Deck 16: Money and the Banking System

Question 1

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit currency which is spent and circulated in the marketplace is an example of the counterfeit currency being used as a

A) medium of exchange.
B) commodity money.
C) store of value.
D) bank reserve.

Answer 1

medium of exchange.

Question 2

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. The U.S. government is continually adding security features to its paper currency to help make counterfeit money easier to detect. If counterfeit currency remained undetected, a vast increase in the supply of counterfeit U.S. currency would

A) decrease aggregate demand in the short run.
B) lead to inflation.
C) reduce the amount of M1.
D) lower the nominal income of the average U.S. worker.

Answer 2

lead to inflation.

Question 3

Money solves the dilemma of a double coincidence of wants by serving as a

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

Answer 3

medium of exchange.

Question 4

Suppose after the semester ends, you take a trip to a tropical island. Upon arriving at the island, you make a stop at one of the markets and notice that everyone is carrying around jars full of little turtles. You also notice the person in line in front of you just paid for a bottle of rum with 6 turtles. Someone else just bought a straw hat for two turtles. Thinking back to your economics class (as painful as that may be), you would conclude that

A) this is a barter economy.
B) those little turtles are serving as money.
C) turtles are valueless.
D) turtle soup is a delicacy.

Question 5

What gives money value under a fiat system?

A) Fiat money is backed by gold.
B) The supply of fiat money is controlled by the government.
C) Fiat money is also a commodity.
D) Fiat money is the same as Treasury bonds.

Question 6

Which of the following are examples of "mediums of exchange"?

A) money used to buy goods
B) goods used to obtain other goods
C) pigs used to obtain chickens
D) all of the above

Question 7

The supply of money in the U.S. economy is determined primarily by

A) decisions made by the Federal Reserve and the U.S. Treasury.
B) the actions of the Federal Reserve and the banking system.
C) consumers and the banking system.
D) the demand for money in the economy.

Question 8

M1

A) is the sum of currency plus traveler's checks.
B) is the narrowest definition of the money supply.
C) includes small time deposits.
D) includes credit cards.

Question 9

Which of the following can be used as money?

A) checks
B) cigarettes
C) precious stones
D) all of the above

Question 10

In order for a barter transaction to be successful, there must be a

A) market for the goods.
B) high demand for a certain item.
C) double coincidence of wants.
D) federal tax law in effect.

Question 11

When money is used to express the value of goods and services, it is functioning as a

A) medium of exchange.
B) store of value.
C) unit of account.
D) store of purchasing power.

Question 12

If the prices of goods and services were expressed in terms of carved wooden beads, then the carved wooden beads would be serving as a

A) medium of exchange.
B) store of value.
C) unit of account.
D) mechanism for transforming present purchases into future purchases.

Question 13

Money that has no intrinsic value and is created by a government decree is called

A) barter money.
B) commodity money.
C) fiat money.
D) asset money.

Question 14

In the ________ increases in the supply of money will ________.

A) short run; raise total demand and output
B) long run; raise total demand and output
C) long run; lead to lower prices
D) short run; decrease total demand and output

Question 15

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. As long as counterfeit U.S. currency remains undetected and in circulation, an increase in the U.S. inflation rate would essentially

A) decrease the real value of the counterfeit currency.
B) increase the real value of the counterfeit currency.
C) decrease the nominal value of the counterfeit currency.
D) increase the nominal value of the counterfeit currency.

Question 16

When money is accepted as payment for a good or service, it is being used as a

A) medium of exchange.
B) store of value.
C) unit of account.
D) mechanism for transforming current purchases into future purchases.

Question 17

Money is

A) anything that is regularly used and generally accepted in economic transactions or exchanges.
B) necessary to conduct economic transactions.
C) facilitates specialization in production.
D) anything the government declares to have value.

Question 18

The stored value of money over time should not change significantly as long as the level of inflation is

A) high.
B) low.
C) adjusted by the government.
D) less than your pay increases.

Question 19

If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a

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

Question 20

As inflation rates increase, money becomes less useful as a

A) unit of account.
B) store of value.
C) medium of exchange.
D) double coincidence of wants.

Question 21

Which of the following is included in M2?

A) commercial paper
B) U.S. Treasury bonds
C) savings accounts
D) stocks

Question 22

Checking account balances are included in

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

Question 23

Traveler's checks are included in

A) M1 only.
B) M2 only.
C) both M1 and M2.
D) neither M1 nor M2.

Question 24

Which of the following is NOT included in M1?

A) savings accounts
B) deposits in checking accounts
C) deposits in checking accounts that pay interest
D) traveler's checks

Question 25

Deposits in savings accounts are included in

A) M1.
B) M2.
C) both M1 and M2.
D) neither M1 nor M2.

