Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F'

if the statement is false.
1) The M2 money supply is larger than the M1 money
supply.

⊚ true
⊚ false

2) The M2 money supply may be larger or smaller than fund balances held by
the M1 money supply, depending on the size of small- individuals.
denominated time deposit balances and money market mutual

⊚ true
⊚ false

3) Checkable deposits held in savings and loan of the M1 definition of the

institutions, mutual savings banks, and credit unions are part money supply.

⊚ true
⊚ false

4) Currency and coins held by banks are part of the M1

definition of money supply.

⊚ true
⊚ false

5) Gold backs the U.S. money supply.

⊚ true
⊚ false

Version 1 1
 ⊚ true

Version 1 2
7) The U.S. Treasury is the only agency authorized to put
money into circulation in the U.S. economy.

⊚ true
⊚ false

8) Thrifts are known as "banker's banks" because they

lend money to commercial banks.

⊚ true
⊚ false

9) Subprime mortgage loans are so named because the

rates charged are below the prime interest rate.

⊚ true
⊚ false

10) The programs enacted to bail out the financial system hazard problem in the
from crisis in 2007 and 2008 helped alleviate the moral financial industry.

⊚ true
⊚ false

11) (Consider This) Credit cards are defined as money

because they facilitate transactions.

⊚ true
⊚ false

12) When you use money to purchase groceries, money is

functioning as a store of value.

⊚ true
⊚ false

Version 1 3
13) Money performs its function as a store of value very
well, because it protects one against the erosion of purchasing
power from inflation.

⊚ true
⊚ false

14) As long as the owner (seller) of an asset is willing to meet the full definition of
accept any price, the asset will sell quickly, thus making it liquidity.

⊚ true
⊚ false

15) With token money, the face value is greater than the
intrinsic value.

⊚ true
⊚ false

16) The M1 money supply is composed of currency,

checkable deposits, and savings deposits.

⊚ true
⊚ false

17) Credit card balances are part of money supply M2.

⊚ true
⊚ false

18) In the United States, all money is essentially the debt

of the Fed, commercial banks, and thrift institutions.

⊚ true
⊚ false

Version 1 4
19) The currency held in the vaults of commercial banks is
included in the money supply M1.

⊚ true
⊚ false

20) Debit card balances are part of money supply M1, but
credit card balances are not.

⊚ true
⊚ false

21) Using a debit card is like writing a check; the amount

will be deducted from one's checking account.

⊚ true
⊚ false

22) The value (or purchasing power) of money increases

when the price level increases.

⊚ true
⊚ false

23) The value of money in the United States is based on

the stock of gold and silver held by the United States
government.

⊚ true
⊚ false

24) The Federal Reserve System is independent of

Congress and the president and does not have to follow orders
from either Congress or the president.

Version 1 5
 ⊚ true ⊚ false

25) The Federal Open Market Committee (FOMC)

regulates markets and enforces antitrust laws to keep markets
open and competitive.

⊚ true
⊚ false

26) Unlike banks, thrifts are not subject to monetary reserves against their
control by the Fed, and thus they (thrifts) do not have to hold checkable deposits.

⊚ true
⊚ false

27) The Federal Reserve System is the institution that

issues the U.S. paper currency or dollar bills.

⊚ true
⊚ false

28) The Federal Reserve System is a bankers' bank and

thereby acts as a "lender of last resort" to banks.

⊚ true
⊚ false

29) The general public can open deposit accounts at their

district's Federal Reserve Bank.

⊚ true
⊚ false

Version 1 6
 ⊚ true

Version 1 7
31) A few years prior to the Financial Crisis of 2007–
2008, many people were getting approved for mortgage loans
even without proper documentation or credit checks.

⊚ true
⊚ false

32) Subprime mortgages, which played a central role in

the Financial Crisis of 2007–2008, had been strongly
encouraged and supported by the government before the
crisis.

⊚ true
⊚ false

33) The Great Recession was the main cause of the

Financial Crisis of 2007–2008.

⊚ true
⊚ false

34) During the Great Recession, the bailout money given

to the car companies GM and Chrysler under the TARP
program came from the Fed acting in its role as lender of last
resort.

⊚ true
⊚ false

35) The so-called moral-hazard problem in financial

management refers to the fact that managers will tend to take
on more risk if they know that they are somehow insured
against some or all of their losses.

Version 1 8
 ⊚ true ⊚ false

36) The TARP loans and the Fed's lender-of-last-resort

actions that bailed out large, failing financial institutions
helped reduce the moral-hazard problem in financial
management.

⊚ true
⊚ false

37) During a financial crisis, the Fed and other central firms that are solvent but
banks always adopt a strict policy of lending only to financial illiquid.

⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that

best completes the statement or answers the question.
38) To say "money is what money does" means that

D) society, acting
A) money has been defined in a Constitutional through Congress,
amendment. specifies what shall be
B) whatever performs the functions of money included in the money
extremely well is considered to be money. supply.
C) the money supply includes all public and private
securities purchased by society.

39) Money functions as

of exchange.
A) a store of value.
B) a unit of account.
C) a medium of exchange.
D) a store of value, a unit of account, and a medium

Version 1 9
40) If you are estimating your total expenses for school
next semester, you are using money primarily as

D) an economic
A) a medium of exchange. investment.
B) a store of value.
C) a unit of account.

41) If you place a part of your summer earnings in a

savings account, you are using money primarily as a

D) standard of
A) medium of exchange. value.
B) store of value.
C) unit of account.

42) If you write a check on a bank to purchase a used

Honda Civic, you are using money primarily as

D) an economic
A) a medium of exchange. investment.
B) a store of value.
C) a unit of account.

43) A $70 price tag on a sweater in a department store

window is an example of money functioning as a

D) medium of
A) unit of account. exchange.
B) standard of deferred payments.
C) store of value.

44) Stock market price quotations best exemplify money

serving as a

C) medium of
A) store of value.
B) unit of account.

Version 1 10
exchange.
D) index of satisfaction.

Version 1 11
45) Purchasing groceries using a debit card best
exemplifies money serving as a

D) index of
A) store of value. satisfaction.
B) unit of account.
C) medium of exchange.

46) When economists say that money serves as a medium

of exchange, they mean that it is

relative values of goods.

A) a way to keep wealth in a readily spendable form D) declared as
for future use. legal tender by the
B) a means of payment. government.
C) a monetary unit for measuring and comparing the

47) When economists say that money serves as a unit of

account, they mean that it is

relative values of goods.

A) a way to keep wealth in a readily spendable form D) declared as
for future use. legal tender by the
B) a means of payment. government.
C) a monetary unit for measuring and comparing the

48) When economists say that money serves as a store of

value, they mean that it is

relative values of goods.

A) a way to keep wealth in a readily spendable form D) declared as
for future use. legal tender by the
B) a means of payment. government.
C) a monetary unit for measuring and comparing the

49) The paper money used in the United States is

Version 1 12
 D) Federal
A) National Bank notes. Reserve notes.
B) Treasury notes.
C) United States notes.

50) In the United States, the money supply (M1) includes

D) paper
A) coins, paper currency, and checkable deposits. currency, coins, gold
B) currency, checkable deposits, and Series E bonds. certificates, and time
C) coins, paper currency, checkable deposits, and deposits.
credit balances with brokers.

51) Currency held in the vault of First National Bank is

a checking account.
A) counted as part of M1. D) not counted as
B) counted as part of M2 but not M1. part of the money supply.
C) only counted as part of M1 if it was deposited into

52) Checkable deposits are classified as money because

Treasury.
A) they can be readily used in purchasing goods and D) they earn
paying debts. interest income for the
B) banks hold currency equal to the value of their depositor.
checkable deposits.
C) they are ultimately the obligations of the

53) Currency (paper money plus coins) constitutes about

D) 66 percent of
A) 25 percent of the U.S. M1 money supply. the U.S. M1 money
B) 43 percent of the U.S. M1 money supply. supply.
C) 57 percent of the U.S. M1 money supply.

Version 1 13
54) As of March 2019, the supply of money (M1) in the United States was about

D) $12,479
A) $2,472 billion. billion.
B) $3,760 billion.
C) $1,359 billion.

55) To say that coins are "token money" means that

D) they are not

A) their face value is less than their intrinsic value. legal tender.
B) their face value is greater than their intrinsic
value.
C) their face value is equal to their intrinsic value.

56) In defining money as M1, economists exclude time

deposits because

D) they are not

A) the intrinsic value of time deposits is nil. recognized by the federal
B) the purchasing power of time deposits is much government as legal
less stable than that of checkable deposits and currency. tender.
C) they are not directly or immediately a medium of
exchange.

57) Which of the following is not part of the M2 money

supply?

D) large-
A) money market mutual fund balances denominated time deposits
B) money market deposit accounts
C) currency

58) The M2 money supply includes

C) the cash value

A) stock certificates.
B) currency in bank vaults.

Version 1 14
of life insurance policies.
D) individual shares in money market mutual funds.

Version 1 15
59) A checking account entry is money because it

C) performs the
A) is ensured by the Federal Deposit Insurance functions of money.
Corporation. D) can be sold for
B) has been declared as such by the federal currency.
government.

