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d.
different kinds of money are exchanged for each other.
e.
none of the above
69. The unit of account function of money refers to the
a.
fact that money and income are the same thing.
b.
common denominator of measurement provided by money.
c.
characteristic that all money is intrinsically valuable.
d.
all of the above
70. The store of value function of money refers to the ability of money to
a.
facilitate the exchange of goods and services.
b.
maintain its value over time.
c.
express relative scarcity.
d.
earn interest over time.
e.
increase its value over time.
71. M2 includes M1 plus all of the following except
a.
savings deposits.
b.
retail money market mutual funds.
c.
short-term U.S. government securities.
d.
small-denomination time deposits.
72. According to the textbook, many people believe that the character Dorothy, in the book The Wonderful Wizard of Oz,
represents
a.
presidential candidate Barry Goldwater.
b.
President Abraham Lincoln.
c.
President William McKinley.
d.
presidential candidate William Jennings Bryan.
73. Which of the following is not included in M1?
a.
retail money market mutual funds
b.
checkable deposits
c.
traveler's checks
d.
all of the above
74. Money is defined by economists as
a.
the market value of an asset.
b.
the funds one receives during a specified period of time.
c.
any good that is widely accepted in exchange and for the repayment of debts.
d.
both b and c
e.
all of the above
75. A medium of exchange is
a.
anything that is generally accepted in exchange for goods and services.
b.
a common measurement in which relative values are expressed.
c.
an item's ability to hold value over time.
d.
the exchange of goods and services for other goods and services.
e.
both a and d
76. A unit of account is
a.
anything that is generally accepted in exchange for goods and services.
b.
a common measurement in which relative values are expressed.
c.
an item's ability to hold value over time.
d.
the exchange of goods and services for other goods and services.
e.
both a and d
77. The M2 money supply
a.
includes M1.
b.
is commonly referred to as the broad definition of the money supply.
c.
includes savings deposits.
d.
is larger than M1.
e.
all of the above
78. Total reserves are
a.
equal to required reserves plus excess reserves.
b.
equal to vault cash plus bank deposits at the Federal Reserve.
c.
an asset to banks.
d.
both b and c
e.
all of the above
79. Bank A has checkable deposits of $10 million and total reserves of $1 million. The required reserve ratio is 9 percent.
The bank has excess reserves of
a.
$910,000.
b.
$91,000.
c.
$100,000.
d.
$10,000.
e.
There is not enough information provided to answer this question.
80. Bank A has checkable deposits of $10 million and total reserves of $1 million. The required reserve ratio is 9 percent.
The bank has required reserves of
a.
$910,000.
b.
$90,000.
c.
$900,000.
d.
$1,000,000.
e.
There is not enough information provided to answer this question.
81. Bank A has $25,500 in required reserves. The required reserve ratio is 10 percent. Bank A has checkable deposits of
a.
$2,550.
b.
$255,000.
c.
$2,550,000.
d.
$25,500.
82. Bank A has $75,000 in total reserves, and zero excess reserves. The required reserve ratio is 12 percent. Bank A has
checkable deposits of
a.
$84,000.
b.
$62,500.
c.
$625,000.
d.
$6,250,000.
e.
$840,000
83. Saying that it takes twice as many dollars to buy one ticket for a concert than two tickets for a movie refers to the use
of money as a
a.
medium of exchange.
b.
unit of account.
c.
store of value.
d.
means of achieving the double coincidence of wants.
84. Inflation does the greatest harm to money's function as a
a.
medium of exchange.
b.
unit of account.
c.
store of value.
d.
liquid asset.
85. Fractional reserve banking originated
a.
when the United States Congress passed a law regarding the required reserve ratio.
b.
when goldsmiths realized they could issue warehouse receipts beyond gold on deposits.
c.
with the establishment of the Federal Reserve System.
d.
in the United States with the Clayton Act.
Exhibit 12-1
Balance Sheet
BANK A
($ millions)
Assets
Liabilities
Required Reserves
$20
Checkable Deposits
$ 100
Excess Reserves
0
Nontransaction Deps
50
Loans
100
Borrowings
5
Securities
40
Bank Capital
(A)
86. Refer to Exhibit 12-1. The required reserve ratio is
a.
0.10.
b.
0.15.
c.
0.20.
d.
0.25.
e.
0.30.
87. Refer to Exhibit 12-1. How much bank capital does Bank A have (i.e.what dollar value goes in blank (A))?
a.
$0.
b.
$50
c.
$20
d.
$10
e.
$5
88. Refer to Exhibit 12-1. If Bank A's assets rise by 5 percent and its liabilities rise by 3 percent, by what percentage
would its bank capital change compared to its original bank capital (i.e. the value originally in blank (A))?
a.
