Chapter 5&6

50. Most of the liabilities of the Fed are in the form of a. Federal Reserve notes. b. checkable deposits. c. U.S. Treasury deposits. d. loans to member banks.

A. Federal Reserve notes are the dollar bills we use in the market place. These bills are IOUs of the Federal Reserve. Therefore, they are considered liabilities of the Federal Reserve because they represent what is owed.

14. Until 1980, most of the national debt was the result of a. wartime borrowing. b. inflation. c. bad monetary policy. d. wasteful Congressional spending.

A. Historically most of government borrowing was the result of a war. Starting in the 1970's, under Lyndon Johnson's Great Society Programs, deficit spending increased year after year.

45. The requirement that banks hold required reserves comes from the a. Federal Reserve. b. stockholders of the bank c. depositors of the bank. d. Federal Deposit Insurance Corporation.

A. The Federal Reserve is our central bank. It has a certain amount of authority over all financial institutions.

26. Of the national debt held by the public, foreigners now hold a. a lot of the total b. not much of the total. c. less and less as time goes on.

A. The amount that foreigners owns of the U.S. government debt has increased in recent years and complicates our debt situation.

73. When the reserve requirement is 10%, each time an individual bank gains $1000 in reserves, it is able tomake loans totaling a. $900. b. $1000. c. $100. d. $9000.

A. The required reserve of $1000 with a reserve requirement of 10% is equal to $100. Therefore, a bank can lend out $900 of the $1000.

22. Which one of the following is not a function of the Federal Reserve banks? The banks serve as a. lenders to major corporations. b. lenders to banks. c. lenders to the federal government. d. banks to bankers.

A. A Federal Reserve bank is what is called a "bankers bank," it only does business with financial institutions. It does not do business with consumers or businesses.

16. In the world of banking, checks are a. written instructions from a depositor to the bank. b. written instruction from one depositor to another. c. a form of commodity money. d. token money.

A. A check is simply instructions to a bank to free the funds in a person's bank account.

9. One proposal for reforming and improving the budget process is to a. switch to a two-year or biennial budget process. b. remove the Council of Economic Advisors from the process. c. require more detail in the various line items of the budget. d. provide for automatic annual increases in all budget categories.

A. A two year cycle would give legislatures more time to debate and finalize our federal budget.

6. Mary Ellen deposits $100 into her savings account each month. Her daughter Carolyn keeps all her pennies in a piggy bank. These are examples of money functioning as a. a store of value. b. commodity money. c. a medium of exchange. d. a standard of deferred payments.

A. Another purpose of money is that it can be used as a store of value. Money put into savings to be available at a later point in time is using money as a store of value.

41. When liquidity refers to the ease with which an asset can be converted into the medium of exchange without a significant loss of value, the least liquid of the assets below is a. real estate. b. currency. c. a traveler's check. d. oil.

A. Of the options listed above, real estate would be the most difficult to convert to a medium of exchange.

70. Required reserves must be held a. either as vault cash or as a deposit at the Fed. b. on both checkable deposits and savings accounts. c. entirely at the Fed, for safety. d. entirely in the bank's vault, for availability.

A. Only cash can be used as reserves. This cash can be kept at the bank, or at the Fed, or some in both places.

23. The discount rate is a. the interest rate charge to commercial banks for loans from the Federal Reserve bank. b. the rate or percent of deposits which banks are required to hold on reserve. c. the rate of interest paid on government bonds. d. the charge for cashing a check at a Federal Reserve bank.

A. Only financial institutions can borrow money from the Fed. The interest rate they pay to borrow this money is called the discount rate.

2. The largest single item of expenditures in the federal budget is a. Social Security and Medicare. b. national defense. c. welfare. d. interest on the debt.

A. Social Security, Medicare and Medicaid make up about 40% and interest on the debt about 20%.

31. Which of the following is an alternative to line item veto power that is practiced in Virginia? a. A bill can only cover one topic and the name of that topic has to be in the title of the bill. b. The governor has unlimited power to balance the budget. c. Virginians have the right of referendum.

A. The Commonwealth of Virginia has a provision at the state level that a bill can only cover one topic. This makes it easy to vote on a bill.

