preferred bank borrowers, and the federal funds rate is the rate that the national government pays to borrow from the central bank.
C) The discount rate is the interest rate that banks pay to borrow from the central bank, and the federal funds rate is the rate that banks pay to borrow one another's excess reserves.
D) The discount rate is the interest rate that banks pay to borrow from each other, and the federal funds rate is the rate that they pay to borrow from the central bank.

Question 72

When the central bank engages in open market operations, it is:

A) surveying the credit markets to see if there are shortages or surpluses in them.
B) borrowing and lending to banks in the federal funds market.
C) buying and selling stocks on the stock market.
D) buying and selling government bonds in the secondary bond markets.

Question 73

When the central bank sells bonds on the open market, the nation's money supply should:

A) decrease.
B) increase.
C) not change.
D) increase, decrease, or stay the same.

Question 74

When the central bank buys or sells government securities in the secondary bond markets, it is engaging in:

A) marginal monetary adjustments.
B) open market operations.
C) reserve requirements.
D) discount transactions.

Question 75

When a central bank buys bonds on the open market, the country's money supply will:

A) not change.
B) increase, decrease, or stay the same.
C) decrease.
D) increase.

Question 76

If the Federal Reserve Bank engages in open market operations, it actually is:

A) buying and selling stocks on the stock market.
B) changing the reserve requirement that banks must meet.
C) buying and selling government bonds in the secondary bond markets.
D) printing paper currency to add to bank reserves.

Question 77

If the central bank wants to reduce interest rates in the nation through open market operations, it would:

A) buy bonds.
B) sell bonds.
C) increase the reserve requirement.
D) decrease the reserve requirement.

Question 78

Which of the following describes how the Federal Reserve could use the tools of monetary policy to increase the money supply?

A) Reduce the reserve requirement, reduce the discount rate, or buy bonds.
B) Raise the interest rate banks receive from the Fed, increase the discount rate, or sell bonds.
C) Increase the reserve requirement, increase the discount rate, or sell bonds.
D) Increase the reserve requirement, reduce the discount rate, or reduce the interest rate that banks receive from the Fed.

Question 79

Which of the following actions by the central bank would NOT increase the money supply?

A) Lower the discount rate.
B) Buy bonds on the open market.
C) Lower the reserve requirement.
D) Raise the interest rate that banks receive on their deposits at the Federal Reserve.

Question 80

Which of the following describes how the Federal Reserve could use tools of monetary policy to decrease the money supply?

A) Increase the reserve requirement, increase the discount rate, and sell bonds.
B) Increase the interest rate that the Federal Reserve pays on bank deposits, increase the discount rate, and buy bonds.
C) Decrease the reserve requirement, increase the discount rate, and sell bonds.
D) Decrease the reserve requirement, decrease the discount rate, and decrease the interest rate that the Fed pays on bank deposits.