Finance assignment

Assignment 3–Undergraduates Due at end of day on Sunday, March 1

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There are 35 multiple choice questions worth 1 point each and one short essay question worth 5 points. As usual, BL refers to Benson and Loftesness and ES to Evans and Schmalensee.

Multiple choice questions (1 point each)

1. ____ is money that is not convertible into anything else. According to Kohn, it is accepted as payment mainly because ____. (Kohn, p. 201)

A. bank dollars; people believe that others will accept it as payment B. bank dollars; the government orders that it be accepted for all payments C. fiat money or definitive money; people believe that others will accept it as payment D. fiat money or definitive money; the government orders that it be accepted for all payments

2. Kohn argues that governments have ____ ability to create the type of money in the previous question and that this has been a main cause of ___around the world. (Kohn, pp. 201-202)

A. limited recessions B. limited; inflation C. unrestricted; recessions D. unrestricted; inflation

3. According to ES, the first metallic money consisted of ____ coins produced by the Lydians in the 7th century B.C. These coins had the advantage over previous commodity monies of being more ____. (ES, pp. 26-27)

A. copper; easily exchanged, stored, and counted B. copper; difficult to steal C. gold and silver; easily exchanged, stored, and counted D. gold and silver; difficult to steal

4. Governments that issued metallic coins earned a profit called _____ that consisted of the difference between the value of the coin in exchange and the value of the metallic content. This profit tempted governments to ____ the coins. (ES, p. 27)

A. seigniorage; debase B. float; delay payments of C. seigniorage; increase the metallic content of D. interchange; hoard

5. According to BL, the only way cash can get into the economy is through _____. (BL, p. 110) A. the Treasury using cash to make payments to the public

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B. banks and other depository institutions ordering cash from the Fed C. the public going to the Federal Reserve to request currency D. banks and other depository institutions ordering cash from the Treasury

6. Legal tender laws require that cash be accepted for which of the following payments? (BL, p. 110, Kohn, p. 201)

1. Taxes and private debts. 2. Purchases of goods and services without regard to size of purchase. 3. Purchases of goods and services below a specified dollar amount.

A. 1 only B. 1 and 2 C. 3 only D. 1, 2, and 3

7. When a bank receives worn or damaged currency, it typically returns the currency to the ____ and receives ____. (BL, p. 111)

A. Federal Reserve; nothing in return B. Federal Reserve, a credit to its reserve account at the Fed C. Treasury; nothing in return D. Treasury, a reduction in its federal tax liability

8. When a consumer withdraws cash from one of the bank’s own ATM machines, she typically pays to her bank ____. (BL, p. 111)

A. no fee, though perhaps up to a monthly limit of withdrawals B. a fixed fee per withdrawal C. a fee that depends on the size of the withdrawal D. both a fixed fee and a fee that depends on the size of the withdrawal

9. When a consumer withdraws cash from an ATM machine owned by a bank other than his own, it has been customary for ___ to be paid by _____. (BL, p. 112)

A. a network fee; both banks to the ATM network B. a transaction fee; the consumer to the ATM network C. an interchange fee; the consumer’s bank to the bank that owns the ATM machine D. an interchange fee; bank that owns ATM machine to the consumer’s bank

10. According to BL, technological advances have made the counterfeiting of currency____, while prompting banks and processors to ____. (BL, p. 112)

A. harder; avoid handling cash B. easier; avoid handling cash C. harder; install more sophisticated equipment for detecting it

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D. easier; install more sophisticated equipment for detecting it

11. BL say that use of cash at the POS is ___ and that digital currencies such as Bitcoin have _____ to replace cash. (p. 113)

A. decreasing; the potential B. decreasing; no chance C. increasing; the potential D. increasing; no chance

12. According to Kohn, dollar bills are an example of ___, while checks are an example of ____. (p. 202)

A. commodity money; fiat money B. fiat money; commodity money C. bank IOUs that are convertible on demand into fiat money; fiat money D. fiat money; bank IOUs that are convertible on demand into fiat money

13. Assume that you write a check for $700 to UMKC for tuition. You have a checking account at Students Bank, while UMKC has a checking account at University Bank. If UMKC uses the “direct” method described by Kohn at the bottom of p. 202 to get its money, it will ___.

A. send a messenger to University Bank to present the check for immediate payment in cash B. send a messenger to Students Bank to present the check for immediate payment in cash C. deposit your check in its account at University Bank after endorsing it D. deposit your check in its account at University Bank, making sure not to endorse it

14. If UMKC gets its money in the more usual way described by Kohn on p. 203, it will ___.

A. send a messenger to University Bank to present the check for immediate payment in cash B. send a messenger to Students Bank to present the check for immediate payment in cash C. deposit your check in its account at University Bank after endorsing it D. deposit your check in its account at University Bank, making sure not to endorse it

15. If University Bank and Students Bank do not have accounts at the same correspondent bank, the payment will most likely be settled by the Federal Reserve ____ the reserve account of University Bank and ___ the reserve account of Students Bank. (Remember that crediting an account means adding to it, and debiting an account means taking away from it.) (Kohn, p. 203)

A. debiting; crediting B. debiting; debiting C. crediting; crediting D. crediting; debiting

16. In the previous question, the payment can be cleared by the bank of deposit sending the check to ____. (Kohn, p. 203)

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A. a correspondent bank B. a local clearinghouse C. the Federal Reserve D. any of the above

17. Which of the following are ways that have been used in the U.S. and other countries to reduce the burden on merchants of bounced checks? (Kohn, p. 204) 1. Check guarantee cards for checking account customers. 2. Overdraft privileges for checking account customers. 3. Fines on merchants for accepting checks that end up bouncing.

