chapter 32 review

John deposits $3,000 into his checking account. If the reserve ratio is 15%, required reserves are _______ and excess reserves are _______

$450 $2550

You decide to take $300 out of your piggy bank at home and place it in the bank. If the reserve requirement is 5 percent, how much can your $300 increase the amount of money in the economy?

$5700

A bank run is:

- the situation that arises from fear that the bank is in danger of running out of money. - when all depositors from a single bank demand to withdraw all deposits at once. - when a bank's reserves are not enough to satisfy all withdrawal demands.

The Fed changes the reserve requirement sparingly because:

- very small changes cause very large overall changes to money supply due to the money multiplier. - it would cause uncertainty for banks and slow their rate of lending. - sudden changes of such a huge magnitude would have far-reaching, and sometimes undesirable, effects.

Consider a country where all money is currently held as cash and the money supply has a value of $5,000. A banking system is developed, and the residents of the country deposit the $5,000 of cash into the banking system and decide they no longer want to hold any cash. If the reserve ratio is equal to 10%, how much can the $5,000 increase the amount of money in the economy 1. The money supply in the economy will be equal to $__________ 2. The banking system has the ability to create $__________ of new money.

1. 50,000 2. 45,000

Consider a country where all money is currently held as cash and the money supply has a value of $2,200. A banking system is developed, and the residents of the country deposit the $2,200 of cash into the banking system and decide they no longer want to hold any cash. If the reserve ratio is equal to 4%, then the banking system has the ability to create $__________ of new money and the money supply in the economy will be equal to $________

1. 52800 2. 55000

If the money multiplier is approximated to be 4, then the reserve ratio must be:

25 percent.

You decide to take $300 out of your piggy bank at home and place it in the bank. If the reserve requirement is 5 percent, how much can your $300 increase the amount of money in the economy?

5700

Which of the following is an example of money that functions as a medium of exchange?

A grocery store purchase

Which of the following would cause the money demand curve to shift to the left?

A technological advance, like online shopping

The entity that carries full responsibility for setting the overall direction of monetary policy and guiding the money supply is the:

Federal Open Market Committee.

Your checking account balance would be counted in which measure of money?

It would be counted in both M1 and M2

Which measure of money would we most likely use if we were interested in looking at spending in the economy?

M1

Your savings account balance would be counted in which measure of money?

M2

The one central bank president that always has a seat on the Federal Open Market Committee is located in:

New York City.

Which of the following tools is used most often by the Fed for changing the supply of money?

Open market operations

Which of the following is the most used monetary policy tool?

Open-market operations

In the liquidity-preference model, which of the following is true?

The money supply does not change as the interest rate changes.

When deciding what to use as money, one characteristic to look for is its:

When deciding what to use as money, one characteristic to look for is its:

We say that money is a store of value because it represents:

a certain amount of purchasing power held over time.

This tool is the best choice in most circumstances because it is performed on:

a daily basis, doesn't inconvenience bank managers, and doesn't require banks to take loans from the Fed.

Modern banks in the United States can keep reserves as:

a deposit at the Federal Reserve.

Assume that $1 million is deposited into a bank with a reserve requirement of 15 percent. a. What is the money supply as a result? b. What would change if the government decides to raise the reserve requirement to 40 percent?

a. 6.67 mill b. Only $2.5 million in new money would be created

In a severe national financial crisis, a central bank can stabilize the financial system by:

acting as a lender of last resort.

If banks kept 100 percent of deposits on hand as reserves, the reserve requirement ratio: Banks would:

and the multiplier would be 1. not be able to create new money.

The money supply is the amount of money:

available in the economy.

The Board of Governors is made up of experts in:

banking.

Money contributes to economic activity and allows for a more complex society than barter does because:

barter is inefficient. Each time you want to make a trade you have to find a partner who has something you want and wants what you have to offer.

If the Fed wishes to increase the money supply, it can:

buy bonds from a bank, giving the bank cash in return, which it can then lend out.

If the economy is in a recession, the Fed could:

buy bonds through open market operations to increase spending in the economy.

If the economy is in a recession, the Fed is likely to:

buy bonds through open market operations.

If the Fed wishes to increase the money supply, it could:

buy bonds.

The definition of M2 includes:

cash, checking accounts, savings accounts, and other financial instruments where money is locked away for a specified period of time.

The institution ultimately responsible for managing the nation's money supply and coordinating the banking system to ensure a sound economy is called a:

central bank.

An example of a good that can be used for money that has intrinsic value is:

cigarettes gold fish ALL HAVE INTRINSIC VALUE CORRECT

If the Fed wishes to slow economic activity, it might actively pursue:

contractionary monetary policy.