2 percent
b.
8 percent
c.
28 percent
d.
40 percent
e.
67 percent
89. When money is used to buy a computer, it is functioning as a
a.
unit of account.
b.
store of value.
c.
medium of exchange.
d.
none of the above
90. A house is $100,000, a computer is $2,000, and a car is $20,000. In this context, money is principally functioning as a
a.
unit of account.
b.
store of value.
c.
medium of exchange.
d.
none of the above
91. Which of the following represents a double coincidence of wants?
a.
Smith has what Jones has and neither wants what the other has.
b.
Smith has what Jones wants but Jones doesn't have what Smith wants.
c.
Smith has what Jones wants and Jones has what Smith wants.
d.
Smith wants what Jones has, Jones wants what Brown has, and Brown wants what Smith has.
e.
none of the above
92. In a barter economy,
a.
money trades for goods, goods trade for services, and services trade for money.
b.
goods and services trade for other goods and services.
c.
some goods are more readily accepted in exchange than others.
d.
making exchanges takes less time (on average) than in a money economy.
e.
b and c
93. Which set of prices would you expect to see (posted, quoted) in a barter economy?
a.
1 horse = 10 pieces of gold; 1 kettle = 1 piece of gold
b.
1 horse = 10 kettles; 1 kettle = 1/10 horse
c.
1 horse = $200; 1 kettle = $20
d.
1 horse = 10 kettles; 1 kettle = 10 apples; 1 apple = 1 orange
e.
b and d
94. Consider the following data: currency (held outside banks) = $354 billion, checkable deposits = $250 billion, traveler's
checks = $4 billion, small-denomination time deposits = $200 billion, savings deposits = $100 billion, retail money
market mutual funds = $160 billion. M1 equals __________ billion and M2 equals __________ billion.
a.
$608; $1,068
b.
$708; $1,038
c.
$708; $948
d.
$694; $1,038
e.
none of the above
95. Which of the following statements is false?
a.
Currency is money, but money is more than just currency.
b.
M1 is a component of M2.
c.
Retail money market mutual funds are part of M2, but institutional money market mutual funds are not.
d.
Credit cards are money since they are widely accepted for purposes of exchange.
e.
Money reduces the transaction costs of making exchanges.
96. Bank deposits at the Federal Reserve = $40 billion, vault cash = $2 billion, the required reserve ratio = 0.10, and total
checkable deposits = $400 billion. It follows that required reserves equal __________ billion, (total) reserves equal
__________ billion and excess reserves equal __________ billion.
a.
$42; $42; $2
b.
$42; $40; $2
c.
$2; $40; $38
d.
$38; $40; $2
e.
$40; $42; $2
97. Banks in the United States operate under a fractional reserve system, which means they must maintain only a fraction
of their deposits in the form of
a.
debt.
b.
loans.
c.
an insurance policy.
d.
reserves.
98. When economists say that banks must hold a percentage of their total deposits in reserve form, what does this mean?
a.
It means that banks must hold a fraction of their customers' deposits either as bank deposits at the Federal
Reserve, or as vault cash, or both.
b.
It means that banks reserve the right to turn away customers a certain percentage of the time.
c.
It means that the fraction of vault cash a bank has cannot be greater than the fraction of bank deposits (it has)
at the Federal Reserve.
d.
Essentially, it means that total reserves are greater than required reserves.
e.
none of the above
99. In which setting are the transaction costs of making an exchange likely to be the highest?
a.
buying cereal at the grocery store
b.
buying a house
c.
buying a computer over the Internet
d.
buying stock in a company
e.
buying a Big Mac at McDonald's
100. When people in a barter economy began to accept the good that had greater acceptability than all other goods, they
weren't trying to create the institution of money. They were simply trying to __________.
a.
get along with their neighbors.
b.
become rich.
c.
make trading easier for themselves.
d.
pay lower prices.
e.
none of the above
101. To a bank, a checkable deposit is classified as
a.
an asset.
b.
a liability.
c.
vault cash.
d.
excess reserves.
e.
bank capital.
102. To a bank, a loan the bank has made to its borrowers is classified as
a.
an asset.
b.
a liability.
c.
vault cash.
d.
excess reserves.
e.
bank capital.
103. If reserves equal $29 million and vault cash equals $29 million, it follows that
a.
bank deposits at the Federal Reserve equal $29 million.
b.
currency in the hands of the public equals $29 million.
c.
excess reserves equal $10 million.
d.
bank deposits at the Federal Reserve equal $0.
e.
There is not enough information to answer the question.
