Ch.13 Money And Banks Test Bank 11th Edition

Chapter 13 Test Bank KEY

1. Barter

A. makes market transactions easier and less time consuming.

B. is considered to be an efficient process for an economy.

C. is the direct exchange of one good or service for another.

D. requires the use of gold to assess value.

2. Which of the following is NOT about barter?

A. It involves the direct exchange of one good or service for another.

B. It is more likely to occur if people lose faith in a nation's currency.

C. It is considered to be less efficient for an economy than the use of money.

D. It allows people to obtain more goods than they can using money.

3. Professor Williams tutors her next-door neighbor's son in economics. Instead of paying her for this service, the neighbor washes the professor's car. This is an example of

A. a market transaction.

B. barter.

C. a monetary transaction.

D. a store of value.

4. Reggie fixes his friend's car and the friend cleans his house instead of paying him. In economics, this is referred to as

A. a market transaction.

B. an efficient exchange.

C. barter.

D. a swap.

5. In order to simplify market transactions, an economy must use

A. U.S. dollars.

B. a form of money.

C. barter.

D. gold.

6. Historically in the United States, money has included all of the following except

A. grain.

B. fish.

C. milk.

D. furs.

7. Which of the following has NOT served as a form of money for the United States?

A. eggs

B. gunpowder

C. tobacco

D. spanish gold coins

8. Which of the following is NOT about money?

A. It promotes the specialization of labor.

B. It is a mechanism for transforming current income into future purchases.

C. It must be minted by the government in order to have value.

D. It facilitates the continuous series of exchanges that characterize a market economy.

9. Which of the following is NOT an essential characteristic of money?

A. It serves as a benchmark for barter.

B. It serves as a store of value.

C. It serves as a medium of exchange.

D. It serves as a standard of value.

10. Which of the following is NOT an essential characteristic of money?

A. It is a store of value.

B. It is backed by gold or silver.

C. It is a standard of value.

D. It is a medium of exchange.

11. When money is used to pay for goods and services it is functioning as a

A. store of value.

B. standard of value.

C. medium of exchange.

D. mechanism for accounting.

12. Money is functioning as a medium of exchange when you

A. buy lunch at a fast food restaurant for yourself and your friend.

B. use it to compare the cost of a steak dinner to the cost of a hamburger.

C. decide to save your cash for gas and eat leftover pizza for dinner.

D. borrow a DVD from your friend and she borrows your textbook.

13. Money is functioning as a medium of exchange if you

A. compare book prices at the university bookstore versus online.

B. spend less this week so you'll have money for a concert next month.

C. purchase coffee at the local coffee shop before class.

D. share a ride with your roommate instead of buying gas.

14. If money is used to transform current income into future purchases, it is functioning as a

A. medium of exchange.

B. store of value.

C. mechanism for barter.

D. standard of value.

15. Money is functioning as a store of value when you

A. buy a rare baseball card that you expect to increase in value.

B. use it to compare the cost of a pair of shoes to the cost of a shirt.

C. decide to save your cash to pay for tuition next semester.

D. pay more than the minimum due on your credit card bill.

16. Money is functioning as a store of value if you

A. buy your textbooks online at a reduced price.

B. put it in a savings account so you can buy a new car next summer.

C. walk all over the mall searching for the best prices.

D. shop at thrift stores and garage sales.

17. When the market value of goods and services is expressed in prices, money is functioning as a

A. medium of exchange.

B. standard of value.

C. store of value.

D. type of barter.

18. Money is functioning as a standard of value when you

