Deck 15: Monetary Institutions

Question 1

The more widely held and accepted credit cards are, the more money people would be expected to hold in the form of currency.

Answer 1

False

Question 2

Credit cards should be included in M1 because they are just like checks.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

The higher the interest rate paid on certificates of deposit and other nontransaction deposits, other things being equal, the less people would be expected to hold in demand deposits.

Question 6

A reserve requirement of 10% implies a money multiplier of 10 and a reserve requirement of 15% implies a money multiplier of 15.

Question 7

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

Question 8

Money is a more efficient store of value than wheat.

Question 9

A majority of U.S.money, whether M1 or M2, is created by private businesses.

Question 10

If a person buries his money in his backyard, he is using money as a medium of exchange.

Question 11

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

Question 12

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

Question 13

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

Question 14

Deposit insurance and government's willingness to help distressed banks have virtually eliminated the potential for serious bank runs.

Question 15

Which of the following is not one of the functions of money?

A)unit of account
B)means of deferred payment
C)conversion of taxes
D)medium of exchange
E)store of value

Question 16

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

Question 17

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

Question 18

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

Question 19

New loans create money directly, but they also create excess reserves in other banks, which leads to still further increases in both loans and the supply of money.

Question 20

Reserve requirements exist primarily to prevent bank failures.

Question 21

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)unit of account.
D)commodity itself.
E)all of the above are correct.

Question 22

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

A)increase both M1 and M2.
B)increase M1 but have no effect on M2.
C)decrease both M1 and M2.
D)decrease M1 but have no effect on M2.

Question 23

Which of the following is false?

A)Demand deposits and other checkable deposits have replaced paper and metallic currency as the major source of money used for transactions in the United States.
B)Credit cards are not money; they are substitutes for the use of money in exchange.
C)Most of the money that we use for day-to-day transactions is not official legal tender.
D)Our money is money because of confidence that we have in private financial institutions as well as our government.
E)None of the above is false; all are true.

Question 24

"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)all of the above.

Question 25

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

A)the possibility of tracking trade for tax purposes.
B)increased time devoted to finding trade partners.
C)increased time devoted to shopping for what we want.
D)increased efficiency in arranging transactions.
E)all of the above.

Question 26

Using money as a store of value rather than wheat is:

A)safer.
B)less expensive.
C)both safer and less expensive.
D)neither safer nor less expensive.

Question 27

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 like oil or wheat.
C)Money serves as a store of value.
D)Money serves as a means of deferred payment.

Question 28

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

Question 29

Which of the following is included in both M1 and M2?

A)traveler's checks
B)checkable deposits
C)currency
D)all of the above.

Question 30

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 five-dollar bill in his money belt.
C)Scott deposits cash into a savings account.
D)Roland puts his coins into a piggy bank.
E)All of the above are correct.

Question 31

Which of the following is not a form of money?

A)checkable deposits
B)travelers' checks
C)currency
D)coins
E)credit cards

Question 32

Fiat money has value because:

A)it is backed by gold.
B)it is divisible.
C)it can be used to buy things.
D)it can be exchanged for a commodity backing it.
E)all of the above are true.

Question 33

Which of the following observations is true of nontransaction deposits?

A)depositor can use them directly as a means of payment
B)they do not pay any interest
C)depositor cannot directly write checks against them
D)they generally pay lower interest rates than transaction deposits

Question 34

The idea behind money as a unit of account is that use of money allows:

A)greater efficiency in exchange.
B)receipt of income to be separated from spending.
C)persons to hold spending power for some period of time.
D)double-entry bookkeeping.
E)prices quoted in money terms.

Question 35

Which of the following is false?

A)Whenever excess reserves appear, banks will convert the non-interest earning reserves into other interest-earning assets.
B)Credit cards are not included in any measures of the money supply.
C)Paper currency is the only form of legal tender.
D)Economists are not completely in agreement on what constitutes money for all purposes.
E)M1 does not include savings accounts.

Question 36

Money lowers the transaction cost when:

A)the economy is experiencing rapid inflation.
B)its value is stable.
C)the rate of inflation is uncertain.
D)there is widespread deflation

Question 37

Barter system is less desirable than using money for exchange because:

A)it is a more inefficient and a time-consuming process.
B)gold and silver are risky and inconvenient to transport.
C)it tends to promote inflation.
D)gold and silver are relatively scarcer than other commodities.
E)the government maintains too important a role in the money-creating process.

Question 38

A depositor cannot directly write checks against:

A)demand deposits.
B)transaction deposits.
C)nontransaction deposits.
D)money market mutual fund accounts.

