The Economic Way of Thinking, 13e (Heyne)
Chapter 14 Money
1) The most important function of money is to
A) allow for positive interest rates.
B) enable people to measure their own personal worth.
C) facilitate the collection of taxes.
D) encourage greed among people.
E) serve as a medium of exchange.
2) The alternative to the use of money by the members of a society is
A) barter.
B) borrowing.
C) division of labor.
D) from each according to ability, to each according to need.
E) payment by check.
3) Money is
A) anything backed by gold.
B) any durable good.
C) whatever people use as a general medium of exchange.
D) something intentionally created by farsighted people.
4) Money is
A) anything backed by credit cards.
B) any durable good.
C) anything declared by law to be a general medium of exchange.
D) anything people use as a general medium of exchange.
5) The people of the Island of Yap used stones as a general medium of exchange. Therefore,
A) their economic system was based upon barter.
B) their stones served as money.
C) they had no price system, because prices can’t be measured with stones.
D) inflation was impossible.
6) The Kwakiutl Indians of the Northwest used Hudson Bay blankets as a general medium of
exchange. In the economic way of thinking, their blankets were therefore used
A) irrationally.
B) as goods in and of themselves.
C) without regard to their value.
D) as money.
7) Goldsmiths who issued receipts for the customer deposits of gold or silver coins were
probably the originators of
A) money.
B) paper money.
C) seignorage.
D) Federal Reserve notes.
8) According to the text, paper money probably first evolved from
A) the Federal Reserve.
B) the early American savings and loan institutions.
C) goldsmiths.
D) the Bank of England.
9) Traditional bank notes promised to pay the bearer a specific quantity of
A) cigarettes.
B) consumer goods and services.
C) metallic money.
D) durable goods.
E) interest.
10) Today’s Federal Reserve bank notes promise to pay the bearer
A) nothing.
B) a fixed quantity of gold.
C) a variable quantity of gold.
D) a specific interest rate.
E) a variable interest rate.
11) U.S. dollar bills
A) are backed by gold.
B) are backed by silver.
C) are backed by platinum.
D) are backed by uranium.
E) are not backed by any precious metal.
12) Today’s U.S. dollar bills are “backed” by
A) nothing.
B) Warren Buffet.
C) barrels of oil.
D) precious metals.
E) U.S. Treasury Bonds.
13) Why are Federal Reserve Notes (U.S. dollar bills) money in the U.S? Because
A) they are backed by gold.
B) they are used as a general medium of exchange.
C) they are created by the government.
D) they would otherwise be useless.
E) of all the above reasons.
14) The value of the U.S. dollar bill is determined by
A) the quantity of gold in Fort Knox.
B) the quantity of gold in the Federal Reserve.
C) the quantity of gold in circulation.
D) the gold futures market.
E) none of the above.
15) What is a credit card?
A) Money
B) A convenient way to borrow money
C) A bond
D) A convenient way to sell a bond
16) Are credit cards “money”?
A) No, because they are not used as a general medium of exchange.
B) No, because they are used to make money.
C) Yes, because they are used as a general medium of exchange.
D) Yes, because they are used to make money.
17) What is the essential characteristic of money?
A) It must be backed by some other tradable commodity.
B) It must be backed by gold or silver.
C) It must be accepted and used by people as a general medium of exchange.
D) It must be declared by government authority.
18) Something becomes money only if
A) people use it as a general medium of exchange.
B) it is backed by another commodity, typically gold or silver bullion.
C) the central government says it’s money.
D) it promises to pay the bearer a fixed quantity of a scarce metallic good.
19) According to the economic way of thinking, “money” is defined as
A) anything backed by gold.
B) anything backed by some other commodity.
C) anything used as a general medium of exchange.
D) anything the government declares to be legal tender.
20) What is both a necessary and sufficient condition for anything to become money?
A) Metallic backing
B) Government fiat
C) Acceptability
D) A stable price level
E) Seignorage
21) The most widely used medium of exchange in the United States in terms of value of
transactions is
A) checkable deposits.