A. use it to compare two houses in different price ranges.

B. buy jeans at the mall.

C. buy an original painting that you expect will increase in value.

D. save the money you earn during the summer to pay for fall tuition.

19. Money is functioning as a standard of value if you

A. buy a college T-shirt to support the athletic teams.

B. skip lunch all week so you'll have enough money for the weekend.

C. scan your own groceries in the "self" checkout line so that you can see the prices.

D. compare the prices of running shoes online to those in a sporting goods store.

20. Money is anything that

A. can be used to barter.

B. is generally accepted as a medium of exchange.

C. has value.

D. a government declares to have value.

21. The basic money supply includes

A. currency, transactions accounts, and traveler's checks.

B. currency, transactions accounts, and savings account balances.

C. currency, transactions accounts, and credit card balances.

D. currency, savings account balances, and traveler's checks.

22. The overwhelming majority of the basic money supply in the U.S. is in the form of

A. traveler's checks and currency in circulation.

B. currency in circulation and savings accounts.

C. transactions accounts and currency in circulation.

D. credit card balances and transactions accounts.

23. The smallest component of the basic money supply is in the form of

A. savings accounts.

B. transactions accounts.

C. currency in circulation.

D. traveler's checks.

24. Savings accounts and certificates of deposit are called

A. transaction accounts.

B. treasury accounts.

C. store of value.

D. near money.

25. The makeup of almost all the basic U.S. money supply is currency and

A. transactions accounts.

B. piggy banks.

C. traveler's checks.

D. credit cards.

26. Martin takes $150 out of his checking account and hides it in his house as cash. The immediate result of this transaction is that M1

A. does not change in value.

B. decreases by $150.

C. decreases by more than $150.

D. increases by $150.

27. LaTressa takes $230 from under her mattress and deposits it in her checking account. The immediate result of this transaction is that M1

A. increases by $230.

B. increases by more than $230.

C. decreases by $230.

D. does not change in value.

28. If Justin takes $75 from his cookie jar and deposits it in his checking account, the immediate result is that

A. the value of M1 stays the same.

B. M1 increases by more than $75.

C. M1 increases by less than $75.

D. M1 increases by exactly $75.

29. If Edgar takes $100 out of his savings account and deposits it into his checking account, the immediate result of this transaction is that M1

A. increases by $100.

B. decreases by $100.

C. decreases by more than $100.

D. does not change.

30. When an individual deposits cash or coins in a transactions account, there is

A. no change in either the composition or the size of the money supply.

B. a change in the size of the money supply, but not the composition.

C. a change in the composition of the money supply, but not the size.

D. a change in both the composition and the size of the money supply.

31. Most market transactions are made using

A. cash.

B. transactions accounts.

C. credit cards.

D. traveler's checks.

32. As the size of purchases becomes larger, a greater percentage of the purchases are made using

A. cash.

B. checks and debit cards.

C. barter.

D. traveler's checks.

33. Which of the following functions like money, but is NOT included in M1?

A. checking accounts

B. cash

C. traveler's checks

D. money market mutual funds

34. Which of the following is NOT part of M1, but is included in "near money" according to the text?

A. traveler's checks

B. cash

C. transactions accounts

D. savings accounts

35. Money market mutual funds are

A. pools of money used to buy interest-bearing securities.

B. sources of readily available cash at low interest rates.

C. demand deposits earning high interest rates.

D. a component of M1.

36. The total quantity of output demanded at alternative price levels in a given time period, ceteris paribus, is the definition of

