Deck 15: Monetary Institutions

Question 1

Reserve requirements exist primarily to prevent bank failures.

Answer 1

False

Question 2

A reserve requirement ratio of 10 percent implies a money multiplier of 10.

Answer 2

False

Question 3

New loans decrease the money supply in an economy.

Answer 3

False

Question 4

M1 includes currency, checkable deposits, traveler's checks, and savings deposits.

Question 5

In general, a bank that held excess reserves would earn higher profits as a result.

Question 6

Debit cards provide a grace period between purchase and payment.

Question 7

Banks create money when they increase demand deposits through the process of creating loans.

Question 8

If the government requires banks to keep 100 percent of their deposits as reserves, a $1,000 deposit in a checking account would lead to a $100,000 increase in the money supply.

Question 9

Paper money is fiat money because it has been declared by government as a means of exchange.

Question 10

People continue to value money because they have confidence in its convertibility into goods and services.

Question 11

In the years leading up to the financial crisis of 2008, financial institutions made negative profits.

Question 12

Nontransaction deposits are the money itself.

Question 13

Savings accounts are the most liquid of all assets because they can be quickly and easily transferred.

Question 14

Money functioning as a medium of exchange results in an increase in transactions costs.

Question 15

Paper and metallic currency have replaced demand deposits and other checkable deposits as the major source of money used for transactions in the United States.

Question 16

The existence of inflation and other possible uncertainties reduces the usefulness of money as a store of value.

Question 17

When the U.S. banking system collapsed during 1929-1933, the money supply increased dramatically.

Question 18

Money would generally be a more efficient store of value than wheat when inflation is not rapid.

Question 19

When a person pays a loan back to a bank by writing a check for the amount due, both demand deposits and the money supply increase.

Question 20

A debit card is money.

Question 21

Which of the following is not a correct statement about money?

A)Money serves as a medium of exchange.
B)The value of money generally fluctuates much more than the prices of individual commodities.
C)Money can provide a means of saving or "storing" things of value in an efficient manner.
D)Money serves as a means of deferred payment.
E)As a unit of account, money provides a yardstick to compare values of diverse goods and services.

Question 22

Which of the following is true of debit cards?

A)They are used to eliminate the use of money.
B)They provide a grace period between purchase and payment.
C)They help the account holders get loans from the card-issuing bank.
D)They require a personal identification number of the card holder.
E)They allow the cardholder to use any given amount of money in future exchanges.

Question 23

The primary benefit of monetary exchange compared to barter exchange is the increased:

A)possibility of tracking trade for tax purposes.
B)time devoted to finding trade partners.
C)time devoted to determining the value of the product that is being offered for barter.
D)efficiency in arranging transactions.
E)possibility of a double coincidence of wants.

Question 24

Which of the following is true of money?

A)The primary function of money is to lower transaction costs.
B)It is a liability of the federal government.
C)It is a liability of a commercial bank.
D)The value of money fluctuates more than the value of individual commodities.
E)Lending in money imposes more risks on buyers and sellers than lending in commodities.

Question 25

Transaction deposits are better than paper money because:

A)transaction deposits are safer than paper money.
B)transaction deposits are legal tender, while paper money is not.
C)transaction deposits are readily transferable, unlike paper money.
D)transaction deposits are a medium of exchange, while paper money is not.
E)transaction deposits have low transaction costs in small transactions, while paper money require more.

Question 26

Which of the following is an example of money serving as a medium of exchange?

A)John buys a cup of coffee and a roll at the faculty dining room.
B)Steve puts a one-hundred-dollar bill in his money belt.
C)Scott deposits cash into a savings account.
D)Roland puts his coins into a piggy bank.
E)Ursula deposits all her savings into a fixed deposit scheme.

Question 27

Which of the following is true of credit cards?

A)They are near monies.
B)They are used to postpone the payment of money.
C)They are used to eliminate the payment of money.
D)They are included in the narrow definition of money.
E)They provide access to money via a checking account.

Question 28

Rapid inflation makes holding a large amount of money:

A)wiser because more and more money is required to buy goods and services.
B)less wise because the opportunity cost of holding money is high.
C)less wise because someone might steal it, or it might be destroyed.
D)wiser because the opportunity cost of holding money is high.
E)less wise because inflation leads to a decrease in the supply of money.

Question 29

Which of the following assets is the most liquid?

