Chapter 13—Money and the Financial System 1. Barter is the exchange of goods and services without the use of money. A. True B. False 2. Exchange is necessary in an economy if A. output is to be produced B. output is to be consumed C. individuals are self-sufficient D. families are self-sufficient E. labor is specialized 3. The earliest type of exchange involved A. coins B. barter C. commodity money D. fiduciary money E. fiat money 4. Specialization of labor means that A. production requires a special kind of labor B. the overall skill level of labor is increasing C. individuals produce goods other than those they want to consume D. individuals achieve self-sufficiency in production E. exchange within the economy consists of trading in services 5. Specialization of labor means that A. production requires a special kind of labor B. the overall skill level of labor is increasing C. individuals produce goods that they are relatively good at producing and trade for those that they do not produce D. individuals achieve self-sufficiency in production E. exchange within the economy consists of trading in services 6. In a barter system, A. an individual offers one good or service to get another good or service B. an individual offers money to get a good or service C. an individual offers a good or service to get money D. different kinds of money are exchanged for each other E. individuals are self-sufficient 7. In a barter system, A. it is difficult to keep track of the relative values of goods and services B. an individual offers money to get a good or service C. an individual offers a good or service to get money D. different kinds of money are exchanged for each other E. individuals are self-sufficient 8. In a barter system, A. trade will only occur if there is a double coincidence of wants B. an individual offers money to get a good or service C. an individual offers a good or service to get money D. different kinds of money are exchanged for each other E. individuals are self-sufficient 9. Barter is the direct exchange of goods and services for A. any kind of money B. other goods and services C. either goods or money D. commodity money E. foreign currency 10. Which of the following best illustrates the double coincidence of wants? A. Both Tom and Jerry would like to purchase the same good. B. Tom has something he's willing to trade to Jerry; Jerry has something he's willing to trade to Tom. C. Tom and Jerry have very similar tastes; hence, Tom's wants coincide with Jerry's. D. Tom has something he's willing to trade to Jerry, who wants it; Jerry has something he's willing to trade to Tom, who wants it. E. Tom has something Jerry wants; Jerry has something Tom wants. 11. The more specialized labor is, A. the less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop B. the less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop C. the more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop D. the more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop E. the more likely it is that individuals are producing only what they want to consume 12. As the number of goods and services increases, barter becomes A. easier because the chance of there being a double coincidence of wants increases B. harder because the chance of there being a double coincidence of wants increases C. easier because the chance of there being a double coincidence of wants decreases D. harder because the chance of there being a double coincidence of wants decreases E. easier because people have more choice 13. The greater the number of different goods available in an economy, A. the less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop B. the less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop C. the more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop D. the more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop E. the more likely it is that individuals are producing only goods they want to consume 14. Barter is more feasible in primitive societies than in modern societies because A. there is no inflation in primitive societies B. there are many goods available for trade in primitive societies, so people can always find the goods that they want C. specialization is limited and thus there are few goods available for trade in primitive societies D. specialization is limited and thus there are many goods available for trade in primitive societies E. people in primitive societies have limited wants 15. The greater the degree of specialization in the economy, A. the easier it is to discover a double coincidence of wants B. the more feasible a barter system is C. the less likely it is that monetary exchange will develop D. the harder it is to negotiate an exchange rate between all pairs of goods E. the more likely it is that individual consumers are self-sufficient 16. Under a system of barter, A. no rates of exchange are defined B. there are as many different rates of exchange as there are pairs of goods to trade C. rates of exchange are expressed in goods per dollar D. rates of exchange are expressed in dollars per good E. rates of exchange are denominated in gold or silver 17. Barter works best A. in the absence of a double coincidence of wants B. when many different products are available in the economy C. when money is readily available to establish relative prices D. when each trader has what the other wants and wants what the other has E. in highly developed economies with extensive specialization of labor 18. To say that money serves as a store of value is to say that money is a useful way to store wealth for future use. A. True B. False 19. Which of the following is not a function of money? A. to act as a medium of exchange B. to act as a unit of account C. to act as a store of value D. to facilitate trade E. to provide a double coincidence of wants 20. Which of following is not an important characteristic of money? A. general acceptability B. has commodity value C. divisibility D. has stable value E. none of the above 21. If people use quartz as a medium of exchange, then they A. have a barter economy B. are using commodity money C. are using token money D. are using legal tender E. are using fiat money 22. Commodity money is something A. that has no intrinsic value B. that has an intrinsic value C. that is based on a valuable metal D. whose value never changes E. whose value changes frequently 23. Which of the following was the earliest type of money? A. coins B. barter C. commodity money D. token money E. fiat money 24. In order for something to be used as money, it must be A. issued by the government B. issued by banks C. declared to be money D. generally acceptable E. made of something valuable 25. The unit of account function of money A. all of the following are correct B. means that money makes price information more accessible C. requires that money be made of something valuable D. means that money can be used to save up purchasing power E. means that money is more easily counted than goods 26. The unit of account function of money A. all of the following are correct B. means that money makes the relative values of goods and services more easily known C. requires that money be made of something valuable D. means that money can be used to save up purchasing power E. means that money is more easily counted than goods 27. How does money function as a unit of account? A. Money has intrinsic worth as a commodity. B. Money is convertible into commodities that have intrinsic worth. C. The prices of all goods and services are measured in terms of money. D. Things that function as money can do so because people know there is a standard of value that ultimately backs the money even if it is only faith. E. Bank accounts make it easy for people to store their wealth. 