Component
Amount
(billions of dollars)
Currency
235
Checking deposits
570
Savings deposits
416
Traveler’s checks
8
Time deposits
1,144
Money market mutual
funds
930
Available credit on credit
cards
675
78) According to the table above, the value of M1 is ________ and the value of M2 is ________.
A) $813 billion; $2490 billion
B) $805 billion; $2490 billion
C) $813 billion; $3303 billion
D) $1,488 billion; $3978 billion
Component
Amount
(billions of dollars)
Currency
300
Checking deposits
600
Savings deposits
450
Traveler’s checks
10
Time deposits
1,200
Money market mutual
funds
1,100
Available credit on credit
cards
900
79) According to the table above, the value of M1 is ________ and the value of M2 is ________.
A) $900 billion; $3,650 billion
B) $910 billion; $3,460 billion
C) $900 billion; $3,450 billion
D) $910 billion; $3,660 billion
80) Liquidity is the
A) speed with which the price of an asset changes as its intrinsic value changes.
B) inverse of the velocity of money.
C) same as the velocity of money.
D) ease with which an asset can be converted into money.
81) Liquidity is the
A) degree to which an asset acts as money without a loss of value.
B) ease with which an asset can be converted into a means of payment with little or no loss of
value.
C) degree to which money can be converted into an asset with little or no loss of value.
D) ease with which credit cards are accepted as a means of payment.
82) Liquidity is the same as
A) easy conversion of money to an asset, allowing for loss of value.
B) diversification of an investor’s store of value.
C) easy conversion of an asset to a means of payment, allowing for loss of value.
D) easy conversion of an asset to a means of payment, with little or no loss of value.
83) A highly liquid asset
A) has high transaction costs associated with its sale.
B) is highly leveraged.
C) generally has a very limited market for its resale.
D) can be converted into a means of payment easily without loss of value.
84) Liquidity ________.
A) is the property of money being instantly convertible into assets
B) increases when a consumer has more credit cards
C) is how quickly an asset loses its worth
D) is the property of assets being instantly convertible into money
85) In the list of assets below, which is the most liquid?
A) $500 worth of Ford Motors common stock
B) $500 worth of Ford Motors bonds
C) a $500 traveler’s check
D) a one-ounce gold coin
86) An individual wanting the most liquid asset possible will hold
A) currency.
B) a savings account.
C) gold.
D) U.S. government bonds.
87) Which of the following is the most liquid?
A) the U.S. dollars in your pocket
B) the funds in your checking account
C) your house
D) the funds in your savings account
88) Which of the following is the most liquid?
A) the U.S. dollars that your professor used this morning to buy breakfast
B) your credit card
C) gold
D) the pencil or pen in your hand right now
89) Which of the following is the most liquid asset?
A) money
B) land
C) a government bond
D) a share of stock
90) Checks ________ money and credit cards ________ money.
A) are; are
B) are not; are
C) are; are not
D) are not; are not
91) Which of the following is NOT money?
A) currency
B) checking deposits
C) checks in the checkbook
D) All of the above are money.
92) Checks that people write are
A) the largest component of the money supply.
B) not money.
C) only part of M2 but not part of M1.
D) part of M1 but not part of M2.
93) Which of the following is TRUE?
I. Checks are considered money because they can be used as a medium of exchange.
II. Checks represent a transfer of money.
A) I only
B) II only
C) both I and II
D) neither I nor II
94) Checks ________ money and checking deposits ________ money.
A) are; are
B) are; are not
C) are not; are
D) are not; are not
95) Checks are NOT money because they
A) are issued by banks, not by the government.
B) are merely instructions to transfer money.
C) have value in exchange but little intrinsic value.
D) are not backed by either gold or silver.
96) Credit cards are
A) money but are not a large part of the money supply.
B) not money.
C) money and are the largest part of the money supply.
D) not money because they are not made of paper.
97) Credit cards are
A) not money because they are not a means of payment.
B) a part of M1 but not of M2.
C) money because they are used to purchase goods and services.
D) a part of M2 but not a part of M1.
98) Credit cards are
A) a part of money because they are used in so many transactions.
B) a part of money when the transaction approach is used but not when the liquidity approach is
used.