60) Currency in circulation is part of

D) both M1 and
A) M1 only. M2.
B) M2 only.
C) neither M1 nor M2.

61) Money market deposit accounts are included in

D) both M1 and
A) M1 only. M2.
B) M2 only.
C) neither M1 nor M2.

62) Checkable deposits are

D) also called
A) included in M1. time deposits.
B) not included in either Ml or M2.
C) considered to be a near money.

63) The amount of money reported as M2

D) includes large
A) is smaller than the amount reported as M1. ($100,000 or more)
B) is larger than the amount reported as M1. certificates of deposit.
C) excludes coins and currency.

Version 1 16
64) The largest component of the money supply (M1) is

D) stock
A) currency in bank vaults. certificates.
B) currency in circulation.
C) checkable deposits.

65) Paper money (currency) in the United States is issued

by the

C) U.S. Treasury.
A) U.S. Mint. D) national banks.
B) Federal Reserve Banks.

66) A $20 bill is a

D) Federal
A) gold certificate. Reserve note.
B) Treasury note.
C) Treasury bill.

67) Coins in people's pockets and purses are

exchange them for Federal

A) included in M1 but not in M2. Reserve notes.
B) included both in M1 and in M2.
C) included in M2 but not in M1.
D) excluded from M1 and M2 because people can

68) Coins held in commercial bank vaults are

D) not part of the

A) included in M1 but not in M2. nation's money supply.
B) included both in M1 and in M2.
C) included in M2 but not in M1.

Version 1 17
69) Checkable deposits include

D) only the
A) both large- and small-denominated time deposits. checkable deposits of thrift
institutions.
B) the deposits held by banks and thrifts on which
checks can be written.
C) only the checkable deposits of commercial banks.

70) The difference between M1 and M2 is that

D) the latter
A) the former includes time deposits. includes cash held by
B) the latter includes small-denominated time commercial banks and the
deposits, savings accounts, money market deposit accounts, U.S. Treasury.
and money market mutual fund balances.
C) the latter includes negotiable government bonds.

71) Assuming no other changes, if checkable deposits

increase by $40 billion and currency in circulation decreases
by $40 billion, the

D) M2 money
A) M1 money supply will decline. supply will increase.
B) M1 money supply will not change.
C) M2 money supply will decline.

72) Assuming no other changes, if checkable deposits funds increase by $40

decrease by $40 billion and balances in money market mutual billion, the

D) M1 and M2
A) M1 money supply will decline and the M2 money money supplies will both
supply will remain unchanged. decline.
B) M1 and M2 money supplies will not change.
C) M1 money supply will increase and the M2
money supply will remain unchanged.

Version 1 18
73) "Near monies" are included in

D) neither M1 nor
A) both M1 and M2. M2.
B) M2 only.
C) M1 only.

74) 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

money supply will

A) M1 and M2 money supplies will not change. decrease.
B) M2 money supply will increase.
C) M1 money supply will decline.
D) M2 money supply will increase and the M1

75) Small-denominated time deposits, by definition

D) are held by
A) mature in one month or less. state and local banks only.
B) mature in one year or less.
C) are less than $100,000.

76) The near-money components of M2 are

D) highly illiquid.
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.

77) Near monies

B) are certain
A) include all financial and real assets that can be highly liquid financial
easily converted into currency. assets that do not function

Version 1 19
directly as a medium of exchange but can be readily immediately available, at
converted into M1. zero cost, for household
C) are excluded from M2 because they are highly and business transactions.
liquid.
D) are defined as monetary balances that are

78)

Money Market Mutual Fund Balances $ Small- 8

Held by Businesses 100 denominated
Money Market Mutual Fund Balances 220 ($100,000 or
Held by Individuals less) Time
Deposits
Currency in Banks 10
Checkable 7
Currency in Circulation 60
Deposits
Savings Deposits, Including Money 50
Market Deposit Accounts
Refer to the table. Money
supply M1 for this
Large-denominated ($100,000 or 180
economy is
more) Time Deposits

C) $130.
A) $60. D) $140.
B) $70.

79)

Money Market Mutual Fund Balances $1 Small- 8

Held by Businesses 00 denominated
Money Market Mutual Fund Balances 22 ($100,000 or
Held by Individuals 0 less) Time
Deposits
Currency in Banks 10
Checkable 7
Currency in Circulation 40
Deposits
Savings Deposits, Including Money 50
Market Deposit Accounts
Refer to the table. Money
supply M1 for this
Large-denominated ($100,000 or 18
economy is
more) Time Deposits 0

B) $40.
A) $110.

Version 1 20
 C) $70.
D) $120.

Version 1 21
80)

Money Market Mutual Fund Balances $ Small- 8

Held by Businesses 100 denominated
Money Market Mutual Fund Balances 220 ($100,000 or
Held by Individuals less) Time
Deposits
Currency in Banks 10
Checkable 7
Currency in Circulation 60
Deposits
Savings Deposits, Including Money 50
Market Deposit Accounts
Refer to the table. Money
supply M2 for this
Large-denominated ($100,000 or 180
economy is
more) Time Deposits

C) $490.
A) $480. D) $630.
B) $130.

81)

Money Market Mutual Fund Balances $1 Small- 8

Held by Businesses 00 denominated
Money Market Mutual Fund Balances 22 ($100,000 or
Held by Individuals 0 less) Time
Deposits
Currency in Banks 10
Checkable 8
Currency in Circulation 60
Deposits
Savings Deposits, Including Money 50
Market Deposit Accounts
Refer to the table. Money
supply M2 for this
Large-denominated ($100,000 or 18
economy is
more) Time Deposits 0

C) $80.
A) $490. D) $500.
B) $60.

82)

Money Market Mutual Fund Balances $ Held by 1

Version 1 22
 Businesses Small- 8
Money Market Mutual Fund Balances 220 denominated
Held by Individuals ($100,000 or
less) Time
Currency in Banks 10
Deposits
Currency in Circulation 60
Checkable 7
Savings Deposits, Including Money 50 Deposits
Market Deposit Accounts
Refer to the table. The
Large-denominated ($100,000 or 180
value of the near monies
more) Time Deposits
that are part of M2 is

C) $350.
A) $480. D) $530.
B) $630.

83)

Money Market Mutual Fund Balances $ Small- 9

Held by Businesses 100 denominated
Money Market Mutual Fund Balances 230 ($100,000 or
Held by Individuals less) Time
Deposits
Currency in Banks 10
Checkable 7
Currency in Circulation 60
Deposits
Savings Deposits, Including Money 60
Market Deposit Accounts
Refer to the table. The
value of the near monies
Large-denominated ($100,000 or 180
that are part of M2 is
more) Time Deposits

C) $60.
A) $380. D) $390.
B) $230.

84) Refer to the given

list of assets.
1. Large-denominated
($100,000 and over) time
deposits 2. Savings
deposits
3. Currency (coins and

Version 1 23
paper money) in circulation 10. Currency held in
4. Small-denominated (under $100,000) time deposits bank vaults
5. Stock certificates The M1 definition of
6. Checkable deposits money includes item(s)
7. Money market deposit accounts
8. Money market mutual fund balances held by individuals
9. Money market mutual fund balances held by businesses

C) 3 and 6.
A) 6 only. D) 3, 6, and 10.
B) 3, 4, and 6.

85) Refer to the given list of assets. 9. Money market mutual

1. Large-denominated ($100,000 and over) time deposits 2. fund balances held by
Savings deposits businesses
3. Currency (coins and paper money) in circulation 10. Currency held in
4. Small-denominated (under $100,000) time deposits bank vaults
5. Stock certificates The M2 definition of
6. Checkable deposits money includes
7. Money market deposit accounts
8. Money market mutual fund balances held by individuals

D) all of the items

A) items 2, 3, 4, 6, 7, 8, and 10. listed.
B) items 3, 4, 5, and 6.
C) items 2, 3, 4, 6, 7, and 8.

86) Refer to the given list of assets. 9. Money market mutual

1. Large-denominated ($100,000 and over) time deposits 2. fund balances held by
Savings deposits businesses
3. Currency (coins and paper money) in circulation 10. Currency held in
4. Small-denominated (under $100,000) time deposits bank vaults
5. Stock certificates The assets that are not
6. Checkable deposits included in either M1 or
7. Money market deposit accounts M2 are
8. Money market mutual fund balances held by individuals

B) items 2, 5, 8,
A) items 1, 5, 9, and 10. and 9.

Version 1 24
 C) items 1, 3, 5, 7, and 9. M1 or M2).
D) all of the 10 items listed (i.e., none are included in

87) Refer to the given list of assets. 9. Money market mutual

1. Large-denominated ($100,000 and over) time deposits 2. fund balances held by
Savings deposits businesses
3. Currency (coins and paper money) in circulation 10. Currency held in
4. Small-denominated (under $100,000) time deposits bank vaults
5. Stock certificates Which of the following
6. Checkable deposits are considered to be near
7. Money market deposit accounts monies?
8. Money market mutual fund balances held by individuals

D) items 1, 5, and
A) items 2, 5, 8, and 9 10
B) all items except for 3
C) items 2, 4, 7, and 8

88) Time deposits of $100,000 or more are

D) not a
A) a component of M1. component of M1 or M2.
B) a component of M2 but not of M1.
C) a component of M1 but not of M2.

