Chapter 2: Money and the Financial System
Questions and Answers
1. Historically, which of the following has been a reliable surplus economic unit?
a. Individuals
b. Federal government
c. State and local governments
d. Corporations
Answer: a
2. Money was first developed to serve as a _____ _____.
a. a credit offer
b. medium of non-exchange
c. medium of exchange
d. a debt offer
Answer: c
3. Which of the following should be classified as a financial asset?
a. gold
b. real estate
c. long-term bond issued by a corporation
d. credit card debt
Answer: c
4. What is a bimetallic standard?
a. a nonmonetary standard based on commercial paper
b. a monetary standard based on two metals, usually silver and gold
c. a monetary standard based on a banker’s acceptance
d. coins that do not contain the same value in metal as their face value
Answer: b
5. The two basic components of money supply in the United States include _____ _____ and _____ _____.
a. mortgage notes; physical money
b. loan applications; credit defaults
c. bankers acceptances; precious metals
d. physical money; deposit money
Answer: d
6. Which of the following best describes a banker’s acceptance?
a. a debt that is accepted by a bank
b. a promise of future payment issued by a bank and guaranteed by an importing firm
c. a promise of future payment issued by an importing firm and guaranteed by a bank
d. a promise of current payment issued by an importing firm and guaranteed by the government
Answer: c
7. What is commercial paper?
a. short-term unsecured promissory note issued by a high credit-quality corporation
b. short-term secured promissory note issued by a low credit-quality corporation
c. long-term unsecured promissory note issued by a low credit-quality corporation
d. long-term secured promissory note issued by a high credit-quality corporation
Answer: a
Level: easy
Section: Money Market Securities
8. What is a negotiable certificate of deposit (NCD)?
a. a long-term debt instrument issued by depository institutions to individual or institutional depositors.
b. a short-term debt instrument issued by depository institutions to individual or institutional depositors.
c. a long-term debt instrument issued to a depository institution for individual and institutional depositors.
d. a short-term debt instrument issued to a depository institution for individual and institutional depositors.
Answer: b
9. Which of the following is not a characteristic of a treasury bill?
a. long-term debt obligation
b. short-term debt obligation
c. issued by the U.S. Federal Government
d. it is useful when imbalances exist between tax revenue and government expenditures
Answer: a
10. Which of the following best describes a money market security?
a. a debt instrument or security that never matures
b. a debt instrument or security with maturities of one year or less
c. a credit instrument or security with maturities of one year or less
d. a debt instrument or security with a high default risk and a low liquidity
Answer: b
11. The M1 measure of money includes all of these components except for
a. demand deposits
b. currency
c. savings accounts
d. travelers’ checks
Answer: c
12. Why are credit cards useful?
a. they provide unlimited credit limits to consumers that are in bankruptcy.
b. they provide undetermined credit limits to consumers when the cards are issued
c. they provide predetermined credit limits to consumers when the cards are issued
d. they provide unlimited credit limits to consumers when the cards are issued
Answer: c
13. What is inflation?
a. the decrease in the prices of goods and services not offset by an increase in quality
b. the rise in the prices of goods and services not offset by an increase in quality
c. the stability in the prices of goods and services not offset by an increase in quality
d. the demand in the prices of goods and services not offset by an increase in quality
Answer: b
14. What does the velocity of money measure?
a. the rate money deteriorates in the economy
b. the rate of circulation of the money supply
c. the rate of international goods imported in the United States
d. the rate that money is mutilated in the United States
Answer: b
15. Which of the following best describes the gross domestic product (GDP)?
a. the sum of all domestic products in the United States
b. input of goods and services in the economy
c. output of goods and services in the economy
d. the sum of the defective products in the United States
Answer: c
16. The international monetary system was previously tied to what historical standard?
a. money
b. bronze
c. silver
d. gold
Answer: d