Business Essentials, 12e (Ebert/Griffin)
Chapter 16 Understanding Money and the Role of Banking
1) Which of the following banking instruments has a fixed term?
A) Demand deposits
B) Time deposits
C) Money market mutual funds
D) Credit card accounts
E) Savings accounts
2) Which of the following BEST describes the portability characteristic of money?
A) If it wears out, it can be replaced.
B) Units of money can be matched with the value of goods.
C) It can be exchanged across national borders.
D) It allows people to measure the relative value of goods and services.
E) It is light and easy to handle.
3) Which of the following is a consequence of the divisibility characteristic of money?
A) Units of money do not expire after a certain time limit.
B) Units of money can be accurately matched with the value of goods.
C) Units of money are easily carried.
D) Units of money have relatively stable value.
E) Units of money of different nations are easily converted to other units of money.
4) Which of the following affects the value of money?
A) How much currency is in circulation
B) How many units the currency can be divided into
C) How portable the form of currency is
D) How durable the form of currency is
E) How much currency has been saved
5) Which of the following BEST describes the durability characteristic of money?
A) Units of money do not expire after a certain time limit.
B) Units of money can be matched with the value of goods.
C) Units of money allow people to measure the relative value of goods and services.
D) Units of money of different nations are easily converted to other units of money.
E) Units of money have lasting value.
6) Which of the following BEST describes the stability characteristic of money?
A) Units of money do not expire after a certain time limit.
B) Units of money of different nations are easily converted to other units of money.
C) Units of money can be matched with the value of goods.
D) Units of money allow people to measure the relative value of goods and services.
E) Units of money have relatively constant value.
7) Money frees society from a system of barter. In doing so, money is performing which of the
following functions?
A) Store of value
B) Measure of worth
C) Unit of account
D) Determination factor
E) Medium of exchange
8) Which of the following is NOT part of the M-1 supply?
A) Currency at hand
B) Currency amount of written checks
C) Currency available through a debit card
D) Currency in checking accounts
E) Currency value of time deposits
9) Which of the following is NOT part of the M-2 money supply?
A) Certificates of deposit
B) Time deposits
C) Money market mutual funds
D) Savings account
E) Credit card account
10) What measure of the money supply is most often used by businesses and governments for
economic planning?
A) M-2
B) Currency
C) Demand deposits
D) Liquidity
E) M-1
11) Why are credit cards excluded from the measure of the nation’s money supply?
A) Because debt continues to accrue as the credit card is used
B) Because money is not moved until the debt is paid
C) Because there are few spending controls on credit cards
D) Because credit cards represent a convenience, not a service
E) Because only the interest paid on the credit card is considered liquid money
12) Any object can serve as money if it is portable, divisible, durable, and stable.
13) The overall value of the U.S. M-2 has grown considerably since 1979 due primarily to the
increased use of credit cards and debit cards.
14) The divisibility characteristic of money is illustrated by a financial company’s ability to
divide its monetary assets among several investments.
15) The reason why a savings account is not considered a component of the M-1 money supply
is that it bears interest.
16) A check is an order to a bank to withdraw funds at any time.
17) What are the components of the M-1 money supply?
18) What are the components of the M-2 money supply?
19) Why are savings accounts not considered a component of M-1, whereas checking accounts
are?
20) Which of the three functions of money does a time deposit account MOST exemplify?
21) Which of the following financial institutions earn profits from loans taken from the funds in
each of its depositors’ accounts?
A) Securities investment firms
B) Pension funds
C) Finance companies
D) Commercial banks
E) Nondeposit institutions
22) Which of the following financial institutions are considered to be owned by their depositors?
A) Commercial banks and savings and loan associations
B) Savings and loan associations and mutual savings banks
C) Mutual savings banks and credit unions
D) Credit unions and pension funds
E) Pension funds and savings institutions
23) Which of the following terms represents a promise by the bank to pay a firm on behalf of
another firm, if specified conditions are met?
A) Banker’s acceptance
B) Bank trust service
C) Certified check
D) Letter of credit
E) Currency exchange agreement
24) Which of the following reasons is the primary motivator for a commercial bank to acquire
new depositors?
A) A new deposit account will make more funds available to pay the interest on other deposit
accounts.
B) A new deposit account will make more funds available to pay the bank’s employees.
C) A new deposit account will make more funds available to give out in loans.
D) A new deposit account will make more funds available to give out in dividends to its
investors.
E) A new deposit account will make more funds available to facilitate brokerage transactions.
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25) Which of the following represents a pool of managed funds that provide retirement income
for members?
A) Insurance companies
B) Finance companies
C) Securities investment dealers
D) Nondeposit institutions
E) Pension funds
26) Which type of pension trust service includes tax-deferred funds that wage earners and their
spouses can use to supplement their retirement funds?
A) Trust services
B) Securities investment deals
C) Pension funds
D) Individual retirement accounts (IRAs)
E) Savings
27) What types of firms lend to businesses needing capital or long-term funds?
A) Insurance companies
B) Pension and trust services
C) Commercial finance companies
D) Pension funds
E) Securities investment dealers
28) What type of nondeposit institution will buy and sell stocks and bonds on behalf of clients?
A) Insurance companies
B) Pension and trust services
C) Finance companies
D) Pension funds
E) Securities investment dealers
29) According to reports, in addition to fraudulent information on loan applications, what can the
subprime crisis of 2008 be traced to?
A) Overly relaxed credit standards
B) Home foreclosures
C) Defaults on credit payments
D) High unemployment levels
E) Prime mortgage rates
30) What is the interest rate offered by banks to only their most creditworthy commercial
customers?
