Chapter 14: Quiz Answers -- Money and Banking

1. A barter economy
   all of the above. Because exchange in a barter economy involves trading goods and services directly for goods and services, no monetary system is used, transactions are difficult to carry out, and trade requires an double coincidence of wants.

2. Which statement best describes the distinction that economist makes between "money" and "income?"
   Income is the flow of revenue over a particular time period (for example, I make $10 per hour) while money is something used to facilitate transactions. Money is a stock, and income is a flow. Income must be qualified by some measure of time, i.e. $10 per hour.

3. Which of the following assets qualifies as "money" meaning M1?
   checking account balances. Government bonds and savings accounts are not part of M1. Savings account balances, however, are part of M2.

4. Two assumptions required to achieve the maximum money supply expansion are
   banks hold no excess reserves, and all cash is deposited into a checking account. If funds are deposited into savings accounts as well, then M1 expands by less than the maximum amount. Banks must hold some reserves against deposits but they cannot hold excess reserves if the money supply is to expand by the maximum possible.

5. Rank these assets from most liquid to least liquid:
   1-3-4-2 The assets from most liquid (easiest to convert to cash) to least liquid (most difficult to convert to cash) are checking accounts, saving accounts, stocks, and a car.

6. Suppose the RRR is 10 percent and a bank accepts $100 in new deposits. The maximum amount that the money supply can expand is
   $900. The maximum change in the money supply is 1/RRR (10) times the initial change in excess reserves ($100 - 10% x $100) = $90. Therefore, $90 x 10 = $900.

7. Suppose the RRR is 100 percent and a bank accepts $100 in new deposits. The maximum amount that the money supply can expand is
   $0 This scenario represents a situation in which banks are simply big vaults. They must keep every dollar of deposits on hand. Because nothing is left to lend out, the money supply cannot expand. All that changes is that cash is converted into bank deposits.

8. The following are all bank assets except
   Certificates of Deposit. Certificates of deposit (CDs) are bank funding sources; they are bank liabilities.

9. The U.S. dollar is still backed by gold; its value resides in the vaults at Fort Knox because the government will exchange dollars for gold.
   False. The government officially abandoned the domestic gold standard in the early 1970s. All that supports the value of the dollar is the belief that people put in the value of the dollar.

10. The United States has a fractional reserve banking system. This term means that banks can break all of their reserves up and lend them out to many different borrowers.
    False. A fractional reserve system means that banks need to hold only a fraction of deposits on hand as reserves. It is true, however, that they can lend excess reserves to many different borrowers.