Chapter 14

To say money is socially defined means that:
A. money has been defined in a Constitutional amendment.

B. whatever performs the functions of money extremely well is considered to be money.

C. the money supply includes all public and private securities purchased by society.

D. society, acting through Congress, specifies what shall be included in the money supply.

B. whatever performs the functions of money extremely well is considered to be money.
Money functions as:
A. a store of value.

B. a unit of account.

C. a medium of exchange.

D. all of these.

D. all of these
If you are estimating your total expenses for school next semester, you are using money primarily as:
A. a medium of exchange.

B. a store of value.

C. a unit of account.

D. an economic investment.

C. unit of account
If you place a part of your summer earning in a savings account, you are using money primarily as a:
A. medium of exchange.

B. store of value.

C. unit of account.

D. standard of value.

B. store of value.
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as:
A. a medium of exchange.

B. a store of value.

C. a unit of account.

D. an economic investment.

A. medium of exchange.
A $70 price tag on a sweater in a department store window is an example of money functioning as a:
A. unit of account.

B. standard of deferred payments.

C. store of value.

D. medium of exchange.

A. unit of account.
Stock market price quotations best exemplify money serving as a(n):
A. store of value.

B. unit of account.

C. medium of exchange.

D. index of satisfaction.

B. unit of account.
Purchasing common stock by writing a check best exemplifies money serving as a(n):
A. store of value.

B. unit of account.

C. medium of exchange.

D. index of satisfaction.

C. medium of exchange.
When economists say that money serves as a medium of exchange, they mean that it is:
A. a way to keep wealth in a readily spendable form for future use.

B. a means of payment.

C. a monetary unit for measuring and comparing the relative values of goods.

D. declared as legal tender by the government.

B. means of payment.
When economist say that money serves as a unit of account, they mean that it is:
A. a way to keep wealth in a readily spendable form for future use.

B. a means of payment.

C. a monetary unit for measuring and comparing the relative values of goods.

D. declared as legal tender by the government.

C. a monetary unit for measuring and comparing the relative values of goods.
When economists say that money serves as a store of value, they mean that it is:
A. a way to keep wealth in a readily spendable form for future use.

B. a means of payment.

C. a monetary unit for measuring and comparing the relative values of goods.

D. declared as legal tender by the government.

A. a way to keep wealth in a readily spendable form for future use.
The paper money used in the United States is:
A. National Bank Notes.

B. Treasury Notes.

C. United States Notes.

D. Federal Reserve Notes.

D. Federal Reserve Notes.
In the United States, the money supply (M1) is compromised of:
A. coins, paper currency, and checkable deposits.

B. currency, checkable deposits, and Series E bonds.

C. coins, paper currency, checkable deposits, and credit balances with brokers.

D. paper currency, coins, gold certificates, and time deposits.

A. coins, paper currency, and checkable deposits.
Currency held in the vault of the First National Bank is:
A. counted as part of M1.

B. counted as part of M2, but not M1.

C. only counted as part of M1 if it was deposited into a checking account.

D. not counted as part of the money supply.

D. is not counted as part of the money supply.
Checkable deposits are classified as money because:
A. they can be readily used in purchasing goods and paying debts.

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

C. they are ultimately the obligations of the Treasury.

D. they earn interest income for the depositor.

A. they can be readily used in purchasing godds and paying debts.
Currency (paper money plus coins) constitutes about:
A. 67 percent of the U.S. M1 money supply.

B. 51 percent of the U.S. M1 money supply.

C. 49 percent of the U.S. M1 money supply.

D. 33 percent of the U.S. M1 money supply.

B. 51 percent of the U.S. M1 money supply.
In January 2010, the supply of money (M1) in the United States was about:
A. $847 billion.

B. $1,676 billion.

C. $1,365 billion.

D. $8,463 billion.

B. 1,676 billion.
To say that coins are “token money” means that:
A. their face value is less than their intrinsic value.

B. their face value is greater than their intrinsic value.

C. their face value is equal to their intrinsic value.

D. they are not legal tender.

B. their face value is greater than their intrinsic value.
In define money as M1, economists exclude time deposits because:
A. the intrinsic value of time deposits is nil.

B. the purchasing power of time deposits is much less stable than that of checkable deposits

and currency.

C. they are not directly or immediately a medium of exchange.

D. they are not recognized by the Federal government as legal tender.

C. they are not directly or immediately a medium of exchange.
Which of the following is not part of the M2 money supply?
A. money market mutual fund balances

B. money market deposit accounts

C. currency

D. large-denominated time deposits

D. large-denominated time deposits
The M2 money supply includes:
A. stock certificates.

B. currency in bank vaults.

C. the cash value of life insurance policies.

D. individual shares in money market mutual funds.

D. individual shares in money market mutual funds.
A checking account entry is money because it:
A. is ensured by the Federal Deposit Insurance Corporation.

