Chapter 15 Money, Banking, and Central Banking 695
42) If the transactions approach to measuring money is used, then the money supply consists of
A) currency only.
B) transaction deposits only.
C) currency and transaction deposits only.
D) currency, checkable and debitable deposits, and traveler s checks.
43) Which of the following is NOT included in the money supply when the transactions approach is
used?
A) Money market deposit accounts. B) Traveler s checks.
C) Transaction deposits. D) Currency.
44) Which of the following is NOT included in M1?
A) Currency. B) Transaction deposits.
C) Saving deposits. D) Traveler s checks.
45) Currency consists of
A) only coins minted by the U.S. Treasury.
B) only Federal Reserve notes.
C) coins minted by the U.S. Treasury and Federal Reserve notes.
D) coins, Federal Reserve Notes and traveler s checks.
696 Miller Economics Today, 16th Edition
Amount
Component (Billions of Dollars)
Currency $250
Coins 50
Transaction Deposits 600
Savings Deposits 450
Traveler s Checks 10
Small Denomination Time Deposits 1,200
Money Mkt Mutual Fund Shares 500
Over Night Eurodollars 20
Over Night Repurchase
Agreements at Commercial Banks 65
Available Credit on Credit Cards 900
Large Time Deposits 2,500
46) Refer to the above table. The value of M1 is
A) $860 billion. B) $910 billion. C) $1,360 billion. D) $2,560 billion.
47) The liquidity approach to measuring the money supply uses
A) M1 only. B) near moneys only.
C) M1 plus some highly liquid assets. D) M2 plus some highly liquid assets.
48) An interest earning account that can be withdrawn at any time without payment of a penalty is
a
A) savings deposit. B) money market deposit account.
C) time deposit. D) certificate of deposit.
49) An account issued by banks yielding a market rate of interest with a minimum balance
requirement and a limit on transactions is a
A) savings deposit. B) money market deposit account.
C) time deposit. D) certificate of deposit.
50) A deposit in a financial institution that requires notice of intent to withdraw is a
A) savings deposit. B) money market deposit account.
C) time deposit. D) certificate of deposit.
51) Which of the following is a time deposit with a fixed maturity date offered by banks and other
financial institutions?
A) Savings deposit
B) Money market deposit account
C) Time deposit
D) Small denomination certificate of deposit
52) Small denomination time deposits are less than
A) $1 million. B) $100,000. C) $10,000. D) $1,000.
53) U.S. paper currency is issued by the
A) United States Mint. B) Federal Reserve System.
C) U.S. Treasury. D) largest commercial banks.
698 Miller Economics Today, 16th Edition
Outstanding U.S. Treasury Bills $900
Currency in Circulation $500
Money Market Deposits Accounts $300
Small Denomination Time Deposits $600
Transaction Deposits $1,000
Stock Market Shares $1,000
Money Market Mutual Funds Balances $500
Savings Deposits $400
Traveler s Checks Not Issued by Banks $200
54) Based on the information in the above table, the value of M1 is
A) $2,100. B) $1,700. C) $3,000. D) $3,100.
55) Using the information in the above table, the value of M2 is
A) $3,500. B) $2,100. C) $4,500. D) $5,400.
56) The M1 definition of the money supply includes all of the following EXCEPT
A) currency. B) transaction deposits.
C) savings accounts. D) travelers checks.
57) In defining money as M1, economists exclude time deposits because
A) they have no intrinsic value.
B) they do not directly serve as a medium of exchange.
C) they are not recognized as legal tender.
D) they earn an interest for their holders.
58) If people withdraw $10 million from the nation s money market mutual funds and redeposit the
funds in various checkable and debitable accounts, then
A) M1 and M2 will remain unchanged.
B) M1 will increase, M2 will remain unchanged.
C) M1 will increase, M2 will decrease.
D) M1 and M2 will increase.
59) In defining money according to the transactions approach, you would want to include
A) those assets that are used as a store of value.
B) those assets that are used as a medium of exchange.
C) those assets that are used as a unit of account.
D) those assets that are used as a standard of deferred payment.
60) Which one of the following is true?
A) Transaction deposits are counted in M2 but are not included in M1.
B) Most of the U.S. currency in existence circulates outside U.S. borders.
C) Traveler s checks are not considered to be money because they are not valid unless signed.
D) Balances in money market deposit accounts are counted in M1 but are not included in M2.
61) The M1 measure of money is suggested by the ________ approach to measuring money.
A) investment B) liquidity C) transactions D) security
62) The M2 measure of money is suggested by the ________ approach to measuring money.