89) Currency held by banks is part of

D) neither the M1
A) both the M1 and M2 definitions of the money nor the M2 definition of
supply. the money supply.
B) the M2 definition of the money supply only.
C) the M1 definition of the money supply only.

90) The money supply is backed

of money and therefore to

A) by the government's ability to control the supply keep its value relatively

Version 1 25
stable. total value of dollars in
B) by government bonds. circulation.
C) dollar-for-dollar by gold and silver.
D) by gold reserves representing a fraction of the

91) Which of the following does not explain what backs

the money supply in the United States?

government.
A) It is backed by gold. D) It is relatively
B) It is widely accepted in transactions. scarce.
C) It is designated "legal tender" by the federal

92) Suppose that the federal government suddenly possible outcome of that
declared that wheat was to be used as money. What is a decision?

accept it in exchange for

A) The value of the "wheat dollar" would be unstable goods and services.
depending on crop yields from year to year. D) All of these are
B) Farmers would replace corn and soybean crops possible outcomes.
with wheat.
C) Wheat would function as money so long as people

93) The purchasing power of money and the price level

vary

D) directly and
A) inversely. proportionately.
B) directly during recessions but inversely during
inflations.
C) directly but not proportionately.

94) The value of money varies

C) directly with
A) inversely with the price level.
B) directly with the volume of employment.

Version 1 26
the price level.
D) directly with the interest rate.

Version 1 27
95) If the price index rises from 100 to 120, the
purchasing power value of the dollar

D) will rise by 20
A) may either rise or fall. percent.
B) will rise by one-sixth.
C) will fall by one-sixth.

96) If the price index rises from 200 to 250, the

purchasing power value of the dollar

D) will fall by 20
A) may either rise or fall. percent.
B) will rise by 25 percent.
C) will fall by 25 percent.

97) The purchasing power of the dollar

demand.
A) has been increasing in recent years because of D) is the
economic growth. reciprocal of the price
B) varies directly with the cost-of-living index. level.
C) is inversely related to the level of aggregate

98) During periods of rapid inflation, money may cease to

work as a medium of exchange

D) because people
A) unless it has been designated legal tender. and businesses will not
B) unless it is backed by gold. want to accept it in
C) because it is too scarce for everyone to have transactions.
enough for transactions.

99) Stabilizing a nation's price level and the purchasing

power of its money can be achieved

Version 1 28
 D) with neither
A) only with fiscal policy. fiscal nor monetary policy.
B) only with monetary policy.
C) with both fiscal and monetary policy.

100) Other things equal, an excessive increase in the money

supply will

dollar.
A) increase the purchasing power of each dollar. D) reduce the
B) decrease the purchasing power of each dollar. price level.
C) have no impact on the purchasing power of the

101) If P equals the price level expressed as an index

number and $V equals the value of the dollar, then

C) 1 = $V/ P.
A) P = $V −1. D) $V = P −1.
B) $V = 1/ P.

102)

Year Price Level Value of Dollar 4 0.50

1 1.00 $ 1.00
Refer to the given table.
2 1.25
The value of the dollar in
3 0.80 year 2 is

C) $0.80.
A) $1.25. D) $0.75.
B) $1.33.

103)

Year Price Level Value of Dollar 2 1.25

1 1.00 $ 1.00

Version 1 29
 3 0.80 Refer to the given table.
The value of the dollar in
4 0.50 year 3 is

C) $0.80.
A) $1.20. D) $1.10.
B) $1.25.

104)

Year Price Level Value of Dollar 4 0.50

1 1.00 $ 1.00
Refer to the given table.
2 1.25
The value of the dollar in
3 0.80 year 4 is

C) $0.50.
A) $1.50. D) $2.00.
B) $0.33.

105) The central authority of the U.S. banking system is the

D) Council of
A) Federal Open Market Committee (FOMC). Economic Advisers.
B) Board of Governors of the Federal Reserve.
C) Federal Monetary Authority.

106) The Federal Reserve System was created in

C) 1895.
A) 1926. D) 1913.
B) 1946.

107) In the U.S.

economy, the money
supply is controlled by the

Version 1 30
 D) Congress.
A) U.S. Treasury.
B) Federal Reserve System.
C) Senate Committee on Banking and Finance.

108) As it relates to Federal Reserve activities, the acronym

FOMC describes the

D) Federal
A) Federal Open Market Committee. Organization for Money
B) Federal Options Market Committee. Creation.
C) Federal Organization for Monetary Control.

109) The Federal Open Market Committee (FOMC) is

made up of

the Federal Reserve

A) the chair of the Board of Governors along with System along with the
the 12 presidents of the Federal Reserve Banks. president of the New York
B) the seven members of the Board of Governors Federal Reserve Bank and
along with the president of the New York Federal Reserve four other Federal Reserve
Bank. Bank presidents on a
C) the seven members of the Board of Governors of rotating basis.
the Federal Reserve System along with the three members of
the Council of Economic Advisers.
D) the seven members of the Board of Governors of

110) The group that sets the Federal Reserve System's

policy on buying and selling government securities (bills,
notes, and bonds) is the

D) Federal Open
A) Federal Deposit Insurance Corporation (FDIC). Market Committee
B) Federal Bond Sale Authority. (FOMC).
C) Council of Economic Advisers.

111) Approximately how many commercial banks are now operating in the United

Version 1 31
States?

C) about 8,500
A) about 7,300 D) about 6,800
B) about 4,600

112) Which one of the following is true about the U.S.

Federal Reserve System?

D) The Open
A) There are 12 regional Federal Reserve Banks. Market Committee is
B) The head of the U.S. Treasury also chairs the smaller in size than the
Federal Reserve Board. Federal Reserve Board.
C) There are 14 members of the Federal Reserve
Board.

113) The Board of Governors of the Federal Reserve has

____ members.

C) 9
A) 5 D) 14
B) 7

114) The members of the Federal Reserve Board

Federal Reserve Banks.

A) serve seven-year terms. D) are appointed
B) are appointed by the American Economic for 14-year terms.
Association.
C) are elected by votes of the 12 presidents of the

115) An important routine function of the Federal Reserve

Bank is to

correspondent
A) supervise the liquidation of the assets of bankrupt relationships with smaller
state banks. commercial banks.
B) help large commercial banks develop C) advise

Version 1 32
commercial banks as to the most profitable ways of thrift institutions may
reinvesting profits. collect checks.
D) provide facilities by which commercial banks and

116) Which of the following statements best describes the

12 Federal Reserve Banks?

and interest rates in

A) They are privately owned and privately controlled promoting the general
central banks whose basic goal is to provide an ample and economic welfare.
orderly market for U.S. Treasury securities. D) They are
B) They are privately owned and publicly controlled privately owned and
central banks whose basic function is to minimize the risks in publicly controlled central
commercial banking in order to make it a reasonably banks whose basic goal is
profitable industry. to earn profits for their
C) They are privately owned and publicly controlled owners.
central banks whose basic goal is to control the money supply

117) The seven members of the Board of Governors of the

Federal Reserve System are

D) appointed by
A) appointed by the president with the confirmation the presidents of the 12
of the Senate. Federal Reserve Banks.
B) elected by Congress from a slate of nominees
provided by the president.
C) appointed by the Senate Finance Committee.

118) To say that the Federal Reserve Banks are quasi-

public banks means that

public.
A) they are privately owned but managed in the D) they are
public interest. publicly owned but
B) they deal only with banks of foreign nations and privately managed.
do not have direct business contact with U.S. banks.
C) they deal only with commercial banks, and not the

Version 1 33
119) Which of the following is the basic economic policy
function of the Federal Reserve Banks?

D) collecting or
A) holding the deposits or reserves of commercial clearing checks among
banks commercial banks
B) acting as fiscal agents for the federal government
C) controlling the supply of money

120) The Federal Reserve System

D) is an agency of
A) has the same status as the Supreme Court. the executive branch of the
B) is basically an independent agency. federal government.
C) has the status of a congressional committee.

121) Studies show that

D) the more
A) the more independent the central bank, the lower independent the central
the average annual rate of inflation. bank, the higher the
B) the more independent the central bank, the higher average annual rate of
the average annual rate of inflation. unemployment.
C) there is no relationship between the degree of
independence of a country's central bank and its inflation rate.

122) Research suggests that

of its real GDP.

A) the more independent the central bank, the lower D) the less
the average annual growth of real GDP. independent the central
B) the more independent the central bank, the higher bank, the higher the
the average annual growth of real GDP. average annual rate of
C) there is no relationship between the degree of inflation.
independence of a country's central bank and the growth rate

Version 1 34
123) "Subprime mortgage loans" refer to

D) loans from the

A) high-interest-rate loans to home buyers with Federal Reserve to home
above-average credit risk. mortgage lenders to
B) home-buying loans that charge interest rates support a greater volume
below the prime interest rate. of home-buying loans at
C) loans to buyers of homes that are in need of affordable interest rates.
substantial repair.

