Money and the Banking System

Money is a medium of exchange that is widely accepted in payment for goods and services. It serves as a unit of account, a store of value, and a standard of deferred payment.

The banking system is a network of financial institutions that provide various banking services such as accepting deposits, making loans, and facilitating the transfer of funds. Banks play a crucial role in the economy by intermediating between savers and borrowers, and by providing a means for the government to implement monetary policy.

Central banks, such as the Federal Reserve in the United States, are responsible for regulating and supervising the banking system. They also serve as the lender of last resort, providing banks with liquidity during times of crisis.

The relationship between money and the banking system is complex. Banks create money through the process of fractional reserve banking, where they hold a fraction of deposits as reserves and lend out the rest. This process increases the money supply in the economy and can have a significant impact on the economy’s overall performance. Central banks, in turn, use monetary policy tools to control the money supply and interest rates, in order to manage inflation, stabilize the economy and achieve other macroeconomic objectives.

Overall, the banking system and money are essential components of the economy, and the way they interact has a significant impact on the economy’s performance.

1.The purchasing power of money is:

directly related to the general price level in an economy

directly related to interest rates in an economy

inversely related to the level of private investment in an economy

inversely related to the supply of money in an economy

2.Which of the following would cause the money supply in the United States to expand?

An increase in the discount rate

An increase in the interest rate paid to banks on their deposits with the Fed

An increase in the world supply of gold

An increase in the purchase of securities and other financial assets by the Fed

3.Which of the following is true of the M1 money supply?

It is the sum of savings deposits and small time deposits

It is the sum of savings deposits, small time deposits, and traveler’s checks

It is the sum of currency in circulation and checkable deposits

It is the sum of currency in circulation and small time deposits

4.When a banker accepts a deposit of $1,000 in cash and puts $100 aside as reserves and then makes a loan of $900 to a new borrower, this set of transactions:

decreases the money supply by $100

does not change the money supply

increases the money supply by $900

increases the money supply by $1900

5.Identify the correct statement.

Money does not provide a holder with future purchasing power

An increase in the use of credit cards increases the average quantity of money held by people

An increase in the supply of money increases the purchasing power of money

Money is a financial asset that has purchasing power

6.Identify the correct statement regarding commercial banks.

They are responsible for changes in the money supply

They have to maintain a certain amount of gold reserves with the Federal Reserve as required reserves

The changes in the tax structures in an economy are decided by these banks

The primary source of revenue for these banks is the income they derive from their loans and investments

7.Identify the correct statement about the supply of money in an economy.

If the supply of money decreases rapidly, the purchasing power of money decreases

If the supply of money increases rapidly, the inflation rate generally increases

If the supply of money increases rapidly, the unemployment rate generally decreases

If the supply of money increases rapidly, the value of money increases

8.Identify the correct statement about the M2 money supply.

It excludes small time deposits

It is equal to the sum of the M1 money supply, savings deposits, small time deposits, and money market mutual funds

It is equal to the difference between the M1 money supply and the sum of savings deposits, small time deposits, and money market mutual funds

It includes time deposits that are greater than $100,000

9.When people use money to buy and sell goods and services, money serves as a:

medium of exchange

measure of social benefits received from a transaction

measure of the opportunity cost of buying and selling goods and services

means of storing value for future use

10.Which of the following is an asset for a commercial bank?

Time deposits

Outstanding interest-earning loans

Checking deposits

Savings deposits

11.If there is an increase in the supply of money in an economy relative to its demand, then the:

value of money will fall

purchasing power of money will increase

level of unemployment in the economy will increase

prices of all goods and services will decrease in the economy

12.Which of the following is true of money?

It is a liquid asset

It is non-durable and non-portable in nature

There is no opportunity cost of holding money

It cannot be transformed into other forms of assets without a loss of value

13.Demand deposits are:

non-interest-earning checking deposits that can be either withdrawn

mediums of exchange made of metal or paper

interest-earning accounts that pool depositors’ funds and invest them in highly liquid short-term securities

interest-earning deposits that are also available for checking

14.Using money as a medium of exchange:

reduces a country’s gains from trade

reduces the profits of firms

reduces transaction costs

increases the opportunity costs of producing goods

15.Which of the following comprises a major share of the M1 money supply in the United States?

Savings and small time deposits

Traveler’s checks and money market mutual funds

Money market mutual funds and savings deposits

Demand deposits and checkable deposits

16.Which of the following statements is true of the Federal Deposit Insurance Corporation (FDIC)?

