Deck 10: Money and Banking

Question 1

Perishable goods such as tomatoes and milk are never used as a form of money, primarily because they cannot function as:

A)a store of purchasing power.
B)a means of payment.
C)a standard of deferred payment.
D)a medium of exchange.
E)a unit of account.

Answer 1

a store of purchasing power.

Question 2

In the United States, the different categories of money supply measurement are based on:

A)the elasticity of money.
B)the liquidity of money.
C)the amount of purchasing power provided.
D)the reserve requirements in the banking system.
E)the velocity of money.

Answer 2

the liquidity of money.

Question 3

Using money as a medium of exchange:

A)requires people to match goods wanted with goods available.
B)inhibits economic transactions.
C)reduces the need for barter in the economy.
D)reduces the need for a banking system.
E)reduces the range of feasible exchanges in the economy.

Answer 3

reduces the need for barter in the economy.

Question 4

A scalper reselling Super Bowl tickets is an example of money being used as:

A)a store of value.
B)a unit of account.
C)an illegal asset.
D)a standard of deferred payment.
E)a medium of exchange.

Question 5

Which of the following is a reason why the Japanese yen is considered money?

A)It is generally accepted as a medium of exchange in all countries of the world.
B)Its value over the years has varied significantly.
C)Goods in Japan are priced in terms of the yen, the most liquid asset of the economy.
D)It is backed by silver.
E)It is an asset that lacks liquidity.

Question 6

Which of the following would be counted as part of M1?

A)Money market deposit accounts
B)Savings deposits
C)Mutual funds
D)Traveler's checks
E)Time deposits

Question 7

Which of the following is a transactions account?

A)Currency
B)Travelers' checks
C)A savings account
D)A credit card balance
E)A demand deposit

Question 8

The concept of double coincidence of wants refers to the fact that:

A)for a financial asset to be exchanged, it needs to be priced correctly.
B)for barter to take place, both parties have to want what the other party has.
C)people can never exactly agree on an equilibrium price.
D)different people value goods differently.
E)for barter to take place, both parties must have equal quantities of the same good.

Question 9

As a standard of deferred payment, money can be used to:

A)express debt obligations in the form of purchasing power.
B)foster barter activity.
C)facilitate exchanges of goods and services.
D)achieve a common denominator for measuring the value of goods and services.
E)ascertain the liquidity of financial assets.

Question 10

Credit can be described as:

A)money used as a standard of deferred payment.
B)savings made available to borrowers.
C)fiduciary currency.
D)a form of liquid asset.
E)bank loans converted into commodity money.

Question 11

An asset that can easily be exchanged for goods and services is referred to as:

A)an intangible asset.
B)wealth.
C)a liquid asset.
D)a fixed asset.
E)an immovable asset.

Question 12

The measure of the money supply that includes the fewest types of assets:

A)is M4.
B)is M2.
C)is M3.
D)is M1.
E)are both M1 and M3.

Question 13

If Brazil experienced a period of rapid and unexpected inflation, causing Brazilians to lose confidence in the local currency (real)as a store of value, which of the following would be least likely to occur?

A)The value of the Brazilian real would depreciate on the foreign exchange market.
B)Foreign currency would be used as a substitute for the real.
C)The real would be used as a store of value in other countries
D)Brazilians would save less.
E)The purchasing power of the real would decrease.

Question 14

Identify the correct definition of liquidity.

A)The availability of credit in the form of money.
B)The ability of money to be a store of value.
C)The difference between real and nominal money values.
D)The ability of an asset to be easily converted into money.
E)The ability of a precious metal to be converted into spendable bank notes.

Question 15

The use of foreign money instead of domestic money when the domestic economy has a high rate of inflation is called _____.

A)currency depreciation
B)currency substitution
C)capital flight
D)currency devaluation
E)currency trade

Question 16

The use of money as a unit of account:

A)discourages specialization and division of labor.
B)inhibits the exchange of goods and services.
C)makes it difficult to compare the relative values of goods and services.
D)lowers information costs relative to barter.
E)relies on the existence of a double coincidence of wants.

Question 17

Which of the following assets would be considered least liquid?

A)A silver coin
B)An antique automobile
C)A U.S.savings bond
D)A debit card
E)A certificate of deposit

Question 18

Which of the following properties should be satisfied by a commodity to be considered as money?