A) investment B) liquidity C) transactions D) security
63) Which one of the following is included in M2 but NOT in M1?
A) coins and currency B) transaction deposits
C) a savings deposit without a set maturity D) large denomination time deposits
64) Which of the following is NOT included in the M1 money supply?
A) currency B) passbook savings accounts
C) checkable and debitable accounts D) traveler s checks
65) Which of the following is included in M2 but NOT in M1?
A) small denomination time deposits B) transaction deposits
C) currency D) traveler s checks
66) The M2 money supply is equal to the M1 money supply plus
A) small time deposits, savings deposits, and retail money market mutual fund shares.
B) all credit card balances and retail money market mutual fund shares.
C) large time deposits and retail money market mutual fund shares.
D) every account held by commercial banks.
67) Small denomination certificates of deposits are
A) included in M1 but not M2. B) included in M1 and M2.
C) included only in M1. D) included in M2 but not M1.
68) The narrowest definition of the money supply is
A) M1. B) M2.
C) the difference between M2 and M1. D) the sum of M1 and M2.
69) Money market mutual funds are funds pooled by
A) a group of people to buy shares of stocks.
B) a group of people to buy stock market funds.
C) a group of people to buy short maturity credit instruments.
D) a group of people to buy U.S. Treasury bonds.
70) For a small denomination certificate of deposit to be included in M2 it must be a denomination
of less than
A) $1,000,000. B) $100,000. C) $10,000. D) $1,000.
71) Which of the following assets are counted in M1?
A) transaction deposits B) mutual funds accounts
C)
b
onds D) line of credit
72) Which of the following assets are counted in M2?
A) gold
B)
b
alances in retail mutual funds accounts
C) value of outstanding bonds
D) lines of credit offered by commercial banks
73) Suppose your $50,000 certificate of deposit matures and you transfer the funds to your checking
account. This causes
A) M1 to decrease by $50,000 and M2 to increase by $50,000.
B) M1 to increase by $50,000 and M2 to remain the same.
C)
b
oth M1 and M2 to increase by $50,000.
D) no change to either M1 or M2.
74) Which of the following is NOT included in M1?
A) transaction deposits B) currency
C) small time deposits D) travelers checks
75) The largest component of M1 is
A) transaction deposits. B) currency and coins.
C) travelers checks. D) savings accounts.
76) Checking accounts are included in
A) certificates of deposit. B) currency.
C) lines of credit. D) M1.
77) A checking account balance in a commercial bank is
A) part of the currency supply.
B) a time deposit.
C) not liquid enough to be considered money.
D) an asset readily usable for most transactions.
78) A transaction deposit is
A) a fiduciary monetary system. B) a checkable and debitable account.
C) opportunity cost. D) the liquidity approach.
79) Federal Reserve notes are
A) paper currency. B) savings bonds.
C) checks issued by the U.S. government. D) travelers checks.
80) For the United States, what is money based on the transactions approach to measuring money?
81) How does the liquidity approach to measuring the money supply differ from the transaction
approach?
15.4 Financial Intermediation and Banks
1) The financial institutions in our banking system are all in the business of transferring funds
from savers to investors. This process is known as
A) lobbying. B) parachuting.
C) money laundering. D) financial intermediation.
2) Suppose you place your savings in a time deposit at the bank, and that bank lends some of those
funds to a business that desires a loan. This is an example of
A) direct finance. B) indirect finance.
C) asymmetric information. D) adverse selection.
3) An item to which a business holds legal claim is called a(n)
A) asset. B) liability. C) loan. D) time deposit.
4) A checkable and debitable account is
A) a liability to a commercial bank.
B) an asset to a commercial bank.
C) a liability to the household or firm that has the account.
D) an asset for the Federal Reserve System.
5) Financial institutions participate in which of the following activities?
A) financial intermediation B) indirect finance
C) the issuance of loans D) all of the above
6) Financial intermediation is best defined as the process by which
A) inflation is controlled.
B) corporations issue new stock.
C) liabilities are liquidated.
D) financial institutions accept savings from savers and make loans to investors.
7) Financial intermediaries are institutions that
A) produce money for the federal government.
B) regulate the activities of stock and bond markets.
C) act as middlemen in the process of directing funds from savers to investors.
D) oversee the activities of government institutions such as the Federal Reserve.
8) Financial intermediaries are important because
A) they bring lenders and borrowers together in a way that lowers transaction costs.
B) they provide large funds to the stock market.
C) they employ large numbers of people.
D) they increase costs for banks.
