Deck 14: Banking and the Money Supply.

Question 1

What are monetary aggregates?

A) money held by the nonbank public
B) money held by banking institutions
C) measures of individual wealth defined by the Federal Reserve
D) measures of the money supply defined by the Treasury
E) measures of the money supply defined by the Federal Reserve

Answer 1

measures of the money supply defined by the Federal Reserve

Question 2

About ____ of Federal Reserve notes are held abroad.

A) one-tenth
B) one-fifth
C) one-third
D) quarter
E) half

Answer 2

half

Question 3

Which of the following is included in the M1 money supply?

A) savings deposits
B) certificates of deposit
C) miscellaneous near-monies
D) checkable deposits
E) money market mutual fund accounts

Answer 3

checkable deposits

Question 4

Deposits that earn a fixed rate of interest if held for a specified period ranging from several months to several years are called _____

A) cash in bank vaults.
B) savings deposits.
C) money market mutual fund accounts.
D) time deposits.
E) checkable deposits.

Question 5

M2 consists of _____

A) M1 plus savings accounts, small-time deposits, money market mutual funds, and miscellaneous near-monies.
B) coins, currency, and checkable deposits only.
C) only near-monies.
D) M1 plus time deposits only.
E) M1 plus money market mutual funds only.

Question 6

The distinction between M1 and M2 has blurred over time because _____

A) M1 is now larger than M2.
B) depositors can transfer funds between accounts easily.
C) the Federal Reserve has defined them less precisely.
D) M1 is becoming less liquid.
E) banks are now offering time deposits.

Question 7

Distinctions between M1 and M2 are becoming _____

A) more meaningful as banks allow depositors to transfer funds from one account to another.
B) less meaningful as banks allow depositors to transfer funds from one account to another.
C) more meaningful as banks do not allow depositors to transfer funds from one account to another.
D) less meaningful as banks do not allow depositors to transfer funds from one account to another.
E) confusing and not necessary.

Question 8

Bank deposits that earn interest but have no specific maturity date are called _____

A) cash in bank vaults.
B) savings deposits.
C) money market mutual fund accounts.
D) time deposits.
E) checkable deposits.

Question 9

Which of the following is true of M1?

A) It is equal to M2.
B) It consists of all near-monies.
C) It consists of certificates of deposit.
D) It is the broader definition of money.
E) It is only a fraction of M2.

Question 10

If you returned a $5 Federal Reserve note to the Fed, you could receive _____

A) $5 in silver.
B) $5 in gold.
C) 5 one-dollar bills.
D) 10 one-dollar bills.
E) a small gold bar.

Question 11

The M1 money supply consists of _____

A) only coins and currency held by the nonbank public.
B) certificates of deposit only.
C) coins and currency held by the nonbank public, checkable deposits, and traveler's checks.
D) money market mutual fund accounts, savings accounts, and other miscellaneous near-monies.
E) only paper currency.

Question 12

Roughly _____ of the Fed's liabilities consist of Federal Reserve notes.

A) one-tenth
B) one-fifth
C) one-third
D) quarter
E) half

Question 13

Bank deposits that allow the account owner to draw down an account with a check or a debit card are called _____

A) cash in bank vaults.
B) savings deposits.
C) money market mutual fund accounts.
D) time deposits.
E) checkable deposits.

Question 14

Stores need not accept your check but must accept currency because _____

A) currency is backed by gold.
B) checks are not money, but currency is.
C) currency is legal tender, but checks are not.
D) currency is easier to handle.
E) currency is a medium of exchange, but checks are not.

Question 15

Compared to M1, M2 is nearly _____

A) half.
B) double.
C) three times larger.
D) four times larger.
E) equal.

Question 16

A 2005 quarter is called token money because _____

A) it is legal tender.
B) its metal value exceeds its face value.
C) there is less than a quarter's worth of metal in it.
D) it can be used in the subway.
E) it is generally not accepted in exchange.

Question 17

Which of the following is not true of Federal Reserve notes?

A) They are fiat money.
B) They are a liability of the Fed.
C) They are redeemable for other Federal Reserve notes.
D) They are redeemable for gold.
E) They are counted as currency in the money supply.

Question 18

Which of the following is not included in the narrow definition of the money supply?

A) cash in bank vaults
B) savings deposits
C) money market mutual fund accounts
D) negotiable certificates of deposit
E) checkable deposits

Question 19

The narrow definition of money is _____

A) M0
B) M1
C) M2
D) M3
E) Mn

Question 20

All of the following are part of M2 except one. Which is the exception?