124) What are "mortgage-backed securities"?

D) insurance
A) company stock shares for financial institutions against mortgage loan
that lend to home buyers defaults
B) bonds backed by mortgage payments
C) Treasury bills and savings bonds that banks sold
to maintain liquidity during the mortgage default crisis

125) When banks bundled mortgage loans and sold the

resulting mortgage-backed securities,

default risk but were still

A) they insulated the banking system from any risk exposed through loans to
associated with mortgage defaults. investors in mortgage-
B) they greatly reduced the overall risk of mortgage backed securities.
defaults.
C) buyers of these securities assumed all of the risk
of mortgage defaults.
D) they reduced their direct exposure to mortgage

126) Banks lost money during the mortgage default crisis

because

purchased from investment

A) of defaulted loans to investors in mortgage- firms.
backed securities. C) homebuyers
B) they held mortgage-backed securities they had defaulted on mortgages

Version 1 35
held by the banks.
D) of all of these reasons.

127) In the financial industry, "securitization" refers to

other financial debts into

A) increasing insurance protection on bank deposits. new securities.
D) increasing
B) requiring greater down payments on home collateral requirements on
purchases to reduce mortgage default risk. loans.
C) bundling groups of loans, bonds, mortgages, and

128) What does it mean when economists say that home

buyers are "underwater" on their mortgages?

higher than current market

A) Buyers owe more on their mortgage than the interest rates, creating
properties are worth. interest payments that
B) Buyers are financially incapable of repaying their create financial hardship.
mortgages and bankruptcy is inevitable.
C) Buyers are purchasing homes on flood plains and
are highly susceptible to financial losses.
D) Buyers are paying interest rates substantially

129) Which of the following statements is true about the

high rate of mortgage defaults that contributed to the financial
crisis of 2007–2008?

loans.
A) High interest rates on mortgage loans were the D) The high rate
primary cause of defaults. of defaults resulted
B) The high rate of defaults occurred despite the primarily from the two
efforts of government to discourage new home ownership and years of recession
slow the growth of the housing bubble. preceding the mortgage
C) Prior to the rise in defaults, banks had become lax default crisis.
in their lending practices, resulting in a large number of bad

Version 1 36
130) Which of the following financial institutions declared
bankruptcy as a result of the financial crisis of 2007–2008?

D) AIG
A) Merrill Lynch
B) Lehman Brothers
C) Goldman Sachs

131) Which of the following financial institutions was

acquired by Bank of America as a result of the financial crisis
of 2007–2008?

D) AIG
A) Merrill Lynch
B) Lehman Brothers
C) Goldman Sachs

132) TARP, created in 2008, stands for

D) Troubled Asset
A) Toxic Asset Relief Program. Relief Program.
B) Troubled Asset Recovery Plan.
C) Toxic Asset Reinvestment Policy.

133) How much did the U.S. Congress allocate to the

Troubled Asset Relief Program in 2008?

C) $787 billion
A) $170 billion D) $885 billion
B) $700 billion

134) Some economists are concerned that the financial

rescue provided by the TARP will encourage financial
investors and firms to take on greater risks in the future. This
is an example of

Version 1 37
 D) shadow
A) moral hazard. banking.
B) adverse selection.
C) a prisoner's dilemma.

135) Which of the following statements is true as a result of the financial crisis of
Federal Reserve efforts to rescue the financial industry from 2007–2008?

D) From February
A) From February 2008 to May 2009, the Fed 2008 to March 2009, Fed
oversaw the consolidation of 20 major financial institutions lending caused the U.S.
into fewer than a dozen. public debt to rise by over
B) From March 2008 to February 2009, the Fed $1 trillion.
experienced a 50 percent decline in the value of assets held.
C) From February 2008 to March 2009, Fed assets
more than doubled to nearly $2 trillion.

136) TARP and other lender-of-last-resort programs

implemented by the Fed in response to the financial crisis of
2007–2008

D) were designed
A) severely depleted the assets of the Federal to offset the moral hazard
Reserve. created by the TARP and
B) have been little used and therefore are ineffective. other bailout programs.
C) increased the moral hazard problem by limiting
losses from bad financial decisions.

137) The Federal Deposit Insurance Corporation (FDIC)

insures deposits in

D) securities firms
A) mutual fund companies and pension fund and insurance companies.
companies.
B) thrifts and insurance companies.
C) commercial banks and thrifts.

Version 1 38
138) (Consider This) Credit cards are

C) not money, as
A) the fastest-growing component of the M1 money officially defined.
supply. D) also known as
B) near monies that are part of the M2 money supply time deposits.
but not the M1 money supply.

139) (Consider This) Which of the following is not part of

the M2 money supply?

$100,000
A) currency in circulation D) checkable
B) credit card balances deposits
C) small-denominated time deposits of less than

140) (Consider This) Credit card balances are

D) not a
A) a component of M1. component of M1 or M2.
B) a component of M2 but not of M1.
C) a component of M1 but not of M2.

141) (Last Word) The Glass-Steagall Act of 1933:

jail."
A) encouraged the creation of large, interconnected D) separated high-
financial services firms. risk and low-risk financial
B) was a primary cause of the 2007-2008 financial activities across different
crisis and subsequent recession. firms.
C) created banks "too big to fail" and "too big to

142) (Last Word) After years of helping terrorist groups sanctions, HSBC bank
launder money, and aiding Iran and North Korea evade was:

reorganization.
A) fined about five weeks' worth of profits. C) dismantled by
B) taken over and run by the government, pending the government, with

Version 1 39
different sectors in the bank sold to other banks in the system. held criminally
D) fined nearly $1 trillion, and key executives were responsible.

143) (Last Word) The Assistant U.S. Attorney General in

charge of prosecuting financial crimes did which of the
following in response to HSBC bank's years of money
laundering and helping firms and individuals cheat on their
taxes?

D) Imposed
A) Imposed fines on HSBC and prosecuted key sanctions based on the
executives so as to diminish moral hazard in the financial provisions of the 2010
services industry. Wall Street Reform and
B) Filed an antitrust lawsuit so as to break up HSBC Consumer Protection Act.
without disrupting the financial system.
C) Imposed only modest fines on HSBC so as not to
destabilize the bank and the financial system.

144) The functions of money are to serve as a

government spending.
A) resource allocator, method for accounting, and D) factor of
means of income distribution. production, exchange, and
B) unit of account, store of value, and medium of aggregate supply.
exchange.
C) determinant of consumption, investment, and

145) When a consumer wants to compare the price of one

product with another, money is primarily functioning as a

D) medium of
A) store of value. exchange.
B) unit of account.
C) checkable deposit.

146) When a banker records how many dollars each of his borrowers owes the bank,

Version 1 40
money is serving as

D) legal tender.
A) a store of value.
B) a unit of account.
C) a medium of exchange.

147) What function is money serving when you deposit

money in a savings account?

D) a medium of
A) a store of value exchange
B) a unit of account
C) a checkable deposit

148) What function is money serving when you use it when

you go shopping?

D) a medium of
A) a store of value exchange
B) a unit of account
C) a medium of deferred payment

149) Which of the following functions of money enables

society to gain the benefits of geographic and labor
specialization?

D) medium of
A) unit of account deferred payment
B) store of value
C) medium of exchange

150) If product prices were stated in terms of marbles, then

marbles would be functioning primarily as

C) a store of
A) fiat money.
B) legal tender.

Version 1 41
value.
D) a unit of account.

Version 1 42
151) Money functions as a store of value if it allows you to

D) increase your
A) measure the value of goods in a reliable way. confidence in money.
B) make exchanges in a more efficient manner.
C) delay purchases until you want the goods.

152) One major advantage of money serving as a medium

of exchange is that it allows society to

D) use credit
A) transfer purchasing power from the present to the cards instead of currency.
future.
B) measure the relative worth of products.
C) escape the complications of barter.

153) An asset's liquidity refers to its ability to be

D) a means of
A) bought and stored. payment.
B) increasing in value over time.
C) used and enjoyed.

154) Which one of the following is considered to be a

"stock" rather than a "flow" variable?

C) wages
A) income D) profits
B) money

155) The M1 money supply is composed of

C) bank deposits
A) all coins and paper money held by the general
public and the banks.
B) bank deposits of households and business firms.

Version 1 43
and mutual funds.
D) checkable deposits and currency in circulation.

Version 1 44
156) The currency, or money, of the United States, like
those of other countries, is

C) token money.
A) commodity money. D) deposit money.
B) intrinsic money.

157) The paper money, or currency, in the United States

essentially represents

D) a debt of the
A) a debt of commercial banks and savings Federal Reserve System.
institutions.
B) a debt of the U.S. Treasury.
C) an asset of the Federal government.

