bab 12 money & banking

8/10/2019 Bab 12 Money & Banking

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Money and Banking 51

Chapter 12Money and Banking

1. To an economist, money is a synonym for which of the following?a. income b. creditc. wealthd. salarye. none of the aboveAN ! e

2. Barter isa. the e"change of money for goods and then the e"change of those goods for money.

b. the e"change of money for money, or the e"change of money for stocks and bonds.c. the e"change of goods and services for goods and services witho#t the #se of money.d. any e"change, with or witho#t the #se of money, in which the $artici$ants negotiate %or barter&

the $rice of the goods to be e"changed.AN ! c

3. 'hich of the following ill#strates a barter transaction?a. A b#shel of oranges is traded for a b#shel of a$$les.

b. omeone b#ys a $i((a for the s$ecial $rice of )*.c. omeone b#ys a ho#se for )1++,+++.d. b and ce. a, b, and cAN ! a

4. Transaction costs are best defined as thea. vario#s costs of different goods and services.

b. cost of one good in terms of another that is, the $rice of a$$les in terms of oranges.c. costs involved in borrowing money from someone, that is, the interest that m#st be $aid for the

#se of someone else-s money.d. costs associated with the time and effort necessary to make an e"change.AN ! d

5. n which sit#ation are transaction costs most likely to be the lowest?a. /odney b#ys anti0#es he is c#rrently looking for an eighteenth cent#ry table.

b. 2athy is looking for someone who is willing to trade acco#nting services %in ret#rn& for lawservices.

c. /odrig#e( wants to b#y a ho#se with two master bedrooms.d. Melinda wants to b#y a Mc3onald-s Big Mac %she will not be asking for a s$ecial order&.AN ! d


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6. 'hich of the following is a correct listing of money-s f#nctions?a. so#rce of credit, val#e of transaction costs, #nit of barter

b. medi#m of barter, medi#m of e"change, medi#m of transactionsc. #nit of barter, #nit of acco#nt, a #nit of incomed. store of val#e, store of e"change, meas#re of acco#nte. store of val#e, medi#m of e"change, #nit of acco#ntAN ! e

7. Money-s basic advantage as com$ared to barter is thata. everybody has money b#t not everyone has the o$$ort#nity to barter.

b. a money system relies on a do#ble coincidence of wants.c. money red#ces transaction costs.d. money is the only medi#m yo# can #se to store yo#r wealth.AN ! c

8. f $ean#ts were widely acce$ted for $#r$oses of e"change, thena. $ean#ts wo#ld be money.

b. $ean#ts wo#ld be less val#able than they are c#rrently.c. we wo#ld observe $eo$le #sing $ean#ts to $#rchase cars.d. a and ce. a and bAN ! d

9. A #nit of acco#nt isa. a bank acco#nt.

b. a savings acco#nt.c. a common meas#rement in which val#es are e"$ressed.d. the same as a medi#m of e"change.e. none of the aboveAN ! c

10. f a $erson #ses money to b#y a $air of shoes, money is f#nctioning asa. a #nit of acco#nt.

b. a store of val#e.c. a medi#m of e"change.d. none of the aboveAN ! c

11. 'hich of the following statements is false?a. Money is the only good that can or does serve as a store of val#e.

b. n a barter economy, there is no good that serves as a #nit of acco#nt.c. There are higher transaction costs of making e"changes in a barter economy than in a money

economy.d. Money f#nctions as a medi#m of e"change, #nit of acco#nt, and store of val#e.AN ! a


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12. According to the te"t, the good that emerged as money in 'orld 'ar 67' cam$s wasa. tinned beef

b. toilet $a$er c. cigarettesd. cheeseAN ! c

13. n the 8a$ civili(ation of the o#th 6acific $rior to 194+, large, heavy stones in the sha$e of a wheelwere #sed as money. 'hich f#nction of money was $robably least served by this form of money?a. medi#m of e"change

b. store of val#ec. #nit of acco#ntd. store of wealthAN ! a

14. Money evolved %berkembang& o#t of the self interested actions of a. economists.

b. governments.c. a few kings and 0#eens.d. individ#als.e. none of the aboveAN ! d

15. 2om$ared to barter, money :::::::::: transaction costs, making transactions :::::::::: timecons#ming.a. increases more

b. increases lessc. red#ces mored. red#ces lessAN ! d

16. The re0#irement of a ;do#ble coincidence of wants< is the chief :::::::::: of the ::::::::::e"change system.a. advantage barter

b. advantage monetaryc. disadvantage barter d. disadvantage monetaryAN ! c

17. 8o#r neighbor has knowledge of economics and yo# wo#ld like her to share it with yo#. 8o# own acar, a 23 $layer and a new $air of r#nning shoes. 8o# wish to make a trade, b#t the neighbor doesnot want what yo# have. The $roblem can be stated as follows! 8o# are not satisfying the

a. r#le of transaction costs. b. do#ble coincidence of wants.c. law of marketability.d. terms of a common denominator.AN ! b


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18. M1 is com$rised of c#rrency held o#tside banks = checkable de$osits = ::::::::::.a. credit cards

b. savings de$ositsc. goldd. traveler-s checksAN ! d

19. >istorically, which of the following goods have evolved into money?a. gold

b. saltc. cattled. cocoa beanse. all of the aboveAN ! e

20. 'hich of the following statements is tr#e?a. n 4++1, of the three com$onents of M1, the checkable de$osits com$onent was the largest.

b. M1 is sometimes referred to as the broad definition of the money s#$$ly.c. Time de$osits are a $art of M1 b#t not M4.d. M1 is a larger dollar fig#re than M4.e. All of the above statements are false.AN ! a

21. A ;money market de$osit acco#nt< is a%n&a. checking acco#nt that $ays no interest.

b. bank acco#nt with a s$ecified mat#rity date.c. store of ederal /eserve Notes held in bank va#lts to cash checkable de$osits on demand.d. checking acco#nt created from an a#tomatic transfer from a savings acco#nt.e. interest earning acco#nt at a bank or thrift instit#tion that #s#ally has a minim#m balance

re0#irement.

AN ! e

22. ;Near money< com$risesa. some assets in M4 b#t not in M1.

b. some assets in M1 b#t not in M4.c. the assets in both M1 and M4.d. the assets in neither M1 nor M4.AN ! a

23. A savings de$osit is a ty$e of a. time de$osit that is $ayable on demand.

b. time de$osit that earns interest and allows the de$ositor to write checks $ayable to other

$ersons.c. time de$osit that does not earn interest b#t does offer limited check writing services.d. interest earning acco#nt at a bank or thrift instit#tion in which f#nds can be withdrawn at any

time witho#t a $enalty $ayment.e. checkable de$osit that also $ays interest.AN ! d


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24. n a barter economy, $eo$le are ::::::::: to s$eciali(e in the $rod#ction of one good or service,com$ared to in a money economy.a. more likely

b. less likelyc. e0#ally likelyd. almost always goingAN ! b

25. M4 is com$rised of a. small denomination time de$osits = savings de$osits = money market acco#nts.

b. small denomination time de$osits = credit cards = money market acco#nts = gold de$osits.c. M1 = small denomination time de$osits = savings de$osits = money market m#t#al f#nds.d. M1 = small denomination time de$osits = credit cards = money market acco#nts.AN ! c