B) credit cards.
C) currency and coin.
D) Federal Reserve notes.
22) Are checkable deposits really money?
A) No, because they are only commercial bank liabilities, not government liabilities.
B) No, because they are ultimately only entries in the balance sheets of commercial banks.
C) Yes, because they can be converted on demand into currency or coin.
D) Yes, because they can be used to make purchases and pay debts.
23) An asset becomes more liquid and hence more money-like
A) as its value relative to other goods approaches zero.
B) as its value relative to other goods becomes more uncertain and unpredictable.
C) as the cost of exchanging it for other goods approaches zero.
D) when it is demanded for its own intrinsic value.
24) People have a demand for liquidity because
A) liquidity increases one’s options.
B) the rate of interest is positive.
C) they have confidence in their own future earning power.
D) they prefer present goods to future goods.
25) Which of the statements below best explains how the use of money in an economy adds to
the wealth of the society using it? Money creates wealth
A) because it is capital.
B) by earning interest.
C) by making specialization less costly.
D) insofar as it is invested rather than consumed.
26) The use of money adds to wealth because it tends to increase people’s
A) options.
B) risks.
C) costs.
D) expenditures.
E) elasticity of demand.
27) “Demand deposits” in commercial banks are
A) assets of both the non-bank public and the banks.
B) assets of the depositors and liabilities of the banks.
C) liabilities of the non-bank public and of the banks.
D) liabilities of the non-bank public and assets of the banks.
28) Requiring commercial banks to hold reserves equal to some fraction of their deposit
liabilities
A) acts as a constraint on bank lending.
B) is an alternative for banks that choose not to use the gold standard.
C) is without significance since banks are not required to meet their liabilities on demand by
depositors.
D) prevents runs on banks by depositors who fear that the banks may not have assets equal to
their liabilities.
E) really has no effect on the monetary system today.
29) What gives a demand deposit value?
A) The belief others will readily accept the demand deposit in exchange for valuable goods
B) The currency the bank holds as reserves
C) The guarantees the government provides
D) The gold backing the deposits
E) In God we trust.
30) The critical factor in maintaining the value of the dollar is
A) confidence the supply of dollars will be limited.
B) government budget deficits.
C) government budget surpluses.
D) the U.S. balance of international payments.
E) vigorous economic competition.
31) There is no completely satisfactory way to define the money supply in the United States
because
A) data on the money supply are always approximate and only available after a time lag of
several months.
B) much of it is held by the public and so cannot be monitored by the Fed.
C) the Federal Reserve uses a number of different definitions.
D) the liquidity of any asset is a matter of degree.
32) Monetary management in the United States today is under the direction of the
A) Council of Economic Advisers.
B) Federal Trade Commission.
C) Joint Economic Committee of the Congress.
D) Open Market Committee of the Federal Reserve.
E) United States Chamber of Commerce.
33) When do Federal Reserve notes become part of the money supply (M1)? When they are
A) deposited in the vaults of commercial banks.
B) printed by the Bureau of Engraving.
C) received by the Federal Reserve Banks.
D) spent by the public on newly-produced goods.
E) withdrawn from commercial banks by the public.
34) Which of the following is included in the M1 money supply?
A) Bonds
B) Credit cards
C) Gold
D) Deposits in checking accounts
E) All of the above.
35) Which of the following is a component of the M1 money supply?
A) Mutual funds
B) Stock investments
C) Three month T-bills
D) All of the above are part of M1.
E) None of the above is part of M1.
36) Which of the following is not a component of the M1 money supply?
A) Cash in circulation
B) Gold owned by the federal authorities
C) Deposits in checking accounts
D) Any issued traveler’s checks
37) Checking account deposits are counted in M1, but savings account deposits are not because
A) checking deposits can be used for payment; cash in savings cannot.
B) checking deposits are a form of consumption; savings deposits are a form of investments.
C) Trick question! Neither type is counted in M1.
D) Trick question! Both deposit types are counted in M1.