Question 39

The problem of double coincidence of wants is associated with:

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

Question 40

Which of the following is the best definition of money?

A)anything generally accepted as a payment for goods or repayment of debt
B)anything that is a liability of the federal government
C)anything that is a liability of a commercial bank
D)coins and currency in the hands of the public

Question 41

A decrease in credit card balances would ____ M1 and ____ M2.

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

Question 42

Which of the following observations concerning money market mutual funds is not true?

A)They are interest-earning accounts provided by brokers.
B)They are considered to be near money.
C)Depositors are allowed to write checks against their accounts.
D)These funds are invested in long-term securities.

Question 43

A gold standard is:

A)a measurement of the importance of a good; it indicates high quality.
B)the basis for monetary exchange internationally.
C)an internationally recognized means for defining currency exchange rates.
D)a system where currency (e.g., the dollar) was defined as equivalent in value to a certain amount of gold.

Question 44

M2 equals M1 plus:

A)federal reserve.
B)fixed assets.
C)near moneys.
D)currency in circulation.

Question 45

A conversion of checking account balances into savings account balances would ____ M1 and ____ M2.

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

Question 46

Which of the following is not included in the M1 category?

A)Currency
B)Checkable deposits
C)Traveler's checks
D)Savings deposits

Question 47

An increase in demand deposits would ____ M1 and ____ M2.

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

Question 48

Gresham's Law states that:

A)"There's no such thing as a free lunch."
B)"Cheap money drives out dear money."
C)"A dollar is a dollar is a dollar."
D)"What goes up must come down."
E)"Dear money drives out cheap money."

Question 49

M1 includes:

A)cash and travelers' checks.
B)cash, checking account balances, and travelers' checks.
C)cash, travelers checks', and bank deposits
D)cash, checking account balances, and saving account balances.
E)cash, bank deposits, and money market accounts.

Question 50

An increase in currency in circulation would ____ M1 and ____ M2.

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

Question 51

Which of the following assets is most liquid?

A)funds in a savings account
B)a car
C)ten acres of land
D)a television

Question 52

The difference between M1 and M2 is significant.Which of the following best describes the difference?

A)M1 is nearly three times as large as M2.
B)M2 is made up mostly of demand and checkable transactions.
C)M2 is nearly four times as large as M1.
D)None of the above.

Question 53

Other things being equal, if you took money out of your demand deposit account and put it in a savings deposit account:

A)M1 would increase and M2 would increase.
B)M1 would increase but M2 would not change.
C)M1 would decrease and M2 would decrease.
D)M1 would fall but M2 would not change.

Question 54

Credit card balances are:

A)included in both M1 and M2.
B)included in M1 but not M2.
C)included in M2 but not M1.
D)not included in either M1 or M2.

Question 55

Other things being equal, if you took money out of your savings deposit account and put it in a demand deposit account:

A)M1 would increase and M2 would increase.
B)M1 would increase but M2 would not change.
C)M1 would decrease and M2 would decrease.
D)M1 would fall but M2 would not change.

Question 56

Checkable deposits are:

A)included in both M1 and M2.
B)included in M1 but not M2.
C)included in M2 but not M1.
D)not included in either M1 or M2.

Question 57

A decrease in savings deposits would ____ M1 and ____ M2.

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

Question 58

One point virtually all economists agree on when defining money is that:

A)money must be spendable.
B)money must be liquid.
C)money must be accepted as payment.
D)money must be easily transferable.
E)all of the above are correct.

Question 59

Which of the following is true?

A)Checking account deposits and time deposits constitute assets of banks.
B)M2 includes M1, plus saving accounts, time deposits (except for some large-denomination certificates of deposits), and money market mutual funds.
C)reserves times the required reserve ratio equals deposits.
D)Money is destroyed when banks make loans.

Question 60

When two forms of money are available, people prefer to:

A)hoard the form of money that is less valuable.
B)spend the form of money that is less valuable.
C)save the form of money that is less valuable.
D)invest the form of money that is less valuable.

Question 61

A bank receives a demand deposit of $5,000.The bank loans out $3,500 of this deposit and increases its excess reserves by $500.What is the required reserve ratio?

A)10%
B)20%
C)40%
D)60%
E)80%

Question 62

A bank's actual reserves can be calculated by:

A)multiplying its demand deposits by the required reserve ratio.
B)multiplying its excess reserves by the required reserve ratio.
C)subtracting its required reserves from its excess reserves.
D)adding its required reserves and its excess reserves.
E)subtracting its excess reserves from its required reserves.