A)Funds in a checking account
B)A car
C)Ten acres of land
D)A television
E)Stocks and bonds

Question 30

Near monies are:

A)included in the M1 definition of the money supply.
B)highly liquid assets that are close substitutes for money.
C)stocks, bonds, and real estate.
D)U.S. notes and Federal Reserve notes.
E)convenient tools for carrying out transactions that minimize the physical transfer of checks or currency.

Question 31

Legal tender is fiat money because it is:

A)a means of exchange that has been established by custom and tradition.
B)a means of exchange that has been established by the value of the metal in a coin.
C)the balance in bank accounts that depositors can access on demand.
D)a means of exchange that has been established by government declaration.
E)the balance in bank accounts that can be easily converted into currency.

Question 32

The problem of double coincidence of wants is associated with:

A)paper money.
B)insurance.
C)credit cards.
D)a barter system.
E)fiat money.

Question 33

Which of the following is the best definition of money?

A)Anything generally accepted in exchange for goods and services
B)Anything that is a liability of the federal government
C)Anything that is a liability of a commercial bank
D)Anything that depositors can access on demand by simply writing checks
E)Anything that is an asset of a commercial bank

Question 34

Which of the following observations is true of nontransaction deposits?​

A)They can be directly used to buy goods and services.
B)They generally pay lower interest rates than transaction deposits.
C)Depositors can directly write checks against them.
D)They satisfy the formal definition of money.
E)They are available in the form of savings accounts and time deposits.

Question 35

Money as a means of deferred payment _____.

A)makes it easier to borrow and repay loans
B)makes it easier to store value in an efficient manner
C)lowers the information costs involved in making transactions
D)serves as the only medium that is generally accepted for most transactions
E)makes it easier to compare the values of diverse goods and services

Question 36

Identify the correct statement.

A)Paper and metallic currency have replaced demand deposits and other checkable deposits as the major source of money used for transactions in the United States.
B)A credit card is a long-term loan.
C)Most of the money used for day-to-day transactions is legal tender.
D)A debit card is money.
E)Paying for goods and services with checks is easier and less risky than paying with paper money.

Question 37

Money almost always serves as the standard unit for quoting prices. This is another way of saying money serves as a:

A)medium of exchange.
B)store of value.
C)standard of value.
D)commodity itself.
E)means of deferred payment.

Question 38

A depositor cannot directly write checks against:

A)demand deposits.
B)currency deposits.
C)nontransaction deposits.
D)money market mutual fund accounts.
E)traveler's checks.

Question 39

Paper money in the U.S. is:

A)fiat money.
B)more than half of M2.
C)only partially backed by the reserves of gold and silver in the Federal Reserve.
D)convertible into gold or silver at the holder's request.
E)a form of transaction deposits.

Question 40

Nontransaction deposits:

A)are near money assets.
B)are the money itself.
C)defer the payment for a transaction using a demand deposit.
D)are fund accounts against which the depositor can directly write checks.
E)are legal tender.

Question 41

Which of the following is true of reserve requirements?

A)They exist primarily to control the size of the money supply.
B)They exist primarily to generate profits for banks.
C)They exist primarily to generate excess reserves.
D)They are equal to the sum of actual reserves and excess reserves.
E)They are equal to the bank's deposits divided by the reserve requirement ratio.

Question 42

A decrease in currency in circulation combined with an equal increase in savings account deposits would:

A)increase M1.
B)have no effect on M1.
C)increase M2.
D)have no effect on M2.
E)decrease M2.

Question 43

Money market mutual funds:

A)are highly liquid assets.
B)defer the payment for a transaction using a demand deposit.
C)are a direct medium of exchange.
D)are invested in long-term securities.
E)are legal tender.

Question 44

A bank's capital is:

A)the value of all its assets, including loans.
B)the value of all its assets, excluding loans.
C)the value of its physical plant, including buildings, computers, and automatic teller machines.
D)the difference between its assets and liabilities.
E)the sum of its assets and liabilities.

Question 45

In which of the following situations will there be an increase in the money supply?

A)Rick keeps $10,000, which he has won in a lottery, in his bank.
B)Callie gets a loan of $30,000 from her bank to buy a car.
C)Roxanne buys a bike for which she pays $10,000 in cash.
D)Dominik lends $2,000 to his friend.
E)Ursula buys a used sofa set from the yard sale for which she pays $1,000 in cash.

Question 46

Which of the following generates profits for banks?​

A)Borrowings from the Central Bank
B)Time deposits
C)Buying and selling stocks
D)Making loans
E)Demand deposits

Question 47

Banks create money by:

A)making loans.
B)offering bonds at low nominal prices.
C)acting as an intermediary between the government and private investors.
D)selling mutual funds.
E)printing money for customers.