A) Fixed
B) Prime
C) Variable
D) Prime plus 1
E) Below prime
31) Which of the following allows a bank’s customers to conduct account-related activities any
time they choose to?
A) Bank acceptance notes
B) Letters of credit
C) Commercial banks
D) Electronic funds transfers
E) Automated teller machines
32) How does an automated teller machine aid in the customer’s ability to conduct transactions
whenever needed?
A) By processing payments in real time, electronically
B) By allowing a customer to have a line of credit until business can be conducted within regular
banking hours
C) By taking deposits and making loans on demand
D) By allowing electronic account-related activities every day of the week, 24 hours a day
E) By transferring funds from the Reserve Bank to meet transaction needs
33) If a U.S. firm wishes to buy products from an overseas supplier, what would the firm use to
guarantee payment on a specific future date?
A) Currency exchange guarantee
B) Letter of credit
C) Brokerage service
D) Banker’s acceptance
E) Security intermediary
34) Banks offer a variety of services for customers, including banker’s acceptances. Which type
of service offered by a bank would include a banker’s acceptance option?
A) Pension services
B) International services
C) Financial advice
D) Electronic funds transfer
E) Automated teller machines
35) The management of funds offered by a commercial bank on behalf of an individual can be
conducted by a bank through
A) trust services.
B) letters of credit.
C) banker’s acceptance notes.
D) individual retirement accounts.
E) securities investments deals.
36) In order to save money on transactional costs, the U.S. Treasury is moving to electronic fund
transfers for payments rather than issuing checks.
37) Savings and loan associations began primarily to loan money to small and medium-sized
businesses.
38) Individual retirement accounts can be opened only by self-employed people such as doctors,
small business owners, and consultants.
39) In mutual savings banks, all depositors are considered owners of the bank.
40) What is the difference between a public pension fund and a private pension fund?
41) It has been discovered that the bank involved has been selling its riskiest mortgage accounts
to the insurance company, which in turn has been selling these accounts packaged with other
more stable loans at a sharply discounted price to other banks. Gavin asks his aides why this
would be a beneficial relationship between the two institutions. What would his aides say?
42) Why would a consumer utilize trust services offered by commercial banks?
43) Which of the following actions can the Federal Deposit Insurance Company take in the event
of a failure of one of its insured banks?
A) The FDIC can seize the assets of the investors and settle the bank’s debts.
B) The FDIC can allow the bank to stay afloat by granting a loan of federal money.
C) The FDIC can conduct an inquiry into the investors’ assets and actions to determine if there
was any malfeasance that caused the bank failure.
D) The FDIC can allow another bank to take responsibility for the failed bank’s liabilities
through sale of the failed bank.
E) The FDIC can settle the bank’s debts through its insurance deposit fund and regulate the
bank’s transactions more strictly.
44) Which of the following statements BEST explains how financial institutions create money?
A) By opening new checking accounts and giving more people access to readily available cash,
financial institutions expand the money supply.
B) By issuing money through government contracts, financial institutions expand the money
supply.
C) By taking deposits and loaning out these funds, financial institutions expand the money
supply.
D) By paying interest on its accounts and investments, financial institutions expand the money
supply.
E) By giving interest from its accounts to its clients, financial institutions expand the money
supply.
45) Which of the following agencies guarantees the safety of all of its members’ bank accounts?
A) Internal Revenue Service
B) Federal Open Market Committee
C) Federal Reserve Bank
D) Federal Deposit Insurance Corporation
E) Federal Exchange Commission
46) Why does the government take an active role in the regulation of the U.S. financial system?
A) Commercial banks are essential in paying for international trade.
B) To generate fees in addition to those paid to the FDIC
C) To help commercial banks dispose of assets
D) Commercial banks are essential to the creation of money.
E) To allow commercial banks to settle debt
47) What recourse is available to the FDIC when a bank fails?
A) Funds can be taken from the insurance deposit fund to pay off creditors.
B) Employee behavior is monitored and analyzed to ensure ethical behavior.
C) Interest rates can be raised to offset the cost of payouts.
D) Other banks are purchased to cover the cost of the failure.
E) Bank assets can be disposed of in order to pay off debt.
48) When a bank’s assets are sold to settle debt during a bank failure, what happens to the
resulting gain?
A) Remaining funds are added to the insurance deposit funds.
B) Remaining funds are deducted to those paid by the insurance deposit funds.
C) Remaining funds are used to buy and consolidate smaller banks.
D) Remaining funds are dispersed to depositors to help offset losses.
E) Remaining funds are returned to the bank to aid in recovery.
49) Over the past several years, there has been increased belief that creating ethical behavior is
best achieved through
A) increased social media use.
B) corporate culture.
C) increased regulation.
D) stricter enforcement by the FDIC.
E) increased stability of the industry.
50) The unwritten rules that guide employee’s behaviors are known as what?
A) Work rules
B) Regulation
C) Culture
D) Vision
E) Focus
51) Through the Federal Deposit Insurance Corporation, a deposit in a member bank is currently
insured up to $50,000.
52) Banks create money through contracts with the government to mint bills and coins.
53) The Federal Deposit Insurance Corporation is the government agency that regulates
American banks.
54) Money deposited into a commercial bank has the potential of increasing the overall money
supply.
55) The increased activity of the financial market in the past five years has resulted in a severe
drop in the required premiums for commercial banks to be members of the Federal Deposit
Insurance Corporation.
56) There is discussion of a bill raising insurance premiums on bank deposits. Why would these
premiums need to be raised?
57) Explain how current financial institutions can create $342 out of a deposit of $200.
58) Explain the need for restricting banks to lending out only 90 percent of their deposit funds.