A. aggregate supply.

B. aggregate demand.

C. money supply.

D. money demand.

37. Which of the following is affected by changes in aggregate demand?

A. total output, but not employment or prices

B. employment and prices, but not total output

C. prices and total output, but not employment

D. prices, employment, and total output

38. Which of the following is NOT a function performed by banks?

A. accepting deposits

B. offering check writing privileges

C. making loans

D. determining fiscal policy

39. Banks do all of the following except

A. purchase stock.

B. earn a profit.

C. make loans.

D. accept deposits.

40. The creation of transaction deposits by bank lending is the definition of

A. counterfeit money.

B. money laundering.

C. loan creation.

D. deposit creation.

41. Deposit creation occurs when

A. a person puts cash in a bank and the bank holds all of it as reserves.

B. someone deposits a payroll check into a transactions account at a bank.

C. money enters the banking system and a portion of it is lent out.

D. a bank borrows reserves from the Federal Reserve.

42. Money creation occurs when

A. a person puts cash in a bank.

B. a person deposits a payroll check in their checking account.

C. banks make loans to borrowers.

D. the Federal Reserve increases the reserve requirement.

43. When a bank makes a loan

A. it reduces the amount of money in the monetary system.

B. it creates a transactions account balance for the borrower.

C. it usually gives the borrower cash.

D. it prints additional money for the borrower.

44. Which of the following does NOT occur when a bank makes a loan?

A. It creates money.

B. It creates a transactions account balance for the borrower.

C. The money supply increases.

D. It transfers money from spenders to savers.

45. Banks do all of the following except

A. lend money to businesses for new plant and equipment.

B. lend money to consumers for new homes and cars.

C. print dollar bills.

D. create money through lending.

46. Banks are most profitable when

A. loans are initiated.

B. borrowers open a checking account.

C. they sell traveler's checks.

D. they help customers.

47. Ceteris paribus, the money supply becomes smaller when

A. the Federal Reserve reduces the reserve requirement.

B. an individual deposits currency into their transactions account.

C. an individual repays the money that they borrowed from a bank.

D. a bank reduces its excess reserves to make a loan.

48. Ceteris paribus, if Tamika pays off a loan at the bank then over time

A. deposit creation takes place.

B. the money supply becomes larger.

C. there is no change in the money supply.

D. the money supply becomes smaller.

49. The assets held by a bank to fulfill its deposit obligations are known as

A. excess reserves.

B. bank reserves.

C. the reserve ratio.

D. the deposit ratio.

50. If there is only one bank in an economy

A. reserves never leave the bank.

B. transactions accounts equal bank reserves.

C. loans equal bank reserves.

D. loans equal transactions accounts.

51. The term fractional reserves refers to

A. the fact that reserves are split among many banks.

B. reserves being a fraction of total deposits.

C. the ratio of required reserves to total loans.

D. the ratio of excess reserves to total loans.

52. If you deposit $1,000 in your checking account, your bank is only required to hold a portion of the deposit and is allowed to lend out the balance. This illustrates the concept known as

A. split reserves.

B. money laundering.

C. fractional reserves.

D. demand deposits.

53. Which of the following is for U.S. banks?

A. Banks must keep only a fraction of total deposits as reserves.

B. Banks create money by printing it.

C. Banks are allowed to lend as much money as they choose.

D. Banks transfer money from spenders to savers.

54. The reserve ratio is equal to

A. bank reserves plus total deposits.

B. bank reserves divided by total deposits.

C. total deposits minus bank reserves.

D. total deposits divided by bank reserves.

55. The reserve ratio is the

A. percentage of excess reserves held by banks.

B. fraction of deposits that banks hold as excess reserves.

C. number of deposit dollars the banking system can create.

D. percentage of total deposits that are held as bank reserves.

56. The reserve ratio is the ratio of

A. bank reserves to total transactions deposits.

B. bank reserves to savings account balances.

C. bank transactions deposits to required reserves.

D. required reserves to excess reserves.

57. Which of the following requires U.S. banks to maintain a minimum reserve ratio?

A. the Organization of Commercial Banks

B. the U.S. Treasury

C. the Federal Reserve

D. congress

58. The reserve requirement directly limits the ability of banks to

A. change their interest rates.

B. advertise their services.

C. accept additional deposits.

D. make new loans.

59. If there is no minimum reserve requirement in the banking system, the potential ability of banks to create money is

A. zero.

B. unlimited.

C. limited by the amount of deposits.

D. limited by the number of banks in the banking system.

60. Required reserves represent

A. a leakage from the flow of money.

B. the desire on the part of some banks to hold funds and not lend them out.

C. dollars that can be lent.

D. a flaw in the banking system.

61. Suppose a bank has $50,000 in transaction accounts and a minimum reserve requirement of 10 percent. Required reserves for this bank are

A. $5,000.

B. $50,000.

C. $55,000.

D. $500,000.

62. Suppose a bank has $200,000 in deposits and a minimum reserve requirement of 15 percent. Then required reserves are

A. $3,000.

B. $30,000.

C. $200,000.

D. $330,000.

63. Suppose a bank has $1,000,000 in deposits and a minimum reserve requirement of 20 percent. Then required reserves are

A. $1,000,000.

B. $880,000.

C. $200,000.

D. $1,200,000.

64. Suppose a bank has $100,000 in deposits and a minimum reserve requirement of 7 percent. Then required reserves are

A. $100,000.

B. $93,000.

C. $70,000.

D. $7,000.

65. Excess reserves are calculated as

A. total reserves minus required reserves.

B. total reserves minus transactions accounts.

C. required reserves minus transactions accounts.

D. bank reserves minus vault cash.

66. For a single bank in a large banking system, excess reserves are equal to the

A. amount of money that the Federal Reserve System makes available for loans.

B. amount of reserves that a bank must hold above the loans that it makes.

C. amount of loans a bank can make after meeting the reserve requirement.

D. difference between transaction account balances and loans.

67. A bank may lend an amount equal to its

A. required reserves.

B. total reserves.

C. total assets.

D. excess reserves.

68. If excess reserves are $25,000, demand deposits are $100,000, and the minimum reserve requirement is 20 percent, then total reserves are

