Deck 16: Banking and the Money Supply

Question 1

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

Answer 1

C

Question 2

Demand deposits are

A)long-term, high-interest savings accounts
B)accounts into which banks can require depositors make regular deposits
C)checkable deposits held by commercial banks that earn no interest
D)negotiable order of withdrawal accounts
E)loans from the Fed

Answer 2

C

Question 3

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; checks are not
D)currency is easier to handle
E)currency is a medium of exchange; checks are not

Answer 3

C

Question 4

Which of the following are included in the narrowest 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 5

Coins in the United States are manufactured and distributed by the

A)Federal Reserve
B)U.S. Mint
C)U.S. Treasury
D)FBI
E)Controller of the Currency

Question 6

M1 includes currency held in shoeboxes by people distrustful of banks.

Question 7

Narrowly defined, the M1 money supply consists primarily of

A)coins and currency
B)gold
C)gold and silver
D)certificates of deposit
E)checkable deposits

Question 8

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 9

The M1 money supply is defined as

A)one-dollar bills
B)currency and coins held by the nonbank public, checkable deposits, and traveler's checks
C)M3 minus M2
D)all currency and checkable deposits
E)coins and currency held by the nonbank public

Question 10

The M1 money supply consists of

A)coins and currency held by the nonbank public
B)coins and currency held by the nonbank public and currency held in banks
C)coins and currency held by the nonbank public, checkable deposits, and traveler's checks
D)coins and currency held in banks and checkable deposits
E)paper currency

Question 11

Currency held by the nonbank public is a medium of exchange.

Question 12

The narrowest definition of the money supply includes only currency held by the nonbank public.

Question 13

M1 includes currency held in bank vaults.

Question 14

Narrowly defined, the M1 money supply consists primarily of

A)coins
B)currency
C)cash held by banks
D)checkable deposits
E)money market mutual fund accounts

Question 15

M1 is the narrowest measure of the money supply.

Question 16

Which of the following make up the money supply as it is most narrowly defined?

A)coins and currency held by the nonbank public, traveler's checks, and savings deposits
B)all coins and currency held by the nonbank public
C)coins and currency held by the nonbank public, checking deposits, and traveler's checks
D)coins and currency held by the nonbank public, checking deposits, and savings deposits
E)checking deposits, savings deposits, and money market mutual fund accounts

Question 17

Which of the following is not legal tender in the United States?

A)a $2 bill
B)a fifty-cent piece
C)a $100 bill
D)a $5 Federal Reserve Note
E)a check

Question 18

M1, the money supply narrowly defined, consists of coins, paper currency, checkable deposits, travelers checks, and certificates of deposit (CDs).

Question 19

Currency held by banks is not included in the money supply.

Question 20

In the United States, paper money is redeemable for gold.

Question 21

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

A)money market deposit accounts
B)coins
C)travelers checks
D)large denomination time deposits
E)savings deposits

Question 22

The Federal Reserve's narrowest definition of money is

A)M3
B)M2
C)M1
D)near money
E)money market mutual funds

Question 23

Currently, M2 is approximately

A)equal to M1
B)twice the size of M1
C)half the size of M1
D)ten times the size of M1
E)three times the size of M1

Question 24

From a bank's point of view, its deposits are liabilities, not assets.

Question 25

Banks earn a profit on the difference between

A)interest charged to depositors and interest offered to borrowers
B)interest charged on loans and interest paid on deposits
C)deposit and loan balances
D)liabilities and deposits
E)dividends and interest

Question 26

A 2005 quarter is called token money because

A)it is legal tender
B)its metal value exceeds it 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 not generally accepted in exchange

Question 27

The Federal Reserve's narrowest definition of money is

A)M3
B)M2
C)currency in the hands of the public plus checkable deposits plus traveller's checks
D)near money
E)money market mutual funds

Question 28

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

A)lend larger 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 29

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)serving the credit needs of borrowers and the security needs of savers
E)selling shares of stock to investors

Question 30

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 money.
E)They are a way of postponing the payment of money.

Question 31

Usually, a commercial bank's depositors and its owners are the same individuals.

Question 32

What do commercial banks and thrifts attempt to maximize?

A)assets
B)deposits
C)loans
D)profits
E)utility

Question 33

Asymmetric information in financial markets exists when

A)teachers know more about banking than students do
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 know more about banking than banks do

Question 34

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 so easily
C)the Federal Reserve has defined them less precisely
D)M1 is becoming less liquid
E)banks are offering time deposits

Question 35

A bank that borrows from the Fed at 3 percent annual interest

A)must hold 3 percent of its total reserves as required reserves
B)must hold 97 percent of its total reserves as required reserves
C)will be able to profit by charging less than 3 percent for its loans
D)hopes to charge more than 3 percent for its loans
E)must give up U.S. government securities to secure the loan

Question 36

M2 is defined as

A)M1 plus savings accounts, small time deposits, and money market mutual funds
B)coins, currency, and checkable deposits
C)all near moneys
D)M1 plus time deposits
E)M1 plus money market mutual funds

Question 37

Net Worth on a bank's balance sheet 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)on the asset side of the balance sheet

Question 38

Banks create money when they make loans.

Question 39

The largest component of M1 is

A)currency
B)checkable deposits
C)traveler's checks
D)money market mutual fund accounts
E)savings accounts

Question 40

Asymmetric information in financial markets exists when one party to the transaction has more information than the other regarding risks, alternatives, and other relevant details.

Question 41

Banks are required to hold reserves against the total value of all their assets.

Question 42

A bank's assets include all but one of the following. Which one is the exception?

A)checkable deposits
B)loans
C)securities
D)mortgages
E)cash

Question 43

In banking, Assets plus Liabilities must equal Net Worth.