158) Checkable deposits are

agencies.
A) debts of commercial banks and savings D) assets of
institutions. commercial banks and
B) debts of the Federal government and government savings institutions.
agencies.
C) assets of the Federal government and government

159) Currency and checkable deposits are

worth of money.
A) assets of the Federal Reserve Banks or of D) the major
financial institutions. components of money
B) redeemable for gold and silver from the Federal supply M1.
Reserve System.
C) of intrinsic value, which determines the relative

160) The paper currencies of the United States are also

called

Version 1 45
 D) Treasury
A) Federal Reserve notes. bonds.
B) Treasury bills.
C) U.S. Government notes.

161) As of March 2019, more than half of the money

supply (M1) was in the form of

D) savings
A) currency. deposits.
B) checkable deposits.
C) gold coins and bars.

162) Which of the following institutions does not provide

checkable-deposit services to the general public?

C) U.S. Treasury
A) commercial banks D) credit unions
B) savings and loan associations

163) Which definition(s) of the money supply include(s)

only items that are directly and immediately usable as a
medium of exchange?

D) M1 and M2
A) M1
B) M2
C) neither M1 nor M2

164) Money supply M1 does not include the currency held

by

D) state and local

A) households in their wallets or purses. governments.
B) business firms.
C) commercial banks.

Version 1 46
165) Which of the following is included as part of the M1 money supply?

U.S. Treasury
A) $200,000 balance in the checking account of D) $200 million in
Main Street Trading Corp. the vaults of the Federal
B) $200,000 in reserves held by Main Street Reserve Banks
Commercial Bank in its vaults
C) $2 million balance in the checking account of the

166) Joe deposits $200 in currency into his checking

account at a bank. This deposit is treated as

D) no change in
A) a subtraction of $200 from the money supply the money supply because
because the $200 in currency is no longer in circulation. the $200 in currency has
B) an addition of $200 to the money supply because been converted to a $200
of the creation of a checkable deposit of $200. increase in checkable
C) an addition of $200 to the money supply because deposits.
the bank holds $200 in currency and the checking account has
been increased by $200.

167) Which of the following would be considered to be the

most liquid?

D) savings
A) checkable deposits deposits
B) small time deposits
C) money market mutual funds

168) Which of the following items are included in money

supply M2 but not M1?

D) checkable
A) Federal Reserve notes deposits
B) coins
C) savings deposits

Version 1 47
169) As of March 2019, M1 accounted for roughly what percentage of M2?

C) 50 percent
A) 10 percent D) 75 percent
B) 25 percent

170) Checkable deposits are included in

D) neither M1 nor
A) M1 but not in M2. M2.
B) M2 but not in M1.
C) both M1 and M2.

171)

Item Billion Market Deposit 6

s of Accounts
Dollars Money-Market 9
Checkable Deposits $ Mutual Funds
597 Held by
Small Time Deposits 818 Individuals
Currency 639 Refer to the accompanying
Money-Market Mutual Funds Held by 1,0 table. The size of the M1
Businesses 45 money supply is
Savings Deposits, Including Money- 2,8

C) $1,415 billion.
A) $979 billion. D) $1,618 billion.
B) $1,236 billion.

172)

Item Billion Currency 6

s of Money-Market 1
Dollars Mutual Funds
Checkable Deposits $ Held by
598 Businesses
Small Time Deposits 818 Savings 2

Version 1 48
 Deposits, Including Money-Market Refer to the accompanying
Deposit Accounts table. The size of the M1
Money-Market Mutual Funds Held by 979 money supply is
Individuals

C) $644 billion.
A) $1,242 billion. D) $2,060 billion.
B) $598 billion.

173)

Item Billion Market Deposit 6

s of Accounts
Dollars Money-Market 9
Checkable Deposits $ Mutual Funds
597 Held by
Small Time Deposits 818 Individuals
Currency 639 Refer to the accompanying
Money-Market Mutual Funds Held by 1,0 table. The size of the M2
Businesses 45 money supply is
Savings Deposits, Including Money- 2,8

C) $5,899 billion.
A) $2,054 billion. D) $6,792 billion.
B) $2,696 billion.

174)

Item Billion Market Deposit 6

s of Accounts
Dollars Money-Market 9
Checkable Deposits $ Mutual Funds
597 Held by
Small Time Deposits 618 Individuals
Currency 639
Money-Market Mutual Funds Held by 1,0
Businesses 45
Savings Deposits, Including Money- 2,8

Version 1 49
Refer to the accompanying table. The size of the M2 money supply is

C) $4,720 billion.
A) $5,699 billion. D) $6,744 billion.
B) $2,833 billion.

175)

Item Billion 6
s of Money-Market 9
Dollars Mutual Funds
Checkable Deposits $ Held by
597 Individuals
Small Time Deposits 818 Refer to the accompanying
Currency 639 table. The value of the
Money-Market Mutual Funds Held by 1,0 money included in M2 but
Businesses 45 not counted in M1 is
Savings Deposits, Including Money- 2,8
Market Deposit Accounts

C) $2,886 billion.
A) $1,457 billion. D) $4,663 billion.
B) $4,442 billion.

176)

Item Billion Refer to the accompanying

s of table. The value of the
Dollars money included in M2 but
Checkable Deposits $ not counted in M1 is
597
Small Time Deposits 818
Currency 639
Money-Market Mutual Funds Held by 1,0
Businesses 45
Savings Deposits, Including Money- 2,8
Market Deposit Accounts 66
Money-Market Mutual Funds Held by 965
Individuals

Version 1 50
 C) $2,866 billion.
A) $4,649 billion. D) $5,694 billion.
B) $818 billion.

177) Items
1. Money market mutual funds held by individuals
2. Savings deposits, including money market deposit
accounts
3. Money market mutual funds held by businesses
4. Currency held by the public
5. Small time deposits
6. Checkable deposits
Refer to the accompanying list. The M1 money supply is
composed of items

C) 6 and 7.
A) 5 and 6. D) 1 and 4.
B) 4 and 6.

178) Items 5. Small time deposits

1. Money market mutual funds held by individuals 6. Checkable deposits
2. Savings deposits, including money market deposit Refer to the
accounts accompanying list. The M2
3. Money market mutual funds held by businesses money supply is composed
4. Currency held by the public of items

C) 1, 2, 4, and 6.
A) 1, 2, 3, 4, 5, and 6. D) 2, 4, 5, and 6.
B) 1, 2, 4, 5, and 6.

179) Items
1. Money market mutual
funds held by individuals
2. Savings deposits,
including money market
deposit accounts
3. Money market mutual
funds held by businesses

Version 1 51
 4. Currency held by the public the M2 money supply but
5. Small time deposits not the M1 money supply?
6. Checkable deposits
Refer to the accompanying list. Which items are included in

C) 1 and 2
A) 1 and 7 D) 1, 2, and 5
B) 3 and 5

180)

Item Billion Individuals

s of Money-Market 7
Dollars Mutual Funds
Checkable Deposits $ Held by
2,0 Businesses
00 The accompanying table
Small Time Deposits 350 contains hypothetical data
Currency Held by the Public 80 for an economy. The size
Savings Deposits, Including Money- 1,3 of the M1 money supply is
Market Deposit Accounts 00
Money-Market Mutual Funds Held by 600

C) $2,220 billion.
A) $1,940 billion. D) $2,730 billion.
B) $2,080 billion.

181)

Item Billion Money-Market 6

s of Mutual Funds
Dollars Held by
Checkable Deposits $ Individuals
2,1 Money-Market 7
80 Mutual Funds
Small Time Deposits 350 Held by
Businesses
Currency Held by the Public 80
Savings Deposits, Including Money- 1,3
Market Deposit Accounts 00

Version 1 52
The accompanying table contains hypothetical data for an
economy. The size of the M1 money supply is

D) $2,860 billion.
A) $2,260 billion. E) $2,610 billion.
B) $2,180 billion.
C) $80 billion.

182)

Item Billion Individuals

s of Money-Market 7
Dollars Mutual Funds
Checkable Deposits $ Held by
2,0 Businesses
00 The accompanying table
Small Time Deposits 350 contains hypothetical data
Currency Held by the Public 80 for an economy. The size
Savings Deposits, Including Money- 1,3 of the M2 money supply is
Market Deposit Accounts 00
Money-Market Mutual Funds Held by 600

C) $4,330 billion.
A) $3,730 billion. D) $4,470 billion.
B) $3,980 billion.

183)

Item Billion Individuals

s of Money-Market 7
Dollars Mutual Funds
Checkable Deposits $ Held by
2,0 Businesses
00
Small Time Deposits 400
Currency Held by the Public 80
Savings Deposits, Including Money- 1,3
Market Deposit Accounts 00
Money-Market Mutual Funds Held by 600

Version 1 53
The accompanying table contains hypothetical data for an
economy. The size of the M2 money supply is

C) $3,780 billion.
A) $4,380 billion. D) $3,080 billion.
B) $1,300 billion.

184) The so-called near monies have the following

characteristics, except

D) readily
A) highly liquid assets. converted into cash.
B) not a means of payment.
C) part of money supply M1.

185) Michelle transfers $4,000 from her savings account to

her checking account. What effect is this change likely to
have on M1 and M2?

