Deck 20: Money and the Banking System

Question 1

All of the following fit the narrow definition of money EXCEPT

A) savings accounts.
B) demand deposit accounts.
C) coins.
D) currency.
E) NOW accounts.

Answer 1

A

Question 2

The money supply,broadly defined,is distinguished from the money supply,narrowly defined,in that the former includes

A) checking accounts.
B) some deposit accounts that are not as easy to use for purchases.
C) items of greater value.
D) U.S. government bonds.
E) precious metals.

Answer 2

B

Question 3

Fiat money is any money that

A) exists in the form of coin or currency.
B) is issued by the Federal Reserve.
C) has a greater face value than its purchasing power.
D) is money because the government says so and the people accept it.
E) earns interest when deposited in banks.

Answer 3

D

Question 4

The largest component of the U.S.money supply,narrowly defined,is

A) coins.
B) currency.
C) demand and other checkable deposits.
D) savings deposits.
E) credit cards.

Question 5

To be considered money,a financial asset must

A) be convertible into gold or silver.
B) be coins, currency, or fractional reserve.
C) be issued by the Federal Reserve System.
D) serve as a medium of exchange, store of value, and standard of value.
E) be kept in banks.

Question 6

Over the past 50 years,the U.S.money supply has

A) increased every year, despite federal efforts to hold it in check.
B) increased in some years but has tended to shrink overall.
C) generally increased, although not at a constant rate.
D) not changed; although the amount of money in circulation has varied, the actual money supply has not grown or shrunk.
E) fallen.

Question 7

Assets a government says are money and are accepted by the public as money are called ________ money.

A) near
B) funny
C) sophisticated
D) nominal
E) fiat

Question 8

When money is held to make future purchases,it serves as a

A) medium of exchange.
B) store of value.
C) standard of value.
D) price index.
E) required reserve.

Question 9

When money serves as a common denominator for measuring the exchange rates among goods and services,it performs as a

A) medium of exchange.
B) store of value.
C) standard of value.
D) measure of fiat.
E) standard of intrinsic worth.

Question 10

The direct exchange of goods produced for goods consumed is called

A) managed float.
B) appreciation.
C) fractional reserve banking.
D) fiduciary displacement.
E) bartering.

Question 11

To say that all U.S.currency is presently fiat money means that

A) it is money by government decree.
B) its metallic value exceeds its face value.
C) the government will redeem that money with gold.
D) money serves as a store of value.
E) currency is the only asset that can serve as money.

Question 12

The basic distinction between demand deposits and NOW accounts is that NOW accounts

A) are fiat money; demand deposits are near money.
B) serve primarily as a store of value; demand deposits serve as a medium of exchange.
C) are a part of the money supply only when broadly defined; demand deposits are part of the money supply when narrowly defined.
D) are essentially interest-bearing checking accounts; demand deposits earn no interest.
E) must be converted into currency before they can be used; demand deposits can be used directly.

Question 13

Checking deposits are considered a form of money because

A) any bank asset is considered money.
B) checking deposits are as large as the sum total of coins and currency.
C) they are used in calculating national expenditures.
D) they are assets of the Federal Reserve System.
E) they are generally accepted and serve the same functions as coins and currency.

Question 14

To ensure the acceptability of money,a government must

A) back it with gold or silver.
B) create enough of it so people can purchase all the goods they want and need.
C) limit its quantity relative to output.
D) prevent the public from holding it for extended periods.
E) ensure its supply keeps pace with inflation.

Question 15

Currency in the United States is

A) convertible into gold at fixed rates.
B) fiat money.
C) issued by commercial banks based on their deposits.
D) another name for checking deposits and demand deposit accounts.
E) any interest-bearing government note.

Question 16

The need for barter is eliminated when money is used as a

A) medium of exchange.
B) measure of the price level.
C) standard of value.
D) hoard of wealth.
E) store of value.

Question 17

The basic requirement of money is that it be

A) backed by precious metals.
B) authorized as legal tender by the nation's government.
C) generally accepted as a medium of exchange.
D) some form of debt or credit.
E) unlimited in quantity.

Question 18

Our money supply,narrowly defined,consists of

A) currency, checking accounts, savings accounts, and money market mutual funds.
B) money created by the commercial banks.
C) coins, currency, demand deposits, and other checkable deposits.
D) cash, checks, and near money.
E) coins, paper money, all checkable deposits, and gold.