One of the main roles of a central bank is:

coordinating the banking system to ensure a sound economy.

"Base" money consists of:

currency in circulation and bank reserves.

An advantage of monetary policy over fiscal policy is the:

decisions are made by experts who are independent of political pressures.

If the Fed were to change the reserve requirement in an effort to increase the money supply, they would:

decrease the reserve requirement.

If Nancy is carrying $300 in cash and she deposits it into her savings account, M1 will _________ while M2 will _________

decrease, stay the same

Any amount that a bank chooses to keep on hand beyond what it is required to is called:

excess reserves.

When interest rates decrease, the cost of borrowing __________ and people tend to save ________

falls, less

The smaller the reserve ratio the:

greater the money is created in the economy.

The discount window provides:

guaranteed emergency funds for banks in trouble at a higher interest rate than federal funds rate.

Comparing _____ can give us some sense of what the multiplier actually is in the economy.

hard money to M2

Wide acceptance of money without intrinsic value comes largely from the fact that it:

has a stable value.

Because a bank earns money when it makes a loan to a borrower it:

has an incentive to loan out as much of each deposit as it can.

Hard money:

includes cash.

Expansionary monetary policy involves actions that:

increase the money supply in order to increase aggregate demand.

The Federal Reserve could _________ the amount of money circulating in the economy by reducing the reserve ratio. However, doing this could increase the risk of banks becoming insolvent if __________ should occur.

increase, a bank run

Reducing the reserve requirement would have the effect of _________ the money supply

increasing

Throughout time, metals such as gold have been popular choices for money across various societies. This is because gold:

is durable and has intrinsic value.

One reason we use paper money instead of gold coins in the Unites States today is because it:

is more convenient.

The Federal Reserve:

is the central bank of the United States.

For every dollar that you deposit into a bank, the bank will tend to:

keep a portion of it and lend out the rest.

Using the liquidity-preference model, the Federal Reserve can react to the threat of exceedingly high inflation via monetary policy by shifting the supply of money to the:

left with contractionary monetary policy, increasing the interest rate and lowering the equilibrium quantity of money.

The actual money multiplier observed in the economy is _________ the theoretical money multiplier (which is calculated by taking 1 divided by the reserve ratio).

less than

An essential function of a central bank is to:

manage the money supply.

The Board of Governors is made up of experts in:

monetary policy.

When the interest rate earned on government bonds is high, most people will try to hold:

more bonds and less cash.

When depositors change the way they hold assets this could increase the M1 measure of the money supply while leaving M2 unchanged if depositors:

moved assets from savings to checking.

If the Federal Reserve successfully implements expansionary monetary policy, there will be _________ the money demand curve and __________ the aggregate demand curve

movement along, a rightwards shift in

Holding money is:

nearly always the most convenient way to hold onto wealth over time.

The money multiplier is approximated as being equal to:

one divided by the reserve ratio.

The monetary policy tool most frequently used by the Federal Reserve is:

open-market operations.

An example of a good that can be used for money that has no intrinsic value is:

paper dollar bills.

The goal of expansionary monetary policy is to:

reduce interest rates to stimulate the economy.

The Federal Reserve System has 12:

regional banks.

The amount of demand deposits that a bank must keep as vault cash or on deposit with the Federal Reserve is called:

required reserves

If the Federal Open Market Committee wants to decrease the money supply, it should use open-market operations to ________ government bonds

sell

In the liquidity-preference model, if the slope of the money demand curve is relatively steep, a one percent increase in the interest rate will cause a _________ in the quantity of money demanded when compared to a one percent increase in the interest rate with a less steep money demand curve.

smaller decrease

Banks have historically used the discount window:

sparingly, until the financial crisis of 2008.

A bank keeping a reserve ratio of zero would be a very bad idea because:

the bank would quickly find itself unable to meet its customers' liquidity needs and would not be in business long.

The money multiplier measures:

the change in the money supply caused by a change in base money.

In the liquidity-preference model, when the money supply changes, the slope of the money demand curve will determine the magnitude of the change in:

the interest rate and the level of output.

The nominal interest rate is given by:

the intersection of the money demand curve and the money supply curve.

The reserve requirement is:

the regulation that sets the minimum fraction of deposits banks must hold in reserve.

If money has intrinsic value, it has value:

unrelated to its use as money.

In the United States, the dollar was commodity backed:

until 1971.

Over time, the money multiplier:

was relatively stable until 2008, when it dropped dramatically.

On the Yap Islands in the middle of the Pacific Ocean, giant stone wheels weighing as much as a small car were used as currency. Some of the likely problems with this currency were that they:

were heavy and inconvenient to carry around.