38) Suppose Robert deposits $100 of cash into a checking account at a commercial bank. His
actions will
A) decrease M1 by $10,000.
B) increase M1 by $10,000.
C) produce no change in M1, but M1 will decrease in the future because the bank has excess
reserves.
D) produce no change in M1, but M1 will increase because the bank has excess reserves.
39) Suppose Stan transfers $1,000 from his checking account into a savings account. What are
the effects on M1 and M2 money supply?
A) M1 increases; M2 decreases.
B) M1 decreases; M2 remains the same.
C) Both M1 and M2 increase.
D) Both M1 and M2 decrease.
E) Both M1 and M2 remain the same.
40) Suppose Stan transfers $1,000 from his savings account into his checking account. What are
the effects on M1 and M2 money supply?
A) M1 increases; M2 remains the same.
B) M1 decreases; M2 increases.
C) Both M1 and M2 increase.
D) Both M1 and M2 decrease.
E) Both M1 and M2 remain the same.
41) Which of the following is not a component of the M1 money supply?
A) Cash in circulation
B) Gold owned by the federal authorities
C) Deposits in checking accounts
D) Any issued traveler’s checks
42) Which of the following is not a component of the M2 money supply?
A) Cash in circulation
B) Gold owned by the federal authorities
C) Deposits in checking accounts
D) Any issued traveler’s checks
E) All of the above.
43) The M1 money supply
A) is calculated by subtracting M2 from GDP.
B) does not include checking account deposits.
C) is the narrowest measure of the nation’s money supply.
D) does not include travelers’ checks.
44) Credit cards are included in
A) the M1 money supply.
B) the M2 money supply.
C) all of the above.
D) none of the above.
45) The immediate, direct effect of someone’s cashing a check at a commercial bank is
A) a decrease in the stock of money (M1).
B) an increase in the stock of money (M1).
C) no change in the stock of money.
D) unknown until the check casher spends the currency withdrawn from the bank.
46) Typically the largest component of the narrowly-defined money stock in the United States,
known officially as M1, is
A) commercial bank reserves.
B) currency in commercial bank vaults or the hands of the public.
C) demand deposits and savings deposits in commercial banks.
D) checking account deposits.
E) gold, silver, coins, and paper currency.
47) The narrowly-defined money supply in the U.S., called M1, does not include which of the
following?
A) Coins in circulation
B) Currency in circulation
C) Currency in the vaults of commercial banks
D) Demand deposit liabilities of commercial banks
48) The broadly-defined money supply in the U.S., called M2, differs from M1 primarily in its
inclusion of
A) bonds of all sorts held by the public.
B) outstanding charge-account balances.
C) savings deposits in financial institutions.
D) Treasury bills held by the public.
E) credit cards.
49) If you withdraw currency from your checking account for cash, you are
A) increasing M1, decreasing M2.
B) increasing both M1 and M2.
C) decreasing both M1 and M2.
D) not affecting M1 or M2.
E) increasing M1 but not affecting M2.
50) If you withdraw currency from your bank savings account, you are
A) increasing M1, decreasing M2.
B) increasing both M1 and M2.
C) decreasing both M1 and M2.
D) not affecting M1 or M2.
E) increasing M1 but not affecting M2.
51) It is difficult for competent authorities to agree on the best definition of the money stock
because money is composed primarily of the liquid liabilities of financial institutions
A) and liquidity implies the absence of certainty.
B) of which there are many different kinds whose relative liquidity is continually changing.
C) on which we simply have no reliable data.
D) whose solvency is highly questionable.
52) When a commercial bank lends $1000 to a customer
A) M1 and M2 decline by $1000.
B) M1 and M2 rise by $1000.
C) M1 rises but M2 does not change.
D) there is no change in M1 or M2 until the loan proceeds are spent.
53) When a commercial bank lends $1000 to a customer, and the loan proceeds are spent by the
customer, the legal reserves of the banking system
A) decline by $1000.
B) do not change unless the loan proceeds are withdrawn in currency.
