Under barter, contracts for future delivery are hard to arrange, especially for perishable goods.
Correct Answer
True
True. Without money, a future deal has to be stated in specific goods, and goods such as fresh food may spoil before the trade takes place. Money solves this by letting deals be stated and settled in a common measure.
Category: Functions of Money
Question 2
Money can serve as a medium of exchange only if a government backs it with gold or silver.
Correct Answer
False
False. Fiat money has no commodity backing yet is widely accepted in payment. Its acceptance rests on government decree and public trust that it will keep its value.
Category: Forms of Money
Question 3
Before the Great Recession, U.S. banks typically held reserves close to the required minimum.
Correct Answer
True
True. Before 2008 reserves earned no interest, so holding extra reserves meant giving up income from loans, and banks kept reserves near the minimum. During and after the Great Recession, banks began holding ample reserves well above the requirement.
Category: Money Creation
Question 4
Commodity money has value only because of its use as money.
Correct Answer
False
False. Commodity money, such as gold, silver or cocoa beans, also has value from other uses. Gold, for example, is used in jewelry and electronics.
Category: Forms of Money
Question 5
M1 is included in M2.
Correct Answer
True
True. M2 is the broader measure of money and equals M1 plus less liquid assets such as money market funds and certificates of deposit. Anything counted in M1 is also counted in M2.
Category: Measuring Money
Question 6
Currency held in bank vaults is counted as currency in circulation in M1.
Correct Answer
False
False. Currency in circulation excludes coins and bills held in bank vaults, at the Federal Reserve or by the Treasury. Only currency held by the public counts, because vault cash is part of bank reserves.
Category: Measuring Money
Question 7
In the money multiplier model, money created beyond a bank's original reserves comes from loans that are redeposited and lent out again.
Correct Answer
True
True. Each loan is deposited in another bank, which keeps part as reserves and lends the rest. These repeated rounds of lending and depositing expand checkable deposits and M1.
Category: Money Creation
Question 8
On a T-account, a bank's assets equal its liabilities minus its net worth.
Correct Answer
False
False. Assets equal liabilities plus net worth. Net worth is what remains when liabilities are subtracted from assets, so the two sides of the T-account always balance.
Category: Bank Balance Sheets
Question 9
Savings institutions and credit unions, like banks, accept deposits and make loans.
Correct Answer
True
True. All three are depository institutions that pool deposits and lend from that pool. They differ in ownership and history; for example, credit unions are nonprofits owned by their members.
Category: Bank Risk
Question 10
Owning more debit cards increases the amount of money in the economy.
Correct Answer
False
False. A debit card only gives access to money already in a checking account. Getting more cards does not change the money supply, just as printing more checks does not add money to an account.
Category: Measuring Money
Question 11
When interest rates rise, a bank holding many older fixed-rate loans can end up paying more on deposits than it earns on those loans.
Correct Answer
True
True. To keep depositors, the bank must raise the rates it pays, but older loans keep earning their original lower rates. This is a risk created by the asset-liability time mismatch.
Category: Bank Risk
Question 12
Credit unions are for-profit firms owned by outside shareholders.
Correct Answer
False
False. Credit unions are nonprofit institutions owned and run by their members. Members are also the people who receive most of their loans.
Category: Bank Risk
Question 13
A higher reserve requirement reduces the money multiplier.
Correct Answer
True
True. The money multiplier is 1 divided by the reserve requirement, so a larger requirement gives a smaller multiplier. Banks must hold more of each deposit, leaving less to lend in each round.
Category: Money Creation
Question 14
Bank lending reduces M1 because the loaned money leaves the banking system.
Correct Answer
False
False. Bank lending expands M1. Loans are typically deposited in other banks, raising checkable deposits, which are part of M1.
Category: Money Creation
Question 15
A bank with negative net worth is bankrupt.
Correct Answer
True
True. Negative net worth means the bank's liabilities exceed its assets, so it cannot repay all its depositors from what it owns. This can happen when loan defaults are far larger than expected.
Category: Bank Balance Sheets
Question 16
Time deposits are counted in M1 because they can be spent as easily as currency.
Correct Answer
False
False. Time deposits are counted in M2, not M1, because the money is committed for a set period. They can be withdrawn, but with more effort or a penalty, so they are less liquid than M1.
Category: Measuring Money
Question 17
A financial intermediary lowers the transaction costs of savers and borrowers finding each other.
Correct Answer
True
True. Banks and other intermediaries collect deposits from many savers and lend to many borrowers. This saves each saver from having to find and check a borrower on their own.
Category: Bank Risk
Question 18
Money market funds pool investors' money and place it in long-term, high-risk corporate stocks.
Correct Answer
False
False. Money market funds pool investors' deposits into safe, short-term assets such as short-term government bonds. That safety and short term is why they are counted in M2.
Category: Measuring Money
Question 19
Banks under financial stress may cut back lending, which can hurt sectors that depend on borrowing, such as home construction.
Correct Answer
True
True. When a bank's assets lose value, it may lend less to protect itself. Sectors that rely on credit, such as housing, business investment and car manufacturing, are hit hard, as happened in the 2008 to 2009 crisis.
Category: Bank Risk
Question 20
Bank capital is another name for a bank's total deposits.
Correct Answer
False
False. Bank capital is another name for a bank's net worth, its assets minus its liabilities. Deposits are liabilities the bank owes to its customers.
Category: Bank Balance Sheets