Question 48

The ease with which one asset can be converted into another asset or into goods and services is called:

A)durability.
B)liquidity.
C)divisibility.
D)portability.
E)utility.

Question 49

Other things constant, a decrease in credit card balances would _____ M1 and _____ M2.

A)increase; increase
B)not change; increase
C)decrease; decrease
D)not change; not change
E)decrease; not change

Question 50

M1 includes:​

A)gold.
B)cash, checking account balances, and travelers' checks.
C)bank deposits.
D)time deposits.
E)noninstitutional money market mutual fund shares.

Question 51

Which of the following backs the supply of money in the United States?

A)Faith in the market system that the suppliers will provide the goods that are demanded
B)Gold reserves
C)Faith in government
D)Time deposits
E)Savings deposits

Question 52

Which of the following is included in M2 but is not included in M1?​

A)Eurodollar deposits
B)Savings accounts
C)Traveler's checks
D)Checkable deposits
E)Government bonds

Question 53

M2 includes:

A)M1 plus savings deposits only.
B)M1 plus savings deposits, time deposits, and money market mutual funds.
C)M1 plus certificates of deposit and noninstitutional money market mutual funds only.
D)M1 plus certificates of deposit only.
E)M1 plus time deposits only.

Question 54

Which of the following is the least liquid asset?

A)Gold
B)Traveler's check
C)Checkable deposits
D)Bonds
E)Time deposits

Question 55

Which of the following is an asset to a commercial bank?

A)Borrowings from the Central Bank
B)Time deposits
C)Checkable deposits
D)Making loans
E)Savings accounts

Question 56

Which of the following is true of M1 and M2?

A)M1 is nearly three times as large as M2.
B)M2 is made up mostly of demand and checkable deposits.
C)M2 is substantially larger than M1.
D)M2 consists of M1 and savings deposits only.
E)M1 is made up of M2 and certificates of deposit only.

Question 57

Which of the following is true of stocks?

A)They are included in the narrow definition of money.
B)Their value fluctuates over time.
C)Their use minimizes the physical transfer of checks or currency.
D)They are considered to be near monies.
E)They defer the payment for a transaction using a demand deposit.

Question 58

Which of the following is true of secondary reserves?

A)They are highly liquid, interest paying assets.
B)Checkable deposits are examples of secondary reserves.
C)They cannot be turned into cash as quickly as a savings deposit in a financial institution.
D)They are interest-earning accounts provided by brokers who pool funds into investments.
E)Their values fluctuate over time.

Question 59

Which of the following is true of the banking system?

A)Government regulatory authorities limit the loan issuance of banks by imposing reserve requirements.
B)The predominant liability of virtually all banks is capital stocks.
C)The difference between a bank's assets and its liabilities constitutes its secondary reserves.
D)Government regulatory authorities limit the loan issuance of banks by increasing the prime lending rate.
E)The largest asset item for most banks is time deposits kept by the customers with the bank.

Question 60

An increase in the circulation of currency would:

A)increase both M1 and M2.
B)not change M1 but increase M2.
C)decrease both M1 and M2.
D)not change M1 or M2.
E)decrease M1 and not change M2.

Question 61

Demand deposits are:

A)assets of banks and liabilities of depositors.
B)liabilities of banks and assets of depositors.
C)assets of banks and their depositors.
D)liabilities of banks and their depositors.
E)assets of the government and liabilities of the public.

Question 62

A bank has $8,000 in checkable deposits. If the reserve requirement is 0.2, _____.

A)the bank can lend $8,000
B)the bank cannot lend more than $6,400
C)the bank cannot lend more than $5,400​
D)the bank can lend $1,600
E)the bank can lend $7,000

Question 63

Suppose all banks are subject to a uniform reserve requirement of 20 percent and that the Gamblers Last Chance Bank of Las Vegas has zero excess reserves. If a new customer deposits $10,000, the bank can now extend new loans up to a maximum of:

A)$2,000.
B)$8,000.
C)$10,000.
D)$50,000.
E)$3,000.

Question 64

Which of the following is true of fractional reserve banking systems?

A)Banks hold only a fraction of their reserves at the bank itself.
B)Banks keep only a fraction of total deposits as reserves.
C)Banks reserve only a fraction of total deposits for lending.
D)Banks reserve only a fraction of total deposits for buying stocks.
E)Banks keep only a fraction of total deposits as profits.

Question 65

Which of the following is a result of a banking transaction creating new excess reserves for a bank?

