Multiple Choice Tutorial Chapter 5 Money and the Federal Reserve

1. Multiple Choice TutorialChapter 5Money and the Federal Reserve

2. 1. Barter works best a. in the absence of a double coincidence of wants b. when many different product are available in the economy c. when money is relatively available to establish relative prices d. when each trader has what the other wants and wants what the other has D. Barter requires a coincidence of wants; each person has to have exactly what the other wants.

3. 2. A coincidence of wants happens exists when a. two people want the same thing at the same time b. one person wants to but two different things at the same time c. the individual who has what I want, also wants what I have C. A problem with barter is how the alternate goods or services can be divided. If one person wants eggs and the other wants a pound of beef, but the second person still has cattle, what to do? If the cow is killed, there will be a lot of meat left over.

4. 3. The essential characteristic required before any substance can function as money is that a. it be issued by the government b. it be backed by a precious metal c. the supply of it be unlimited and uncontrolled d. people accept it as money D. Money can take just about any form as long as it is accepted by everyone and is easily exchanged. Money can even be an electronic impulse on a computer. All that is necessary is to keep track of someone’s debit and someone else's credit in a financial transaction.

5. 4. To say that money functions as a medium of exchange is to say that a. it is the preferred form of compensation for fortune-tellers, mediums, and those through whom the spirit world is contacted b. it is the generally accepted form of payment for goods and services c. it is the common unit of expressing the value of goods and services d. it is bought and sold on the stock exchange B. Money has several purposes, one is that it is used by consumers to buy and sell in the market place. This is using money as a medium of exchange.

6. 5. School administrators announce the following schedule of fees for the next academic year: In-state tuition, $175 per credit hour; Out-of-state tuition, $400 per credit hour; Room-and-board, $3,000 per semester. This is an example of money functioning as a. a medium of exchange. b. a store of value. c. fiat money. d. a unit of account. D. Money is being used to measure the cost of education in the case.

7. 6. Mary Ellen deposits $100 into her savings account each month. Her daughter Carolyn keeps all her pennies in a piggy bank. These are examples of money functioning as a. a store of value b. commodity money c. a medium of exchange d. a standard of deferred payments A. Another purpose of money is that it can be used as a store of value. Money put into savings to be available at a later point in time is using money as a store of value.

8. 7. All of the following are examples of commodity money except a. cattle b. gold c. tobacco d. $10 Federal Reserve notes D. Commodity money is money that has some intrinsic value other than money. Cattle, gold, and tobacco have value other than being used as money. Federal Reserve notes (dollar bills) do not have value except as money.

9. 8. All of the following are functions of money except a. medium of exchange. b. unit of account. c. index of prices. d. standard of deferred payment. C. Money is used as a medium of exchange, a unit of account, and a standard of deferred payment.

10. 9. All of the following are problems with commodity money except a. often commodity money deteriorates in storage. b. often commodity money is too bulky for major transactions. c. often commodity money is not divisible into small and uniform units. d. often commodity money is viewed as an unfair competitor by suppliers of fiat money. D. Different forms of money always compete, this is not a problem; in such a case a good form of money will drive out a bad form.

11. 10. Whatever functions as money must be a. authorized by the government b. accepted for deposit by banks c. backed by precious metals like gold or silver d. limited in supply D. Because money can be just about anything, it does not have to be sanctioned by the government or backed up by anything. It does not have to be in a form that can be deposited in a bank. It does, however, have to be limited in supply to have any value.

12. 11. In the United States economy which one of the following is not money? a. a Susan B. Anthony $1 coin b. a checking account at a bank c. a 25-cent piece (i.e., a quarter) d. a $100 U.S. Government savings bond D. U.S Government savings bonds are not transferable in terms of ownership. Therefore, they could not be used as money.

13. 12. The difference between bank notes, Federal Reserve notes, and fiat money is that a. fiat money is redeemable for gold or silver, but the others are not. b. bank notes are redeemable for gold or silver but the others are not. c. fiat money derives its acceptability as money from the precious metal which “back” it. B. Bank notes are papers promising a specific amount of gold or silver to bearers who presented them to issuing banks for redemption; an early type of money.

