EC225 Chapter 14 Homework
Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $60 billion?
$1,200 billion increase
The use of money
- eliminates the double coincidence of wants - allows for greater specialization. - reduces the transaction costs of exchange. CORRECT: all of the above.
If the money supply is growing at a rate of 3 percent per year, real GDP (real output) is growing at a rate of 1 percent per year, and velocity is constant, what will the inflation rate be? If the money supply is growing at a rate of 3 percent per year, real GDP (real output) is growing at a rate of 1 percent per year, and velocity is growing at 2 percent per year instead of remaining constant, what will the inflation rate be?
2% 4%
In a fractional reserve banking system what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank; a bank panic involves many banks.
The U.S. dollar can best be described as
fiat money
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks.
In November 2016 the Indian government decided to withdraw paper currency that made up more than 86 percent of the value of all rupee bills in circulation. An article in the Wall Street Journal published shortly after that decision described a small merchant in India as having "traded one customer a kilogram of potatoes, cauliflower and tomatoes for half a liter of honey. That was a good deal, he says. In normal times, the honey would be 120 rupees in the market (around $1.80) and the vegetables 70 rupees." Source: Raymond Zhong and Karan Deep Singh, "Barter Economy Is Reborn in Villages as India Cancels Cash," Wall Street Journal, November 18, 2016. Does the merchant's ability to arrange a barter deal with a customer indicate that the Indian economy doesn't actually require money to function efficiently? Briefly explain.
No, resorting to barter means that each trade required a double coincidence of wants for trade to occur.
The United States is divided into ____ Federal Reserve Districts.The Federal Reserve Bank's Board of Governors consists of ________members appointed by the president of the U.S. to 14-year, non-renewable terms.One of the board members is appointed to a ________ year, renewable term as the chairman.
12; 7; 4
Which of the following is NOT a function of money?
Acceptability
Which of the following is true with respect to hyperinflation?
All of the above.
The figure shows a breakdown of the M1 definition of the money supply in 2019. Which area corresponds to the amount of checking account deposits?
B
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
Buying $500 million worth of government securities, such as Treasury bills. Increasing the reserve requirement from 10 percent to 12.5 percent. Decreasing the rate at which banks can borrow money from the Federal Reserve. All of the above. CORRECT
Hermesia, a developed economy, has been experiencing low growth in output with a high rate of unemployment for more than a year. Two members of the National Trade Union in Hermesia, Geoffrey Miller and Arthur Davis, are discussing the relevant expansionary policies that can be taken by the central bank or the government to stimulate economic growth in Hermesia. Geoffrey suggests that the central bank should substantially lower the reserve requirements of the commercial banks so that money supply and household spending both increase. Arthur, however, disagrees. According to him, a decrease in the reserve requirements will not have the desired impact on money supply. He believes that an increase in government spending is more likely to boost the economy than an expansionary monetary policy. Which of the following, if true, will weaken Geoffrey's claim that lowering the reserve requirement will have a strong positive impact on demand?
Due to a recent recession in Hermesia, consumers are still uncertain about economy's prospects in spite of a positive growth rate.
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks.
Credit cards are
Included in neither the M1 definition of the money supply nor in the M2 definition.
Which of the following is true with respect to hyperinflation?
It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. It can be hundreds—even thousands—of percentage points per year. In the presence of hyperinflation, firms and households avoid holding money. All of the above. CORRECT
In 2008, the required reserve ratio for a bank's first $9.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10 percent on all deposits. Therefore, the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?
Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.
Which one of the following is not the formula for the quantity theory of money? How does the quantity theory provide an explanation about the cause of inflation?
M x Y = P x V The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
Which one of the following is not one of the policy tools the Fed uses to control the money supply? Which tool is the most important?
Moral suasion.
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit." Source: W. Stanley Jevons, Money and the Mechanism of Exchange, New York: D. Appleton and Company, 1889, pp. 1-2. Part 2 Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?
No. The goods are not a store of value.
Which of the following is true with respect to Irving Fisher's quantity equation, M×V=P×Y?
P = the GDP deflator B.Upper V equals StartFraction Upper P times Upper Y Over Upper M EndFraction V=P×YM M = M1 definition of the money supply V = Average number of times a dollar is spent on goods and services All of the above CORRECT
Suppose that the Federal Reserve makes a $10 million discount loan to First National Bank (FNB) by increasing FNB's account at the Fed. Complete the following T-account to show the impact of this transaction. Assume that before receiving the discount loan, FNB had no excess reserves The maximum amount of the $10 million that FNB can issue in loans is Assume that the required reserve ratio is 10%. The maximum total increase in the money supply that can result from the Fed's discount loan is
Reserves $10 million; Discount $10 million $10 million $100 million
The formula for the simple deposit multiplier is If the required reserve ratio is 0.20, the maximum increase in checking account deposits that will result from an increase in bank reserves of $5,000 is $____ (Enter your response as an integer.)
Simple Deposit Multiplier = 1/RR $25000
According to the quantity theory of money inflation results from which of the following?
The money supply grows faster than real GDP.
In the last few years investment in green technology has increased substantially in Daslow, a developed economy. With an increased flow of credit to this sector, the stock prices of some of the leading green technology firms went up by 75 percent or more in the current fiscal year. A group of economists in Daslow claims that such a sharp increase in stock prices are an indication of a bubble. Since bubbles are unsustainable, this could hurt the economy in the near future. However, a group of industry analysts disagrees. They feel that with rising concern for the environment, the green technology industry is only likely to grow faster. Which of the following questions would be most important to answer in order to determine whether the economists' claim is accurate?
Will earnings growth of these firms justify current valuation?
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
buy U.S. Treasury securities from the public. fewer; decrease
An initial increase in a bank's reserves will increase checkable deposits
by an amount greater than the increase in reserves
Money is an imperfect standard of deferred payment because _________ causes the value of money to decrease over time.
inflation
According to Peter Heather, a historian at King's College London, during the Roman Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: "Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells us, Germani of the Rhine region were using good-quality Roman silver coins for this purpose)." Source: Peter Heather, The Fall of the Roman Empire: A New History of Rome and the Barbarians, New York:Oxford University Press, 2006, p. 89. Part 2 When sellers are willing to accept money in exchange for goods and services, money is acting as a If some of the Roman coins had been taken to Germania, then the coins could have been a medium of exchange in Germania if people began to consider it safe and would have accepted it for payments. If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
medium of exchange true
During the years from 2010 to 2018, the average annual growth rate of M1 was 9.1 percent, while the inflation rate as measured by the GDP deflator averaged 1.7 percent. Source: Data from the Federal Reserve Bank of St. Louis. These values are____. To determine if these values are consistent with the quantity equation, additional information would be needed about
not included in the quantity equation. all of the above
