Question 1

Money is:

Accepted Answer

A)  paper money and coins but not checks. 
B)  currency and stocks. 
C)  anything that can easily be used to buy goods and services. 
D)  paper money but not coins.

Question 2

The medium-of-exchange function means that money is used:

Accepted Answer

A)  as the common denominator of prices. 
B)  as the common denominator of future payments. 
C)  to pay for goods and services. 
D)  to accumulate purchasing power.

Question 3

Which statement is NOT considered one of the three chief characteristics of money?

Accepted Answer

A)  It serves as a medium of exchange. 
B)  It acts as a store of value. 
C)  It is a highly illiquid asset. 
D)  It is a unit of account.

Question 4

The primary difference between M1 and M2 is that:

Accepted Answer

A)  the dollar amount of M1 is much larger than the dollar amount of M2. 
B)  M1 includes checkable deposits, but M2 does not. 
C)  M2 includes checkable deposits, but M1 does not. 
D)  M2 includes savings deposits and time deposits, but M1 does not.

Question 5

"Tuition at State University this year is $8,000." Which function of money does this statement best illustrate?

Accepted Answer

A)  store of value 
B)  medium of exchange 
C)  unit of account 
D)  means of deferred payment

Question 6

Suppose that a bank does NOT hold excess reserves and the reserve ratio is 20%. If Molly deposits $1,000 of cash in her checking account and the bank lends $600 to Freda, the bank can lend an additional:

Accepted Answer

A)  $400. 
B)  $200. 
C)  $1,000. 
D)  $5,000.

Question 7

Use the following to answer questions: 
-(Table: Balance Sheet) Refer to Table: Balance Sheet. If the reserve ratio is 25%, loans are:

Accepted Answer

A)  $5,000. 
B)  $15,000. 
C)  $60,000. 
D)  $80,000.

Question 8

Bank runs in the United States during the 1930s damaged the economy because:

Accepted Answer

A)  capital requirements prevented bank managers from taking additional lending risks. 
B)  the reserve ratio was set too high. 
C)  the Federal Reserve system did not exist at the time. 
D)  the loss of confidence at one bank quickly extended to other banks.

Question 9

Use the following to answer questions: 
-(Table: Balance Sheet) Refer to Table: Balance Sheet. If the reserve ratio is 25%, deposits are:

Accepted Answer

A)  $5,000. 
B)  $15,000. 
C)  $60,000. 
D)  $80,000.

Question 10

A major problem with bank runs is that they:

Accepted Answer

A)  spread to other banks. 
B)  cause inflation because the money moves so fast. 
C)  drive down interest rates. 
D)  drive down both inflation and interest rates.

Question 11

Suppose a bank has excess reserves of $50 and the reserve ratio is 20%. If Andy deposits $5,000 of cash in his checking account and the bank lends $2,500 to Molly, the money supply:

Accepted Answer

A)  is increased by $7,500. 
B)  is increased by $2,500. 
C)  remains unchanged. 
D)  is decreased by $5,000.

Question 12

Included in M1 are:

Accepted Answer

A)  checkable bank deposits. 
B)  savings deposits. 
C)  U.S. Treasury bills. 
D)  demand deposits, savings deposits, and U.S. Treasury bills.

Question 13

Which asset is considered to be money?

Accepted Answer

A)  stock 
B)  bonds 
C)  credit cards 
D)  checkable bank deposits

Question 14

If the currency in circulation is $100 million, checkable bank deposits are $500 million, savings deposits are $300 million, and traveler's checks are $10 million, then M1 is:

Accepted Answer

A)  $100 million. 
B)  $410 million. 
C)  $610 million. 
D)  $900 million.

Question 15

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 8% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Accepted Answer

A)  about $667,000 
B)  about $111,000 
C)  $250,000 
D)  $1 million

Exam 14: Money, Banking, and the Federal Reserve System