26. @. rank Ba#m, the a#thor of The 'onderf#l 'i(ard of 7(, blamed :::::::::: for the economicde$ression of 1 9 and the related hardshi$s faced by farmers and workers.a. the gold standard

b. the silver standardc. a massive tornadod. high ta"esAN ! a

27. 'hich of the following can be considered money or near money?a. credit cards

b. checkable de$ositsc. savings de$ositsd. a and be. b and cAN ! e

28. A savings acco#nt f#nctions asa. a #nit of acco#nt.

b. a store of val#e.c. a medi#m of e"change.d. none of the aboveAN ! b

29. The first bankers werea. sheriffs.

b. goldsmiths.c. clergy.

d. innkee$ers.e. economists.AN ! b


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30. Beca#se money ::::::::::, $eo$le are :::::::::: likely to s$eciali(e their work in a moneyeconomy.a. is a store of val#e less

b. eliminates the do#ble coincidence of wants morec. is a #nit of acco#nt mored. eliminates the need for holdings of $recio#s metals moreAN ! b

31. The Wonderful Wizard of Oz is alleged to be a story abo#ta. the 2alifornia gold strikes of 1 *9.

b. the end of the gold standard in 19 *.c. the $residential election of 1 9 .d. the financial $anic of 19+C.e. a witch, a dog, a cyclone, and that-s it.AN ! c

32. n the book version of The Wonderful Wizard of Oz , 3orothy-s sli$$ers area. gold.

b. silver.c. r#by.d. $a$er.AN ! b

33. n the history of banking, wareho#se recei$ts refer to recei$tsa. that goldsmiths once iss#ed acknowledging that they held a c#stomer-s gold.

b. for storing f#rnit#re in a wareho#se.c. goldsmiths iss#ed to each other when they borrowed gold.d. for storing food and other $erishables in a wareho#se.AN ! a

34. ractional reserve banking is a term #sed to describe a banking system wherebya. individ#al banks share a fraction of the total f#nds de$osited in the whole banking system.

b. banks are re0#ired to 0#ote interest rates in fractions.c. banks hold reserves e0#al to only a fraction of their de$osit liabilities.d. banks hold reserves e0#al to a m#lti$le of their de$osit liabilities that is, fractional in this case

really means m#lti$le.e. banks are re0#ired to maintain a certain fraction of their de$osits in the form of checkable

de$osits, a certain fraction of their de$osits in the form of savings de$osits, etc.AN ! c

35. /eserves e0#ala. checkable de$osits = va#lt cash = traveler-s checks.

b. va#lt cash = c#rrency in the hands of the nonbanking $#blic.c. bank de$osits at the ederal /eserve.d. bank de$osits at the ederal /eserve = va#lt cash.AN ! d

36. 'hich of the following statements is tr#e concerning a#tomatic transfer systems %AT &?a. AT acco#nts are incl#ded in M1 b#t not M4.

b. AT acco#nts are incl#ded in M4 b#t not M1.c. AT acco#nts are incl#ded in both M1 and M4 %since they are incl#ded in M1 and M1 is


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Money and Banking 5C

incl#ded in M4&.d. AT acco#nts are incl#ded in neither M1 nor M4.AN ! c

37. /e0#ired reserves are the amo#nt of a. reserves a bank m#st hold against its de$osits as mandated by the ederal /eserve.

b. cash a bank m#st hold against its de$osits as mandated by the ederal /eserve.c. checkable de$osits a bank m#st hold against all other de$osits as mandated by the D. .

Treas#ry.d. reserves a bank m#st hold against all its assets as mandated by the ederal /eserve.AN ! a

38. f checkable de$osits in Bank A total )14 million and the re0#ired reserve ratio is 15 $ercent, thenre0#ired reserves at Bank A e0#ala. )4.+ million.

b. )1.5 million.c. )1. million. %14 " 15 E 1++&d. )1+.4 million.AN ! c

39. f checkable de$osits in Bank A total ) 4+ million and the re0#ired reserve ratio is 14 $ercent, thenre0#ired reserves at Bank A e0#ala. )14.+ million.

b. )14+.+ million.c. ) .* million.d. )4 1. million.e. none of the aboveAN ! c

40. Ninth National Bank holds )1* ,+++,+++ in checkable de$osits and )1 ,+++,+++ in reserves. 'ith a

re0#ired reserve ratio of 14 $ercent, how m#ch in e"cess reserves is Ninth National holding?a. )4,1 +,+++

b. )4*+,+++c. ) 5,C +,+++d. )15, *+,+++AN ! b

41. Ninth National Bank holds )1C ,5++,+++ in checkable de$osits and )44,C*+,+++ in reserves. 'ith are0#ired reserve ratio of 14 $ercent, how m#ch in e"cess reserves is Ninth National holding?a. )1 4,5 +,+++

b. )4+,+11,4++c. F)1+,+**,+++

d. )1,5 +,+++AN ! d

42. A bank-s T acco#nt recordsa. the assets and liabilities of the bank.

b. how m#ch tea the bank holds.c. the changes in the bank-s assets and liabilities.d. the changes in the bank-s assets only.e. none of the above


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AN ! c

43. The amo#nt of re0#ired reserves a bank holds de$ends on thea. re0#ired reserve ratio.

b. demand de$osit ratio.c. e"cess reserve ratio.d. c#rrency ratio.AN ! a

44. f bank de$osits at the ederal /eserve rise, ceteris pari us , thena. va#lt cash rises.

b. reserves rise.c. the money s#$$ly may rise.d. b and ce. a, b, and cAN ! d

45. The banking system increases the money s#$$ly by creatinga. checkable de$osits.

b. c#rrency.c. checkable de$osits and c#rrency.d. ederal /eserve Notes.AN ! a

46. /eserves held beyond the re0#ired amo#nt are called :::::::::: reserves.a. red#ndant

b. $reca#tionaryc. e"cessd. s#r$l#sAN ! c

47. Bank A has de$osits of )5,+++ and reserves of )1, ++. f the re0#ired reserve ratio is +.4+, the bankhas re0#ired reserves ofa. )1,+++. %5+++ " +.4+&

b. )4,+++.c. ) ,+++.d. )*,+++.AN ! a

48. A re0#ired reserve ratio of 14.5 $ercent, gives rise to a sim$le de$osit m#lti$lier of a. 4.

b. *.

c. .d. .AN ! d

49. A re0#ired reserve ratio of $ercent gives rise to a sim$le de$osit m#lti$lier of a. +.145.

b. 1.+ C.c. 14.5.d. 94 G.


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AN ! c

50. An increased cash leakage :::::::::: the re0#ired reserve ratio, b#t it does :::::::::: thestrength of the money e"$ansion $rocess.a. does not affect lower

b. does not affect raisec. raises lower d. raises raiseAN ! a

51. Bank A has de$osits of ) ,+++ and reserves of )1,4++. f the re0#ired reserve ratio is 1+ $ercent, the bank has e"cess reserves ofa. )4++.

b. )*++.c. ) ++.d. ) ++.AN ! b

52. Bank A has de$osits of ) ,+++ and reserves of )1, ++. f the re0#ired reserve ratio is 14.5 $ercent,the bank can safely lenda. )1,+5+. % +++ " 14.5 $ercent& H C5+ , 1 ++ F C5+ H 1+5+

b. ) , C5.c. )*,4++.d. ) ,*++.AN ! a

53. #$$ose that the e"cess reserves in Bank A increase by )C++. f the re0#ired reserve ratio is 45 $ercent, what is the ma"im#m change in checkable de$osits bro#ght abo#t by the banking system?a. )1C5

b. )4,*++

c. )4, ++d. )4, ++AN ! d

54. Bank A receives )1,+++ new reserves from the transfer of a checking acco#nt from another bank.The re0#ired reserve ratio is 4+ $ercent. Based on the new reserves, Bank A can increase checkablede$osits by a ma"im#m of a. )4+,+++.

b. )5,+++.c. ) ++.d. )4++.AN ! c

55. Based in $art on a 199 st#dy on gift giving by %then& 8ale economist, Ioel 'aldfogel, someeconomists have concl#ded thata. it may be better to give money as a gift when the gift reci$ient-s $references are not well

known. b. it may be better to give a tangible gift, rather than money, even when the gift reci$ient-s

$references are not well known.c. gift reci$ients always $refer to receive gift certificates rather than money.d. gift reci$ients rarely $refer to receive gift certificates rather than tangible gifts.


