Chapter 14: Money, the Federal Reserve, and Interest Rates

What are reasons that checkable deposits are considered to be a component of M1?

A checkable deposit can be converted into spendable electronic cash almost instantaneously by a cash-transfer system, such Venmo or PayPal. A checkable deposit can transfered simply to another party by means of a check or debit card payment. A checkable deposit can be converted into paper money and coins on demand.

The Federal Open Market Committee (FOMC) includes

Answer: d a. the Board of Governors members and 5 of the 12 presidents of the Federal Reserve Banks, of which, the Chairman of the Federal Reserve Board of Governors has a permanent voting seat. b. the Chairman of the Federal Reserve Board of Governors and 7 of the 12 presidents of the Federal Reserve Banks, of which, the president of the New York Fed has a permanent voting seat. c. the Board of Governors members, 7 of the 12 presidents of the Federal Reserve Banks, and the president of the United States. d. the Board of Governors members and 5 of the 12 presidents of the Federal Reserve Banks, of which, the president of the New York Fed has a permanent voting seat.

The Federal Open Market Committee (FOMC)

Answer:d a. develops monetary policy and sells government securities. b. votes on the Fed's monetary policy and purchases government securities. c. develops monetary policy and directs the purchase or sale of government securities. d. votes on the Fed's monetary policy and directs the purchase or sale of government securities.

What is the amount of money that people want to hold as a store of value?

Asset demand for money

In the United States, the monetary authorities are members of the Board of Governors of the ______ ______ System.

Blank 1: Federal Blank 2: Reserve

The 12 ______ _____ banks blend private ownership and public control, making them quasi-public banks. (Enter only one word per blank.)

Blank 1: federal or fed Blank 2: reserve

Which of the following characteristics of checks has made checkable deposits a large component of the M1 money supply?

Convenience Safety

Which of the components of M1 is legal tender?

Currency

What are the components of the M1 money supply?

Currency in circulation and checkable deposits

In the United States, the monetary authorities are members of the Board of Governors of what institution?

Federal Reserve System

Which of the following aspects of the economy are directly controlled by the Fed?

Interest rates Money supply Reason: The Fed raises or lowers the money supply in order to lower or raise interest rates, respectively. The demand for money and prices may be indirectly affected.

Currency in the hands of the public and checkable deposits are components of Blank______.

M1

Currency in the hands of the public and checkable deposits are components of ______.

M1

Which of the following comprise the currency of the United States?

Metal coins Paper money Reason: Coins and bills constitute our nation's currency and, in effect, all other nations' fiat currencies. Checkable deposits are where coins and bills may be held which is part of the money supply.

What near-monies are included in M2 money supply?

Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances

What type of operations serve to control the nation's money supply and influence interest rates?

Open-market

Which of the following are functions that the Federal Reserve Banks perform?

Setting reserve requirements and holding reserves Issuing currency Lending money to financial institutions

Who establishes reserve requirements or the fraction of checking account balances that banks must maintain as currency reserves?

The Fed

Who is responsible for issuing currency, setting reserve requirements and holding reserves, lending money to financial institutions, and providing for check collection?

The Federal Reserve Banks

Select all of the following choices which explain why the public keeps some wealth in the form of money.

To hold it as an asset To make purchases with it

What is the term for the demand for money as a medium of exchange?

Transactions demand for money

The safety and convenience of Blank______ has made checkable deposits a large component of the M1 money supply.

checks

What is the money in the form of currency and checkable deposits in commercial banks called?

M1

A second and broader definition of money includes which of the following?

M1 plus several near-monies

A "stock" of some item or group of items is called what?

Money

Metal coins are issued by the US ______.

Treasury or mint

True or false: Commercial state banks are private banks chartered by the individual states to operate within those states.

True

True or false: People can convert checkable deposits into paper money and coins on demand.

True

True or false: The currency of the United States consists primarily of metal coins and paper money.

