Chapters 12-14

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Macroeconomics

Instructor: Jen Dinsmore Hanson

Homework Assignment

Chapter 13

Multiple Choice Questions

1. Which of the following is money?

A. A credit card

B. A check

C. A share of corporate stock

D. None of the choices are money.

2. Back in the Middle Ages, the only safe place to put your money was

A. in Treasury bills.

B. in goldsmiths' safes.

C. in real estate.

D. in commodity futures.

3. Statement I: The savings and loan debacle has cost the U.S. taxpayers hundreds of billions

of dollars.

Statement II: One of the main causes of the savings and loan debacle was federal deregulation

of that industry.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

4. Statement I: In the 1980s, many savings and loan associations made very risky real estate

loans that were not repaid.

Statement II: Risky investments in junk bonds played a role in the decline and fall of the

savings and loan industry.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

5. Bank deposit creation is limited by

A. reserve requirements.

B. the interest rate.

C. whether a bank is nationally or state chartered.

D. whether a bank is in a large city or rural area.

6. The _____ demand for money is most sensitive to interest rate changes.

A. transactions

B. precautionary

C. speculative

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7. Suppose a goldsmith (banker) had a certain number of gold coins in his safe and he kept

writing more and more goldsmiths' receipts for people who came to him to borrow money.

What would be happening to his reserve ratio?

A. It would be rising.

B. It would be falling.

C. It would stay the same.

D. There is not enough information to answer this question.

8. People tend to hold more money as

A. the price level rises and interest rates rise.

B. the price level falls and interest rates fall.

C. the price level rises and interest rates fall.

D. the price level falls and interest rates rise.

9. The transaction motive for holding money

A. varies inversely with income.

B. varies directly with the number of times one is paid annually.

C. are used to make expected expenditures.

D. are held for the same reasons that precautionary cash balances are held.

E. are held to cover unpredictable expenditures.

10. Statement I: As the level of income rises, people tend to hold more money.

Statement II: People tend to hold less money as credit availability increases.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

11. Most (75%) of the financial transactions are through the use of

A. electronic fund transfers.

B. credit cards.

C. checks.

D. cash.

12. Coins in the hands of the public are

A. included in M1, but not in M2.

B. included in both M1 and in M2.

C. included in M2, but not in M1.

D. excluded from M1 and M2 because people can exchange them for Federal Reserve notes.

13. Which is NOT considered money?

A. Checking account balances

B. Traveler's checks issued by non-banks

C. Credit cards

D. Currency

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14. The opportunity cost of holding money

A. is zero because money is not an economic resource.

B. varies inversely with the interest rate.

C. varies directly with the interest rate.

D. varies inversely with the level of national income.

15. Statement I: One job of money is as a store of value.

Statement II: Money may perform as a standard of value or as a medium of exchange, but not

both at the same time.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

16. Which statement is true?

A. Money may perform as a standard of value or as a store of value, but not both at the same

time.

B. The main job of money is a medium of exchange.

C. Money may perform as a standard of value or as a standard of deferred payment, but not

both at the same time.

D. Money performs extremely well as a standard of deferred payment in the long run.

17. Paper money in the United States is issued by the

A. United States Mint.

B. Federal Reserve Banks.

C. United States Treasury.

D. Federal Open Market Committee.

E. United States Government Printing Office.

18. Even though credit cards are used by many people in making purchases, they are not

included in the M1. A major reason is that

A. credit cards are a way of going into debt, whereas the components of M1 represent assets.

B. credit cards had not yet been invented when money was defined.

C. some credit cards are issued by stores (such as Sears), whereas all money is issued by

banks.

D. credit cards are much less liquid than M1.

E. credit cards don't affect consumer expenditures, whereas M1 does.

19. The term "double coincidence of wants"

A. means that people are trying to purchase the same thing.

B. is a situation where runaway prices are the result of printing too much money.

C. describes a barter situation where individuals agree to trade commodities in amounts

satisfactory to both parties.

D. means that people with the same commodities agree to trade among themselves.

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20. Large denomination time deposits are included in

A. M2 only.

B. M3 only.

C. M2 and M3.

D. M1 and M2.

E. M1, M2, and M3.

21. Which is the most accurate statement?

A. The FDIC will not let any bank fail.

B. The FDIC insures all bank deposits up to $10,000.

C. The FDIC was created in the 1930s to prevent bank failures.

D. The FDIC insures all bank deposits up to $40,000.

22. Money serves which of the following functions?

A. A medium of exchange.

B. A standard of value.

C. A store of value.

D. All of the choices are true of money's function.

23. The major consideration of whether something can serve as money is that it must be

A. redeemable in precious metals such as gold or silver.

B. printed by each nation's government or banking authority.

C. freely available to all who want it.

D. exchangeable for other types of money.

E. acceptable as a means of payment.

24. The main purpose of federal deposit insurance is to

A. permit the Federal Reserve to control the money supply.

B. prevent borrowers who are likely to default on their loans from getting loans in the first

place.