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e. none of the above.AN ! a

56. The act#al change in the money s#$$ly as a res#lt of an increase in e"cess reserves will be less thanthe ma"im#m change if banksa. do not lend o#t all of their e"cess reserves.

b. borrow from the ederal /eserve.c. sell some of their government sec#rities to the ederal /eserve.d. lend only their e"cess reserves.AN ! a

57. A bank has )1+ million in checkable de$osits and )4.5 million in reserves. f the re0#ired reserveratio is 15 $ercent, then the bank hasa. e"cess reserves of )1.+ million. %1+ " +.15 H 1.5&, %4.5 F 1.5 H 1.+ &

b. e"cess reserves of )1.5 million.c. e"cess reserves of )C.5 million.d. re0#ired reserves of )C.5 million.e. none of the aboveAN ! a

58. Bank A holds )1 million in re0#ired reserves and the re0#ired reserve ratio is 1+ $ercent. t followsthat Bank A holds checkable de$osit liabilities that totala. )1 million.

b. )1+ million. % 1 million E 1+ $ercent& H 1+c. )4+ million.d. )1++,+++ million.AN ! b

59. A bank has (ero e"cess reserves, with a re0#ired reserve ratio of 1+ $ercent. f )1++,+++ in cash iswithdrawn from the bank, it has a reserve deficiency of

a. )1+,+++. b. )9+,+++.c. )1++,+++.d. )1,+++,+++.AN ! b

60. 'hen a bank makes a loan to one of its c#stomers, to the bank the loan is classified asa. an asset.

b. a liability.c. neither an asset nor a liability.d. an asset in some cases and a liability in other cases, de$ending on the ty$e of loan.AN ! a

61. National Bank holds )C*,+++,+++ in checkable de$osits, holds ) , +,+++ in reserves, and hase"cess reserves of e"actly (ero. f ) ,+++,+++ in checkable de$osits is transferred to this bank, whatis the ma"im#m amo#nt of new money National Bank can create?a. )45,+++,+++

b. ) ,*+9,+++c. ) ,+++,+++d. )4, *+,+++e. There is not eno#gh information to answer the 0#estion.


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AN ! d

62. National Bank holds )5 ,+++,+++ in checkable de$osits and )+ in e"cess reserves #nder a re0#iredreserve ratio of 1+ $ercent. #$$ose c#stomers of the bank bring in )4,+++,+++ in c#rrency to addto their checkable de$osits. >ow m#ch more money can this bank now create at ma"im#m?a. )4, ++,+++

b. )1, ++,+++c. )1, ++,+++d. )C++,+++AN ! b

63. National Bank holds )1+9,+++,+++ in checkable de$osits and )1,145,+++ in e"cess reserves #nder are0#ired reserve ratio of 14 $ercent. #$$ose c#stomers of the bank bring in )5,+++,+++ in c#rrencyto add to their checkable de$osits. >ow m#ch money can this bank now create at ma"im#m?a. )*,*++,+++

b. ) ,4C5,+++c. )5,545,+++d. )1 ,* +,+++AN ! c

64. National Bank holds )* ,+++,+++ in checkable de$osits, holds ) ,+++,+++ in reserves, and hase"cess reserves of e"actly (ero. f )5,+++,+++ in checkable de$osits is transferred to this bank, whatis the ma"im#m amo#nt of new money it can create?a. ) 45,+++

b. )C5+,+++c. )*, C5,+++d. ) , 45,+++AN ! c

65. 'hich of the following statements is false?

a. A change in the com$osition of the money s#$$ly can event#ally change the si(e of the moneys#$$ly.

b. f Iones takes )1,+++ o#t of her wallet and de$osits it into a checking acco#nt in a bank, thecom$osition of the money s#$$ly changes.

c. f mith takes )1,+++ o#t of his checking acco#nt and $#ts it into his wallet, the com$osition ofthe money s#$$ly changes.

d. A change in the com$osition of the money s#$$ly always increases the money s#$$ly.AN ! d

66. 'hich of the following statements is tr#e?a. The D. . banking system is a 1++ $ercent reserve banking system.

b. Banks create money by $rinting it.

c. The way banks create money is by creating checkable de$osits in the $rocess of e"tendingloans.

d. Dnder certain circ#mstances, the total dollar amo#nt of checkable de$osits may be greater thanM1.

AN ! c


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67. #$$ose Bank A gains )1+,+++ in reserves that Bank B loses. f both banks are s#bJect to the samere0#ired reserve ratio and are c#rrently holding (ero e"cess reserves, thena. the money s#$$ly rises.

b. the money s#$$ly falls.c. the money s#$$ly remains constant.d. checkable de$osits fall.AN ! c

68. rank receives a check from 'ilson for )*,+++. >e de$osits ) ,*++ into the bank and asks the bankteller for ) ++ cash. The ) ++ is referred to asa. a check leakage.

b. a bank leakage.c. a cash leakage.d. e"cess reserves.e. none of the aboveAN ! c

69. te$hanie takes the ) ,+++ she has in her safe at home and de$osits it into a checking acco#nt in a bank. The re0#ired reserve ratio is 4+ $ercent. The ma"im#m change in checkable de$osits bro#ghtabo#t by the banking system thro#gh new lending isa. )15,+++.

b. )1 ,5++.c. )1,5++.d. )14,+++.e. none of the aboveAN ! d

70. 2arl has checking acco#nts with Bank A and Bank B. 7ne day he withdraws )4,+++ from hischecking acco#nt at Bank A and de$osits it into his checking acco#nt at Bank B. Both banks hold(ero e"cess reserves and are faced with the same re0#ired reserve ratio. As a res#lt of 2arl-s action,

the money s#$$lya. rises.

b. falls.c. remains constant.d. changes its com$osition.AN ! c

71. #$$ose 4+,+++ new dollars fall from the sky into the hands of K#incy >arrison. f we ass#me there0#ired reserve ratio is 1+ $ercent, what is the minim#m increase in the money s#$$ly that mayres#lt?a. )4++,+++

b. )1 +,+++

c. )4+,+++d. )*+,+++e. none of the aboveAN ! c


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Money and Banking

72. The sim$le de$osit m#lti$lier isa. the reci$rocal of the re0#ired reserve ratio.

b. always 1.c. the same as the re0#ired reserve ratio.d. different from bank to bank even if the re0#ired reserve ratio is the same for all banks.AN ! a


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73. A bank has )1+,+++ in e"cess reserves and the re0#ired reserve ratio is 4+ $ercent. This means the bank co#ld have :::::::::: in checkable de$osit liabilities and :::::::::: in reserves.a. ) +,+++, )1+,+++

b. )1++,+++, )4+,+++c. )5+,+++, )45,+++d. )1++,+++, ) +,+++AN ! d

74. f a $erson withdraws )1,+++ o#t of her checking acco#nt, the banka. loses reserves and checkable de$osits e0#al to the withdrawal.