27. Which of the following was not an action taken to end the financial crisis of the 1930's? a. Creation of the Federal Reserve System. b. Creation of the Federal Deposit Insurance Corp. c. A one week "bank holiday." d. Revision of the banking laws.

A. The Federal Reserve System was established in 1913, the same year that the income tax became law. Woodrow Wilson was the President at that time.

59. Assume the Fed initiates a money and credit expansion process by purchasing $5000 in U.S. securities from banks. Also, assume any expansion takes place to the greatest extent possible. If the reserve requirement is 10%, a. required reserves will have increased by $5000. b. excess reserves will have increased by $5000. c. loans will have increased by $5000.

A. The deposit multiplier in this case is 10. The total amount of money generated will be $50,000. Of this 1/10, or $5,000, must be kept as required reserves.

64. Lowering the discount rate is a way to expand the money supply because a. it encourages banks to borrow from the Fed so banks can more easily accommodate their customers' needs for loans. b. in encourages business customers to borrow directly from the Fed. c. a lower discount rate reduces the amount of reserves that banks are required to keep.

A. The discount rate is the interest rate that banks pay to borrow money from the Fed. When this rate is lowered, it becomes less expensive to borrow money from the Fed, so banks will tend to increase their borrowing.

38. When many depository institutions - especially thrifts - failed in the 1970's and 1980's, a. most depositors got their money back. b. most depositors lost everything. c. most of the losses to depositors were paid out of the pockets of the owners of these institutions.

A. The government was involved in a multi billion dollarbailout of many thrift institutions. This along with the FSLIC, which no longer exists, protected most depositors.

56. When a bank makes a loan of $5000 to a regular customer the immediate effect is that a. the banks' assets and liabilities both increase by $5000. b. the bank subtracts $5000 from the customer's account. c. total bank reserves decrease by $4000.

A. The loan is an asset because it is money that is owed to the bank. Because two sides of a bank's ledger have to be equal, when the banks assets increase by $5,000, so to its liabilities increase by $5,000; assets must equal liabilities on a bank's balance sheet.

62. The potential expansion of the money supply when there are excess reserves can only be realized when a. people chose not to increase their cash holdings. b. banks lend only a portion of their cash reserves. c. borrowers set aside part of their loans for savings. d. borrowers cut back on borrowing.

A. The multiplier process is dependent on people spending their money. If people decide to save more of their money, the multiplier process is limited.

36. Deregulation in the 1970's, it is now recognized, produced a disaster resulting in a financial bailout. This is an example of a. moral hazard. b. the Laffer Curve. c. Classical economics.

A. This is a typical case of "moral hazard." Moral hazard takes place when the risks of investments are eliminated by promise of a bail out if anything goes wrong. Generous depository insurance provided this protection. This encouraged banks to make risky investments hoping to make big gains with no fear of loss. The resultant collapse in banking led to the huge $200 billion bailout of 1989.

27. Each time you buy a gallon of gas you pay a tax, this tax goes to building and maintaining roads. This is an example of a. the ability to pay principle of taxation. b. the benefits received principle of taxation. c. a progressive tax.

A. Those people who drive the most end up paying more taxes than people who drive less.

12. The difference between bank notes, Federal Reserve notes, and fiat money is that a. fiat money is redeemable for gold or silver, but the others are not. b. bank notes are redeemable for gold or silver but the others are not. c. fiat money derives its acceptability as money from the precious metal which "back" it.

B. Bank notes are papers promising a specific amount of gold or silver to bearers who presented them to issuing banks for redemption; an early type of money.

30. The number of Federal Reserve banks is a. seven. b. twelve. c. fourteen. d. about 10,000.

B. The United States is divided into 12 federal reserve districts. Each district has a Federal Reserve bank.

49. Most of the assets of the Fed are held in the form of a. gold. b. U.S. government securities. c. loans to member banks. d. U.S. Treasury deposits.

B. A U.S. government security is a bond that the federal government has sold; this is how the federal government borrows money. The Fed is a major purchaser of these securities.