D) M2 increases
A) M1 decreases and M2 increases and M1 stays the same
B) M1 increases and M2 decreases
C) M1 increases and M2 stays the same

186) One reason that near monies are important is because

D) credit cards
A) they simplify the definition of money and synchronize one's
therefore the formulation of monetary policy. expenditures and income,
B) they can be easily converted into money or vice thereby reducing the cash
versa, and thereby can influence the stability of the economy. and checkable deposits one
C) they do not reflect the level of consumer spending must hold.
but they have a critical impact on saving and investment in
the economy.

187) (Consider This) The use of a credit card is most

similar to

Version 1 54
 D) obtaining a
A) paying with a check. short-term loan.
B) an ACH (automatic clearinghouse) transaction.
C) purchasing a certificate of deposit.

188) The use of a debit card is most similar to

D) obtaining a
A) paying with a check. short-term loan.
B) using a stored-value card.
C) using currency.

189) (Consider This) One major advantage of credit cards

used for transactions is that they

D) allow
A) offer discounts on most transactions. consumers to coordinate
B) charge a lower interest rate than other means of timing and payment for
payment. purchases.
C) give consumers the lowest prices on products
purchased.

190) (Consider This) Which of the following is not true

about the use of a credit card?

M1.
A) It is a means of deferring payment for a short D) A credit card
period of time. transaction is not the same
B) It allows people to "economize" on the use of as a debit card transaction.
money.
C) Credit card balances are part of M2 but not part of

191) Which of the following "backs" the value of money in

the United States?

New York
A) the gold stored in the Federal Reserve Bank of B) the

Version 1 55
acceptability of it as a medium of exchange government
C) the willingness of foreign governments to hold
U.S. dollars
D) the size of the budget surplus in the U.S.

192) United States currency has value primarily because it

generally acceptable in
A) is legal tender, is generally acceptable in exchange for goods and
exchange for goods or services, and is backed by the gold and services.
silver of the Federal government. D) facilitates
B) is generally acceptable in exchange for goods or trade, is legal tender, and
services, is backed by the gold and silver of the federal permits the use of credit
government, and facilitates trade. cards and near monies.
C) is relatively scarce, is legal tender, and is

193) The federal backing for money in the United States

comes from

value of money relatively

A) providing sufficient quantities of precious metals, stable over time.
such as gold and silver, to cover the amount of paper money D) protecting
in circulation. checkable deposits at
B) pledging physical assets, such as land, natural financial institutions with
resources, and public buildings, as collateral for outstanding deposit guarantees.
currency.
C) controlling the money supply in order to keep the

194) What "backs" the money supply of the United States?

Reserve System
A) the U.S. government's ability to keep the value of D) the fact that the
money relatively stable intrinsic value of coins in
B) the amount of gold the U.S. government has on circulation is greater than
deposit at its banks their face value
C) the fact that currency is issued by the Federal

Version 1 56
195) Money in the U.S. is essentially debt of

D) businesses and
A) businesses and the banks. the Federal Reserve
B) the Federal Reserve System and the banks. System.
C) the national and local governments.

196) The basic requirement for an item to function as

money is that it be

D) some form of
A) backed by precious metals—gold or silver. debt or credit.
B) authorized as legal tender by the central
government.
C) generally accepted as a medium of exchange.

197) Checkable deposits are money because they are

D) token money.
A) legal tender.
B) fiat money.
C) acceptable as payment.

198) When paper money is designated as legal tender, it

means that

D) it will be
A) it is printed by the government. accepted by the
B) its supply is controlled by the government. government.
C) it is a means of payment by law.

199) When there is inflation in the economy, it implies that

the

money is also falling.

A) price index is rising and the purchasing power of C) price index is
money is also rising. falling and the purchasing
B) price index is falling and the purchasing power of power of money is rising.

Version 1 57
 D) price index is rising and the purchasing power of money is falling.

200) If the price index rises from 100 to 130, then the
purchasing power of the dollar will fall by about

C) 23 percent.
A) 15 percent. D) 30 percent.
B) 19 percent.

201) If the price index rises from 100 to 115, then the
purchasing power of the dollar will fall by about

D) 15 percent.
A) 13 percent. E) 100 percent.
B) 10 percent.
C) 23 percent.

202) If the purchasing power of the dollar is falling, then it

follows that

D) interest rates
A) the price index is falling. are rising.
B) the price index is rising.
C) nominal incomes are falling.

203) The purchasing power of the dollar would fall by 20

percent if the price index rises by

C) 25 percent.
A) 10 percent. D) 44 percent.
B) 12.5 percent.

204) An inflation rate of 8 percent would erode the

purchasing power of the dollar by

Version 1 58
 C) 4.4 percent.
A) 8.0 percent. D) 12.5 percent.
B) 7.4 percent.

205) An inflation rate of 6 percent would erode the

purchasing power of the dollar by

C) 6.
A) 5.7. D) 16.7.
B) 3.3.

206) To keep high inflation from eroding the value of

money, monetary authorities in the United States

D) control the
A) create token money that is less than its intrinsic supply of money in the
value. economy.
B) make paper money legal tender for the payment of
debt.
C) establish insurance on checkable deposit accounts.

207) The Federal Reserve Banks are owned by the

D) private
A) federal government. commercial banks within
B) Board of Governors. each district.
C) United States Treasury.

208) The Federal Reserve System consists of which of the

following?

Engraving and Printing

A) Federal Open Market Committee and Office of D) Board of
Thrift Supervision Governors and the 12
B) Federal Deposit Insurance Corporation and Federal Reserve Banks
Controller of the Currency
C) U.S. Treasury Department and Bureau of

Version 1 59
209) How many members can serve on the Board of
Governors of the Federal Reserve System?

C) 12
A) 7 D) 14
B) 9

210) The Federal Reserve System was established by the

Federal Reserve Act of

C) 1945.
A) 1913. D) 1955.
B) 1933.

211) The Federal Reserve System of the United States is

the country's

D) deposit
A) financial adviser. insurance provider.
B) comptroller or accountant.
C) central bank.

212) Which of the following is not true about the Federal

Reserve Banks?

profits.
A) They serve as bankers' banks. D) They compete
B) They are privately owned but government with commercial banks in
controlled. their basic functions.
C) Unlike other banks, they are not motivated by

213) Members of the Federal Reserve Board of Governors

are

terms.
A) appointed by Congress to staggered 14-year B) selected by the

Version 1 60
Federal Open Market Committee for 4-year terms. 4-year terms.
C) appointed by the president to staggered 14-year
terms.
D) selected by each of the Federal Reserve banks for

214) Which group aids the Board of Governors of the

Federal Reserve System in conducting monetary policy?

D) Federal Open
A) U.S. Treasury Market Committee
B) U.S. Congress
C) Federal Advisory Council

215) The Federal Open Market Committee (FOMC).

D) follows the
A) provides advice on banking stability to the Fed. actions and operations of
B) monitors regulatory banking laws for member financial markets to keep
banks. them open and
C) sets policy on the sale and purchase of competitive.
government bonds by the Fed.

216) The Federal Open Market Committee (FOMC) of the

Federal Reserve System is primarily for

D) setting the
A) maintaining cash reserves that can be used to Fed's monetary policy and
settle international transactions. directing the purchase and
B) supervising banks to make sure that markets are sale of government
open to all and remain competitive. securities.
C) issuing currency and acting as the fiscal agent for
the Federal government.

217) The 12 Federal Reserve Banks can best be

characterized as

A) central banks,

Version 1 61
bankers’ banks, and quasi-public banks. D) national banks,
B) regional banks, public banks, and member banks. quasi-public banks, and
C) investment banks, bankers’ banks, and public investment banks.
banks.

218) The most important among the Federal Reserve

district banks in conducting monetary policy is the

D) San Francisco
A) Boston bank. bank.
B) Chicago bank.
C) New York bank.

219) The Federal Reserve System is divided into

C) 12 districts.
A) 5 districts. D) 15 districts.
B) 7 districts.

220) Holding the money deposits of businesses and

households and making loans to the public are the basic
functions of

D) the Federal
A) the district banks of the Federal Reserve System. Deposit Insurance
Corporation and the
B) commercial banks and thrift institutions. Federal Savings and Loan
C) the Federal Open Market Committee and the Insurance Corporation.
Board of Governors.

221) When the Fed acts as a "lender of last resort," as it did

in the financial crisis of 2007-2008, it is performing its role of

D) providing for
A) controlling the money supply. check clearing and
B) setting the reserve requirements. collection.
C) being a bankers' bank.

Version 1 62
222) Which group is responsible for the policy decision of
changing the money supply?

D) Federal
A) Federal Open Market Committee Advisory Council
B) Office of Management and Budget
C) Thrift Advisory Council

223) The main function of the Federal Reserve System is to

D) control the
A) serve as the fiscal agent for the federal money supply.
government.
B) set reserve requirements of banks.
C) clear checks from member banks.

224) The Federal Reserve System performs many

functions, but its most important one is

D) acting as fiscal
A) issuing currency. agent for the U.S.
B) controlling the money supply. government.
C) providing for check clearing and collection.

