Question 1

An increase in the reserve ratio would tend to

Accepted Answer

A)  increase excess reserves and raise the money multiplier.
B)  decrease excess reserves and decrease the money multiplier.
C)  increase excess reserves and decrease the money multiplier.
D)  decrease excess reserves and raise the money multiplier.E) C) and D)
F) B) and C)

Question 2

Money is almost always used to quote prices.This illustrates the function of money as a

Accepted Answer

A)  medium of exchange.
B)  store of value.
C)  unit of account.
D)  commodity value.E) B) and D)
F) A) and B)

Question 3

Which of the following definitions of the money supply includes only the most liquid forms of money?

Accepted Answer

A)  M1
B)  M2
C)  Savings deposits
D)  Money market mutual depositsE) None of the above
F) All of the above

Question 4

A principal disadvantage of conventional checking accounts compared to money market mutual funds is that checking accounts

Accepted Answer

A)  are less liquid.
B)  often do not pay interest.
C)  cannot be used as a store of value.
D)  are not insured by deposit insurance.E) None of the above
F) A) and D)

Question 5

The net worth of a bank is

Accepted Answer

A)  equal to the value of assets.
B)  equal to the value of deposits.
C)  equal to the value of liabilities.
D)  the value of assets less liabilities.
E)  the value of loans and securities.F) A) and B)
G) B) and E)

Question 6

Explain why monetary policy is needed specifically with regard to the existence of excess reserves.Compare and contrast the effectiveness of monetary policy during the Great Depression and the Great Recession?

Accepted Answer

During a recession, banks will maintain ...

Question 7

The increase in bank supervision in the United States in the 1980s and early 1990s was due to an increase in bank

Accepted Answer

A)  profits.
B)  ownership of common stocks.
C)  failures.
D)  deposits and loans.E) C) and D)
F) B) and D)

Question 8

When a bank loans out $1,000, the money supply

Accepted Answer

A)  increases.
B)  decreases.
C)  does not change.
D)  None of the above is correct.E) A) and B)
F) None of the above

Question 9

Fractional reserve banking has three crucial features: bank profitability, bank discretion over the money supply, and bank exposure to runs.

Accepted Answer

A) True 
 B)False

Question 10

A unit of account is the function of money when used as a yardstick to post prices and record debts.

Accepted Answer

A) True 
 B)False

Question 11

The distinction between M1 and M2 is based on

Accepted Answer

A)  portability-the ease with which an asset can be moved.
B)  divisibility-the ease with which an asset can be used to make smaller payments.
C)  liquidity-the ease with which an asset can be converted into cash.
D)  storability-how long an asset will retain its value.E) None of the above
F) A) and B)

Question 12

Money that is backed solely by a government decree is referred to as fiat money.

Accepted Answer

A) True 
 B)False

Question 13

During the financial crisis of 2007-2009, the U.S.government determined that

Accepted Answer

A)  AIG was too big to fail but Lehman Brothers was not.
B)  Lehman Brothers was too big to fail but AIG was not.
C)  both Lehman Brothers and AIG were too big to fail.
D)  neither Lehman Brothers nor AIG were too big to fail.E) B) and C)
F) A) and B)

Question 14

Systemic risks are most likely to exist with regard to

Accepted Answer

A)  small governments.
B)  large governments.
C)  small financial institutions.
D)  large financial institutions.E) A) and C)
F) B) and C)

Question 15

Money only consists of coins, paper money, and checkable deposits.

Accepted Answer

A) True 
 B)False

Question 16

If the required reserve ratio, m, is 20 percent, then the oversimplified money multiplier is

Accepted Answer

A)  10
B)  5
C)  4
D)  2E) B) and D)
F) A) and D)

Question 17

Excess reserves are put to use by a bank when it

Accepted Answer

A)  puts cash in the vault to back existing loans.
B)  pays off the mortgage on its building.
C)  sells government securities.
D)  makes loans to its customers.E) None of the above
F) All of the above

Question 18

Credit cards

Accepted Answer

A)  defer payments.
B)  are a store of value..
C)  have led to a wider use of currency.
D)  All of these responses are correct.E) All of the above
F) A) and B)

Question 19

The M1 money supply is composed of

Accepted Answer

A)  currency, demand deposits, traveler's checks, and other checkable accounts.
B)  currency, demand deposits, savings deposits, money market mutual funds, and small time deposits.
C)  currency, government bonds, gold certificates, and coins.
D)  None of the above is correct.E) None of the above
F) B) and C)

Question 20

Banks try to keep their level of excess reserves low because

Accepted Answer

A)  the Fed charges a penalty for holdings of excess reserves.
B)  they are concerned that the money multiplier will become too large.
C)  they wish to maximize profits.
D)  bank regulators levy fines on the amount of excess reserves.E) B) and C)
F) B) and D)

Exam 28: Money and the Banking System

When a bank loans out $1,000, the money supply

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During the financial crisis of 2007-2009, the U.S.government determined that

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Money is almost always used to quote prices.This illustrates the function of money as a

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Credit cards

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The increase in bank supervision in the United States in the 1980s and early 1990s was due to an increase in bank

Correct AnswerverifiedShow Answer

Systemic risks are most likely to exist with regard to

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The distinction between M1 and M2 is based on

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Which of the following definitions of the money supply includes only the most liquid forms of money?

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A unit of account is the function of money when used as a yardstick to post prices and record debts.

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Money only consists of coins, paper money, and checkable deposits.

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Money that is backed solely by a government decree is referred to as fiat money.

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If the required reserve ratio, m, is 20 percent, then the oversimplified money multiplier is

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An increase in the reserve ratio would tend to

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Banks try to keep their level of excess reserves low because

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A principal disadvantage of conventional checking accounts compared to money market mutual funds is that checking accounts

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The net worth of a bank is

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The M1 money supply is composed of

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Excess reserves are put to use by a bank when it

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Explain why monetary policy is needed specifically with regard to the existence of excess reserves.Compare and contrast the effectiveness of monetary policy during the Great Depression and the Great Recession?

Correct AnswerverifiedDuring a recession, banks will maintain ...View AnswerShow Answer

Fractional reserve banking has three crucial features: bank profitability, bank discretion over the money supply, and bank exposure to runs.

Correct AnswerverifiedShow Answer

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The distinction between M₁ and M₂ is based on

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The M₁ money supply is composed of

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During a recession, banks will maintain ...
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