9) Suppose that a new customer opens a checking account and a saving account, placing $50,000 in
each. Later, the bank makes a loan of $100,000 to a business firm. For this bank,
A) assets increased by $50,000 because the saving account is an asset, while liabilities
increased by $50,000 because the checking account is a liability.
B) assets increased by $100,000 because the checking and saving accounts are assets, and
liabilities increased by $100,000 because the loan is a liability.
C) assets increased by $100,000 because the loan is an asset, and liabilities increased by
$100,000 because the checking and saving accounts are liabilities.
D) assets remained unchanged but liabilities increased by $100,000 because of the loan.
10) Which of the following is NOT an example of a financial intermediary?
A) A credit union B) A pension fund
C) The Internal Revenue Service D) An insurance company
11) The term depository institution refers to
A) commercial banks only.
B) credit unions only.
C) savings and loan associations only.
D) commercial banks, credit unions, and savings and loan associations.
12) A business owner applies for a bank loan to launch a fairly low risk project. After receiving the
loan, she cancels the low risk project and instead uses the borrowed funds for a high risk
venture. This is an example of
A) financial intermediation. B) the transactions approach.
C) moral hazard. D) capital controls.
13) If knowledge possessed by one party in a financial transaction is not known to the other party,
________ exists.
A) disintermediation B) asymmetric information
C) fraud D) no financial intermediation
14) Who benefits from the process of financial intermediation?
A) Savers only.
B) Borrowers only.
C) Both savers and borrowers.
D) There is no benefit, because money does not create wealth.
15) Asymmetric information is a situation in which
A) information possessed by one party in a transaction is not known by another party.
B) information possessed by one party in a transaction is also known by another party.
C) the government has information that it chooses to pass along to private firms.
D) private firms have information that they choose to pass along to the government.
16) The process in which financial institutions accept savings from businesses, households, and
governments and lend the funds to other businesses, households, and governments is called
A) central banking system. B) financial intermediation.
C) moral hazard. D) adverse selection.
17) A central bank is
A) the largest bank in the country. B) the largest bank in the country s capital.
C) a banker s bank. D) an international bank.
18) Financial intermediaries are institutions that
A) create money.
B) provide checking accounts.
C) set interest rates.
D) transfer funds in the form of loans from savers to investors.
19) All of the following are examples of financial intermediaries EXCEPT
A) credit unions. B) insurance companies.
C) retirement funds. D) stock exchanges.
20) Possession of information by one party in a financial transaction but not by the other party is
A) asymmetric information. B) symmetric information.
C) informational hazard. D) financial intermediation.
21) Two people are involved in a borrower/lender situation, and one person has superior
knowledge of its own current and future prospects over the other person. This is known as
A) preventable information. B) symmetric information.
C) asymmetric information. D) deceptive knowledge.
22) The likelihood that individuals who seek to borrow money may use the funds for unworthy,
high risk projects is
A) asymmetric information. B) adverse selection.
C) moral hazard. D) financial intermediation.
23) The possibility that a borrower might engage in riskier behavior after a loan has been obtained
is
A) asymmetric information. B) adverse selection.
C) moral hazard. D) financial intermediation.
24) Russia borrowed funds from the International Monetary Fund in 1989 in exchange for agreeing
to undertake certain changes. However, after receiving the funds, Russia spent the funds on
other things, making the loan repayment more unlikely to occur. This situation is referred to as
A) adverse selection. B) moral hazard.
C) asymmetric information. D) deceptive knowledge.
25) The process by which financial institutions accept savings from businesses, households and
governments and lend the savings to other businesses, households and governments is
A) asymmetric information. B) adverse selection.
C) moral hazard. D) financial intermediation.
26) When you deposit funds in a bank and then the bank lends these funds to a borrower, the bank
is engaged in
A) fiduciary investment. B) fraudulent behavior.
C) universal banking. D) financial intermediation.
27) Which of the following is NOT an asset of commercial banks?
A) consumer loans B)
b
usiness loans
C) savings deposits D) home mortgages
28) People with savings often deposit their funds in a commercial bank, rather than investing them
directly with business enterprises, in order to
A) avoid the problems associated with financial intermediation.
B) avoid the problems associated with asymmetric information.
C) earn the highest possible return for taking on the riskiest investments.
D) All of the above are correct.
29) From an accounting point of view, a checking account should be considered part of a bank s
A) assets. B) liabilities. C) profits. D) reserves.
30) Which of the following is NOT a description of indirect finance?
A) You take out a student loan from your bank.
B) An insurance company lends funds to IBM.
C) You borrow $500 from your best friend.
D) You buy shares in a mutual fund.
31) Which of the following is a financial intermediary?
