Money and Banking 51

Chapter 12
Money and Banking
1. To an economist, money is a synonym for which of the following?
a. income
b. credit
c. wealth
d. salary
e. none of the above
AN! e
2. Barter is
a. the e"change of money for goods and then the e"change of those goods for money.
b. the e"change of money for money, or the e"change of money for stocks and bonds.
c. the e"change of goods and services for goods and services witho#t the #se of money.
d. any e"change, with or witho#t the #se of money, in which the $artici$ants negotiate %or barter&
the $rice of the goods to be e"changed.
AN! c
3. 'hich of the following ill#strates a barter transaction?
a. A b#shel of oranges is traded for a b#shel of a$$les.
b. omeone b#ys a $i((a for the s$ecial $rice of )*.
c. omeone b#ys a ho#se for )1++,+++.
d. b and c
e. a, b, and c
AN! a
4. Transaction costs are best defined as the
a. vario#s costs of different goods and services.
b. cost of one good in terms of another, that is, the $rice of a$$les in terms of oranges.
c. costs involved in borrowing money from someone, that is, the interest that m#st be $aid for the
#se of someone else-s money.
d. costs associated with the time and effort necessary to make an e"change.
AN! d
5. .n which sit#ation are transaction costs most likely to be the lowest?
a. /odney b#ys anti0#es, he is c#rrently looking for an eighteenth1cent#ry table.
b. 2athy is looking for someone who is willing to trade acco#nting services %in ret#rn& for law
services.
c. /odrig#e( wants to b#y a ho#se with two master bedrooms.
d. Melinda wants to b#y a Mc3onald-s Big Mac %she will not be asking for a s$ecial order&.
AN! d
54 2ha$ter 14
6. 'hich of the following is a correct listing of money-s f#nctions?
a. so#rce of credit, val#e of transaction costs, #nit of barter
b. medi#m of barter, medi#m of e"change, medi#m of transactions
c. #nit of barter, #nit of acco#nt, a #nit of income
d. store of val#e, store of e"change, meas#re of acco#nt
e. store of val#e, medi#m of e"change, #nit of acco#nt
AN! e
7. Money-s basic advantage as com$ared to barter is that
a. everybody has money b#t not everyone has the o$$ort#nity to barter.
b. a money system relies on a do#ble coincidence of wants.
c. money red#ces transaction costs.
d. money is the only medi#m yo# can #se to store yo#r wealth.
AN! c
8. .f $ean#ts were widely acce$ted for $#r$oses of e"change, then
a. $ean#ts wo#ld be money.
b. $ean#ts wo#ld be less val#able than they are c#rrently.
c. we wo#ld observe $eo$le #sing $ean#ts to $#rchase cars.
d. a and c
e. a and b
AN! d
9. A #nit of acco#nt is
a. a bank acco#nt.
b. a savings acco#nt.
c. a common meas#rement in which val#es are e"$ressed.
d. the same as a medi#m of e"change.
e. none of the above
AN! c
10. .f a $erson #ses money to b#y a $air of shoes, money is f#nctioning as
a. a #nit of acco#nt.
b. a store of val#e.
c. a medi#m of e"change.
d. none of the above
AN! c
11. 'hich of the following statements is false?
a. Money is the only good that can or does serve as a store of val#e.
b. .n a barter economy, there is no good that serves as a #nit of acco#nt.
c. There are higher transaction costs of making e"changes in a barter economy than in a money
economy.
d. Money f#nctions as a medi#m of e"change, #nit of acco#nt, and store of val#e.
AN! a
Money and Banking 55
12. According to the te"t, the good that emerged as money in 'orld 'ar .. 67' cam$s was
a. tinned beef
b. toilet $a$er
c. cigarettes
d. cheese
AN! c
13. .n the 8a$ civili(ation of the o#th 6acific $rior to 194+, large, heavy stones in the sha$e of a wheel
were #sed as money. 'hich f#nction of money was $robably least served by this form of money?
a. medi#m of e"change
b. store of val#e
c. #nit of acco#nt
d. store of wealth
AN! a
14. Money evolved %berkembang& o#t of the self1interested actions of
a. economists.
b. governments.
c. a few kings and 0#eens.
d. individ#als.
e. none of the above
AN! d
15. 2om$ared to barter, money :::::::::: transaction costs, making transactions :::::::::: time1
cons#ming.
a. increases, more
b. increases, less
c. red#ces, more
d. red#ces, less
AN! d
16. The re0#irement of a ;do#ble coincidence of wants< is the chief :::::::::: of the ::::::::::
e"change system.
a. advantage, barter
b. advantage, monetary
c. disadvantage, barter
d. disadvantage, monetary
AN! c
17. 8o#r neighbor has knowledge of economics and yo# wo#ld like her to share it with yo#. 8o# own a
car, a 23 $layer and a new $air of r#nning shoes. 8o# wish to make a trade, b#t the neighbor does
not want what yo# have. The $roblem can be stated as follows! 8o# are not satisfying the
a. r#le of transaction costs.
b. do#ble coincidence of wants.
c. law of marketability.
d. terms of a common denominator.
AN! b
5* 2ha$ter 14
18. M1 is com$rised of c#rrency held o#tside banks = checkable de$osits = ::::::::::.
a. credit cards
b. savings de$osits
c. gold
d. traveler-s checks
AN! d
19. >istorically, which of the following goods have evolved into money?
a. gold
b. salt
c. cattle
d. cocoa beans
e. all of the above
AN! e
20. 'hich of the following statements is tr#e?
a. .n 4++1, of the three com$onents of M1, the checkable de$osits com$onent was the largest.
b. M1 is sometimes referred to as the broad definition of the money s#$$ly.
c. Time de$osits are a $art of M1 b#t not M4.
d. M1 is a larger dollar fig#re than M4.
e. All of the above statements are false.
AN! a
21. A ;money market de$osit acco#nt< is a%n&
a. checking acco#nt that $ays no interest.
b. bank acco#nt with a s$ecified mat#rity date.
c. store of ?ederal /eserve Notes held in bank va#lts to cash checkable de$osits on demand.
d. checking acco#nt created from an a#tomatic transfer from a savings acco#nt.
e. interest1earning acco#nt at a bank or thrift instit#tion that #s#ally has a minim#m balance
re0#irement.
AN! e
22. ;Near money< com$rises
a. some assets in M4 b#t not in M1.
b. some assets in M1 b#t not in M4.
c. the assets in both M1 and M4.
d. the assets in neither M1 nor M4.
AN! a
23. A savings de$osit is a ty$e of
a. time de$osit that is $ayable on demand.
b. time de$osit that earns interest and allows the de$ositor to write checks $ayable to other
$ersons.
c. time de$osit that does not earn interest b#t does offer limited check1writing services.
d. interest1earning acco#nt at a bank or thrift instit#tion in which f#nds can be withdrawn at any
time witho#t a $enalty $ayment.
e. checkable de$osit that also $ays interest.
AN! d
Money and Banking 55
24. .n a barter economy, $eo$le are ::::::::: to s$eciali(e in the $rod#ction of one good or service,
com$ared to in a money economy.
a. more likely
b. less likely
c. e0#ally likely
d. almost always going
AN! b
25. M4 is com$rised of
a. small1denomination time de$osits = savings de$osits = money market acco#nts.
b. small1denomination time de$osits = credit cards = money market acco#nts = gold de$osits.
c. M1 = small1denomination time de$osits = savings de$osits = money market m#t#al f#nds.
d. M1 = small denomination time de$osits = credit cards = money market acco#nts.