28. Suppose that corn is the unit of account in a certain economy. If a pair of tennis shoes exchanges for two bushels of corn and a pair of hiking boots exchanges for twelve bushels of corn, then A. whether or not a double coincidence of wants exists, all trades have to be made using corn B. with one pair of tennis shoes, a person will be able to purchase twelve pairs of hiking boots C. with one pair of tennis shoes, a person will be able to purchase six pairs of hiking boots D. with twelve pairs of tennis shoes, a person will be able to purchase one pair of hiking boots E. with six pairs of tennis shoes, a person will be able to purchase one pair of hiking boots 29. Whatever serves as a medium of exchange is A. money B. money, so long as it also is the best such medium of exchange available C. money, so long as it is not also a commodity D. money, so long as it is not also legal tender E. not money unless it continues to be backed by its issuing institution 30. Suppose an ocean liner sinks and the passengers become stranded on a lush tropical island. Which of the following is most likely to be most useful as money in the economy that develops among the survivors? A. the life jackets they put on when leaving the ship B. beads from the necklaces that were the party favors the night the ship sank C. the coconuts growing on the island D. the fish swimming around the island E. the sand on the island's beaches 31. The Miwok Indians of Yosemite Valley used seashells as money. The advantages of seashells as money for these people included all of the following except one. Which is the exception? A. It was difficult for anyone to get shells except by trading. B. The shells were easily identifiable. C. The shells were easy to carry. D. The shells provided a money supply that was easily divisible. E. The shells were intrinsically valuable as commodities. 32. Commitments to make or receive payments in the future are made easier by money's function as a A. unit of account B. store of value C. medium of exchange D. form of barter E. commodity 33. Inflation is impossible in a commodity money system. A. True B. False 34. In general, the more money in existence, the better it functions as a store of value. A. True B. False 35. One characteristic of houses that makes them unsuitable as a medium of exchange is that they are not easily divisible. A. True B. False 36. One characteristic of houses that makes them unsuitable as a medium of exchange is that they are not portable. A. True B. False 37. According to Gresham's Law, when two kinds of money are in circulation (such as $1 gold coins and $1 silver coins), the preferred—or more highly valued—form of money will tend to predominate, driving the "bad" money out of circulation. A. True B. False 38. Which type of money has the lowest opportunity cost? A. silver coin B. gold coin C. commodity money D. token coins E. fiat money 39. If two kinds of money are circulating at the same time, A. one of them must be commodity money B. one of them must be fiat money C. one of them must be paper money D. the poorer quality one will be offered by purchasers of goods and the better one will be hoarded E. the better quality one will be offered by purchasers of goods and the poorer one will be hoarded 40. Gresham's Law states that people A. sell goods for money but prefer to buy goods with other goods B. buy and sell goods with money C. spend some money and hoard some money D. spend lower-quality money and hoard higher-quality money E. spend higher-quality money and hoard lower-quality money 41. Who is famous for his observation that bad money drives out good money? A. Adam Smith B. François Quesnay C. Thomas Gresham D. John Maynard Keynes E. J. B. Say 42. Gresham's Law states that when different forms of commodity money circulate simultaneously (e.g., $1 gold coins and $1 silver coins), A. the one with the more intrinsic ("commodity") value will disappear from circulation B. the one with the lesser intrinsic ("commodity") value will disappear from circulation C. both will eventually have to be withdrawn from circulation by the government D. the resultant disruption in the money markets will cause inflation E. the resultant disruption in the money markets will cause a recession 43. 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. completely indestructible E. limited in supply 44. Coins were minted with serrated edges A. to make it obvious that they were made of cheap alloys B. so that cheaper metals did not have to be used C. to allow words to be printed on the border D. to prevent the coins from being clipped E. to make them jingle less when they rub together 45. Seigniorage is A. a retirement home for senior citizens B. revenue earned from coining money C. a fine paid by counterfeiters D. the profits made by illegally "clipping" or "shaving" bits of precious metal from coins E. the oldest known form of commodity money 46. The term seigniorage refers to A. the conversion of paper money to a valuable commodity B. clipping C. revenue earned from the power to coin money D. fiat money E. none of the above 47. A government receives seigniorage whenever it A. sells gold to people for money B. uses silver to buy gold from people, or vice versa C. sells goods and services it produces for money D. uses money to buy goods and services E. mints coins whose face value is greater than the value of the resources used up in producing the money 48. If the cost of producing coins is lower than the face value of the coins, then the government receives revenue called A. token money, and produces token coins B. seigniorage, and produces fiat money C. token money, and produces fiat money D. seigniorage, and produces token coins E. token money, and produces seignior coins 49. The currency of Camelot is the noble. King Arthur orders the minting of a five-noble gold coin, but it costs only four nobles to mine and process the amount of gold in the coin. Which of the following statements is true? A. Five-noble coins will not be accepted in exchange. B. Five-noble coins will be accepted only by the government. C. When King Arthur spends these coins, he profits. D. When King Arthur takes these coins in again in the form of taxes, he profits. E. When these coins circulate through spending or taxation, King Arthur receives a profit of one noble, less seigniorage. 50. The currency of Camelot is the noble. King Arthur orders the minting of a five-noble gold coin, but it costs only four nobles to mine and process the amount of gold in the coin. Which of the following statements is true? A. The seigniorage that King Arthur has to pay is five nobles. B. The seigniorage that King Arthur has to pay is four nobles. C. The seigniorage that King Arthur has to pay is one noble. D. The five-noble coin is token money. E. The five-noble coin is fiat money. 