C) not part of money because they represent a loan of money to the user.
D) not part of money because the government has no control over the amount of credit
outstanding.
99) Using a credit card can best be likened to
A) taking out a loan.
B) a barter exchange.
C) using currency only as a means of payment.
D) using any other form of money as a means of payment.
100) Checks and credit cards are NOT considered money because they
A) are issued by banks, not the Federal Reserve.
B) are not the means of payment.
C) typically require an identification requirement, such as your driver’s license.
D) are not backed by all commercial banks.
101) Credit cards were introduced in 1959. In 2014, the U.S. credit card balance was $880
billion. Which of the following is TRUE?
A) The $880 billion balance is part of M2 but not part of M1.
B) The $880 billion balance is part of both M1 and M2.
C) Only that portion of the $800 billion actually charged in 2009 is counted in M1 and M2.
D) No part of the $880 billion balance is counted in M1 and M2.
102) The balance owed on credit cards in the United States in 2014 was $880 billion. When
consumers pay off this balance in full,
A) M1 will decrease by $880 billion.
B) M1 will remain unchanged but M2 will decrease by $880 billion.
C) neither M1 nor M2 will change.
D) M1 will increase by $880 billion.
103) Which of the following is NOT a function of money?
A) medium of exchange
B) barter
C) unit of account
D) store of value
104) The fact that money can be exchanged for goods reflects money’s role as a
A) cause of inflation.
B) medium of exchange.
C) unit of account.
D) store of value.
2 Depository Institutions
1) Which of the following is considered a depository institution?
I. the U.S. Treasury
II. a commercial bank like Citibank
III. a credit union for federal government employees
A) I only
B) I and II
C) II and III
D) I, II and III
2) Which of the following institutions is NOT a depository institution?
A) the U.S. Treasury
B) a commercial bank
C) a money market mutual fund
D) a thrift institution, such as a savings and loan association
3) A depository institution is a firm that takes deposits from ________ and makes loans to
________.
A) households and firms; other households and firms
B) firms only; households only
C) households only; firms only
D) firms only; other firms only
4) Depository institutions
A) make profit from the spread between the interest rate they pay on deposits and the interest
rate they receive on loans.
B) make a profit according to how much the Federal Reserve pays them.
C) make their profit by charging the government for their services.
D) make zero profit but receive compensation by the government because their services are so
valuable.
5) The major role of a commercial bank is to
A) make mortgage loans.
B) sell shares and use the proceeds to buy stocks.
C) receive deposits and make loans.
D) restrain the growth of the quantity of money.
6) Commercial banks do NOT
A) buy U.S. government Treasury bills.
B) accept deposits from their customers.
C) make loans to creditworthy individuals and businesses.
D) determine what assets are money.
7) Modern U.S. commercial banks perform all of the following functions EXCEPT
A) accept checking deposits.
B) issue paper currency.
C) make loans to households and business firms.
D) accept savings deposits.
8) A savings bank is a depository institution that ________.
A) sells shares which it uses to purchase shares in U.S. Treasury bills
B) makes mostly home-purchase loans
C) is owned by a social or economic group
D) makes mostly consumer loans
9) Examples of thrift institutions include
A) savings deposits and checking deposits.
B) commercial banks, savings and loan associations, and insurance companies.
C) savings and loan associations, savings banks, and credit unions.
D) money market mutual funds, commercial banks, and credit unions.
10) A credit union is
A) a combination of credit card corporations.
B) a depository institution owned by a social or economic group.
C) a thrift institution that issues credit cards.
D) a commercial bank owned by its depositors.
11) Money market mutual funds invest in
A) residential mortgages.
B) commercial real estate.
C) long-term government securities.
D) highly liquid assets.
12) Sarah buys shares from a financial institution that uses her funds together with other funds to
purchase U.S. treasury bills. Sarah has deposited her money into a ________.
A) savings bank
B) credit union
C) money market mutual fund
D) savings and loan association
13) Money market mutual funds
A) are provided by the Federal Reserve as liquidity for private banks.
B) have no restrictions on shareholder withdrawals.
C) do not provide any checking services to their owners.
D) allow shareholders to write check on their funds.
14) Which of the following is TRUE regarding money market mutual funds?