AN! c
26. @. ?rank Ba#m, the a#thor of The 'onderf#l 'i(ard of 7(, blamed :::::::::: for the economic
de$ression of 1A95 and the related hardshi$s faced by farmers and workers.
a. the gold standard
b. the silver standard
c. a massive tornado
d. high ta"es
AN! a
27. 'hich of the following can be considered money or near money?
a. credit cards
b. checkable de$osits
c. savings de$osits
d. a and b
e. b and c
AN! e
28. A savings acco#nt f#nctions as
a. a #nit of acco#nt.
b. a store of val#e.
c. a medi#m of e"change.
d. none of the above
AN! b
29. The first bankers were
a. sheriffs.
b. goldsmiths.
c. clergy.
d. innkee$ers.
e. economists.
AN! b
5B 2ha$ter 14
30. Beca#se money ::::::::::, $eo$le are :::::::::: likely to s$eciali(e their work in a money
economy.
a. is a store of val#e, less
b. eliminates the do#ble coincidence of wants, more
c. is a #nit of acco#nt, more
d. eliminates the need for holdings of $recio#s metals, more
AN! b
31. The Wonderful Wizard of Oz is alleged to be a story abo#t
a. the 2alifornia gold strikes of 1A*9.
b. the end of the gold standard in 195*.
c. the $residential election of 1A9B.
d. the financial $anic of 19+C.
e. a witch, a dog, a cyclone, and that-s it.
AN! c
32. .n the book version of The Wonderful Wizard of Oz, 3orothy-s sli$$ers are
a. gold.
b. silver.
c. r#by.
d. $a$er.
AN! b
33. .n the history of banking, wareho#se recei$ts refer to recei$ts
a. that goldsmiths once iss#ed acknowledging that they held a c#stomer-s gold.
b. for storing f#rnit#re in a wareho#se.
c. goldsmiths iss#ed to each other when they borrowed gold.
d. for storing food and other $erishables in a wareho#se.
AN! a
34. ?ractional reserve banking is a term #sed to describe a banking system whereby
a. individ#al banks share a fraction of the total f#nds de$osited in the whole banking system.
b. banks are re0#ired to 0#ote interest rates in fractions.
c. banks hold reserves e0#al to only a fraction of their de$osit liabilities.
d. banks hold reserves e0#al to a m#lti$le of their de$osit liabilities, that is, fractional in this case
really means m#lti$le.
e. banks are re0#ired to maintain a certain fraction of their de$osits in the form of checkable
de$osits, a certain fraction of their de$osits in the form of savings de$osits, etc.
AN! c
35. /eserves e0#al
a. checkable de$osits = va#lt cash = traveler-s checks.
b. va#lt cash = c#rrency in the hands of the nonbanking $#blic.
c. bank de$osits at the ?ederal /eserve.
d. bank de$osits at the ?ederal /eserve = va#lt cash.
AN! d
36. 'hich of the following statements is tr#e concerning a#tomatic transfer systems %AT&?
a. AT acco#nts are incl#ded in M1 b#t not M4.
b. AT acco#nts are incl#ded in M4 b#t not M1.
c. AT acco#nts are incl#ded in both M1 and M4 %since they are incl#ded in M1 and M1 is
Money and Banking 5C
incl#ded in M4&.
d. AT acco#nts are incl#ded in neither M1 nor M4.
AN! c
37. /e0#ired reserves are the amo#nt of
a. reserves a bank m#st hold against its de$osits as mandated by the ?ederal /eserve.
b. cash a bank m#st hold against its de$osits as mandated by the ?ederal /eserve.
c. checkable de$osits a bank m#st hold against all other de$osits as mandated by the D..
Treas#ry.
d. reserves a bank m#st hold against all its assets as mandated by the ?ederal /eserve.
AN! a
38. .f checkable de$osits in Bank A total )14 million and the re0#ired reserve ratio is 15 $ercent, then
re0#ired reserves at Bank A e0#al
a. )4.+ million.
b. )1.5 million.
c. )1.A million. %14 " 15 E 1++&
d. )1+.4 million.
AN! c
39. .f checkable de$osits in Bank A total )54+ million and the re0#ired reserve ratio is 14 $ercent, then
re0#ired reserves at Bank A e0#al
a. )14.+ million.
b. )14+.+ million.
c. )5A.* million.
d. )4A1.B million.
e. none of the above
AN! c
40. Ninth National Bank holds )1*A,+++,+++ in checkable de$osits and )1A,+++,+++ in reserves. 'ith a
re0#ired reserve ratio of 14 $ercent, how m#ch in e"cess reserves is Ninth National holding?
a. )4,1B+,+++
b. )4*+,+++
c. )55,CB+,+++
d. )15,A*+,+++
AN! b
41. Ninth National Bank holds )1CB,5++,+++ in checkable de$osits and )44,C*+,+++ in reserves. 'ith a
re0#ired reserve ratio of 14 $ercent, how m#ch in e"cess reserves is Ninth National holding?
a. )154,5A+,+++
b. )4+,+11,4++
c. F)1+,+**,+++
d. )1,5B+,+++
AN! d
42. A bank-s T1acco#nt records
a. the assets and liabilities of the bank.
b. how m#ch tea the bank holds.
c. the changes in the bank-s assets and liabilities.
d. the changes in the bank-s assets only.
e. none of the above
5A 2ha$ter 14
AN! c
43. The amo#nt of re0#ired reserves a bank holds de$ends on the
a. re0#ired reserve ratio.
b. demand1de$osit ratio.
c. e"cess1reserve ratio.
d. c#rrency ratio.
AN! a
44. .f bank de$osits at the ?ederal /eserve rise, ceteris parius, then
a. va#lt cash rises.
b. reserves rise.
c. the money s#$$ly may rise.
d. b and c
e. a, b, and c
AN! d
45. The banking system increases the money s#$$ly by creating
a. checkable de$osits.
b. c#rrency.
c. checkable de$osits and c#rrency.
d. ?ederal /eserve Notes.
AN! a
46. /eserves held beyond the re0#ired amo#nt are called :::::::::: reserves.
a. red#ndant
b. $reca#tionary
c. e"cess
d. s#r$l#s
AN! c
47. Bank A has de$osits of )5,+++ and reserves of )1,A++. .f the re0#ired reserve ratio is +.4+, the bank
has re0#ired reserves of
a. )1,+++. %5+++ " +.4+&
b. )4,+++.
c. )5,+++.
d. )*,+++.
AN! a
48. A re0#ired reserve ratio of 14.5 $ercent, gives rise to a sim$le de$osit m#lti$lier of
a. 4.
b. *.
c. B.
d. A.
AN! d
49. A re0#ired reserve ratio of A $ercent gives rise to a sim$le de$osit m#lti$lier of
a. +.145.
b. 1.+AC.
c. 14.5.
d. 94 G.
Money and Banking 59
AN! c
50. An increased cash leakage :::::::::: the re0#ired reserve ratio, b#t it does :::::::::: the
strength of the money e"$ansion $rocess.
a. does not affect, lower
b. does not affect, raise
c. raises, lower
d. raises, raise
AN! a
51. Bank A has de$osits of )A,+++ and reserves of )1,4++. .f the re0#ired reserve ratio is 1+ $ercent, the
bank has e"cess reserves of
a. )4++.
b. )*++.
c. )B++.
d. )A++.
AN! b
52. Bank A has de$osits of )B,+++ and reserves of )1,A++. .f the re0#ired reserve ratio is 14.5 $ercent,
the bank can safely lend
a. )1,+5+. % B+++ " 14.5 $ercent& H C5+ , 1A++ F C5+ H 1+5+
b. )5,BC5.
c. )*,4++.
d. )A,*++.
AN! a
53. #$$ose that the e"cess reserves in Bank A increase by )C++. .f the re0#ired reserve ratio is 45
$ercent, what is the ma"im#m change in checkable de$osits bro#ght abo#t by the banking system?
a. )1C5
b. )4,*++
c. )4,B++
d. )4,A++
AN! d
54. Bank A receives )1,+++ new reserves from the transfer of a checking acco#nt from another bank.
The re0#ired reserve ratio is 4+ $ercent. Based on the new reserves, Bank A can increase checkable
de$osits by a ma"im#m of
a. )4+,+++.
b. )5,+++.
c. )A++.
d. )4++.