Question 19

Since World War II,the M1 (narrowly defined)money supply has

A) decreased steadily.
B) remained unchanged on balance but differed from year to year.
C) increased at a constant yearly rate.
D) increased at an average rate of 5 to 10 percent per year.
E) increased at an average yearly rate of above 10 percent.

Question 20

The sum of coins,currency,and checkable deposits is called

A) national income.
B) nominal GDP.
C) fractional reserves.
D) M1.
E) cash.

Question 21

A primary function of investment bankers is to

A) help firms sell their securities to the public.
B) create money and promote economic growth.
C) pay interest and provide customers with economic security.
D) set interest rates and support the Federal Reserve.
E) collect taxes and hold government deposits.

Question 22

The basic distinction between M1 and M2 is that

A) M2 excludes all checkable deposits.
B) M1 is the money supply broadly defined to include large certificates of deposit.
C) M2 is the money supply expressed in current dollars, whereas M1 is expressed in constant dollars.
D) M1 includes credit card balances on bank-issued credit cards.
E) M2 equals M1 plus savings, small time deposits, money market mutual fund balances, and money market deposit accounts.

Question 23

Banks make their profits mainly by

A) charging customers for their services.
B) earning more interest on loans than they pay out on deposits.
C) investing in the stock market.
D) foreclosing on mortgages and other overdue loans.
E) creating money to lend to households and businesses.

Question 24

Demand deposits in a commercial bank are considered part of the bank's

A) assets.
B) liabilities.
C) net exposure.
D) ordinary ratio.
E) fractional multiplier.

Question 25

The bank practice of lending money and therefore holding less cash than what is owed its depositors is called ________ banking.

A) fractional-reserve
B) Federal Reserve
C) cash flow
D) creative
E) deposit ratio

Question 26

Fractional-reserve banking means that

A) banks hold less in reserves than the amounts they owe their depositors.
B) all of a bank's reserves are held by Federal Reserve Banks.
C) some gold is reserved to back paper money but not 100 percent.
D) reserves actually have three components: required, excess, and free.
E) a dangerous situation exists in which bank loans exceed deposits.

Question 27

Fractional-reserve banking depends on the assumption that

A) not all depositors will withdraw their deposits at the same time.
B) most banks will have assets that outweigh liabilities.
C) banks generally make more sound investments than poor investments.
D) at least a portion of the currency, though not all, is backed by gold.
E) the FDIC insures all bank loans up to $100,000.

Question 28

The cash holdings of a commercial bank are considered part of the bank's

A) assets.
B) liabilities.
C) net exposure.
D) ordinary ratio.
E) fractional multiplier.

Question 29

The liabilities of a commercial bank include

A) loans.
B) time and demand deposits.
C) net worth.
D) deposits at the Federal Reserve Bank.
E) shares of stock.

Question 30

Some economists include time or savings deposits in the money supply because

A) these deposits can be readily transformed into cash.
B) these deposits can be used as collateral for loans.
C) the value of time deposits is measured in dollars.
D) there is no difference between the various types of bank deposits.
E) savings and loan institutions have the same status as commercial banks.

Question 31

A bank's legal reserve requirements consist of

A) the bank's holdings of cash and deposits with the Federal Reserve Bank.
B) the value of a bank's assets.
C) checkable deposits plus net worth.
D) the difference between bank assets and liabilities.
E) the sum of direct and indirect transfers plus deposits.

Question 32

The assets of a commercial bank include

A) net worth.
B) demand deposits.
C) loans.
D) time deposits.
E) savings accounts.

Question 33

A characteristic typical of commercial banks is that

A) depositors are completely protected, because every cent of their deposits is covered by the bank's reserves.
B) money put up by the owners is the main source of funds for making loans.
C) they lend short and borrow long.
D) they are more profitable as the percentage of demand deposits they keep as reserves rises.
E) a very large percentage of their liabilities must be paid on demand.

Question 34

In the absence of fractional-reserve banking practices,commercial banks would

A) be less safe as places to keep money.
B) have more money available to be put to work on behalf of business firms.
C) charge depositors higher fees for keeping deposits.
D) be considered as nonprofit organizations.
E) need to borrow money if a run occurred.

Question 35

In general,financial institutions

A) exclude those businesses that lend to the public.
B) act as intermediaries between savers and investors.
C) number fewer than a thousand in the United States.
D) hold reserves equal to the value of checkable deposits.
E) operate as nonprofit institutions for the public good.

