Question 1

The money creation process generated by an injection of reserves stops when

Accepted Answer

A)  people deposit their loans into other banks. 
B)  reserve requirements are raised. 
C)  the increase in required reserves equals the size of the injection. 
D)  bankers begin to fear runs and stop making loans. 
A)  people deposit their loans into other banks. 
B)  reserve requirements are raised. 
C)  the increase in required reserves equals the size of the injection. 
D)  bankers begin to fear runs and stop making loans.

Question 2

Due to new methods of electronically transferring assets from savings accounts to checking accounts, many economists favor moving savings accounts from

Accepted Answer

A)  M₁ into M2. 
B)  M2 into M3. 
C)  M3 into M2. 
D)  M2 into M₁. 
A)  M₁ into M2. 
B)  M2 into M3. 
C)  M3 into M2. 
D)  M2 into M₁.

Question 3

Bank regulation exists because public authorities are convinced that

Accepted Answer

A)  the balance between public interest and safety does not affect profitability, and should be removed from the hands of managers. 
B)  the balance between bank profitability and public interest cannot be handled with legislation, but can be handled with regulation. 
C)  the balance between bank profitability and safety cannot be left to profit-maximizing managers. 
D)  the balance between bank safety and public interest can best be obtained by reliance on the market. 
A)  the balance between public interest and safety does not affect profitability, and should be removed from the hands of managers. 
B)  the balance between bank profitability and public interest cannot be handled with legislation, but can be handled with regulation. 
C)  the balance between bank profitability and safety cannot be left to profit-maximizing managers. 
D)  the balance between bank safety and public interest can best be obtained by reliance on the market.

Question 4

Bank runs are "contagious" in that they often spread to other banks.

Accepted Answer

A) True 
 B)False

Question 5

Many economists believe that savings accounts should be added to M₁ because they

Accepted Answer

A)  are larger in size than conventional checking accounts. 
B)  pay larger interest than checking accounts. 
C)  can be transferred quickly into checkable accounts. 
D)  are also insured by the federal government. 
A)  are larger in size than conventional checking accounts. 
B)  pay larger interest than checking accounts. 
C)  can be transferred quickly into checkable accounts. 
D)  are also insured by the federal government.

Question 6

The oversimplified money multiplier formula, when the required reserve ratio is m, is

Accepted Answer

A)  change in money supply = change in reserves × m. 
B)  change in money supply = (1/m) /change in reserves. 
C)  change in money supply = (1/m) × change in reserves. 
D)  change in money supply = m/change in reserves. 
A)  change in money supply = change in reserves × m. 
B)  change in money supply = (1/m) /change in reserves. 
C)  change in money supply = (1/m) × change in reserves. 
D)  change in money supply = m/change in reserves.

Question 7

Most bank deposits in the United States are insured by the Federal Deposit Insurance Corporation (FDIC).

Accepted Answer

A) True 
 B)False

Question 8

Under fractional banking, when a bank lends to a customer

Accepted Answer

A)  the money supply increases. 
B)  bank profitability is decreased. 
C)  the bank is protected from a run. 
D)  bank credit decreases. 
A)  the money supply increases. 
B)  bank profitability is decreased. 
C)  the bank is protected from a run. 
D)  bank credit decreases.

Question 9

In September 2007 the British bank Northern Rock which specialized in home mortgages experienced a noteworthy bank run.

Accepted Answer

A) True 
 B)False

Question 10

As of December 2010+, the largest single component of M2 consists of

Accepted Answer

A)  checkable deposits at banks. 
B)  cash, coins, and other currency. 
C)  savings deposits. 
D)  gold and silver in commodity accounts. 
A)  checkable deposits at banks. 
B)  cash, coins, and other currency. 
C)  savings deposits. 
D)  gold and silver in commodity accounts.

Question 11

Which of the following is the term used to describe a failing bank selling off a substantial amount of assets in a short time period in order to remain solvent?

Accepted Answer

A)  fire sale 
B)  short sale 
C)  long sale 
D)  liquidity sale 
A)  fire sale 
B)  short sale 
C)  long sale 
D)  liquidity sale

Question 12

Fractional reserve banking takes its name from the fact that banks

Accepted Answer

A)  hold only a fraction of their reserves at the bank itself. 
B)  keep only a fraction of their total deposits on reserve. 
C)  lend only a fraction of their total reserves to customers. 
D)  reserve only a fraction of their activity for lending. 
A)  hold only a fraction of their reserves at the bank itself. 
B)  keep only a fraction of their total deposits on reserve. 
C)  lend only a fraction of their total reserves to customers. 
D)  reserve only a fraction of their activity for lending.