B. has been declared as such by the Federal government.

C. performs the functions of money.

D. can be sold for currency.

C. performs the functions of money.
Currency in circulation is part of:
A. M1 only.

B. M2 not including M1.

C. neither M1 nor M2.

D. both M1 and M2.

D. both M1 and M2
Money market deposits accounts are included in:
A. M1 only.

B. M2 only.

C. neither M1 nor M2.

D. both M1 and M2.

B. M2 only.
Checkable deposits are:
A. included in M1.

B. not included in either Ml

C. considered to be a near money.

D. also called time deposits.

A. included in M1.
The amount of money reported as M2:
A. is smaller than the amount reported as M1.

B. is larger than the amount reported as M1.

C. excludes coins and currency.

D. includes large ($100,000 or more) certificates of deposit.

B. is larger than the amount reported as M1.
The largest component of the money supply (M1) is:
A. currency in bank vaults.

B. currency in circulation.

C. checkable deposits.

D. stock certificates.

B. currency in circulation
Paper money (currency) in the United States is issued by the:
A. United States Mint.

B. Federal Reserve Banks.

C. United States Treasury.

D. national banks.

B. Federal Reserve Banks.
A $20 bill is a:
A. gold certificate.

B. Treasury note.

C. Treasury bill.

D. Federal Reserve Note.

D. Federal Reserve Note.
Coins in people’s pockets and purses are:
A. included in M1, but not in M2.

B. included in both M1 and in M2.

C. included in M2, but not in M1.

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

B. included in both M1 and M2.
Coins held in commercial banks are:
A. included in M1, but not in M2.

B. included both in M1 and in M2.

C. included in M2, but not in M1.

D. not part of the nation’s money supply.

D. not part of the nation’s money supply.
Checkable deposits include:
A. both large and small-denominated time deposits.

B. the deposits of banks and thrifts on which checks can be written.

C. only the checkable deposits of commercial banks.

D. only the checkable deposits of thrift institutions.

B. the deposits of banks and thrifts on which checks can be written
The difference between M1 and M2 is that:
A. the former includes time deposits.

B. the latter includes small-denominated time deposits, non-checkable savings accounts,

money market deposit accounts, and money market mutual fund balances.

C. the latter includes negotiable government bonds.

D. the latter includes cash held by commercial banks and the U.S. Treasury.

B. the latter includes small-denominated time deposits, non-checkable savings accounts, money markets deposit accounts, and money market mutual fund balances.
Assuming o other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the:
A. M1 money supply will decline.

B. M1 money supply will not change.

C. M2 money supply will decline.

D. M2 money supply will increase.

B. M1 money supply will not change.
Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the:
A. M1 money supply will decline and M2 money supply will remain unchanged.

B. M1 and M2 money supplies will not change.

C. M1 money supply will increase and M2 money supply will remain unchanged.

D. M1 and M2 money supplies will both decline.

A. M1 money supply will decline and M2 money supply will remain unchanged.
“Near-monies” are included in:
A. both M1 and M2.

B. M2 only.

C. M1 only.

D. neither M1 nor M2.

B. M2 only.
Assuming no other changes, if balances in money market deposit accounts increase by $50 billion and small-denominated time deposits decrease by $50 billion, the:
A. M1 and M2 money supplies will not change.

B. M2 money supply will increase.

C. M1 money supply will decline.

D. M2 money supply will increase and the M1 money supply will decrease.

A. M1 and M2 money supplies will not change.
Small-denominated time deposits, by definition:
A. mature in one month or less.

B. mature in one year or less.

C. are less than $100,000.

D. are held by state and local banks only.

C. are less than $100,000.
The near-money components of M2 are:
A. equally liquid as the M1 components of M2.

B. more liquid than the M1 components of M2.

C. less liquid than the M1 components of M2.

D. highly illiquid.

C. less liquid than the M1 components of M2.
The M2 money supply is about _______ times larger than the M1 money supply.
A. 1.5

B. 5

C. 10

D. 20

B. 5
Near-monies:
A. include all financial and real assets that can be easily converted into currency.

B. are certain highly liquid financial assets that do not function directly as a medium of

exchange but can be readily converted into M1.

C. are excluded from M2 because they are highly liquid.

D. are defined as monetary balances that are immediately available, at zero cost, for

household and business transactions.

B. are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.
Time deposits of $100,000 or more are:
A. a component of M1.

B. a component of M2 but not of M1.

C. a component of M1 but not of M2.

D. not a component of M1 or M2.

D. not a component of M1 or M2
Currency held within banks is part of:
A. both the M1 and M2 definitions of the money supply.

B. the M2 definition of the money supply only.

C. the M1 definition of the money supply only.

D. none of these definitions of the money supply.

D. none of these definitions of the money supply.
The money supply is backed:
A. by the government’s ability to control the supply of money and therefore to keep its value

relatively stable.