225) The Federal Reserve System performs the following

functions except

government.
A) issuing the paper currency in the economy. D) lending money
B) providing banking services to the general public. to banks and thrifts.
C) providing financial services to the federal

226) The Federal Reserve System is an

B) agency that is
A) agency that is controlled by Congress. under the direction of the

Version 1 63
president. D) agency run by
C) independent agency of government. popularly elected officials.

227) The reason for the Fed being set up as an independent

agency of government is to

D) let it be able to
A) protect it from political pressure. compete with other
B) allow it to earn profits like private firms. financial institutions.
C) make it be managed and controlled by member
banks.

228) Economic studies suggest there is

annual rate of inflation.

A) a positive relationship between the degree of D) a positive
independence of the central bank and the size of the average relationship between the
annual rate of inflation. degree of independence of
B) an inverse relationship between the degree of the central bank and the
independence of the central bank and the size of the average size of the central bank.
annual rate of inflation.
C) no relationship between the degree of
independence of the central bank and the size of the average

229) The Financial Crisis of 2007–2008 started in which

sector of the economy?

D) real estate and

A) foreign trade sector housing sector
B) consumer durables sector
C) dot-com and technology sector

230) The major wave of defaults on home mortgages in

2007 destabilized

A) only the banks

Version 1 64
that directly made the mortgage loans. D) mostly large
B) only the mortgage brokers, not the commercial banks, but not too many
banks. small ones.
C) many banks, including those that made the loans
indirectly.

231) Which of the following is not true about subprime

mortgage loans?

D) They were
A) They played a central role in the financial crisis of considered high-risk loans
2007–2008. because the borrowers had
B) They were encouraged by the Federal government poor credit ratings.
for many years before the financial crisis.
C) They had always been discouraged by the
government and even banned in some cases.

232) When a bank's loans are written off, then the bank's

D) assets stay the

A) ability to make more new loans increases. same, while its liabilities
B) ability to make new loans is restricted. grow.
C) assets will grow, while its liabilities stay the same.

233) Which of the following is not true about so-called

mortgage-backed securities?

many financial institutions.

A) Before the crisis, they were believed by many D) Their use was
banks to be a way of reducing loan risks. strongly discouraged by
B) Before the crisis, they played a major role in the Federal government.
broadening home ownership in America.
C) They were links that spread instability across

234) Which of the following is not one of the causes of the financial crisis in 2007–
skyrocketing mortgage default rates that triggered the 2008?

Version 1 65
 D) Real estate
A) Mortgage lending became very lax. values started declining
B) Many people took on mortgages that they were after having risen for many
simply incapable of repaying. years.
C) Housing prices increased drastically.

235) The destabilizing effects of defaulting mortgages mortgages were involved

quickly spread throughout the financial system because those in widespread

D) real-balance
A) diversification. effects.
B) securitization.
C) multiplier effects.

236) The bailout money that went to giant financial the Great Recession, came
institutions like Citibank and Goldman Sachs, along with from the
General Motors and Chrysler, during the financial crisis and

D) Term
A) American Recovery and Reinvestment Act. Securities Lending
B) Troubled Assets Relief Program. Facility.
C) Primary Dealer Credit Facility.

237) The government bailout of large institutions creates

the problem of moral hazard, which means that these large
firms will

D) be limited in
A) not be able to pay back the bailout money. terms of the securities and
B) have an incentive to make highly risky services that they get
investments. involved in.
C) now have to play it safer to reduce their risks.

238) The so-called moral hazard problem refers to one's

tendency to

A) buy less of

Version 1 66
something if one does not have good information about it. D) take on greater
B) avoid something that is considered risky or risk if one is at least partly
hazardous. insured against losses.
C) get insurance against some possible hazard or
danger.

239) During the Financial Crisis of 2007–2008, Goldman bank holding companies in
Sachs, Morgan Stanley, and other financial firms with heavy order to
exposure to the mortgage-related problems rushed to become

D) acquire funds
A) follow the order of the U.S. Treasury. from the general public.
B) obtain bailout money from Congress.
C) get massive loans from the Fed.

240) "Thrifts" refers to the following institutions except

D) savings and
A) commercial banks. loan associations.
B) credit unions.
C) mutual savings banks.

241) The Bureau of Consumer Financial Protection was

created in 2010 to become part of the

D) Office of the
A) U.S. Treasury Department. President.
B) Federal Reserve System.
C) Department of Commerce.

242) If a firm possesses assets whose value exceeds the

value of its debts, the firm is said to be

C) solvent.
A) insolvent. D) liquid.
B) illiquid.

Version 1 67
243) Theoretically, during a financial crisis, the Fed is
supposed to act as a lender of last resort to

D) insolvent
A) all insolvent banks. banks that are highly
B) insolvent banks that are illiquid. liquid.
C) solvent banks that are illiquid.

244) In practice, during a financial crisis, the Fed and other "Extend and pretend"
central banks are under pressure to adopt an "extend and refers to extending loans
pretend" policy, in order to contain the wave bankruptcies.

D) to firms and
A) only to financial firms that are solvent, as long as then pretending that the
the firms could pledge enough assets. loans are being repaid
B) to financial firms, both solvent and insolvent, as when they become due.
long as the firms could pledge enough assets.
C) to financial firms in need of liquidity, regardless
of whether the firms pledge enough assets or not.

245) During a financial crisis, the Fed and other central consequence of this
banks often adopt an "extend and pretend" policy in their policy?
emergency lending activities. Which of the following is not a

well-deserved
A) It limits the potential for insolvent banks to drag bankruptcies.
down the solvent ones as well. D) It increases the
B) It enhances the moral-hazard problem going chances of the Fed itself
forward; banks will be more likely to engage in risky (or another central bank)
behavior. being dragged into its own
C) It allows many poorly managed firms that have bankruptcy crisis.
become insolvent due to making bad investments to avoid

246)

Money Market Mutual Fund Balances $ Held by

Held by Businesses 100 Individuals
Money Market Mutual Fund Balances 220 Currency in 1

Version 1 68
 Banks less) Time
Currency in Circulation 40 Deposits
Savings Deposits, Including Money 50 Checkable 7
Market Deposit Accounts Deposits
Large-denominated ($100,000 or 180 Refer to the table. Money
more) Time Deposits supply M1 for this
Small-denominated ($100,000 or 80 economy is

C) $70.
A) $110. D) $120.
B) $40.

247) If the price index rises from 100 to 115, then the
purchasing power of the dollar will fall by about

D) 15 percent.
A) 13 percent. E) 100 percent.
B) 10 percent.
C) 23 percent.

ESSAY. Write your answer in the space provided or on a

separate sheet of paper.
248) What is money? Explain in terms of the functions of
money.

249) Define liquidity. Provide an example of a highly liquid

and highly illiquid asset.

Version 1 69
250) What is a key advantage of money over other financial
assets such as stocks, bonds, precious metals, or real estate?

251) What are the two major components of the M1 money

supply?

252) Why are today's coins not made of precious metals?

253) What is a commercial bank? What kinds of loans do

they provide?

254) What is the difference between the M1 and M2

definitions of the money supply?

Version 1 70
255) Explain the difference between a money-market
deposit account and a money-market mutual fund.

256) (Consider This) Are credit cards money? Explain.

257) Discuss three major points about what gives money its
value.

258) What does it mean that a currency has been designated

legal tender? How important is this designation?

259) State the formula for the relationship between the

purchasing power of the U.S. dollar and the price level.

Version 1 71
260) How do high rates of inflation affect the acceptability
of a nation’s currency?

261) Describe the three major units of the Federal Reserve

System and their functions.

262) How do long terms for appointments benefit the

Federal Reserve’s Board of Governors?

263) What is the main purpose of the Federal Open Market

Committee (FOMC)?

264) What are the seven functions of the Federal Reserve

System? Which one is most important?

Version 1 72
265) What were the main factors that led to the mortgage
default crisis?

266) What did the Federal Reserve do during the financial

crisis of 2007 and 2008?

267) What is the Wall Street Reform and Consumer

Protection Act?