C) rise by $1000.
D) rise by more than $1000 because spending increases nominal GDP.
54) Legal reserve requirements on banks in the United States today are primarily
A) a limitation on banks’ ability to make loans.
B) a protection for bank depositors against runs.
C) a protection for bank shareholders against capital loss.
D) an attempt to restrain the market power of banks.
E) designed to control competition among banks.
55) The primary function of the reserve requirements imposed by the Fed upon commercial
banks is to
A) assure that Federal Reserve Banks will receive deposits with which they can purchase
income-earning assets.
B) enable the government to borrow in emergencies.
C) protect the liquidity of the banking and monetary system.
D) protect the solvency of the commercial banking system.
E) serve as a control lever for central banking authorities.
56) The ability of a commercial bank to increase the money supply is limited by the
A) availability of eligible borrowers and the bank’s reserves in relation to legal reserve
requirements.
B) demand of the public for liquidity.
C) eligibility of the bank for currency drafts and its ratio of M2 to M1.
D) willingness of customers to withdraw currency for circulation.
57) The Fed controls bank lending and thus the process of money creation through its power to
A) alter legal reserve requirements and the dollar amount of reserves.
B) establish maximum and minimum interest rates on bank loans and deposits made with banks.
C) oversee the lending criteria banks use.
D) suspend the charter of banks whose lending activities contribute to an excessive rate of
increase in the money supply.
58) The number of dollars that the commercial banking system can add to the money supply for
each dollar of new reserves created by the Fed
A) cannot legally be greater than 8 nor less than 2.
B) is governed largely by reserve requirements and the form in which the public chooses to hold
money.
C) is less than one because a portion of new reserves must be retained in bank vaults or on
deposit with the Fed.
D) would increase if the public decided to transfer the amounts currently in commercial bank
savings accounts into checking accounts.
59) Financial panics characterized by depositor “runs” and consequent bank failures have not
occurred in the United States since the 1930s primarily because
A) commercial banks now hold larger reserves.
B) the Federal Deposit Insurance Corporation has reduced the fears of depositors.
C) we have abandoned the gold standard.
D) we have had no major recessions since the 1930s.
60) If bank depositors in the U.S. suddenly decided to withdraw in currency everything in their
checking accounts, commercial banks would
A) be better off because their legally required reserves would decline.
B) be unable to meet their demands and would become insolvent.
C) borrow the required Federal Reserve notes to meet the requests for currency.
D) give them the currency held in their vaults as backing for the checking accounts.
E) refuse to honor their requests for 30 days.
61) Suppose Acme County Bank and Trust has $1 million in total deposits and the required
reserve ratio is 10%. How many dollars is Acme allowed to use to seek profits?
A) 0
B) $100,000
C) $900,000
D) $1 million
E) $10 million
62) Suppose Acme County Bank and Trust has $1 million in total deposits and the required
reserve ratio is 5%. How many dollars is Acme bank allowed to use to seek profits?
A) 0
B) $50,000
C) $500,000
D) $950,000
E) Trick question: banks aren’t allowed to seek profit.
63) Suppose Acme County Bank and Trust has $1 million in total deposits and the required
reserve ratio is 8%. How many dollars must the bank keep in its vaults or on deposit at a Federal
Reserve Bank?
A) 0
B) $80,000
C) $920,000
D) $1,000,000
E) None of the above—it’s the bank’s own choice.
64) Suppose Marquette Bank and Trust has $10 million in total deposits and the required reserve
ratio is 7%. How many dollars must the bank keep in its vaults or on deposit at a Federal Reserve
Bank?
A) $9.3 million
B) $7 million
C) $930,000
D) $700,000
E) None of the above—it’s the bank’s own choice.
65) Suppose Marquette Bank and Trust has $10 million in total deposits and the required reserve
ratio is 7%. How many dollars can the bank use to seek profit opportunities?
A) $9.3 million
B) $7 million
C) $930,000
D) $700,000
E) 0. Banks cannot seek profits.