Deck 16: Money and Banking

Question 1

Which of the following is not a function of money?

A) medium of exchange
B) factor of production
C) store of value
D) unit of account

Answer 1

B

Question 2

By providing a standard measure for prices and economic comparisons, money serves which of the following functions?

A) factor of production
B) unit of account
C) medium of exchange
D) store of value

Answer 2

B

Question 3

By allowing people to carry purchasing power over time, money acts as a:

A) store of value.
B) unit of account.
C) factor of production.
D) medium of exchange.

Answer 3

A

Question 4

During times of _____, cash acts as a poor:

A) deflation; store of value.
B) deflation; unit of account.
C) inflation; store of value.
D) inflation; unit of account.

Question 5

An economy uses coins made of gold as money. This is an example of:

A) fiat money.
B) gold standard.
C) commodity money.
D) commodity standard.

Question 6

Which of the following statements is NOT true?

A) Under a system of commodity money, the money must be made of precious metals.
B) Under a gold standard, money can be exchanged for an established amount of gold.
C) Fiat money has value because the government says it does.
D) Both the gold standard and commodity money system deter high rates of inflation.

Question 7

The gold standard refers to a system where money:

A) is made from gold.
B) has value because the government says it does.
C) is valued in terms of gold and can be exchanged for it.
D) can be exchanged for treasury bonds.

Question 8

Fiat money refers to a system where money:

A) is made from precious metals.
B) can be exchanged for a fixed amount of precious metals.
C) has value because the government says it does.
D) can be exchanged for treasury bonds.

Question 9

Which of the following is NOT considered to be an ideal characteristic of money?

A) tangibility
B) divisibility
C) portability
D) uniformity

Question 10

_____ are not considered to be ideal characteristics of money.

A) Tangibility and portability
B) Rarity and portability
C) Tangibility and rarity
D) Rarity and uniformity

Question 11

Which of the following statements is NOT true?

A) Digital systems of payments cannot be considered money because they are not tangible.
B) Fiat money has value because the government says it does.
C) Under a gold standard, money can be exchanged for a fixed amount of gold.
D) Commodity money need not be made up only of precious metals.

Question 12

Under the current U.S monetary system, _____ are not considered money.

A) credit cards and checks
B) credit cards and coins
C) coins and paper currency
D) coins and checks

Question 13

Under the current U.S. monetary system, _____ are both considered types of money.

A) credit cards and checks
B) coins and paper currency
C) credit cards and coins
D) checks and paper currency

Question 14

Under the current U.S monetary system, currency is distributed by the:

A) commercial banks.
B) Treasury Department.
C) Federal Reserve.
D) investment banks.

Question 15

Which of the following statements is true?

A) Because credit cards can be used as a medium of exchange, they are also considered money.
B) Fiat money is money that is backed by a commodity other than gold.
C) Because checks just enable the transfer of funds from one bank account to another, they are not considered money.
D) Under a gold standard, all coins in the economy must be made of gold.

Question 16

Commodity money refers to money that:

A) is comprised of only precious metals.
B) has value apart from its use as money.
C) has been decreed by the government to have value.
D) can be exchanged for a fixed amount of precious commodity.

Question 17

Money that has value apart from its use as money is known as ______, while money that has value only because the government says it is valuable is known as:

A) the gold standard; paper currency.
B) commodity money; paper currency.
C) fiat money; commodity money.
D) commodity money; fiat money.

Question 18

According to the principle of time value of money:

A) money loses value over time because of inflation.
B) money has diminishing marginal utility.
C) people prefer a given amount of money sooner than later.
D) people prefer more money to less money.

Question 19

Which of the following is NOT included in the measure M1?

A) currency in bank vaults
B) currency held by individuals and firms
C) checkable deposits
D) traveler's checks

Question 20

Which of the following is NOT included in the measure M1?

A) currency held by individuals and firms
B) currency held by the Federal Reserve
C) traveler's checks
D) checkable deposits

Question 21

Which of the following is included in the measure M1?

A) currency held by the Federal Reserve
B) currency held by banks in their vaults
C) traveler's checks
D) saving account deposits

Question 22

Which of the following is included in the measure M1?