AN! c
55. Based in $art on a 1995 st#dy on gift giving by %then& 8ale economist, Ioel 'aldfogel, some
economists have concl#ded that
a. it may be better to give money as a gift when the gift reci$ient-s $references are not well
known.
b. it may be better to give a tangible gift, rather than money, even when the gift reci$ient-s
$references are not well known.
c. gift reci$ients always $refer to receive gift certificates rather than money.
d. gift reci$ients rarely $refer to receive gift certificates rather than tangible gifts.
B+ 2ha$ter 14
e. none of the above.
AN! a
56. The act#al change in the money s#$$ly as a res#lt of an increase in e"cess reserves will be less than
the ma"im#m change if banks
a. do not lend o#t all of their e"cess reserves.
b. borrow from the ?ederal /eserve.
c. sell some of their government sec#rities to the ?ederal /eserve.
d. lend only their e"cess reserves.
AN! a
57. A bank has )1+ million in checkable de$osits and )4.5 million in reserves. .f the re0#ired reserve
ratio is 15 $ercent, then the bank has
a. e"cess reserves of )1.+ million. %1+ " +.15 H 1.5&, %4.5 F 1.5 H 1.+ &
b. e"cess reserves of )1.5 million.
c. e"cess reserves of )C.5 million.
d. re0#ired reserves of )C.5 million.
e. none of the above
AN! a
58. Bank A holds )1 million in re0#ired reserves and the re0#ired reserve ratio is 1+ $ercent. .t follows
that Bank A holds checkable de$osit liabilities that total
a. )1 million.
b. )1+ million. % 1 million E 1+ $ercent& H 1+
c. )4+ million.
d. )1++,+++ million.
AN! b
59. A bank has (ero e"cess reserves, with a re0#ired reserve ratio of 1+ $ercent. .f )1++,+++ in cash is
withdrawn from the bank, it has a reserve deficiency of
a. )1+,+++.
b. )9+,+++.
c. )1++,+++.
d. )1,+++,+++.
AN! b
60. 'hen a bank makes a loan to one of its c#stomers, to the bank the loan is classified as
a. an asset.
b. a liability.
c. neither an asset nor a liability.
d. an asset in some cases and a liability in other cases, de$ending on the ty$e of loan.
AN! a
61. National Bank holds )C*,+++,+++ in checkable de$osits, holds )A,AA+,+++ in reserves, and has
e"cess reserves of e"actly (ero. .f )5,+++,+++ in checkable de$osits is transferred to this bank, what
is the ma"im#m amo#nt of new money National Bank can create?
a. )45,+++,+++
b. )5,*+9,+++
c. )5,+++,+++
d. )4,B*+,+++
e. There is not eno#gh information to answer the 0#estion.
Money and Banking B1
AN! d
62. National Bank holds )5A,+++,+++ in checkable de$osits and )+ in e"cess reserves #nder a re0#ired
reserve ratio of 1+ $ercent. #$$ose c#stomers of the bank bring in )4,+++,+++ in c#rrency to add
to their checkable de$osits. >ow m#ch more money can this bank now create at ma"im#m?
a. )4,5++,+++
b. )1,A++,+++
c. )1,5++,+++
d. )C++,+++
AN! b
63. National Bank holds )1+9,+++,+++ in checkable de$osits and )1,145,+++ in e"cess reserves #nder a
re0#ired reserve ratio of 14 $ercent. #$$ose c#stomers of the bank bring in )5,+++,+++ in c#rrency
to add to their checkable de$osits. >ow m#ch money can this bank now create at ma"im#m?
a. )*,*++,+++
b. )5,4C5,+++
c. )5,545,+++
d. )15,*B+,+++
AN! c
64. National Bank holds )*A,+++,+++ in checkable de$osits, holds )B,+++,+++ in reserves, and has
e"cess reserves of e"actly (ero. .f )5,+++,+++ in checkable de$osits is transferred to this bank, what
is the ma"im#m amo#nt of new money it can create?
a. )B45,+++
b. )C5+,+++
c. )*,5C5,+++
d. )B,B45,+++
AN! c
65. 'hich of the following statements is false?
a. A change in the com$osition of the money s#$$ly can event#ally change the si(e of the money
s#$$ly.
b. .f Iones takes )1,+++ o#t of her wallet and de$osits it into a checking acco#nt in a bank, the
com$osition of the money s#$$ly changes.
c. .f mith takes )1,+++ o#t of his checking acco#nt and $#ts it into his wallet, the com$osition of
the money s#$$ly changes.
d. A change in the com$osition of the money s#$$ly always increases the money s#$$ly.
AN! d
66. 'hich of the following statements is tr#e?
a. The D.. banking system is a 1++ $ercent reserve banking system.
b. Banks create money by $rinting it.
c. The way banks create money is by creating checkable de$osits in the $rocess of e"tending
loans.
d. Dnder certain circ#mstances, the total dollar amo#nt of checkable de$osits may be greater than
M1.
AN! c
B4 2ha$ter 14
67. #$$ose Bank A gains )1+,+++ in reserves that Bank B loses. .f both banks are s#bJect to the same
re0#ired reserve ratio and are c#rrently holding (ero e"cess reserves, then
a. the money s#$$ly rises.
b. the money s#$$ly falls.
c. the money s#$$ly remains constant.
d. checkable de$osits fall.
AN! c
68. ?rank receives a check from 'ilson for )*,+++. >e de$osits )5,*++ into the bank and asks the bank
teller for )B++ cash. The )B++ is referred to as
a. a check leakage.
b. a bank leakage.
c. a cash leakage.
d. e"cess reserves.
e. none of the above
AN! c
69. te$hanie takes the )5,+++ she has in her safe at home and de$osits it into a checking acco#nt in a
bank. The re0#ired reserve ratio is 4+ $ercent. The ma"im#m change in checkable de$osits bro#ght
abo#t by the banking system thro#gh new lending is
a. )15,+++.
b. )15,5++.
c. )1,5++.
d. )14,+++.
e. none of the above
AN! d
70. 2arl has checking acco#nts with Bank A and Bank B. 7ne day he withdraws )4,+++ from his
checking acco#nt at Bank A and de$osits it into his checking acco#nt at Bank B. Both banks hold
(ero e"cess reserves and are faced with the same re0#ired reserve ratio. As a res#lt of 2arl-s action,
the money s#$$ly
a. rises.
b. falls.
c. remains constant.
d. changes its com$osition.
AN! c
71. #$$ose 4+,+++ new dollars fall from the sky into the hands of K#incy >arrison. .f we ass#me the
re0#ired reserve ratio is 1+ $ercent, what is the minim#m increase in the money s#$$ly that may
res#lt?
a. )4++,+++
b. )1A+,+++
c. )4+,+++
d. )*+,+++
e. none of the above
AN! c
Money and Banking B5
72. The sim$le de$osit m#lti$lier is
a. the reci$rocal of the re0#ired reserve ratio.
b. always 1.
c. the same as the re0#ired reserve ratio.
d. different from bank to bank even if the re0#ired reserve ratio is the same for all banks.