51. The currency of Camelot is the noble. King Arthur orders the minting of a ten-noble gold coin, but it costs only seven nobles to mine and process the amount of gold in the coin. Which of the following statements is true? A. Individuals outside the government will have an incentive to melt down the coin and use its contents, rather than its face value, in exchange. B. King Arthur has an incentive to melt down the coin and use its contents, rather than its face value, in exchange. C. The government loses seigniorage every time it spends new coins. D. The government earns seigniorage every time it spends new coins. E. The people of Camelot gain seigniorage on every private transaction. 52. Which of the following have, at one time or another, been part of the U.S. money supply? A. seashells B. platinum coins C. token money D. legal tender E. private bank notes 53. Under a fractional reserve banking system, banks may lend out only a fraction of their reserves. A. True B. False 54. Under a fractional reserve banking system, banks may lend out a multiple of their reserves. A. True B. False 55. The first checks were probably notes written to a goldsmith asking him to transfer ownership of some designated amount of gold from the writer of the note to its bearer. A. True B. False 56. To make sure they can accommodate withdrawal requests at any time, banks must keep a dollar on reserve in the bank vault for each dollar of deposits. A. True B. False 57. Under a fractional reserve banking system, A. only a fraction of the banks in the system are allowed to create money B. only a fraction of the banks in the system have reserves C. the claims outstanding against the bank are only a fraction of the bank's total reserves D. each bank must deposit a fraction of its reserves with the Federal Reserve Bank E. bank reserves represent only a fraction of bank deposits 58. The reserve ratio is the ratio of A. Federal Reserve member banks to nonmember banks B. Federal Reserve nonmember banks to member banks C. Federal Reserve member banks to all U.S. banks D. Federal Reserve nonmember banks to all U.S. banks E. a bank's reserves to its total deposits 59. The original bankers were A. seigniors B. governments C. savings and loan institutions D. farmers E. goldsmiths 60. Goldsmiths are considered to be the forerunners of modern banks because they A. had safes to keep gold secure B. issued gold coins C. created money by lending out gold reserves D. created legal tender E. verified the quality of money 61. Any bank that uses deposits to make loans A. operates on a 100 percent reserve system B. operates on a fractional reserve system C. does not operate on a reserve system D. does not keep reserves E. charges an interest rate determined by the reserve ratio 62. Mary Ellen deposits $100 into her savings account every 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 E. a unit of account 63. 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 $20 Federal Reserve note E. a $100 U.S. Government bond 64. An important function of commercial banks is to A. print new currency B. issue fiat money C. mint coins D. redeem currency for precious metals E. make loans 65. The first bankers were probably A. carpenters B. stock brokers C. goldsmiths D. sea captains E. grain merchants 66. In the world of banking, checks are A. written instructions from a depositor to the bank B. written instructions from one depositor to another depositor C. a form of commodity money D. token money E. fiat money 67. Fractional reserve banking occurs when A. a bank has reserves that exceed its deposits B. a bank has reserves that are equal to its deposits C. a bank has reserves that are less than its deposits D. some depositors lose their deposits through poor bank management E. some lenders fail to repay their loans 68. Paper money is a good example of commodity money. A. True B. False 69. The U.S. dollar is a good example of fiat money. A. True B. False 70. The U.S. dollar is backed by gold. A. True B. False 71. Bank notes created by a goldsmith in a fractional reserve system were A. not backed by anything of value B. commodity money, since they were backed by gold C. not commodity money fully, since not all the gold was there D. representative of commodity money E. fiat money 72. Suppose that partners Kemp and Sam open a goldsmith shop and general store in the Wild West. The more rapidly people "cash in" their bank notes, A. the higher their profit from making loans will be B. the lower their profit from the goods in the store C. the fewer bank notes they will be able to issue D. the larger the denominations in which they will have to issue bank notes E. the smaller their reserve ratio 73. If money is acceptable because the government requires that it be accepted in payment for debt, the money is A. legal tender B. commodity money C. guaranteed to be a good store of wealth D. convertible to a valuable commodity E. subject to Gresham's Law 74. Which of the following are legal tender? A. checks B. Federal Reserve notes C. bank notes issued by private banks D. credit cards E. traveler's checks 75. Fiat money A. has value because people accept it B. has intrinsic value C. is backed by commodity reserves D. is money because of its metallic content E. is frequently "clipped" 76. Fiat money is backed by A. gold or silver B. fractional reserves C. the promise of a bank to redeem it upon presentation D. the commodity in which it is denominated E. nothing 77. The value of money is fundamentally determined by the A. reputation of the bank that holds it B. reputation of the person who holds it C. gold or silver for which it can be redeemed D. value of the commodities for which it can be traded E. value of comparable stocks and bonds 78. The value of money is determined by A. people's belief that it is worth something B. the amount of precious metal that the government holds to back the money C. the money's market value as a commodity D. the rate of interest, which is the price paid to borrow money E. its ability to function as a unit of account 79. Money is legal tender if A. people willingly 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 E. it is in a bank account 80. When prices rise, A. the purchasing power of money increases B. the purchasing power of money decreases C. the purchasing power of money remains unchanged D. the purchasing power of money either increases or decreases, depending upon the size of the national debt E. the purchasing power of money either increases or decreases, depending upon the level of government expenditures 81. Money does not solve the double coincidence of wants problem unless it is generally acceptable. A. True B. False 82. One problem with fiat money, as compared to commodity money, is that A. more resources are used to create fiat money B. there is frequently too little fiat money available C. there is a greater potential for inflation with fiat money D. fiat money must be turned in to the government to receive the commodity on which it is