46. Liquidity contributes to the bank's achievement of all of the following except a. confidence of the depositors. b. income of the bank. c. ability to pay funds out to depositors on demand. d. flexibility to make an immediate loan to a valued customer.

B. A bank's assets are not dependent on the form in which a bank holds those assets. Liquidity, therefore, does not determine the income of a bank.

25. The question of who bears the burden of the debt is complicated by all of the following factors except a. how high the interest rate paid on government loans is. b. what the rate of unemployment in the future is. c. how much of the publicly held debt is held by foreigners. d. whether the borrowed funds purchase capital goods or not.

B. An increase in the unemployment rate does not change the makeup of how much any particular group owes of their debt share.

18. When prices rise a. the purchasing power of money rises. b. the purchasing power of money falls. c. the purchasing power of money remains unchanged. d. the purchasing power of money either rises or falls, depending upon the size of the national debt.

B. As prices rise it takes more money to buy the same amount of goods and services as used to be the case. This is what we call inflation.

20. The United States is said to have a dual banking system because a. some banks make mortgage loans and some banks do not. b. some banks have state charters and some have national charters. c. two different types of banks are authorized to issue bank notes.

B. If you wanted to start a bank, you would need a license. You could get a license either from the federal government or the state banking commission which the bank would reside. If you got your license from the federal government you would be a national bank and would have the word national in your name.

25.The Federal Reserve banks probably could have prevented many of the bank failures in the early 1930's by a. raising the reserve requirements of the commercial banks. b. lending large sums of money to the commercial banks. c. improving the system whereby checks are cleared.

B. Incredibly as it is, the Fed actually tightened the money supply in the early years of the Great Depression. The proper policy would have been to loosen the money supply to get more money in circulation in order to encourage an increase in spending.

4. To say that money functions as a medium of exchange is to say that a. it is the preferred form of compensation for fortune-tellers, mediums, and those. through whom the spirit world is contacted b. it is the generally accepted form of payment for goods and services. c. it is the common unit of expressing the value of goods and services. d. it is bought and sold on the stock exchange.

B. Money has several purposes, one is that it is used by consumers to buy and sell in the market place. This is using money as a medium of exchange.

10. Since 1960 the federal government has experienced a budget deficit every year but a. one. b. two. c. three. d. four.

B. The last year that the federal government balanced the budget was 2001 .

30. The president of the U.S. has line item veto power. a. True b. False

B. The line-item veto allows the President to veto certain lines of a budget bill. Only that portion that is not vetoed becomes law. Vetoed portions can be overridden by a 2/3 majority of the House of Representatives. The president does not have this authority.

40. Banks are referred to as financial intermediaries because they a. receive new Federal Reserve notes from the Fed and put them into circulation. b. bring together the two sides of the market- savers and borrowers. c. bring different savers into contact with each other. d. bring about the merger of smaller banks to make larger ones.

B. The purpose of banks is to take in money from savers, to keep a small portion of this money to meet day to day transactions, and then to lend out the rest of it.

53. By far the most important (i.e., most frequently used) mechanism by the Fed for increasing excess reserves in the banks is a. selling U.S. government securities. b. buying U.S. government securities. c. raising the required reserve ratio. d. reducing the required reserve ratio.

B. When the Fed buys government securities from banks the securities are exchanged for cash, therefore the bank's reserves increase. Only cash can be held in reserves by banks.

60. A bank gains excess reserves in all of the following cases except a. the bank sell U.S. securities to the Fed. b. the required reserve ratio is increased. c. the bank sells U.S. securities to the public. d. the bank borrows from the Fed.

B. When the required reserve ratio increases, banks have to keep more of their assets in reserve, therefore, a bank loses excess reserves.

51. Which of the following statements is incorrect? a. There are twelve regional banks in the Federal Reserve System. b. The Fed tries to maintain stability in financial markets. c. The coins and currency in circulation in the U.S. are produced by the Fed.

C. Coins and currency are produced by the U.S Treasury and not the Federal Reserve.

7. Which of the following is an example of a third partylaw? a. Motorcycle drivers must wear a helmet. b. When in a moving vehicle seat belts must be worn. c. Cars must be inspected periodically.