I. Money market mutual funds buy highly liquid assets like Treasury bills.
II. Shareholders can obtain loans from money market mutual funds.
A) I only
B) II only
C) both I and II
D) neither I nor II
15) A money market mutual fund is
A) essentially the same as a checking account.
B) a time deposit of $100,000 or less.
C) a time deposit of more than $100,000.
D) a depository institution that sells shares and buys securities such as U.S. Treasury bills.
16) Which of the following explains why a bank holds reserves?
I. Banks are required by law to hold reserves.
II. To meet depositors’ currency withdrawals
III. To use them to make loans to households
A) I only
B) II only
C) I and II
D) I, II, and III
E) I and III
17) For a commercial bank, the term “reserves” refers to
A) a banker’s concern (“reservation”) in making loans to an individual without a job.
B) the profit that the bank retains at the end of the year.
C) the cash in its vaults and its deposits at the Federal Reserve.
D) the net interest that it earns on loans.
18) Which of the following are part of a commercial bank’s reserves?
I. cash in the bank’s vaults
II. loans
III. cash in checking accounts
A) I only
B) I and II
C) I and III
D) I, II and III
19) Reserves are ________.
A) gold in a bank’s vault plus its gold at Federal Reserve banks
B) cash in a bank’s vault plus its deposits at Federal Reserve banks
C) cash in a bank’s vault plus its gold at Federal Reserve banks
D) cash in a bank’s vault plus the cash carried by its customers
20) A bank’s reserves include
A) the cash in its vault plus the value of its depositors’ accounts.
B) the cash in its vault plus its deposits held at a Federal Reserve bank.
C) the cash in its vault plus any gold held for the bank at Fort Knox.
D) its common stock holdings, the cash in its vault, and any deposits at a Federal Reserve bank.
21) Bank reserves include
I. the cash in the bank’s vault.
II. the bank’s deposits at the Federal Reserve.
A) only I
B) only II
C) both I and II
D) neither I nor II
22) A commercial bank puts the funds it receives from various sources into
A) securities, cash assets and loans.
B) loans, notes and coins in the bank’s vault and deposits.
C) reserves, deposits and loans.
D) securities, cash assets and deposits.
23) Cash assets of a commercial bank consist of
A) notes and coins in the bank’s vault, a deposit account at the Fed and loans to other banks.
B) notes and coins in the bank’s vault , a deposit account at the Fed and any gold held for the
bank at Fort Knox.
C) vault cash, a deposit account at the Fed and the bank’s stock holdings.
D) vault cash, a deposit account at the Fed and the value of its depositors’ accounts.
24) Of the following, the riskiest assets held by commercial banks are
A) reserves.
B) U.S. government bonds.
C) U.S. government Treasury bills.
D) loans.
25) An asset category that caries the highest interest rate is
A) checkable deposit accounts.
B) loans.
C) cash in the bank vault.
D) savings deposits.
26) Which of the following functions are performed by depository institutions?
I. They make long-term loans using short-term deposits, thereby creating liquidity.
II. They efficiently gather funds from a large base of depositors.
III. They concentrate risk.
A) I only
B) II only
C) III only
D) I and II
27) Which of the following is a service of depository institutions?
A) decreasing the liquidity drain of funds in the banking system
B) monitoring the Federal Reserve
C) pooling risk
D) loaning funds to other depository institutions at the discount rate
28) Depository institutions are good at minimizing
A) the costs of monitoring borrowers.
B) risky borrowers.
C) liquidity.
D) all of the above.
29) If a savings and loan “pools risk,” which of the following must it do?
A) take funds in from a large number of lenders
B) have a large spread between the interest rate it charges borrowers and the interest rate it pays
lenders
C) lend money to a large number of firms
D) Both answers A and C are correct.
30) Depository institutions undertake all the following activities EXCEPT they do not ________.
A) print money
B) minimize the cost of monitoring borrowers
C) pool risk
D) create liquidity
31) Depository institutions do all of the following EXCEPT
A) set the required reserve ratio.
B) create liquidity.
C) pool risks.
D) minimize the cost of obtaining funds.
32) Liquidity can
A) not be created.
B) be created by borrowing short and lending long.
C) only be created by the government.
D) be created by borrowing long and lending short.