A)Scarce and rare
B)Perishable
C)Indivisible
D)Unpredictable in value
E)Homogenous in nature

Question 19

Money fails to act as a store of value when:

A)it is no longer backed by gold.
B)the inflation rate is very high.
C)the goods produced in an economy are indivisible.
D)the economy goes into a recession.
E)coins are replaced by paper money.

Question 20

An asset is said to be illiquid when:

A)it lacks purchasing power.
B)it cannot act as a store of value.
C)it is an illegal tender.
D)it cannot be readily exchanged for goods.
E)it cannot be used to settle debts.

Question 21

Which of the following is not true about a special drawing right (SDR)?

A)The SDR is a composite currency.
B)The value of the SDR is an average of the values of the currencies of the major industrial countries.
C)The SDR was created in 1980 by the World Bank.
D)The SDR is an international reserve asset.
E)The SDR is used to settle international debts.

Question 22

Assume that an American investor decides to buy one-year Swiss bonds that are denominated in Swiss francs and pay 2 percent annual interest.For this purpose, $10, 000 is exchanged into Swiss francs at an exchange rate of $1 = 2Fr to buy the bonds.How many dollars will the investor have after one year if the exchange rate is then $1 = 1.5Fr?

A)$10, 000
B)$10, 200
C)$15, 300
D)$13, 600
E)$7, 650

Question 23

Which of the following can be categorized as a composite currency?

A)Italian lira
B)European Currency Unit
C)Pound
D)Australian dollar
E)Danish Krone

Question 24

A composite currency whose value is the average of the value of the U.S.dollar, the Japanese yen, the euro, and the British pound is known as:

A)special drawing right.
B)social direct response.
C)single directive response.
D)scarce diligence resource.
E)scarce delivery resource.

Question 25

Which of the following is true of other checkable deposits?

A)These are checking account deposits at commercial banks and do not pay any interest.
B)They are accounts at financial institutions that pay interest and give the depositor check-writing privileges.
C)They comprise solely of demand deposits at mutual savings banks.
D)They are not included in the M1 money supply.
E)They are savings deposits that earn interest at savings and loan associations.

Question 26

According to Gresham's Law:

A)money with relatively high intrinsic value will be used for transactions.
B)money with relatively low intrinsic value will be used for transactions.
C)money with relatively high intrinsic value will cause inflation.
D)money with relatively low intrinsic value will cause inflation.
E)inflation increases the intrinsic value of money.

Question 27

The table given below shows the components of money supply in an economy. Table 12.1
Refer to Table 12.1 and calculate the value of M2.

A)$1, 145
B)$1, 325
C)$1, 750
D)$2, 550
E)$2, 815

Question 28

Calculate the dollar price of a German automobile worth 40, 000 euros, if the dollar per euro exchange rate is 1.5.

A)$41, 500
B)$26, 700
C)$60, 000
D)$50, 000
E)$38, 500

Question 29

Which of the following is true of a certificate of deposit?

A)They are accounts at savings and loan associations.
B)The funds in this deposit account are not given out in the form of loans.
C)The funds in this account must be deposited for a specified period of time.
D)The value of the deposit should be more than $100, 000.
E)The deposits earn very little or no interest.

Question 30

Under Gresham's law, the term bad money refers to:

A)money with no face value.
B)illegal tender.
C)devalued money.
D)commodity money.
E)money with low commodity value.

Question 31

Which of the following is true of international reserve currencies?

A)They are used for international exchange of goods and services.
B)They are used to settle international debt.
C)They are used for international bookkeeping.
D)They are held for government investment abroad.
E)They are created for international stock market trading.

Question 32

The Depository Institutions Deregulation and Monetary Control Act passed by the Congress in 1980 led to:

A)the complete removal of thrift institutions.
B)increased competition among financial institutions.
C)the formation of large number of savings and loan associations.
D)privatization of all financial institutions in the U.S.
E)the complete removal of credit unions.

Question 33

Which of the following is true of the European Currency Unit?

A)It was used by the European nations as a medium of exchanging goods and services.
B)It was an accounting entry that was transferred between two European nations.
C)It was replaced by the euro in the early 1980s.
D)It was denominated in the British pound.
E)It was a primary international reserve asset of most of the nations across the world.

Question 34

_____ are accounts at the U.S.commercial banks that combine an interest-bearing savings account with a noninterest bearing checking account.

