Chapter 12
Money and Banking in the Developing Economy
General Questions
1.Thomas Jefferson argued that the United States should adopt the Spanish dollar as the official unit of account because
a.so many colonists came from Spanish-speaking nations.
b.it was based on the decimal system.
c.it was less prone to inflation than other units of account.
d.it was the unit of account used in most European countries.
2.Under the bimettalic standard of the 19th century,
a.the amount of money in circulation increased.
b.the American dollar served poorly as a unit of account.
c.only one metal tended to circulate as money at any given time.
d.the government earned profits by selling gold.
3.The Coinage Act of 1792 designated
a.both gold and silver as the monetary standard for the United States.
b.gold as the monetary standard for the United States.
c.silver as the monetary standard for the United States.
d.paper Treasury notes as the monetary standard for the United States.
4.According to Gresham’s Law,
a.inflation and unemployment are inversely related.
b.tax rates and tax revenues are inversely related.
c.bad money drives out good money.
d.inflation is inevitable in the long run.
5.All of the following means were used to reduce problems associated with the circulation of commercial bank notes except
a.a pledge by the Treasury to accept all bank notes issued by state-chartered banks.
b.anti-counterfeiting associations formed by commercial banks.
c.bank note reporters and counterfeit detectors, such as Thompson’s Reporter and Hodges’ Bank Note Safeguard.
d.note brokers who bought and sold commercial bank notes.
6.Which of the following was not true of the First and Second Banks of the United States?
a.They had branches throughout the country.
b.They issued paper money.
c.They made loans to private individuals.
d.They set the bimetallic ratio.
7.Opponents of the First Bank of the United States argued that the bank
a.was unconstitutional.
b.created a “money monopoly.”
c.favored northern manufacturing more than southern agriculture.
d.opened the U.S. monetary system to foreign control.
e.all of the above
8.According to Walton and Rockoff, Wall Street bankers opposed the Second Bank of the United States. Their opposition was based on the idea that the Second Bank
a.lent too freely to the federal government.
b.followed a monetary policy that favored stable prices even at the cost of a slower growing economy.
c.followed a monetary policy that kept interest rates too high.
d.favored Philadelphia because that was where the head office of the bank was located.
9.What was not one of the primary reasons why people opposed the First and Second Banks of the United States?
a.They printed too much money and triggered a substantial inflation.
b.They had monopoly control over some banking activities.
c.They were unconstitutional.
d.They did not provide sufficiently generous lending policies.
10.Which of the following antebellum institutions acted most like a central bank?
a.the First Bank of the United States
b.the Second Bank of the United States
c.banks created by the National Bank Act
d.the U.S. Treasury
11.The Second Bank of the United States rose to prominence under the leadership of
a.Alexander Hamilton.
b.Andrew Jackson.
c.Henry Clay.
d.Nicholas Biddle.
12.In the mid-1830s, the United States entered an inflationary period that culminated in the depression of 1839-1843. Contemporary economic historians attribute this economic downturn to
a.the demise of the Second Bank of the United States in 1832.
b.over-issuance of gold coins by the U.S. Mint.
c.over-expansion by the manufacturing sector.
d.external forces, including large inflows of specie from Mexico and Europe.
13.All of the following are examples of state regulations on banks except
a.the Suffolk System.
b.the Safety Fund System.
c.required bond deposits with a state authority prior to chartering.
d.the Forstall System.
14.The Forstall system was the antebellum banking regulation in
a.New England.
b.the old Northwest (Ohio, Indiana, Illinois, and neighboring states).
c.New York state.
d.Louisiana.
- States that developed successful and sound commercial banking systems in the antebellum period included all of the following except
a.New York.
b.Ohio.
c.Michigan.
d.Louisiana.
16.Which of the following antebellum banking innovations was the forerunner of the modern Federal Deposit Insurance Corporation (FDIC)?
a.the Suffolk System
b.the Safety Fund Act
c.the Forstall System
d.the bimetallic standard
17.What best describes the U.S. experience with banking from 1785 until the Civil War?
a.There was a national bank for the entire time period.
b.The first two national banks were largely foreign owned.
c.Only gold was used to back currency.
d.Only national banks could print notes.
18.Which was not a result of the California gold rush?
a.A substantial increase in the money supply.
b.A large increase in GNP.
c.A significant decrease in the prices of farm goods.
Economic Insights
1.What is typically not considered a characteristic of a central bank?
a.The bank backs its currency with gold or silver.
b.The bank has considerable control over the stock of money and uses this control to moderate fluctuations in credit conditions and prices.
c.The bank regulates other banks.
d.The bank lends a lot of money to the government.
e.The bank serves as a lender of last resort to other banks by lending them money when no one else will.
- According to Hume’s price-specie-flow mechanism, a sudden increase in the money stock of Country A will
a.cause an immediate deflation in Country A.
b.lead to an increase in Country A’s imports relative to its exports.
c.lead to an increase in Country A’s exports relative to its imports.
d.cause specie from the rest of the world to flow into Country A.
Economic Analysis
1.In the 1850s, the proportion of silver in the currency supply fell, and the proportion of gold rose. This is an illustration of
a.the quantity theory of money.
b.Gresham's Law.
c.Say's Law.
d.the Walrasian auctioneer.
e.It violates every known law of economics.
- If the market ratio of silver to gold is 16 to 1 and the mint ratio is 15 to 1, then
a.people will cease to use gold and silver as money.
b.the Treasury will be forced to issue paper money.
c.gold is overvalued at the mint.
d.silver is overvalued at the mint.
3.The Coinage Act of 1792 set the relative values of silver and gold coins at 15 to 1. Suppose the relative values of silver and gold in the market was 14 to 1. In this case,
a.only silver would circulate as money.
b.silver would be hoarded or sold abroad.
c.silver would be overvalued at the mint.
d.both gold and silver would circulate as money.
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