The FDIC collects an insurance premium from customers for each dollar deposited in a bank

The FDIC provides loans to banks that are unable to pay their customers their deposits

The FDIC is a financial institution that is owned by the stockholders of banking institutions

When a bank fails, FDIC guarantees the deposits of banking customers up to some limit

17.Required reserves are the:

minimum amount of reserves that a bank is required by law to keep on hand to back up its deposits

reserves that commercial banks are required to maintain in the form of gold

minimum amount that the Federal Reserve needs to invest in stocks and bonds

minimum amount that the Federal Reserve needs to keep on hand to meet the needs of the commercial banks

18.Suppose the hypothetical country of Agraria faced a debt crisis when the government borrowed money from international financial institutions. In order to repay the debt, the government decided to increase the money supply. This caused a(n):

decrease in the demand for money in the country

increase in the inflation rate in the country

increase in the investment rate of the country

increase in the value of money in the country

19.Which of the following is not a tool that the Fed can use to control the money supply in the U.S. economy?

The buying and selling of U.S. government securities and other financial assets in the open market

A change in income tax rates

A change in the discount rate

The establishment of reserve requirements for banks

20.If savings deposits increase by $2,000, then:

the M2 money supply increases

the M2 money supply decreases

the M2 money supply remains constant

the M1 money supply increases

21.Which of the following makes the M1 money supply growth figures less reliable as a gauge of monetary policy?

Changes in the interest rates of checkable deposits

Increased use of cash to make transactions

Decreased use of money market mutual funds

The widespread use of domestic currency abroad

22.In the decade after payment of interest to banks on their reserve deposits with the Fed was instituted in 2008, the ratio of bank reserves to checkable deposits:

increased substantially

was considerably lower than during the prior period when bank reserves were controlled with the reserve requirement tool

was unchanged from the prior period when bank reserves were controlled with the reserve requirement tool

declined substantially

23.The Federal Reserve System regulates:

the banking system and controls the money supply in the United States

government spending in the U.S. economy

the revenue earned by the federal government in the U.S. economy

the tax rate in the U.S. economy

24.Depository institutions:

control the market interest rate

control the money supply in an economy

accept deposits in exchange for shares that pay dividends

accept checking and savings deposits

25.Which of the following is true of the Board of Governors of the Fed?

It establishes the rules and regulations that apply to all depository institutions in the United States

It consists of members from the Federal Reserve District Banks

It consists of 8 members, each appointed for a 10-year term

It establishes the rules and regulations for the tax structure of an economy

26.If a person sells stock and uses the funds to open a time deposit account of $50,000 at a bank, then:

the M1 money supply will increase

the bank reserves will decrease

the required reserve ratio will increase

the M2 money supply will increase

27.Which of the following makes the M1 money supply growth figures less reliable as a gauge of monetary policy?

The widespread use of domestic currency abroad

Decreased use of money market mutual funds

Changes in the interest rates of checkable deposits

Increased use of cash to make transactions

28.If the Fed wanted to follow a more expansionary monetary policy, which of the following actions would it take?

Increase the reserve requirements imposed on commercial banks

Extend fewer loans to commercial banks

Purchase additional U.S. securities and other assets

Increase the interest rate paid on the excess reserves held by commercial banks

29.Which of the following is true of the Federal Reserve?

It balances the budget of the federal government

It conducts monetary policy in a manner that is designed to promote both full employment and price stability

It controls the demand for money in an economy

It controls the number of credit and debit cards that can be issued by commercial banks in a financial year

30.Which of the following is an example of fiat money?

Gold coins

Cowrie shells

Paper money

Checks

31.What is meant by the expression, “There is too much money chasing too few goods”?

People spend too much time chasing after money

The value of money will tend to decline when the supply of gold increases

An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices

People would be better off if the monetary authorities increased the supply of money more rapidly

32.Which of the following is a feature of a barter economy?

Goods are directly traded for other goods

The costs of transaction are very low

Money is used as a medium of exchange

Precious metals are used as mediums of exchange

33.The unit of account function of money reflects that money:

serves as a common denominator for the expression of both the costs of and the benefits from goods

measures the implicit costs of producing goods

allows people to transfer purchasing power from one period to the next

serves as a means to measure the marginal social benefit from the production and consumption of goods

34.Which of the following is a component of the M1 money supply?

