Chapter 12 Money, Banking, and the Financial System

A time deposit is an interest-earning deposit

with a specified maturity date.

Which of the following statements is false?

In indirect finance, lenders and borrowers do not go through a financial intermediary.

Which of the following statements is false?

Credit cards are money since they serve as a medium of exchange

A money economy is likely to have _________________ and _________________than a barter economy, because a double coincidence of wants is ____________ in a barter economy.

more output, more leisure, necessary

A bank has $100 million in assets and a net worth of $20 million. It's liabilities equal

$80 million.

M1 is equal to

currency held outside banks + checkable deposits

To a bank, the checkable deposits it holds for its customers are classified as

a liability.

The Federal Reserve System redefined the money supply measures M1 and M2 in

May 2020

AreaRefer to the exhibit. What dollar amount goes in blank (B)?

Balance Sheet

Bank QRS

($ millions)

Assets

Liabilities

Reserves

(A)

Checkable Deposits

$ 150

Loans

200

Nontransaction Deposits

50

Securities

60

Borrowings

6

Total Assets

$284.5

Bank Capital

(B)

$78.5

AreaRefer to the exhibit. Is Bank QRS currently insolvent?

Balance Sheet

Bank QRS

($ millions)

Assets

Liabilities

Reserves

(A)

Checkable Deposits

$ 150

Loans

200

Nontransaction Deposits

50

Securities

60

Borrowings

6

Total Assets

$284.5

Bank Capital

(B)

No, because its total assets are greater than its total liabilities.

Interest the proper economics term money, income, credit, or wealth in the following blanks: (1) Most of her ____________ is tied up in real estate. (2) How much _______ did Jones earn last year at his job? (3) It is difficult to get ___________ in today's tight mortgage market?

wealth, income, credit

Given the following data, what is the dollar value of currency held outside banks?

M1 = $900 billion

Checkable deposits = $550 billion

Small denomination time deposits = $330 billion

Money market mutual funds = $250 billion

$350 billion

Consider the following data: currency (held outside banks) = $685 billion, checkable deposits = $4,709 billion, small-denomination time deposits = $2,500 billion, retail money market mutual funds = $700 billion. M1 equals __________ billion and M2 equals __________ billion.

$5,394, $8,594

Credit cards ______________ a medium of exchange and __________ considered by economists to be money.

are, are not

As the price level in the economy rises,

the store of value function of money diminishes.

If people move money from their demand deposits into their savings accounts, it follows that

Both M1 and M2 will remain unchanged.

___________________is a condition that exists when one party to a transaction changes his or her behavior in a way that is hidden from, and costly to, the other party.

Moral hazard

Under a fractional reserve banking system, banks must hold only a fraction of their deposit liabilities in the form of

reserves

A savings deposit is

an interest-earning account at a commercial bank or thrift institution for which there is no specified maturity date.

When we say that money serves as a unit of account, this means that

money serves a common measure in which relative values are expressed.

A bank's assets are $700 million and its liabilities are $500 million, which indicates that the bank's net worth (bank capital) is ____________________million. If the bank's assets rise by 10% at the same time that its liabilities rise by 5%, the bank's new net worth will then be _______________million.

$200, $245

If we say that a dollar is being used to trade for some good, then here the dollar, as money, is serving as a ______________

medium of exchange

Economists define money as

any good that is widely accepted for purposes of exchange and the repayment of debt

__________________ relates to an economic agent on one side of a transaction having information that an economic agent on the other side of the transaction does not have

Asymmetric information

Credit cards are

not money

Prior to the Fed redefining the money supply measures, there was a ______________ dollar difference between _________________________ than there is today.

larger, M1 and M2

Which of the following functions of money best describes the function of savings deposits?

store of value

Fractional reserve banking is an arrangement that allows banks to hold reserves equal to a fraction of its

deposit liabilities

Brian has what Jose wants and Jose wants what Brian has. Brian and Jose

have a double coincidence of wants

In a barter economy, it is harder to find people with whom you have a double coincidence of wants than is the case in a money economy. Because of this, the _______________ of making exchanges in a barter economy are likely to be higher than in a money economy

transaction costs

If people withdraw money from their checkable deposits and deposit that money into their retail money market mutual funds, it follows that

M1 will decline and M2 will remain unchanged

Refer to the exhibit. If Bank QRS's assets rise by 3 percent and its liabilities rise by 2 percent, by what percentage would its bank capital change compared to its original bank capital (i.e., the value originally in blank (B))?

Balance Sheet

Bank QRS

($ millions)

Assets

Liabilities

Reserves

(A)

Checkable Deposits

$ 150

Loans

200

Nontransaction Deposits

50

Securities

60

Borrowings

6

Total Assets

$284.5

Bank Capital

(B)

5.7 percent

The unit of account function of money refers to the

common measurement service provided by money

If M1 rises, then

M2 will rise.

Refer to the exhibit. What dollar amount goes in blank (A)?

Balance Sheet

Bank QRS

($ millions)

Assets

Liabilities

Reserves

(A)

Checkable Deposits

$ 150

Loans

200

Nontransaction Deposits

50

Securities

60

Borrowings

6

Total Assets

$284.5

Bank Capital

(B

$24.5.

______________ were the first bankers

Goldsmiths

The function of money termed unit of account refers to the

function money serves as a common measure in which relative values are expressed

Refer to the exhibit. What dollar amount goes in blank (A)?

———————————-

Balance Sheet

Bank ABC

($ million)

———————————

Assets Liabilities

———————————

Reserves $35

Checkable Deposits $300

Loans 900

Nontransaction Deposits 500

Securities 40

Borrowings 75

Bank Capital (A)

$100