A. $20,000.

B. $25,000.

C. $45,000.

D. $125,000.

69. If excess reserves are $50,000, demand deposits are $1,000,000, and the minimum reserve requirement is 5 percent, then total reserves are

A. $1,000,000.

B. $100,000.

C. $50,000.

D. $2,500.

70. If excess reserves are $30,000, demand deposits are $500,000, and the minimum reserve requirement is 10 percent, then total reserves are

A. $20,000.

B. $30,000.

C. $50,000.

D. $80,000.

71. Suppose a bank has $1,500,000 in deposits, a minimum reserve requirement of 20 percent, and total reserves of $350,000. Then the bank has excess reserves of

A. $1,850,000.

B. $350,000.

C. $300,000.

D. $50,000.

72. Suppose a bank has $2,000,000 in deposits, a minimum reserve requirement of 10 percent, and bank reserves of $250,000. Then the bank has excess reserves of

A. $50,000.

B. $250,000.

C. $450,000.

D. $1,550,000.

73. Suppose a bank has $1,000,000 in deposits, a minimum reserve requirement of 15 percent, and bank reserves of $170,000. Then the bank can make new loans in the amount of

A. $15,000.

B. $20,000.

C. $170,000.

D. $320,000.

74. Suppose a bank has $100,000 in deposits, a minimum reserve requirement of 5 percent, and bank reserves of $12,000. Then it can make new loans in the amount of

A. $12,000.

B. $7,000.

C. $5,000.

D. $2,000.

75. Suppose a bank has $400,000 in deposits, a minimum reserve requirement of 25 percent, and bank reserves of $100,000. Then, the bank can make new loans in the amount of

A. $100,000.

B. $75,000.

C. $25,000.

D. $0.

76. Initially a bank has a minimum reserve requirement of 10 percent and no excess reserves. If $10,000 is deposited in the bank, then ceteris paribus

A. the bank can increase its loans by $10,000.

B. the bank can increase its loans by $9,000.

C. total reserves will increase by $9,000.

D. required reserves will increase by $10,000.

77. Initially a bank has a minimum reserve requirement of 15 percent and no excess reserves. If $200,000 is deposited in the bank, then ceteris paribus

A. the bank can increase its loans by $230,000.

B. excess reserves will increase by $170,000.

C. required reserves will increase by $200,000.

D. the bank can increase its loans by $30,000.

78. Initially a bank has a minimum reserve requirement of 20 percent and no excess reserves. If $20,000 is deposited in the bank, then the bank can, ceteris paribus

A. lend $20,000.

B. lend $16,000.

C. hold $20,000 less in excess reserves.

D. reduce its required reserves by $20,000.

79. Banks try to keep their holdings of excess reserves low in order to

A. create as much money as possible for the economy.

B. keep the money multiplier low.

C. escape Fed penalties.

D. maximize profits.

80. The money multiplier is

A. a bank's transaction deposits divided by its reserves.

B. the amount of a bank's excess reserves divided by its required reserves.

C. the amount of a bank's actual reserves divided by its required reserves.

D. one divided by the required reserve ratio.

81. The money multiplier represents

A. the lending capacity of the banking system.

B. the number of deposit dollars the banking system can create from $1 of excess reserves.

C. faith in the banking system.

D. the amount of a bank's excess reserves divided by its required reserves.

82. Which of the following is a direct result of a fractional reserve banking system?

A. The money multiplier is greater than one.

B. Excess reserves are equal to zero.

C. Required reserves are equal to total reserves.

D. Banks can loan only their required reserves.

83. If the banking system has a required reserve ratio of 15 percent, then the money multiplier is

A. 1.5.

B. 6.67.

C. 5.0.

D. 15.0.

84. If the banking system has a required reserve ratio of 20 percent, then the money multiplier is

A. 0.2.

B. 0.8.

C. 1.25.

D. 5.0.

85. If the required reserve ratio is 5 percent, the money multiplier is

A. 0.05.

B. 5.0.

C. 10.0.

D. 20.0.

86. If the required reserve ratio is 10 percent, the money multiplier is

A. 0.05.

B. 5.0.

C. 10.0.

D. 20.0.

87. If the required reserve ratio is 25 percent, the money multiplier is

A. 0.25.

B. 4.0.

C. 25.0.

D. 40.0.

88. If total reserves for a bank are $10,000, excess reserves are zero, and demand deposits are $100,000, then the money multiplier must be