A) checks written on checking account deposits
B) traveler's checks
C) currency at bank vaults
D) currency held in savings account deposits

Question 23

Which of the following is NOT included in the measure M2?

A) retail money market mutual funds
B) checking account deposits
C) savings account deposits
D) institutional money market mutual funds

Question 24

If an individual moves money from a checking account into a savings account, then the value of M1 _____, and the value of M2:

A) increases; does not change.
B) does not change; increases.
C) decreases; does not change.
D) does not change; decreases.

Question 25

If an individual moves money from savings account to retail money market mutual fund, then the value of M1 _____, and the value of M2:

A) decreases; does not change.
B) does not change; does not change.
C) does not change; decreases.
D) decreases; decreases.

Question 26

If an individual moves money from a saving account to a checking account deposit, then the value of M1 _____, and the value of M2:

A) increases; deceases.
B) increases; does not change.
C) decreases; increases.
D) decreases; does not change.

Question 27

If an individual converts cash into a checking account deposit, then the value of M1 _____, and the value of M2:

A) does not change; does not change.
B) does not change; decreases.
C) increases; does not change.
D) increases; decreases.

Question 28

If an individual converts part of his or her cash into a checking account deposit and another part into a saving account deposit, then the value of M1 _____, and the value of M2:

A) decreases; does not change.
B) does not change; increases.
C) increases; does not change.
D) decreases; increases.

Question 29

Which of the following are not included in thrift institutions?

A) investment banks
B) credit unions
C) savings banks
D) savings and loans associations

Question 30

In a fractional banking system, banks:

A) are owned by the depositors.
B) can lend out all but a fraction of their deposits.
C) are not allowed to make mortgage loans.
D) cannot hold any excess reserves.

Question 31

The percentage of deposits that banks cannot lend out is known as:

A) excess reserves.
B) the money multiplier.
C) the deposit multiplier.
D) the reserve requirement.

Question 32

Suppose that the reserve requirement is 10 percent and a commercial bank has $500 million in deposits. In this case, the required reserves are _____ million, and the maximum amount the banks can lend out is _____ million.

A) $50; $50
B) $10; $490
C) $50; $450
D) $100; $400

Question 33

Suppose that a bank receives $100 in deposits and the maximum it can lend from that is $80. In this case, the reserve requirement for the bank is _____ percent.

A) 5
B) 10
C) 15
D) 20

Question 34

Suppose that a bank receives $100 in deposits and the reserve requirement is 10 percent. In this case, the maximum amount that this bank can lend out from the deposit is:

A) $10.
B) $50.
C) $90.
D) $100.

Question 35

Suppose that the reserve requirement for a bank is 10 percent. The bank receives a deposit, and the maximum it can lend from it is $81. We can conclude that the bank received a deposit of _____ and the required reserves are:

A) $100; $10.
B) $90; $9.
C) $100; $19.
D) $90; $10.

Question 36

Suppose that a bank receives a $500 deposit and the required reserves are $10. In this case, the excess reserves are _____, and the reserve requirement is _____ percent.

A) $450; 10
B) $490; 2
C) $450; 2
D) $490; 10

Question 37

Suppose that the reserve requirement for banks is 5 percent. A bank receives a deposit of which $25 are required reserves. Therefore, the total deposit received by the bank is ______, and the excess reserves are:

A) $100; $75.
B) $300; $275.
C) $400; $375.
D) $500; $475.

Question 38

Suppose that a bank receives a $500 deposit and holds $25 of that as required reserves. In this case, the reserve requirement is _____ percent, and the excess reserves are:

A) 5; $475.
B) 10; $450.
C) 15; $425.
D) 20; $400.

Question 39

Financial institutions whose primary focus is to provide mortgage loans are known as:

A) investment banks.
B) savings and loans associations.
C) credit unions.
D) savings banks.

Question 40

The maximum amount of money that can be created using $1 of excess reserves is known as the:

A) required reserve multiplier.
B) spending multiplier.
C) money multiplier.
D) excess reserve multiplier.

Question 41

If the reserve requirement on banks is 10 percent, then the money multiplier for the economy is:

A) 1.
B) 10.
C) 15.
D) 20.