A) money market deposit accounts
B) coins
C) traveler's checks
D) large-denomination time deposits
E) savings deposits

Question 21

Which of the following is correct?

A) Banks act as financial intermediaries by charging interest.
B) Savers need a safe place for their money and need credit.
C) Borrowers need a safe place for their money and need credit.
D) Savers need a safe place for their money, and borrowers need credit.
E) Borrowers need a safe place for their money, and savers need credit.

Question 22

A situation in which one side of the market has more reliable information than the other side is called _____

A) asymmetric information.
B) moral hazard.
C) adverse selection.
D) free-riding.
E) liquidity.

Question 23

Which of the following is true of credit cards?

A) They have eliminated the use of money.
B) They are currently the most popular means of payment in the United States.
C) They are included in the narrow definition of money, M1.
D) They are near-monies.
E) They are used to postpone the payment of money.

Question 24

Many people prefer debit cards to checks because _____

A) checkbooks are not required and direct payments are made.
B) checks are unsafe for use.
C) debit cards delay money payments.
D) using checks is time consuming.
E) debit cards help account holders get a loan from the card issuer.

Question 25

Banks minimize the risk of loss to depositors by _____

A) lending to government officials.
B) making many different loans to different borrowers.
C) refusing to lend money to the U.S. government.
D) lending to the richest 1 percent of the population.
E) making very long-term loans.

Question 26

Banks act as financial intermediaries by _____

A) bringing together car buyers and auto dealers.
B) bringing together real estate brokers and home buyers.
C) printing money for all to use.
D) attracting deposits from savers to lend to borrowers.
E) selling shares of stock to investors.

Question 27

The economy is more efficient because _____

A) banks develop expertise in evaluating creditworthiness.
B) borrowers develop expertise in structuring loans.
C) borrowers develop expertise in enforcing loan contracts.
D) banks reduce the transaction costs of channeling savings to creditworthy savers.
E) banks increase the transaction costs of channeling savings to creditworthy borrowers.

Question 28

Compared to bitcoin, the supply of M1 in 2017 was about _____

A) $1 trillion, or about 900 times greater.
B) $3 trillion, or about 900 times greater.
C) $1 trillion, or about 300 times greater.
D) $3 trillion, or about 300 times greater.
E) $5 trillion, or about 1000 times greater.

Question 29

Banks have more expertise than individual households in making loans because banks _____

A) lend smaller amounts of money.
B) are regulated by the government.
C) also pay interest to savers.
D) are subject to severe penalties if they make bad loans.
E) make many more loans than individual households do.

Question 30

The economy is more efficient because _____

A) savers develop expertise in evaluating creditworthiness.
B) banks develop expertise in structuring loans.
C) borrowers develop expertise in enforcing loan contracts.
D) banks reduce the transaction costs of channeling savings to creditworthy savers.
E) banks increase the transaction costs of channeling savings to creditworthy borrowers.

Question 31

Which of the following is correct?

A) Savers develop expertise in evaluating creditworthiness.
B) Borrowers develop expertise in structuring loans.
C) Borrowers develop expertise in enforcing loan contracts.
D) Banks reduce the transaction costs of channeling savings to creditworthy borrowers.
E) Banks increase the transaction costs of channeling savings to creditworthy borrowers.

Question 32

Which of the following is an advantage of using a credit card?

A) Credit cards help account holders tap directly into their checking account.
B) Credit cards help account holders get a loan from the card issuer.
C) Credit cards require a PIN number and are therefore safe.
D) Credit card holders can earn a fixed interest on their accounts.
E) Credit cards help eliminate the use of money.

Question 33

The economy is more efficient because:

A) savers develop expertise in evaluating creditworthiness.
B) borrowers develop expertise in structuring loans.
C) banks develop expertise in enforcing loan contracts.
D) banks reduce the transaction costs of channeling savings to creditworthy savers.
E) banks increase the transaction costs of channeling savings to creditworthy borrowers.

Question 34

Which of the following is a disadvantage of using debit cards?

A) Debit cards are unsafe for use.
B) Debit cards do not provide a grace period between a purchase and required payment.
C) Debit cards delay payments.
D) Debit cards are not easy to use.
E) Debit cards make purchases more expensive than they actually are.

