Deck 17: Income, Poverty and Health Care

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Financial institutions are not very heavily leveraged, to prevent risk to the banking system.

Question 5

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

Question 6

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

Question 7

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

Question 8

Money is a more efficient store of value than wheat, especially when there is not rapid inflation.

Question 9

For society, more money means more wealth.

Question 10

Reserve requirements exist primarily to prevent bank failures.

Question 11

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

Question 12

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

Question 13

The larger the fraction of an investment financed by borrowing, the greater the potential for both profits and losses from that investment.

Question 14

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 15

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

Question 16

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

Question 17

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

Question 18

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

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

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

Question 21

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.

Question 22

The Open Market Committee oversees the money supply through the Fed's sale and purchase of government securities.

Question 23

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

Question 24

In the United States, monetary policy is the responsibility of the Federal Reserve Board of Governors and the Federal Open Market Committee.

Question 25

There are 12 Federal Reserve Banks in the Federal Reserve System.

Question 26

The chief function of the Federal Reserve is to be the federal government's tax collection institution.

Question 27

The interest rate that the Fed charges banks for borrowing funds is called the federal funds rate.

Question 28

Open market operations directly change the rate of interest at which banks can borrow funds from the Fed.

Question 29

A one percentage point change in the required reserve ratio would change the money supply by less than one percent, other things being equal.

Question 30

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

Question 31

If the Fed paid a higher interest rate to banks on their reserves at the Fed, excess reserves in the banking system would tend to fall.

Question 32

America's banking system is called a fractional reserve system.

Question 33

The Fed is part of the executive branch of the federal government.

Question 34

If the Fed paid a lower interest rate to banks on their reserves at the Fed, the money supply would tend to rise.

Question 35

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

Question 36

The problem of double coincidence of wants is associated with:

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

Question 37

Most of the key decisions of the Federal Reserve are actually made by its Federal Open Market Committee.

Question 38

There is a positive correlation between a nation's average annual inflation and the degree of independence of its central bank.

Question 39

Changing reserve requirements is the most important method the Federal Reserve uses to change the supply of money.

Question 40

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.

Question 41

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.

Question 42

Paper money in the U.S. is:

A)​fiat money.
B)​more than half of M2.
C)​only partially backed by gold and silver in Fort Knox.
D)​convertible into specie (gold or silver) at the holder's request.

Question 43

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.

Question 44

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 45

Which of the following assets is most liquid?

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

Question 46

Which of the following is not a form of money?

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

Question 47

From a new deposit in a checking account potential money creation is:

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

Question 48

One reason why gold and silver coins have historically served as money is that:

A)​they are easily portable.
B)​they can be made of uniform size and quality.
C)​they can be divided if necessary for low prices.
D)​all of the above are correct.

Question 49

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)​all of the above are correct.

Question 50

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.

Question 51

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 52

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 53

One major problem with some commodity monies is that:

A)​to be useful, money must be divisible.
B)​to be useful, money must be storable.
C)​to be useful, money must be of uniform quality.
D)​all of the above are problems with commodity monies.

Question 54

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 that people will take it in exchange for goods and services
D)​Precious metals

Question 55

The idea behind money as a standard of value 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)​prices quoted in money terms.

Question 56

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

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

Question 57

"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.

Question 58

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.

Question 59

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 deposits.
C)​M2 is substantially larger than M1.
D)​None of the above.

Question 60

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

A)​unit of account
B)​means of deferred payment
C)​encouraging people to barter
D)​medium of exchange

Question 61

The process of money creation can be reversed:

A)​when a person pays a loan back to a bank.
B)​when the government passes a law against it.
C)​when customers begin to deposit money into banks.
D)​when loans are extended to customers.

Question 62

A depositor cannot directly write checks against:

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

Question 63

If the reserve requirement is 15 percent and a customer makes a new cash deposit of $50,000, how much new excess reserves are created?

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

Question 64

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 reserve only a fraction of their activity for lending.
D)​all of the above

Question 65

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.

Question 66

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 67

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 68

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 69

Can bankers create money?

A)​No, they do not have this power.
B)​No, unless they have a special charter which permits it.
C)​Yes, through multiple deposit creation.
D)​Yes, by printing checks for customers.

Question 70

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 71

The largest asset item for most banks is:

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

Question 72

The predominant liability item for most banks is:

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

Question 73

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.

Question 74

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 75

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 76

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 77

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 78

Rapid inflation makes holding a large amount of money:

A)​wiser, because you will generally need more and more to buy the goods and services you want.
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.

Question 79

A single bank is severely limited in its ability to create money because:

A)​the FDIC will not permit it to create money unless the Resolution Trust Corporation guarantees the loans.
B)​loan recipients usually take the proceeds of the loan in cash.
C)​the funds loaned probably will be deposited in another bank.
D)​recent federal legislation prohibits banks from creating money except to finance international trade.

Question 80

An important effect of fractional reserve banking is that:

A)​bankers' choices about how much to lend can affect the money supply.
B)​the commercial banking system has complete control over total reserves.
C)​bankers always turn every dollar of excess reserves into loans.
D)​a new bank deposit allows a bank to extend loans of the same amount to borrowers.