b. loses only checkable de$osit liabilities e0#al to the withdrawal.c. gains the ability to increase its loans.d. finds that both its assets and its liabilities decline.e. a and dAN ! e

75. f the com$osition of the money s#$$ly changes s#ch that there is less c#rrency in the hands of the $#blic and more checkable de$osits, the money s#$$ly likelya. rises.

b. falls.c. stays constant.d. first rises and then shar$ly falls.AN ! a

76. 'hich of the following is tr#e?a. /eserves H re0#ired reserves F e"cess reserves.

b. /eserves F re0#ired reserves H e"cess reserves.c. /eserves H re0#ired reserves = e"cess reserves.d. b and ce. a and b

AN ! d

77. n a barter economy,a. money is a medi#m of e"change.

b. coins are #sed to facilitate trade.c. money is a store of val#e.d. goods and services are traded directly for each other.e. the money s#$$ly consists entirely of coins and c#rrency.AN ! d

78. ;Barter< im$lies thata. to get one good or service, an individ#al offers another.

b. to get one good or service, an individ#al offers money.c. to get a check, an individ#al offers a good or service.d. different kinds of money are e"changed for each other.e. none of the aboveAN ! a


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79. The #nit of acco#nt f#nction of money refers to thea. fact money and income are the same thing.

b. common denominator of meas#rement $rovided by money.c. characteristic that all money is intrinsically val#able.d. all of the aboveAN ! b

80. The store of val#e f#nction of money refers to the ability of money toa. facilitate the e"change of goods and services.

b. maintain its val#e over time.c. e"$ress relative scarcity.d. earn interest over time.e. increase its val#e over time.AN ! b

81. The most li0#id ty$e of bank acco#nt is the :::::::::: de$osit.a. time

b. a#tomaticc. checkabled. certificate ofe. savingsAN ! c

82. @i0#idity refers to thea. intrinsic val#e of an asset.

b. difference between the real and nominal val#es of an asset.c. ease with which metallic money can be converted back into a li0#id state.d. ease with which an asset, witho#t a loss in its val#e, can be converted into cash.e. all of the aboveAN ! d

83. M4 incl#des M1 $l#s all of the following e!cept a. savings de$osits.

b. money market m#t#al f#nd balances.c. short term D. . government sec#rities.d. time de$osits.AN ! c

84. Many $eo$le believe that the character 3orothy, in the book The 'onderf#l 'i(ard of 7(,re$resentsa. $residential candidate Barry Loldwater.

b. 6resident Abraham @incoln.

c. 6resident 'illiam Mc inley.d. $residential candidate 'illiam Iennings Bryan.AN ! d


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2ha$ter 14

85. The D. . money s#$$ly is backed bya. gold or silver.

b. fractional reserves.c. the commodity in which it is denominated.d. nothing.e. the D. . Treas#ry.AN ! d

86. The fractional reserve system of de$ository instit#tionsa. red#ces the li0#idity of M4.

b. red#ces the li0#idity of M1.c. eliminates the $ossibility of r#ns on banks.d. means that all reserves will be e"cess reserves.e. enables the system to e"$and or contract the money s#$$ly.AN ! e

87. 'hich of the following is not incl#ded in M1?a. money market acco#nts

b. checkable de$ositsc. traveler-s checksd. all of the aboveAN ! a

88. f the re0#ired reserve ratio is 45 $ercent, what do a bank-s e"cess reserves amo#nt to when a b#siness de$osits a )1,+++ check drawn on another bank?a. )45+

b. )C5+c. ) 5+d. )1,45+e. ) 5+

AN ! b

89. 'hen a check is cleared against a bank, the bank will losea. cash and sec#rities.

b. checkable de$osits and reserves.c. reserves and ca$ital stock.d. loans and checkable de$osits.e. none of the aboveAN ! b

90. Money is defined by economists asa. the market val#e of an asset.

b. the f#nds one receives d#ring a s$ecified $eriod of time.c. any good that is widely acce$ted in e"change and for the re$ayment of debt.d. both b and ce. all of the aboveAN ! c


17/34

Money and Banking C

91. A medi#m of e"change isa. anything that is generally acce$ted in e"change for goods and services.

b. a common meas#rement in which relative val#es are e"$ressed.c. an item-s ability to hold val#e over time.d. the e"change of goods and services for other goods and services.e. both a and dAN ! a

92. A #nit of acco#nt isa. anything that is generally acce$ted in e"change for goods and services.

b. a common meas#rement in which relative val#es are e"$ressed.c. an item-s ability to hold val#e over time.d. the e"change of goods and services for other goods and services.e. both a and dAN ! b

93. The M4 money s#$$lya. incl#des M1.

b. is the most common broad definition of the money s#$$ly.c. incl#des savings de$osits.d. is larger than M1.e. all of the aboveAN ! e

94. /eserves area. e0#al to re0#ired reserves $l#s e"cess reserves.

b. e0#al to va#lt cash $l#s bank de$osits at the ederal /eserve.c. an asset to banks.d. both b and ce. all of the above

AN ! e

95. Bank A has checkable de$osits of )1+,+++ and reserves of )*,+++. The re0#ired reserve ratio is 14.5 $ercent. The bank has e"cess reserves ofa. )1+,+++.

b. ) ,C5+.c. )*,+++.d. )4,C5+.e. )1,45+.AN ! d

96. Bank A has checkable de$osits of )1+,+++ and reserves of )*,+++. The re0#ired reserve ratio is 14.5

$ercent. The bank has re0#ired reserves ofa. )1+,+++.

b. ) ,C5+.c. )*,+++.d. )4,C5+.e. )1,45+.AN ! e


18/34

2ha$ter 14

97. Bank A has checkable de$osits of )1+,+++ and reserves of ) ,+++. The re0#ired reserve ratio is 14.5 $ercent. The bank can loan o#t a ma"im#m ofa. )1+,+++.

b. ) ,C5+.c. ) ,+++.d. )1,C5+. % 1+ +++ " +.145 H 145+&, +++ F 145+ H 1C5+e. ) C5.AN ! d

98. Bank A has checkable de$osits of )1+,+++ and reserves of )*,+++. The re0#ired reserve ratio is 14.5 $ercent. Bank A can increase the money s#$$ly by a ma"im#m of a. )1+,+++.

b. ) ,C5+.c. )*,+++.d. )4,C5+.e. )1,45+.AN ! d

99. #$$ose Iack takes )4,+++ in c#rrency and de$osits it in his checking acco#nt. f the re0#iredreserve ratio is $ercent, by how m#ch does the ma"im#m M1 money s#$$ly rise?a. )+

b. ) , ++c. )4 ,+++ %4+++ E $ercent& H 45+++ F 4+++ H 4 +++d. )45,+++AN ! c

100. The banking system has de$osits of )1++ billion and reserves of )4+ billion. The re0#ired reserveratio is 14.5 $ercent. The banking system has e"cess reserves of a. )4+.+ billion.

b. )14.5 billion.

c. ) .+ billion.d. )C.5 billion.e. )4.+ billion.AN ! d

101. The banking system has de$osits of )1++ billion and no e"cess reserves. The re0#ired reserve ratiois 14.5 $ercent. A de$osit of )1+ billion in new money is made in Bank A, and no other bank in the

banking system loses reserves. The ma"im#m increase in checkable de$osits that can be bro#ghtabo#t by Bank A isa. ) .C5 billion.

b. ) .5 billion.c. )1+.+ billion.

