Foundations of Macroeconomics, 7e, GE (Bade/Parkin)

Chapter 11 The Monetary System

41) Which statement most accurately captures the state of money today?
A) Money today includes currency, bank deposits and checks.
B) Money today includes currency and checks but not bank deposits.
C) Money today includes bank deposits and currency but not checks.
D) Money today includes bank deposits and checks but not currency.
E) Money today includes checks and credit cards.
Answer: C

42) Which of the following is an example of money?

A) currency in your wallet
B) currency inside the banks
C) checks written as payment for a good or service
D) credit card used as a payment for a good or service
E) a debit card
Answer: A

47) Which of the following is money?

A) a credit card with no credit left
B) the check you write to pay tuition
C) a credit card that still has credit available on it
D) a checkable deposit in your bank
E) the current credit available on a credit card
Answer: D

48) Which of the following is money?

A) debit cards
B) e-checks
C) credit cards
D) checkable deposits
E) checks
Answer: D

52) Credit cards are

A) a form of money used to make purchases.
B) a special ID card that is not money.
C) a special ID card that is the same as money.
D) a form of money that is not generally accepted.
E) included in the M1 measure of money.
Answer: B

53) When you use a credit card to pay your tuition,

A) you've used the credit card as money because it is a means of payment.
B) the credit card is not money but is an ID card for an instant loan.
C) the credit card is not money because it involves an electronic transaction.
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D) the credit card is not money because it is not officially issued by the government.
E) you've used the credit card as money because you received something in return.
Answer: B

54) Credit cards are

i. a generally accepted form of payment and therefore part of M1.
ii. included in M1 because you write a check to pay your monthly bill.
iii. a means of borrowing money.
A) i only
B) ii only
C) iii only
D) i and ii
E) i and iii
Answer: C

55) When Dale buys a new computer for $1,000 using a credit card,
A) he is taking out a loan for $1,000.
B) his bank account decreases by $1,000.
C) the credit card is acting as money.
D) the money supply decreases by $1,000.
E) the credit card is performing the function of an unit of account.
Answer: A

56) Debit cards and e-checks are not money because

A) they can be forged easily.
B) they can fail their purpose of being mediums of exchange as a result of technical difficulties.
C) they are just instruments to transfer money between people.
D) not all banks offer them and not all businesses accept them.
E) they are not regulated by the government.
Answer: C

57) A debit card is

A) money because it is a means of payment.
B) not money but is used to transfer bank deposits which are money.
C) money because it is generally accepted as a means of payment.
D) not money because it is not officially issued by the government.
E) part of the M2 money supply but not part of the M1 money supply.
Answer: B

58) Which of the following are considered money?

i. electronic checks
ii. paper checks
iii. the deposit transferred using an e-check
A) i, ii and iii
B) i and iii
C) i and ii
D) iii only
E) ii and iii
Answer: D

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59) An official measure of money in the United States is M1, which includes the sum of
A) checkable deposits plus small time deposits.
B) currency plus checkable deposits.
C) currency plus credit card transactions.
D) currency plus traveler's checks plus time deposits.
E) currency plus traveler's checks plus checkable deposits plus small time deposits plus money market
funds and other deposits.
Answer: B

60) M1 is composed of
A) currency held by individuals and businesses, traveler's checks, and checkable deposits owned by
individuals and businesses.
B) checkable deposits owned by individuals and businesses, saving deposits, and certificates of deposit.
C) currency inside of banks, traveler's checks, and government-issued checks.
D) traveler's checks, credit cards, and e-cash.
E) currency held by individuals and businesses, traveler's checks, and the credit line on credit cards.
Answer: A

61) Which of the following are included in the M1 definition of money?

A) currency and checkable deposits
B) currency and savings deposits
C) traveler's checks and money market mutual funds
D) currency and small time deposits
E) traveler's checks and savings deposits
Answer: A

62) M1 is defined as a measure of money including, in part,

A) checkable deposits and currency.
B) time deposits and currency.
C) currency and savings deposits.
D) time deposits and money market fund deposits.
E) the lines of credit on credit cards and currency.
Answer: A

69) When people make deposits of currency into a bank, the quantity of M1
A) immediately decreases by the amount of the deposit.
B) immediately increases by the amount of the deposit.
C) does not immediately change.
D) immediately changes but whether it increases or decreases depends on whether the bank had excess
reserves or did not have excess reserves.
E) changes only if the deposit is an open market operation.
Answer: C

70) If you deposit $1,000 in cash in your checkable deposit at your bank, the quantity of M1 immediately
A) increases by $1,000.
B) decreases by $1,000.
C) increases by $2,000.
D) does not change in size.

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E) changes, but more information about the required reserve ratio is necessary to determine the amount
of the change.
Answer: D

71) In December 2009, currency was $400 billion, traveler's checks were $5 billion; checkable deposits
owned by individuals and businesses were $600 billion, saving deposits were $2,00 billion, time deposits
were $1,500 billion; and money market funds were $1,200 billion. What was the M1 in December 2009?
A) M1 = $405 billion
B) M1 = $1,005 billion
C) M1 = $3,005 billion
D) M1 = $3500 billion
E) M1 = $3505 billion
Answer: B

72) If Joe withdraws a $100 bill from his checking account and Jack deposits another $100 bill in his
savings account, by how will M1 and M2 change?
A) M1 will decrease, but M2 will remain the same.
B) M1 will increase, and M2 will increase.
C) M2 will decrease by $100.
D) Both M1 and M2 will remain the same.
E) M1 will remain the same, and M2 will increase.
Answer: A

73) Susan just sold her text books for $200 cash and deposited the cash she received in her checking
account. This transaction has
A) increased the quantity of M1.
B) decreased the quantity of M1.
C) increased the quantity of M2.
D) decreased the quantity of M2.
E) not changed either M1 or M2.
Answer: E

74) M2 consists of
A) M1 plus traveler's checks.
B) M1 plus saving deposits, small time deposits, and money market funds.
C) M1 plus checkable deposits.
D) M1 plus currency at the banks.
E) M1 plus Federal Reserve notes.
Answer: B

75) Which of the following are included in the M2 definition of money?