C. Laws requiring helmets and seat belts only protect the first person, not others. But laws requiring state inspections of cars can protect people in the car but also protects others not in the car.

71. Money is created immediately when a. the Fed reduces the reserve requirement. b. the Fed reduces the discount rate. c. banks make loans. d. the Fed buys U.S. government securities from banks.

C. Money is not really created when banks lend money, although we call it money creation. What is really happening is that money is being multiplied as it is goes from person to person.

8. All of the following are functions of money except a. medium of exchange. b. unit of account. c. index of prices. d. standard of deferred payment.

C. Money is used as a medium of exchange, a unit of account, and a standard of deferred payment.

29. Including the unfunded liabilities of government retirement programs like Social Security in the deficit would a. have little impact on the size of the deficit. b. have little impact on the size of the national debt. c. triple the size of the national debt.

C. Social Security is unfunded because of the lack of savings by the program. Congress has replaced all savings by IOU's that cannot be sold in the bond market, they are only redeemable by the federal government. Money owed to retirees is as much as a liability to the government as interest owed.

26. Because Federal Reserve banks have unlimited power to create money, a. they are more likely to fail than other banks. b. they are the cause of most inflation in the U.S. c. they cannot fail. d. FDIC insurance against bank failure is unnecessary.

C. Technically the Fed cannot fail because it can always meet its commitments by creating new money. However, if it does this too much, the result would be inflation.

44. University Center National Bank has checkable deposits of $800,000, outstanding loans and other securities valued at $550,000 and $250,000 of cash in its vault. When the reserve requirement is 20%, the bank has a. total reserves of $160,000. b. total reserves of $300,00. c. excess reserves of $90,000. d. excess reserves of $250,00.

C. The bank's assets equal $800,000. Of this it can legally lend out .80 x $800,000 or $640,000. Because it has already lent out $550,000 it has $90,000 it can still lend out.

29. The Federal Open Market Committee of the Fed a. is responsible for regulation of commodity markets. b. is responsible for regulation of the New York Stock Exchange. c. uses the buying and selling of U.S. government securities to accomplish its objectives.

C. The main function of the Open Market Committee is to decide when and how much to buy or sell government securities. During periods of inflation, more securities would be sold; during periods of unemployment, more securities would be bought.

63. If the banking system has no excess reserves, a multiple contraction of money will necessarily occur if a. the reserve requirement is reduced. b. banks sell U.S. government securities to the Fed. c. loans are repaid to the banks.

C. The multiplier process works in reverse. Let's suppose that the multiplier is 5. An increase of loans by $100 will result in $500 of checkable deposits. But if $100 is paid back, the reverse of a loan, then $500 of potential checkable deposits is taken out of the system.

5. A continuing resolution is a. an annual determination on the part of Congress to improve the budget process. b. a decision to maintain a specific spending level ad infinitum. c. a temporary extension of spending authority into the new fiscal year. d. the official name for the entire budget package when it is finally enacted.

C. When Congress and the President fail to finalize the budget by October 1, the government continues to operate based on the last years spending levels, this is called a continuing resolution.

69. Increasing the discount rate has the same effect on the money supply as a. reducing the reserve requirement. b. discovering a large new deposit of gold. c. selling (by the Fed) of U.S. government securities.

C. When the Fed sells U.S. government securities to banks, bank's reserves diminish as the securities replace cash. When the Fed increases the discount rate, banks will borrow less money from the Fed and therefore lend out less money. So the two actions have the same result, less lending by banks and less money circulating in the economy.

32. All of the following are objections to the balanced budget amendment to the U.S. constitution except a. government spending could not be increased to offset a recession. b. taxes would have to be raised in periods of recession. c. a policy that puts too much power in the hands of the President.

C. A balance budget amendment does not give the President too much power. He has less power with this amendment because he has less control over the national budget.

57. An individual bank in a banking system can lend no more than its excess reserves because a. credit-worthy borrowers are hard to find. b. of the required reserve ratio. c. the bank risks the loss of reserves when borrowers spend the money. d. low interest rates make lending unprofitable.