33) The practice of borrowing short and lending long
A) pools risk.
B) minimizes the cost of monitoring borrowers.
C) creates liquidity.
D) All of the above answers are correct.
34) Which of the following is NOT an economic benefit of depository institutions?
A) They borrow long and lend short.
B) They create liquidity.
C) They pool risk.
D) They reduce the cost of monitoring borrowers.
35) Depository institution create liquidity when they
A) buy assets that are liquid.
B) borrow short and lend long.
C) have liabilities that are illiquid.
D) borrow long and lend short.
36) Which of the following allow banks to minimize the cost to a business of borrowing?
I. Borrowing long and lending short
II. Raising funds from a large number of depositors
III. Creating money by lending all their reserves
A) I only
B) II only
C) I and III
D) II and III
37) The risk of making a loan is
A) earning profits that are too high and cause higher taxes.
B) the risk that lender does not pay.
C) the risk that the borrower does not pay.
D) called “default risk” when taxes are not paid.
38) Pooling of risk occurs when depository institutions
A) make assets more liquid.
B) specialize in loaning only to good borrowers.
C) bring lenders together.
D) lend to a variety of different borrowers.
39) When a depository institution pools risk, it
A) buys short and lends long.
B) borrows reserves from the Federal Reserve.
C) spreads loan losses across many depositors so that no one depositor faces a high degree of
risk.
D) makes loans to just one firm.
40) Financial innovation is
A) the process of turning assets into a more liquid form.
B) the development of new financial products and services.
C) responsible for credit cards being included as part of money.
D) causing a decrease in bank profits.
41) Depository institutions do all the following EXCEPT
A) minimize the cost of obtaining funds.
B) create liquidity.
C) pool risks.
D) create required reserve ratios.
42) An argument in favor of 100 percent reserve banking is that
A) a bank deposit is owned by the depositor, so the bank has no legal right to lend the deposit to
someone else.
B) banks should be allowed to lend deposits in order to increase their profits and strengthen the
banking system.
C) unregulated institutions would be riskier than regulated fractional-reserve banks.
D) it would limit the precision of the central bank’s control over the quantity of money.
43) An argument in favor of fractional-reserve banking is that
A) unregulated institutions would be riskier than regulated fractional-reserve banks.
B) it increases the precision of the central bank’s control over the quantity of money.
C) a bank deposit is owned by the depositor, so the bank has no legal right to lend the deposit to
someone else.
D) it decreases the risk of a bank running out of cash.
3 The Federal Reserve System
1) The Federal Reserve System is the
A) insurance agency the insures deposits.
B) central bank of the United States.
C) law enforcement agency that tracks counterfeit money.
D) federal government agency that undertakes deregulation for depository institutions.
2) In the United States, the central bank is the ________.
A) Bank of America
B) Federal Reserve System
C) Federal Reserve Bank of New York
D) Federal Reserve Bank of Washington D.C.
3) Which of the following is the central bank of the United States?
A) Comptroller of the Currency
B) Treasury Department
C) Federal Reserve System
D) Office of the Budget
4) The Federal Reserve System
A) regulates the nation’s financial institutions.
B) conducts the nation’s monetary policy.
C) Both answers A and B are correct.
D) Neither answer A nor B is correct.
5) All the following statements about the Federal Reserve are true EXCEPT the fact that it
________.
A) is a public authority
B) regulates a nation’s depository institutions
C) accepts checking deposits from the nation’s residents
D) controls the quantity of money
6) The Bank of Japan is Japan’s central bank. As part of its duties, the Bank of Japan would
A) provide banking services to Japan’s citizens and firms.
B) provide banking services to foreigners.
C) control the quantity of money in circulation in Japan.
D) change tax rates.
7) As a “central bank,” which of the following is TRUE regarding the Fed?
I. The Fed is a public authority that regulates the nation’s banks.
II. The Fed is not allowed to provide services to commercial banks like Citibank.
III. The Fed is required to provide banking services to private citizens.
A) I
B) II
C) I and II
D) I and III
8) The Federal Reserve System
A) has officers that are elected, like members of Congress.
B) controls the amount of currency in circulation.
C) is headquartered in San Francisco.
D) was recently declared unconstitutional by the Supreme Court.