based E. fiat money is less divisible than commodity money 83. Since 1960, the purchasing power of the dollar has fallen steadily. A. True B. False 84. When a nation's official money fails to serve as a medium of exchange, A. nothing will replace money to help facilitate exchange B. there will be an increase in economic efficiency C. resources must be diverted from production to exchange D. transactions costs of exchange will decrease E. fewer barter exchanges will be completed 85. Fiat money is the only thing that can be used as a standard of value. A. True B. False 86. In prisoner of war camps during WWII which common commodity often served the function of money? A. chocolate bars B. cigarettes C. cans of tuna fish D. bars of soap E. band aids 87. All of the following are reasons that cigarettes came to serve as money in WWII prisoner of war camps except one. Which is the exception? A. cigarettes are of uniform quality B. cigaretttes were in limited supply C. cigarettes are reasonably durable D. cigarettes could not be counterfeited E. cigarettes could individually support small transactions and in packs they could support large transactions 88. Which of the following has come to serve as money in many Federal prisons in the United States? A. postage stamps B. power bars C. cans of mackerel D. cans of tuna E. cigarettes 89. Which of the following is associated with the problem of hyperinflation? A. Money is in short supply. B. The value of money rises dramatically. C. The government runs out of money. D. People look for alternatives to using money. E. People start to hold onto money for long periods of time. 90. In Germany after World War II, prices were set well below what people thought they should be. As a result, A. sellers stopped accepting money, and this forced people to barter B. the German mark no longer served as a unit of account C. Gresham's Law took effect when people switched to fiat money D. the German price level rose E. nominal GDP fell while real GDP increased 91. In Brazil during the 19th century, copper became scarce and copper coins were no longer minted. As a result, A. barter was prohibited by law B. people hoarded the limited supply of coins C. the Brazilian peso was no longer used as a medium of value D. nominal GDP fell while real GDP increased E. the unemployment rate fell 92. 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 E. a well-organized barter system 93. Banks earn a profit by making loans. A. True B. False 94. Financial intermediaries do all of the following except one. Which is the exception? A. link savers and borrowers B. earn profits by loaning money C. offer lower interest rates on savings than they charge on loans D. print money E. accept deposits 95. The main source of profit for financial institutions is A. their ownership of stocks in commercial corporations B. their ownership of real assets received in foreclosures on loans to households C. the fees charged for holding and servicing checking accounts D. the difference between interest paid on deposits and interest received on loans E. the difference between the cost of creating new money and the interest paid on loans 96. Some financial institutions are known as financial intermediaries because they serve as go-betweens that link A. the government and taxpayers through IRAs B. savers and borrowers C. employers and employees D. firms and the government E. firms and consumers 97. All of the following are depository institutions except one. Which is the exception? A. commercial banks B. savings and loan associations C. stock brokers D. mutual savings banks E. credit unions 98. All of the following are depository institutions except one. Which is the exception? A. commercial banks B. savings and loan associations C. anminsurance company D. mutual savings banks E. credit unions 99. Which of the following is a depository institution? A. an insurance company B. a credit union C. a finance company D. a pension fund E. a stock market 100. Which of the following is not a depository institution? A. a commercial bank B. a thrift institution C. a pension fund D. a savings and loan institution E. a credit union 101. The distinction between depository institutions and other financial institutions is that A. only depository institutions seek to maximize profit B. only depository institutions don't seek to maximize profit C. depository institutions do not make loans D. only depository institutions make loans E. only depository institutions receive funds through customer deposits 102. Some financial institutions are classified as depository institutions based on A. the way they acquire funds B. the number of customers they have C. the number of loans they make D. the size of the loans they make E. the amount of reserves they hold 103. Which of the following is not a thrift institution? A. a savings and loan association B. a commercial bank C. a mutual savings bank D. an employee credit union E. a college credit union 104. The twelve district banks of the Federal Reserve System were created to decentralize power and respond to the public's fears of the monopoly power of a single central bank such as the Bank of England or the Bank of Japan. A. True B. False 105. The Federal Reserve System was established A. by the U.S. Constitution B. immediately after the Civil War C. in 1914 D. during the Great Depression E. immediately following World War II 106. When the Federal Reserve System was established, A. all banks were required to become members B. only federally chartered banks were allowed to join C. only federally chartered banks were required to join D. most banks joined even though none were required to join E. membership was required for all banks in some states, but not in others 107. The law that established the Federal Reserve System is the A. Federal Reserve Act of 1913 B. National Banking Act of 1863 C. Banking Act of 1933 D. law that also established the FDIC E. law that also established the Comptroller of the Currency 108. The Federal Reserve System was created A. by the National Banking Act of 1863 B. initially as a bank for the banking system C. with strong central powers and a mandate to control the money supply until it was restructured in the 1930s D. initially with 12 districts, which were later restructured into the 15-district system we have today E. with the power to regulate all banks 109. Under the Federal Reserve System, A. there is one Federal Reserve Bank, located in Washington, DC B. there is one Federal Reserve Bank, whose location changes every 14 years C. there is a Federal Reserve bank in each Congressional district D. there is a Federal Reserve bank in each state E. there are 12 Federal Reserve banks 110. 