True

Who issues metal coins?

US Treasury

Who is the central authority of the U.S. money and banking system?

The Board of Governors of the Federal Reserve

Which of the following are functions of money?

Store of value Unit of account Medium of exchange

The public wants to hold some of its wealth as ______ to make purchases with it and to hold it as an asset.

money, cash, or currency

Consider the following statement: "Money is whatever society says it is." This statement acknowledges that money

must be an acceptable medium for exchange to occur.

The main determinant of the amount of money demanded for transactions is the level of Blank______.

nominal GDP

The face value of a coin is greater than its intrinsic value because

otherwise people would sell it for its intrinsic value.

Rapid inflation can undermine money's ability to perform its functions. For example, in runaway inflation

people revert to barter because money fails as a medium of exchange.

The 12 Federal Reserve Banks are quasi-public banks, which blend ______ ownership and public control.

private

Money is used for buying and selling goods and is therefore considered what?

A medium of exchange

The chairperson of the Federal Reserve Board is selected by the

Answer: a a. U.S. president and confirmed by the Senate. b.Supreme Court and confirmed by the Senate. c.U.S. president and confirmed by the Supreme Court. d.Chairman of the Banking Committee and confirmed by the Senate.

The purchasing power of money is

Answer: a a.inversely related to the price level. b.naturally related to the price level. c.directly related to the price level. d.positively related to the price level.

Who in the U.S. is responsible for maintaining money's purchasing power?

Answer: c a.The Federal Open Market Committee of the Federal Reserve System b.Congress c.The Board of Governors of the Federal Reserve System d.The Senate

The value of money is determined by

Answer: d a.the cache of gold owned by the Treasury. b.the foreign exchange rate. c.the Federal Reserve. d.people's willingness to accept it in exchange for goods and services.

What happens when the bond holder sells a bond after a price drop and before earning the full principal?

Capital loss

Which two of the following are necessary for price level stability?

Careful management of interest rates Intelligent management of the money supply

Which of the following were deemed by Congress in the early 20th century to be essential for an efficient banking system?

Centralization Public control

Which of the following are components of M1?

Checkable deposits Saving deposits Currency

Checkable deposits are the debts or liabilities of which of the following?

Commercial banks Thrift institutions

What is the largest component of M1?

Currency

The transactions demand for money varies in what way with nominal GDP?

Directly Reason: We specify nominal GDP because households and firms will want more money for transactions if prices rise or if real output increases. In both instances, a larger dollar volume will be needed to accomplish the desired transactions.

True or false: Money supply M1 includes all components of M2.

False

True or false: Society can attain a higher degree of specialization without the use of money than it can with money.

False

What type of relationship exists between bond prices and interest rates?

Inverse

How are individuals and firms accessing credit affected by a Fed policy that prompts a decrease in bank lending?

They will need to pay a higher interest rate on loans. They will have a lower volume of loans available to them.

The Federal Reserve Board of Governors

a. coordinates policies for the 12 Federal Reserve Banks. b. is the largest bank in U.S. c. is made up of 5 members. d. is replaced every 2 years.

Consider the following statement: "Any central bank can create money; the trick is to create enough, but not too much, of it." This statement acknowledges that a central bank

can create too much money, lowering its value and causing inflation.

When the price of a bond falls, the bondholder who sells the bond prior to the payback date of the full principal will suffer a _______ loss.

capital

Just as banks and thrifts accept the deposits of and make loans to the public, the Blank______ accepts the deposits of and makes loans to banks and thrifts.

central bank

Early in the 20th century, Congress decided that Blank______ and public control were essential for an efficient banking system.

centralization

The debts or liabilities of commercial banks and thrift institutions are known as ______ deposits.

checkable or checking

To the extent that people want to hold money as an asset, there is Blank______.

asset demand for money

The 12 Federal Reserve Banks also serve as Blank______ banks.

banker's banks

Token money consists of ______.