A. 1 only B. 2 only C. 1 and 2 D. 1, 2, and 3

18. Certified checks ____ regular checks in that payment with certified checks is ____by the bank. (Kohn, p. 204)

A. resemble; not guaranteed B. resemble; guaranteed C. differ from; not guaranteed D. differ from; guaranteed

19. In the terminology introduced in Unit 1, giro payments can be classified as ____ payments. According to Kohn, paper giro payments have been used much ____ in other countries than in the U.S. (Kohn, pp. 205-206, BL, pp. 9-10)

A. credit push; less B. credit push; more C. debit pull; less D. debit pull; more

20. Kohn argues that giro payments ____ a solution to the problem of bad checks because the payer’s bank ___ accept the payment order if there are insufficient funds in the payer’s account. (p. 206)

A. are not; will B. are not; will not C. are; will D. are; will not

21. In the U.S. in the late 1800s and early 1900s, non-par checking referred to _____. (ES, pp. 39-41; BL, p. 26)

A. the use by banks of the correspondent banking system to settle check payments

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FIN 5567/369 Keeton Spring 2015

FIN 5567/369 Keeton Spring 2015

B. the use by banks of clearinghouses to settle check payments C. the practice by banks in remote areas of charging an exchange fee on checks presented for payment by mail D. the practice by banks of charging their customers a fee for each check written

22. According to critics of the late 1800s check-clearing system, checks sometimes took a circuitous route from the payee’s bank to the payer’s bank because ____. (ES. pp. 40-41).

A. the U.S. transportation system was still undeveloped B. the payee’s bank was trying to avoid exchange charges by the payer’s bank for collection C. the payer’s banks was located in a remote area that was hard to reach D. government regulations distorted check clearing

23. During the first years following its founding in 1913, the Federal Reserve changed the nature of check clearing by doing which of the following? (ES, p. 41; BL, p. 32)

1. Setting up a national system for clearing checks among member banks. 2. Reducing the extent of non-par banking. 3. Putting all private clearinghouses out of business.

A. 1 only B. 2 only C. 1 and 2 D. 1 and 3

24. In check payments, the amount of time the payee’s bank takes to make the funds available to the payee is ___. (BL, p. 29)

A. strictly at the discretion of the payee’s bank B. strictly at the discretion of the payer’s bank C. almost always equal to the maximum allowed by Regulation D. often less than the maximum allowed by Regulation CC, so as to compete for deposits

25. One early example of technological innovation in check processing was Magnetic Ink Character Recognition (MICR). Its main effect was to ____. (BL, pp. 26-28)

A. improve detection of fraudulent checks B. enable large-volume sorting of checks by machine C. cause the conversion of paper checks to electronic images D. reduce the need for airplanes to transport checks

26. The objective of Check 21 was to encourage greater use of ____ in check processing. (BL. p. 28) A. paper checks B. check sorting machines

C. electronic check images

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D. the ACH system 27. The way Check 21 achieved the objective in the previous question was to ____. (BL, pp. 28)

A. require the payer’s bank to accept a printed copy of the original check B. require the payer’s bank to accept an electronic image of the check C. prohibit use of paper checks D. allow payees to convert checks to ACH debits

28. Check 21 had which of the following effects on check payments? (BL, pp. 28, 32, 38)

1. Reduced the cost of processing checks. 2. Eliminated paper checks. 3. Decreased vulnerability of payments to terrorist attacks such as 9/11.

A. 1 only B. 1 and 2 C. 2 and 3 D. 1 and 3

29. Banks usually ____fees to their consumer and small business customers for writing or depositing checks because they tend to view checking accounts as ____. (BL, pp. 33-34)

A. charge; part of an overall bundle of services that attracts deposit customers B. charge; a separate line of business that should be profitable on its own C. do not charge; a separate line of business that should be profitable on its own D. do not charge; part of an overall bundle of services that attracts deposit customers

30. For large business customers, banks charge transactions fees for checking accounts but allow customers to offset the fees by ____. (BL, p. 34)

A. referring other business customers to the bank B. assuming liability for check fraud C. paying higher interest rates on loans D. holding compensating balances in low-interest deposit accounts

31 “Positive pay” is a service offered primarily to ____ customers that is designed to prevent ____. (BL, p. 34)

A. business; fraudulent checks from being paid B. business; checks from bouncing due to insufficient funds C. consumer; fraudulent checks from being paid D. consumer; checks from bouncing due to insufficient funds

32. The purpose of “lockbox services” is to provide businesses with ____. (BL, pp. 34-35)

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A. an efficient way to process large volumes of checks received from customers B. an efficient way to process large volumes of checks written to suppliers C. a safe place to store large volumes of checks D. a safe place to store large volumes of cash

33. In check payments, remote deposit capture (RDC) is a way for ___. (BL, p. 35)

A. the payee’s bank to send an electronic image of a check to the Federal Reserve B. the payee to deposit an electronic image of a check with his or her bank C. the payer to send an electronic image of a check to the payee D. the payee’s bank to send an electronic image of a check to the payer’s bank

34. A bank of deposit ____ suffer a loss if a check is returned for insufficient funds because ____. (BL, p. 38)

A. can; a bank of deposit cannot re-present a bounced check B. can; the check depositor may have drained the account before the check is returned C. cannot; the Federal Reserve will still credit the bank of deposit’s reserve account D. cannot; a bank of deposit can debit the customer’s account if the check is returned

35. According to BL (p. 44), the majority of losses from bounced checks (NSF) are borne by ____. (BL, p. 38)

A. the banks in which the merchants and biller deposit the checks B. the merchants and billers who are paid with the checks C. the banks of the consumers who write the checks D. the government

Essay Question (5 points)

36. In the attached article, Stahl discusses whether it is a good idea for the U.S. to rely on currency for payments. Briefly summarize his position and explain how he justifies it.

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