A)Automatic transfer system accounts
B)Negotiable orders of withdrawal
C)Eurodollar deposits
D)Certificates of deposit
E)Credit union share draft accounts

Question 35

The thrift institutions:

A)were nonprofit banking institutions.
B)were owned by the Federal Reserve.
C)historically offered only savings accounts, not checking accounts.
D)controlled the U.S.monetary policy prior to the establishment of the Federal Reserve.
E)were monitored by the Federal Deposit Insurance Corporation.

Question 36

The table given below shows the components of money supply in an economy. Table 12.1
Refer to Table 12.1 and calculate the value of M1.

A)$550 million
B)$570 million
C)$780 million
D)$1, 125 million
E)$1, 145 million

Question 37

Commodity money is money that:

A)has no value as a commodity.
B)is not backed by gold or silver and is not a legal tender.
C)may go out of circulation with an increase in its intrinsic value.
D)always has a face value greater than the intrinsic value.
E)is solely used in barter exchanges.

Question 38

The primary international reserves in most countries is:

A)silver.
B)gold.
C)the euro.
D)the U.S.dollar.
E)the Japanese yen.

Question 39

U.S.bank notes have no intrinsic value and yet are widely accepted as a medium of exchange.This is a result of:

A)Gresham's law.
B)the use of money as a store of value.
C)the fiduciary monetary system.
D)the valuation of currency as commodity money.
E)the gold and silver reserves of the Federal government that backs the currency.

Question 40

The M2 measure of money supply includes all of the following, except:

A)demand deposits.
B)U.S.government securities.
C)savings deposits.
D)money market deposits.
E)certificates of deposit.

Question 41

The Gramm-Leach-Bliley Act (GLBA), passed by the U.S.Congress in the year 1999, allows commercial banks to:

A)operate in all foreign countries.
B)open new branches in Cuba.
C)expand their business into other areas of finance, including insurance and selling securities.
D)raise reserve requirements for other financial institutions.
E)eliminate unit banking.

Question 42

Which of the following is the most popular instrument for financing Islamic investments?

A)Murabaha
B)Mortgage
C)Microfinance
D)Riba
E)Mudaraba

Question 43

Which of the following statements applies to international banking facilities (IBFs)?

A)IBFs are subject to U.S.interest rate regulations.
B)IBFs are located all over the world.
C)IBFs do not require FDIC deposit insurance.
D)IBFs offer a higher interest rate spread than normal U.S.banks.
E)IBFs allow European residents to participate in the American stock exchanges.

Question 44

Which of the following is true of offshore banking?

A)The offshore banks are mainly concentrated in the European Union and the transactions are generally denominated in euro.
B)The offshore banks operate with costly restrictions and pay higher taxes than the domestic banks.
C)The offshore banks usually charge higher rates of interest on consumption loans than the domestic banks.
D)Offshore banks in the U.S.are able to offer a higher rate on dollar deposits and a lower rate on dollar loans than their domestic competitors.
E)Offshore banking transactions are considerably less risky than domestic transactions as they are closely monitored by the government of the nations in which they operate.

Question 45

Which of the following facilities give bank customers access to services over a much wider geographic area than any single bank's branches can cover?

A)Traveler's checks
B)Saving account checks
C)ATM networks
D)Demand drafts
E)Certificates of deposit

Question 46

In fractional reserve banking:

A)bank assets are less than bank reserves.
B)only a fraction of total deposits are bank reserves.
C)only a fraction of required reserves are investor assets.
D)bank loans are less than bank reserves.
E)a fraction of bank reserves needs to be backed by gold.

Question 47

People in developing countries may want to participate in a rotating savings and credit association (ROSCAS)because:

A)such associations are part of the black market and they offer attractive returns.
B)such associations promise a guaranteed return unlike other banking institutions.
C)such associations allow participating individuals to invest their savings abroad.
D)such associations allow every member but the last to receive funds faster than they could save on their own.
E)most governments encourage it.

Question 48

The interest rate charged on a Eurodollar loan will be:

A)higher than the interest rate charged on a U.S.loan.
B)lower than the interest rate charged on a U.S.deposit.
C)essentially equal to the interest rate charged on a Eurodollar deposit.
D)lower than the London interbank offer rate.
E)lower than the interest rate charged on a U.S.loan.

Question 49

Which of the following is true of International Banking Facilities (IBFs)in the U.S.?