A. 5.

B. 10.

C. 15.

D. 20.

89. If total reserves for a bank are $25,000, excess reserves are zero, and demand deposits are $100,000, then the money multiplier must be

A. 0.25.

B. 4.00.

C. 20.00.

D. 25.00.

90. If total reserves for a bank are $200,000, excess reserves are zero, and demand deposits are $1,000,000, then the money multiplier must be

A. 5.

B. 10.

C. 15.

D. 20.

91. If total reserves for a bank are $150,000, excess reserves are zero, and demand deposits are $1,000,000, then the money multiplier must be

A. 0.15.

B. 1.50.

C. 6.67.

D. 20.00.

92. Suppose the entire banking system has $10 million in excess reserves and a required reserve ratio of 5 percent. The deposit creation potential of the banking system is

A. $5 million.

B. $10 million.

C. $100 million.

D. $200 million.

93. Suppose the entire banking system has $50 million in excess reserves and a required reserve ratio of 10 percent. The deposit creation potential of the banking system is

A. $500 million.

B. $50 million.

C. $10 million.

D. $5 million.

94. Suppose the entire banking system has $70,000 in excess reserves and a required reserve ratio of 25 percent. The deposit creation potential of the banking system is

A. $2,800.

B. $70,000.

C. $280,000.

D. $1,750,000.

95. Suppose the entire banking system has $10,000 in excess reserves and a required reserve ratio of 20 percent. The deposit creation potential of the banking system is

A. $200,000.

B. $50,000.

C. $20,000.

D. $500.

96. Suppose Caroline finds $10,000 under her bed and deposits it in her checking account. If the required reserve ratio is 25 percent, this deposit has the potential of increasing the money supply by

A. $2,500.

B. $10,000.

C. $30,000.

D. $50,000.

97. Suppose the entire banking system has a required reserve ratio of 0.20. How much can the money supply increase in response to a $1 billion increase in excess reserves for the whole banking system?

A. $20 billion

B. $5 billion

C. $1 billion

D. $200 million

98. Use the following balance sheet for XYZ Bank, which is one of many banks in a banking system.

With a required reserve ratio of 15 percent, XYZ Bank would have excess reserves of

A. $15,000.

B. $20,000.

C. $50,000.

D. $150,000.

99. Use the following balance sheet for XYZ Bank, which is one of many banks in a banking system.

If XYZ Bank has a required reserve ratio of 20 percent, it can legally increase its loans by

A. $10,000.

B. $20,000.

C. $40,000.

D. $50,000.

100. Use the following balance sheet for XYZ Bank, which is one of many banks in a banking system.

With total reserves of $50,000 and a required reserve ratio of 10 percent, potential deposit creation for the banking system is equal to

A. $20,000.

B. $50,000.

C. $80,000.

D. $300,000.

101. Use the following balance sheet for XYZ Bank, which is one of many banks in a banking system.

(With total reserves of $50,000 and a required reserve ratio of 25 percent, potential deposit creation for the banking system is equal to

A. zero.

B. $50,000.

C. $200,000.

D. $250,000.

102. Use the following balance sheet for Bank of the Universe, which is one of many banks in a banking system.

With a required reserve ratio of 12 percent, Bank of the Universe would have excess reserves of

A. $30,000.

B. $120,000.

C. $150,000.

D. $1,000,000.

103. Use the following balance sheet for Bank of the Universe, which is one of many banks in a banking system.

With a required reserve ratio of 15 percent, Bank of the Universe would have excess reserves of

A. $150,000.

B. $850,000.

C. $1,000,000.

D. Zero.

104. Use the following balance sheet for Bank of the Universe, which is one of many banks in a banking system.

With a required reserve ratio of 10 percent, Bank of the Universe can make new loans in the amount of

A. $10,000.

B. $50,000.

C. $100,000.

D. $1,000,000.

105. Use the following balance sheet for Bank of the Universe, which is one of many banks in a banking system.

With a required reserve ratio of 8 percent, Bank of the Universe can make new loans in the amount of