Question 42

Assume that individuals hold no cash and banks hold no excess reserves. If the reserve requirement on banks is 10 percent, then a $1 increase in excess reserves will lead to a _____ increase in the money supply.

A) $1
B) $10
C) $100
D) $1,000

Question 43

Assume that individuals hold no cash and banks hold no excess reserves. The Federal Reserve buys $100 worth of Treasury securities from a bank, and the money supply increases by $500. In this case, the money multiplier is _____, and the reserve requirement is _____ percent.

A) 10; 10
B) 5; 10
C) 10; 20
D) 5; 20

Question 44

Assume that individuals hold no cash and banks hold no excess reserves. The Federal Reserve buys $100 worth of Treasury securities from a bank, and the money multiplier is 5. In this case, the reserve requirement on banks is _____ percent, and the total money supply in the economy will increase by:

A) 10; $500.
B) 10; $1,000.
C) 20; $500.
D) 20; $1,000.

Question 45

Assume that individuals hold no cash and banks hold no excess reserves. The Federal Reserve buys $500 worth of government securities from a bank, and the reserve requirement on banks is 5 percent. In this case, the money multiplier is _____, and the overall increase in money supply because of Federal Reserve's action will be:

A) 10; $5,000.
B) 20; $5,000.
C) 10; $10,000.
D) 20; $10,000.

Question 46

Assume that individuals hold no cash and banks hold no excess reserves. The Federal Reserve buys Treasury securities from a bank, and the reserve requirement on banks is 10 percent. As a result of the Federal Reserve's action, the money supply in the economy increases by $5,000. Therefore, the Federal Reserve must have bought _____ of securities from the bank.

A) $100
B) $500
C) $1,000
D) $1,500

Question 47

Assume that individuals do not hold any cash and the banks do not hold any excess reserves. If the Federal Reserve buys $100 of government securities and the money supply increases by $10,000, then the reserve requirement on banks is _____ percent, and the money multiplier is:

A) 10; 10.
B) 1; 10.
C) 10; 100.
D) 1; 100.

Question 48

Assume that individuals hold cash and banks hold some excess reserves. If the reserve requirement is 10 percent and the Federal Reserve buys $100 of Treasury securities from a bank, then money supply will:

A) increase by less than $1,000.
B) increase by more than $1,000.
C) decrease by less than $1,000.
D) decrease by more than $1,000.

Question 49

Assume that individuals hold cash and the banks hold excess reserves. If the reserve requirement is 1 percent and the Federal Reserve buys $10 of Treasury securities from a bank, then money supply will _____ than $1,000.

A) increase by more
B) increase by less
C) decrease by more
D) decrease by less

Question 50

Suppose that the reserve requirement on banks is 10 percent. If the Federal Reserve buys $100 of Treasury securities and the money supply increases by $1,000, then we can conclude that:

A) the money multiplier is 10.
B) banks hold some excess reserves.
C) individuals hold cash.
D) the money multiplier is more than 10.

Question 51

Which of the following institutions insures the deposits in commercial banks, savings banks, and savings and loans institutions?

A) Federal Deposit Insurance Corporation
B) Federal Reserve
C) United States Treasury
D) National Credit Union Insurance Corporation

Question 52

The difference between a savings account deposit and a certificate of deposit at a commercial bank is that:

A) a savings account pays interest and a certificate of deposit does not.
B) a savings account does not pay interest and a certificate of deposit does.
C) both pay interest but a savings account ties up the money for a preset period of time.
D) both pay interest but a certificate of deposit ties up the money for a preset period of time.

Question 53

The idea that an individual is willing to accept $80 today instead of $90 two years from now is known as:

A) the diminishing marginal utility of money.
B) decreasing returns to money.
C) increasing returns to money.
D) the time value of money.

Question 54

Which of the following is not considered money?

A) checking account deposits
B) credit cards
C) traveler's checks
D) currency

Question 55

Under the current U.S monetary system, ______ are not considered to be money.

A) checks and checking account deposits
B) debit cards and credit cards
C) credit cards and checking account deposits
D) traveler's checks and credit cards

Question 56

Under the current U.S. monetary system, _____ are not considered to be money.

A) checks and debit cards
B) checking account deposits and debit cards
C) checks and currency
D) debit cards and traveler's checks

Question 57

Which of the following is the most liquid form of money?