C. A bank has to keep reserves in order to meet day to day transactions. When depositors come to withdraw their money, a bank has to make sure it has the money on hand to give to these people. Therefore a bank can only lend money out of its excess reserves.

17. Fractional reserve banking occurs when a. a bank has reserves which exceed it deposits. b. a bank has reserves which are equal to its deposits. c. a bank has reserves which are less than its deposits. d. some depositors lose their deposits through poor banking management.

C. A fractional reserve banking system is a system that allows its banks to lend out a portion of every dollar deposited in the bank. This is what allows a bank to make a profit.

4. The new fiscal year for the federal budget begins on the first day of a. January. b. April. c. July. d. October.

D. The fiscal year used to begin on June 1, but to give Congress and the President more time to finalize the budget, the fiscal year was pushed forward to October 1. So the federal fiscal year begins October 1 to September 30.

2. A coincidence of wants happens exists when a. two people want the same thing at the same time. b. one person wants to but two different things at the same time. c. the individual who has what I want, also wants what I have.

C. A problem with barter is how the alternate goods or services can be divided. If one person wants eggs and the other wants a pound of beef, but the second person still has cattle, what to do? If the cow is killed, there will be a lot of meat left over.

6. The problem of pollution can a. be solved if businesses had a social conscience. b. be solved with enough public awareness. c. can only be solved with effective laws.

C. Any business with a social conscience and who invests in anti pollution devices will experience higher costs than competitors and therefore will not be able to compete, everything else being equal.

47. The federal funds rate is the rate of interest paid when a. the Federal Reserve makes loans to member banks. b. taxpayers pay overdue taxes. c. one bank briefly borrows reserves from another bank. d. banks make loans to the federal government.

C. Banks can borrow money from depositors, the Fed, or other banks. When it borrows from other banks short term, one day, the interest paid is determined by the federal funds rate.

28. Social Security is the world's largest Ponzi Scheme because a. the money collected is saved in the money markets to earn interest. b. it is a government program. c. the money paid out in day two was collected in day one.

C. Because Social Security is a "pay as you go" type program, as the number of people who pay into the system declines relative to the number of people who receive benefits, the burden on those people who pay increases.

15. The first bankers were probably a. carpenters. b. stock brokers. c. goldsmiths. d. sea captains.

C. In the very early days of capitalism, gold and silver were the primary forms of money. When a person had a lot of gold he would want to keep his gold safely somewhere. So he would give his money to a goldsmith. These goldsmiths, in turn, discovered that they could lend a portion of their gold holdings out to make interest income. Thus they became our first banks.

55. Assume there are no excess reserves in the banking system when the reserve requirement is 20%. The purchase by the Fed of $10,000 in U.S government securities from Academy National Bank has the potential of ultimately increasing the money supply by a total of a. $8,000. b. $10,000 c. $50,000.

C. Since there was exactly zero excess reserves to begin with, the infusion of $10,000 in cash means that the bank now has exactly $10,000 in excess reserves, which we assume it lends out. Because the multiplier is 1 divided by the reserve requirement or 1 divided by 1/5 equals 5, 5 times $10,000 = $50,000.

34. All of the following are goals of the Fed except a. a high level of employment in the U.S. b. stability in interest rates. c. rising prices (to encourage production). d. stability in financial markets.

C. The primary goal of the Fed is price stability. With a threat of inflation, the Fed will decrease the money supply in order to bring down prices. If unemployment and falling prices is a problem, the Fed will take steps to increase the nation's money supply.

54. Assuming that a bank is exactly meeting its reserve requirement, the sale by Academy National Bank to the Fed of $10,000 in U.S. government securities immediately increases the excess reserves of the bank by a. $2000. b. $8000. c. $10,000. d. $20,000.

C. The securities were not counted as a part of a bank's reserves. But when the securities were exchanged for cash, because cash is counted as a part of a bank's reserves, its excess reserves increases by the full $10,000.

33.The U.S. has more banks per capita than most other countries primarily because it a. has more people. b. has a more prosperous economy. c. has restricted branch banking. d. continues to prohibit bank holding companies

C. Where one bank may be more efficient, government rules prohibit certain types of banking practices, thus branch banking is somewhat restricted, especially across state lines. This, however, is in the process of changing.