A. $70,000.

B. $80,000.

C. $150,000.

D. $770,000.

106. Which of the following is an essential function performed by banks?

A. transferring funds from spenders to savers

B. transferring funds from savers to spenders

C. keeping the money supply constant

D. lending funds to the Federal Reserve

107. Which of the following is NOT concerning the banking system?

A. It lends funds to the Federal Reserve.

B. It creates money through lending.

C. It impacts aggregate demand through changes in the money supply.

D. It transfers money from savers to spenders.

108. An increase in the amount of bank loans should shift the aggregate

A. supply curve to the left.

B. supply curve to the right.

C. demand curve to the left.

D. demand curve to the right.

109. A reduction in the money supply should shift the aggregate

A. supply curve to the left.

B. supply curve to the right.

C. demand curve to the left.

D. demand curve to the right.

110. Which of the following does NOT constrain deposit creation?

A. Consumers and businesses decide to take money out of transactions accounts and hold it as cash.

B. Consumers, businesses, and governments decide to stop borrowing.

C. Banks decide to stop lending money to qualified borrowers.

D. The Federal Reserve decides to reduce the minimum reserve requirement.

111. Constraints on deposit creation include all of the following except

A. an increase in the money multiplier.

B. the lack of interest in borrowing money on the part of individuals.

C. the decision by individuals to stop depositing money in transaction accounts.

D. an increase in the reserve requirement.

112. Suppose Students Bank and Trust has zero excess reserves. If the required reserve ratio decreases

A. bank assets will increase.

B. required reserves will increase.

C. the bank will be able to make more loans.

D. the money multiplier will decrease.

113. Suppose First National Bank has zero excess reserves. If the required reserve ratio increases, which of the following will happen immediately?

A. Bank assets will decrease.

B. The bank will not have enough required reserves.

C. The money multiplier will increase.

D. Total reserves will increase.

114. Almost all Internet purchases are paid for by

A. cash.

B. check.

C. money order.

D. credit card.

115. Compared to traditional shopping, Internet sales are constrained because consumers are concerned about

A. the high cost of goods sold online.

B. payment security.

C. inflation and unemployment.

D. the lack of quality for goods sold online.

116. One News Wire article about Venezuela mentioned that fish is now being directly exchanged for flour. This implies

A. the price of flour is falling in terms of the Venezuelan currency.

B. barter is replacing the Venezuelan currency.

C. there is deflation in Venezuela.

D. there is an excess supply of fish, which allows the excess to be used as a medium of exchange.

117. One News Wire article about Venezuela mentioned that fish is now being directly exchanged for flour. This implies that Venezuelan currency

A. rations scarce commodities such as fish.

B. serves as a medium of exchange in barter transactions.

C. is falling in value.

D. is likely to be hoarded as its value changes.

118. One News Wire article about Venezuela mentioned that fish is now being directly exchanged for flour. This implies

A. there is strong demand for fish in Venezuela.

B. barter is not allowed in Venezuela.

C. the Venezuelan currency is increasing in value.

D. fish is functioning as a medium of exchange.

119. One News Wire article in the text, titled "How Would You Like to Pay for That?" points out that a greater percentage of noncash payments were made with debit and credit cards than with checks. In this case, debit and credit cards function as a

A. medium of exchange.

B. store of value.

C. standard of value.

D. unit of account.

120. Barter is the direct exchange of one good for another without the use of money.

People can exchange goods or specialized talents in place of money.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

121. Even if an economy has a form of money, if the money loses its value then people may resort to barter.

If people lose confidence in money, or the issuing government collapses, people will resort to barter.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

122. Without money, the process of acquiring goods and services would be much more efficient.

The process of acquiring goods and services would be less efficient.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

123. The essential characteristics of money are that it serves as a medium of exchange, a store of value, and a standard of value.

When money is accepted it will either be accepted as payment for goods and services; held for future purchases; or serve as a yardstick for measuring the prices of goods and services.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

124. Money functions well as a store of value when prices are rising.

Money serves as a store of value held for future purchases. If prices are rising, it becomes less valuable in terms of purchasing power and so its ability to store value diminishes.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

125. When you purchase jeans at the mall, money is serving as a medium of exchange.

Money is accepted as payment for goods and service.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

126. When you put $50 in your savings account, money is serving as a standard of value.

Money is acting as a store of value in this case.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

127. Only currency and coins serve as money in the United States economy.

Checks, debit cards, and traveler’s checks also serve as money.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Specify what is included in the "money supply."
Topic: The Money Supply

128. A transactions account is considered to be inconvenient for most people because a trip to the bank is required to access the funds in it.