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. all replaced after each Presidential election E. selected by the President with the approval of the Senate 111. In the United States, only Federal Reserve Banks can issue paper currency but their power to do so is virtually unlimited. A. True B. False 112. The reason that the Federal Reserve System has not been more effective is that it lacks the power to set legal reserve requirements for member banks. A. True B. False 113. Federal Reserve notes are A. token money B. commodity money C. coins D. backed by gold E. fiat money 114. Federal Reserve banks do all of the following except one. Which is the exception? A. hold member banks' reserves on deposit B. make loans to member banks C. issue bank notes D. serve as bankers to the federal government E. hold deposits of households and firms 115. The duties of the Federal Reserve include all of the following except one. Which is the exception? A. regulating banks' reserve ratios B. extending loans to banks on occasion C. offering deposit insurance D. controlling the monetary system of the U.S. E. providing gold in exchange for Federal Reserve notes 116. Which of the following is not a function of the Federal Reserve System? A. holding deposits of member banks B. clearing checks C. making loans to member banks D. serving as a bank to the Federal government E. making loans to the public 117. Which of the following is true of the discount rate? A. It is the interest rate commercial banks charge their most creditworthy customers. B. It is the interest rate that thrift institutions charge for home mortgages. C. It is the interest rate at which depository institutions can borrow from the Federal Reserve. D. It is the interest rate set in the market for U.S. Treasury Bills. E. It is the prime interest rate. 118. The discount rate is the interest rate that A. banks charge on large loans B. banks charge on loans to other banks C. the Fed charges on loans to branches of the U.S. government D. the Fed charges on loans to depository institutions E. the Fed charges on loans to the public 119. The discount rate is A. the interest rate charged by the Federal Reserve banks on loans to banking institutions B. the interest rate banks charge each other for loans C. the rate banks charge their best business customers D. the rate of discount that banks use to determine the true mortgage rate E. the fraction of deposits that banks hold as reserves 120. The interest rate charged by the Federal Reserve banks on loans to banking institutions is A. the discount rate B. the prime rate C. the federal funds rate D. the Federal Reserve rate E. the mortgage interest rate 121. The Fed's tools for regulating the money supply include A. setting excess reserves B. capping the federal funds rate C. setting the discount rates D. open-market operations E. setting reserve requirements 122. The Federal Reserve System has the power to A. raise or lower federal income tax rates B. balance the federal government budget C. increase or decrease federal government spending D. compete with commercial banks in making loans to business firms E. buy and sell federal government securities 123. 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 E. the power to set the reserve requirement for banks 124. The discount rate is A. the interest rate charged commercial banks for loans from a 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 E. the interest rate charged to commercial banks for loans from other commercial banks 125. All of the following are goals of the Fed except one. Which is the exception? A. a high level of employment B. stability in interest rates C. rising prices (to encourage production) D. stability in financial markets E. stability in foreign-exchange markets 126. Many banks in the U.S. failed in the 1930s not because they were poorly managed but because they could not survive the panicky withdrawals of funds by their depositors. A. True B. False 127. Which of the following is true of the Federal Reserve System? A. It is one central bank located in Washington, DC. B. It was created just before World War II. C. All Federal Reserve banks are required to become state banks also. D. With the formation of the Fed, the power to issue bank notes was taken away from national banks and turned over to the state banks. E. It was notably unsuccessful in averting the Great Depression. 128. Which of the following did not contribute to the thousands of U.S. bank failures in the 1930s? A. Businesses failed, so loans were not repaid. B. As the public grew concerned about the safety of its deposits, people withdrew more of their cash from banks. C. Banks sold more securities. D. The value of banks' assets declined. E. The Fed loaned too many reserves to member banks. 129. Which of the following is not thought to have contributed to the Great Depression? A. interest rate competition B. banks selling corporate stocks and bonds C. fears about the safety of deposits D. lack of bank liquidity E. bank holiday 130. During the Great Depression, the Federal Reserve Board A. prevented many bank failures B. failed to act as a lender of last resort C. failed to clear checks adequately D. began operating as the government's bank E. issued too many bank notes 131. During which of the following periods did the Fed act effectively as a lender of last resort? A. the Panic of 1907 B. at the outbreak of World War I C. the Crash of 1929 D. the bank runs of the Great Depression E. the stock market crash of 1987 132. A lender of last resort is a financial institution that is willing and able to lend to A. individuals who have other debts outstanding B. individuals who do not have a positive net worth C. banks that are not members of the Federal Reserve System D. fractional reserve system banks experiencing runs on their deposits E. Federal Reserve System member banks experiencing runs on their deposits 133. 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 shifted their funds to take advantage of rising stock market prices E. people lost confidence in them 134. The Federal Reserve banks could probably have prevented many of the bank failures in the early 1930s by A. raising the reserve requirement of the commercial banks B. lending money to the commercial banks C. improving the system whereby checks are cleared D. helping to create a commission of experts to engage in a prolonged study of the problem E. selling large amounts of government bonds 135. 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 E. tempt many depository institutions to take unreasonable risks 136. The chairman of the Fed must resign when a new president is elected. A. True B. False 137. The chairman of the Fed is appointed by the president. A. True B. False 138. The chairman of the Fed is elected by US citizens. A. True B. False 139. Each member of the Federal Reserve's Board of Governors is appointed for life. A. True B. False 140. The Federal Deposit Insurance Corporation (FDIC) insures the total value of all deposits in banks that are members of the Fed. A. True B. False 141. The Federal Open Market Committee was established to give the Fed the power to change reserve requirements. A. True B. False 142. The reserve requirement is A. the percentage of deposits that banks are required to hold as reserves B. the amount of gold required to back up all Federal Reserve notes C. the requirement that banks reserve part of their lending capacity to small businesses D. the requirement that Reserve bank presidents be part of the FOMC E. the Treasury deposits held by the Fed 143. Which of the following is not a power of the Federal Reserve System? A. setting the prime interest rate B. issuing Federal