24. Which of the following statements is correct? a. Only a small portion of the national debt comes due during one year. b. Interest payments on the national debt are about 35% of the budget. c. A one percentage point increase in the nominal interest rate increases the annual interest costs of the federal government

C. With a total national debt of over $17 trillion, the interest paid on this increases every year. Thus, even a one percent increase in the interest rate the government has to pay translates into a lot of money.

58. If an initial increase in excess reserves of $20,000 can generate a maximum increase in the money supply of $80,000, the required reserve ratio must be a. 4%. b. 10%. c. 20%. d. 25%.

D. The formula for the deposit multiplier is 1 divided by the reserve ratio. 25% is equal to 1/4. One divided by 1/4 is equal to 4. 25% is the answer because 4 times $20,000 is equal to $80,000.

28. The Fed's Board of Governors are a. elected by the member banks. b. chosen by the state Governors. c. elected for seven year terms. d. selected by the President with approval by the Senate.

D. All presidential appointments have to be approved by the Senate according to our Constitution. There are seven members of the Board of Governors. There terms are for 14 years after which they cannot be reappointed, except for the chairman who serves for four years, but he can be reappointed by the President.

52. The Fed can increase the amount of excess reserves in banks by a. selling U.S. government securities. b. raising the discount rate. c. borrowing from member banks. d. reducing the required reserve ratio.

D. Excess reserves is cash on hand above a bank's required reserves. The three main ways the Fed can increase banks excess reserves is to buy government securities, lower the discount rate, and to reduce the required reserves imposed on banks.

3. The essential characteristic required before any substance can function as money is that a. it be issued by the government. b. it be backed by a precious metal. c. the supply of it be unlimited and uncontrolled. d. people accept it as money.

D. Money can take just about any form as long as it is accepted by everyone and is easily exchanged. Money can even be an electronic impulse on a computer. All that is necessary is to keep track of someone's debit and someone else's credit in a financial transaction.

24. Between 1930 and 1933 many banks in the U.S. failed because a. the FDIC moved too slowly to prevent the bank failures. b. most bankers were either corrupt or incompetent. c. of excessive regulation by the federal government. d. people lost confidence in them.

D. Our banking system works because we believe it works. Because we have a partial reserve banking system, if enough depositors lose faith and withdraw their money from banks, the whole banking system would fail.

61. In the money and credit expansion process, when r = the required reserve ratio, the total change in checkable deposits is equal to the initial change in excess reserves a. multiplied by r. b. plus the change in required reserves. c. divided by 1/r. d. multiplied by 1/r.

D. The deposit multiplier is one divided by the reserve ratio. So one divided by 1/r times the initial change in excess reserves will equal the ultimate change in checkable deposits.

37. Insurance protecting individuals from the loss of their bank deposits a. makes bank officials especially careful about the loans and investments they make. b. makes it virtually impossible for a bank to fail. c. is so costly that few banks can afford it. d. makes depositors less concerned about the safety of their money than the interest rate it is earning.

D. The purpose of the insurance, like the FDIC, is to shore up citizen's confidence in the banking system. As long as people believe that the system will work, it will work.

39. Cleaning up the mess created by the failure of so many thrift institutions in the 1980's has involved all of the following except a. increasing deposit insurance premiums. b. asking the American taxpayer to pay nearly $125 billion to cover losses. c. shutting down weak and failing thrifts. d. creating a new super-agency with great new powers to oversee the day-to-day operations of thrifts.

D. The result of the bail out was a restoration of confidence and the survival of many savings and loans. However, the distinction between savings and loans and banks was obliterated; today there is little difference.

42. Immediately after it accepts its first deposit the day it opens its doors, the balance sheet of the Brand NewNational Bank will likely contain all of the following except a. net worth. b. checkable deposits. c. stock in the district Federal Reserve bank. d. loans.

D. A bank has to attract money before it has any to lend. Every dollar in a bank comes from someone's deposit.

72. Banks earn interest on all of the following except a. U.S. government securities. b. loans to other banks. c. mortgage loans. d. reserves deposited at the Fed.