Question 35

Bitcoin serves as _____

A) a medium of exchange.
B) a unit of account.
C) a store of value.
D) money.
E) a traditional currency.

Question 36

Banks help to overcome the problem of asymmetric information by _____

A) lending to a single rich borrower and not diversifying their portfolio.
B) acquiring expertise in evaluating the credit histories of borrowers.
C) threatening borrowers.
D) offering only one type of loan.
E) providing information to lenders.

Question 37

Asymmetric information in financial markets exists when _____

A) borrowers reveal their financial details to banks before borrowing funds.
B) borrowers know more about their ability to repay loans than lenders do.
C) lenders know more about borrowers than borrowers know about themselves.
D) borrowers pay off a loan before it is due.
E) borrowers and lenders have equal information about borrower creditworthiness.

Question 38

Which of the following is correct about banks?

A) Banks are financial intermediaries that do not get funds from depositors.
B) Banks attract deposits from savers to lend to borrowers, and earn a profit on the difference between the interest paid by depositors and the interest charged to borrowers.
C) Banks aim to attract home buyers.
D) Banks do not feel the need to inspire depositor confidence.
E) None of these statements are correct.

Question 39

What undermines bitcoin's functions as a unit of account and as a store of value?

A) narrow fluctuations relative to traditional currencies
B) wide fluctuations relative to traditional currencies
C) access to banking systems
D) access to deposit insurance
E) ability by holders to buy or sell goods anonymously

Question 40

Which of the following is not money?

A) checks
B) coins
C) federal reserve notes
D) debit cards
E) credit cards

Question 41

On a bank's balance sheet, the value of its assets must equal the value of its _____

A) net worth only.
B) liabilities only.
C) its revenues plus costs.
D) its liabilities plus net worth.
E) its revenues minus costs.

Question 42

Which of the following is a liability of a bank?

A) U.S. government securities owned by the bank
B) deposits with the Fed
C) checkable deposits
D) consumer and business loans
E) buildings and furniture owned by the bank

Question 43

Suppose the First National Bank acquires $1,000,000 in new deposits. Which of the following is true?

A) Assets and liabilities increase by $1,000,000.
B) Excess reserves on the new deposits are $500,000.
C) Required reserves on the new deposits are $60,000.
D) Excess reserves on the new deposits are $12,000.
E) Total reserves on the new deposits are $440,000.

Question 44

A bank's net worth is _____

A) equal to assets plus liabilities.
B) sometimes called the owners' equity.
C) equal to assets minus reserves.
D) the same thing as net profits.
E) the amount of interest charged by the bank for short-term loans.

Question 45

Suppose a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2. If the bank wishes to hold no excess reserves, its actual reserves will be _____

A) $4,000.
B) $1,200.
C) $3,000.
D) less than $1,000.
E) $4,800.

Question 46

If a bank has $950,000 million in liabilities and $50,000 in net worth, its assets must equal _____

A) $50,000.
B) $1,050,000.
C) $50,000,000.
D) $1,000,000.
E) $950,000.

Question 47

Which of the following is true of banks?

A) Banks reduce the opportunity cost of holding idle cash.
B) Banks act as intermediaries between the government and private investors.
C) Banks can reduce risk by lending to rich borrowers.
D) Banks reduce the transaction costs of borrowing and lending money.
E) Banks can reduce risks by extending more loans.

Question 48

If the required reserve ratio is 10 percent and a bank receives a new deposit for $100,000, then the _____

A) bank must keep $5,000 in excess reserves.
B) bank's required reserves increase by $45,000.
C) bank's liabilities increase by $100,000.
D) bank must keep $10,000 in excess reserves.
E) bank can increase its loans by up to $400,000.

Question 49

Suppose a bank has $8,000 in checkable deposits and the required reserve ratio is 0.2. If actual reserves equal $3,000, then excess reserves equal _____

A) $1,600.
B) $1,400.
C) $2,400.
D) $5,000.
E) zero.

Question 50

Banks earn a profit on the difference between _____

A) the interest charged from depositors and the interest offered to borrowers.
B) the interest charged on loans and the interest paid on deposits.
C) the deposit and loan balances.
D) outstanding loans and interests.
E) dividends and interests.

Question 51

If the required reserve ratio is 20 percent and a bank has $100,000 in checkable deposits, then its _____

A) required reserves are $500,000.
B) required reserves are $20,000.
C) assets are $500,000.
D) liabilities are $500,000.
E) net worth is $500,000.

