Name:
Class:
Date:
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Page 1
1. The flow of money has a direct effect on how the economy performs.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
2. Liquidity is variable, depending on the nature of the asset.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
3. MZM is sometimes referred to as the “base” money supply.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
4. The agreed-upon value of money in the United States today is based on the government’s supply of gold at Fort Knox,
Kentucky.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.2 – LO: 4.1.2
5. Banks can loan customers the money they have on deposit, minus the reserve requirement.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
6. A bank may not use secondary reserves to give depositors their money back if they demand it.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
7. Most large money transactions involve ledger entries rather than the movement of physical currency.
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 2
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.2 – LO: 4.2.2
8. A dollar bill represents an obligation of the government to provide something of value to you.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.2 – LO: 4.2.2
9. Generally speaking, when interest rates are high more credit is accessible and the economy tends to grow quickly.
a.
True
b.
False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
10. The prime rate is usually the same among major banks.
a.
True
b.
False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
11. If there is too much money moving in the economy
a.
unemployment will probably rise.
b.
prices may rise, causing inflation.
c.
prices will fall, causing widespread business failure.
d.
both a and b, but not c
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
12. Which of the following assets is the most liquid?
a.
the money in your savings account
b.
100 shares of stock in a Fortune 500 company
c.
the money in your wallet
d.
a certificate of deposit that comes due in six months
ANSWER:
c
POINTS:
1
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 3
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
13. Which of the following elements of the money supply, as defined by the Federal Reserve, can be spent immediately?
a.
M1
b.
M2
c.
Reserves
d.
MZM
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
14. The official currency of the United States can properly be classified as
a.
conventional money.
b.
fiat money.
c.
commodity money.
d.
product money.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.2 – LO: 4.1.2
15. Which of the following is NOT considered a factor in money creation?
a.
the Federal Reserve’s supply and control of money
b.
banks’ use of money
c.
the demand for money
d.
the printing of currency by the Bureau of Engraving and Printing
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
16. Which of the following would be considered a secondary reserve for a bank?
a.
cash the bank has on hand
b.
securities the bank has purchased from the federal government
c.
deposits that may be due from other banks
d.
the reserve percentage required by the Federal Reserve System
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
17. Money on deposit, minus ____________________, can be loaned by banks to customers.
a.
excess reserves
b.
cash on hand
c.
primary reserves
d.
the reserve requirement
Name:
Class:
Date:
Copyright Cengage Learning. Powered by Cognero.
Page 4
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
18. If banks must hold more money in reserve,
a.
the money supply will expand.
b.
there is more money available to lend.
c.
there is less money available to lend.
d.
both a and b, but not c.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.2 – LO: 4.2.2
19. The interest rate the Federal Reserve charges for loans to member banks is called the
a.
prime rate.
b.
discount rate.
c.
market rate.
d.
treasury rate.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
20. The Federal Reserve influences the federal funds rate by
a.
buying and selling government securities.
b.
adjusting the reserve requirement.
c.
lowering the discount rate.
d.
all of the above.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
21. The ____________________ supply is defined as the liquid assets held by banks and individuals.
ANSWER:
money
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
22. The measure of how quickly things may be converted to something of value is called ____________________.
ANSWER:
liquidity
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
23. ____________________ was a measure of the money supply in use from 1971 until 2006.
ANSWER:
M3
POINTS:
1
Name:
Class:
Date:
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Page 5
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
24. ____________________ measures are tools used to estimate the size of the money supply.
ANSWER:
Aggregate
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
25. ____________________ money is based on some item of value, such as gold or precious stones.
ANSWER:
Commodity
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
26. ____________________ money is money that is deemed legal tender by a government.
ANSWER:
Fiat
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.2 – LO: 4.1.2
27. Resources a bank uses to create money through its business transactions are called ____________________ reserves.
ANSWER:
excess
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
28. The ____________________ effect is a phenomenon that creates new deposits from lending.
ANSWER:
multiplier
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
29. The federal ____________________ rate is the amount of interest charged for short-term, interbank loans.
ANSWER:
funds
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
30. The ____________________ rate is the interest rate the Federal Reserve sets and charges for loans to member banks.
ANSWER:
discount
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
31. Barry earns a monthly income of $2,500. He receives a 12 percent raise. What is his monthly income now?
ANSWER:
$2,800
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
32. Suppose the total amount of currency (i.e., Federal Reserve notes and coins) in circulation today is $713 billion. If 95
percent of this amount consists of Federal Reserve notes, what amount of currency in circulation consists of coins?
ANSWER:
$35.65 billion
Name:
Class:
Date:
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POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
33. Suppose the Fed requires all banks to hold a reserve of 4 percent on the first $45 million of customer deposits, and 10
percent on all deposits above that. If a bank has $100 million on deposit, what is the amount of the reserve requirement?
