ECO 202 Chapter 14
Which of the following is a monetary policy LOADING... tool used by the Federal Reserve Bank?
Increasing the reserve requirement from 10 percent to 12.5 percent. B. Buying $500 million worth of government securities, such as Treasury bills. C. Decreasing the rate at which banks can borrow money from the Federal Reserve.
Which of the following is not a correct statement about M2?
M2 is the best definition of money as a medium of exchange.
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase.
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
Reserve requirements are changed infrequently because
banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.
An initial increase in a bank's reserves will increase checkable deposits
by an amount greater than the increase in reserves.
If you move $100 from your savings account to your checking account, then M1 will _________ and M2 will _________ .
increase by $100, remain the same
The Federal Reserve Bank of New York is always a voting member of the FOMC because
it carries out the policy directives of the FOMC.
The amount of U.S. currency outstanding averages to about $2,800 per person in the U.S. This large amount of currency per person can be partially explained because
many U.S. dollars are held outside of the country by foreigners
Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?
reserve requirements
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
the required reserve ratio
When the Federal Reserve sells Treasury securities in the open market,
the buyers of these securities pay for them with checks and bank reserves fall.
When the Federal Reserve purchases Treasury securities in the open market:
the sellers of such securities deposit the funds in their banks and bank reserves increase.
The quantity theory of money is better able
to explain the inflation rate in the long run
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
$1.8 Billion
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
$100 Million
Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $40 billion?
$800 billion increase
Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account. Wells Fargo Assets Reserves +$100,000 Liabilities Deposits $100,000 If the required reserve ratio is 0.15, or 15 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is
$85,000
If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is constant, what will the inflation rate be?
3%
If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 2 percent per year, and velocity is growing at 1 percent per year instead of remaining constant, what will the inflation rate be?
4%
In a fractional reserve banking system LOADING..., what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank; a bank panic involves many banks.
Which of the following is true with respect to Irving Fisher's quantity equation, M x V = P x Y
A. V = Average number of times a dollar is spent on goods and services B. M = M1 definition of the money supply C. V= P x Y/ M D. P = the GDP deflator
The (FOMC) Federal Open Market Committee
A. determines the target federal funds rate and the direction of open market operation policies. B. includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (though not all are voting members). C. makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents.
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. A.) When sellers are willing to accept money in exchange for goods and services, money is acting as a B.) 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.
A. ) medium of exchange B.) True
An article in the Wall Street Journal reported in 2015 that the People's Bank of China, which is the central bank of China, "is freeing up cash by reducing the amount that banks must keep in reserve." Source: Lingling Wei, "China Central Bank Checks Europe Playbook on Credit," Wall Street Journal, April 19, 2015. A. )The monetary policy tool that the People's Bank of China was using was changes to the B.)This policy change would "free up cash" because C.)The People's Bank of China was hoping this policy action would
A.) required reserve ration B.) reserves that were required are now excess reserves available for lending C.) Stimulate economic growth
Which of the following is NOT a function of money?
Acceptability
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
Changing Income tax rates.
Do you agree or disagree with the following statement? "I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the United States is less than half as wealthy as the government statistics indicate."
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.
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.
The U.S. dollar can be best described as
Flat Money
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks.
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 hundred-even thousands-of percentage points per year. In the presence of hyperinflation, firms and households avoid holding money.
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.
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. Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?
No, the goods are not a store of value.
Using the information below compute the M1 money supply. Category -Amount Currency and coin held by the public -$700 Checking account balances -$1000 Traveler's checks -$10 Savings account balances -$2800 Small denomination time deposits -$5000 Money market deposit accounts in banks -$1000 Noninstitutional money market fund shares -$2000
The M1 money supply is equal to $1710
According to the quantity theory of money LOADING..., inflation results from which of the following?
The money supply grows faster than real GDP.
Using the following information what is the velocity of money? Component Value(dollar amt) Money supply : $2400 Price level : 1.62 Real GDP : $12000
The velocity of money is equal to: 8.1
Velocity is defined as
V = (P × Y)/M
Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet.
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system changed fundamentally during the boom. . . . [The] non-bank financial system grew to be very large. . . . [The] institutions in this parallel financial system [are] vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks. Source: Timothy F. Geithner, "Reducing Systemic Risk in a Dynamic Financial System," Remarks at the Economics Club of New York, June 9, 2008. a. What did Geithner mean by the "non-bank financial system"? b. What is a "classic type of run" c. Why would deposit insurance provide the banking system with protection against runs?
a.) Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households. b.)Many depositors simultaneously decide to withdraw their money from a bank. c.) Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door'." In the same article, Ambrose Evans-Pritchard, a writer for the London-based newspaper The Telegraph, is quoted as saying: "Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." Source: Doug French, "We Should Celebrate Price Deflation," American Free Press, November 17, 2008. a. ) what is price deflation? b. ) What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"? c. )Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
a.) a fall in the price level b.) An increase in the money supply that exceeds the rate of growth of GDP will increase the price level. c.) Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.
Which of the following is the largest liability of a typical bank?
deposits
Credit Cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
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. First National Bank Assets Reserves $10 million Liabilities Discount loan $10 million Assume that before receiving the discount loan, FNB had _________ The maximum amount of the $10 million that FNB can issue in loans is __________
no excess reserves, $10 million
M1 includes more than just currency because
other assets can also be used to make transactions to buy goods and services.
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants
The use of money
reduces the transaction costs of exchange, eliminates the double coincidence of wants, allows for greater specialization
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has.