14. 13. Money is legal tender if a. people willing accept it in payment of debts b. it is backed by gold or silver c. it is commodity money d. the government says it is D. Legal tender is when the legal courts of the land recognize certain pieces of paper as payment of personal and public debt (public debt is tax money owed to the government). This is why is says on each of our dollars, “this note is legal tender for all debts public and private.”

15. 14. An important function of commercial banks, in addition to storing money and keeping it safe, is to a. print new currency. b. issue fiat money. c. mint coins. d. make loans. D. We have what is called a partial reserve banking system. Banks only keep a part of their assets in reserve, the rest is free to lend out; the interest earned on the money that is lent out is how banks make a profit.

16. 15. The first bankers were probably a. carpenters b. stock brokers c. goldsmiths d. sea captains C. In the very early days of capitalism, gold and silver were the primary forms of money. When a person had a lot of gold he would want to keep his gold safely somewhere. So he would give his money to a goldsmith. These goldsmiths, in turn, discovered that they could lend a portion of their gold holdings out to make interest income. Thus they became our first banks.

17. 16. In the world of banking, checks are a. written instructions from a depositor to the bank b. written instruction from one depositor to another c. a form of commodity money d. token money A. A check is simply instructions to a bank to free the funds in a person’s bank account.

18. 17. Fractional reserve banking occurs when a. a bank has reserves which exceed it deposits b. a bank has reserves which are equal to its deposits c. a bank has reserves which are less than its deposits d. some depositors lose their deposits through poor banking management C. A fractional reserve banking system is a system that allows its banks to lend out a portion of every dollar deposited in the bank. This is what allows a bank to make a profit.

19. 18. When prices rise a. the purchasing power of money rises b. the purchasing power of money falls c. the purchasing power of money remains unchanged d. the purchasing power of money either rises or falls, depending upon the size of the national debt B. As prices rise it takes more money to buy the same amount of goods and services as used to be the case. This is what we call inflation.

20. 19. Which of the following is most critical for the maintenance of an efficient, productive economy? a. money backed by gold or silver b. steadily rising prices c. an unlimited and unregulated supply of money d. a properly functioning monetary system D. A stable and properly functional monetary system is a pillar which any economy is built upon.

21. 20. The United States is said to have a dual banking system because a. some banks make mortgage loans and some banks do not. b. some banks have state charters and some have national charters. c. two different types of banks are authorized to issue bank notes. B. If you wanted to start a bank, you would need a license. You could get a license either from the federal government or the state banking commission which the bank would reside. If you got your license from the federal government you would be a national bank and would have the word national in your name.

22. 21. All of the following are powers of the Federal Reserve System except a. the ability to buy and sell government securities b. the authority to issue Federal Reserve notes c. the responsibility to clear checks d. the obligation to make loans to the general public D. The Federal Reserve is known as a banker’s bank. It only does business with other financial institutions and not the general public or businesses.

23. 22. Which one of the following is not a function of the Federal Reserve banks? The banks serve as a. lenders to major corporations. b. lenders to banks. c. lenders to the federal government. d. banks to bankers. A. A Federal Reserve bank is what is called a “bankers bank,” it only does business with financial institutions. It does not do business with consumers or businesses.

24. 23. The discount rate is a. the interest rate charge to commercial banks for loans from the Federal Reserve bank b. the rate or percent of deposits which banks are required to hold on reserve c. the rate of interest paid on government bonds d. the charge for cashing a check at a Federal Reserve bank A. Only financial institutions can borrow money from the Fed. The interest rate they pay to borrow this money is called the discount rate.

25. 24. Between 1930 and 1933 many banks in the U.S. failed because a. the FDIC moved too slowly to prevent the bank failures. b. most bankers were either corrupt or incompetent. c. of excessive regulation by the federal government. d. people lost confidence in them. D. Our banking system works because we believe it works. Because we have a partial reserve banking system, if enough depositors lose faith and withdraw their money from banks, the whole banking system would fail.

26. 25.The Federal Reserve banks probably could have prevented many of the bank failures in the early 1930’s by a. raising the reserve requirements of the commercial banks b. lending large sums of money to the commercial banks c. improving the system whereby checks are cleared B. Incredibly as it is, the Fed actually tightened the money supply in the early years of the Great Depression. The proper policy would have been to loosen the money supply to get more money in circulation in order to encourage an increase in spending.

