Econ: Chapter 25

4. Most payments in the U.S. for good and services are made using: A) currency. B) checking account deposits. C) gold. D) traveler's checks

B) checking account deposits

Describe medium of exchange.

Money is the asset that we use to buy goods and services

What is the required reserve ratio?

The fraction of deposits that banks are required to keep as reserves

If the required reserve ratio is 10 percent, then using the simple deposit multiplier, what is the total increase in checking account deposits caused by an initial deposit of $1,000? a. $100 b. $1,000 c. $10,000 d. $100,000

c. $10,000

Jill deposits $100 from her checking account into her savings account at the local bank. As a result of this transaction a. neither M1 nor M2 will change. b. M2 will increase by $100. c. M1 will decrease by $100. d. both b and c are correct

c. M1 will decrease by $100

What are required reserves?

reserves that banks are legally required to hold

What is the velocity of money?

the average number of times each dollar in the money supply is spent during the yea

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue economic objectives is called a. fiscal policy. b. open market operations. c. monetary policy. d. financial management

c. monetary policy.

When does a barter economy work?

in a double coincidence of wants, where both parties to the trade want what the other one has

Describe a bank panic.

many banks experience runs at the same time.

Describe a bank run.

many depositors decide simultaneously to withdraw money from a bank

Describe the Federal Open Market Committee (FOMC).

meets in Washington, DC, eight times per year to discuss monetary policy.

What are the Fed's three monetary policy tools?

open market operations, discount policy, and reserve requirements

Which of the following is the largest liability of a typical bank? a. deposits b. loans c. reserves d. treasury bills

a. deposits

Which of the following is the largest asset of a typical bank? a. loans b. buildings c. vault cash d. checking account deposits

a. loans

The Fed conducts monetary policy primarily through a. open market operations. b. discount policy. c. reserve requirements. d. none of the above

a. open market operations

Which of the following is an asset to a bank? a. reserves b. checking account deposits c. savings account deposits d. certificates of deposit

a. reserves

What is the Federal Reserve System

1. central bank of the U.S. 2. established in 1913 to stop bank panics 3. main role today is to carry out monetary policy

Describe the quantity theory of money.

1. devised by Irving Fisher 2. assumes that the velocity of money is constant

Describe M2.

1. includes everything that is in M1, plus savings accounts, small-denomination time deposits (such as certificates of deposit (CDs)), money market deposit accounts in banks, and noninstitutional money market fund shares.

What are the four functions of money?

1. a medium of exchange 2. a unit of account 3. a store of value 4. a standard of deferred payment

8. According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be A) 4%. B) 2%. C) 6%. D) 8%.

A) 4%.

The narrowest official definition of the money supply is A) M1 B) L C) M3 D) M2

A) M1

. Which of the following is (are) responsible for managing the money supply in the United States? A) The Federal Open Market Committee B) The Board of Governors. C) The twelve Federal Reserve Banks. D) The Federal Reserve Bank of New York

A) The Federal Open Market Committee

Gold is an example of A) commodity money. B) M1. C) barter money. D) fiat money.

A) commodity money

A fractional reserve banking system is one in which banks hold less than 100 percent of _______ in reserves. A) deposits B) shareholder equity C) securities D) loans

A) deposits

Describe unit of account.

All goods and services are priced in terms of money

What are excess reserves?

Any reserves banks hold over and above the legal requirement

1. Which of the following is an asset for a bank? A) Deposits of its customers. B) Loans. C) Shareholders' equity D) Short-term borrowing

B) Loans

. If households in the economy decide to take money out of checking account deposits and put this money into savings accounts this will initially A) increase M1 and decrease M2. B) decrease M1 and not change M2. C) decrease M1 and increase M2. D) decrease M1 and decrease M2.

B) decrease M1 and not change M2.

. The portion of ________ that a bank does not loan out or spend on securities is known as ________. A) deposits; securities B) deposits; reserves C) loans; securities D) loans; reserves

B) deposits; reserves

M2 includes M1 plus A) checking account deposits, large-denomination time deposits, and noninstitutional money market fund shares. B) savings account balances, money market deposit accounts in banks, small-denomination time deposits, and noninstitutional money market fund shares. C) currency in circulation, checking account deposits in banks, and holdings of traveler's checks. D) currency in circulation, savings account balances, and small denomination time deposi

B) savings account balances, money market deposit accounts in banks, small-denomination time deposits, and noninstitutional money market fund shares.