Question 13

Nowadays, most observers believe that monetary policy

Accepted Answer

A)  is less important than fiscal policy. 
B)  is more important than fiscal policy. 
C)  and fiscal policy are equally important. 
D)  and fiscal policy are both unimportant. 
A)  is less important than fiscal policy. 
B)  is more important than fiscal policy. 
C)  and fiscal policy are equally important. 
D)  and fiscal policy are both unimportant.

Question 14

During a period of economic depression, such as has existed for a long period in Japan, a profit-oriented bank will act in such a way that

Accepted Answer

A)  dampens the fluctuations. 
B)  makes the depression worse. 
C)  is neutral with respect to the fluctuations. 
D)  is counter-cyclical and stabilizing. 
A)  dampens the fluctuations. 
B)  makes the depression worse. 
C)  is neutral with respect to the fluctuations. 
D)  is counter-cyclical and stabilizing.

Question 15

Although checking deposits are considered money, they are actually

Accepted Answer

A)  fictitious numbers in persons' checkbooks. 
B)  backed by commodities like gold. 
C)  not very useful for making payments. 
D)  bookkeeping entries in bank balance sheets. 
A)  fictitious numbers in persons' checkbooks. 
B)  backed by commodities like gold. 
C)  not very useful for making payments. 
D)  bookkeeping entries in bank balance sheets.

Question 16

The largest portion of the M₁ money supply consists of

Accepted Answer

A)  coins in circulation. 
B)  paper currency in circulation. 
C)  savings deposits at credit unions. 
D)  checkable deposits. 
A)  coins in circulation. 
B)  paper currency in circulation. 
C)  savings deposits at credit unions. 
D)  checkable deposits.

Question 17

The primary feature of money is that it serves as

Accepted Answer

A)  barter value. 
B)  a medium of exchange. 
C)  intrinsic value. 
D)  commodity value. 
A)  barter value. 
B)  a medium of exchange. 
C)  intrinsic value. 
D)  commodity value.

Question 18

Why are checking account balances included in the M₁ definition of the money supply?

Accepted Answer

A)  They are a traditional form of money that pre-dates paper money. 
B)  They are used to make so many payments. 
C)  They are backed by gold and silver. 
D)  They pay interest. 
A)  They are a traditional form of money that pre-dates paper money. 
B)  They are used to make so many payments. 
C)  They are backed by gold and silver. 
D)  They pay interest.

Question 19

The distinction between M₁ and M2 is based on

Accepted Answer

A)  portability-the ease with which an asset can be moved. 
B)  divisibility-the ease with which an asset can be used to make smaller payments. 
C)  liquidity-the ease with which an asset can be converted into cash. 
D)  storability-how long an asset will retain its value. 
A)  portability-the ease with which an asset can be moved. 
B)  divisibility-the ease with which an asset can be used to make smaller payments. 
C)  liquidity-the ease with which an asset can be converted into cash. 
D)  storability-how long an asset will retain its value.

Question 20

If people begin to hold more cash, the money multiplier process will

Accepted Answer

A)  increase in intensity. 
B)  remain the same. 
C)  decrease in actual size. 
D)  cause larger amounts of excess reserves. 
A)  increase in intensity. 
B)  remain the same. 
C)  decrease in actual size. 
D)  cause larger amounts of excess reserves.

Exam 29: Money and the Banking System

The money creation process generated by an injection of reserves stops when

Due to new methods of electronically transferring assets from savings accounts to checking accounts, many economists favor moving savings accounts from

Bank regulation exists because public authorities are convinced that

Bank runs are "contagious" in that they often spread to other banks.

Many economists believe that savings accounts should be added to M₁ because they

The oversimplified money multiplier formula, when the required reserve ratio is m, is

Most bank deposits in the United States are insured by the Federal Deposit Insurance Corporation (FDIC).

Under fractional banking, when a bank lends to a customer

In September 2007 the British bank Northern Rock which specialized in home mortgages experienced a noteworthy bank run.

As of December 2010+, the largest single component of M2 consists of

Which of the following is the term used to describe a failing bank selling off a substantial amount of assets in a short time period in order to remain solvent?

Fractional reserve banking takes its name from the fact that banks

Nowadays, most observers believe that monetary policy

During a period of economic depression, such as has existed for a long period in Japan, a profit-oriented bank will act in such a way that

Although checking deposits are considered money, they are actually

The largest portion of the M₁ money supply consists of

The primary feature of money is that it serves as

Why are checking account balances included in the M₁ definition of the money supply?

The distinction between M₁ and M2 is based on

If people begin to hold more cash, the money multiplier process will

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate over Monetary and Fiscal Policy

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

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