D. A bank does not earn interest on its reserves. This is true even if those reserves are kept at the Federal Reserve.

19. Which of the following is most critical for the maintenance of an efficient, productive economy? a. Money backed by gold or silver. b. Steadily rising prices. c. An unlimited and unregulated supply of money. d. A properly functioning monetary system.

D. A stable and properly functional monetary system is a pillar which any economy is built upon.

65. In order to increase the money supply the banking system must have a. required reserves. b. the authority to but corporate checks. c. the authority to print U.S. currency. d. excess reserves.

D. Banks can only lend money out from the excess reserves.

1. Barter works best a. in the absence of a double coincidence of wants. b. when many different product are available in the economy. c. when money is relatively available to establish relative prices. d. when each trader has what the other wants and wants what the other has.

D. Barter requires a coincidence of wants; each person has to have exactly what the other wants.

10. Whatever functions as money must be a. authorized by the government. b. accepted for deposit by banks. c. backed by precious metals like gold or silver. d. limited in supply.

D. Because money can be just about anything, it does not have to be sanctioned by the government or backed up by anything. It does not have to be in a form that can be deposited in a bank. It does, however, have to be limited in supply to have any value.

32. One of the purposes of the banking reforms of the 1930's was to a. require banks to invest in more stocks. b. require banks to invest in more corporate bonds. c. discourage the public from putting so much faith in the banking system. d. restrict banks' assets primarily to loans and government securities.

D. Before this banks held their assets in many different ways. Many of these forms became worthless as a result of the stock market crash in October of 1929 and the ensuing Great Depression.

43. All of the following might be assets of a bank except a. building. b. furniture. c. outstanding loans. d. checkable deposits.

D. Checkable deposits are not assets of a bank because they are liabilities. This is money that the bank owes depositors.

7. All of the following are examples of commodity money except a. cattle. b. gold. c. tobacco. d. $10 Federal Reserve notes.

D. Commodity money is money that has some intrinsic value other than money. Cattle, gold, and tobacco have value other than being used as money. Federal Reserve notes (dollar bills) do not have value except as money.

9. All of the following are problems with commodity money except a. often commodity money deteriorates in storage. b. often commodity money is too bulky for major transactions. c. often commodity money is not divisible into small and uniform units. d. often commodity money is viewed as an unfair competitor by suppliers of fiat money.

D. Different forms of money always compete, this is not a problem; in such a case a good form of money will drive out a bad form.

8. Which of the following is not an entitlement program? a. Social Security. b. Medicare. c. Aid to Families with Dependent Children. d. Federal research grants.

D. Entitlement programs are guaranteed benefits for those who qualify under government transfer programs such as Social Security, Medicare, and Aid to Families with Dependent Children.

12. Automatic payroll deduction of tax payments became law in the U.S. for the first time in a. 1776. b. 1865. c. 1936. d. 1942.

D. It was in 1942 that Beardsley Ruml introduced the idea of payroll deduction as an alternative to tax payerswriting out checks once a year to pay their taxes.

13. Money is legal tender if a. people willing accept it in payment of debts. b. it is backed by gold or silver. c. it is commodity money. d. the government says it is.

D. Legal tender is when the legal courts of the land recognize certain pieces of paper as payment of personal and public debt (public debt is tax money owed to the government). This is why is says on each of our dollars, "this note is legal tender for all debts public and private."

5. School administrators announce the following schedule of fees for the next academic year: In-state tuition, $175 per credit hour; Out-of-state tuition, $400 per credit hour; Room-and-board, $3,000 per semester. This is an example of money functioning as a. a medium of exchange. b. a store of value. c. fiat money. d. a unit of account.

D. Money is being used to measure the cost of education in the case.

11. An example of a capital expenditure in the present for which shifting the cost to future generations through deficit financing might be justified because those future generations will also share in its benefits is a. Social Security. b. interest on the debt. c. welfare. d. a highway.

D. Only a highway is tangible and can thus be used by future generations, the other choices produce nothing tangible.

35. Deregulation of banks and other depository institutions did all of the following except a. allow all depository institutions to offer checking accounts. b. allow all depository institutions to offer money market accounts. c. allow thrift institutions more latitude in investing their assets. d. allow the FDIC to open branch banks of its own.