bills or coins with face values that exceed their commodity value

Because people accept them as money, Blank______ and Blank______ deposits are money.

currency; checkable

The intersection of demand and supply determines the ______ (one word) price for money.

equilibrium or clearing

In the market for money, the intersection of demand and supply determines the Blank______.

equilibrium price of money equilibrium interest rate

Money is a medium of ________ that is used for buying and selling goods and services.

exchange or trade

Money functions primarily as a medium of ______, a unit of _____, and a store of value.

exchange or trade account

A banking system in which only a portion of checkable deposits are backed up by cash in bank vaults or deposits in the central bank is called a

fractional reserve banking system.

Consider the following statement: "When the price of everything goes up, it is not because everything is worth more but because the currency is worth less." This statement acknowledges that

if the price of everything rises, it means that the currency has less purchasing power.

Fed policy changes that prompt banks to Blank______ will result in easier access to credit.

increase their lending

Appropriate fiscal policy that is supportive of efforts of the nation's monetary authorities is meant to control Blank______.

inflation

Studies show that countries that have independent central banks like the Fed have lower rates of ________, on average, than countries that have little or no central bank independence.

inflation

The Fed's primary influence is on the money supply and Blank______.

interest rates

There is a(n) _______ relationship between the amount of money demanded as an asset and the rate of interest.

inverse, indirect, or negative

The amount of goods and services a unit of money will buy is called Blank______.

purchasing power

The _______ power of money is the amount of goods and services a unit of money will buy.

purchasing, buying, or spending

The Federal Reserve Bank sets Blank______ which are the fractions of checking account balances that banks must maintain as currency reserves.

reserve requirements

Private banks chartered by the individual states to operate within those states are called Blank______.

state banks

Money is a ______ of some item or group of items.

stock

When economists say that the Federal Reserve Banks are 'central' banks, this means

the policies are coordinated by the Federal Reserve Board of Governors.

When economists say that the Federal Reserve Banks are quasi-public banks, this means

they are a blend of private ownership and public control.

When economists say that the Federal Reserve Banks are 'bankers' banks, this means

they perform the same functions for banks as banks perform for the public.

Currency that derives its value from the amount printed on it rather than from the value of the paper or metal from which it is made is referred to as Blank______ money.

token

The demand for money as a medium of exchange is called the ______ demand for money.

transactions

What are the three basic functions of money?

A medium of exchange, a unit of account, and store of value

Why are currency and checkable deposits money?

Because they are widely accepted by people

Which of the following statements is true?

Anwser: a a. There is no concrete backing to the money supply in the United States. b. The gold standard applies to a small fraction of the money supply. c. The money supply is backed by Treasury notes. d. Half the money supply is backed by gold.

The central authority of the U.S. money and banking system is the Blank______

Board of Governors of the Federal Reserve System

Money enables society to gain which of the following advantages?

Geographic specialization Human specialization

The money supply in the United States essentially is "backed" by whose ability to keep the value of money relatively stable?

Government

Studies show that countries that have independent central banks, such as the Federal Reserve Bank, compared to those that have little or no central bank independence, have lower average rates of Blank______.

inflation

The purpose of open-market operations is to control the nation's money supply and influence _______ (Enter one word) rates

interest

The amount of money demanded as an asset varies ______ with the rate of interest.

inversely or indirectly

Interest rates and bond prices are _______ related.

inversely, indirectly, or negatively

An asset's ______ is the ease with which it can be converted quickly into physical or electronic cash, with little or no loss of purchasing power.

liquidity

The supply of Blank______ in the United States essentially is "backed" (guaranteed) by the government's ability to keep its value relatively stable.

money

M1 is a component of the U.S. ______.

money supply

Consider the following statement: "The invention of money is one of the great achievements of humankind, for without it, the enrichment that comes from broadening trade would have been impossible." This statement acknowledges that

without money, trade must occur through barter, which is inefficient and cumbersome.