Question

22 true/false (@.5 pt., 11 points possible) 1. Free banking is characterized by Rothbard as one where entry by new firms is free. 2. Because banking is complicated, Rothbard claims that with free banking owners should not be subject to the same rules as other firms insofar as having to pay off their debts. 3. Free banking is likely to be quite inflationary. 4. The more that the public is willing to hold a checking account rather than cash, the greater is the potential for inflation. 5. The presence of a central bank makes it more likely that individual private banks will collapse and go out of business. 6. Bank reserves tend to move in the same direction as the public's demand to hold cash (i.e., they both go up together or they both go down together). 7. The creation of credit cards has decreased the demand for cash (currency). 8. As Rothbard points out, if Citibank receives a deposit of $1000 and the money multiplier is 5, then they can immediately increase loans and demand deposits by $4000. 9. One problem that Rothbard points to is that government financing of its debt by selling bonds to the public results in a crowding out effect, resulting in less capital formation in the private sector. 10. The Bank of England was chartered in the same year as the American Revolution, 1776. 11. The Peel Act of 1844 attempted to eliminate fractional reserve banking in England, but failed to do so.

Answer 1

4) the more that the public is willing to hold a checking account rather than cash, the greater is the potential for inflation. False. (there is no relationship between checking account and inflation).

5) the presence of central bank makes it more likely that individual private banks will collapse and go out of business,: false ( the central bank will control both the private and public banks, so if the private banks follow all the rules and regulations then there is no chance of collapse)

6) bank reserves tend to move in the same direction as the public's demand to hold cash: false

(Bank reserves is the minimum amount that the commercial banks need to keep with central bank. If bank reserves is more, the bank will have less money to lend, so the public holding of cash will be minimum.).

7. the creation of credit cards has decreased the demand for cash

(True, as people are using more credit cards, so they are demanding less cash ),