D. The FDIC is what it has always been; an institution that insures bank deposits.

31. The job of the Federal Deposit Insurance Corporation is to a. guarantee that investors will not lose money by investing in government bonds. b. insure U.S. Treasury deposits in the Federal Reserve banks. c. insure commercial banks against the possibility of losing money. d. insure the deposits in commercial banks and savings banks.

D. The Federal Deposit Insurance Corporation (FDIC) was established by the U.S. Congress. Each bank account of participating banks is insured.

21. All of the following are powers of the Federal Reserve System except a. the ability to buy and sell government securities. b. the authority to issue Federal Reserve notes. c. the responsibility to clear checks. d. the obligation to make loans to the general public.

D. The Federal Reserve is known as a banker's bank. It only does business with other financial institutions and not the general public or businesses.

3. Federal spending is approximately what percent of GDP? a. 3%. b. 5%. c. 12%. d. 25%.

D. The federal government spends about one quarter of all spending.

48. The Fed performs all of the following functions except a. makes loans to banks. b. clears checks for banks. c. holds deposits of banks. d. mints U.S. coins.

D. The minting of U.S. coins is a function of the U.S. Treasury.

66. By reducing the required reserve ratio, the Fed can not only create excess reserves, but also a. increase mortgage interest rates. b. reduce borrowing by corporations. c. increase the safety of bank deposits. d. increase the money multiplier.

D. The money multiplier is equal to the reciprocal of the reserve requirement. So as the reserve requirement decreases the value of the multiplier increases. In other words, as the denominator of a fraction increases, the value of the number increases.

11. In the United States economy which one of the following is not money? a. A Susan B. Anthony $1 coin. b. A checking account at a bank. c. A 25-cent piece (i.e., a quarter). d. A $100 U.S. Government savings bond.

D. U.S Government savings bonds are not transferable in terms of ownership. Therefore, they could not be used as money.

14. An important function of commercial banks, in addition to storing money and keeping it safe, is to a. print new currency. b. issue fiat money. c. mint coins. d. make loans.

D. We have what is called a partial reserve banking system. Banks only keep a part of their assets in reserve, the rest is free to lend out; the interest earned on the money that is lent out is how banks make a profit.

67. The appropriate open market operation for reducing the money supply is a. buying U.S. government securities. b. limiting the amount loaned to banks. c. buying up Federal Reserve notes. d. selling U.S. government securities.

D. When banks exchange cash for government securities, their excess reserves decrease. Therefore, the amount of money they have to lend out decreases, thus decreasing the money supply.

68. Which of the following statements is correct? a. To control the money supply, the Fed relies primarily on the reserve requirement. b. The discount rate is the rate of interest which banks charge to their best customers. c. The Fed changes the reserve requirement frequently. d. Banks can turn a borrower's IOU into money, that is, they can create money.

D. When people borrow money they will spend the money. Anytime money is spent, there is a multiple effect on the money as money changes hands and people spend a percentage of any money they receive.

23. The federal debt will decline as a percentage of GDP only when a. GDP increases more slowly than the debt increases. b. prices are held constant. c. GDP and the debt increase at the same rate. d. GDP increases faster than the debt increases.

D. Whether the debt is considered high or low depends on how big it is in relation to GDP. If GDP increases more than the debt increases, the debt will decline as a percent of GDP.

13. When U.S. imports exceed exports, foreigners accumulate dollars which they partially invest in assets in the United States, thereby providing all of the following except a. an additional means of funding federal deficits. b. a source of capital investment in U.S. cities and towns. c. buyers for U.S. corporations and real estate. d. a supplement to the growing U.S. saving rate.

D. With more money leaving the country than entering, U.S. savings rate will decrease.

1. Which of the following is a function of government? a. Make and enforce the rule of law. b. Provide public goods. c. Protect citizens against social costs. d. Encourage merit goods. e. All of the above

E. The government has many functions. A free enterprise system can only function and prosper with a strong central government, but the question is - what role should the government play and how large should it be to promote the above while encouraging growth and preserving our freedom?