Chapter 8: Econ midterm 2

Between 2008 and 2009, U.S. real GDP decreased from $13.2 trillion to $12.9 trillion. As a result, the real demand for money ________ and the demand for money curve ________. A) decreased; shifted leftward

decreased; shifted leftward

Based on the data in the table above, what is the value of M1?

$1,361 billion

How do banks create liquidity?

Answer: Banks create liquidity because they accept short-term deposits and make long-term loans. The short-term deposits can be quickly and easily changed into money—indeed, some of the deposits are money itself! In exchange, the bank makes long-term loans that cannot be converted to money until their due date is reached.

If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?

Answer: If the Fed sells $100 million of U.S. government securities, the monetary base decreases and, along with it, the quantity of money decreases. The money multiplier shows that the quantity of money decreases by more than $100 million.

What makes up M1? Is M1 larger or smaller than real GDP?

Answer: M1 is the sum of currency outside of the banks plus checkable deposits owned by individuals and businesses plus traveler's checks. All the assets in M1 are accepted as means of payment and so all the assets are money. M1 is smaller than real GDP. Real GDP is about 9 times larger than M1.

What are the three functions of money?

Answer: Money serves as a medium of exchange (so that money is accepted in exchange for goods and services), as a unit of account (so that prices are measured in units of money), and as a store of value (so that money is exchangeable at a later date).

Explain which of the following count as money.

Answer: Only parts (c), currency in Ann's purse, and (d), Ann's checking deposit, are money. Ann's check, given in part (a), is a method of transferring money from Ann to someone else. Thus the check (itself) is not money. Part (d), the currency in Ann's bank, is not money until someone withdraws it because currency inside a bank does not count as money.

What is the interaction between the Federal Reserve districts and the Board of Governors of the Federal Reserve System?

Answer: The Federal Reserve System divides the nation into 12 regions, each with a Federal Reserve Bank. Each Federal Reserve Bank has a nine-member board of directors. Of the nine members, six are elected by the commercial banks within the Federal Reserve district and three are appointed by the Board of Governors. The directors of each Federal Reserve Bank appoint the president of the bank, subject to approval from the Board of Governors.

"Banks hold 100 percent of their customers' deposits as reserves." Is the previous statement correct or not?

Answer: The statement is incorrect. If banks kept all of their deposits as reserves, banks would earn no profit. So banks keep a fraction of their deposits as reserves.

"The velocity of circulation is the average speed with which money is loaned to businesses and households." Is the previous statement correct or incorrect?

Answer: The statement is incorrect. The velocity of circulation is the average speed with which money is used to purchase goods and services.

When a bank has excess reserves

Both answers A and B are correct.

The main policy-making body of the Federal Reserve System is the Federal Open Market committee.

TRUE

The term "currency drain" refers to an increase in currency held outside banks.

TRUE

The monetary base is

currency and reserves of depository institutions.

Liquidity is the same as

easy conversion of an asset to a means of payment, with little or no loss of value.

Financial innovations can have the effect of

either increasing or decreasing the demand for money depending on what the innovation is.

Which of the following does NOT describe a function of money?

hedge against inflation

If a customer deposits $10,000 in currency into a checking account, the bank's total reserves ________.

increase

If the money multiplier is 3.5, a $10 billion increase in the monetary base

increases the quantity of money by $35 billion.

The quantity theory of money states that

inflation increases when the money growth rate increases.

M2 ________.

is a broader measure of money than M1

A savings bank is a depository institution that ________.

makes mostly home-purchase loans

Controlling the quantity of money and interest rates to influence aggregate economic activity is called

monetary policy.

The balance owed on credit cards in the United States in 2014 was $880 billion. When consumers pay off this balance in full,

neither M1 nor M2 will change.

The opportunity cost of holding money is the

nominal interest rate on assets other than money.

Checking deposits are

part of money.

Suppose the equilibrium interest rate in the money market is 5 percent and the current interest rate is 7 percent. As a result

people buy bonds and the interest rate falls.

The fraction of deposits that banks are required to keep is known as the

required reserve ratio.

In the figure above, an increase in the monetary base would create a change such as a

shift from the supply of money curve MS0 to the supply of money curve MS1.

In the figure above, a decrease in the monetary base would create a change such as a

shift from the supply of money curve MS1 to the supply of money curve MS0.

The main policy-making organ of the Federal Reserve System is

the Federal Open Market Committee.

Depository institutions are good at minimizing

the costs of monitoring borrowers.

If nominal GDP equals $10 trillion and the velocity of circulation is 5, then

the quantity of money is $2 trillion

The risk of making a loan is

the risk that the borrower does not pay.

A decrease in the quantity of reserves held by commercial banks could be the result of

the sale of government securities by the Federal Reserve.

Suppose that you find out from an L.L. Bean catalogue that a sweater costs $30.00. In this case, money is serving as a

unit of account.

Based on the data in the table above, what is the value of M2?

$8,587 billion

Suppose that M = 300, P = 150, and Y = 6. Then the velocity of circulation equals

3.00.

If you use $500 of currency to make a deposit in a saving deposit

M1 decreases, but M2 is unchanged.

Barter eliminates the double coincidence of wants. true or false

FALSE

If the Fed sells securities to commercial banks, there is no money multiplier effect.

FALSE

Suppose that nominal interest rates double. As a result, the quantity of money doubles as well.

FALSE

The money supply, as measured by M1, consists almost entirely of currency.

FALSE

The main policy designer of the Federal Reserve system is the

Federal Open Market Committee.

Which of the following is the central bank of the United States?

Federal Reserve System

Which of the following applies to an object serving as a store of value? I. If an object can be held and exchanged later for a good or service, it serves as a store of value. II. The less stable an object's value, the better it serves as a store of value. III. A work of art can serve as a store of value.

I and III

A medium of exchange is

an object that sellers will accept as payment.

Checks are NOT money because they

are merely instructions to transfer money.

If an economy has no money, then all transactions must be conducted through the use of ________.

barter

Money as a medium of exchange I. facilitates the exchange of goods. II. reduces or eliminates the need for barter.

both I and II