Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Many employers offer direct deposit, as a convenient and cost savings method of
distributing employee pay each month.
158. From a bank’s point of view, debit cards and credit cards are treated in identical ways.
159. Credit cards and debit cards eliminate the paper handling processes of using checks.
160. Both checks and debit cards will immediately transfers funds from the customer’s
account to the seller’s account.
161. Smart cards contain a microprocessor chip that stores information about the user, such
as drivers’ license data and bank balance.
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162. Smart cards can allow the user to access secure areas within buildings or buy gas with
the swipe of the card.
163. A direct payment is a pre-authorized electronic payment.
164. Although there are many new ways to perform electronic funds transfer, legally, the
only way that an employer can pay an employee is by writing a check.
Feedback: Employers are utilizing electronic funds transfer in several cost effective ways,
including when distributing payroll. Direct deposit and payroll debit cards have grown in
popularity.
165.
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Lower fees and better interest rates motivate customers to open accounts with Internet
banks. However, the lack of personal service and concern for information security
encourages some customers to return to a traditional bank.
Feedback: Since Internet banks operate as a virtual bank, i.e. online services only, they do not
have the costs of physical overhead that more traditional banks have. This allows them to
offer lower fees and better interest rates. However putting financial information into
cyberspace raises security concerns for some, while others miss the personal relationship of
their local bank.
166. While an electronic funds transfer represents a faster and more flexible method of
making payments than writing checks, it is more expensive for banks.
Feedback: Checks are very expensive, primarily because of all of the paperwork involved.
Electronic funds transfer will reduce paperwork and improve the efficiency of the banking
system, thus reducing costs.
167.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Tim travels extensively on business. Most of the hotels where he stays provide him with a
card that unlocks his room. The card is keyed to the particular lock that matches the lock
on the assigned room, and also contains information about Tim. The type of card that Tim
is using is a smart card.
Feedback: The smart card is a card with a microprocessor that can hold lots of different
information including the recipient’s credit card and debit card information; his/her driver’s
license. It can also be programmed to unlock doors, such as dorm room doors, hotel doors,
and office doors.
168. Damian has played supporting roles in a number of movies and is also passionate
about his craft to the point where he created a home theatre inside his house. He has a
satellite dish where he receives an unlimited number of movies, and he also has an online
account with Netflix™ and Blockbuster™. For added convenience, he has set-up direct
payment to these companies. This means when his statement arrives each month, he will
get online and tell his bank how much to pay these vendors.
Feedback: For direct payment, the customer authorizes the vendor to automatically transfer
funds from the customer’s bank account, to the vendor’s account.
169. A letter of credit represents a promise that a bank will disburse a specified amount of
funds at a particular time if certain conditions are met.
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170. Banks help businesses operate in other countries by exchanging the currency of one
nation for the currency of another.
171. A banker’s acceptance represents a promise that a bank will pay a specified amount at
a specified time if certain conditions are met.
172. When traveling in other countries, tourists can use their MasterCard or Visa bankcards
to obtain foreign currencies at ATMs.
173. More than ever, the American economy operates as a distinctly separate entity from
the international economy.
174.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
International bankers prefer to invest in their own countries whenever possible.
175. The global money markets trade about $4 trillion every day.
176. International bankers make loans wherever they can get the maximum return for their
money.
177. While Federal Reserve actions impact domestic investors, they have little effect on
decisions made by international investors.
178. The World Bank primarily finances projects to protect the environment.
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179. The World Bank primarily finances projects to improve the productivity and standard
of living in less-developed nations.
180. The International Monetary Fund assists with the smooth flow of money among
nations.
181. The International Monetary Fund does not lend money.
182. The IMF’s goal is to maintain a global monetary system.
183.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Given the size and strength of the U.S. economy and the widespread use of the dollar, the
Federal Reserve essentially regulates international monetary markets.
Feedback: The net result of the free flow of trillions of dollars across international boundaries
has been to link the economies of the world into one interrelated system with no regulatory
control.
184. When the Federal Reserve pursues policies that increase interest rates, the amount of
foreign funds flowing into the United States also increases.
Feedback: International bankers and investors tend to invest where they can get the best
return at a reasonable risk. When the Fed drives up interest rates, foreign investors are
attracted by the higher return and move more of their money into the United States.