Question 52

To obtain a charter, or the right to operate, a national bank must apply to the _____

A) Federal Reserve.
B) Department of the Treasury.
C) U.S. Comptroller of the Currency.
D) state banking authority.
E) Office of Domestic Finance.

Question 53

The United Bank of Glassen lent money to only a limited number of big business houses. After a financial crisis, the bank went out of business. Which of the following reasons could have contributed to the collapse of this bank?

A) their decision not to lend funds to the Federal Reserve
B) their decision not to diversify their asset portfolio
C) their decision to extend loans to a diversified pool of borrowers
D) their decision to extend mainly short-term loans
E) their decision to unnecessarily scrutinize each borrower's details

Question 54

If a bank has $950,000 million in liabilities and $1,000,000 in assets, its net worth must equal _____

A) $50,000.
B) $1,050,000.
C) $50,000,000.
D) $1,000,000.
E) $950,000.

Question 55

When a customer deposits $100 into a checking account, it _____

A) increases the bank's liabilities only.
B) decreases the bank's liabilities only.
C) increases the bank's assets only.
D) decreases both the bank's liabilities and its assets.
E) increases both the bank's liabilities and its assets.

Question 56

If a bank has $1,000,000 in assets and $50,000 in net worth, its liabilities must equal _____

A) $50,000.
B) $1,050,000.
C) $50,000,000.
D) $1,000,000.
E) $950,000.

Question 57

If a bank has $6,000 in checkable deposits and the required reserve ratio is 0.2, then the bank can lend:

A) exactly $4,000.
B) about $16,000.
C) no more than $4,800.
D) about $13,000.
E) exactly $1,000.

Question 58

When a customer deposits $1,000 in a bank, the deposit is _____

A) an asset of the Federal Reserve.
B) included in M1 if it is currently in the bank's vault.
C) a liability to the customer.
D) an asset to the bank if it is currently in the bank's vault.
E) a liability for the bank, as the bank owes it to the customer.

Question 59

Which of the following is an asset to a bank?

A) checkable deposits
B) transaction deposits
C) credit cards
D) loans
E) borrowings from the Fed

Question 60

On a bank's balance sheet, the value of its liabilities must equal the value of its _____

A) net worth only.
B) liabilities only.
C) its revenues plus costs.
D) its assets minus net worth.
E) its revenues minus costs.

Question 61

In order to meet a deficiency of required reserves, a bank could _____

A) buy securities.
B) deposit vault cash with the Fed.
C) turn some of its deposits at the Fed into cash.
D) close some checking accounts.
E) borrow from another bank in the federal funds market.

Question 62

The least liquid of the assets listed below is _____

A) real estate.
B) currency.
C) traveler's checks.
D) oil.
E) checkable deposits.

Question 63

The immediate effect of a member bank's sale of U.S. government securities to the Fed is a(n) _____

A) increase in that bank's required reserves.
B) decrease in that bank's required reserves.
C) increase in that bank's excess reserves.
D) decrease in that bank's excess reserves.
E) decrease in the Fed's assets.

Question 64

Suppose a bank lends you $1,000 to purchase a car. Which of the following correctly represents the changes in the bank's balance sheet before you spend the money?

A) Assets: loans, +$1,000; Liabilities and net worth: checking deposits, +$1,000
B) Assets: loans, $- \$ 1,000$ , checking deposits, +$1,000; Liabilities and net worth: no change
C) Assets: loans, +$1,000, checking deposits, $- \$ 1,000$ ; Liabilities and net worth: no change
D) Assets: checking deposits, +$1,000; Liabilities and net worth: loans, +$1,000
E) Assets: checking deposits, +$1,000; Liabilities and net worth: loans, $- \$ 1,000$

Question 65

By holding highly liquid assets to guard against sudden large withdrawals, banks _____

A) sacrifice safety.
B) sacrifice profitability.
C) increase profitability.
D) diversify their portfolio.
E) earn more interest than they could on business loans.

Question 66

Suppose you bank at Bank A and you write a check to your friend, who banks at Bank B. After the check clears, _____

A) both Bank A's and Bank B's assets increase.
B) both Bank A's and Bank B's assets decrease.
C) Bank A's assets increase and Bank B's assets decrease.
D) Bank A's assets decrease and Bank B's assets increase.
E) there is an increase in the Federal Reserve's assets.

Question 67

Banks differ from other types of businesses because banks _____

A) earn profits.
B) combine economic resources to produce services.
C) can go out of business.
D) can create fiat money.
E) are regulated by the government.

