Professional Documents
Culture Documents
MULTIPLE CHOICE
1. Barter is the exchange of goods and services without the use of money.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: The Evolution of Money
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
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Barter and the Double Coincidence of Wants
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
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Barter and the Double Coincidence of Wants
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
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Barter and the Double Coincidence of Wants
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.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Barter and the Double Coincidence of Wants
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
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Barter and the Double Coincidence of Wants
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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Earliest Money and Its Functions
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
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Earliest Money and Its Functions
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.
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Earliest Money and Its Functions
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
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Earliest Money and Its Functions
34. In general, the more money in existence, the better it functions as a store of value.
a. True
b. False
ANS: B PTS: 1 DIF: Hard NAT: Analytic
LOC: The role of money TOP: Properties of the Ideal Money
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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Properties of the Ideal Money
36. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Properties of the Ideal Money
40. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Properties of the Ideal Money
41. 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
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Properties of the Ideal Money
44. 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
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Coins
47. 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
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Coins
48. 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.
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: 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. 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.
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Coins
50. 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.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Coins
51. 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
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Coins
52. Under a fractional reserve banking system, banks may lend out only a fraction of their reserves.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Money and Banking
53. 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
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Money and Banking
54. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Money and Banking
58. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Money and Banking
60. 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
ANS: A PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: The role of money TOP: Money and Banking
61. 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
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Money and Banking
70. 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
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Representative Money and Fiat Money
71. 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
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Representative Money and Fiat Money
79. Money does not solve the double coincidence of wants problem unless it is generally acceptable.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: When Money Performs Poorly
80. 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
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: When Money Performs Poorly
82. Fiat money is the only thing that can be used as a standard of value.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Mackerel Economics in Federal Prisons
83. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Mackerel Economics in Federal Prisons
84. 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
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Mackerel Economics in Federal Prisons
85. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Mackerel Economics in Federal Prisons
88. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: When Money Performs Poorly
89. 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
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: The Evolution of Money
91. 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
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Financial Institutions in the United States
93. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Financial Institutions in the United States
94. 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
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Financial Institutions in the United States
95. 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
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Financial Institutions in the United States
98. 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
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Commercial Banks and Thrifts
101. 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
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Birth of the Fed
104. 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
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Birth of the Fed
108. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
109. 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
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
111. 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
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
112. 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
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
113. 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
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
117. 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
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
119. 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
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Powers of the Federal Reserve System
121. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
122. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
124. 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.
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
125. 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
ANS: E PTS: 1 DIF: Hard NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
127. 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
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
128. 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
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
129. 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
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
130. 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
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
131. 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
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
132. The chairman of the Fed must resign when a new president is elected.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
134. Each member of the Federal Reserve's Board of Governors is appointed for life.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
135. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
136. The Federal Open Market Committee was established to give the Fed the power to change reserve
requirements.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
138. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
139. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
146. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
148. 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.
ANS: E PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
150. 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
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
154. 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
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Troubles during the Great Depression
155. 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
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
157. 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
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
160. 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.
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
161. 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.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banking Troubles during the Great Depression
162. Interest rate ceilings resulted in great profitability for banks in the 1970s.
a. True
b. False
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
164. 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
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
165. 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
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
166. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
169. 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
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
170. 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.
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
171. 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
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
173. 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)
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banks Lost Deposits When Inflation Increased
176. 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
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Banking Deregulation
177. 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.
ANS: E PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: The role of money TOP: Banking Deregulation
178. 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
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Banking Deregulation
179. 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
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Savings Banks on the Ropes
182. 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
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
LOC: The role of money TOP: Savings Banks on the Ropes
183. 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
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
LOC: The role of money TOP: Savings Banks on the Ropes
188. Which of the following has a face value greater than it costs the US Treasury to mint it?
a. penny
b. nickel
c. quarter
d. quarter and nickel
e. quarter and penny
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Coins
190. Gresham’s Law suggests that people tend to hold on to the best money and trade away inferior money.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Properties of the Ideal Money
192. The purchasing power of $1 today is greater than the purchasing power of $1 in 1980.
a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: When Money Performs Poorly
193. Which of the following is not a function of the US Federal Reserve System?
a. extend loans to member banks
b. clear checks in the banking system
c. extend loans to the public
d. set reserve requirements for banks
e. buying and selling US Treasury securities
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Powers of the Federal Reserve System
195. 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
ANS: D PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Coins
196. People came to accept fiat money because they believed that others would accept it as well.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Representative Money and Fiat Money
200. The United States has a dual banking system consisting of state banks and national banks.
a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Birth of the Fed
201. 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
ANS: C PTS: 1 DIF: Easy NAT: Analytic
LOC: The role of money TOP: Banking Deregulation
203. 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
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money TOP: Top Banks in America and the World
206. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money
TOP: Subprime Mortgages and Mortgage Backed Securities
207. The emergence of the subprime mortgage market following the recession of 2001 set off a boom in the
housing industry.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money
TOP: Subprime Mortgages and Mortgage Backed Securities
208. 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
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money
TOP: Subprime Mortgages and Mortgage Backed Securities
209. 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
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
LOC: The role of money
TOP: Subprime Mortgages and Mortgage Backed Securities