A) the Red Cross B) the Internal Revenue Service
C) a share of corporate stock D) an insurance company
32) Which of the following is NOT a financial intermediary?
A) commercial banks B) a savings and loan association
C) the Federal Reserve Bank of New York D) the Internal Revenue Service
33) Let us suppose that you apply for a loan with a bank. You tell the bank that you are going to
remodel your kitchen, but after you get the loan you go to Las Vegas to gamble with the money.
Your behavior is an example of
A) adverse selection. B) direct credit allocation.
C) moral hazard. D) indirect credit allocation.
34) The function that banks perform by obtaining funds from households, businesses, and
governments and lending these funds to other households, businesses, and governments is
known as
A) financial intermediation. B) lending intermediation.
C) fiscal intermediation. D) liquidity intermediation.
35) Which of the following is NOT a reason that people tend to deposit their funds with banks
rather than lend their funds directly to other individuals?
A) adverse selection problems B) asymmetric information problems
C) moral hazard problems D) liquidity problems
36) Adverse selection refers to the
A) possibility that the borrower may engage in riskier behavior after the loan is obtained.
B) likelihood that a potential borrower may use the funds that he receives for unworthy, high
risk projects.
C) possession of information by one party in a financial transaction not known by the other
party.
D) use of statistical discrimination in making loans.
37) The possibility that a borrower might engage in riskier behavior after a loan is made is called
A) adverse selection. B) liability aversion.
C) moral hazard. D) the risk of default.
38) Which of the following describes a moral hazard problem?
A) a process by which individuals have substantial resources devoted to the exchange process
and need to make a profit or they will be adversely affected
B) a post contractual problem that may result because participants to the exchange process
have information that allows them to act in an opportunistic manner
C) a process by which individual buyers or sellers with better information are more likely to
participate in voluntary exchange
D) a contractual problem that results because monopolies exist in all economies
39) Suppose you and a friend are shopping at a swap meet and you borrow $500 from your friend
to pay for a guitar that you see there. This is an example of
A) direct financing. B) indirect financing.
C) moral hazard. D) transaction costs.
40) Suppose you borrow $500 from your bank to pay for a guitar. This is an example of
A) direct financing. B) indirect financing.
C) moral hazard. D) transaction costs.
41) Financial institutions that receive most of their funds from the savings of the public are
A) the fiduciary monetary system. B) the world index fund.
C) universal banking. D) thrift institutions.
42) When you use a debit card to purchase a pair of jeans, you are
A) creating a 30 day loan from your bank to the seller.
B) creating a 30 day loan from the seller to your bank.
C) giving your bank an instruction to transfer funds directly from your bank account to the
store s bank account.
D) creating an overnight repurchase agreement between your bank and the store.
43) When you make a purchase at a retail store by giving your bank an instruction to transfer funds
directly from your bank account to the store s bank account, you have most likely made the
purchase using
A) cash. B) a loan. C) a debit card. D) credit.
44) Explain the role of financial intermediation.
15.5 The Federal Reserve System: The U.S. Central Bank
1) The central bank for the United States is
A) Chase Manhattan Bank. B) the Congressional Bank.
C) the Federal Reserve System. D) First National Bank of New York.
2) The current chair of the Board of Governors of the Federal Reserve is
A) Alan Greenspan. B)
J
ohn Snow.
C) Ben Bernanke. D) Henry Paulson.
3) Which of the following is true of the Federal Reserve System?
I. It was established in the early 1980s.
II. It serves as the central bank of the United States.
A) I only B) II only C) Both I and II D) Neither I nor II
4) The Federal Open Market Committee (FOMC)
A) determines the tax policy of the government.
B) influences the future growth of the money supply.
C) oversees all transactions on the stock market.
D) lends to the least credit worthy customers.
5) The part of the Federal Reserve System that determines monetary policy actions is the
A) District Bank Board.
B) Federal Deposit Insurance Corporation (FDIC).
C) Federal Open Market Committee.
D) Comptroller s Office.
6) The Board of Governors of the Federal Reserve System is
A) elected by the general public.
B) composed of seven members who are appointed by the President and approved by the
Senate.
C) composed of representatives from the country s 12 largest commercial banks.
D) composed of 12 members of the Senate and the U.S. House of Representatives.
7) Monetary policy actions are determined by the
A) Federal Open Market Committee. B) New York Federal Reserve Bank.
C) President of the United States. D) U.S. Congress.
8) Who appoints the Federal Reserve System s Board of Governors?
A) The Secretary of the Treasury
B) The President of the United States
C) The Speaker of the House of Representatives
D) The American Banking Association