Question 36

In general,commercial banks receive their higher interest rates from

A) service charges on demand deposits.
B) loans that have a greater degree of risk.
C) the federal funds market.
D) foreclosures.
E) capital gains in the stock market.

Question 37

The basic principle behind fractional-reserve banking is that

A) on a daily basis new deposits tend to equal withdrawals.
B) loans and investments are made with funds advanced by bank owners.
C) banks hold reserves either in the form of cash or deposits with the Federal Reserve banks.
D) a bank's assets are equal to its liabilities plus net worth.
E) there is a legal limit on the amount of reserves banks must retain against their loans.

Question 38

Any definition of the money supply must be

A) legally established by the Federal Reserve System in conjunction with Congress.
B) arbitrary because many assets exhibit the properties of money.
C) agreed on by a majority vote of economists.
D) determined by the price level.
E) determined by the bullion content of an asset.

Question 39

The two major functions of commercial banks are to

A) maintain checking accounts and lend money to individuals and firms.
B) print and circulate money and serve as lenders of last resort.
C) store gold and stabilize financial markets.
D) provide for-profit services such as money orders and traveler's checks and to store people's valuables.
E) supervise the financial activities of thrift institutions and maintain monetary stability.

Question 40

The security holdings of a commercial bank are considered part of the bank's

A) assets.
B) liabilities.
C) net exposure.
D) ordinary ratio.
E) fractional multiplier.

Question 41

The following questions refer to the table that follows. Assume that there is a fractional-reserve banking system, that the legal reserve requirements are 10 percent, and that the balance sheet for Bank X is as follows:

Bank X has legal reserve requirements of

A) $3,000,000.
B) $2,000,000.
C) $1,667,000.
D) $1,000,000.
E) $0.

Question 42

The most important reason for having a legal reserve requirement is to

A) ensure bank safety.
B) prevent banks from reaping tremendous profits as intermediaries.
C) keep currency in circulation.
D) control the money supply.
E) provide enough money to meet everyday needs, such as check cashing and savings withdrawals.

Question 43

The following questions are based on the following changes in the balance sheet of Nowhere National Bank.

Which letter best indicates the total effect on Nowhere National Bank's balance sheet after all the transactions just described have taken place?

A) a
B) b
C) c
D) d
E) e

Question 44

The following questions refer to the table that follows. Assume that there is a fractional-reserve banking system, that the legal reserve requirements are 10 percent, and that the balance sheet for Bank X is as follows:

Bank X can safely increase its loans and investment by the amount of

A) $5,000,000.
B) $3,000,000.
C) $2,000,000.
D) $1,667,000.
E) $1,000,000.

Question 45

When currency is deposited into a demand deposit account

A) it is a sign that a run on the bank has begun.
B) the money supply will fall.
C) the Federal Reserve System must borrow.
D) bank reserves increase.
E) it is no longer serving as a standard of value.

Question 46

One reason given for the collapse in the savings and loan industry in the late 1980s and early 1990s is

A) the lack of government insurance on savings and loan deposits.
B) that savings and loan investments were limited to relatively low-yielding government bonds.
C) that the savings and loan banks required significant amounts of owner-provided funds to be profitable.
D) that their reserve requirements were greater than those for commercial banks.
E) that they made risky short-term loans during an era of financial deregulation and lax regulatory supervision.

Question 47

The following questions are based on the following changes in the balance sheet of Nowhere National Bank.

Which letter best indicates the balance sheet of Nowhere National Bank at the instant a new deposit is made?

A) a
B) b
C) c
D) d
E) e

Question 48

The following questions are based on the following information: The country has a fractional-reserve banking system, required reserves are 12.5 percent of demand deposits, each bank initially has reserves exactly equal to the required amount, each wants to maintain this equality, and no person withdraws cash from the banking system.
Suppose $10,000 in newly printed currency is deposited in a checking account in bank A.Bank A now has

A) excess reserves of $10,000.
B) required reserves up by $10,000.
C) net worth up by $10,000.
D) demand deposits up by $10,000.
E) added $10,000 to the money supply.

Question 49

The following questions are based on the following changes in the balance sheet of Nowhere National Bank.

Which letter best indicates the change in the balance sheet of this bank after completion of a loan?