C. prevent bank panics.

D. put savings and loan associations on an equal competitive footing with commercial banks.

25. When money is held as an asset, it is serving as

A. a standard of value.

B. a standard of deferred payment.

C. a medium of exchange.

D. a store of value.

26. It is costly to hold money because

A. deflation may reduce its purchasing power.

B. in doing so one sacrifices interest income.

C. bond prices are highly variable.

D. the velocity of money may decline.

27. An increase in the rate of interest would increase

A. the opportunity cost of holding money.

B. the transactions demand for money.

C. the asset demand for money.

D. the price of bonds.

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28. Money allows dissimilar goods and services to be valued according to a single common

denominator-a nation's basic monetary unit, such as the dollar. Which of the following

represents this function?

A. Medium of exchange

B. Store of value

C. Standard of value

D. Standard of deferred payment

29. Our money supply

A. does not grow from year to year.

B. grows by about three percent from year to year.

C. grows by about six percent from year to year.

D. grows by varying amounts from year to year.

30. The precautionary motive for holding money is

A. the desire to hold silver instead of gold.

B. the desire to hold money to undertake unexpected transactions.

C. the desire to hold gold instead of interest-bearing assets.

D. the desire to hold money to complete purchases of goods and services.

31. Statement I: The whole idea of the FDIC is to avert bank panics by assuring the public

that the federal government stands behind the banking system.

Statement II: The FDIC is backed by the Congress, the Treasury, and the Federal Reserve.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

32. The opportunity cost of holding cash in your wallet

A. tends to increase as interest rates decrease.

B. is the foregone interest that could have been earned on other assets.

C. is zero.

D. None of the choices are correct.

33. Higher interest rates ____ the ____ cost of holding currency and therefore reduce the

quantity of currency demanded.

A. decrease; opportunity

B. increase; transaction

C. decrease; transaction

D. increase; opportunity

34. When inflation occurs

A. money gains in value.

B. money loses value.

C. the value of money is unaffected.

D. the value of demand deposits falls but the value of currency is unaffected.

E. inflation has nothing to do with money.

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35. A goldsmith with 100 gold coins in his safe and 400 goldsmith's receipts in circulation has

a reserve ratio of

A. 400%.

B. 100%.

C. 50%.

D. 25%.

E. 20%.

36. The largest United States bank in 2010 was

A. BankAmerica.

B. Citigroup.

C. J.P. Morgan Chase.

D. Security Pacific.

37. Checkable deposits are classified as money because

A. they can be readily used in the making of purchases and payment of debts.

B. banks hold currency equal to the value of their outstanding deposits.

C. they are ultimately the obligations of the Treasury.

D. they earn interest income for the depositor.

38. Another name for the money of checking accounts is

A. certificates of deposit.

B. time deposits.

C. demand deposits.

D. bank notes.

E. near money.

39. In the fractional reserve banking system

A. only a fraction of bank assets at any one time may be used to create money.

B. only a fraction of a bank's liabilities must be held as reserves to meet withdrawals at any

one time.

C. a bank receives only a fraction of the reserve it needs at any given time.

D. All of the choices are correct.

40. Statement I: Welfare banks are check-cashing outlets.

Statement II: To cash a check at a check-cashing outlet, you usually have to pay a fee of one

to three percent of the value of the check.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

41. Statement I: Banks require a minimum balance of checking accounts because it cost them

money to process each check.

Statement II: The American Bankers Association has successfully beaten back attempts to

pass legislation requiring banks to provide free check-cashing services to the poor.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

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42. Money is NOT

A. a medium of exchange.

B. a standard of value.

C. a store of value.

D. the exclusive means of holding wealth.

43. The first bankers were

A. goldsmiths.

B. printers.

C. storekeepers.

D. innkeepers.

E. blacksmiths.

44. People tend to hold more money as the rate of inflation ___ and as the level of income

___.

A. rises; rises

B. falls; falls

C. rises; falls

D. falls; rises

45. Barter transactions

A. involve directly exchanging goods for other goods.

B. can occur without the "double coincidence of wants."

C. are less costly than transactions involving money.

D. involve the use of money as a medium of exchange.

46. Banks create money when they

A. add to their reserves in the Federal Reserve Bank.

B. accept deposits of cash.

C. sell government bonds.

D. exchange demand deposits for loans to businesses and individuals.

47. Which of these is NOT money in the United States?

A. M1

B. Currency

C. Credit cards

D. None of the choices/statements are true (i.e., each is money).

48. The most responsive to interest rate changes is the _______ demand for money.

A. transactions

B. precautionary

C. speculative

49. Statement I: Processing a teller transaction costs more than double what an ATM

transaction costs.

Statement II: In 2009 there were about 425,000 ATMs in the U.S.

A. Statement I is true and statement II is false.

B. Statement II is true and statement I is false.

C. Both statements are true.

D. Both statements are false.

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50. Mr. Krapotkin hopes to use the family savings to invest in the stock market after prices

fall next week. This is an example of

A. speculative demand for holding money.

B. the precautionary motive for holding money.

C. the commodity demand for money.

D. the transaction demand for money.

Short Answer Questions

M1 = 1,000

Small denomination time deposits = 1,500

Savings deposit = 1,800

Money market mutual funds = 300

Large denomination time deposits = 800

1. How much is M2?

2. How much is M3?