B. by government bonds.

C. dollar-for-dollar by gold and silver.

D. by gold reserves representing a fraction of the total value of dollars in circulation.

A. by the government’s ability to control the supply of money and therefore to keep its value relatively stable.
Which of the following does not explain what back the money supply in the United States?
A. It is back by gold.

B. It is widely accepted in transactions.

C. It is designated “legal tender” by the Federal government.

D. It is relatively scarce.

A. It is back by gold.
Suppose that the Federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?
A. The value of the “wheat dollar” would be unstable depending on crop yields from year to year.

B. Farmers would replace corn and soy crops with wheat.

C. Wheat would function as money so long as people accept it in exchange for goods and services.

D. All of these are possible outcomes.

D. All of these are possible outcomes.
The purchasing power of money and the price level vary:
A. inversely.

B. directly during recessions, but inversely during inflations.

C. directly, but not proportionately.

D. directly and proportionately.

A. inversely.
The value if money varies:
A. inversely with the price level.

B. directly with the volume of employment.

C. directly with the price level.

D. directly with the interest rate.

A. inversely with the price of index
If the price index rises from 100 to 120, the purchasing power values of the dollar:
A. may either rise or fall.

B. will rise by one-sixth.

C. will fall by one-sixth.

D. will rise by 20 percent.

C. will fall by one-sixth
If the price index rises from 200 to 250, the purchasing power values of the dollar:
A. may either rise or fall.

B. will rise by 25 percent.

C. will fall by 25 percent.

D. will fall by 20 percent.

D. will fall by 20 percent
The purchasing power of the dollar:
A. has been increasing in recent years because of economic growth.

B. varies directly with the cost-of-living index.

C. is inversely related to the level of aggregate demand.

D. is the reciprocal of the price level.

D. is the reciprocal of the price level
The basic policy-making body in the U.S. banking system us the:
A. Federal Open Market Committee (FOMC).

B. Board of Governors of the Federal Reserve.

C. Federal Monetary Authority.

D. Council of Economic Advisers.

B. Board of Governors of the Federal Reserve.
The Federal Reserve System was created in:
A. 1926.

B. 1946.

C. 1895.

D. 1913.

D. 1913
In the U.S. economy the money supply is controlled by the:
A. U.S. Treasury.

B. Federal Reserve System.

C. Senate Committee on Banking and Finance.

D. Congress.

B. Federal Reserve System
As it relates to the Federal Reserve activities, the acronym FOMC describes the:
A. Federal Open Market Committee.

B. Federal Options Market Committee.

C. Federal Organization for Monetary Control.

D. Federal Organization for Money Creation.

A. Federal Open Market Committee
The Federal Open Market Committee (FOMC) is made up of:
A. the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks.

B. the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank.

C. the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers.

D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.

D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.
Which of the following is true about the U.S. Federal Reserve System?
A. There are 12 regional Federal Reserve Banks.

B. The head of the U.S. Treasury also chairs the Federal Reserve Board.

C. There are 14 members of the Federal Reserve Board.

D. The Open Market Committee is smaller in size than the Federal Reserve Board.

A. There are 12 regional Federal Reserve Banks
The Board of Governors of the Federal Reserve has ___ members.
A. 5

B. 7

C. 9

D. 14

B. 7
The member of the Federal Reserve Board:
A. serve seven-year terms.

B. are appointed by the American Economic Association.

C. are elected by votes of the 12 presidents of the Federal Reserve Banks.

D. are appointed for 14-year terms.

D. are appointed for 14-year terms
An important function of the Federal Reserve Bank is to:
A. supervise the liquidation of the assets of bankrupt state banks.

B. help large commercial banks develop correspondent relationships with smaller commercial banks.

C. advise commercial banks as to the most profitable ways of reinvesting profits.

D. provide facilities by which commercial banks and thrift institutions may collect checks.

D. provide facilities by which commercial banks and thrift institutions may collect checks.
Which of the following statements best describe the twelve Federal Reserve Banks?
A. They are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities.

B. They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry.

C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.

D. They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners.

C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.
The seven members of the Board of Governors of the Federal Reserve System are:
A. appointed by the President with the confirmation of the Senate.

B. elected by Congress from a slate of nominees provided by the President.

C. appointed by the Senate Finance Committee.

D. appointed by the presidents of the twelve Federal Reserve Banks.

A. appointed by the President with the confirmation of the Senate
Which of the following is the basic economic policy function of the Federal Reserve Banks?
A. holding the deposits or reserves of commercial banks

B. acting as fiscal agents for the Federal government

C. controlling the supply of money

D. the collection or clearing of checks among commercial banks

C. controlling the supply of money
The Federal Reserve System:
A. has the same status as the Supreme Court.

B. is basically an independent agency.

C. has the status of a Congressional committee.

D. is an agency of the executive branch of the Federal government.

B. is basically an independent agency.

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