A)IBFs were legalized by the Federal Reserve Board in 1970.
B)IBFs are bookkeeping systems set up in existing bank offices of the U.S.to record international banking transactions
C)IBFs are "shell" bank branches of U.S.banks in the Caribbean.
D)Loans extended by the IBFs are subject to reserve requirements and interest rate regulations.
E)IBFs are allowed to extend loans to the residents and businesses of the United States and not to the nonresidents.

Question 50

A Eurodollar loan is a(n):

A)ECU-denominated loan issued by a U.S.bank.
B)dollar-denominated loan payable to a European bank.
C)ECU-denominated loan that is subject to banking regulations in both the United States and Europe.
D)dollar-denominated loan issued outside the U.S.domestic banking system.
E)loan by the European Community to the U.S.government.

Question 51

A depository institution's profit is derived from the difference between:

A)the interest rate it receives on loans and the rate it receives on investments in government securities.
B)the interest rate it pays on deposits and the rate it receives on loans.
C)its primary deposit and its derivative deposit.
D)its assets and its liabilities.
E)the interest rate it receives on domestic loans and the rate it receives on Eurodollar loans.

Question 52

The main source of earning profits for banks is:

A)government securities.
B)savings accounts.
C)reserves.
D)loans.
E)checking account fees.

Question 53

Which of the following is true of the banks that operate under Islamic law?

A)Islamic banks are not allowed to lend out to private firms.
B)Islamic banks do not function as intermediaries between borrowers and lenders.
C)Islamic Banks are not allowed to offer checking accounts or traveler's checks.
D)Islamic banks are required to offer trade-related services free of cost.
E)Islamic banks do not charge interest on loans or pay interest on deposits.

Question 54

In the 1980s, some states in the United States had significantly more bank failures than other states.What industries did the former states depend on heavily?

A)Oil and agriculture
B)Tourism
C)Defense and aeronautics
D)Construction and textiles
E)The computer industry

Question 55

The balance sheet of a depository institution lists:

A)loans to private individuals as assets.
B)excess reserves as liabilities.
C)checkable deposits as liabilities.
D)required reserves as liabilities.
E)loans from the central bank as assets.

Question 56

Which of the following is true of the FDIC?

A)It controls the operations of all commercial banks in the U.S.
B)It exists only in the countries of North America and Europe.
C)It covers depositors against losses up to $500, 000 in a bank account.
D)It is a federal agency that insures bank deposits in commercial banks.
E)It is a financial institution that uses cost-plus pricing.

Question 57

The _____ account for about 60 percent of deposit and loan activity in the Eurocurrency market.

A)ECUs
B)Europounds
C)Euroyens
D)Euros
E)Eurodollars

Question 58

Commercial banks act as middlemen between savers and borrowers, therefore they are called _____.

A)lenders of the last resort
B)financial intermediaries
C)banker's banks
D)thrift institutions
E)profitable institutions

Question 59

When do we say that a bank is loaned up?

A)When its debtors don't want to repay
B)When it is susceptible to a bank panic
C)When its excess reserves equal zero
D)When it is part of a fractional reserve banking system
E)When its required reserves are equal to its excess reserves

Question 60

Which of the following is true of unit banking?

A)It is the dominant form of banking in the United Sates.
B)It occurs when national banks open interstate branch offices.
C)It implies that every financial institution should maintain its account with the Federal Reserve.
D)It occurs when a bank is not allowed to operate in more than one location.
E)It refers to the monopolization of the banking industry.

Question 61

Assume that the reserve requirement is 10 percent.A $1, 000 cash deposit into a savings account will immediately increase the bank's required reserves by _____.

A)$10, 000.
B)$500.
C)$100.
D)$1, 500.
E)$10.

Question 62

Suppose the reserve requirement is 10 percent and a person deposits $1, 500 in a local bank.That single local bank can now create a maximum of:

A)$150 in additional money by lending $150.
B)$15, 000 in additional money by lending $15, 000.
C)$1, 500 in additional money by lending $1, 500.
D)$1, 350 in additional money by lending $1, 350.
E)$135 in additional money by lending $135.

Question 63

If a bank's required reserves equal $270, 000, no excess reserves are held, and the reserve requirement is equal to 18 percent, what is the value of the bank's total deposits?

