Question 1

Why are the following included in the broader definition of supply known as M2?
(a)money market deposit accounts(b)money market mutual funds(c)savings accounts

Accepted Answer

(a)Money market deposit accounts: They a

Question 2

The money multiplier process is based on the principle of fractional reserve banking.

Accepted Answer

A) True 
 B)False

Question 3

Banking under a fractional reserve system is inherently risky, but

Accepted Answer

A) safe if banks are allowed to make profits. 
B) regulation removes all danger of failures. 
C) is always safely done with modern management. 
D) is made safer with cautious and prudent management. 
A) safe if banks are allowed to make profits. 
B) regulation removes all danger of failures. 
C) is always safely done with modern management. 
D) is made safer with cautious and prudent management.

Question 4

The moral hazard problem refers to

Accepted Answer

A) difficulty banks have in satisfying the government's reserve requirement. 
B) depositors making a run on the bank, even though the bank is insured. 
C) banks taking on more risk in their lending because they know their depositors are insured. 
D) banks issuing bank notes that compete with the government's currency. 
A) difficulty banks have in satisfying the government's reserve requirement. 
B) depositors making a run on the bank, even though the bank is insured. 
C) banks taking on more risk in their lending because they know their depositors are insured. 
D) banks issuing bank notes that compete with the government's currency.

Question 5

The narrowest definition of the money supply (M1) includes

Accepted Answer

A) cash and travelers' checks. 
B) cash, travelers' checks, and savings account balances. 
C) cash, checking account balances, and travelers' checks. 
D) cash, bank deposits, and money market accounts. 
A) cash and travelers' checks. 
B) cash, travelers' checks, and savings account balances. 
C) cash, checking account balances, and travelers' checks. 
D) cash, bank deposits, and money market accounts.

Question 6

Which of the following observations is not true?

Accepted Answer

A) Money is divisible. 
B) The value of money never remains the same. 
C) Money has an intrinsic value. 
D) Money is the most liquid form of asset. 
A) Money is divisible. 
B) The value of money never remains the same. 
C) Money has an intrinsic value. 
D) Money is the most liquid form of asset.

Question 7

The U.S.government will probably return soon to a system of paper money backed by gold.

Accepted Answer

A) True 
 B)False

Question 8

The main advantage of money market deposit accounts over traditional checking accounts is the ease of check writing.

Accepted Answer

A) True 
 B)False

Question 9

Fractional reserve banking has three crucial features: bank profitability, bank discretion over the money supply, and bank exposure to runs.

Accepted Answer

A) True 
 B)False

Question 10

Due to the private nature of bank ownership, there is often a difference between bankers' goals and macroeconomic objectives.

Accepted Answer

A) True 
 B)False

Question 11

Paper money has been in use since the

Accepted Answer

A) Roman Empire. 
B) eleventh century in China. 
C) Civil War in the United States. 
D) development of money-center banking in nineteenth-century London. 
A) Roman Empire. 
B) eleventh century in China. 
C) Civil War in the United States. 
D) development of money-center banking in nineteenth-century London.

Question 12

The initial development of paper money began when people used ____ as payment for goods and services.

Accepted Answer

A) credit cards 
B) commodity money 
C) goldsmith receipts 
D) gold bullion 
E) gold coins 
A) credit cards 
B) commodity money 
C) goldsmith receipts 
D) gold bullion 
E) gold coins

Question 13

The "efficiency of the payments mechanism" refers to

Accepted Answer

A) the ease and speed of exchanging money for goods and services. 
B) how fast member banks replenish required reserves. 
C) how fast banks pay interest on deposit accounts. 
D) how fast countries pay off foreign debts. 
A) the ease and speed of exchanging money for goods and services. 
B) how fast member banks replenish required reserves. 
C) how fast banks pay interest on deposit accounts. 
D) how fast countries pay off foreign debts.

Question 14

Price levels rarely remain the same.This implies that

Accepted Answer

A) money is an excellent medium of exchange. 
B) money is divisible. 
C) money is a good medium for measuring value. 
D) money is an imperfect medium for storing value. 
A) money is an excellent medium of exchange. 
B) money is divisible. 
C) money is a good medium for measuring value. 
D) money is an imperfect medium for storing value.

Question 15

The money creation formula is oversimplified because it assumes that

Accepted Answer

A) every recipient of a bank loan will redeposit the proceeds in another bank. 
B) loan recipients will not take any of the proceeds in cash. 
C) every bank lends out all excess reserves. 
D) All of the above are correct. 
A) every recipient of a bank loan will redeposit the proceeds in another bank. 
B) loan recipients will not take any of the proceeds in cash. 
C) every bank lends out all excess reserves. 
D) All of the above are correct.

Question 16

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions

Accepted Answer

A) decreases the money supply by $1,000. 
B) decreases the money supply by $200. 
C) does not change the money supply. 
D) increases the money supply by $200. 
E) increases the money supply by $800. 
A) decreases the money supply by $1,000. 
B) decreases the money supply by $200. 
C) does not change the money supply. 
D) increases the money supply by $200. 
E) increases the money supply by $800.

Question 17

Banks that are managed in a very safe and conservative manner can be expected to earn

Accepted Answer

A) high, steady profits. 
B) high but volatile profits. 
C) low and consistent profits. 
D) low profits with occasional major losses. 
A) high, steady profits. 
B) high but volatile profits. 
C) low and consistent profits. 
D) low profits with occasional major losses.

Question 18

Fractional reserve banking began as a search for

Accepted Answer

A) a different metallic monetary system. 
B) additional sources of gold. 
C) different types of borrowers. 
D) additional profits. 
A) a different metallic monetary system. 
B) additional sources of gold. 
C) different types of borrowers. 
D) additional profits.

Question 19

The only major disadvantage of paper money is that it is hard to divide into smaller denominations.

Accepted Answer

A) True 
 B)False

Question 20

Paper money in the United States is

Accepted Answer

A) backed by gold in Fort Knox. 
B) partially backed by gold and silver. 
C) entirely fiat money. 
D) fully convertible into gold at fixed prices. 
A) backed by gold in Fort Knox. 
B) partially backed by gold and silver. 
C) entirely fiat money. 
D) fully convertible into gold at fixed prices.

Exam 29: Money and the Banking System

Why are the following included in the broader definition of supply known as M2? (a)money market deposit accounts(b)money market mutual funds(c)savings accounts

The money multiplier process is based on the principle of fractional reserve banking.

Banking under a fractional reserve system is inherently risky, but

The moral hazard problem refers to

The narrowest definition of the money supply (M1) includes

Which of the following observations is not true?

The U.S.government will probably return soon to a system of paper money backed by gold.

The main advantage of money market deposit accounts over traditional checking accounts is the ease of check writing.

Fractional reserve banking has three crucial features: bank profitability, bank discretion over the money supply, and bank exposure to runs.

Due to the private nature of bank ownership, there is often a difference between bankers' goals and macroeconomic objectives.

Paper money has been in use since the

The initial development of paper money began when people used ____ as payment for goods and services.

The "efficiency of the payments mechanism" refers to

Price levels rarely remain the same.This implies that

The money creation formula is oversimplified because it assumes that

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions

Banks that are managed in a very safe and conservative manner can be expected to earn

Fractional reserve banking began as a search for

The only major disadvantage of paper money is that it is hard to divide into smaller denominations.

Paper money in the United States is

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: the Price System

The Shortcomings of Free Markets

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

Is Useconomic Leadership Threatened

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

He 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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