Question 1

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 2

Fiat money is

Accepted Answer

A)   always backed by gold or silver.
B)   useful in buying Italian cars.
C)   only backed by government decree.
D)   not as liquid as precious metals.E) A) and C)
F) None of the above

Question 3

The type of currency in circulation in the modern U.S. economy is almost entirely

Accepted Answer

A)   commodity money.
B)   metallic money.
C)   fiat money.
D)   silver certificates.E) All of the above
F) A) and D)

Question 4

Credit cards are part of the M2 money supply and are valued at the maximum credit limit of the cardholder.

Accepted Answer

A) True 
 B)False

Question 5

If fears of a terrorist attack are widespread and people lose faith in money, the economy could revert to a system of

Accepted Answer

A)   cash and checks.
B)   double-entry bookkeeping.
C)   barter.
D)   financial intermediaries.E) A) and D)
F) B) and D)

Question 6

When people trade goods for money, money is being used as a medium of exchange.

Accepted Answer

A) True 
 B)False

Question 7

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.E) None of the above
F) B) and C)

Question 8

Banks create wealth when they lend their excess reserves.

Accepted Answer

A) True 
 B)False

Question 9

As a general rule, you would be unwise to keep a deposit at an FDIC-insured bank in an amount greater than

Accepted Answer

A)   20 percent of the bank's reserves.
B)   $1,000,000.
C)   $250,000.
D)   an infinite amount; there is no limit.E) B) and D)
F) None of the above

Question 10

Price levels rarely remain the same. This implies that money is

Accepted Answer

A)   an excellent medium of exchange.
B)   divisible.
C)   a good medium for measuring value.
D)   an imperfect medium for storing value.E) A) and C)
F) A) and D)

Question 11

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 these responses are correct.F) None of the above
G) A) and B)

Question 12

One difference between the assets included in M1 and those added to calculate M2 is that items in M1 are

Accepted Answer

A)   better stores of value than those added to compute M2.
B)   more liquid than those added to compute M2.
C)   less liquid than those added to compute M2.
D)   larger than those added to compute M2.E) B) and D)
F) None of the above

Question 13

Which of the following is included in M1?

Accepted Answer

A)   Savings accounts
B)   Money market deposit accounts
C)   Money market mutual funds
D)   Travelers' checks
E)   None of the above is included.F) A) and D)
G) B) and D)

Question 14

The new $20 bills are being introduced by the U.S. Treasury primarily to diminish

Accepted Answer

A)   inflation.
B)   poverty.
C)   counterfeiting.
D)   bank failures.E) B) and C)
F) A) and D)

Question 15

In a market system, the most dangerous types of bankruptcies involve

Accepted Answer

A)   industrial monopolies.
B)   multinational firms.
C)   employment agencies.
D)   financial institutions.E) A) and D)
F) A) and C)

Question 16

A run on a bank may occur if

Accepted Answer

A)   depositors withdraw some funds to invest in the stock market.
B)   required reserves are increased.
C)   interest rates are raised.
D)   depositors lose confidence in the bank and attempt to withdraw all their funds.
E)   All of these responses are correct.F) B) and C)
G) A) and E)

Question 17

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.E) C) and D)
F) B) and C)

Question 18

Why are credit cards not considered part of the money supply?

Accepted Answer

Credit cards lengthen the period of time...

Question 19

A credit card is a form of money.

Accepted Answer

A) True 
 B)False

Question 20

Moral hazard is the idea that when people are insured against the consequences of a risk, they will engage in risker behavior.

Accepted Answer

A) True 
 B)False

Exam 28: Money and the Banking System

Fiat money is

Correct AnswerverifiedShow Answer

A credit card is a form of money.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is included in M1?

Correct AnswerverifiedShow Answer

Moral hazard is the idea that when people are insured against the consequences of a risk, they will engage in risker behavior.

Correct AnswerverifiedShow Answer

Why are credit cards not considered part of the money supply?

Correct AnswerverifiedCredit cards lengthen the period of time...View AnswerShow Answer

If fears of a terrorist attack are widespread and people lose faith in money, the economy could revert to a system of

Correct AnswerverifiedShow Answer

As a general rule, you would be unwise to keep a deposit at an FDIC-insured bank in an amount greater than

Correct AnswerverifiedShow Answer

A run on a bank may occur if

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Price levels rarely remain the same. This implies that money is

Correct AnswerverifiedShow Answer

One difference between the assets included in M1 and those added to calculate M2 is that items in M1 are

Correct AnswerverifiedShow Answer

The new $20 bills are being introduced by the U.S. Treasury primarily to diminish

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In a market system, the most dangerous types of bankruptcies involve

Correct AnswerverifiedShow Answer

Banks create wealth when they lend their excess reserves.

Correct AnswerverifiedShow Answer

Bankers must always trade off

Correct AnswerverifiedShow Answer

When people trade goods for money, money is being used as a medium of exchange.

Correct AnswerverifiedShow Answer

The type of currency in circulation in the modern U.S. economy is almost entirely

Correct AnswerverifiedShow Answer

Credit cards are part of the M2 money supply and are valued at the maximum credit limit of the cardholder.

Correct AnswerverifiedShow Answer

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Credit cards lengthen the period of time...
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