Question 26

Table 16.1
According to the information in Table 16.1, M1 is equal to

A) $620 billion.
B) $672 billion.
C) $842 billion.
D) $1,012 billion.

Question 27

Money market mutual funds are included in

A) M1.
B) M2.
C) both M1 and M2.
D) neither M1 nor M2.

Question 28

Currency is included in

A) M1 only.
B) M2 only.
C) neither M1 nor M2.
D) both M1 and M2.

Question 29

The smallest single component of M1 is

A) demand deposits.
B) savings account balances.
C) other checkable deposits.
D) traveler's checks.

Question 30

A reason that economists keep an eye on both M2 and M1 is because

A) M2 is more accurate than M1.
B) both fluctuate widely and frequently in total dollar value.
C) money market accounts are sometimes used like checking accounts and sometimes like savings accounts.
D) during a recession, M1 is meaningless.

Question 31

Which of the following appears in M2 and NOT M1?

A) currency
B) checking account balances
C) money market mutual funds
D) traveler's checks

Question 32

Along with currency not in banks and deposits in checking accounts, what is another component of the M1 measure of money?

A) credit cards
B) debit cards
C) traveler's checks
D) prepaid accounts

Question 33

Table 16.1
According to the information in Table 16.1, M2 is equal to

A) $840 billion.
B) $1,062 billion.
C) $1,692 billion.
D) $1,862 billion.

Question 34

In the 1980s, a new category entitled ________ was added to M1.

A) traveler's checks
B) demand deposits
C) other checkable deposits
D) money market mutual fund deposits

Question 35

In the United States economy, what is the basic measure of money?

A) wealth
B) M1
C) disposable income
D) commodities

Question 36

About 46 percent of M1 is composed of

A) demand deposits.
B) savings deposits.
C) money market mutual funds.
D) currency held by the public.

Question 37

The largest single component of M2 is

A) demand deposits.
B) savings deposits.
C) money market mutual funds.
D) currency held by the public.

Question 38

Economists use different definitions of money because

A) there are differences in the frequency with which depositors use their accounts.
B) deposits can be domestic or international.
C) deposits may be held at banks or savings and loans.
D) it is not always clear which assets are used primarily as money.

Question 39

Checking accounts that pay interest are included in the

A) "demand deposits" part of M1.
B) "other checkable deposits" part of M1.
C) "savings deposits" part of M2.
D) "money market mutual funds deposits" part of M2.

Question 40

Which of the following is NOT included in M1 or M2?

A) checking account balances
B) currency in circulation outside of commercial banks
C) traveler's checks
D) credit card balances

Question 41

In the United States today, the government will exchange gold or silver for paper money.

Question 42

Economists use M2 to measure the amount of money that is regularly used in transactions.

Question 43

Inflation makes money an imperfect store of value.

Question 44

Financial monetary assets which often cannot be readily used in commercial exchanges are included in

A) M1.
B) M2.
C) credit cards.
D) prepaid accounts.

Question 45

Recall the Application about how Greek citizens began to hold large amounts of cash in 2015 to answer the following question(s).
According to this Application, the main concern of Greek residents was that

A) hyperinflation could occur in the economy.
B) banks would convert their accounts to drachmas and they would suffer financial losses.
C) the country wold switch to a gold standard.
D) the Prime Minister of Greece would be impeached.

Question 46

Money market mutual funds are hard to classify because they are used both for making transactions and savings.

Question 47

Credit cards are regularly used in economic exchanges, so credit card balances are included in the definition of money.

Question 48

Recall the Application about how Greek citizens began to hold large amounts of cash in 2015 to answer the following question(s).
According to this Application, residents of Greece in 2015 ________ withdrawals of funds from their banks in order to hold ________ cash.

A) increased; less
B) increased; more
C) decreased; less
D) decreased; more

Question 49

Fiat money refers to a monetary system in which gold backs up paper money.

Question 50

Credits cards are NOT a part of the M1 or M2 money supply.

Question 51

According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit U.S. currency being held by the public both at home and abroad will impact the level of

A) the reserve ratio.
B) the money multiplier.
C) M1.
D) commodity money.

Question 52

In order for money to be an effective medium of exchange, it is important to have it serve as a unit of account.

Question 53

Money is the standard of exchange by which any type of goods can be purchased.

Question 54

M1 is larger than M2.

Question 55

An example of money is

A) a dollar bill.
B) a checking account balance.
C) a traveler's check.
D) all of the above

Question 56

One of the essential functions that a bank performs is

A) purchasing government bonds.
B) creating deposits by lending required reserves.
C) transferring money from savers to lenders.
D) owning assets like real estate.

Question 57

Money solves the problem of double coincidence of wants that would regularly occur under a system of credit.

Question 58

Recall the Application about how Greek citizens began to hold large amounts of cash in 2015 to answer the following question(s).
According to this Application, which of the following is a reason for holding cash?