. With a required reserve ratio of 20 percent, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of A) $2,000. B) $8,000. C) $50,000. D) $100,000.

C) $50,000

If the reserve requirement percentage is .05 then the simple deposit multiplier is A) 5 B) 10 C) 20 D) 2

C) 20

. A major source of inefficiency in barter economies is that they require A) more liquid stores of value than do monetary economies. B) a standard of deferred payment to make trade possible. C) that there is a double coincidence of wants in exchange. D) All of the above are correct.

C) that there is a double coincidence of wants in exchange

Describe standard for deferred payment.

In the United States, contracts involving future payments are usually written specifying payment in dollars.

Which of the following predictions can be made using the growth rates associated with the quantity equation? a. If the money supply grows at a faster rate than real GDP, there will be inflation. b. If the money supply grows at a slower rate than real GDP, there will be inflation. c. If the money supply grows at the same rate as real GDP, the price level will fall. d. none of the above

a. If the money supply grows at a faster rate than real GDP, there will be inflation

The sum of currency in circulation, checking account balances in banks, and holdings of traveler's checks equals a. M1. b. M2. c. M1 + M2. d. none of the above

a. M1.

Money is A) one's assets net of one's liabilities at any point in time. B) the income one earns over a period of time. C) an asset that people are willing to accept in exchange for goods and services. D) a liability that people are willing to accept in exchange for goods and services.

an asset that people are willing to accept in exchange for goods and services.

Which of the following statements is correct? a. Today, most governments in the world issue paper currency that is backed by gold and can be redeemed for gold. b. Paper currency has no value unless it is used as money. c. Paper money is a commodity money. d. all of the above

b. Paper currency has no value unless it is used as money.

Which of the following statements is true? a. Today, U.S. law prohibits banks from paying interest on checking account deposits. b. Today, people are not allowed to write checks against their savings account balances. c. Today, the difference between checking accounts and savings accounts is greater than it was before the banking reform in 1980. d. all of the above

b. Today, people are not allowed to write checks against their savings account balances.

a. money that has value independent of its use as money b. an asset that has the ability to be easily converted into the medium of exchange c. money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money d. money issued by financial intermediaries, such as banks and thrift institutions, not the central bank

c. money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money

Which of the following people vote on monetary policy at the Federal Open Market Committee (FOMC) meetings? a. the seven members of the Federal Reserve's Board of Governors b. the president of the Federal Reserve Bank of New York c. four presidents from Federal Reserve banks other than the president of the Federal Reserve Bank of New York (rotating basis) d. all of the above

d. all of the above

If prisoners of war use cigarettes as money, then cigarettes are a. token money. b. fiduciary money. c. fiat money. d. commodity money.

d. commodity money

The Fed uses three monetary policy tools. Which of the following is not one of those tools? a. open market operations b. discount policy c. reserve requirements d. federal funds rate setting

d. federal funds rate setting

What are reserves?

deposits that the bank has retained rather than loaned out or

What are the qualifications for an asset to serve as a medium of exchange.

it must be generally acceptable, of standardized quality, durable, valuable relative to its weight, and divisible

What is monetary policy?

the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives

What are open market operations?

the buying and selling of Treasury securities by the Federal Reserve

Describe the term fiat money.

1. paper currency is fiat money, which has no value except as money 2. has no value as a commodity and is money because it has been declared money by the government and because people have confidence in it.

Describe the quantity equation.

1. relates the money supply to the price level 2. M x V = P X Y

Describe M1

1. the narrowest definition of the money supply 2. includes currency, checking account balances, and traveler's checks

What is the simple deposit multiplier?

1.the ratio of the amount of deposits created by banks to the amount of new reserves 2. 1/RR

By making exchange ________, money allows for ________ and higher ________. A) easier; specialization; productivity B) harder; generalization; productivity C) harder; specialization; costs D) easier; specialization; costs

A) easier; specialization; productivity

Paper currency is a A) fiat money. B) barter money. C) commodity money. D) bond.

A) fiat money.

8. If you transfer all of your currency to your checking account, then initially M1 will ________ and M2 will ________. A) not change; not change B) increase; not change C) decrease; increase D) not change; increase

A) not change; not change

7. Bank panics have largely disappeared in the U.S. because A) of deposit insurance. B) banks are now required to hold a larger fraction of deposits as reserves. C) bank loans are more closely monitored by the Federal Reserve. D) of low interest rates.

A) of deposit insurance.