185. Abdul Industries wants to import some heavy machinery from a producer located in
the Czech Republic. To facilitate payment to the Czech firm, Abdul arranged for its bank
to issue a banker’s acceptance. Under this arrangement, the bank pays the exporter after
the equipment passes inspection.
Feedback: A banker’s acceptance is a promise that a bank will pay a certain amount at a
particular time. No conditions are imposed on payment.
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186. As a relatively poor nation, Liberia wants to obtain funds for a project to improve the
availability of water and electricity. Liberia should contact the International Monetary
Fund.
Feedback: The World Bank is primarily responsible for financing economic development. In
recent years the World Bank has lent most of its funds to less-developed nations to help
improve productivity and standards of living. In contrast, the International Monetary Fund is
more concerned with overseeing the monetary and exchange rate policies of member nations.
187. Chipper’s Golf Resort plans to carry an inventory of golf clubs – irons, drivers, and
woods from a German manufacturer. The manufacturer has promised delivery in four
weeks, which will be just in time for the beginning of Chipper’s golf season at its Chicago
course. In order to prudently watch cash flow, you have recommended that Chipper’s
Resort sign a letter of credit with an international bank asking the bank to disburse
payment when the clubs arrive at the Chicago course and after they are inspected.
Feedback: A letter of credit represents an agreement issued by the customer for products
coming from other nations. It is a promise for a bank to pay the seller at a specified time, if
certain conditions have been met.
188.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
Everything else held constant, an international bank based in New York would prefer to
loan money to an efficient firm operating in San Paulo, Brazil than an inefficient firm
operating in southern California.
Feedback: International bankers make investments anywhere they can get a maximum return
of their money at a reasonable risk. An efficient firm offers less risk and greater probability of
repayment.
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189. __________ includes anything that people generally accept as payment for goods and
services.
A. An intangible asset
B. Money
C. A commodity
D. A barter good
190. __________ occurs when goods are traded directly for other goods.
A. Barter
B. Direct exchange
C. Direct marketing
D. Credit
191. Which of the following is not a favorable characteristic of money?
A. Barterability
B. Divisibility
C. Portability
D. Durability
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198. The ______ definition of money supply includes money that is quickly and easily
accessed.
A. e-cash
B. M-3
C. M-2
D. M-1
199. __________ represents the most commonly used definition of the money supply.
A. M-1
B. M-2
C. M-3
D. L
200. A rapid increase in the money supply may lead to a(n):
A. increase in the rate of inflation.
B. recession.
C. decrease in interest rates.
D. decrease in spending by consumers and businesses.
201.
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When the value of the U.S. dollar increases relative to other currencies:
A. the rate of inflation increases.
B. the size of the national debt decreases.
C. foreign goods become less expensive to U.S. consumers.
D. U.S. goods become less expensive to foreign buyers.
202. The strength of the U.S. dollar relative to other currencies depends mainly on:
A. the rate of inflation in the United States.
B. the performance of the U.S. economy relative to other economies.
C. how much gold backs the money supply.
D. exchange rate decisions made by the International Monetary Fund.
203. The organization responsible for conducting monetary policy in the United States is
the:
A. Federal Trade Commission.
B. Council of Economic Advisors.
C. Federal Reserve System.
D. Federal Monetary Control Authority.
204.
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The Federal Reserve System consists of ________ Federal Reserve banks.
A. 5
B. 9
C. 12
D. 14
205. The board of governors of the Federal Reserve System determines:
A. exchange rates.
B. U.S. monetary policy.
C. and monitors the inflows and outflows of gold reserves to ensure a stable money
supply.
D. how much money the U.S. will loan to foreign governments.
206. The Fed uses ________ to regulate the money supply.
A. stock market investments
B. the deposit requirement
C. the political negotiation process
D. the discount rate
207.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
The ___________ represents one of the Fed’s most powerful monetary policy tools.
A. reserve requirement
B. discount rate
C. margin requirement
D. working capital requirement
208. The Fed requires that banks hold a percentage of their deposits in a vault. This
percentage is the __________.
A. prime rate
B. working capital requirement
C. discount rate
D. reserve requirement
209. Open-market operations involve:
A. monitoring the reserve requirement.
B. the buying and selling of bonds.
C. increasing and decreasing interest rates.
D. participating with the IMF.