d. )1.5 billion.e. )1.45 billion.AN ! a


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Money and Banking 9

102. The banking system has de$osits of )1++ billion and no e"cess reserves. The re0#ired reserve ratiois 14.5 $ercent. A de$osit of )1+ billion in new money is made in Bank A, and no other bank in the

banking system loses reserves. The ma"im#m increase in checkable de$osits that can be bro#ghtabo#t by the banking system isa. ) +.+ billion.

b. )C+.+ billion.c. ) .+ billion.d. )14.5 billion.e. )1+.+ billion.AN ! b

103. Iane takes )1,+++ o#t of her cookie Jar and de$osits it into Bank A. nitially, the money s#$$ly hasa. changed in magnit#de.

b. changed in com$osition.c. not changed in magnit#de.d. not changed in com$osition.e. both b and cAN ! e

104. Bank A has )4,5++ in re0#ired reserves. The re0#ired reserve ratio is 14.5 $ercent. Bank A hascheckable de$osits ofa. )14,5++.

b. )4+,+++. %45++ E 14.5 $ercent&c. )1++,+++.d. )1 +,+++.AN ! b

105. Bank A has )5,+++ in reserves, all re0#ired to be held. The re0#ired reserve ratio is 1+ $ercent.Bank A has checkable de$osits ofa. )5++.

b. )5,+++.c. )5+,+++. % 5+++ E 1+ $ercent&d. )5++,+++.AN ! c

106. 'ith a re0#ired reserve ratio of 1 $ercent, the sim$le de$osit m#lti$lier isa. 1 .+.

b. 1. .c. .45. % 1E 1 $ercent or +.1 &d. .C45.e. 1.19.AN ! c

107. aying that it takes twice as many dollars to b#y one ticket for a concert than two tickets for amovie refers to the #se of money as aa. medi#m of e"change.

b. #nit of acco#nt.c. store of val#e.d. means of achieving the do#ble coincidence of wants.AN ! b


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C+ 2ha$ter 14

108. Dsing yo#r Mastercard to order a ring from the >ome ho$$ing Network is #sing money as aa. medi#m of e"change.

b. #nit of acco#nt.c. store of val#e.d. a and ce. none of the above credit cards are not money.AN ! e

109. nflation does the greatest harm to money-s f#nction as aa. medi#m of e"change.

b. #nit of acco#nt.c. store of val#e.d. li0#id asset.AN ! c

110. 'hich of the following is false?a. n a barter economy, $a$er money is #sed only as a medi#m of e"change.

b. n a barter economy, transaction costs are m#ch higher than in a money economy.c. n a barter economy, a do#ble coincidence of wants has to be f#lfilled before a transaction can

take $lace.d. None of the above all are tr#e.AN ! a

111. 'hich of the following assets is the most li0#id?a. gold

b. savings de$ositsc. money market m#t#al f#nd sharesd. ederal /eserve Notese. Treas#ry bills

AN ! d

112. The D. . dollar has val#e beca#se ita. is backed by gold.

b. bears the signat#re of a D. . $resident.c. is widely acce$ted as a means of $ayment.d. is backed by silver AN ! c

113. A savings de$osit is considered $art of a broader meas#re of the money s#$$ly beca#se ita. $ays interest to the de$ositor.

b. is an asset of a commercial bank.c. is relatively li0#id.

d. is denominated in dollars.AN ! c

114. ractional reserve banking originateda. when the Dnited tates 2ongress $assed a law regarding the re0#ired reserve ratio.

b. when goldsmiths reali(ed they co#ld iss#e wareho#se recei$ts beyond gold on de$osits.c. with the establishment of the ederal /eserve ystem.d. in the Dnited tates with the 2layton Act.AN ! b


21/34

Money and Banking C1

115. f the re0#ired reserve ratio is 45 $ercent, a )1+ increase in reserves res#lting from a de$osit ofc#rrency into the banking system will increase checkable de$osits by )*+ $rovideda. there are no cash leakages.

b. every bank lends o#t all its e"cess reserves.c. there is a cash leakage of )4.d. a and be. b and cAN ! d

Exhibit 12-1

BANK A

Assets Liabilities

/e0#ired /eserves ) +,+++ 2heckable 3e$osits ) 4++,+++

"cess /eserves ) +

@oans ) ?

or 0#estions 119 144, refer to "hibit 14 1 above.

116. /efer to "hibit 14 1. The re0#ired reserve ratio isa. +.1+.

b. +.15. % + +++ E 4++ +++&c. +.4+.d. +.45.e. +. +.AN ! b

117. /efer to "hibit 14 1. The total amo#nt of loans o#tstanding at Bank Aa. is )1C+,+++. % 4++ +++ F + +++&

b. is )4++,+++.c. is )4 +,+++.d. is ) +,+++.AN ! a

118. /efer to "hibit 14 1. Marsha receives her )1,+++ monthly $aycheck and de$osits it in Bank A. The bank is now able to grant new loans in the amo#nt of a. )C++.

b. ) ++.c. ) 5+. % 1+++ " +.15 & H 15+, 1+++ F 15+ H 5+

d. )9++.e. )1,+++.AN ! c


22/34

C4 2ha$ter 14

119. /efer to "hibit 14 1. 3avid withdraws )4,+++ from his checking acco#nt with Bank A. Thisimmediately res#lts in Bank A being in a reserve deficiency $osition of a. )4++.

b. ) ++.c. )1,5++.d. )1,C++.e. )4,+++.AN ! d

Exhibit 12-2

BANK B

Assets Liabilities

/e0#ired /eserves ) ? 2heckable 3e$osits ) 1++,+++

"cess /eserves ) +

@oans ) +,+++

or 0#estions 14 145, refer to "hibit 14 4 above.

120. /efer to "hibit 14 4. The sim$le de$osit m#lti$lier isa. +.4.

b. +. .c. 1.45.d. 5.+.e. cannot be determinedAN ! d

121. /efer to "hibit 14 4. f Bank B receives )4,+++ in new checkable de$osits, its e"cess reserves will bea. )*++.

b. )1,4++.c. )1, ++. %4+++ E 1++ ++ H +.+4&, % +.+4 " + +++&d. )1, ++.e. )4,+++.AN ! c

122. /efer to "hibit 14 4. /achel took a )1++ bill she was kee$ing at home and de$osited it in herchecking acco#nt at Bank B. The ma"im#m change in the checkable de$osits bro#ght abo#t by the

banking system will be

a. ) 4+. b. )*++.c. )5++.d. )9++.e. )1,+++.AN ! b


23/34

Money and Banking C

123. te$hanie $#rchases a rench $erf#me for )1++ and $ays for it with a check. f the re0#ired reserveratio in the banking system is 1+ $ercent, this transaction will, ass#ming no cash leakages, changethe money s#$$ly bya. )+.

b. )1++.c. )11+.d. )1,+++.e. )1,1++.AN ! a

124. Bank A and Bank B have no e"cess reserves, and the re0#ired reserve ratio is 1+ $ercent. Iillreceives a )5++ check and de$osits it in her acco#nt with Bank A. Bank A immediately e"tends aloan to Iack for the f#ll amo#nt of the newly created e"cess reserves by crediting his checkingacco#nt. Iack then s$ends the f#ll amo#nt of the loan on a color TO #sing his debit card toelectronically transfer the f#nds to the TO retailer-s acco#nt with Bank B. Bank B-s e"cess reservesarea. )+.

b. ) C5.c. )*+5.d. )*5+. % 5++ " 1+ $ercent& H 5+, 5++ F 5+ H *5+e. )5++.AN ! c

125. An initial increase of )4,+++ in a bank-s checkable de$osits res#lted in an increase of )1, ++ in newloans e"tended by the bank. Ass#ming no change in e"cess reserves held by the bank, the re0#iredreserve ratio isa. 1+ $ercent.