A) currency outside of banks and checkable deposits
B) currency outside of banks and credit lines on credit cards
C) time deposits and the value of prime grade bonds
D) currency both inside and outside of banks
E) currency inside of banks and banks' reserves
Answer: A

76) If we look at the components of M2, we find that

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A) money market funds are the largest component.
B) savings deposits are the largest component.
C) currency is the largest component.
D) banks' reserves are the largest component.
E) loans are the largest component.
Answer: B

78) If currency outside of banks is $800 billion; traveler's checks are $10 billion; checkable deposits owned
by individuals and businesses are $700 billion; savings deposits are $4,000 billion; small time deposits are
$1,000 billion; and money market funds and other deposits are $800 billion, then M2 equals ________
billion.
A) $7,310
B) $5,800
C) $2,510
D) $1,510
E) $710
Answer: A

79) The above table has information about the hypothetical economy of Robotica. Based on the data, the
size of M1 is
A) $610 billion.
B) $1,510 billion.
C) $600 billion.
D) $1,110 billion.
E) $2,600 billion.
Answer: A

80) The above table has information about the hypothetical economy of Robotica. Based on the data, the
size of M2 is
A) $2,600 billion.
B) $2,610 billion.
C) $610 billion.
D) $600 billion.
E) $1,710 billion.
Answer: B

83) Which of the following best defines what money is now and what it has been in the past?
A) currency
B) currency plus checking deposits
C) currency plus credit cards
D) anything accepted as a means of payment
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E) anything used as a store of value
Answer: D

84) Which of the following is NOT a function of money?

i. unit of account
ii. store of value
iii. unit of debt
A) i only
B) ii only
C) iii only
D) both ii and iii
E) both i and ii
Answer: C

85) Barter is
A) the exchange of goods and services for money.
B) the pricing of goods and services with one agreed upon standard.
C) the exchange of goods and services directly for other goods and services.
D) a generally accepted means of payment.
E) storing money for use at a later date.
Answer: C

1) A commercial bank is defined as

A) any institution that accepts deposits.
B) a firm that is chartered to accept deposits and make loans.
C) the institution that sets regulations for commercial activities.
D) a firm that obtains funds by selling shares and then buys U.S. Treasury bills.
E) any institution that makes loans.
Answer: B

2) Which statement is most correct about the types of deposits a commercial bank can accept?
A) A commercial bank accepts checking, savings and time deposits.
B) A commercial bank can only accept checking deposits from commercial enterprises.
C) A commercial bank accepts savings and time deposits, but not checking deposits.
D) A commercial bank does not accept deposits but sells shares.
E) A commercial bank can accept loan deposits, reserve deposits, and checkable deposits.
Answer: A

3) The goal of a commercial bank is to

A) establish good regulations for commercial activities.
B) make only safe, no-risk loans.
C) maximize its stockholders' wealth.
D) minimize its taxes paid to state governments.
E) accept only deposits made in money.
Answer: C

4) Banks earn a profit by

A) keeping as many reserves on hand as possible.
B) making loans at a lower interest rate than the rate that they offer on their deposits.

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C) charging an interest rate on their depositors' accounts.
D) making loans at a higher interest rate than the rates that they offer on their deposits.
E) not paying interest on their reserves.
Answer: D

5) Which of the following are assets of commercial banks?

i. reserves
ii. loans
iii. deposits
A) i only
B) ii only
C) i and ii
D) ii and iii
E) i, ii, and iii
Answer: C

6) Banks generally earn the highest interest rate

A) on service charges on individuals' checking accounts.
B) by making loans to business firms.
C) by making mortgage loans to individuals.
D) by making credit card loans.
E) by buying government securities.
Answer: D

7) The largest category of commercial banks' assets is

A) loans.
B) reserves.
C) currency.
D) securities.
E) checkable deposits.
Answer: A

9) Which of the following describes the "invention" of banking?

A) The British Empire created a banking system to fund its exploration of the New World.
B) Members of the New York Stock Exchange founded the Bank of America in the 1700s.
C) Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold
on demand.
D) Clergy in the Renaissance created the banking system to help further the growth of the church.
E) The United States government founded the Federal Reserve in 1913.
Answer: C

10) When goldsmiths issued receipts to gold owners, and those gold receipts circulated while gold stayed
in the goldsmiths' safes,
A) the gold receipts were considered money because they were used as a means of payment.
B) an infant banking system developed in sixteenth century Europe.
C) fiat money was created.
D) money was invented.
E) Both A and B are correct.
Answer: E

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15) A bank has checkable deposits of $1,000,000, loans of $600,000, and government securities of $400,000.
If the required reserve ratio is 5 percent, the amount of required reserves is
A) $100,000.
B) $30,000.
C) $50,000.
D) $80,000.
E) $20,000.
Answer: C

16) A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time deposits, $1,000 in
loans to businesses, $400 in outstanding credit card balances, $800 in government securities, $25 in
currency in its vault, and $25 in deposits at the Fed. Of these, ________ are part of M2.
A) $3,450
B) $2,450
C) $2,850
D) $2,200
E) $2,600
Answer: B

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