Near money (savings accounts) would cause a trip to the bank, but would not be considered a great barrier. Transactions accounts do not require a person to make a trip to the bank in order to use them (checking accounts, etc.).

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Specify what is included in the "money supply."
Topic: The Money Supply

129. The distinguishing feature of transactions accounts is that they allow for direct payment to a third party.

An example would be writing a check or using a debit card.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Specify what is included in the "money supply."
Topic: The Money Supply

130. Transactions accounts make up almost one third of the basic money supply.

Transactions accounts make up nearly half of the basic money supply.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Specify what is included in the "money supply."
Topic: The Money Supply

131. The amount of money in circulation can affect spending behavior, but it will not change aggregate demand.

How much money people have is one of the determinants of their spending behavior.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-05 Discuss why the money supply is important.
Topic: The Money Supply

132. When a bank makes a loan, transactions account balances are created but the money supply is not affected.

In making a loan, a bank effectively creates money, because transaction account balances are counted as part of the money supply.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

133. Because the United States has a fractional reserve banking structure, banks are allowed to make loans which increase the money supply.

Banks need to maintain only a fraction of their assets and each loan generates new transactions balances for someone without decreasing the balances of others.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

134. When a bank makes a loan, dollars leave the banking system so the money supply decreases.

Banks need to maintain only a fraction of their assets and each loan generates new transactions balances for someone without decreasing the balances of others.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

135. Since banks are required to keep only a fraction of total deposits as bank reserves, the reserve ratio is always greater than one.

The reserve ratio is a fraction of one. The money multiplier is greater than one.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

136. The Federal Reserve System requires banks to maintain a minimum reserve ratio.

The Federal Reserve System requires banks to maintain some minimum reserve ratio.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

137. Deposit creation possibilities are greater with a larger minimum reserve requirement.

With smaller required reserves, banks have more money to lend because they do not need to keep as much on hand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

138. The amount a single bank, in a multibank system, can lend is greater than its excess reserves.

Banks cannot make loans that exceed their excess reserves.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

139. The money multiplier represents the relationship between excess reserves and the number of deposit dollars the banking system can generate.

Each loan made creates new excess reserves, which help fund the next loan.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: The Money Multiplier

140. The money multiplier is equal to 1 divided by the required reserve ratio.

Money Multiplier = 1 / Required Reserve Ratio.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: The Money Multiplier

141. If the required reserve ratio decreases, the money multiplier decreases.

Money Multiplier = 1 / Required Reserve Ratio. A smaller required reserve ratio would then increase the money multiplier.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 3 Hard
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: The Money Multiplier

142. Potential deposit creation for the entire banking system is without limit because when lending takes place, the excess reserves of one bank become deposits for another bank.

If excess reserves exist anywhere in the system, then some banks still have unused lending authority. The required reserve ratio limits potentially infinite deposit creation.

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: The Money Multiplier

143. The level of excess reserves is used to determine the lending capacity of the banking system.

The key issue is not how much excess reserves any specific bank holds, but how much excess reserves exist in the entire banking system.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: The Money Multiplier

144. Ceteris paribus, an increase in the money supply will cause an increase in aggregate demand.

The larger the money supply, the more loans can be made creating an increase in aggregate demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-05 Discuss why the money supply is important.
Topic: The Macro Role of Banks

145. Deposit creation is constrained by the willingness of consumers and businesses to use and accept checks rather than cash for market transactions.

If people preferred to hold cash rather than checkbooks, banks would not be able to acquire or maintain the reserves that are the foundation of bank lending activity.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: The Macro Role of Banks

146. If businesses and individuals decide to stop borrowing money, this can reduce money creation.

If no one wanted to borrow any money, deposit creation would never begin.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: The Macro Role of Banks

147. How do banks create money?

Banks participate in the money supply process. Banks lend excess reserves to borrowers. The money borrowed is added to the customer’s transactions accounts, and these accounts are part of the money supply.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

148. Why are people willing to accept printed paper as money?

The paper dollar has value because people accept it as money. The value of money is then dependent on people’s faith in their ability to use it as a medium of exchange, store of value, and standard of value.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