27. 26. Because Federal Reserve banks have unlimited power to create money, a. they are more likely to fail than other banks. b. they are the cause of most inflation in the U.S. c. they cannot fail. d. FDIC insurance against bank failure is unnecessary. C. Technically the Fed cannot fail because it can always meet its commitments by creating new money. However, if it does this too much, the result would be inflation.

28. 27. Which of the following was not an action taken to end the financial crisis of the 1930’s? a. creation of the Federal Reserve System b. creation of the Federal Deposit Insurance Corp. c. a one week “bank holiday” d. revision of the banking laws. A. The Federal Reserve System was established in 1913, the same year that the income tax became law. Woodrow Wilson was the President at that time.

29. 28. The members of the Board of Governors of the Fed are a. elected by the member banks b. chosen by the state Governors c. elected for seven year terms d. selected by the President with approval by the Senate D. All presidential appointments have to be approved by the Senate according to our Constitution. There are seven members of the Board of Governors. There terms are for 14 years after which they cannot be redesignated, except for the chairman who serves for four years, but he can be redesignated by the President.

30. 29. The Federal Open Market Committee of the Fed a. is responsible for regulation of commodity markets b. is responsible for regulation of the New York Stock Exchange c. uses the buying and selling of U.S. government securities to accomplish its objectives C. The main function of the Open Market Committee is to decide when and how much to buy or sell government securities. During periods of inflation, more securities would be sold; during periods of unemployment, more securities would be bought.

31. 30. The number of Federal Reserve banks is a. seven. b. twelve. c. fourteen. d. about 10,000. B. The United States is divided into 12 federal reserve districts. Each district has a Federal Reserve bank.

32. 31. The job of the Federal Deposit Insurance Corporation is to a. guarantee that investors will not lose money by investing in government bonds. b. insure U.S. Treasury deposits in the Federal Reserve banks. c. insure commercial banks against the possibility of losing money. d. insure the deposits in commercial banks and savings banks. D. The Federal Deposit Insurance Corporation (FDIC) was established by the U.S. Congress. Each bank account of participating banks is insured up to $100,000.

33. 32. One of the purposes of the banking reforms of the 1930’s was to a. require banks to invest in more stocks. b. require banks to invest in more corporate bonds. c. discourage the public from putting so much faith in the banking system. d. restrict banks’ assets primarily to loans and government securities. D. Before this banks held their assets in many different ways. Many of these forms became worthless as a result of the stock market crash in October of 1929 and the ensuing Great Depression.

34. 33.The U.S. has more banks per capita than most other countries primarily because it a. has more people. b. has a more prosperous economy. c. has restricted branch banking. d. continues to prohibit bank holding companies. C. Where one bank may be more efficient, government rules prohibit certain types of banking practices, thus branch banking is somewhat restricted, especially across state lines. This, however, is in the process of changing.

35. 34. All of the following are goals of the Fed except a. a high level of employment in the U.S. b. stability in interest rates. c. rising prices (to encourage production). d. stability in financial markets. C. The primary goal of the Fed is price stability. With a threat of inflation, the Fed will decrease the money supply in order to bring down prices. If unemployment and falling prices is a problem, the Fed will take steps to increase the nation’s money supply.

36. 35. Deregulation of banks and other depository institutions did all of the following except a. allow all depository institutions to offer checking accounts. b. allow all depository institutions to offer money market accounts. c. allow thrift institutions more latitude in investing their assets. d. allow the FDIC to open branch banks of its own. D. The FDIC is what it has always been; an institution that insures bank deposits.

37. 36. Deregulation in the 1970’s, it is now recognized, produced a disaster resulting in a financial bailout. This is an example of a. moral hazard. b. the Laffer Curve. c. Classical economics. A. This is a typical case of “moral hazard.” Moral hazard takes place when the risks of investments are eliminated by promise of a bail out if anything goes wrong. Generous depository insurance provided this protection. This encouraged banks to make risky investments hoping to make big gains with no fear of loss. The resultant collapse in banking led to the huge $200 bailout of 1989.