AN! a
B* 2ha$ter 14
73. A bank has )1+,+++ in e"cess reserves and the re0#ired reserve ratio is 4+ $ercent. This means the
bank co#ld have :::::::::: in checkable de$osit liabilities and :::::::::: in reserves.
a. )A+,+++, )1+,+++
b. )1++,+++, )4+,+++
c. )5+,+++, )45,+++
d. )1++,+++, )5+,+++
AN! d
74. .f a $erson withdraws )1,+++ o#t of her checking acco#nt, the bank
a. loses reserves and checkable de$osits e0#al to the withdrawal.
b. loses only checkable de$osit liabilities e0#al to the withdrawal.
c. gains the ability to increase its loans.
d. finds that both its assets and its liabilities decline.
e. a and d
AN! e
75. .f the com$osition of the money s#$$ly changes s#ch that there is less c#rrency in the hands of the
$#blic and more checkable de$osits, the money s#$$ly likely
a. rises.
b. falls.
c. stays constant.
d. first rises and then shar$ly falls.
AN! a
76. 'hich of the following is tr#e?
a. /eserves H re0#ired reserves F e"cess reserves.
b. /eserves F re0#ired reserves H e"cess reserves.
c. /eserves H re0#ired reserves = e"cess reserves.
d. b and c
e. a and b
AN! d
77. .n a barter economy,
a. money is a medi#m of e"change.
b. coins are #sed to facilitate trade.
c. money is a store of val#e.
d. goods and services are traded directly for each other.
e. the money s#$$ly consists entirely of coins and c#rrency.
AN! d
78. ;Barter< im$lies that
a. to get one good or service, an individ#al offers another.
b. to get one good or service, an individ#al offers money.
c. to get a check, an individ#al offers a good or service.
d. different kinds of money are e"changed for each other.
e. none of the above
AN! a
Money and Banking B5
79. The #nit1of1acco#nt f#nction of money refers to the
a. fact money and income are the same thing.
b. common denominator of meas#rement $rovided by money.
c. characteristic that all money is intrinsically val#able.
d. all of the above
AN! b
80. The store1of1val#e f#nction of money refers to the ability of money to
a. facilitate the e"change of goods and services.
b. maintain its val#e over time.
c. e"$ress relative scarcity.
d. earn interest over time.
e. increase its val#e over time.
AN! b
81. The most li0#id ty$e of bank acco#nt is the :::::::::: de$osit.
a. time
b. a#tomatic
c. checkable
d. certificate of
e. savings
AN! c
82. @i0#idity refers to the
a. intrinsic val#e of an asset.
b. difference between the real and nominal val#es of an asset.
c. ease with which metallic money can be converted back into a li0#id state.
d. ease with which an asset, witho#t a loss in its val#e, can be converted into cash.
e. all of the above
AN! d
83. M4 incl#des M1 $l#s all of the following e!cept
a. savings de$osits.
b. money market m#t#al f#nd balances.
c. short1term D.. government sec#rities.
d. time de$osits.
AN! c
84. Many $eo$le believe that the character 3orothy, in the book The 'onderf#l 'i(ard of 7(,
re$resents
a. $residential candidate Barry Loldwater.
b. 6resident Abraham @incoln.
c. 6resident 'illiam McMinley.
d. $residential candidate 'illiam Iennings Bryan.
AN! d
BB 2ha$ter 14
85. The D.. money s#$$ly is backed by
a. gold or silver.
b. fractional reserves.
c. the commodity in which it is denominated.
d. nothing.
e. the D.. Treas#ry.
AN! d
86. The fractional reserve system of de$ository instit#tions
a. red#ces the li0#idity of M4.
b. red#ces the li0#idity of M1.
c. eliminates the $ossibility of r#ns on banks.
d. means that all reserves will be e"cess reserves.
e. enables the system to e"$and or contract the money s#$$ly.
AN! e
87. 'hich of the following is not incl#ded in M1?
a. money market acco#nts
b. checkable de$osits
c. traveler-s checks
d. all of the above
AN! a
88. .f the re0#ired reserve ratio is 45 $ercent, what do a bank-s e"cess reserves amo#nt to when a
b#siness de$osits a )1,+++ check drawn on another bank?
a. )45+
b. )C5+
c. )B5+
d. )1,45+
e. )A5+
AN! b
89. 'hen a check is cleared against a bank, the bank will lose
a. cash and sec#rities.
b. checkable de$osits and reserves.
c. reserves and ca$ital stock.
d. loans and checkable de$osits.
e. none of the above
AN! b
90. Money is defined by economists as
a. the market val#e of an asset.
b. the f#nds one receives d#ring a s$ecified $eriod of time.
c. any good that is widely acce$ted in e"change and for the re$ayment of debt.
d. both b and c
e. all of the above
AN! c
Money and Banking BC
91. A medi#m of e"change is
a. anything that is generally acce$ted in e"change for goods and services.
b. a common meas#rement in which relative val#es are e"$ressed.
c. an item-s ability to hold val#e over time.
d. the e"change of goods and services for other goods and services.
e. both a and d
AN! a
92. A #nit of acco#nt is
a. anything that is generally acce$ted in e"change for goods and services.
b. a common meas#rement in which relative val#es are e"$ressed.
c. an item-s ability to hold val#e over time.
d. the e"change of goods and services for other goods and services.
e. both a and d
AN! b
93. The M4 money s#$$ly
a. incl#des M1.
b. is the most common broad definition of the money s#$$ly.
c. incl#des savings de$osits.
d. is larger than M1.
e. all of the above
AN! e
94. /eserves are
a. e0#al to re0#ired reserves $l#s e"cess reserves.
b. e0#al to va#lt cash $l#s bank de$osits at the ?ederal /eserve.
c. an asset to banks.
d. both b and c
e. all of the above
AN! e
95. Bank A has checkable de$osits of )1+,+++ and reserves of )*,+++. The re0#ired reserve ratio is 14.5
$ercent. The bank has e"cess reserves of
a. )1+,+++.
b. )A,C5+.
c. )*,+++.
d. )4,C5+.
e. )1,45+.
AN! d
96. Bank A has checkable de$osits of )1+,+++ and reserves of )*,+++. The re0#ired reserve ratio is 14.5
$ercent. The bank has re0#ired reserves of
a. )1+,+++.
b. )A,C5+.
c. )*,+++.
d. )4,C5+.
e. )1,45+.
AN! e
BA 2ha$ter 14
97. Bank A has checkable de$osits of )1+,+++ and reserves of )5,+++. The re0#ired reserve ratio is 14.5
$ercent. The bank can loan o#t a ma"im#m of
a. )1+,+++.
b. )A,C5+.
c. )5,+++.
d. )1,C5+. % 1+ +++ " +.145 H 145+&, 5+++ F 145+ H 1C5+
e. )5C5.
AN! d
98. Bank A has checkable de$osits of )1+,+++ and reserves of )*,+++. The re0#ired reserve ratio is 14.5
$ercent. Bank A can increase the money s#$$ly by a ma"im#m of
a. )1+,+++.
b. )A,C5+.
c. )*,+++.
d. )4,C5+.
e. )1,45+.
AN! d
99. #$$ose Iack takes )4,+++ in c#rrency and de$osits it in his checking acco#nt. .f the re0#ired
reserve ratio is A $ercent, by how m#ch does the ma"im#m M1 money s#$$ly rise?
a. )+
b. )5,B++
c. )45,+++ %4+++ E A $ercent& H 45+++ F 4+++ H 45+++
d. )45,+++
AN! c
100. The banking system has de$osits of )1++ billion and reserves of )4+ billion. The re0#ired reserve
ratio is 14.5 $ercent. The banking system has e"cess reserves of
a. )4+.+ billion.
b. )14.5 billion.
c. )A.+ billion.
d. )C.5 billion.
e. )4.+ billion.
AN! d
101. The banking system has de$osits of )1++ billion and no e"cess reserves. The re0#ired reserve ratio
is 14.5 $ercent. A de$osit of )1+ billion in new money is made in Bank A, and no other bank in the
banking system loses reserves. The ma"im#m increase in checkable de$osits that can be bro#ght
abo#t by Bank A is
a. )A.C5 billion.
b. )A.5 billion.
c. )1+.+ billion.
d. )1.5 billion.
e. )1.45 billion.