149. What is a reserve requirement and what function does a reserve serve?

The reserve requirement is the minimum amount of reserves a bank is required to hold by Federal Reserve regulation. The reserve requirement directly limits the ability of banks to grant new loans as they must keep some funds on hand to meet the requirements.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-04 Explain how the money multiplier works.
Topic: Creation of Money

150. Markets do not require dollars but they cannot function without money.

The markets can use anything for money. Dollars are not the only type of currency and currency is not required to make market exchanges.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Detail what the features of "money" are.
Topic: The Uses of Money

151. Which of the following explains why credit cards cannot be considered as a form of money?

A. Credit cards cannot pay for items.

B. Credit cards are not a popular form of payment.

C. Credit cards are not a store of value.

D. Credit cards are a final form of payment.

152. The newer forms of payments, such as Apple Pay, are a form of money.

Apple Pay is a service, not a form of money.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Specify what is included in the "money supply."
Topic: The Money Supply

153. Use an example of how banks "create" money through the Fractional Reserve system. How does required reserves factor into the system?

A person, who goes to the bank for a loan and receives it, will have the loan amount deposited into their checking account. From that account, a certain percentage will be set aside (reserve ratio) and the rest (excess reserves) are available for additional loans. This initial loan will create several loans. That is how the money supply is increased.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

154. Excess reserves are the difference between total deposits and required reserves.

When a deposit is placed in the bank, a certain percentage is required to stay with the bank by regulation. The rest is considered a part of excess reserves and can be loaned out by the bank.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Describe how a bank creates money.
Topic: Creation of Money

155. Barter consists of

A. the direct exchange of one good for another without the use of money.

B. the ability to conduct a clever negotiation.

C. the purchase of a good for money at a flea market.

D. negotiation of tax revenues.

156. Which of these is included in M1?

A. stocks and bonds

B. transaction accounts

C. loans

D. credit cards

157. Money facilitates efficient division of labor by

A. allowing workers to save their earnings.

B. allowing people to exchange the things they produce for the things they need.

C. allowing people to borrow from others.

D. All of these choices are correct.

158. In order to calculate potential deposit creation, one must measure:

A. banking reserves at the largest banks

B. banking reserves at interstate banks only

C. banking reserves in the entire banking system

D. banking reserves at international banks only

159. When a bank makes a loan

A. it causes a reduction in the money supply.

B. it causes an increase in the money supply.

C. it can cause either an increase or a decrease in the money supply depending on the elasticity of supply.

D. it can stimulate business activity, but there is no effect on the money supply.

160. The reserve requirement is set by the

A. individual banks.

B. commercial banking system.

C. Congress.

D. Federal Reserve.

161. An individual bank can make additional loans up to

A. an amount equal to total reserves minus excess reserves.

B. an amount equal to its excess reserves.

C. any amount it can persuade customers to borrow.

D. an amount equal to its assets minus its liabilities.

162. The potential for deposit creation is

A. equal to 10 multiplied by the required reserve ratio.

B. the number of dollars that the banking system can create from current excess reserves.

C. equal to the quantity of excess reserves.

D. equal to the quantity of required reserves.

163. When there is an increase in the money supply, generally there is a resulting

A. rightward shift of the aggregate supply curve.

B. leftward shift of the aggregate supply curve.

C. rightward shift of the aggregate demand curve.

D. leftward shift of the aggregate demand curve.

164. Required reserves are

A. reserves a bank must keep and not lend out.

B. equal to the required reserve ratio times total deposits.

C. a form of control by the Fed.

D. All of these choices are correct.

165. Bank A has assets of $100. If the reserve requirement increases from 10 percent to 20 percent, the money supply _________ and the money multiplier _______ from _____ to ______.

A. increases; increases; 5; 10

B. decreases; decreases; 10; 5

C. decreases; increases; 10; 20

D. increases; decreases 20; 10

166. When you swipe your debit card to pay for a textbook, you are illustrating which function of money?

A. medium of exchange

B. store of value

C. standard of value

D. both medium of exchange and store of value are correct

167. Which of the following is an example of near money?

A. M1

B. currency in circulation

C. a certificate of deposit

D. traveler’s checks

168. Which of the following is a constraint on a bank’s lending activity?

A. bank licensing.

B. willing borrowers.

C. government expenditures.

D. All of these choices are correct.

169. To calculate the amount of required reserves, one must calculate the required reserve ratio _____ the amount of total deposits.

A. plus

B. minus

C. multiplied by

D. divided by