Version 1 73
Answer Key

Test name: Chap 14_22e_Macro_Static

1) TRUE
2) FALSE
3) TRUE
4) FALSE
5) FALSE
6) FALSE
7) FALSE
8) FALSE
9) FALSE
10) FALSE
11) FALSE
12) FALSE
13) FALSE
14) FALSE
15) TRUE
16) FALSE
17) FALSE
18) TRUE
19) FALSE

Version 1 74
20) TRUE
21) TRUE
22) FALSE
23) FALSE
24) TRUE
25) FALSE
26) FALSE
27) TRUE
28) TRUE
29) FALSE
30) FALSE
31) TRUE
32) TRUE
33) FALSE
34) FALSE
35) TRUE
36) FALSE
37) FALSE
38) B
39) D
40) C

Version 1 75
41) B
42) A
43) A
44) B
45) C
46) B
47) C
48) A
49) D
50) A
51) D
52) A
53) B
54) B
55) B
56) C
57) D
58) D
59) C
60) D
61) B

Version 1 76
62) A
63) B
64) C
65) B
66) D
67) B
68) D
69) B
70) B
71) B
72) A
73) B
74) A
75) C
76) C
77) B
78) C
79) A
80) A
81) A
82) C

Version 1 77
83) A
84) C
85) C
86) A
87) C
88) D
89) D
90) A
91) A
92) D
93) A
94) A
95) C
96) D
97) D
98) D
99) C
100) B
101) B
102) C
103) B

Version 1 78
104) D
105) B
106) D
107) B
108) A
109) D
110) D
111) B
112) A
113) B
114) D
115) D
116) C
117) A
118) A
119) C
120) B
121) A
122) D
123) A
124) B

Version 1 79
125) D
126) D
127) C
128) A
129) C
130) B
131) A
132) D
133) B
134) A
135) C
136) C
137) C
138) C
139) B
140) D
141) D
142) A
143) C
144) B
145) B

Version 1 80
146) B
147) A
148) D
149) C
150) D
151) C
152) C
153) D
154) B
155) D
156) C
157) D
158) A
159) D
160) A
161) B
162) C
163) A
164) C
165) A
166) D

Version 1 81
167) A
168) C
169) B
170) C
171) B
172) A
173) C
174) A
175) D
176) A
177) B
178) B
179) D
180) B
181) A
182) C
183) A
184) C
185) C
186) B
187) D

Version 1 82
188) A
189) D
190) C
191) B
192) C
193) C
194) A
195) B
196) C
197) C
198) C
199) D
200) C
201) A
202) B
203) C
204) B
205) A
206) D
207) D
208) D

Version 1 83
209) A
210) A
211) C
212) D
213) C
214) D
215) C
216) D
217) A
218) C
219) C
220) B
221) C
222) A
223) D
224) B
225) B
226) C
227) A
228) B
229) D

Version 1 84
230) C
231) C
232) B
233) D
234) C
235) B
236) B
237) B
238) D
239) C
240) A
241) B
242) C
243) C
244) B
245) D
246) A
247) A
248) Money is whatever performs the three measuring the
basic functions of money. It is a medium of monetary cost of
exchange for buying and selling goods and goods and services.
services. It serves as a unit of account for It is a store of value

Version 1 85
so people can transfer purchasing power from
the present to the future.
249) Liquidity is the ease with which an asset are a substantial
can be converted quickly into cash with little number of fees
or no loss of purchasing power. It can be associated with the
concluded from this definition that cash is the sale of a house and
most liquid asset available in our economy. these fees generate a
On the other hand, a house is an example of a loss of purchasing
very illiquid asset. Houses are illiquid because power.
they may take time to sell and because there
250) A key advantage of money, especially in money without
its cash form, is that it is widely accepted and losing purchasing
easy to use for transactions. Other assets, such power is a measure
as stocks, bonds, precious metals, or real of the liquidity of an
estate must first be converted to money before asset.
they can be used to make purchases. The ease
with which such assets can be converted to
251) The narrowest definition of the U.S. transfer ownership
money supply is called M1, which has two of deposits to others
principal components. One component is by writing checks;
currency: It consists of coins that are token these checks are
money, which means the value of the metal in generally accepted
the coin is less than the face value of the coin. as a medium of
It also consists of paper money in the form of exchange.
Federal Reserve Notes. The other component
is checkable deposits: They allow a person to
252) If coins were made of precious metals, selling them for the
then people would be melting them down and intrinsic value of the

Version 1 86
metal. Governments make sure that the face from as scrap metal
value exceeds the intrinsic value so that or scrap paper.
people do not deconstruct coins and bills in
order to resell the materials they are made
253) A commercial bank is a firm that they finance
engages in the business of banking (accepts consumer purchases
deposits, offers checking accounts, and makes of automobiles and
loans). They are the primary depository other durable goods.
institutions. Commercial bank loans provide
short-term financial capital to businesses, and
254) M1 is the most liquid form of money and including money
consists of currency and checkable deposits market deposit
and is used mainly for transaction purposes. accounts, small time
M2 includes M1 plus several near monies. deposits, and money
Near monies are slightly less liquid forms of market mutual
money consisting of saving account deposits funds.
255) A money-market deposit account shareholders; the
(MMDA) is an interest-bearing account depositors are only
containing a variety of interest-bearing short- individuals, not
term securities. They have a minimum balance businesses or other
requirement and a limit on how often a person institutions. The
can withdraw funds. A money-market mutual depositors can write
fund (MMMF) is offered by a mutual fund checks against their
company and uses the combined deposits of deposits for a
shareholders to buy interest-bearing short- minimum amount or
term securities like CDs and U.S. government more.
securities. Then they offer interest to their
256) No, credit cards are not money. They are simply a convenient

Version 1 87
means of obtaining a short-term loan for
buying things. At some point that loan must be
paid with money (checks or currency).
257) Money gets its value because it is money is relatively
acceptable as a means of payment; we accept scarce; this means
currency because we are confident we can use that money derives
it in exchange for goods, services, and its value from its
resources. A second major point is that money scarcity relative to
is designated as legal tender; this means that its utility (its want-
the government has designated it as a valid satisfying power).
and legal means of paying any debt that was
contracted in dollars. The third point is that
258) A currency that is designated legal tender sometimes insure
means that the government has stated the deposits at
paper money is a valid and legal means of commercial banks
payment of any debt that was contracted in and thrifts,
that currency. Public acceptance of currency is furthering the
more important than the government acceptance by the
designation, but government agencies general public.
259) $V = 1/P, where V is the value of the because people need
dollar and P is the price level. The purchasing fewer dollars to
power of money is the amount of goods and obtain some specific
services a unit of money will buy. Higher quantity of goods
prices decrease the dollar’s value because and services.
people need more dollars to buy a particular
amount of goods, services, or resources and
lower prices increase the dollar’s value
260) High rates of inflation reduce the purchasing power of

Version 1 88
a nation’s currency. Runaway inflation may losing value while
significantly decrease the value of money "stored," and money
between the time it is received and the time it does not perform
is spent. Rapid declines in a currency’s value the unit of account
may cause people and businesses to reject it as function well either
a medium of exchange. They may look for since it is difficult
alternative currencies to hold that are more for consumers to
stable such as the U.S. dollar or European compare prices
euro. People will not want to use money as a when they are
store of value during times of inflation as it is changing rapidly.
261) The Board of Governors consists of the New York
seven members that are appointed by the Federal Reserve
president for 14-year terms. They supervise Bank, and four
and control the money and banking system. other presidents of
The 12 Federal Reserve Banks are quasi- Federal Reserve
public banks and act as a banker’s bank in Banks, each serving
each of their designated regions. They on a one-year
collectively act as the central bank of the rotating basis. The
United States by setting monetary policy and FOMC meets
regulating the private banking system under regularly to direct
the direction of the Board of Governors. The the purchase and
Federal Open Market Committee (FOMC) is a sale of government
12-member group that consists of the seven securities in the
Board of Governors members, the president of open market.
262) The long-term appointments provide the pressures that could
board with continuity, experienced result in inflation.
membership, and independence from political
263) The FOMC meets regularly to direct the (bills, notes, bonds)
purchase and sale of government securities in the open market.

Version 1 89
They also make decisions about borrowing influence interest
and lending government securities in the open rates.
market. The purpose of open-market
operations is to control the money supply and
264) 1. Issuing currency. 2. Setting reserve supply. Controlling
requirements and holding reserves. 3. Lending the money supply
to financial institutions and serving as an according to the
emergency lender of last resort. 4. Providing economy’s needs is
for check collection. 5. Acting as the fiscal the most important
agent for the federal government. 6. function.
Supervising banks. 7. Controlling the money
265) There were many factors that led to the foreclose on homes,
mortgage default crisis, which included many borrowers just
government subsidies to home buyers and the handed in their
bursting of a large financial bubble in real house keys and
estate values. Leading up to the financial walked away from
crisis, loans were made to home buyers with their homes and
higher-than-average credit risk, which meant mortgages. The
the home buyers were probably going to have value of the
difficulty making their monthly mortgage mortgage-backed
payments. The mortgage-backed bonds caused securities fell
mortgage lenders to think they were no longer drastically, driving
exposed to risk and they become lax in their several large
lending practices, granting loans to many financial firms
people who took on "too much mortgage" and either into
subsequently were soon falling behind in their bankruptcy or near
monthly payments. Then, as lenders began to bankruptcy.
266) The Federal Reserve served as the lender that time. They
of last resort to financial institutions during designed and

Version 1 90
implemented several highly creative new from banks and
lender-of-last-resort programs to pump paying for them
liquidity into the financial system to keep with cash.
credit flowing. One such program included
buying the illiquid mortgage-backed securities
267) Passed after the financial crisis of 2007– regulatory oversight
2008, this law gave authority to the Federal of asset-backed
Reserve System to regulate all large financial securities, and
institutions. The law also created an oversight created a financial
council to look for growing risk to the consumer protection
financial system, established a process for the bureau within the
federal government to sell the assets of large Federal Reserve
failing financial institutions, provided federal System.

Version 1 91