Question 68

The liquidity of an asset indicates _____

A) its buying power.
B) the ease with which it can be converted into cash without a significant loss of value.
C) the ease with which it can be converted into another asset.
D) how likely people are to trade it internationally.
E) its intrinsic value.

Question 69

If a bank sells a $1,000 security to the Fed and the required reserve ratio is 10 percent, _____

A) the bank has $1,000 in additional reserves, of which it can lend $800.
B) the bank has $1,000 in additional reserves, of which it can lend $900.
C) the bank has lost an asset and must reduce its loans.
D) the bank has lost a liability.
E) there is no change in excess reserves, since net assets do not change.

Question 70

A bank can legally hold reserves as _____

A) gold and coins.
B) gold and checks.
C) cash in its vault and non-interest-bearing reserve deposits at the Fed.
D) gold and non-interest-bearing reserve deposits at the Fed.
E) U.S. government securities and coins.

Question 71

Banks want to minimize their holdings of excess reserves because _____

A) they will be penalized by the Federal Reserve System if excess reserves are too high.
B) required reserves are also minimized when banks minimize their holdings of excess reserves.
C) the money multiplier becomes too large if the excess reserves are high.
D) they want to borrow more on the federal funds market.
E) excess reserves earn no interest.

Question 72

In the federal funds market, _____

A) banks make loans to the Fed.
B) banks make short-term loans to other banks.
C) banks make long-term loans to other banks.
D) the Fed makes short-term loans to private borrowers.
E) the Fed makes long-term loans to commercial banks.

Question 73

Suppose the required reserve ratio is 0.1 and Linda deposits $4,000 in cash at the College State Bank. If the bank held no excess reserves before Linda's deposit and now increases its reserves by $500, which of the following is true?

A) The bank must have lent out an additional $4,000.
B) $500 is the value of the bank's required reserves.
C) The bank now has excess reserves of $100.
D) Both the bank's assets and its liabilities rise by $500.
E) The bank now has $500 in excess reserves.

Question 74

If a bank has $50,000 in excess reserves at the end of a business day and the required reserve ratio is 20 percent, the bank can increase its profits by _____

A) keeping the excess reserves.
B) loaning out $40,000.
C) loaning out $50,000 to another bank.
D) borrowing $50,000 to remove the excess reserves.
E) keeping $10,000 and depositing $40,000 with the Fed.

Question 75

To maximize its profit, a bank will _____

A) minimize the number transactions it engages in.
B) maximize required reserves.
C) minimize excess reserves.
D) maximize excess reserves.
E) minimize required reserves.

Question 76

When a check is cleared against Bank A after being deposited at Bank B, _____

A) both Bank A's and Bank B's liabilities increase.
B) both Bank A's and Bank B's liabilities decrease.
C) Bank A's liabilities increase and Bank B's liabilities decrease.
D) Bank A's liabilities decrease and Bank B's liabilities increase.
E) there is an increase in the liabilities of the Federal Reserve.

Question 77

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 78

Suppose the First National Bank acquires $500,000 in new deposits and the required reserve ratio is 12 percent. Which of the following is true?

A) Required reserves on the new deposits are $12,000.
B) Excess reserves on the new deposits are $500,000.
C) Required reserves on the new deposits are $60,000.
D) Excess reserves on the new deposits are $12,000.
E) Total reserves on the new deposits are $440,000.

Question 79

When the Fed buys U.S. government securities from a member bank, _____

A) there is a decrease in the bank's assets.
B) there is an increase in the discount rate.
C) there is a decrease in the bank's liabilities.
D) there is an increase in the federal funds rate.
E) the bank's total assets and liabilities increase.

Question 80

Suppose you borrow $1,000 to purchase a car. Which of the following correctly represents the changes in your personal balance sheet after the bank lends the money, but before you spend it?

A) Assets: loan, +$1,000; Liabilities and net worth: checking deposit, +$1,000
B) Assets: loan, $- \$ 1,000$ , checking deposit, +$1,000; Liabilities and net worth: no change
C) Assets: loan, +$1,000, checking deposit, $- \$ 1,000$ ; Liabilities and net worth: no change
D) Assets: checking deposit, +$1,000; Liabilities and net worth: loan, +$1,000
E) Assets: checking deposit, +$1,000; Liabilities and net worth: loan, $- \$ 1,000$