A Quiz On Ch 13 Money And Banking

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A Quiz On Ch 13 Money And Banking - Quiz

The world today is becoming a cashless economy and everyone is embracing the use of banks to keep our money and using debit and credit notes. Have you read chapter 13 of McConnell and Brue on money and banking? Take the review test below and refresh your memory on the topic.


Questions and Answers
  • 1. 

    When the price of a product is stated in terms of dollars and cents, then money is functioning as a unit of account.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Money functions as a unit of account when the price of a product is stated in terms of dollars and cents. This means that money is being used as a standard measurement for comparing the value of different goods and services. By using money as a unit of account, it becomes easier to determine the relative worth of various products and make informed decisions about purchasing and selling. Therefore, the statement is true.

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  • 2. 

    The money supply designated M1 is the sum of currency and noncheckable deposits.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The explanation for the given correct answer is that the money supply designated as M1 includes only the sum of currency (physical money) and checkable deposits (such as demand deposits in banks). Noncheckable deposits, on the other hand, are not included in M1. Therefore, the statement that M1 is the sum of currency and noncheckable deposits is false.

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  • 3. 

    The currency component of M1 includes both coins and paper money.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The currency component of M1 includes both coins and paper money. This means that when calculating M1, both physical coins and paper money are considered as part of the currency in circulation.

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  • 4. 

    If a coin is token money, its face value is less than its intrinsic value.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    This statement is false. Token money refers to coins or currency that have a face value that is equal to or greater than their intrinsic value. In other words, the value of the metal or material used to make the coin is less than the value assigned to it by the government. This allows the government to control the money supply and prevent the hoarding or melting down of coins for their metal value. Therefore, the face value of a token coin is equal to or greater than its intrinsic value.

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  • 5. 

    Both commercial banks and thrift institutions accept checkable deposits.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Commercial banks and thrift institutions are both types of financial institutions that accept deposits from customers. Checkable deposits refer to funds that can be withdrawn by writing a check against the account balance. Both commercial banks and thrift institutions offer checkable deposit accounts to their customers, allowing them to make payments and withdrawals using checks. Therefore, the statement that both commercial banks and thrift institutions accept checkable deposits is true.

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  • 6. 

    The checkable deposit of the Federal government at the Federal Reserve Banks are a component of M1.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The checkable deposit of the Federal government at the Federal Reserve Banks is not a component of M1. M1 includes currency in circulation, demand deposits, and traveler's checks. The checkable deposit of the Federal government at the Federal Reserve Banks is part of M2, which includes M1 plus savings deposits, money market mutual funds, and other time deposits.

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  • 7. 

    M2 exceeds M1 by the amount of noncheckable savings, small time deposits, and money market deposit accounts and money market mutual funds.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because M2 is a broader measure of money supply than M1. M2 includes all the components of M1 (currency in circulation, demand deposits, and traveler's checks) and also includes noncheckable savings, small time deposits, money market deposit accounts, and money market mutual funds. Therefore, M2 exceeds M1 by the amount of these additional components.

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  • 8. 

    A small time deposit is one that is less than $100,000.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    A small time deposit refers to a deposit that is below the amount of $100,000. Therefore, the statement that a small time deposit is one that is less than $100,000 is true.

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  • 9. 

    M2 is less than M3 by the amount of small time deposits in depository institutions.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because M2 is actually greater than M3 by the amount of small time deposits in depository institutions. M2 includes M1 (currency, demand deposits, and traveler's checks) plus savings deposits, small time deposits, and retail money market mutual funds. M3 includes M2 plus large time deposits, institutional money market mutual funds, and repurchase agreements. Therefore, M2 is a subset of M3 and does not include the amount of small time deposits in depository institutions.

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  • 10. 

    Economists and public officials are in general agreement on how to define the money supply in the U.S.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement suggests that economists and public officials agree on how to define the money supply in the U.S. However, this is not true. There are different measures of the money supply, such as M1, M2, and M3, and economists and public officials may have different opinions on which measure is the most accurate or useful. Additionally, there may be debates and disagreements on the specific components that should be included in the money supply definition. Therefore, the statement is false.

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  • 11. 

    A near money is a medium of exchange.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    A near money is not a medium of exchange. Near money refers to assets that are highly liquid and can be easily converted into cash, such as savings accounts or government bonds. While near money can be used as a store of value, it is not typically used as a direct medium of exchange in transactions. Therefore, the statement that a near money is a medium of exchange is false.

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  • 12. 

    Currency and checkable deposits are money because they are acceptable to sellers in exchange for goods and services.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Currency and checkable deposits are considered money because they are widely accepted by sellers as a medium of exchange for goods and services. Currency refers to physical cash, such as coins and banknotes, while checkable deposits are funds held in bank accounts that can be easily accessed and used for transactions. Both forms of money are universally recognized and trusted as a means of payment, making them acceptable to sellers in exchange for their products or services. Therefore, the statement that currency and checkable deposits are money because they are acceptable to sellers in exchange for goods and services is true.

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  • 13. 

    If money is to have a fairly stable value, its supply must be limited relative to the demand for it.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    In order for money to maintain a fairly stable value, its supply must be limited compared to the demand for it. If there is an excessive supply of money, it can lead to inflation and decrease the value of the currency. On the other hand, if the supply of money is limited and there is a high demand for it, the value of the currency can remain stable or even appreciate. Therefore, the statement is true.