AN! a
Money and Banking B9
102. The banking system has de$osits of )1++ billion and no e"cess reserves. The re0#ired reserve ratio
is 14.5 $ercent. A de$osit of )1+ billion in new money is made in Bank A, and no other bank in the
banking system loses reserves. The ma"im#m increase in checkable de$osits that can be bro#ght
abo#t by the banking system is
a. )A+.+ billion.
b. )C+.+ billion.
c. )BA.+ billion.
d. )14.5 billion.
e. )1+.+ billion.
AN! b
103. Iane takes )1,+++ o#t of her cookie Jar and de$osits it into Bank A. .nitially, the money s#$$ly has
a. changed in magnit#de.
b. changed in com$osition.
c. not changed in magnit#de.
d. not changed in com$osition.
e. both b and c
AN! e
104. Bank A has )4,5++ in re0#ired reserves. The re0#ired reserve ratio is 14.5 $ercent. Bank A has
checkable de$osits of
a. )14,5++.
b. )4+,+++. %45++ E 14.5 $ercent&
c. )1++,+++.
d. )1B+,+++.
AN! b
105. Bank A has )5,+++ in reserves, all re0#ired to be held. The re0#ired reserve ratio is 1+ $ercent.
Bank A has checkable de$osits of
a. )5++.
b. )5,+++.
c. )5+,+++. % 5+++ E 1+ $ercent&
d. )5++,+++.
AN! c
106. 'ith a re0#ired reserve ratio of 1B $ercent, the sim$le de$osit m#lti$lier is
a. 1B.+.
b. 1.B.
c. B.45. % 1E 1B $ercent or +.1B&
d. 5.C45.
e. 1.19.
AN! c
107. aying that it takes twice as many dollars to b#y one ticket for a concert than two tickets for a
movie refers to the #se of money as a
a. medi#m of e"change.
b. #nit of acco#nt.
c. store of val#e.
d. means of achieving the do#ble coincidence of wants.
AN! b
C+ 2ha$ter 14
108. Dsing yo#r Mastercard to order a ring from the >ome ho$$ing Network is #sing money as a
a. medi#m of e"change.
b. #nit of acco#nt.
c. store of val#e.
d. a and c
e. none of the above, credit cards are not money.
AN! e
109. .nflation does the greatest harm to money-s f#nction as a
a. medi#m of e"change.
b. #nit of acco#nt.
c. store of val#e.
d. li0#id asset.
AN! c
110. 'hich of the following is false?
a. .n a barter economy, $a$er money is #sed only as a medi#m of e"change.
b. .n a barter economy, transaction costs are m#ch higher than in a money economy.
c. .n a barter economy, a do#ble coincidence of wants has to be f#lfilled before a transaction can
take $lace.
d. None of the above, all are tr#e.
AN! a
111. 'hich of the following assets is the most li0#id?
a. gold
b. savings de$osits
c. money market m#t#al f#nd shares
d. ?ederal /eserve Notes
e. Treas#ry bills
AN! d
112. The D.. dollar has val#e beca#se it
a. is backed by gold.
b. bears the signat#re of a D.. $resident.
c. is widely acce$ted as a means of $ayment.
d. is backed by silver
AN! c
113. A savings de$osit is considered $art of a broader meas#re of the money s#$$ly beca#se it
a. $ays interest to the de$ositor.
b. is an asset of a commercial bank.
c. is relatively li0#id.
d. is denominated in dollars.
AN! c
114. ?ractional reserve banking originated
a. when the Dnited tates 2ongress $assed a law regarding the re0#ired reserve ratio.
b. when goldsmiths reali(ed they co#ld iss#e wareho#se recei$ts beyond gold on de$osits.
c. with the establishment of the ?ederal /eserve ystem.
d. in the Dnited tates with the 2layton Act.
AN! b
Money and Banking C1
115. .f the re0#ired reserve ratio is 45 $ercent, a )1+ increase in reserves res#lting from a de$osit of
c#rrency into the banking system will increase checkable de$osits by )*+ $rovided
a. there are no cash leakages.
b. every bank lends o#t all its e"cess reserves.
c. there is a cash leakage of )4.
d. a and b
e. b and c
AN! d
Exhibit 12-1
BANK A
Assets Liabilities
/e0#ired /eserves )5+,+++ 2heckable 3e$osits ) 4++,+++
N"cess /eserves ) +
@oans ) ?
?or 0#estions 1191144, refer to N"hibit 1411 above.
116. /efer to N"hibit 1411. The re0#ired reserve ratio is
a. +.1+.
b. +.15. %5+ +++ E 4++ +++&
c. +.4+.
d. +.45.
e. +.5+.
AN! b
117. /efer to N"hibit 1411. The total amo#nt of loans o#tstanding at Bank A
a. is )1C+,+++. % 4++ +++ F 5+ +++&
b. is )4++,+++.
c. is )45+,+++.
d. is )5+,+++.
AN! a
118. /efer to N"hibit 1411. Marsha receives her )1,+++ monthly $aycheck and de$osits it in Bank A. The
bank is now able to grant new loans in the amo#nt of
a. )C++.
b. )A++.
c. )A5+. % 1+++ " +.15 & H 15+, 1+++ F 15+ H A5+
d. )9++.
e. )1,+++.
AN! c
C4 2ha$ter 14
119. /efer to N"hibit 1411. 3avid withdraws )4,+++ from his checking acco#nt with Bank A. This
immediately res#lts in Bank A being in a reserve deficiency $osition of
a. )4++.
b. )5++.
c. )1,5++.
d. )1,C++.
e. )4,+++.
AN! d
Exhibit 12-2
BANK B
Assets Liabilities
/e0#ired /eserves ) ? 2heckable 3e$osits ) 1++,+++
N"cess /eserves ) +
@oans )A+,+++
?or 0#estions 1451145, refer to N"hibit 1414 above.
120. /efer to N"hibit 1414. The sim$le de$osit m#lti$lier is
a. +.4.
b. +.A.
c. 1.45.
d. 5.+.
e. cannot be determined
AN! d
121. /efer to N"hibit 1414. .f Bank B receives )4,+++ in new checkable de$osits, its e"cess reserves will
be
a. )*++.
b. )1,4++.
c. )1,B++. %4+++ E 1++ ++ H +.+4&, % +.+4 " A+ +++&
d. )1,A++.
e. )4,+++.
AN! c
122. /efer to N"hibit 1414. /achel took a )1++ bill she was kee$ing at home and de$osited it in her
checking acco#nt at Bank B. The ma"im#m change in the checkable de$osits bro#ght abo#t by the
banking system will be
a. )54+.
b. )*++.
c. )5++.
d. )9++.
e. )1,+++.
AN! b
Money and Banking C5
123. te$hanie $#rchases a ?rench $erf#me for )1++ and $ays for it with a check. .f the re0#ired reserve
ratio in the banking system is 1+ $ercent, this transaction will, ass#ming no cash leakages, change
the money s#$$ly by
a. )+.
b. )1++.
c. )11+.
d. )1,+++.
e. )1,1++.
AN! a
124. Bank A and Bank B have no e"cess reserves, and the re0#ired reserve ratio is 1+ $ercent. Iill
receives a )5++ check and de$osits it in her acco#nt with Bank A. Bank A immediately e"tends a
loan to Iack for the f#ll amo#nt of the newly created e"cess reserves by crediting his checking
acco#nt. Iack then s$ends the f#ll amo#nt of the loan on a color TO #sing his debit card to
electronically transfer the f#nds to the TO retailer-s acco#nt with Bank B. Bank B-s e"cess reserves
are
a. )+.
b. )5C5.
c. )*+5.
d. )*5+. % 5++ " 1+ $ercent& H 5+, 5++ F 5+ H *5+
e. )5++.
