FINAN 4300 Problem Set 5

What is the difference between transaction and non-transaction accounts?

Transaction accounts = designed for frequent payments and transfers (e.g., demand deposit accounts, NOW accounts, MMDAs with limited checks),

Non-transaction accounts = primarily for savings and wealth accumulation (e.g., passbook savings, CDs, IRAs) with limited or no payment capability

What accounts are considered “core” deposits?

Core deposits are stable, low-cost funding sources that tend not to leave the bank quickly, including demand deposits, NOW accounts, MMDAs, savings accounts, and small retail time deposits

What are the two traditional types of payment systems?

The two traditional payment systems are cash (currency and coin) and cheques.

Identify at least two of the alternative payment systems.

Alternative payment systems debit cards / credit cards and crypto currencies.

What is the definition of “crypto currencies”?

Crypto currencies are digital forms of money that rely on cryptographic systems and distributed ledgers (blockchain) rather than banks or governments; ex: Bitcoin

What entity prints new currency?

Printed by the Bureau of Engraving and Printing, part of the U.S. Department of the Treasury, and distributed through the Federal Reserve System.

What are the three parts of a check?

Legally, the three parts are:

• the drawer (the account holder writing the cheque)

• the drawee (the bank on which it is drawn),

• and the payee (the recipient of the funds).

• Physically, the three parts often refer to:

• the cheque number,

• the routing/transit number

• account number

Demand deposit accounts (DDAs) pay market-linked interest rates similar to money market mutual funds.

FALSE

Demand deposit accounts (DDAs) = typically pay little or no interest and not market-linked rates. DDAs are primarily for liquidity and payments rather than yield

Money market mutual funds = invest in short-term instruments like T-bills and commercial paper, so their yields move with market conditions

Super NOW accounts were created to offer higher yields than standard NOW accounts, though with tighter restrictions.

TRUE

Super NOW accounts were designed in the 1980s to provide higher yields than standard NOW accounts. They often came with restrictions such as limits on the number of cheques or higher minimum balance requirements. The idea was to help banks compete with money market mutual funds without losing deposits. Over time they became less common as interest rate environments changed.

Certificates of Deposit (CDs) provide banks with predictable, stable funding because depositors cannot withdraw funds before maturity

UNCERTAIN

CDs are intended to provide predictable funding because they lock up customer money for a term. However, depositors can withdraw funds before maturity if they are willing to pay penalties, so the stability is not absolute.

The reserve requirement ratio directly controls the amount of loans a bank can make in the modern banking system.

FALSE

Modern banking is driven by credit demand, capital adequacy, liquidity

management, and risk controls rather than reserve mechanics

Cheque kiting is a form of fraud that exploits float between banks

TRUE

Cheque kiting is a deliberate fraud where a customer takes advantage of float

by writing cheques between banks without sufficient funds. The delay in cheque

clearing allows the fraudster to withdraw or use funds temporarily.

ACH payments are generally invisible to consumers, but they power most payroll

deposits and utility debits.

TRUE

ACH payments are not visible as a consumer brand but power core functions like

payroll direct deposits, mortgage or utility debits, and business-to-business

payments. ACH moves money in batches rather than in real-time. It is the backbone of U.S. retail payments.

Real-time payment systems (RTP and FedNow) allow for reversible transactions if the sender later disputes them.

FALSE

Real-time payment systems such as RTP and FedNow are designed to be final and irrevocable once processed. This ensures certainty for both sender and receiver. If a payment is sent in error, it can only be reversed with the receiver’s consent. The design minimizes systemic risk but makes fraud and scams harder to unwind.

Zelle, Venmo, and PayPal are new independent rails that bypass banks entirely.

FALSE

Zelle, Venmo, and PayPal are overlays that rely on existing rails like ACH,

card networks, and increasingly real-time systems. They provide a user interface and branding layer, but settlement still passes through banks and regulated payment infrastructure.

Which of the following is a distinguishing feature of a Negotiable Order of Withdrawal (NOW) account?

It pays interest and allows limited cheque-writing for individuals and non-profits

Which of the following best describes a Money Market Deposit Account (MMDA)?

An insured account with market-linked yields and limited transfers

Which of the following is not generally considered a “core deposit”?

Large negotiable CD purchased by a corporation

In the money multiplier model 𝑀𝑀 = 1/𝑟𝑟, what does “𝑟𝑟” represent?

Required reserves ratio

Which statement about the endogenous money view is most accurate?

Loans create deposits, and reserves are adjusted afterward

Which of the following is not one of the three legal parties to a cheque?

Maker

Under the Check 21 Act, which innovation most changed cheque clearing?

Legal recognition of substitute cheque images

Which of the following is true about the ACH (Automated Clearing House) system?

It processes transactions in batches, such as payroll and bill pay

Which of the following is a key difference between ACH payments and card payments?

Merchants pay interchange fees on cards but not on ACH

Which of the following correctly orders payment instruments from lowest to highest

settlement speed?

Cheque → ACH → Wire