When banks gain ________, they can ________ their loans; and the money supply ________. A) reserves; increase; expands B) withdrawals; increase; expands C) reserves; increase; contracts D) withdrawals; decrease; expands

A) reserves; increase; expands

3. If banks do not loan out all their excess reserves then the real world multiplier is A) smaller than 1/RR. B) equal to 1/RR. C) larger than 1/RR. D) not related to 1/RR

A) smaller than 1/RR

32. The ________ the reserve ratio, the ________ the money multiplier. A) smaller; larger B) smaller; smaller C) larger; larger D) None of the above are correct

A) smaller; larger

6. A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money? A) store of value B) standard of deferred payment C) unit of account D) medium of exchang

A) store of value

Liquidity is defined as A) the ease with which a given asset can be converted to a medium of exchange. B) the ease with which a given asset can be converted to a standard of deferred payment. C) the ease with which a given asset can be converted to a store of value. D) the ease with which a given asset can be converted to a unit of account.

A) the ease with which a given asset can be converted to a medium of exchange

Assets are A) something the firm owes to someone else. B) a measure of a firm's net worth. C) something owned by or owed to a firm. D) always greater than a firm's liabilities

C) something owned by or owed to a firm

A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money? A) unit of account. B) store of value. C) standard of deferred payment. D) medium of exchange.

C) standard of deferred payment.

Congress in 1913 established the Federal Reserve system with the intention of putting an end to A) high interest rates. B) bank panics. C) inflation. D) high unemployment rates.

B) bank panics

The velocity of money is defined as A) P×Y. B) the average number of times each dollar is used to purchase goods and services. C) the total number of times each dollar is used to purchase goods and services. D) M P×Y .

B) the average number of times each dollar is used to purchase goods and services

1. The discount rate is A) the interest rate banks charge each other for overnight loans. B) the interest rate the Fed charges to banks for loans from the Fed. C) the interest rate banks charge their best customers. D) the interest rate the U.S. Treasury pays on Treasury Bills.

B) the interest rate the Fed charges to banks for loans from the Fed

Which of the following is counted as a liability for a bank? A) Bank Reserves B) Bank Loans C) Customer deposits D) Securities

C) Customer deposits

. Suppose you deposit $2000 into Bank of America and that the required reserve ratio is .1. How does this affect the bank's balance sheet? A) Deposits rise by $1,000. B) Required reserves rise by $2000. C) Excess reserves rise by $1,800. D) Reserves rise by $200.

C) Excess reserves rise by $1,800.

5. Suppose the reserve ratio is RR. Then, A) Required Reserves = RR × Loans. B) Required Reserves = RR × Actual Reserves. C) Required Reserves = RR × Deposits. D) Required Reserves = RR × Excess Reserves.

C) Required Reserves = RR × Deposits.

Fiat money is generally issued by A) brokerage firms. B) major multinational corporations. C) central banks. D) private banks.

C) central banks

A bank is legally required to hold a fraction of its ________ as ________. A) loans; excess reserves B) deposits; excess reserves C) deposits; required reserves D) loans; required reserves

C) deposits; required reserves

. Lowering the discount rate will A) decrease reserves, encourage banks to make fewer loans, and increase the money supply. B) increase reserves, encourage banks to make more loans, and decrease the money supply. C) increase reserves, encourage banks to make more loans, and increase the money supply. D) decrease reserves, encourage banks to make fewer loans, and decrease the money supply.

C) increase reserves, encourage banks to make more loans, and increase the money supply.

If the Fed lowers the reserve requirement, then this A) decreases excess reserves, causes banks to reduce their loans, and increases the money supply. B) increases excess reserves, causes banks to reduce their loans, and increases the money supply. C) increases excess reserves, encourages banks to make more loans, and increases the money supply. D) decreases excess reserves, causes banks to reduce their loans, and decreases the money supply

C) increases excess reserves, encourages banks to make more loans, and increases the money supply

When a grocery store accepts your $5 bill in exchange for bread and milk, the $5 bill serves as a A) unit of account. B) store of value. C) medium of exchange. D) standard of deferred payment.

C) medium of exchange.

According to the quantity theory of money, inflation is caused by A) GDP growing at the same rate as the money supply. B) GDP growing faster than the money supply. C) the money supply growing faster than real GDP. D) the money supply growing slower than real GDP.

C) the money supply growing faster than real GDP.