AN! c
125. An initial increase of )4,+++ in a bank-s checkable de$osits res#lted in an increase of )1,B++ in new
loans e"tended by the bank. Ass#ming no change in e"cess reserves held by the bank, the re0#ired
reserve ratio is
a. 1+ $ercent.
b. 15 $ercent.
c. 4+ $ercent. % 4+++ 11B++& H *++ E 4+++ H +.4 " 1++ H 4+
d. 45 $ercent.
e. 5+ $ercent.
AN! c
126. @owering the re0#ired reserve ratio :::::::::: the sim$le de$osit m#lti$lier and :::::::::: the
economy-s ma"im#m $otential money s#$$ly.
a. raises, raises
b. raises, lowers
c. lowers, raises
d. lowers, lowers
AN! a
127. /aising the re0#ired reserve ratio :::::::::: the sim$le de$osit m#lti$lier and :::::::::: the
economy-s ma"im#m $otential money s#$$ly.
a. raises, raises
b. raises, lowers
c. lowers, raises
d. lowers, lowers
AN! d
C* 2ha$ter 14
128. .f the banking system res$onds to a large dro$ in the stock market by increasing its desired holding
of e"cess reserves, this
a. affects neither the sim$le de$osit m#lti$lier nor the economy-s money growth rate.
b. does not affect the sim$le de$osit m#lti$lier b#t does lower the economy-s money growth rate.
c. lowers the sim$le de$osit m#lti$lier b#t does not affect the economy-s money growth rate.
d. does not affect the sim$le de$osit m#lti$lier b#t does raise the economy-s money growth rate.
AN! b
129. 'hen money is #sed to b#y a com$#ter, it is f#nctioning as a
a. #nit of acco#nt.
b. store of val#e.
c. medi#m of e"change.
d. none of the above
AN! c
130. A ho#se is )1++,+++, a com$#ter is )4,+++, and a car is )4+,+++. .n this conte"t, money is
$rinci$ally f#nctioning as a
a. #nit of acco#nt.
b. store of val#e.
c. medi#m of e"change.
d. none of the above
AN! a
131. Iohn says, ;. earned a lot of money in my Job last year.< 'hat is wrong with this statement from an
economist-s $oint of view?
a. Nconomists talk abo#t earning money on a monthly basis, not a yearly basis.
b. Iohn #ses the word "one# when he sho#ld #se the word inco"e.
c. Iohn #ses the word "one# when he sho#ld #se the word $ealth.
d. Iohn is #sing the word "one# incorrectly! he is im$licitly referring to money acting as a
medi#m of e"change when he sho#ld be referring to it acting as a store of val#e.
AN! b
132. 'hich of the following re$resents a do#ble coincidence of wants?
a. mith has what Iones has and neither wants what the other has.
b. mith has what Iones wants b#t Iones doesn-t have what mith wants.
c. mith has what Iones wants and Iones has what mith wants.
d. mith wants what Iones has, Iones wants what Brown has, and Brown wants what mith has.
e. none of the above
AN! c
133. .n a barter economy,
a. money trades for goods, goods trade for services, and services trade for money.
b. goods and services trade for other goods and services.
c. some goods are more readily acce$ted in e"change than others.
d. making e"changes takes less time %on average& than in a money economy.
e. b and c
AN! e
Money and Banking C5
134. 'hich set of $rices wo#ld yo# e"$ect to see %$osted, 0#oted& in a barter economy?
a. 1 horse H 1+ $ieces of gold, 1 kettle H 1 $iece of gold
b. 1 horse H 1+ kettles, 1 kettle H 1E1+ horse
c. 1 horse H )4++, 1 kettle H )4+
d. 1 horse H 1+ kettles, 1 kettle H 1+ a$$les, 1 a$$le H 1 orange
e. b and d
AN! e
135. 'hich of the following is the most basic reason that $a$er money has val#e?
a. Lold backs $a$er money %gold1backing&.
b. 6eo$le will acce$t $a$er money in e"change for what yo# want to b#y from them.
c. 6a$er money is written abo#t in songs and stories.
d. The more $a$er money yo# have, the richer yo# are.
AN! b
136. .n 4++1, the largest com$onent of M1 was ::::::::::, the smallest was ::::::::::.
a. c#rrency, traveler-s checks
b. checkable de$osits, c#rrency
c. c#rrency, checkable de$osits
d. checkable de$osits, overnight N#rodollar de$osits
e. none of the above
AN! e
137. 2onsider the following data! c#rrency %held o#tside banks& H )55* billion, checkable de$osits H
)45+ billion, traveler-s checks H )* billion, small1denomination time de$osits H )4++ billion,
savings de$osits H )1++ billion, money market m#t#al f#nds H )1B+ billion. M1 e0#als ::::::::::
billion and M4 e0#als :::::::::: billion.
a. )B+A, )1,+BA
b. )C+A, )1,+5A
c. )C+A, )9*A
d. )B9*, )1,+5A
e. none of the above
AN! a
138. 'hich of the following is false?
a. 2#rrency is money, b#t money is more than sim$ly c#rrency.
b. M1 is a com$onent of M4.
c. ?ederal /eserve notes make #$ abo#t 99 $ercent of the $a$er money in circ#lation.
d. 2redit cards are money since they are widely acce$ted for $#r$oses of e"change.
e. Money red#ces the transaction costs of making e"changes.
AN! d
CB 2ha$ter 14
139. Bank de$osits at the ?ederal /eserve H )*+ billion, va#lt cash H )4 billion, re0#ired reserve ratio H
+.1+, and total checkable de$osits H )*++ billion. .t follows that re0#ired reserves e0#al
:::::::::: billion, %total& reserves e0#al :::::::::: billion and e"cess reserves e0#al
:::::::::: billion.
a. )*4, )*4, )4
b. )*4, )*+, )4
c. )4, )*+, )5A
d. )5A, )*+, )4
e. )*+, )*4, )4
AN! e
140. .f total %checkable& de$osits are )5++ billion and re0#ired reserves are )*5 billion, the re0#ired
reserve ratio is :::::::::: and the sim$le de$osit m#lti$lier is ::::::::::.
a. 1+ $ercent, 1+.+
b. 15 $ercent, B.BC %*5 E 5++ H +.15 " 1++&, 1E +.15 H B.BC
c. 4+ $ercent, 1+.+
d. 14 $ercent, A.55
e. none of the above
AN! b
141. 'hich of the following statements is false?
a. Banks make loans with e"cess reserves.
b. Banks can create checkable de$osits thro#gh their lending $ractices.
c. /eserves H bank de$osits at the ?ederal /eserve = va#lt cash.
d. 2#rrency %which is a com$onent of the M1 money s#$$ly& is the same as va#lt cash.
e. The smaller the re0#ired reserve ratio, the larger the sim$le de$osit m#lti$lier.
AN! d
142. The ?ederal /eserve creates )1,+++ %new money&, gives it to mith, who then de$osits it in a bank.
.f the re0#ired reserve ratio is 1+ $ercent, the ma"im#m increase in the money s#$$ly is
:::::::::: and the banking system created :::::::::: $ercent of the increase in the money
s#$$ly.
a. )1+,+++, 1+
b. )1+,+++, 1++
c. )1++,+++, 1+
d. )1++,+++, 9+
e. )1+,+++, 9+
AN! e
143. The re0#ired reserve ratio is 1+ $ercent. .f the ?ederal /eserve creates )4+,+++ in new money, the
minim#m change in the money s#$$ly is ::::::::::, the ma"im#m change in the money s#$$ly is
::::::::::.
a. )4++,+++, )4++,+++
b. )4+,+++, )4+,+++
c. )4+,+++, )1++,+++
d. )4,+++, )4+,+++
e. )4+,+++, )4++,+++
AN! e
Money and Banking CC
144. The re0#ired reserve ratio is 1+ $ercent. .f the ?ederal /eserve creates )1++,+++ in new money and
gives it to Iones, what is the dollar difference between the minim#m and ma"im#m change in the
money s#$$ly?
a. )1,+++,+++
b. )1++,+++
c. )9++,+++
d. )5++,+++
e. none of the above
AN! c
145. As the re0#ired reserve ratio ::::::::::, the ma"im#m change in the money s#$$ly ::::::::::,
ceteris parius. As banks increase the %amo#nt of& e"cess reserves they lend, the act#al change in
the money s#$$ly ::::::::::, ceteris parius.
a. falls, rises, falls
b. rises, falls, falls
c. falls, rises, rises
d. rises, rises, rises
e. There is not eno#gh information to answer the 0#estion.