Reserve notes C. buying and selling U.S. government securities D. extending loans to member banks E. clearing checks 144. One of the first steps that President Roosevelt took to ease the U.S. banking crisis of the 1930s was to A. declare a bank holiday, which closed banks for a week B. increase loans by the Fed to member banks C. decrease the reserve requirement D. increase the reserve requirement E. appoint a new chairman of the Fed 145. The chairman of the Fed serves A. a two-year term that coincides with that of members of Congress B. a four-year term C. a four-year term beginning and ending with that of the president who made the appointment D. a fourteen-year term E. a six-year term 146. Each member of the Board of Governors serves A. a four-year term that begins at the same time as that of the newly elected president B. a four-year term that does not coincide with that of the current president C. until a new president is elected D. a fourteen-year term E. a six-year term 147. The Board of Governors A. composes a minority of the FOMC B. consists of twelve presidential appointees C. was authorized to set reserve requirements by the Bank Acts of 1933 and 1935 D. serve four year terms E. are elected by the member banks which own the Federal Reserve 148. The Board of Governors consists of A. seven elected members B. seven members appointed by the president C. a representative from each of the 12 district banks D. 12 elected members E. 12 members appointed by the president 149. The Board of Governors A. are elected by the House of Representatives to seven-year terms B. are appointed for life by the President of the United States C. are directly responsible to the Secretary of Treasury and the Comptroller's office D. was disbanded by Roosevelt in the 1930s E. consist of seven members appointed to 14-year terms by the president 150. Monetary policy is A. controlled by the president, who appoints the members of the Board of Governors B. controlled by the president, who appoints the members of the Open Market Committee C. insulated from politics since the term of only two members of the Board of Governors expire during the tenure of any modern President of the U.S. D. insulated from politics because the Federal Reserve Board is the bankers' bank E. controlled by the president 151. To minimize the effect of short-term political pressure on the Fed's Board of Governors, the governors are all appointed to their terms A. in different years, and their terms are long B. in different years, and their terms are short C. in the same year, and their terms are long D. in the same year, and their terms are short E. in the same year, and their terms are shorter than that of the chairman of the Federal Reserve Board 152. Open-market operations involve A. clearing checks B. lending money to member banks C. accepting deposits from member banks D. the Fed's purchase and sale of government securities E. any monetary policy actions 153. What activity does the Fed undertake when it carries out open-market operations? A. It buys and sells the bonds, but not the notes, of leading U.S. corporations. B. It changes the legal reserve requirements for member banks. C. It changes the discount rate, which generally increases the amount of available credit. D. It provides funds so that healthy depository institutions can purchase weaker ones on the open market. E. It deals in the purchase and sale of U.S. government securities. 154. The Federal Open Market Committee (FOMC) consists of A. the Board of Governors and the Secretary of the Treasury B. the presidents of the 12 Federal Reserve Banks C. the Board of Governors and Federal Reserve Bank presidents D. the Comptroller of the Currency and seven Reserve Bank presidents E. representatives from banks throughout the U.S. 155. The primary purpose of the Federal Open Market Committee (FOMC) is to A. set reserve requirements B. extend loans to member banks of the Fed C. buy and sell government securities D. distribute Federal Reserve notes E. enforce bank regulations 156. The actions of the Fed A. must be approved by the president and the Congress B. must be approved by the president alone C. must be approved by the Congress alone D. are not subject to approval by any branch of government E. are subject to the approval of the electorate 157. The powers of the Federal Reserve System do not include A. the ability to buy and sell U.S. government securities B. the ability to extend loans to commercial banks C. the ability to provide deposit insurance for customers of member banks D. the ability to impose reserve requirements on both member and nonmember commercial banks E. the authority to clear checks 158. The FDIC insures deposits in A. all banks B. Federal Reserve member banks only C. state banks only D. any banking institution that purchases FDIC insurance E. any bank approved by the Fed 159. Because corporate bonds and stocks were considered too risky for commercial banks to own, Congress A. passed the Federal Reserve Act of 1913 B. passed the Banking Act of 1933 C. set up the FDIC D. set up the FSLIC E. set up open market operations 160. The reason why the Banking Act of 1933 prohibited commercial banks from buying and selling corporate stocks and bonds was that A. there was concern that banks would be able to "take over" and monopolize these companies B. they would earn so much profit that they would stop lending to home buyers and small borrowers C. the instability inherent in the asset value of such a corporation would destabilize the banking system D. this would give large banks an unfair advantage over smaller banks E. the statement is incorrect; banks have always been allowed to purchase these stocks and bonds 161. The Banking Act of 1933 A. allowed banks to hold any assets, without the need for approval by the Fed B. allowed banks to hold any assets, subject to approval by the Fed C. allowed banks to hold U.S. government securities, subject to approval by the Fed D. forbade banks from buying corporate stocks and bonds, in order to put a ceiling on bank profits E. forbade banks from buying corporate stocks and bonds, in order to minimize bank risk 162. All of the following occurred under the restructuring of the Fed in the 1930s, except one. Which is the exception? A. the FOMC was created to conduct open-market operations B. the Board of Governors was given the power to change member bank reserve requirements C. the Fed's power was centralized to give it greater monetary control D. the Fed was expanded to include all depository institutions as members E. the Fed could buy and sell securities 163. One purpose of interest-rate ceilings was to A. establish a ceiling on bank profits B. establish a floor on bank profits C. encourage competition in other areas D. eliminate the need for the FDIC E. reduce the chance of bank failures 164. The most effective mechanism for reducing runs on banks is A. the discount rate B. deposit insurance C. the reserve requirement D. open market operations E. the Federal Reserve note 165. Eileen puts $10,000 in an uninsured savings account at the First National Bank. Norma borrows $10,000 from the First National Bank, flies to a South Pacific island, and is never heard from again. Which of the following is true? A. Eileen will lose her $10,000. B. Eileen will lose her $10,000 if she and Norma are related. C. Eileen will lose her $10,000 if the First National Bank makes all of its loans to people who run off to South Pacific islands. D. Eileen will not lose her $10,000 no matter what happens to the First National Bank. E. Eileen will not lose her $10,000 unless the Fed fails. 