ECO 202 - Chapter 14

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.

What is included in M2 but not M1?

Money market deposit accounts in banks

V in Fisher's quantity equation

average number of times a dollar is spent on goods and services; velocity of money

Reserve requirements are changed infrequently because

banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.

An initial decrease in a​ bank's reserves will decrease checkable deposits

by an amount greater than the decrease in reserves.

Which of the following is not a policy tool the Federal Reserve uses to manage the money​ supply?

changing income tax rates

The U.S. dollar can best be described as

fiat money

This large amount of currency per person can be partially explained because

many U.S. dollars are held outside of the country by foreigners.

What is a​ "classic type of​ run"?

many depositors simultaneously decide to withdraw their money from a bank

When sellers are willing to accept money in exchange for goods and​ services, money is acting as a

medium of exchange

The policy change would "free up cash" because

reserves that were required are now excess reserves available for lending

What refers to the minimum fraction of deposits banks are required by law to keep as reserves?

the required reserve ratio

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

Suppose the reserve requirement is 5​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$50 ​billion?

$1000 billion increase

V =

(P x Y) / M

Which of the following is a monetary policy tool used by the Federal Reserve​ Bank?

- Increasing the reserve requirement from 10 percent to 12.5 percent. - Buying​ $500 million worth of government​ securities, such as Treasury bills. - Decreasing the rate at which banks can borrow money from the Federal Reserve.

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 hundredslong dasheven thousandslong dashof percentage points per year. - In the presence of​ hyperinflation, firms and households avoid holding money.

The use of money

- Reduces the transaction costs of exchange - eliminates the double coincidence of wants - allows for greater specialization

M2 includes...

- all of the assests in M1 - savings accounts, small-denomination time deposits, and money market mutual funds - a broader definition of money compared to M1 and currency

What does the FOMC do?

- includes Board of Governors and the presidents of 12 Federal Reserve regional banks - determines the target federal funds rate and the direction of open market operation policies - makes decisions that are voted on by all 7 members of the BOG but only 5 of the 12 regional bank presidents

policy tools the Fed uses to manage money supply

- open market operations - reserve requirements - discount policy

What are the functions of money?

- unit of account - store of value - medium of exchange

If the money supply is growing at a rate of 3 percent per​ year, real GDP​ (real output) is growing at a rate of 0 percent per​ year, and velocity LOADING... is​ constant, what will the inflation rate​ be?

3%

If the money supply is growing at a rate of 3 percent per​ year, real GDP​ (real output) is growing at a rate of 0 percent per​ year, and velocity is growing at 2 percent per year instead of remaining​ constant, what will the inflation rate​ be?

5%

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.

What is price deflation?

A fall in the price level

What is meant by Professor​ Spencer's statement​ "This printing of money​ 'will keep the​ [deflation] wolf from the​ door'"?

An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.

What is the largest area of the M1 money supply?

Checking account deposits

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"?

Consumers delay​ purchases, expecting prices to fall​ more, and the lack of demand causes prices to fall further.

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.

In addition to the Federal Reserve Bank, what other economic factors influence the money supply?

Households, firms, and banks

Fisher's quantity equation

M x V = P x Y

M in Fisher's quantity equation

M1 definition of money supply

What did Geithner mean by the​ "non-bank financial​ system"?

Money market mutual​ funds, hedge​ funds, and other financial firms that raise money from investors and provide it to firms and households.

Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money...​?

No. The goods are not a store of value.

Why would deposit insurance provide the banking system with protection against​ runs?

Since most depositors are​ insured, it is less likely that panicked buyers will simultaneously withdraw funds.

According to the quantity theory of money​, inflation results from which of the​ following?

The money supply grows faster than real GDP

True or False: If coins could have been easily used to purchase goods and services in other​ areas, the coins would also have some intrinsic value.

True

velocity of money formula

V = (P x 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.

Banks must hold...

a fraction of their deposits as vault cash or with the Federal Reserve

What 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.

If you move $100 from your savings account to your checking account, then M1 will ____ by $100 and M2 will ___.

increase; 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

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 monetary policy tool that the People's Bank of China was using was changes to the..

required reserve ratio

Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money​ supply?

reserve requirements

The People's Bank of China was hoping this policy action would...

stimulate economic growth

P in Fisher's quantity equation

the GDP deflator

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.

double coincidence of wants

the fact that for a barter trade to take place between two​ people, each person must want what the other one has