b. 15 $ercent.c. 4+ $ercent. % 4+++ 1 ++& H *++ E 4+++ H +.4 " 1++ H 4+d. 45 $ercent.

e. + $ercent.AN ! c

126. @owering the re0#ired reserve ratio :::::::::: the sim$le de$osit m#lti$lier and :::::::::: theeconomy-s ma"im#m $otential money s#$$ly.a. raises raises

b. raises lowersc. lowers raisesd. lowers lowersAN ! a

127. /aising the re0#ired reserve ratio :::::::::: the sim$le de$osit m#lti$lier and :::::::::: the

economy-s ma"im#m $otential money s#$$ly.a. raises raises

b. raises lowersc. lowers raisesd. lowers lowersAN ! d


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C* 2ha$ter 14

128. f the banking system res$onds to a large dro$ in the stock market by increasing its desired holdingof e"cess reserves, thisa. affects neither the sim$le de$osit m#lti$lier nor the economy-s money growth rate.

b. does not affect the sim$le de$osit m#lti$lier b#t does lower the economy-s money growth rate.c. lowers the sim$le de$osit m#lti$lier b#t does not affect the economy-s money growth rate.d. does not affect the sim$le de$osit m#lti$lier b#t does raise the economy-s money growth rate.AN ! b

129. 'hen money is #sed to b#y a com$#ter, it is f#nctioning as aa. #nit of acco#nt.

b. store of val#e.c. medi#m of e"change.d. none of the aboveAN ! c

130. A ho#se is )1++,+++, a com$#ter is )4,+++, and a car is )4+,+++. n this conte"t, money is $rinci$ally f#nctioning as aa. #nit of acco#nt.

b. store of val#e.c. medi#m of e"change.d. none of the aboveAN ! a

131. Iohn says, ; earned a lot of money in my Job last year.< 'hat is wrong with this statement from aneconomist-s $oint of view?a. conomists talk abo#t earning money on a monthly basis, not a yearly basis.

b. Iohn #ses the word "one# when he sho#ld #se the word inco"e .c. Iohn #ses the word "one# when he sho#ld #se the word $ealth .d. Iohn is #sing the word "one# incorrectly! he is im$licitly referring to money acting as a

medi#m of e"change when he sho#ld be referring to it acting as a store of val#e.

AN ! b

132. 'hich of the following re$resents a do#ble coincidence of wants?a. mith has what Iones has and neither wants what the other has.

b. mith has what Iones wants b#t Iones doesn-t have what mith wants.c. mith has what Iones wants and Iones has what mith wants.d. mith wants what Iones has, Iones wants what Brown has, and Brown wants what mith has.e. none of the aboveAN ! c

133. n a barter economy,a. money trades for goods, goods trade for services, and services trade for money.

b. goods and services trade for other goods and services.c. some goods are more readily acce$ted in e"change than others.d. making e"changes takes less time %on average& than in a money economy.e. b and cAN ! e


25/34


134. 'hich set of $rices wo#ld yo# e"$ect to see %$osted, 0#oted& in a barter economy?a. 1 horse H 1+ $ieces of gold 1 kettle H 1 $iece of gold

b. 1 horse H 1+ kettles 1 kettle H 1E1+ horsec. 1 horse H )4++ 1 kettle H )4+d. 1 horse H 1+ kettles 1 kettle H 1+ a$$les 1 a$$le H 1 orangee. b and dAN ! e

135. 'hich of the following is the most basic reason that $a$er money has val#e?a. Lold backs $a$er money %gold backing&.

b. 6eo$le will acce$t $a$er money in e"change for what yo# want to b#y from them.c. 6a$er money is written abo#t in songs and stories.d. The more $a$er money yo# have, the richer yo# are.AN ! b

136. n 4++1, the largest com$onent of M1 was :::::::::: the smallest was ::::::::::.a. c#rrency traveler-s checks

b. checkable de$osits c#rrencyc. c#rrency checkable de$ositsd. checkable de$osits overnight #rodollar de$ositse. none of the aboveAN ! e

137. 2onsider the following data! c#rrency %held o#tside banks& H ) 5* billion, checkable de$osits H)45+ billion, traveler-s checks H )* billion, small denomination time de$osits H )4++ billion,savings de$osits H )1++ billion, money market m#t#al f#nds H )1 + billion. M1 e0#als ::::::::::

billion and M4 e0#als :::::::::: billion.a. ) + )1,+

b. )C+ )1,+c. )C+ )9*

d. ) 9* )1,+e. none of the aboveAN ! a

138. 'hich of the following is false?a. 2#rrency is money, b#t money is more than sim$ly c#rrency.

b. M1 is a com$onent of M4.c. ederal /eserve notes make #$ abo#t 99 $ercent of the $a$er money in circ#lation.d. 2redit cards are money since they are widely acce$ted for $#r$oses of e"change.e. Money red#ces the transaction costs of making e"changes.AN ! d


26/34

C 2ha$ter 14

139. Bank de$osits at the ederal /eserve H )*+ billion, va#lt cash H )4 billion, re0#ired reserve ratio H+.1+, and total checkable de$osits H )*++ billion. t follows that re0#ired reserves e0#al

:::::::::: billion, %total& reserves e0#al :::::::::: billion and e"cess reserves e0#al :::::::::: billion.a. )*4 )*4 )4

b. )*4 )*+ )4c. )4 )*+ )d. ) )*+ )4e. )*+ )*4 )4AN ! e

140. f total %checkable& de$osits are ) ++ billion and re0#ired reserves are )*5 billion, the re0#iredreserve ratio is :::::::::: and the sim$le de$osit m#lti$lier is ::::::::::.a. 1+ $ercent 1+.+

b. 15 $ercent . C %*5 E ++ H +.15 " 1++&, 1E +.15 H . Cc. 4+ $ercent 1+.+d. 14 $ercent .e. none of the aboveAN ! b

141. 'hich of the following statements is false?a. Banks make loans with e"cess reserves.

b. Banks can create checkable de$osits thro#gh their lending $ractices.c. /eserves H bank de$osits at the ederal /eserve = va#lt cash.d. 2#rrency %which is a com$onent of the M1 money s#$$ly& is the same as va#lt cash.e. The smaller the re0#ired reserve ratio, the larger the sim$le de$osit m#lti$lier.AN ! d

142. The ederal /eserve creates )1,+++ %new money&, gives it to mith, who then de$osits it in a bank.f the re0#ired reserve ratio is 1+ $ercent, the ma"im#m increase in the money s#$$ly is

:::::::::: and the banking system created :::::::::: $ercent of the increase in the moneys#$$ly.a. )1+,+++ 1+

b. )1+,+++ 1++c. )1++,+++ 1+d. )1++,+++ 9+e. )1+,+++ 9+AN ! e

143. The re0#ired reserve ratio is 1+ $ercent. f the ederal /eserve creates )4+,+++ in new money, theminim#m change in the money s#$$ly is :::::::::: the ma"im#m change in the money s#$$ly is

::::::::::.

a. )4++,+++ )4++,+++ b. )4+,+++ )4+,+++c. )4+,+++ )1++,+++d. )4,+++ )4+,+++e. )4+,+++ )4++,+++AN ! e