A) saving account deposits
B) certificate of deposits
C) currency
D) retail money market mutual funds

Question 58

Which of the following types of loans are the primary focus of savings and loan associations (S&Ls)?

A) education
B) mortgage
C) commercial
D) personal

Question 59

Which of the following institutions is owned entirely by its members, who are also their customers?

A) commercial banks
B) credit unions
C) investment banks
D) saving and loan associations

Question 60

A repeal of which of the following acts allowed commercial banks to engage in the buying and selling of stocks and insurance?

A) Glass-Steagall Act
B) Gramm-Leach-Bliley Act
C) Dodd-Franck Act
D) Federal Reserve Act

Question 61

Which of the following will lead to an increase in the value of the money multiplier?

A) a decrease in the amount of loans given out by banks
B) a decrease in the reserve requirement
C) an increase in the amount of cash held by the public
D) an increase in the excess reserves held by bank

Question 62

Which of the following will NOT lead to an increase in the amount of money created as a result of the Federal Reserve buying a given amount of securities?

A) a decrease in the reserve requirement
B) a decrease in the amount of cash held by individuals
C) an increase in the reserve requirement
D) an increase in the amount of loans given out by banks

Question 63

A purchase of Treasury securities held by the Federal Reserve will lead to the maximum possible increase in money supply if banks:

A) do not hold excess reserves and individuals hold cash.
B) hold excess reserves and individuals hold cash.
C) hold excess reserves and individuals do not hold cash.
D) do not hold excess reserves and individuals do not hold cash.

Question 64

All else equal, the _____ the value of Treasury securities purchased by the Federal Reserve and the _____ the reserve requirement, the higher will be the amount of money created.

A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Question 65

All else equal, the _____ the value of Treasury securities purchased by the Federal Reserve and the _____ the amount of cash held by individuals, the higher will be the amount of money created.

A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Question 66

All else equal, the _____ the amount of excess reserves held by banks and the _____ the reserve requirement, the higher will be the amount of money created in the economy as a result of Federal Reserve buying Treasury securities.

A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Question 67

All else equal, the _____ the amount of cash held by individuals and the _____ the reserve requirement, the lower will be the amount of money created as a result of the Federal Reserve purchasing government securities.

A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Question 68

All else equal, the _____ the value of Treasury securities purchased by the Federal Reserve and the _____ the excess reserves held by commercial banks, the lower will be the amount of money created.

A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Question 69

All else equal, the _____ the amount of cash held by individuals and the _____ the amount of loans given out by commercial banks, the higher the amount of money created as a result of Federal Reserve buying Treasury securities.

A) lower; lower
B) lower; higher
C) higher; lower
D) higher; higher

Question 70

Suppose that an individual wins a lottery that offers her two ways of collecting the payment. She can either take $3,000 right now or take $3,100 one year from now. The safest interest rate in the economy is on Treasury securities that yield 5 percent interest per year.
A. Which payment should the lottery winner choose under these conditions? Justify your answer.
B. If the interest rate is 3 percent instead of 5 percent, which payment should the lottery winner choose?

Question 71

Suppose that the total checkable deposits in the entire banking system of an economy is $100 billion. The total required reserves are $10 billion. Further, banks do not hold any excess reserves, and individuals do not hold any cash in the economy.
A. In this economy, if the Federal Reserve buys $10 million worth of government securities, then how much will the money supply increase by? Explain your answer.
B. Will the change in money supply be greater or lesser than what you derived in part A if the banks hold excess reserves and individuals hold cash? Explain your answer.

Question 72

What is the difference between commodity money in which gold is the commodity and the gold standard?

Question 73

The U.S Federal Reserve produces two measures of money - M1 and M2. Which one of these measures is more liquid? Which one of these measures is more stable? Explain your answer.

Question 74

Consider an economy where banks do not hold any excess reserves and individuals do not hold any currency. Suppose that the Federal Reserve buys $20 billion of Treasury securities.
A. For each of these values of the reserve requirement (1 percent, 5 percent, 10 percent, and 20 percent), what is the money multiplier, and how much will the money supply increase?
B. Does the value of the change in money supply increase or decrease with an increase in reserve requirement? Explain your answer.