A) a
B) b
C) c
D) d
E) e

Question 50

The Federal Reserve can set the required reserves for checkable deposits

A) below 50 percent only if a majority of the governors agree.
B) above 3 percent only if five of seven governors agree.
C) at any level it deems necessary in extraordinary circumstances.
D) by majority vote between the limits of either 4 percent above or below the $1 in reserve per $6 in demand deposit average the Fed would like the bank to retain.
E) above what banks would normally require to meet day-to-day fluctuations in withdrawals if five of the seven governors agree.

Question 51

Bank A now loans out the maximum it can to Mr.Smith.Compared to its position just after the deposit of $10,000 in newly printed currency,bank A now has

A) demand deposits up by an additional $10,000.
B) reserves up by an additional $1,250.
C) assets up by an additional $10,000.
D) loans and investments up by $8,750.
E) net worth up by an additional $1,250.

Question 52

The following questions are based on the following changes in the balance sheet of Nowhere National Bank.

Which letter best indicates the change in the balance sheet after the proceeds of the loan have been spent by the borrower?

A) a
B) b
C) c
D) d
E) e

Question 53

The following questions refer to the table that follows. Assume that there is a fractional-reserve banking system, that the legal reserve requirements are 10 percent, and that the balance sheet for Bank X is as follows:

If Bank X safely increases its loans

A) the country's money supply is unaffected.
B) the bank's net worth is immediately increased.
C) both its demand deposit liabilities and its assets will be temporarily increased by the amount of the loan.
D) only its demand deposit liabilities will be increased.
E) its demand deposit liabilities will be increased by some multiple of the loan.

Question 54

In the U.S.economy,a major deterrent to bank runs is

A) the fact that most banks keep 50 percent of their deposits as reserves.
B) government ownership of commercial banks.
C) the stock of gold owned by the government.
D) the ability of commercial banks to create money when needed.
E) the FDIC.

Question 55

The following questions refer to the table that follows. Assume that there is a fractional-reserve banking system, that the legal reserve requirements are 10 percent, and that the balance sheet for Bank X is as follows:

A bank participates in the creation of money when it

A) adds to its required reserves.
B) receives a deposit of currency.
C) raises its interest rates.
D) becomes a member of the Federal Reserve System.
E) lends its excess reserves.

Question 56

Public confidence in the commercial banking system has been strengthened by

A) the requirement that commercial banks use their reserves mainly to buy government bonds.
B) bank practices that maintain cash reserves equal to 50 percent of demand deposit liabilities.
C) the fact that all commercial banks are members of the Federal Reserve System.
D) the over 15 percent spread between interest paid to depositors and interest earned on loans.
E) the existence of almost universal insurance on deposits up to $250,000.

Question 57

Bank investments in short-term government securities that can readily be turned into cash are often referred to as ________ reserves.

A) federal
B) fractional
C) legal
D) open
E) secondary

Question 58

The following questions refer to the table that follows. Assume that there is a fractional-reserve banking system, that the legal reserve requirements are 10 percent, and that the balance sheet for Bank X is as follows:

Bank X has excess reserves of

A) $3,000,000.
B) $2,000,000.
C) $1,667,000.
D) $1,000,000.
E) $0.

Question 59

A bank typically makes loans from its ________ reserves.

A) federal
B) excess
C) partial
D) fractional
E) required

Question 60

The following questions are based on the following changes in the balance sheet of Nowhere National Bank.

What was the bank's required ratio of reserves to deposits?

A) 10 percent
B) 15 percent
C) 16.67 percent
D) 20 percent
E) 25 percent

Question 61

Suppose the required ratio of reserves to deposits is 1:9,banks have no excess reserves,one person withdraws $10,000 from a checking account and stuffs it under a mattress,and no other person withdraws cash from the banking system.When the process has worked itself out,the money supply will show an additional decline of

A) $1,111.
B) $8,889.
C) $11,111.
D) $80,000.
E) $90,000.

Question 62

If the required ratio of reserves to deposits is r,then for every $1 in excess reserves,the banking system can potentially increase the money supply by

A) r.
B) 1 + r.
C) 1/r.
D) 1/(1 - r).
E) (1 - r)/r.

Question 63

Currency withdrawals from the banking system

A) expand the money supply.
B) increase bank reserves by an equal amount.
C) reduce the legally required ratio of reserves to deposits.
D) reduce the amount of demand deposits the banking system can create.
E) leave the amount of legally required reserves held with the Fed unchanged.