27/34

Money and Banking CC

144. The re0#ired reserve ratio is 1+ $ercent. f the ederal /eserve creates )1++,+++ in new money andgives it to Iones, what is the dollar difference between the minim#m and ma"im#m change in themoney s#$$ly?a. )1,+++,+++

b. )1++,+++c. )9++,+++d. )5++,+++e. none of the aboveAN ! c

145. As the re0#ired reserve ratio ::::::::::, the ma"im#m change in the money s#$$ly ::::::::::,ceteris pari us . As banks increase the %amo#nt of& e"cess reserves they lend, the act#al change inthe money s#$$ly ::::::::::, ceteris pari us .a. falls rises falls

b. rises falls fallsc. falls rises risesd. rises rises risese. There is not eno#gh information to answer the 0#estion.AN ! c

146. /eserves H )1++ billion, total de$osits H )1,+++ billion, re0#ired reserve ratio H 1+ $ercent. 'hat isthe ma"im#m amo#nt of new loans that can be created by the banking system?a. )9++ billion

b. )1++ billionc. ) ++ billiond. )+e. There is not eno#gh information to answer the 0#estion.AN ! d

147. Banks in the Dnited tates o$erate #nder a fractional reserve system, which means they m#st

maintain only a fraction of their de$osits in the form of a. debt.

b. loans.c. an ins#rance $olicy.d. reserves.e. none of the aboveAN ! d

148. 7ne tho#sand dollars %)1+++& is withdrawn from a bank and destroyed. f the re0#ired reserve ratiois 1+ $ercent, and banks are holding (ero e"cess reserves, what is the ma"im#m decrease in themoney s#$$ly?a. )9,+++

b. )1+,+++c. )1,+++d. )1,9++AN ! b


28/34

C 2ha$ter 14

149. 6eo$le decide to hold relatively more c#rrency and relatively less checkable de$osits. f banks areholding (ero e"cess reserves, and nothing else changes, it follows thata. the money s#$$ly will increase.

b. the money s#$$ly will decrease.c. banks will increase o#tstanding loans.d. the re0#ired reserve ratio will dro$.e. none of the aboveAN ! b

150. Banks decide to increase their e"cess reserves from + $ercent of total reserves to 1+ $ercent of totalreserves. t follows thata. the re0#ired reserve ratio will rise.

b. banks will red#ce o#tstanding loans.c. the money s#$$ly will increase.d. the sim$le de$osit m#lti$lier will fall.e. a and dAN ! b

151. 'hen economists say that banks m#st hold a $ercentage of their total de$osits in reserve form, whatdoes this mean?a. t means that banks m#st hold a fraction of their c#stomers- de$osits either as bank de$osits at

the ederal /eserve, or as va#lt cash, or both. b. t means that banks reserve the right to t#rn away c#stomers a certain $ercentage of the time.c. t means that the fraction of va#lt cash a bank has cannot be greater than the fraction of bank

de$osits %it has& at the ederal /eserve.d. ssentially, it means that total reserves are greater than re0#ired reserves.e. none of the aboveAN ! a

152. Lwendolyn has )1,+++ in cash at home in a dresser drawer. he takes the )1,+++ to her bank and

de$osits it into her checking acco#nt. At this $oint in time, it follows that thea. si(e of the money s#$$ly has not changed.

b. com$osition of the money s#$$ly has changed.c. com$osition of the money s#$$ly has not changed.d. money s#$$ly has increased.e. a and bAN ! e

153. 'hich of the following statements #ses the word "one# correctly from an economist-s $oint ofview?a. Iackie earns a lot of money in her Job.

b. >e has most of his money tied #$ in artwork.

c. >ow m#ch money did yo# make last year?d. t is diffic#lt to get m#ch money in today-s tight mortgage market.e. none of the aboveAN ! e


29/34


154. n which setting are the transaction costs of making an e"change likely to be the highest?a. b#ying cereal at the grocery store

b. b#ying a ho#sec. b#ying a com$#ter over the nternetd. b#ying stock in a com$anye. b#ying a Big Mac at Mc3onald-sAN ! b

155. 'hich of the following is tr#e?a. Money is an invention of government.

b. The transaction costs of e"change are higher in a money economy than in a barter economy.c. f Barbara has what aren wants and aren has what Barbara wants, then Barbara and aren

have a do#ble coincidence of wants.d. f the re0#ired reserve ratio is 14 $ercent, the sim$le de$osit m#lti$lier is 14.e. c and dAN ! c

156. 'hich of the following is tr#e?a. 2redit cards are money beca#se they are widely acce$ted for $#r$oses of e"change.

b. The early bankers were goldsmiths.c. f the re0#ired reserve ratio is 15 $ercent, the sim$le de$osit m#lti$lier is a$$ro"imately . C.d. a and be. b and cAN ! e

157. Total %checkable& de$osits H )1 million, e"cess reserves H )4++,+++, and the re0#ired reserve ratioH 1+ $ercent. t follows that o#tstanding loans e0#ala. )5++,+++.

b. )*++,+++.c. )C++,+++.

d. ) ++,+++.e. none of the aboveAN ! c

158. Total %checkable& de$osits H )1+ million, re0#ired reserve ratio H 4+ $ercent, and o#tstanding loansH )C million. New loans can be granted #$ toa. ) million.

b. )1 million.c. )4 million.d. ) million.e. There is not eno#gh information to answer the 0#estion.AN ! b

159. Total %checkable& de$osits H )1+ million, o#tstanding loans H ) million, e"cess reserves H )million. t follows that the re0#ired reserve ratio isa. 4+.+ $ercent.

b. 15.+ $ercent.c. 1+.+ $ercent.d. C.5 $ercent.e. There is not eno#gh information to answer the 0#estion.AN ! c


30/34

+ 2ha$ter 14

160. Total %checkable& de$osits H )1++ million, re0#ired reserve ratio H 1+ $ercent, e"cess reserves H )+.t follows that o#tstanding loans e0#ala. )1++ million.

b. )5+ million.c. )9+ million.d. )4+ million.e. none of the aboveAN ! c

161. /e0#ired reserves H )*+ million, re0#ired reserve ratio is 4+ $ercent, o#tstanding loans H )1*+million. t follows that checkable de$osits e0#al :::::::::: million and e"cess reserves e0#al

:::::::::: million.a. )4++ )1+

b. )1 + )4+c. )4++ )*+d. )1*+ ) +e. )4++ )4+AN ! e

162. The banking system has de$osits of )5+ billion and no e"cess reserves. The re0#ired reserve ratio is1+ $ercent. A de$osit of )1+ billion is made in Bank A and no other bank in the banking systemloses reserves. The ma"im#m increase in checkable de$osits %money s#$$ly& that can be bro#ghtabo#t by the banking system isa. )1++ billion

b. )9+ billionc. )C billiond. )1+ billione. none of the aboveAN ! b

163. 'hen $eo$le in a barter economy began to acce$t the good that had greater acce$tability than allother goods, they weren-t trying to create the instit#tion of money. They were sim$ly trying to

::::::::::.a. get along with their neighbors.

b. become rich.c. make trading easier for themselves.d. $ay lower $rices.e. none of the aboveAN ! c

164. To a bank, a checkable de$osit is classified asa. an asset.

b. a liability.c. va#lt cash.d. e"cess reserves.e. a Tacco#nt.AN ! b


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Money and Banking 1

165. mith transfers )4,+++ from his checking acco#nt in Bank A to his checking acco#nt in Bank B.The re0#ired reserve ratio is 1+ $ercent and both banks hold (ero e"cess reserves. t follows that themoney s#$$ly willa. rise by )1 ,+++.

b. fall by )1 ,+++.c. not change.d. rise by )4,+++.e. fall by )4+,+++.AN ! c

166. f reserves e0#al )49 million and va#lt cash e0#als )49 million, it follows thata. bank de$osits at the ederal /eserve e0#al )49 million.