104. Which of the following is not a component of M1?
a.
currency held outside banks
b.
traveler's checks
c.
savings deposits
d.
checkable deposits
105. The risk of specializing (in the production of one good or service) is
a.
lower in a barter economy than in a money economy.
b.
lower in a money economy than in a barter economy.
c.
the same in both a money and barter economy.
d.
greater the less likely you and the person you want to trade with have a double coincidence of wants.
e.
b and d
106. If checkable deposits rise, it follows that the
a.
required reserve ratio will fall.
b.
dollar amount of reserves will rise.
c.
dollar amount of vault cash will rise.
d.
required reserve ratio will rise.
e.
none of the above
107. If M1 is $1,200 billion, currency held outside banks is $400 billion, and traveler's checks is $10 billion, then small-
denomination time deposits equal
a.
$790 billion.
b.
$390 billion.
c.
$800 billion.
d.
$1,190 billion.
e.
There is not information to answer the question.
108. Which of the following statements is true?
a.
A savings deposit is not counted in the most basic, or narrow, definition of the money supply.
b.
M1 is sometimes referred to as transactions money.
c.
Money reduces the transaction costs of making exchanges.
d.
b and c
e.
a, b, and c
109. A bank has $50,000 in excess reserves and the required reserve ratio is 10 percent. This means the bank could have
__________ in checkable deposit liabilities and __________ in (total) reserves.
a.
$500,000; $90,000
b.
$100,000; $20,000
c.
$50,000; $25,000
d.
$250,000; $75,000
110. To a bank, reserves are classified as
a.
an asset.
b.
a liability.
c.
equity
d.
a liability or an asset
111. If reserves equal $59 million and vault cash equals $29 million, it follows that
a.
bank deposits at the Federal Reserve equal $29 million.
b.
currency in the hands of the public equals $29 million.
c.
excess reserves equal $30 million.
d.
bank deposits at the Federal Reserve equal $30 million.
e.
There is not enough information to answer the question.
112. If excess reserves are $10 million, (total) reserves are $14 million, and the required reserve ratio is 10%, then
required reserves equal ________________ and checkable deposits equal ____________________.
a.
$4 million; $40 million
b.
$40 million; $4 million
c.
$24 million; $240 million
d.
$7 million; $70 million
113. Which of the following statements is false?
a.
Asymmetric information can exist both before and after a transaction.
b.
Moral hazard occurs when one party to a transaction changes his or her behavior in a way that is hidden from
and costly to the other party.
c.
Adverse selection has the potential to eliminate some markets.
d.
none of the above
114. Asymmetric information exists when
a.
both parties to an exchange have all relevant facts about that exchange.
b.
a good that is either nonrivalrous or nonexcludable is being sold on a market.
c.
the two parties to an exchange differ in what they know about the good being exchanged.
d.
neither party to an exchange is knowledgeable about the quality of the good being exchanged.
115. The potential buyer of a house has less information about the house than the seller of the house. This is a case of
a.
externality information.
b.
free ridership.
c.
asymmetric information.
d.
biased information.
e.
a public good not being a private good.
116. A bank’s assets are $400 million and its liabilities are $300 million, which means that the bank’s net worth (bank
capital) is ____________________. If the bank’s assets rise by 8% at the same time that its liabilities rise by 5%, the
bank’s new net worth will then be _______________.
a.
$700 million; $713 million
b.
$100 million; $117 million
c.
$100 million; $102 million
d.
$350 million; $360.5 million
117. If a bank’s assets are $500 million and its liabilities are $380 million, then its net worth (bank capital) is
____________________. If the bank’s assets then rise by 6 percent at the same time that its liabilities rise by 5 percent,
the percentage change in the bank’s net worth will be approximately _______________ percent.
a.
$440 million; 10.2
b.
$120 million; 1.2
c.
$100 million; 11.2
d.
$120 million; 9.2
118. If a bank’s deposits at the Federal Reserve equal $40 million and its total reserves equal $35 million, what does the
bank’s vault cash equal?
a.
$5 million
b.
$75 million
c.
$37.5 million
d.
$30 million
119. When a country imposes capital controls, it is controlling the
a.
amount of money flowing in or out of the country.
b.
amount of reserves that banks must hold.
c.
portion of bank deposits that must be held at its central bank.
d.
portion of bank deposits that must be used for loans to the government.
120. Describe the circumstances under which the M1 money supply could fall while the M2 money supply remains
constant at the same time.
121. List and describe the three functions of money.
122. Describe the differences between M1 and M2.
123. Explain why it is not necessary for paper money to be backed by some commodity (e.g. gold) before it can have
value.
124. Discuss some of the economic symbolism thought by many to be contained in L. Frank Baum’s book The Wonderful
Wizard of Oz.