Question 64

The commercial banking system's ability to expand demand deposits is reduced when

A) the public wants to hold currency rather than demand deposits.
B) banks become members of the Federal Reserve System
C) someone deposits newly printed money in the banking system.
D) banks reduce their holdings of cash assets and increase business and consumer loans.
E) the Fed lowers the legal reserve requirement on checkable deposits.

Question 65

At the same time bank B,compared to its original position,has had its

A) cash holdings increased by $8,750.
B) reserve requirements increased by $8,750.
C) reserves increased by $8,750.
D) net worth increased by $8,750.
E) loans increased by $8,750.

Question 66

The process of cumulative expansion of demand deposits assumes that no depositor withdraws cash from the banking system.If some do,when the required reserve ratio is 25 percent and no bank keeps excess reserves,a deposit of $10,000 in newly printed money will lead to an increase in the money supply of

A) less than $30,000.
B) $30,000.
C) $40,000.
D) $50,000.
E) $60,000.

Question 67

Bank B may now safely increase its loans by a maximum of

A) $1,094.
B) $7,656.
C) $8,750.
D) $10,000.
E) $15,312.

Question 68

The Fed can set the ratio of legally required reserves between the limits of 8 and 14 percent on checkable deposits.Hence,the maximum multiple by which the banking system could theoretically expand a dollar of excess reserves would vary between

A) 2 and 3.
B) 5 and 6.
C) 8 and 14.
D) 12 and 7.
E) 14 and 6.

Question 69

Which of the following provides the best distinction between assets and liabilities?

A) Assets are cash reserves; liabilities are money in other forms.
B) Assets are what the bank owns; liabilities are what it owes.
C) Assets are investments from which the bank earns a profit; liabilities are investments on which the bank loses money.
D) Assets are equal to the bank's net worth; liabilities represent a charge against the bank's net worth.
E) Assets consist mainly of buildings and equipment; liabilities are cash and securities.

Question 70

After this process has worked its way through the banking system,the initial excess reserves in bank A will have led to an additional increase in the money supply of

A) $8,750.
B) $10,000.
C) $17,500.
D) $70,000.
E) $80,000.

Question 71

The multiple by which the commercial banking system can expand the money supply is equal to the reciprocal of the

A) marginal propensity to save.
B) discount rate.
C) rate of inflation.
D) rate of unemployment.
E) legal reserve ratio.

Question 72

At this point the two banks together have created additional demand deposits of

A) $8,750.
B) $10,000.
C) $17,500.
D) $70,000.
E) $80,000.

Question 73

Which of the following legal reserve ratios will generate the greatest amount of excess reserves?

A) 1:2
B) 1:3
C) 1:4
D) 1:5
E) 1:6

Question 74

The cumulative expansion process in the commercial banking system will come to an end when a bank's

A) excess reserves equal required reserves.
B) legal reserves equal required reserves.
C) total reserves equal demand deposits.
D) required reserves plus excess reserves equal legal reserves.
E) demand deposits are some fraction of legal reserves.

Question 75

Mr.Smith now spends the exact amount of money he borrowed to buy equipment from Ms.Jones,paying for it with a check drawn on his account at bank A.Ms.Jones deposits the check in her account at bank B.Once the checks have cleared,compared to its position just after the loan to Mr.Smith,bank A now has had its reserves decreased by

A) $1,750.
B) $2,500.
C) $6,000.
D) $8,750.
E) $10,000.

Question 76

Most economists today agree that a situation like the Panic of 1907 is unlikely to recur because

A) of better bank management; unwise investments are very rare.
B) our economy is no longer as dependent on the banking system as in the past.
C) most people entrust only a small percentage of their money to banks.
D) Congress has removed the burden of public regulation, freeing banks to be more profitable.
E) government oversight and deposit insurance have given people more faith in banks than they used to have.

Question 77

The total increase in the money supply that can be achieved from a given amount of excess reserves can be found by

A) adding the excess reserve ratio to the amount of excess reserves.
B) multiplying the excess reserve ratio by the amount of excess reserves.
C) subtracting the required reserve ratio from the excess reserve ratio.
D) dividing the amount of excess reserves by the required reserve ratio.
E) adding the required reserve ratio to the excess reserve ratio and multiplying the reciprocal of the result by the amount of required reserves.

Question 78

The greater the ________,the greater the extent to which the banking system can expand the money supply.

A) legal reserve requirements
B) amount of reserves the public removes from the banking system in form of cash
C) willingness of banks to hold excess reserves
D) reciprocal of the required ratio of reserves to deposits
E) number of independent banks in the system