. If the bank of Wachovia receives a $10,000 deposit, and the reserve requirement is .1 how much can the bank loan out? (Assume that before the deposit this bank is just meeting its legal reserve requirement.) A) $10,000 B) $1,000 C) $11,000 D) $9,000

D) $9,000

4. Which of the following is a function that money serves? A) store of value B) medium of exchange C) unit of account D) All of the above are correct.

D) All of the above are correct.

Hyperinflation is caused by A) Real GDP growing more rapidly than the money supply. B) the money supply growing more slowly than GDP. C) a constant increase in the money supply. D) a high rate of growth in the money supply.

D) a high rate of growth in the money supply

Iraqi dinars issued by the government of Saddam Hussein increased in value against the dollar for a period of time after the collapse of the Hussein government. The authors of your textbook conclude that this event shows that: A) money issued by a government that no longer exists becomes a collector's item and rises in value. B) the presence of fewer goods and services will increase the value of money. C) money may serve as a store of value even if it fails to serve as a medium of exchange. D) anything can be used as money as long as people are willing to accept it in exchange for goods and services.

D) anything can be used as money as long as people are willing to accept it in exchange for goods and services.

Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the money supply? A) raise the discount rate B) raise the reserve requirement C) lower taxes D) buy U.S. treasury bills

D) buy U.S. treasury bills

Which of the following is not a tool the Fed uses to manage the money supply? A) open market operations B) setting reserve requirements for deposits in the banking system. C) setting the discount rate of interest. D) expanding and contracting deposit insurance

D) expanding and contracting deposit insurance

. A problem confronting government regarding the penny is that A) it no longer serves as store of value. B) it cost less to produce than its face value. C) the metals used to produce the penny are in limited supply. D) it cost more to produce than its face value.

D) it cost more to produce than its face value.

. The quantity theory of money seeks to explain the connection between money and A) unemployment. B) interest rates. C) output. D) prices.

D) prices

. Liabilities are A) something owned by or owed to a firm. B) included as part of a firm's reserves. C) a measure of a firm's net losses. D) something a firm owes to someone else.

D) something a firm owes to someone else.

Describe store of value.

Dollars not spent on goods and services in one time period can be held for use in the future.

The Federal Reserve System is a. the central bank of the United States. b. the institution that regulates all state banks. c. the institution solely responsible for regulating the stock and bond markets. d. the institution also known as the Treasury of the United States.

a. the central bank of the United States

What is a barter economy?

an economy that does not use money and in which people trade goods and services directly for other goods and services

28. If Fenway Bank has $500 in deposits and $200 in reserves and the required reserve ratio is 10 percent, then Fenway Bank has a. $200 in excess reserves. b. $50 in required reserves. c. $50 in excess reserves. d. $200 in required reserves.

b. $50 in required reserves

If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows: a. Inflation rate = Growth rate of the money supply + Growth rate of real output. b. Inflation rate = Growth rate of the money supply - Growth rate of real output. c. Inflation rate = Growth rate of the money supply - Growth rate of velocity. d. Inflation rate = Growth rate of the money supply + Growth rate of velocity.

b. Inflation rate = Growth rate of the money supply - Growth rate of real output

Which of the following statements is correct? a. Currency is used much more often to make payments than checking account balances. b. More than 80 percent of all goods and services are purchased with a check, rather than with currency. c. Most of the U.S. currency is held within the United States, but a small amount is actually outside the borders of the United States. d. all of the above

b. More than 80 percent of all goods and services are purchased with a check, rather than with currency

A banking system in which banks keep less than 100 percent of deposits as reserves is called a. the Federal Reserve System. b. a fractional reserve banking system. c. a fully-funded reserve system. d. wildcat banking

b. a fractional reserve banking system.

A higher required reserve ratio _________ the value of the simple deposit multiplier. a. increases b. decreases c. leaves unchanged d. nullifies

b. decreases

An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier. a. increases b. decreases c. leaves unchanged d. nullifies

b. decreases

Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, they reduce their loans and the money supply __________. a. expands; expands b. expands; contracts c. contracts; contracts d. contracts; expands

b. expands; contracts

Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are a. included only in M1. b. included only in M2. c. included in both M1 and M2. d. financial assets that are not included in the money supply.

b. included only in M2.