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  • 14. 

    There is a transactions demand for money because households and business firms use money as a store of value.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because the transactions demand for money is not based on using money as a store of value. The transactions demand for money refers to the need for money to carry out day-to-day transactions, such as buying goods and services. Money serves as a medium of exchange in these transactions, allowing for the smooth functioning of the economy. While money can also be used as a store of value, this is not the primary reason for the transactions demand for money.

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  • 15. 

    An increase in the price level would, ceteris paribus, increase the transactions demand for money.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    An increase in the price level would increase the transactions demand for money because as prices rise, people need more money to make the same amount of purchases. This is because higher prices mean that each individual transaction requires more money. Therefore, to meet this increased demand for money, people would need to hold more cash in order to conduct their daily transactions.

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  • 16. 

    An increase in the nominal GDP, ceteris paribus, will increase both the total demand for money and the equilibrium rate of interest in the economy.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    An increase in the nominal GDP leads to an increase in income and spending in the economy. As people have more money, they will demand more money to carry out their transactions. This increase in the demand for money will lead to an increase in the equilibrium rate of interest. This is because, in order to meet the increased demand for money, banks and financial institutions will have to offer higher interest rates to attract lenders and encourage them to save and deposit their money. Therefore, an increase in nominal GDP will increase both the total demand for money and the equilibrium rate of interest in the economy.

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  • 17. 

    Bond prices and interest rates are inversely related.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Bond prices and interest rates have an inverse relationship. When interest rates rise, the value of existing bonds decreases because new bonds with higher interest rates become more attractive to investors. Conversely, when interest rates fall, the value of existing bonds increases as they offer higher interest rates compared to newly issued bonds. This inverse relationship is due to the fact that bond prices are determined by the present value of future cash flows, and higher interest rates reduce the present value of those cash flows.

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  • 18. 

    Members of the Board of Governors of the Federal Reserve System are appointed by the president and confirmed by the senate.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    Members of the Board of Governors of the Federal Reserve System are appointed by the president and confirmed by the senate. This means that the president selects individuals to serve on the Board, and then the senate reviews and approves these selections. Therefore, the statement is true.

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  • 19. 

    The Federal Open Market Committee is responsible for keeping the stock market open and regulated.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The Federal Open Market Committee (FOMC) is not responsible for keeping the stock market open and regulated. The FOMC is a part of the Federal Reserve System and is responsible for setting monetary policy, including decisions on interest rates and the buying and selling of government securities. The regulation and oversight of the stock market is primarily the responsibility of the Securities and Exchange Commission (SEC). Therefore, the statement is false.

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  • 20. 

    The Federal Reserve Banks are the bankers' banks because they make loans to and accept deposits from depository institutions.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The Federal Reserve Banks act as bankers' banks because they provide loans and accept deposits from depository institutions. This means that these banks serve as a central hub for other banks, offering them financial services such as lending money and accepting their deposits. By performing these functions, the Federal Reserve Banks support the stability and liquidity of the banking system, ultimately benefiting the overall economy.

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  • 21. 

    Federal Reserve Banks are owned and operated by the U.S. government.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement "Federal Reserve Banks are owned and operated by the U.S. government" is false. While the Federal Reserve System is a government entity, the individual Federal Reserve Banks are not owned or directly controlled by the government. Instead, they are owned by member banks, which are private banks that hold stock in the Federal Reserve System. The Federal Reserve Banks operate independently within the framework of the Federal Reserve System, carrying out monetary policy and providing financial services to banks and the government.

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  • 22. 

    At times, the Fed lends money to banks and thrifts, charging them an interest rate called the bank and thrift rate.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because the Fed does not lend money to banks and thrifts. Instead, the Fed conducts open market operations, which involve buying or selling government securities to influence the money supply and interest rates. The Fed sets a target interest rate called the federal funds rate, which is the rate that banks charge each other for short-term loans.

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  • 23. 

    Congress established the Fed as an independent agency to protect it from political pressure so that it can effectively control the money supply and maintain price stability.

    • A.

      True

    • B.

      False

    Correct Answer
    A. True
    Explanation
    The statement is true because Congress established the Fed as an independent agency to ensure that it is not influenced by political pressure. This independence allows the Fed to effectively control the money supply and maintain price stability without being swayed by short-term political considerations. By operating independently, the Fed can make decisions based on economic factors and long-term goals, which is crucial for maintaining a stable and healthy economy.

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  • 24. 

    In recent years, banks and thrifts have increased their share of the financial services indurty and control of financial assets.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement is false because in recent years, banks and thrifts have actually decreased their share of the financial services industry and control of financial assets. This is due to the rise of fintech companies and other non-traditional financial institutions that have disrupted the industry and gained market share.

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  • 25. 

    It is expected that electronic money will reduce the problems for the Fed in controlling the money supply.

    • A.

      True

    • B.

      False

    Correct Answer
    B. False
    Explanation
    The statement suggests that electronic money will reduce the problems for the Fed in controlling the money supply. However, this is not necessarily true. While electronic money may offer certain advantages in terms of efficiency and convenience, it does not inherently solve the challenges faced by the Fed in controlling the money supply. The Fed's ability to control the money supply depends on various factors, including monetary policy tools and economic conditions, which are not directly influenced by the form of money used. Therefore, the statement is false.

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Quiz Review Timeline +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Apr 11, 2009
    Quiz Created by
    Ecofanics
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