A)$900, 000
B)$1, 500, 000
C)$48, 000
D)$486, 000
E)$150, 000

Question 64

Table 12.2 Refer to Table 12.2.Assume a reserve requirement of 10 percent.The maximum amount of new loans the bank could extend is _____.

A)$500
B)$1, 000
C)$2, 000
D)$3, 000
E)$4, 000

Question 65

Table 12.2 Refer to Table 12.2.If the reserve requirement is 12 percent and the bank receives a new deposit of $10, 000, then required reserves will increase by _____.

A)$3, 600
B)$2, 400
C)$2, 600
D)$2, 800
E)$1, 200

Question 66

Assume that the reserve requirement is 25 percent and that the amount of checkable deposits in Federal Bank is $200.If the bank has loaned out $120, then the bank's excess reserves must equal:

A)$0.
B)$25.
C)$30.
D)$80.
E)$225.

Question 67

Excess reserves are equal to:

A)total reserves plus required reserves.
B)cash plus required reserves.
C)total reserves minus cash.
D)total reserves minus required reserves.
E)required reserves minus total reserves.

Question 68

The table given below records the amount of new deposits, the value of required reserves, and total amount loaned out by Banks 1, 2, and 3. Table 12.3
Refer to Table 12.3.What is the reserve requirement?

A)11 percent
B)90 percent
C)10 percent
D)9 percent
E)19 percent

Question 69

If a banking system receives an initial deposit of $150, 000 and the reserve requirement is 40 percent, the total deposit in the banking system (including the initial deposit)can be expanded by _____.

A)$375, 000
B)$150, 000
C)$60, 000
D)$250, 000
E)$450, 000

Question 70

Assume that the reserve requirement is 10 percent.If a bank has total deposits of $80 million, then the required reserves must equal:

A)$80 million.
B)$12 million.
C)$50 million.
D)$8 million.
E)$10 million.

Question 71

Suppose the National Bank has total cash reserves of $2, 000 and has $5, 000 in total deposits.If its total excess reserves are $1, 250, then the reserve requirement is equal to:

A)25 percent.
B)15 percent.
C)10 percent.
D)5 percent.
E)20 percent.

Question 72

In the United States, the reserve requirement is set by the:

A)Bank of America.
B)federal government.
C)U.S.Treasury.
D)Federal Reserve Board.
E)Department of Commerce.

Question 73

Table 12.2 Refer to Table 12.2.With a reserve requirement of 20 percent, the bank has excess reserves of _____.

A)$5, 000
B)$3, 000
C)$2, 000
D)$1, 000
E)$2, 500

Question 74

The table given below records the amount of new deposits, the value of required reserves, and total amount loaned out by Banks 1, 2, and 3. Table 12.3
Refer to Table 12.3.What is the total increase in the money supply created in the banking system as a result of the initial deposit of $10, 000 in Bank 1?

A)$10, 000
B)$27, 100
C)$100, 000
D)$90, 000
E)$20, 000

Question 75

If a bank has deposits worth $800, 000, total reserves worth $900, 000, and the reserve ratio of 0.20, what is the value of excess reserves?

A)$620, 000
B)$1, 000, 000
C)$1, 160, 000
D)$740, 000
E)$160, 000

Question 76

For a depository institution, reserves are:

A)assets on the balance sheet.
B)loans to individuals and businesses.
C)borrowings from the central bank.
D)liabilities it owes to customers.
E)checkable deposits.

Question 77

Table 12.2 Refer to Table 12.2.If excess reserves equal $2, 000, what must the reserve requirement be equal to?

A)3 percent
B)10 percent
C)15 percent
D)20 percent
E)25 percent

Question 78

Suppose Bank X is holding total cash reserves of $32, 000 on deposits of $90, 000.If the reserve requirement is 15 percent, then the excess reserves held by this bank is:

A)$27, 200.
B)$58, 000.
C)$4, 800.
D)$13, 200.
E)$18, 500.

Question 79

The reciprocal of the reserve requirement is called the:

A)spending multiplier.
B)tax multiplier.
C)lending multiplier.
D)deposit expansion multiplier.
E)excess reserve multiplier.

Question 80

What is the immediate effect when Bank A lends $1, 000 to a local business?

A)The money supply increases by $1, 000
B)The money supply decreases by $1, 000
C)Bank A's liability increases by $1, 000
D)Bank A's excess reserves increase by $1, 000
E)Bank A's demand deposits decrease by $1, 000