166. Eileen puts $10,000 in a federally insured checking account at the First National Bank. Norma borrows $10,000 from the First National Bank, flies to a South Pacific island, and is never heard from again. Which of the following is true? A. Eileen will lose her $10,000. B. Eileen will lose her $10,000 if she and Norma are related. C. Eileen will lose her $10,000 if the First National Bank makes all of its loans to people who run off to South Pacific islands. D. Eileen will not lose her $10,000 no matter what happens to the First National Bank. E. Eileen will not lose her $10,000 unless there is a run on the First National Bank. 167. Interest rate ceilings resulted in great profitability for banks in the 1970s. A. True B. False 168. Interest-rate ceilings on deposits A. meant banks were guaranteed "cheap money" from depositors B. were imposed because without them, as was the case in the 1970s, banks couldn't be profitable C. led to banks losing deposits whenever market rates went above the ceiling rates D. are only effective when market rates are below the ceiling rates E. were developed by money market mutual funds as a marketing device 169. Prior to the 1970s, bankers were happy with interest-rate ceilings because those ceilings A. eliminated interest-rate competition among banks B. guaranteed them high profits C. guaranteed them a minimum profit D. enabled them to expand into other lines of commerce E. allowed them to hold corporate stock 170. In the 1970s, U.S. consumers transferred their deposits from accounts in banks and thrifts to money market mutual funds because money market mutual funds A. were more liquid B. were less risky C. paid higher interest rates D. were guaranteed for a larger amount E. were more liquid and paid higher interest rates 171. A major reason for the development of money market mutual funds in the 1970s was that A. open market operations were suspended B. bank deposit rates were capped at levels below market interest rates C. money market funds offered more flexible checking privileges than banks D. they were considered to be safer than banks E. money markets did not exist until 1970 172. One advantage of a money market mutual fund account is that A. it is guaranteed for a larger amount than are FDIC-insured deposits B. it is a riskless asset C. its shareholders typically earn more interest than they could with a regular bank account D. it earns high interest and is liquid E. it is completely liquid and riskless 173. A money market mutual fund account is a(n) A. checking account that earns interest B. savings account against which one can write checks C. group of stocks sold under one name D. claim on a collection of interest-earning assets that is not guaranteed by the FDIC E. account with which the Fed buys and sells U.S. government securities 174. In the 1970s, as they lost deposits to money market mutual funds, U.S. banks and thrifts A. had to borrow at high interest rates to support outstanding loans B. were able to borrow at low interest rates to support outstanding loans C. were forced to increase interest rates on outstanding loans D. were forced to call in outstanding loans E. were bailed out by the FDIC 175. All of the following have contributed to the problems of U.S. depository institutions during the last 20 years except one. Which is the exception? A. Interest rates rose during the 1970s. B. Interest rate ceilings limited the ability of depository institutions to compete with other financial institutions. C. Brokerage houses began offering money market mutual funds. D. The loans made by thrift institutions tended to be short-term loans. E. Many savers withdrew deposits from thrift institutions. 176. Rising interest rates can create profit problems for banks because A. short-term rates rise faster than long-term rates B. bank deposits turn over more rapidly than bank loans C. banks can't lend out money at these higher rates D. long-term rates rise faster than short-term rates E. borrowers must pay more in taxes as interest rates rise 177. Falling interest rates usually increase bank profits because A. banks can make more loans at low rates B. bank deposit costs fall faster than the average return on bank lending C. short-term rates fall faster than long-term rates D. long-term rates fall faster than short-term rates E. none of the above is correct; banks increase profitability with rising interest rates, not falling rates 178. 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. had restricted branch banking D. continues to prohibit bank holding companies E. discourages automatic teller machines (ATMs) 179. The deregulation of U.S. banking in the 1980s led to A. increased profits at all banks B. no change in banks' conduct C. more bank failures than in the 1930s D. many bank failures as banks began to hold riskier assets E. the end of FDIC insurance for banks that held risky assets 180. The purpose of deregulating banks during the 1980s was to A. eliminate the risk that banks incurred B. allow banks to compete with other financial institutions C. allow U.S. banks to compete with foreign banks D. help consumers E. decrease the cost of banking regulation 181. While deposit insurance was designed to make the banking industry more stable, it contributed to the banking crisis of the 1980s because A. the FDIC only insured commercial banks B. the ceiling on insured deposits was too low C. too many banks were not sufficiently insured D. depositors became too complacent about the risks that banks were taking E. unsafe banks were "kicked out" of the deposit insurance system 182. Which of the following statements best characterizes U.S. depository institutions over the last 50 years? A. The industry has been very turbulent throughout this period. B. The industry is highly regulated and hence is a very staid, predictable industry. C. The industry has been highly unprofitable throughout this period. D. The industry was once highly competitive, but now it is relatively quiet since deregulation began during the 1970s. E. Once highly regulated, the industry has changed considerably during the past 20 years. 