AN! c
146. /eserves H )1++ billion, total de$osits H )1,+++ billion, re0#ired reserve ratio H 1+ $ercent. 'hat is
the ma"im#m amo#nt of new loans that can be created by the banking system?
a. )9++ billion
b. )1++ billion
c. )A++ billion
d. )+
e. There is not eno#gh information to answer the 0#estion.
AN! d
147. Banks in the Dnited tates o$erate #nder a fractional reserve system, which means they m#st
maintain only a fraction of their de$osits in the form of
a. debt.
b. loans.
c. an ins#rance $olicy.
d. reserves.
e. none of the above
AN! d
148. 7ne tho#sand dollars %)1+++& is withdrawn from a bank and destroyed. .f the re0#ired reserve ratio
is 1+ $ercent, and banks are holding (ero e"cess reserves, what is the ma"im#m decrease in the
money s#$$ly?
a. )9,+++
b. )1+,+++
c. )1,+++
d. )1,9++
AN! b
CA 2ha$ter 14
149. 6eo$le decide to hold relatively more c#rrency and relatively less checkable de$osits. .f banks are
holding (ero e"cess reserves, and nothing else changes, it follows that
a. the money s#$$ly will increase.
b. the money s#$$ly will decrease.
c. banks will increase o#tstanding loans.
d. the re0#ired reserve ratio will dro$.
e. none of the above
AN! b
150. Banks decide to increase their e"cess reserves from + $ercent of total reserves to 1+ $ercent of total
reserves. .t follows that
a. the re0#ired reserve ratio will rise.
b. banks will red#ce o#tstanding loans.
c. the money s#$$ly will increase.
d. the sim$le de$osit m#lti$lier will fall.
e. a and d
AN! b
151. 'hen economists say that banks m#st hold a $ercentage of their total de$osits in reserve form, what
does this mean?
a. .t means that banks m#st hold a fraction of their c#stomers- de$osits either as bank de$osits at
the ?ederal /eserve, or as va#lt cash, or both.
b. .t means that banks reserve the right to t#rn away c#stomers a certain $ercentage of the time.
c. .t means that the fraction of va#lt cash a bank has cannot be greater than the fraction of bank
de$osits %it has& at the ?ederal /eserve.
d. Nssentially, it means that total reserves are greater than re0#ired reserves.
e. none of the above
AN! a
152. Lwendolyn has )1,+++ in cash at home in a dresser drawer. he takes the )1,+++ to her bank and
de$osits it into her checking acco#nt. At this $oint in time, it follows that the
a. si(e of the money s#$$ly has not changed.
b. com$osition of the money s#$$ly has changed.
c. com$osition of the money s#$$ly has not changed.
d. money s#$$ly has increased.
e. a and b
AN! e
153. 'hich of the following statements #ses the word "one# correctly from an economist-s $oint of
view?
a. Iackie earns a lot of money in her Job.
b. >e has most of his money tied #$ in artwork.
c. >ow m#ch money did yo# make last year?
d. .t is diffic#lt to get m#ch money in today-s tight mortgage market.
e. none of the above
AN! e
Money and Banking C9
154. .n which setting are the transaction costs of making an e"change likely to be the highest?
a. b#ying cereal at the grocery store
b. b#ying a ho#se
c. b#ying a com$#ter over the .nternet
d. b#ying stock in a com$any
e. b#ying a Big Mac at Mc3onald-s
AN! b
155. 'hich of the following is tr#e?
a. Money is an invention of government.
b. The transaction costs of e"change are higher in a money economy than in a barter economy.
c. .f Barbara has what Maren wants and Maren has what Barbara wants, then Barbara and Maren
have a do#ble coincidence of wants.
d. .f the re0#ired reserve ratio is 14 $ercent, the sim$le de$osit m#lti$lier is 14.
e. c and d
AN! c
156. 'hich of the following is tr#e?
a. 2redit cards are money beca#se they are widely acce$ted for $#r$oses of e"change.
b. The early bankers were goldsmiths.
c. .f the re0#ired reserve ratio is 15 $ercent, the sim$le de$osit m#lti$lier is a$$ro"imately B.BC.
d. a and b
e. b and c
AN! e
157. Total %checkable& de$osits H )1 million, e"cess reserves H )4++,+++, and the re0#ired reserve ratio
H 1+ $ercent. .t follows that o#tstanding loans e0#al
a. )5++,+++.
b. )*++,+++.
c. )C++,+++.
d. )A++,+++.
e. none of the above
AN! c
158. Total %checkable& de$osits H )1+ million, re0#ired reserve ratio H 4+ $ercent, and o#tstanding loans
H )C million. New loans can be granted #$ to
a. )5 million.
b. )1 million.
c. )4 million.
d. )B million.
e. There is not eno#gh information to answer the 0#estion.
AN! b
159. Total %checkable& de$osits H )1+ million, o#tstanding loans H )B million, e"cess reserves H )5
million. .t follows that the re0#ired reserve ratio is
a. 4+.+ $ercent.
b. 15.+ $ercent.
c. 1+.+ $ercent.
d. C.5 $ercent.
e. There is not eno#gh information to answer the 0#estion.
AN! c
A+ 2ha$ter 14
160. Total %checkable& de$osits H )1++ million, re0#ired reserve ratio H 1+ $ercent, e"cess reserves H )+.
.t follows that o#tstanding loans e0#al
a. )1++ million.
b. )5+ million.
c. )9+ million.
d. )4+ million.
e. none of the above
AN! c
161. /e0#ired reserves H )*+ million, re0#ired reserve ratio is 4+ $ercent, o#tstanding loans H )1*+
million. .t follows that checkable de$osits e0#al :::::::::: million and e"cess reserves e0#al
:::::::::: million.
a. )4++, )1+
b. )1A+, )4+
c. )4++, )*+
d. )1*+, )5+
e. )4++, )4+
AN! e
162. The banking system has de$osits of )5+ billion and no e"cess reserves. The re0#ired reserve ratio is
1+ $ercent. A de$osit of )1+ billion is made in Bank A and no other bank in the banking system
loses reserves. The ma"im#m increase in checkable de$osits %money s#$$ly& that can be bro#ght
abo#t by the banking system is
a. )1++ billion
b. )9+ billion
c. )CB billion
d. )1+ billion
e. none of the above
AN! b
163. 'hen $eo$le in a barter economy began to acce$t the good that had greater acce$tability than all
other goods, they weren-t trying to create the instit#tion of money. They were sim$ly trying to
::::::::::.
a. get along with their neighbors.
b. become rich.
c. make trading easier for themselves.
d. $ay lower $rices.
e. none of the above
AN! c
164. To a bank, a checkable de$osit is classified as
a. an asset.
b. a liability.
c. va#lt cash.
d. e"cess reserves.
e. a T1acco#nt.
AN! b
Money and Banking A1
165. mith transfers )4,+++ from his checking acco#nt in Bank A to his checking acco#nt in Bank B.
The re0#ired reserve ratio is 1+ $ercent and both banks hold (ero e"cess reserves. .t follows that the
money s#$$ly will
a. rise by )1A,+++.
b. fall by )1A,+++.
c. not change.
d. rise by )4,+++.
e. fall by )4+,+++.