ANSWER:
$7.3 million
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
34. Suppose the Fed requires all banks to hold a reserve of 5 percent on the first $60 million of customer deposits, and 12
percent on all deposits above that. If a bank has $125 million on deposit, what is the amount of the reserve requirement?
ANSWER:
$10.8 million
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
35. Calculate the total amount of money “created” from a deposit of $10,000 as it moves through four cycles of deposit.
Assume a reserve rate of 12 percent. (Round answer to nearest two decimal places.)
ANSWER:
$29,355.67
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
36. Calculate the total amount of money “created” from a deposit of $5,000 as it moves through four cycles of deposit.
Assume a reserve rate of 15 percent. (Round answer to nearest two decimal places.)
ANSWER:
$13,543.15
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
37. What types of money and circumstances of liquidity are defined by the M2 element of the money supply?
ANSWER:
The M2 element of the money supply equals all the money in M1 plus short-term
investments.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
38. You cannot take a Federal Reserve note to a bank and exchange it for gold or silver. Why not?
ANSWER:
Federal Reserve notes are fiat money and are not based on or convertible into a commodity
such as gold or silver.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.2 – LO: 4.1.2
39. Why does the Federal Reserve require banks to hold money in reserve?
ANSWER:
The Federal Reserve requires banks to hold money in reserve in order to guarantee that banks
will have money on hand to cover its liabilities.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
40. What happens to the money supply if the Fed lowers reserve requirements? Why?
Name:
Class:
Date:
ANSWER:
If the Fed lowers reserve requirements, the money supply will expand because more money
will be available to create deposits.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.2 – LO: 4.2.2
41. What “thing of value” does the government provide those who hold United States currency?
ANSWER:
The “thing of value” is the guarantee that the currency will be accepted for payment of taxes
and settlement of debts.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.2 – LO: 4.2.2
42. What is the prime rate?
ANSWER:
The prime rate is the interest rate banks charge their best and most reliable customers.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
43. Why might extra money in the economy cause inflation?
ANSWER:
If consumers suddenly had extra money at their disposal, most would probably buy more
goods. This would create a decrease in the supply of goods, causing their prices to rise. If the
prices for all goods and services go up for a period of time, it can result in inflation.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.1 – LO: 4.1.1
44. What is a fractional-reserve system? What is its relationship to the money supply in the United States?
ANSWER:
A fractional-reserve system refers to the practice of reserving only part (a fraction) of a
deposited quantity. In the United States, the Federal Reserve can control the money supply by
adjusting the reserve requirements of member banks, thus adding or subtracting currency in
circulation.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.1.2 – LO: 4.1.2
45. Name and distinguish between the three types of reserves held by banks.
ANSWER:
Primary reserves consist of cash on hand, deposits that may be due from other banks, and the
percentage required by the Federal Reserve System. Secondary reserves include securities the
bank purchases from the federal government. Excess reserves are reserves held by a bank
beyond its reserve requirements and are used to create money through business transactions.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.2.1 – LO: 4.2.1
46. Briefly describe the main factors affecting interest rates other than the actions of the Federal Reserve.
ANSWER:
Market forces determine most interest rates. Banks can charge whatever rates they choose,
with the understanding that although high rates generate more income they also tend to drive
away business. Economic conditions at large also help determine interest rates. For example,
if demand for capital is high, interest rates tend to rise like any other prices. The inflation rate
also affects interest rates, as savers and investors look for higher rates when they fear that
inflation will erode the value of their earnings.
Name:
Class:
Date:
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
47. Why did the Fed lower the federal funds rate seven times between 2006 and 2008?
ANSWER:
The Fed’s goal was to stimulate the economy by lowering interest rates.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1
48. Name the goals of the Federal Reserve‘s monetary policy and the tools it uses to achieve its goals.
ANSWER:
The goals of the Federal Reserve’s monetary policy are to maintain economic growth, to
stabilize prices, and to help international payments flow. Adjusting reserves, setting the
discount rate, and influencing the federal funds rate are the tools it uses to achieve its goals.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.2 – LO: 4.3.2
49. Explain how the Federal Reserve affects the federal funds rate.
ANSWER:
Using open market operations, the Fed buys and sells government securities, paying for them
by making a deposit in the selling bank’s Federal Reserve account. When it sells the
securities to commercial banks, it withdraws their cost from the commercial bank’s account
at the Federal Reserve. In this way, reserves are increased or decreased, affecting the rate that
banks charge each other for interbank loans.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.2 – LO: 4.3.2
50. How does the discount rate differ from the prime rate?
ANSWER:
The discount rate is the interest rate that the Federal Reserve sets and charges for loans to
member banks, and it is controlled by the Fed. The prime rate is the rate that banks charge
their best and most reliable customers.
POINTS:
1
LEARNING OBJECTIVES:
BNKG.CFFT.3.LO: 4.3.1 – LO: 4.3.1