Question 63

With the invention of banking, one important aspect of money was that:

A)individuals have no discretion over the money supply.
B)government lost all control over the money supply.
C)banks have some discretion over the money supply.
D)banks have full control over the money supply.
E)money was out of control.

Question 64

Loans are:

A)assets of banks, liabilities of borrowers.
B)liabilities of banks, assets of borrowers.
C)assets of banks and their borrowers.
D)liabilities of banks and their borrowers.

Question 65

When is a particular bank in a position to make new loans?

A)When required reserves equal actual reserves.
B)When required reserves exceed actual reserves.
C)When required reserves are less than actual reserves.
D)When required reserves equal excess reserves.

Question 66

If you go into a bank which faces a 10% required reserve ratio and borrow $1,000, the bank will ____ in your checking account at the bank.

A)add $1,000
B)subtract $1,000
C)add $5,000
D)subtract $5,000

Question 67

Which of the following is false?

A)While banks must meet their reserve requirements, they do not want to keep any more of their funds as additional reserves than necessary for safety, because cash assets do not earn any interest.
B)The combination of the Federal Deposit Insurance Corporation (FDIC) and the government's greater willingness to assist distressed banks has largely eliminated bank runs.
C)Banks earn interest on reserve account with the Federal Reserve, but not on cash on hand.
D)None of the above is false.

Question 68

Demand deposits are:

A)assets of banks, liabilities of depositors.
B)liabilities of banks, assets of depositors.
C)assets of banks and their depositors.
D)liabilities of banks and their depositors.

Question 69

Fractional reserve banking takes its name from the fact that:

A)banks hold only a fraction of their reserves at the bank itself.
B)banks keep only a fraction of total deposits on reserve.
C)banks lend only a fraction of their total reserves to customers.
D)banks reserve only a fraction of their activity for lending.
E)banks reserve only a fraction of their cash for teller usage.

Question 70

If individuals will no longer accept a currency, is it still considered to be money?

A)No, because one of the main characteristics necessary for something to serve as money is that it must be generally acceptable.
B)No, because of Gresham's Law.
C)Yes, because the government identifies it as legal tender.
D)Yes, because one of the main characteristics necessary for something to serve as money is that it must be generally acceptable.

Question 71

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.

Question 72

A bank receives a demand deposit of $2,000.The bank loans out $1,200 of this deposit and increases its excess reserves by $600.What is the required reserve ratio?

A)10%
B)30%
C)40%
D)60%
E)70%

Question 73

The predominant liability item for most banks is:

A)deposits.
B)bonds.
C)loans.
D)federal cash reserves.

Question 74

A bank receives a demand deposit of $3,000.The bank loans out $1,800 of this deposit and increases its excess reserves by $300.What is the required reserve ratio?

A)10%
B)30%
C)40%
D)60%
E)70%

Question 75

Suppose the XYZ bank has excess reserves of $4,000 and demand deposits of $80,000.If the required reserve ratio is 25 percent, the banks total reserves equal:

A)$16,000.
B)$20,000.
C)$24,000.
D)$84,000.
E)$96,000.

Question 76

Which of the following is false?

A)The Fed controls the supply of money, even though privately owned commercial banks actually create and destroy money by making loans.
B)With a 10% required reserve ratio, a $10,000 cash deposit in a bank would result in an increase in the bank's excess reserves by $1000.
C)With a 10% required reserve ratio, a $1,000 bond purchase by the Fed directly creates $1,000 in money in the form of bank deposits, and indirectly permits up to $9,000 in additional money to be created through the multiple expansion in bank deposits.
D)When the Fed sells government bonds, it will tend to cause a multiple contraction of bank deposits.

Question 77

U.S.government bonds held by commercial banks are:

A)government assets and commercial bank assets.
B)government assets and commercial bank liabilities.
C)government liabilities and commercial bank assets.
D)government liabilities and commercial bank liabilities.

Question 78

The largest asset item for most banks is:

A)cash.
B)bonds.
C)loans.
D)federal cash reserves.

Question 79

Which of the following backs our money supply?

A)The words "This note is legal tender."
B)The faith in the government
C)The faith in the government's ability to provide an instrument people will take in exchange for goods and services
D)Precious metals

Question 80

A bank may hold secondary reserves, such as U.S.government securities because:

A)they pay higher interest rates than deposits at the Fed, and are easily converted into cash assets.
B)they pay higher interest rates than deposits at the Fed, even though they are hard to convert assets.
C)they pay lower interest rates than deposits at the Fed, but are more easily converted into cash assets.
D)they pay lower interest rates than deposits at the Fed, and are hard to convert into cash assets.