AN! c
166. .f reserves e0#al )49 million and va#lt cash e0#als )49 million, it follows that
a. bank de$osits at the ?ederal /eserve e0#al )49 million.
b. c#rrency in the hands of the $#blic e0#als )49 million.
c. e"cess reserves e0#al )1+ million.
d. bank de$osits at the ?ederal /eserve e0#al )+.
e. There is not eno#gh information to answer the 0#estion.
AN! d
167. The money s#$$ly will not fall when cash leakages increase as long as
a. the increased cash leakages do not ca#se banks to become reserve deficient.
b. the re0#ired reserve ratio remains constant.
c. banks hold all their reserves in va#lt cash.
d. e"cess reserves are (ero.
e. none of the above
AN! a
168. Bob takes )5++ from his wallet and de$osits it into his checking acco#nt in Bank A. The money
s#$$ly will not increase as long as the
a. bank c#rrently has (ero e"cess reserves.
b. bank does not lend o#t the additional e"cess reserves that res#lt from the de$osit.
c. re0#ired reserve ratio is 1++ $ercent.
d. b and c
e. a, b, and c
AN! d
169. 'hich of the following is not a com$onent of M1?
a. c#rrency held o#tside banks
b. traveler-s checks
c. savings de$osits
d. checkable de$osits
AN! c
170. 'hich of the following statements is false?
a. Money today has val#e beca#se of its general acce$tability.
b. 'hen a credit card is #sed to make a $#rchase, the borrower inc#rs a debt.
c. Banks in the Dnited tates o$erate #nder a fractional reserve banking system in which they
m#st maintain 1++ $ercent of their de$osits in reserve form.
d. M1 does not incl#de overnight re$#rchase agreements.
e. Money-s least e"cl#sive f#nction is the store1of1val#e f#nction.
AN! c
A4 2ha$ter 14
171. The risk of s$eciali(ing %in the $rod#ction 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 yo# and the $erson yo# want to trade with have a do#ble coincidence of
wants.
e. b and d
AN! e
172. A bank that had (ero e"cess reserves yesterday will have $ositive e"cess reserves today if
a. it transfers f#nds from its reserve acco#nt at the ?ederal /eserve into va#lt cash.
b. it transfers all its va#lt cash into its reserve acco#nt at the ?ederal /eserve.
c. the re0#ired reserve ratio is lowered.
d. cash leakages rise.
e. none of the above
AN! c
173. 'hich of the following is false?
a. Banks cannot $rint money.
b. Banks can create checkable de$osits by e"tending loans.
c. Banks m#st maintain a certain $ercentage of their total %checkable& de$osits in reserve form.
d. 2heckable de$osits is a larger com$onent of M1 than c#rrency.
e. Today, in the Dnited tates, gold is money.
AN! e
174. 'hich of the following is false?
a. .n a barter economy, some goods are more widely acce$ted for trade than other goods.
b. An increase in checkable de$osits will increase the money s#$$ly, ceteris parius.
c. The sim$le de$osit m#lti$lier is e0#al to the re0#ired reserve ratio divided by 1.
d. .f the ma"im#m change in checkable de$osits is )1+,+++, and the re0#ired reserve ratio is 1+
$ercent, the change in reserves %res#lting from the original inJection of f#nds& e0#als )1,+++.
e. a and d
AN! c
175. .f total %checkable& de$osits rise, it follows that the
a. re0#ired reserve ratio will fall.
b. dollar amo#nt of reserves will rise.
c. dollar amo#nt of va#lt cash will rise.
d. re0#ired reserve ratio will rise.
e. none of the above
AN! b
176. .f M1 is )1,4++ billion, c#rrency held o#tside banks is )*++ billion, and traveler-s checks is )1+
billion, then small1denomination time de$osits e0#al
a. )C9+ billion.
b. )59+ billion.
c. )A++ billion.
d. )1,19+ billion.
e. There is not information to answer the 0#estion.
AN! e
Money and Banking A5
177. 'hich of the following statements is tr#e?
a. A savings de$osit is not co#nted in the most basic, or narrow, definition of the money s#$$ly.
b. ome assets are more li0#id than other assets.
c. Money red#ces the transaction costs of making e"changes.
d. b and c
e. a, b, and c
AN! e
True/False
1. To an economist, the terms ;money< and ;wealth< are synonyms.
AN! ?
4. 2hanging from a barter economy to a money economy can red#ce transaction costs.
AN! T
5. Money is an invention of government.
AN! ?
*. 2redit cards are a widely acce$ted form of money.
AN! ?
5. mall1denomination time de$osits are $art of M4, b#t not $art of M1.
AN! T
B. 'hen a check is cleared against a bank, the bank will lose checkable de$osits and gain reserves.
AN! ?
C. .n the Dnited tates, the money s#$$ly is backed by gold.
AN! ?
A. The ?ed $ays banks interest on bank de$osits held on reserve at the ?ed.
AN! ?
9. @owering the re0#ired reserve ratio raises the sim$le de$osit m#lti$lier.
AN! T
1+. 'hen a c#stomer takes cash from a drawer in his home and de$osits it into his checking acco#nt,
the com$osition of the money s#$$ly will change immediately and the si(e of the money s#$$ly
may event#ally change.
AN! T
11. Lresham-s @aw was based on events that occ#rred d#ring the D.. $residential election of 1A9B.
AN! ?
14. /e0#ired reserves are a set $ercentage of total reserves that m#st be held in cash in a bank-s va#lt.
AN! ?
15. To a bank, checkable de$osits are classified as a liability.
AN! T
A* 2ha$ter 14
1*. The money e"$ansion $rocess can be slowed down by cash leakages and by banks holding onto
e"cess reserves.
AN! T
15. ince an individ#al $erson is better off with a bigger money s#$$ly, it follows that we wo#ld all be
necessarily better off if the M1 money s#$$ly were larger.
AN! ?
Essay
1. 3escribe the $rocess by which banks create money.
AN! 'hen a c#stomer de$osits money into her bank, the bank-s reserves rise by an e0#al amo#nt.
.n a fractional reserve banking system, the bank is only re0#ired to set aside a small $ortion of this
de$osit and the bank is free to loan the remainder. .n the $rocess of making these new loans,
checkable de$osits are created for the $eo$le who received the loans. Liven that checkable
de$osits are $art of the money s#$$ly, by e"tending loans the banking system has increased the
money s#$$ly.
4. 'hat is Lresham-s @aw? 'hat three conditions are necessary in order for it to be valid?
AN! Lresham-s @aw states, ;Bad money drives good money o#t of circ#lation.< .n order for this
law to be valid the following conditions m#st hold! %1& the money m#st have the same face val#e,
%4& the money m#st have different intrinsic val#es, and %5& the money has a fi"ed e"change rate of 1
for 1.
5. 3escribe the circ#mstances #nder which the M1 money s#$$ly co#ld fall while the M4 money
s#$$ly remains constant at the same time.
AN! .n order for the M1 money s#$$ly to fall, one of the com$onents of M1 %checkable de$osits,
c#rrency held o#tside banks, or traveler-s checks& wo#ld have to decline. M4 wo#ld remain
constant as long as the money that was ded#cted from M1 was de$osited into one of the additional
com$onents of M4 %savings de$osits, small1denomination time de$osits, or noninstit#tional money
market m#t#al f#nds&.
*. @ist and describe the three f#nctions of money.
AN! Money serves as a medi#m of e"change, a #nit of acco#nt and a store of val#e. Medi#m of
e"change F .n a money economy, money serves as the medi#m thro#gh which transactions are
made. Dnit of acco#nt F Money is the common standard by which val#e is determined in a money
economy %a ;yardstick< of val#e&. tore of val#e F Money will retain val#e over time.