A)An increase in the amount of loans made by the bank and an increase in the supply of money
B)An increase in the amount of loans made by the bank and a decrease in the supply of money
C)A decrease in the amount of loans made by the bank and an increase in the supply of money
D)A decrease in the amount of loans made by the bank and a decrease in the supply of money
E)An indeterminate effect on the money supply

Question 66

The required reserves of a bank are a specific percentage of its _____.

A)loans
B)cash on hand
C)total assets
D)deposits
E)excess reserves

Question 67

When the reserve requirement is 30 percent, the money multiplier is _____.

A)4.3
B)5.5
C)3.3
D)6.1
E)2.5

Question 68

The predominant liability item for most banks is:​

A)deposits.
B)bonds.
C)loans.
D)reserve accounts at the Federal Reserve.
E)excess reserves.

Question 69

Suppose Money Sure Bank of Commerce faced a 25 percent required reserve ratio and had demand deposits of $50 million. Then, it can be said that the bank can loan out a maximum of _____.

A)$50 million
B)$37.5 million
C)$25 million
D)$12.5 million
E)$55.5 million

Question 70

Suppose First Rhode Island Bank of Commerce faces a reserve requirement ratio of 15 percent. If a customer makes a deposit of $500, the initial result would be:

A)a $425 increase in excess reserves.
B)a $75 increase in excess reserves.
C)a $3,333 increase in excess reserves.
D)a $3,333 increase in required reserves.
E)a $100 increase in required reserves.

Question 71

A decrease in the excess reserves banks want to hold would:

A)increase the money supply.
B)decrease the money supply.
C)result in an increase in the total reserves held by the banks.
D)have an indeterminate effect on the money supply.
E)result in an increase in the required reserves held by the Federal Reserve.

Question 72

_____, the greater is the effect of a given deposit of cash into a demand deposit account on the money supply.

A)The greater the fraction of money people want to hold as currency and the greater the fraction of deposits banks want to hold as excess reserves
B)The greater the fraction of money people want to hold as currency and the smaller the fraction of deposits banks want to hold as excess reserves
C)The smaller the fraction of money people want to hold as currency and the greater the fraction of deposits banks want to hold as excess reserves
D)The smaller the fraction of money people want to hold as currency and the smaller the fraction of deposits banks want to hold as excess reserves
E)The greater the fraction of money people want to hold as currency and the greater the required reserve ratio

Question 73

A reserve requirement of 12.5 percent implies a potential money multiplier of:

A)5.
B)8.
C)12.5.
D)112.5.
E)10.

Question 74

A bank's assets consist of $1,000,000 in total reserves, $2,100,000 in loans, and a building worth $1,200,000. Its liabilities and capital consist of $3,000,000 in demand deposits and $1,300,000 in capital. If the required reserve ratio is 10 percent, then the bank's excess reserves is _____ and it can loan out a maximum of _____.

A)$700,000; $700,000
B)$70,000; $70,000
C)$300,000; $30,000
D)$3,000,000; $3,000,000
E)$10,000; $1,000

Question 75

If a bank faced a 25 percent required reserve ratio and had demand deposits of $80 million, then it can loan out a maximum amount of _____.

A)$20 million
B)$40 million
C)$60 million
D)$80 million
E)$100 million

Question 76

Ursula deposits $4,000 into the checking account of her bank. This will:

A)increase the bank's assets without affecting the amount of liabilities.
B)decrease the bank's liabilities without affecting the amount of assets.
C)increase both the assets and liabilities of the bank.
D)decrease both the assets and liabilities of the bank.
E)increase the bank's assets and decrease the bank's liabilities.

Question 77

When the money multiplier is 10, the required reserve ratio is _____.

A)0.10
B)0.20
C)0.40
D)0.50
E)0.30

Question 78

Suppose a commercial bank faces a reserve requirement of 15 percent on all deposits, and a customer makes a new cash deposit of $50,000. Then, it can be said that a new excess reserve of _____ is created.

A)$7,500
B)$33,000​
C)$67,500
D)$42,500
E)$50,000

Question 79

The potential amount of money that the banking system generates with each dollar of reserves is given by the product of:

A)excess reserves times the money multiplier.
B)initial deposit times the money multiplier.
C)actual reserves times the required reserve ratio.
D)required reserves times the money multiplier.
E)initial deposit times the required reserve ratio.

Question 80

A reserve requirement of 50 percent means a money multiplier of:

A)0.50.
B)2.
C)5.
D)50.
E)100.