Savings deposits

Checking deposits

Small time deposits

Money market mutual funds

35.Bank reserves are the:

difference between vault cash and the deposits of banks with Federal Reserve banks

ratio of vault cash to the deposits of banks with Federal Reserve banks

sum of vault cash and the deposits of banks with Federal Reserve banks

percentage difference between vault cash and the deposits of banks with Federal Reserve banks

36.Identify the correct statement.

M2 is the narrowest definition of money

Depository institutions can regulate the money supply in an economy

Depositors can write checks against money market mutual funds

Demand deposits can be withdrawn only after a period of time

37.Which of the following is true of the deposit expansion multiplier?

When people decide to hold currency rather than depositing the funds in a bank, the size of the deposit expansion multiplier decreases

When the interest rate on excess reserves increases, the size of the deposit expansion multiplier increases

When the use of credit and debit cards falls, the size of the deposit expansion multiplier increases

When banks use a larger share of their reserves to extend loans, the size of the deposit expansion multiplier decreases

38.Suppose the hypothetical country of Agraria faced a debt crisis when the government borrowed money from international financial institutions. In order to repay the debt, the government decided to increase the money supply. This caused a(n):

increase in the value of money in the country

increase in the inflation rate in the country

decrease in the demand for money in the country

increase in the investment rate of the country

39.Which of the following is not included in the M2 money supply?

Time deposits of $200,000

Demand deposits of $300,000

Money market mutual funds of $25,000

Time deposits of less than $50,000

40.When banks are required by law to maintain a portion of their assets in reserve to back up their checking deposits, these reserve assets are called:

required reserves

actual reserves

borrowed reserves

excess reserves

41.A liquid asset refers to an asset that:

can be easily and quickly converted to money without any loss of value

cannot be converted to money without a loss of value

can be converted to money only after a given time period

cannot be used as a medium of exchange after a certain period of time

42.Which of the following is true of money?

It provides a means of storing value for future use

It is used to measure the opportunity cost of producing a good

It has a high intrinsic value

It is used as a medium of exchange in a barter economy

43.Suppose Richard wins $2,000 in a lottery and decides to deposit the money in a bank. If the required reserve ratio is 25 percent, the $2,000 deposit would increase the excess reserves of the bank by:

$1,000

$1,800

$1,500

$2,000

44.Which of the following is true of the deposit expansion multiplier?

The deposit expansion multiplier measures the multiple by which an increase in reserves will increase the money supply

The deposit expansion multiplier will be smaller when banks loan out a larger share of newly created reserves

The deposit expansion multiplier measures the multiple by which a decrease in reserves will increase the money supply

The deposit expansion multiplier is negatively related to the discount rate

45.The Fed responded to the COVID-19 pandemic in 2020 by:

reducing its purchases of Treasury securities and other financial assets

increasing the interest rate paid to banks on their deposits with the Fed

raising the reserve requirements from 10 percent to 20 percent

increasing its purchases of Treasury securities and other financial assets by a huge amount

46.Which of the following is true of checkable deposits other than demand deposits?

These are non-interest-earning deposits

These accounts earn interest but there are generally restrictions on the activities within the accounts

A depositor does not have to maintain a minimum balance in the bank

These cannot be used as a medium of exchange

47.Which of the following is a difference between money and credit cards?

Purchases made with money create liabilities, while those made with credit cards create assets

Credit cards are included in the M1 money supply, while currencies in circulation are included in the M2 money supply

Purchases made with credit cards create liabilities, while goods purchased with money are paid for

Credit cards are included in the M2 money supply, while currencies in circulation are included in the M1 money supply

48.When the Fed began paying banks interest on their reserve deposits with the Fed in 2008, this provided it with a tool that could be used to:

control the M2 money supply, but not the M1 money supply

determine whether the money supply should be increased or decreased

control the reserves of banks, and act as a substitute for mandated reserve requirements

determine if interest rates should be increased or decreased

49.Widespread use of credit cards:

will increase the M1 money supply

tends to reduce the average quantity of money that people will choose to hold

will decrease the M2 money supply

tends to increase the average quantity of money that people will choose to hold

50.Which of the following is true of money market mutual funds?

These are non-interest-earning accounts offered by banks

Depositors cannot write checks against these accounts

These accounts pool depositors’ funds and invest them in highly liquid short-term securities

These securities cannot be quickly converted into cash

Money and the Banking System

Money and the Banking System

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