Money serves as a standard of deferred payment when a. it can be easily stored today and used for transactions in the future. b. repayment of debts is made using money units. c. sellers are willing to accept it in exchange for goods or services. d. all of the above

b. repayment of debts is made using money units

The theory concerning the link between the money supply and the price level that assumes the velocity of money is constant is called a. the quantity equation. b. the quantity theory of money. c. the constant velocity theory of money. d. the purchasing power parity theory of money

b. the quantity theory of money

Describe a fractional reserve banking system.

banks keep less than 100 percent of deposits as reserves

To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York to a. buy U.S. Treasury securities from the public. b. sell U.S. Treasury securities to the public. c. print U.S. Treasury securities and put them out in circulation. d. buy U.S. dollars in the foreign exchange market

buy U.S. Treasury securities from the public

When many depositors decide simultaneously to withdraw their money from a bank, there is a. an increase in bank lending. b. usually a decline in discount lending by the Fed. c. a bank run. d. inflation.

c. a bank run.

The key role that banks play in the economy is to a. provide a market for stocks and bonds. b. manage the money supply. c. accept deposits and make loans. d. serve as lenders of last resort.

c. accept deposits and make loans

Bill Gates holds money and wealth. He also earns an annual income. Which of the three is largest? a. his money b. his income c. his wealth d. All three of the above mean the same thing and are the same size.

c. his wealth

A bank panic occurs when a. there is an increase in bank lending. b. the central bank carries out open market purchases. c. many banks experience runs at the same time. d. many banks fail to attract depositors so their reserves increase significantly.

c. many banks experience runs at the same time.

Assets that are generally accepted in exchange for goods and services or for payment of debts are specifically called a. wealth. b. net worth. c. money. d. capital.

c. money

To economists a. money is only those assets that serve as a medium of exchange. b. money is only currency, checking account deposits, or traveler's checks. c. money can be narrowly or broadly defined, depending on the types of assets included. d. None of the above. There is no official definition or measurement of the money supply today

c. money can be narrowly or broadly defined, depending on the types of assets included.

Money serves as a unit of account when a. sellers are willing to accept it in exchange for goods or services. b. it can be easily stored and used for transactions in the future. c. prices of goods and services are stated in the monetary unit. d. all of the above

c. prices of goods and services are stated in the monetary unit.

There are ________ members of the Board of Governors, who are appointed by the President of the United States to ________, non-renewable terms. One of the Board members is appointed Chairman for a _________, renewable term. a. nine; 7-year; eight-year b. twelve; 4-year; four-year c. seven; 14-year; four-year d. fourteen; 4-year; four-year

c. seven; 14-year; four-year

By making exchange easier, money allows for a. a double coincidence of wants. b. the possible risk of inflation. c. specialization and higher productivity. d. all of the above

c. specialization and higher productivity

Which of the following refers to the minimum fraction of deposits banks are required by law to keep as reserves? a. the quantity equation b. the simple deposit multiplier c. the required reserve ratio d. the cash to deposit ratio

c. the required reserve ratio

In the definition of the money supply, where do credit cards belong? a. M1 b. M2 c. both M1 and M2 d. Credit cards are not included in the definition of the money supply.

d. Credit cards are not included in the definition of the money supply.

Velocity is defined as: a. V = M/(P x Y). b. V = M x P x Y. c. V = M + P + Y. d. V=(P x Y)/M.

d. V=(P x Y)/M.

The simple deposit multiplier equals a. the inverse, or reciprocal, of the required reserve ratio. b. the ratio of the amount of deposits created by banks to the amount of new reserves. c. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. d. all of the above

d. all of the above

Which of the following are included in M2? a. M1 b. savings account balances and small-denomination time deposits c. balances in money market deposit accounts in banks, and noninstitutional money market fund shares d. all of the above

d. all of the above

Which of the following conditions make a good suitable for use as a medium of exchange? a. The good must be acceptable to (that is, usable by) most buyers and sellers. b. The good should be of standardized quality, so that any two units are identical. c. The good should be durable, valuable relative to its weight, and divisible. d. all of the above

d. all of the above

By raising the discount rate, the Fed encourages banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply. a. more; increase b. more; decrease c. fewer; increase d. fewer; decrease

d. fewer; decrease

A double coincidence of wants refers to a. the situation in which a good that is used as money also has value independent of its use as money. b. the fact that for a barter trade to take place between two people, each person must want what the other one has. c. the idea that a barter economy is more efficient than an economy that uses money. d. the situation where two parties are involved in a transaction where money is the medium of exchange.

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

What is the discount rate?

the interest rates the Fed charges on discount loans

What are discount loans?

the loans the Fed makes to banks