38. 37. Insurance protecting individuals from the loss of their bank deposits a. makes bank officials especially careful about the loans and investments they make. b. makes it virtually impossible for a bank to fail. c. is so costly that few banks can afford it. d. makes depositors less concerned about the safety of their money than the interest rate it is earning. D. The purpose of the insurance, like the FDIC, is to shore up citizen’s confidence in the banking system. As long as people believe that the system will work, it will work.

39. 38. When many depository institutions - especially thrifts - failed in the 1970’s and 1980’s, a. most depositors got their money back. b. most depositors lost everything. c. most of the losses to depositors were paid out of the pockets of the owners of these institutions. A. The government was involved in a multi billion dollar bailout of many thrift institutions. This along with the FSLIC, which no longer exists, protected most depositors.

40. 39. Cleaning up the mess created by the failure of so many thrift institutions in the 1980’s has involved all of the following except a. increasing deposit insurance premiums. b. asking the American taxpayer to pay nearly $125 billion to cover losses. c. shutting down weak and failing thrifts. d. creating a new super-agency with great new powers to oversee the day-to-day operations of thrifts. D. The result of the bail out was a restoration of confidence and the survival of many savings and loans. However, the distinction between savings and loans and banks was obliterated; today there is little difference.

41. 40. Banks are referred to as financial intermediaries because they a. receive new Federal Reserve notes from the Fed and put them into circulation b. bring together the two sides of the market- savers and borrowers c. bring different savers into contact with each other d. bring about the merger of smaller banks to make larger ones B. The purpose of banks is to take in money from savers, to keep a small portion of this money to meet day to day transactions, and then to lend out the rest of it.

42. 41. When liquidity refers to the ease with which an asset can be converted into the medium of exchange without a significant loss of value, the least liquid of the assets below is a. real estate. b. currency. c. a traveler’s check. d. oil. A. Of the options listed above, real estate would be the most difficult to convert to a medium of exchange.

43. 42. Immediately after it accepts its first deposit the day it opens its doors, the balance sheet of the Brand New National Bank will likely contain all of the following except a. net worth. b. checkable deposits. c. stock in the district Federal Reserve bank. d. loans. D. A bank has to attract money before it has any to lend. Every dollar in a bank comes from someone’s deposit.

44. 43. All of the following might be assets of a bank except a. building b. furniture c. outstanding loans d. checkable deposits D. Checkable deposits are not assets of a bank because because they are liabilities. This is money that the bank owes depositors.

45. 44. University Center National Bank has checkable deposits of $800,000, outstanding loans and other securities valued at $550,000 and $250,000 of cash in its vault. When the reserve requirement is 20%, the bank has a. total reserves of $160,000 b. total reserves of $300,00 c. excess reserves of $90,000 d. excess reserves of $250,00 C. The bank’s assets equal $800,000. Of this it can legally lend out .80 x $800,000 or $640,000. Because it has already lent out $550,000 it has $90,000 it can still lend out.

46. 45. The requirement that banks hold required reserves comes from the a. Federal Reserve b. stockholders of the bank c. depositors of the bank d. Federal Deposit Insurance Corporation A. The Federal Reserve is our central bank. It has a certain amount of authority over all financial institutions.

47. 46. Liquidity contributes to the bank’s achievement of all of the following except a. confidence of the depositors. b. income of the bank. c. ability to pay funds out to depositors on demand. d. flexibility to make an immediate loan to a valued customer. B. A bank’s assets are not dependent on the form in which a bank holds those assets. Liquidity, therefore, does not determine the income of a bank.

48. 47. The federal funds rate is the rate of interest paid when a. the Federal Reserve makes loans to member banks b. taxpayers pay overdue taxes c. one bank briefly borrows reserves from another bank d. banks make loans to the federal government C. Banks can borrow money from depositors, the Fed, or other banks. When it borrows from other banks short term, one day, the interest paid is determined by the federal funds rate.

49. 48. The Fed performs all of the following functions except a. makes loans to banks b. clears checks for banks c. holds deposits of banks d. mints U.S. coins D. The minting of U.S. coins is a function of the U.S. Treasury.

50. 49. Most of the assets of the Fed are held in the form of a. gold b. U.S. government securities c. loans to member banks d. U.S. Treasury deposits B. A U.S. government security is a bond that the federal government has sold; this is how the federal government borrows money. The Fed is a major purchaser of these securities.