b. c#rrency in the hands of the $#blic e0#als )49 million.c. e"cess reserves e0#al )1+ million.d. bank de$osits at the ederal /eserve e0#al )+.e. There is not eno#gh information to answer the 0#estion.AN ! d

167. The money s#$$ly will not fall when cash leakages increase as long asa. the increased cash leakages do not ca#se banks to become reserve deficient.

b. the re0#ired reserve ratio remains constant.c. banks hold all their reserves in va#lt cash.d. e"cess reserves are (ero.e. none of the aboveAN ! a

168. Bob takes )5++ from his wallet and de$osits it into his checking acco#nt in Bank A. The moneys#$$ly will not increase as long as thea. bank c#rrently has (ero e"cess reserves.

b. bank does not lend o#t the additional e"cess reserves that res#lt from the de$osit.

c. re0#ired reserve ratio is 1++ $ercent.d. b and ce. a, b, and cAN ! d

169. 'hich of the following is not a com$onent of M1?a. c#rrency held o#tside banks

b. traveler-s checksc. savings de$ositsd. checkable de$ositsAN ! c

170. 'hich of the following statements is false?a. Money today has val#e beca#se of its general acce$tability.

b. 'hen a credit card is #sed to make a $#rchase, the borrower inc#rs a debt.c. Banks in the Dnited tates o$erate #nder a fractional reserve banking system in which they

m#st maintain 1++ $ercent of their de$osits in reserve form.d. M1 does not incl#de overnight re$#rchase agreements.e. Money-s least e"cl#sive f#nction is the store of val#e f#nction.AN ! c


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4 2ha$ter 14

171. The risk of s$eciali(ing %in the $rod#ction of one good or service& isa. lower in a barter economy than in a money economy.

b. lower in a money economy than in a barter economy.c. the same in both a money and barter economy.d. greater the less likely yo# and the $erson yo# want to trade with have a do#ble coincidence of

wants.e. b and dAN ! e

172. A bank that had (ero e"cess reserves yesterday will have $ositive e"cess reserves today if a. it transfers f#nds from its reserve acco#nt at the ederal /eserve into va#lt cash.

b. it transfers all its va#lt cash into its reserve acco#nt at the ederal /eserve.c. the re0#ired reserve ratio is lowered.d. cash leakages rise.e. none of the aboveAN ! c

173. 'hich of the following is false?a. Banks cannot $rint money.

b. Banks can create checkable de$osits by e"tending loans.c. Banks m#st maintain a certain $ercentage of their total %checkable& de$osits in reserve form.d. 2heckable de$osits is a larger com$onent of M1 than c#rrency.e. Today, in the Dnited tates, gold is money.AN ! e

174. 'hich of the following is false?a. n a barter economy, some goods are more widely acce$ted for trade than other goods.

b. An increase in checkable de$osits will increase the money s#$$ly, ceteris pari us .c. The sim$le de$osit m#lti$lier is e0#al to the re0#ired reserve ratio divided by 1.d. f the ma"im#m change in checkable de$osits is )1+,+++, and the re0#ired reserve ratio is 1+

$ercent, the change in reserves %res#lting from the original inJection of f#nds& e0#als )1,+++.e. a and dAN ! c

175. f total %checkable& de$osits rise, it follows that thea. re0#ired reserve ratio will fall.

b. dollar amo#nt of reserves will rise.c. dollar amo#nt of va#lt cash will rise.d. re0#ired reserve ratio will rise.e. none of the aboveAN ! b

176. f M1 is )1,4++ billion, c#rrency held o#tside banks is )*++ billion, and traveler-s checks is )1+ billion, then small denomination time de$osits e0#ala. )C9+ billion.

b. ) 9+ billion.c. ) ++ billion.d. )1,19+ billion.e. There is not information to answer the 0#estion.AN ! e


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177. 'hich of the following statements is tr#e?a. A savings de$osit is not co#nted in the most basic, or narrow, definition of the money s#$$ly.

b. ome assets are more li0#id than other assets.c. Money red#ces the transaction costs of making e"changes.d. b and ce. a, b, and cAN ! e

True/False

1. To an economist, the terms ;money< and ;wealth< are synonyms.AN !

4. 2hanging from a barter economy to a money economy can red#ce transaction costs.AN ! T

. Money is an invention of government.AN !

*. 2redit cards are a widely acce$ted form of money.AN !

5. mall denomination time de$osits are $art of M4, b#t not $art of M1.AN ! T

. 'hen a check is cleared against a bank, the bank will lose checkable de$osits and gain reserves.AN !

C. n the Dnited tates, the money s#$$ly is backed by gold.AN !

. The ed $ays banks interest on bank de$osits held on reserve at the ed.AN !

9. @owering the re0#ired reserve ratio raises the sim$le de$osit m#lti$lier.AN ! T

1+. 'hen a c#stomer takes cash from a drawer in his home and de$osits it into his checking acco#nt,the com$osition of the money s#$$ly will change immediately and the si(e of the money s#$$lymay event#ally change.AN ! T

11. Lresham-s @aw was based on events that occ#rred d#ring the D. . $residential election of 1 9 .AN !

14. /e0#ired reserves are a set $ercentage of total reserves that m#st be held in cash in a bank-s va#lt.AN !

1 . To a bank, checkable de$osits are classified as a liability.AN ! T


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* 2ha$ter 14

1*. The money e"$ansion $rocess can be slowed down by cash leakages and by banks holding ontoe"cess reserves.AN ! T

15. ince an individ#al $erson is better off with a bigger money s#$$ly, it follows that we wo#ld all benecessarily better off if the M1 money s#$$ly were larger.AN !

Essay

1. 3escribe the $rocess by which banks create money.AN ! 'hen a c#stomer de$osits money into her bank, the bank-s reserves rise by an e0#al amo#nt.n a fractional reserve banking system, the bank is only re0#ired to set aside a small $ortion of thisde$osit and the bank is free to loan the remainder. n the $rocess of making these new loans,checkable de$osits are created for the $eo$le who received the loans. Liven that checkablede$osits are $art of the money s#$$ly, by e"tending loans the banking system has increased themoney s#$$ly.

4. 'hat is Lresham-s @aw? 'hat three conditions are necessary in order for it to be valid?AN ! Lresham-s @aw states, ;Bad money drives good money o#t of circ#lation.< n order for thislaw to be valid the following conditions m#st hold! %1& the money m#st have the same face val#e,%4& the money m#st have different intrinsic val#es, and % & the money has a fi"ed e"change rate of 1for 1.

. 3escribe the circ#mstances #nder which the M1 money s#$$ly co#ld fall while the M4 moneys#$$ly remains constant at the same time.AN ! n order for the M1 money s#$$ly to fall, one of the com$onents of M1 %checkable de$osits,c#rrency held o#tside banks, or traveler-s checks& wo#ld have to decline. M4 wo#ld remainconstant as long as the money that was ded#cted from M1 was de$osited into one of the additionalcom$onents of M4 %savings de$osits, small denomination time de$osits, or noninstit#tional money

market m#t#al f#nds&.

*. @ist and describe the three f#nctions of money.AN ! Money serves as a medi#m of e"change, a #nit of acco#nt and a store of val#e. Medi#m ofe"change F n a money economy, money serves as the medi#m thro#gh which transactions aremade. Dnit of acco#nt F Money is the common standard by which val#e is determined in a moneyeconomy %a ;yardstick< of val#e&. tore of val#e F Money will retain val#e over time.

bab 12 money & banking

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