A) for convenience
B) to make a purchase when you cannot use a debit or credit card
C) fear of financial catastrophe
D) all of the above

Question 59

Small time deposits of $100,000 or less are classified as

A) part of M1.
B) part of M2.
C) FDIC insured.
D) highly liquid.

Question 60

Before they can be used in regular exchanges, the assets that make up M2 must often

A) have their interest computed.
B) be converted to M1 assets.
C) be paid off if they are credit cards.
D) have reached term if they are insurance policies.

Question 61

Given the following information about Gotham Bank: Bank Deposits $50,000
Loans 34,000
Reserves 12,000
Reserve Requirement 20 percent
Gotham Bank is holding ________ in excess reserves.

A) $22,000
B) $12,000
C) $2,000
D) -$2,000

Question 62

The fraction of deposits that banks are required by law to hold and not lend out are called its

A) reserves.
B) excess reserves.
C) required reserves.
D) net worth.

Question 63

Suppose a bank has $200,000 in deposits and a reserve ratio of 15 percent. Its required reserves are

A) $350.
B) $1,500.
C) $3,000.
D) $30,000.

Question 64

Logan finds $10 in his jacket pocket and deposits it into a bank. As a result of this single transaction, M1 has

A) increased by $10.
B) increased by more than $10.
C) increased by less than $10.
D) not changed.

Question 65

Given the following information about AAA bank: Bank Deposits $200,000
Loans 100,000
Required Reserves 40,000
Excess Reserves 60,000
What is the reserve ratio?

A) 50 percent
B) 40 percent
C) 20 percent
D) 10 percent

Question 66

Suppose a bank has $8 million in deposits and a reserve ratio of 20 percent. Its required reserves are

A) $40,000.
B) $400,000.
C) $1,600,000.
D) $16,000,000.

Question 67

Suppose a bank has $200,000 in deposits, a reserve ratio of 10 percent, and reserves of $45,000. This bank has excess reserves of

A) $155,000.
B) $25,000.
C) $10,000.
D) $5,000.

Question 68

Loans are examples of a bank's

A) assets.
B) liabilities.
C) net worth.
D) balance sheet.

Question 69

Which of the following is a bank asset?

A) demand deposits
B) savings account deposits
C) certificates of deposit held by the public
D) loans made to customers

Question 70

Suppose that while vacationing in Switzerland, you won 9,375 Swiss francs, which is the equivalent of $8,000. When you return to the United States, you deposit the $8,000 into your checking account. If the required reserve ratio is 15 percent, this would increase your bank's

A) liabilities by $8,000.
B) excess reserves by $8,000.
C) required reserves by $8,000.
D) assets by $1,200.

Question 71

By law, banks are required to

A) hold 100 percent of customer deposits as reserves.
B) hold a fraction of their reserves at the Federal Reserve bank.
C) hold a fraction of demand deposits as reserves.
D) lend out no more than the amount of their required reserves.

Question 72

Suppose a bank has $1 million in deposits, a reserve ratio of 25 percent, and reserves of $250,000. This bank has excess reserves of

A) $250,000.
B) $125,000.
C) $62,500.
D) $0.

Question 73

Given the following information about Metropolis Bank: Bank Deposits $50,000
Loans 17,500
Required Reserves 30,000
Excess Reserves 2,500
The required reserve ratio must be

A) 75 percent.
B) 60 percent.
C) 30 percent.
D) 15 percent.

Question 74

A bank's reserves

A) are the sum of its excess and required reserves.
B) can be held as cash in its vault.
C) can be held as deposits with the Federal Reserve.
D) all of the above

Question 75

Suppose a bank has $300,000 in deposits, a reserve ratio of 5 percent, and bank reserves of $45,000. This bank can make new loans in the amount of

A) $345,000.
B) $45,000.
C) $30,000.
D) $15,000.

Question 76

Given the following information about AAA bank: Bank Deposits $50,000
Loans 25,000
Required Reserves 15,000
Excess Reserves 10,000
What is the reserve ratio?

A) 50 percent
B) 30 percent
C) 20 percent
D) 15 percent

Question 77

Which one of the following statements is TRUE?

A) Demand deposits are assets of a bank.
B) A bank's assets plus its liabilities equals must equal zero.
C) A bank's reserves can only be kept as cash in its vault.
D) Assets generate income for a bank.

Question 78

Suppose a bank has $600,000 in deposits, a reserve ratio of 20 percent, and bank reserves of $240,000. This bank can make new loans in the amount of

A) $840,000.
B) $360,000.
C) $120,000.
D) $12,000.

Question 79

Which of the following is a bank liability?

A) reserve deposits held at the Fed
B) loans made to customers
C) required reserves
D) demand deposit balances

Question 80

Deposits are examples of a bank's

A) assets.
B) liabilities.
C) net worth.
D) balance sheet.