183. The banking crisis of the 1980s was due, in part, to all of the following except one. Which is the exception? A. the rising interest rates of the 1970s and early 1980s B. the existence of deposit insurance C. the deregulation of deposit rates that allowed unsafe banks to grow D. the deregulation of lending practices E. the highly concentrated U.S. banking industry, where big banks had branches in nearly every state 184. Money market mutual funds A. were originally introduced by the Federal Reserve Bank of New York B. when they were introduced, constituted serious competition to banks and thrifts for the deposits of savers C. were not originally offered by commercial banks and still are not offered by them D. represent a pooling of cash assets from many countries, like dollars, francs, and pesos E. are not able to offer their customers check writing privileges 185. Money market mutual funds A. offer higher rates of interest than bank checking accounts but lack check writing privileges B. offer higher rates of interest than bank checking accounts and also offer check writing privileges C. usually pay lower rates of interest than bank checking accounts D. were originally developed and offered by banks to their customers E. usually do not offer any check writing privileges 186. Thrift institutions encountered serious difficulties in the 1970s because A. money market mutual funds became serious competitors for their deposits B. the U.S. Treasury deposited larger sums of money than the thrift institutions could effectively manage C. interest rates they had to pay on deposits began to fall D. each of the largest banks increased the pressure on the thrifts by building a nationwide network of branch banks E. the FDIC increased the reserve requirement for thrifts 187. Insurance that protects 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 E. was introduced as a direct result of the financial problems of the 1970s and 1980s 188. When many depository institutions—especially thrifts—failed in the 1970s and 1980s, 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 D. the U.S. taxpayer, fortunately, avoided bearing any of the financial burden of the losses E. the entire economy collapsed and the country was plunged into a severe depression 189. During the 1980s, A. better bank management resulted in the most stable U.S. banking system since the Great Depression B. more U.S. banks failed than in any period since the Great Depression C. U.S. banks became more conservative in the type of assets they held D. economic conditions contributed to the stability of U.S. banks E. there were no U.S. bank failures for the first time in U.S. history 190. Compared to many other countries, the United States has A. fewer banks, with assets distributed more evenly B. fewer commercial banks, with assets concentrated in a few large banks C. more banks, with assets concentrated in a few large banks D. more commercial banks, with assets more widely distributed among banks E. more commercial banks, with assets concentrated in a few large banks 191. Bank holding companies A. b, c, and d are correct B. can often engage in interstate banking C. can provide financial advisory services D. have access to more sources of funds than individual commercial banks E. are subject to the same regulations as commercial banks 192. A bank holding company is A. a conglomerate that owns a bank to service the other businesses it owns B. a loose federation of private banks that hold assets in common C. a corporation that owns one or more banks D. a bank that is owned by the depositors E. a subsidiary of a major corporation 193. Since 1980, bank failures peaked in 2010. A. True B. False 194. In the last three decades, the number of commercial banks has declined but the number of branches has increased. A. True B. False 195. Before the specialization A. families were largely self-sufficient B. families produced much more than they could each consume C. there was a great need for exchange between families D. families consumed much more than they could each produce E. None of the answers is correct 196. When silver and gold were used as money, both their quantity and quality were open to question. The solution was A. seashells B. seigniorage C. token money D. coinage E. fiat money 197. People came to accept fiat money because they believed that others would accept it as well. A. True B. False 198. The first step in the evolution of money was A. physical commodities B. barter C. pieces of paper representing claims on physical commodities D. pieces of paper with no intrinsic value E. electronic entries representing claims on pieces of paper of no intrinsic value 199. Barter may be the only alternative A. only if the supply of money dries up B. if the supply of money dries up or if the price system is not allowed to function properly C. only if the price system is not allowed to function properly D. if hyperinflation sets in E. if fiat money is discontinued 200. A country that has experienced hyperinflation is A. Brazil B. Russia C. Venezuela D. Zimbabwe E. All of the answers are correct 201. The United States has a dual banking system consisting of state banks and national banks. A. True B. False 202. The tendency of bankers to take unwarranted risks in making loans because deposits were insured is an example of what is referred to as a A. golf course hazard B. weather hazard C. moral hazard D. hazard pay E. duke of hazard 203. U.S. banks have grown primarily through A. America’s longstanding preference for big banks B. surviving banks buying up bankrupt banks C. excellent customer service D. mergers and acquisitions E. All of the answers are correct 204. Which of the following countries has the most number of banks among the top 25 based on worldwide assets? A. France B. Japan C. United Kingdom D. Netherlands E. United States 205. Four of the top ten banks in the world are in China. A. True B. False 206. Four of the top ten banks in the world are in the United States. A. True B. False 207. A subprime mortgage is A. a mortgage in which the borrower gets an interest rate below the prime rate B. a mortgage in which the interest rate is adjustable C. a mortgage for which the home is valued below its true market value D. a mortgage in which the borrower has a poor credit rating E. a mortgage for a home that was in foreclosure 208. A mortgage-backed secutiry is hundreds of mortgages bundled together which represents a claim on the monthly payments made on those mortgages. A. True B. False 209. The emergence of the subprime mortgage market following the recession of 2001 made it increasingly difficult for low income individuals to obtain a mortgage. A. True B. False 210. The emergence of the subprime mortgage market following the recession of 2001 set off a boom in the housing industry. A. True B. False 211. The emergence of mortgage-backed securities provided mortgage brokers with an incentive to seek out only the most credit worthy borrowers. A. True B. False 212. The Dodd-Frank Wall Street Reform and Consumer Protection Act included all of the following provisions except one. Which is the exception? A. the law requires mortgage originators to verify a borrowers income, credit history, and job status B. the law authorizes the Federal Reserve to regulate companies other than banks — such as insurance companies and investment firms C. the law establishes the Financial Stability Oversight Council, a super-regulator that will monitor Wall Street’s largest firms D. the law gives the Federal Reserve the authority to establish a reserve requirement for all financial institutions E. the law requires issuers of mortgage-backed securities to retain at least 5 percent of the credit risk associated with the mortgages Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776
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