Question 44

In financial markets, asymmetric information exists when

A)one party to a transaction has more knowledge of relevant details than the other does
B)both parties to a transaction have less knowledge of relevant details than the Fed does
C)lenders know more about the borrowers than the borrowers know about themselves
D)all parties to a transaction have exactly the same information
E)all the information which the parties have is inaccurate

Question 45

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

A)net worth
B)liabilities
C)owner's equity
D)liabilities plus net worth
E)revenues minus costs

Question 46

Banks help to overcome the problem of asymmetric information by

A)lending only to students
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 47

Banks minimize the risk of loss to depositors by

A)lending to casino owners
B)making many different loans to different borrowers
C)refusing to lend money to the U.S. government
D)putting all their eggs in one basket
E)making very long-term loans

Question 48

On a bank's balance sheet,

A)assets are always less than liabilities
B)assets equal liabilities plus net worth
C)assets equal liabilities minus net worth
D)liabilities equal assets plus net worth
E)assets are always larger than liabilities plus net worth

Question 49

Which of the following is not a function of a depository institution?

A)serving as a financial intermediary
B)providing expertise on loans
C)acting as a stockbroker
D)reducing the risk of savers
E)linking savers and borrowers

Question 50

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

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

Question 51

The practice of reducing risk through diversification could be summed up by the phrase

A)a penny saved is a penny earned
B)neither a borrower nor a lender be
C)buy low; sell high
D)don't put all your eggs in one basket
E)a fool and his gold are soon parted

Question 52

When a customer deposits $100 into a checking account, the effect is to

A)increase the bank's liabilities
B)decrease the bank's liabilities
C)increase the bank's assets
D)decrease the bank's assets
E)increase both the bank's liabilities and its assets

Question 53

On a bank's balance sheet,

A)deposits and loans are assets
B)deposits and loans are liabilities
C)deposits are liabilities; loans are assets
D)deposits are assets; loans are liabilities
E)deposits and loans are not listed

Question 54

On a bank's balance sheet,

A)assets = liabilities - net worth
B)assets = liabilities + net worth
C)assets = liabilities
D)assets = net worth
E)net worth = liabilities

Question 55

If a customer deposits $1,000 cash into her checking account, the bank's

A)assets rise by $1,000 and liabilities fall by $1,000
B)assets fall by $1,000 and liabilities rise by $1,000
C)assets and liabilities both fall by $1,000
D)assets and liabilities both rise by $1,000
E)profits rise by $1,000

Question 56

Which of the following is a liability for a bank?

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

Question 57

A $20 Federal Reserve note is

A)an asset of the Federal Reserve
B)included in M1 if it is currently in a commercial bank's vault
C)a liability to you if it is in your wallet
D)an asset to a commercial bank if it is currently in the bank's vault
E)not legal tender because it is not redeemable for silver or gold

Question 58

Banks are financial intermediaries because they

A)receive new Federal Reserve notes from the Fed and put them into circulation
B)bring together the two sides of the market-savers and borrowers
C)bring different savers into contact with each other
D)bring about the merger of smaller banks to make larger ones
E)resolve disputes between stock brokers, mortgage companies, insurance agencies, and other financial institutions

Question 59

Which of the following is not a liability to a bank?

A)checkable deposits
B)NOW accounts
C)net worth
D)borrowings from the Fed
E)deposits with the Fed

Question 60

As a lender, a bank holds an advantage over any individual person because

A)individuals do not diversify their asset holdings
B)individuals are better at enforcing loan contracts
C)banks have to engage in extensive and costly searches for potential borrowers
D)banks develop expertise in evaluating borrowers' loan applications
E)individuals have extensive knowledge of and experience in writing loan contracts

Question 61

Banks are permitted to lend all of their required reserves.

Question 62

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. Required reserves are

A)$1 million
B)$5 million
C)$10 million
D)$50 million
E)$100 million

Question 63

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. The bank has $5 million in actual reserves, so excess reserves are

A)$-10 million
B)$-5 million
C)0
D)$5 million
E)$10 million

Question 64

Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. If the bank has $5 million in excess reserves, then its actual reserves must be

A)$0
B)$5 million
C)$10 million
D)$15 million
E)$20 million

Question 65

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

A)$4,000
B)$16,000
C)no more than $4,800
D)no less than $3,000
E)$1,000

Question 66

All depository institutions are subject to the Fed's required reserve ratios.

Question 67

Banks are permitted to lend all of their excess reserves.

Question 68

A bank with $1 million in deposits and $50,000 in excess reserves, facing a required reserve ratio of 20 percent, holds total reserves of $250,000.

Question 69

If you know the required reserve ratio and the total value of a bank's assets, then you know how much the bank is holding in reserves.

Question 70

If the reserve requirement is constant, it is impossible for a bank's excess reserves to fall if its total reserves have not fallen.

Question 71

Banks are permitted to lend all of their reserves.

Question 72

The ready cash kept on hand by a bank to meet the needs of those who want to withdraw funds does not earn interest for the bank.

Question 73

Suppose that 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 74

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 can increase its loans by up to $50,000
E)bank can increase its loans by up to $400,000

Question 75

If a bank's reserves are exactly equal to the required amount of reserves, then it has no excess reserves.

Question 76

Suppose that 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 77

If you know the required reserve ratio and the amount of a bank's deposits, then you know the minimum amount of reserves the bank is required to hold.

Question 78

If you know the required reserve ratio, then you know how much each bank is holding in reserves.

Question 79

If the reserve ratio is 15 percent, and your bank acquires new deposits of $100,000, the maximum it can lend out of these new deposits is

A)$15,000
B)$100,000
C)$85,000
D)$150,000
E)$666,667

Question 80

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)liabilities plus its net worth are $500,000