CHAPTER 49
Money, Banking, and Credit
MULTIPLE CHOICE
547.
a. be valuable.
b. be nonperishable.
c. be accepted as a medium of exchange.
d. be a precious metal such as gold or silver.
548. Precious metals have several virtues as a medium of exchange. Which of the following is
not an important reason to use precious metals as a medium of exchange?
a. Precious metals are portable.
b. Precious metals are easily divisible.
c. Precious metals are nonperishable.
d. Precious metals are plentiful and readily available.
549. A major step in the evolution of money is the substitution of paper claims for metallic
money. What does this mean?
a. Metallic money was no longer acceptable.
b. People began to use index cards for money.
c. Banks and governments issued paper that could be redeemed in gold.
d. Banks and governments issued paper that could not be redeemed in gold.
550. Today paper money
a. can only be issued by banks.
b. can only be issued by governments.
c. can be converted to gold on demand.
d. is no longer acceptable as a medium of exchange.
551. Early goldsmiths earned income by keeping deposits of coins and gold for safekeeping and
issuing receipts for these deposits. From the point of view of the goldsmiths, these receipts
were
a. assets
b. wealth
c. liabilities
d. income
552. From the point of view of depositors, receipts issued by goldsmiths in exchange for
deposits of coins and gold were considered
a. loans
b. money
c. liabilities
d. debt
553. Goldsmiths became bankers when they created money. How did they create money?
a. printed more receipts.
b. accepted more deposits of coins.
c. found more gold and turned it into coins.
d. made loans in the form of receipts.
554. What is a bank panic?
a. Bankers become very nervous and refuse to take deposits.
b. Everyone rushes to the bank to put his or her money in before closing time.
c. Banks go out of business because they fail to make enough loans.
d. Banks are unable to repay all depositors who want to withdraw their money.
555. The availability of credit makes an economy more financially fragile because
a. Consumers are unable to spend because they cannot get loans.
b. During recessions, consumers and businesses may be unable to repay debt leading to
financial difficulties for financial institutions.
c. During recessions, financial institutions become too free and easy with credit leading to
too much borrowing.
d. During expansions, many businesses and individuals may go bankrupt from spending too
much.
556. What is the prime rate?
a. It is the highest interest rate in the economy.
b. It is the interest rate for long-term loans on real estate.
c. It is the interest rate offered by commercial banks to their best customers.
d. It is the interest rate consumers pay on new car loans.
557. Why does the interest rate typically fall during economic contractions?
a. There is a high demand for loans from consumers.
b. Businesses have more retained profits and do not need to borrow from banks.
c. There is a lower demand for loans from consumers and businesses.
d. Banks are more willing to make loans and offer easier credit terms.
558. What is the relationship between the business cycle and the prime rate?
a. the prime rate rises during a contraction and falls during an expansion.
b. the prime rate rises during an expansion and falls during a contraction.
c. the prime rate rises during an expansion and rises during a contraction.
d. the prime rate initially rises during an expansion and then falls.
APPENDIX 49.1
How Banks Create Money
559. Assume that the Federal Reserve sets a required reserve ratio of 10%. If a bank receives a
deposit of $1000, then
a. it must keep $10 on reserve and can loan out $990.
b. it must keep $100 on reserve and can loan out $900.
c. it must keep $1000 on reserve and cannot make any loans.
d. it must keep $900 on reserve and can loan out $100.
560. Assume that the Federal Reserve sets a required reserve ratio of 5%. Then the money
multiplier is
a. 5
b. 20
c. 50
d. 100
561. Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual
deposits $1000 in cash into the bank. How much money will eventually be created when all
banks are fully loaned out?
a. $800
b. $640
c. $4000
d. $5000
562. Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual
deposits $1000 in cash into the bank. From the point of view of the bank,
a. $160 of this deposit will be required reserves; $840 will be excess reserves.
b. $200 of this deposit will be required reserves; $800 will be excess reserves.
c. $128 of this deposit will be required reserves; $872 will be excess reserves.
d. Half of the deposit will be required reserves, half will be excess reserves.
563. How do banks create money?
a. Banks print new money and distribute it in return for deposits of old money.
b. Banks loan money to the Federal Reserve who then prints new money.
c. Banks cannot create money.
d. Banks create money when they make loans.