Question 1

The primary purpose of bank regulation is to

Accepted Answer

A) assure that banks do not get into financial trouble. 
B) assure that banks lend to needy persons and businesses. 
C) assure that banks maintain a minimum level of profits. 
D) guarantee bank profitability and prevent stockholder losses. 
A) assure that banks do not get into financial trouble. 
B) assure that banks lend to needy persons and businesses. 
C) assure that banks maintain a minimum level of profits. 
D) guarantee bank profitability and prevent stockholder losses.

Question 2

Excess reserves are put to use by a bank when it

Accepted Answer

A) puts cash in the vault to back existing loans. 
B) pays off the mortgage on its building. 
C) sells government securities. 
D) makes loans to its customers. 
A) puts cash in the vault to back existing loans. 
B) pays off the mortgage on its building. 
C) sells government securities. 
D) makes loans to its customers.

Question 3

Which of the following was a result of the Dodd-Frank Act?

Accepted Answer

A) restricted bank activities 
B) established a new consumer protection agency 
C) tougher regulations for banks 
D) All of the above 
A) restricted bank activities 
B) established a new consumer protection agency 
C) tougher regulations for banks 
D) All of the above

Question 4

Liquidity can be defined as the

Accepted Answer

A) cash value of money. 
B) value of money adjusted for inflation. 
C) value of fiat money when used for spending. 
D) ease with which an asset can be converted to a spendable asset. 
A) cash value of money. 
B) value of money adjusted for inflation. 
C) value of fiat money when used for spending. 
D) ease with which an asset can be converted to a spendable asset.

Question 5

Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves

Accepted Answer

A) are disliked by depositors. 
B) means lower profits for banks. 
C) are discouraged by government regulators. 
D) All of the above are correct. 
A) are disliked by depositors. 
B) means lower profits for banks. 
C) are discouraged by government regulators. 
D) All of the above are correct.

Question 6

According to the convention followed in the text, "money" consists all of the following except

Accepted Answer

A) coins. 
B) credit cards. 
C) checkable deposits. 
D) paper money. 
A) coins. 
B) credit cards. 
C) checkable deposits. 
D) paper money.

Question 7

A bank run involves a large flow of money

Accepted Answer

A) into bank depositors' accounts. 
B) into checking and savings accounts. 
C) out of depositors' accounts. 
D) out of individuals' cash reserves into money market funds. 
A) into bank depositors' accounts. 
B) into checking and savings accounts. 
C) out of depositors' accounts. 
D) out of individuals' cash reserves into money market funds.

Question 8

One reason why gold and silver have served as money is that they

Accepted Answer

A) are easy to produce. 
B) are easy to duplicate. 
C) are durable. 
D) All of the above are correct. 
A) are easy to produce. 
B) are easy to duplicate. 
C) are durable. 
D) All of the above are correct.

Question 9

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 10

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 11

When a bank makes loans with excess reserves, it

Accepted Answer

A) creates money. 
B) destroys money. 
C) alters the composition of M1. 
D) leaves the money supply unchanged. 
A) creates money. 
B) destroys money. 
C) alters the composition of M1. 
D) leaves the money supply unchanged.

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

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 14

What is the criticism leveled against deposit insurance by the FDIC?

Accepted Answer

Depositors who are freed from any risk o

Question 15

Bankers must always trade off

Accepted Answer

A) honesty and dishonesty. 
B) stocks and loans. 
C) prudence and profits. 
D) gold and cash. 
E) All of the above are correct. 
A) honesty and dishonesty. 
B) stocks and loans. 
C) prudence and profits. 
D) gold and cash. 
E) All of the above are correct.

Question 16

If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?

Accepted Answer

A) $25 million 
B) $20 million 
C) $5 million 
D) $2.5 million 
A) $25 million 
B) $20 million 
C) $5 million 
D) $2.5 million

Question 17

In a monetary system, people will exchange a good for

Accepted Answer

A) another good. 
B) a service. 
C) money. 
D) gold or other precious metals. 
A) another good. 
B) a service. 
C) money. 
D) gold or other precious metals.

Question 18

Inflation increases the use of money as a store of value.

Accepted Answer

A) True 
 B)False

Question 19

If bankers decide to keep a lower fraction of deposits on reserve, the money supply will

Accepted Answer

A) decrease. 
B) increase. 
C) remain unchanged. 
D) move more quickly through the economy. 
A) decrease. 
B) increase. 
C) remain unchanged. 
D) move more quickly through the economy.

Question 20

The basic equation for a bank's balance sheet is ____.

Accepted Answer

A) assets = liabilities − net worth 
B) net worth = assets − liabilities 
C) net worth = assets + liabilities 
D) liabilities = net worth + assets 
A) assets = liabilities − net worth 
B) net worth = assets − liabilities 
C) net worth = assets + liabilities 
D) liabilities = net worth + assets

Exam 29: Money and the Banking System

The primary purpose of bank regulation is to

Excess reserves are put to use by a bank when it

Which of the following was a result of the Dodd-Frank Act?

Liquidity can be defined as the

Excess reserves make a bank less vulnerable to runs, but bankers do not like to hold excess reserves because holding excess reserves

According to the convention followed in the text, "money" consists all of the following except

A bank run involves a large flow of money

One reason why gold and silver have served as money is that they

Although checking deposits are considered money, they are actually

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

When a bank makes loans with excess reserves, it

Fractional reserve banking takes its name from the fact that banks

The primary feature of money is that it serves as

What is the criticism leveled against deposit insurance by the FDIC?

Bankers must always trade off

If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?

In a monetary system, people will exchange a good for

Inflation increases the use of money as a store of value.

If bankers decide to keep a lower fraction of deposits on reserve, the money supply will

The basic equation for a bank's balance sheet 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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