Banking Chapter 3 Study Guide

Transcription

1 Name: Class: Date: Banking Chapter 3 Study Guide True/False Indicate whether the sentence or statement is true or false. 1. The flow of money has a direct effect on how the economy performs. 2. Liquidity is variable, depending on the nature of the asset. 3. MZM is sometimes referred to as the base money supply. 4. The agreed-upon value of money in the United States today is based on the government s supply of gold at Fort Knox, Kentucky. 5. Banks can loan customers the money it has on deposit, minus the reserve requirement. 6. A bank may not use excess reserves to give depositors their money back if they demand it. 7. Most large money transactions involve ledger entries rather than the movement of physical currency. 8. A dollar bill represents an obligation of the government to provide a commodity of value to you. 9. Generally speaking, when interest rates are high more credit is accessible and the economy tends to grow quickly. 10. The prime rate is usually the same among major banks. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 11. If there is too much money moving in the economy a. unemployment will probably rise. b. prices may rise, causing inflation. c. prices will fall, causing widespread business failure. d. both a and b, but not c 12. Which of the following assets is the most liquid? a. the money in your savings account b. 100 shares of stock in a Fortune 500 company c. the money in your wallet d. a certificate of deposit that comes due in six months 13. Which of the following elements of the money supply, as defined by the Federal Reserve, can be spent immediately? a. M1 b. M2 c. M3 d. MZM 14. The official currency of the United States can properly be classified as a. conventional money. b. fiat money. c. commodity money. d. product money. 1

2 Name: 15. Which of the following is NOT considered a factor in money creation? a. the Federal Reserve s supply and control of money b. banks use of money c. the demand for money d. the printing of currency by the Bureau of Engraving and Printing 16. Which of the following would be considered a secondary reserve for a bank? a. cash the bank has on hand b. securities the bank has purchased from the Federal government c. deposits that may be due from other banks d. the reserve percentage required by the Federal Reserve System 17. Money on deposit, minus, can be loaned by banks to customers. a. excess reserves b. cash on hand c. primary reserves d. the reserve requirement 18. If banks must hold more money in reserve, a. the money supply will expand. b. there is more money available to lend. c. there is less money available to lend. d. both a and b, but not c. 19. The interest rate the Federal Reserve charges for loans to member banks is called the a. prime rate. b. discount rate. c. market rate. d. treasury rate. 20. The Federal Reserve influences the federal funds rate by a. buying and selling government securities. b. adjusting the reserve requirement. c. lowering the discount rate. d. all of the above. Completion Complete each sentence or statement. 21. The supply is defined as the liquid assets held by banks and individuals. 22. The measure of how quickly things may be converted to something of value is called. 23. MZM is a measure of the annual in the money supply 24. measures are tools used to estimate the size of the money supply. 25. money is based on some item of value, such as gold or precious stones. 26. money is money that is deemed legal tender by a government. 27. Resources a bank uses to create money through its business transactions are called reserves. 2

3 Name: 28. The effect is a phenomenon that creates new deposits from lending. 29. The federal rate is the amount of interest charged for short-term, interbank loans. 30. The rate is the interest rate the Federal Reserve sets and charges for loans to member banks. Numeric Response 31. Barry earns a monthly income of $2500. He receives a 12 percent raise. What is his monthly income now? 32. Suppose the total amount of currency (i.e., Federal Reserve notes and coins) in circulation today is $555 billion. If 95 percent of this amount consists of Federal Reserve notes, what amount of currency in circulation consists of coins? 33. Suppose the Fed requires all banks to hold a reserve of 4 percent on the first $45 million of customer deposits, and 10 percent on all deposits above that. If a bank has $100 million on deposit, what is the amount of the reserve requirement? 34. Suppose the Fed requires all banks to hold a reserve of 5 percent on the first $60 million of customer deposits, and 12 percent on all deposits above that. If a bank has $125 million on deposit, what is the amount of the reserve requirement? 35. Calculate the total amount of money created from a deposit of $10,000 as it moves through four cycles of deposit. Assume a reserve rate of 12 percent. (Round answer to nearest two decimal places.) 36. Calculate the total amount of money created from a deposit of $5,000 as it moves through four cycles of deposit. Assume a reserve rate of 15 percent. (Round answer to nearest two decimal places.) Short Answer 37. What types of money and circumstances of liquidity are defined by the M2 element of the money supply? 3

4 Name: 38. You cannot take a Federal Reserve note to a bank and exchange it for gold or silver. Why not? 39. Why does the Federal Reserve require banks to hold money in reserve? 40. What happens to the money supply if the Fed lowers reserve requirements? Why? 41. What thing of value does the government provide those who hold United States currency? 42. What is the prime rate? Essay 43. Why might extra money in the economy cause inflation? 44. What is a fractional-reserve system? What is its relationship to the money supply in the United States? 4

5 Name: 45. Name and distinguish between the three types of reserves held by banks. 46. Briefly describe the main factors affecting interest rates, excepting the actions of the Federal Reserve. 5