Chapter: Money and the Banking System
Money and the Banking System
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1. Currently in the United States, money is backed by
a. silver in the IMF vaults.
b. Federal Reserve notes in banks.
c. gold in Fort Knox.
d. everyone's willingness to accept it.
2. In the modern U.S. economy, most transactions are made with
a. cash.
b. gold and silver.
c. credit cards.
d. checking deposits.
3. Although checking deposits are considered money, they are actually
a. fictitious numbers in persons' checkbooks.
b. backed by commodities like gold.
c. not very useful for making payments.
d. bookkeeping entries in bank balance sheets.
4. The fractional reserve system of banking evolved because
a. goldsmiths did not have safes large enough to hold all their gold deposits.
b. there was always a dire need for additional money.
c. goldsmiths knew that on any given day, only a few depositors would come to claim their deposits.
d. goldsmiths knew that they would not be prosecuted for lending out money they did not have.
5. The objective of bank management is to
a. maximize stockholders' profits by making risky investments and giving loans to borrowers who will pay the highest interest rates.
b. refuse to make risky loans and make loans only to the safest borrowers.
c. invest in U.S. government securities and make loans only to established businesses.
d. strike the appropriate balance between the attraction of bank profits and the need for bank safety.
6. In an economic system with privately-owned, profit-maximizing banks, there will always be a difference between
a. private profits and social profits.
b. bank profits and other corporate profits.
c. bank profits and macroeconomic objectives.
d. bank profits and government profits.
7. When a bank makes loans with excess reserves, it
a. creates money.
b. destroys money.
c. alters the composition of M1.
d. leaves the money supply unchanged.
8. If you have a checking account at a local bank, your bank account there is a(n)
a. asset to the bank and an asset to you.
b. liability of the bank and a liability of yours.
c. liability of the bank and an asset to you.
d. asset to the bank and a liability of yours.
9. The Ponderosa Bank receives a new deposit of $2,500. The reserves requirement is 20 percent. How much can this bank loan out as a result of this deposit?
a. $12,500.
b. $10,000.
c. $2,500.
d. $2,000.
10. An increase in the reserve ratio would tend to
a. increase excess reserves and raise the money multiplier.
b. decrease excess reserves and decrease the money multiplier.
c. increase excess reserves and decrease the money multiplier.
d. decrease excess reserves and raise the money multiplier.
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