ECON QUIZ
why does the federal reserve use two definitions of the money supply rather than one
M1 is a narrow definition focusing on more liquidity, whereas M2 is a broader definition of money supply
Give the formula for the simple deposit multiplier. If the required reserve ratio is 20 percent, what is the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000?
1/RR=simple deposit multiplier Max increase= increase x i/rr
Distinguish among money, income, and wealth. Which one of the three does the central bank of a country control?
A persons money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts
What does an open market purchase of Treasury securities by the Federal Reserve increase bank reserves? Why does an open market sale of Treasury securities by the Federal Reserve decrease bank reserves?
Buys securities to increase money supply. Sells securities to decrease money supply.
why do business accept paper currency when they know unlike the gold coin, the paper currency is worth very little?
Businesses accept paper currency because they believe paper currency is acceptable to their customers and to other businesses. Paper currency serves as money because people believe that others will accept it from them.
Suppose you decided to withdraw $1000
Currency in circulation as well as checking account deposit is both part of M1. Therefore there would be no effect on M1, as there would be an increase in one component and a decrease in another.
What is the difference between commodity money and fiat money?
Fiat money-does not have intrinsic value, while commodity money does
Suppose that congress...
If congress makes the stated rule then in the case customers will gain as they can purchase the goods outright using currency and do not have to first deposit the money in their bank account and then writing checks or using debit card. This can save time and cost, as well as unnecessary hassle. However, this will be disadvantageous for firms concerned who has to tweak their policy and also make it difficult for them to keep track of the customers if they have put in place special system of selling their product like Apple has done in case of Ipad. Banks will also lose because change in rile will reduce the usefulness of checking account deposits or debit cards and as customers will be able to purchase with cash instead of checks, they will put less money in their bank account resulting in lesser increase in reserves with banks and thereby reduce the power of banks to create money.
Bitcoin
In order to make sale of drugs possible drug dealers use the internet instead of meeting with customers in person. However payments would be hard as they could be tracked by their debit and credit cards. The concept of bitcoin solves this problem, as they are private as well as final.
A newspaper article contains...
Income and wealth are two different concepts Income relates to
What are the largest asset and the largest liability of a typical bank?
Largest asset is loans Largest liabilities are deposits
What is the main difference between the M1 and M2 definitions of the money supply?
M2 includes M1 plus savings account balances, small-denomination time deposits, money market deposit accounts in banks, and non institutional money market fund shares.
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 medium of exchange Overall the singers fee can't be expressed as a unit of account The singers fee would lose its value over time in terms of purchasing power The goods received by the singer don't qualify as a standard of deferred payment
Briefly explain...
One would not agree with the statement that states that the 50% of what the government of country prints when held by the people of the foreign countries means that the US is less than 50% as wealthy This is because money and wealth are two different concepts.
What policy tools does the Fed use to control the money supply? Which tool is the most important?
Open market operations Discount Policy Reserve Requirement Most important is open market because completely controls the volume.
in a newspaper column...
People generally opt to keep their funds in the bank account that earn a low interest rate than lend at a higher interest rate because of the following reasons. 1) Generally people keep their funds in the banks to conduct their day-to-day based transactions efficiently. It eased them from the difficulty of maintaining a large cash balance with themselves at home which at times are at a high risk of being robbed or misplaced. 2) Maintaining funds in the bank account provides greater liquidity and better ways of transactions. 3) Individuals do not have a mechanism to evaluate and get a correct picture of the assets and liability position of the prospects before lending. Thus, lending at a high interest rate seems appealing but involves a high risk of loss of funds. 4) An individual who has surplus funds could not track the correct credit history of their own, of those who are need of funds
What are the four functions of money? Can something be considered money if it does not fulfill all four functions?
The four functions are medium of exchange, unit of account, store of value, and standard of deferred payment. In the long run, something will not serve as money if it does not fulfill all four functions.
On Jan 1, 2002...
The reason why people are still using the old currency is for the reason that the old currency is not just a currency. This is because, it was introduced when there was no national symbol, like national flag in a country. Hence people considered currency D to be the symbol of nationality. It represented the success of country G and thus, people found it hard to give up on this currency. So, they were still using that currency.
Why did congress decide to establish the Federal Reserve System in 1913?
They decided to establish the Federal Reserve system to end bank panics and to be a lender of last resorts.
What is commercial lending? In what sense are loans "funded" by deposits?
This referee to the loans made by the banks to businesses. For example, loans working capital, loans to build factories and office buildings and loans to purchase machinery and equipment. When a bank accepts deposit, it keeps only a fraction of the funds as reserves as required by the policy of the central bank of the respective country in which bank operates. Loans get funded by the deposits because without new deposits there would not be any increase in reserves and bank would not be able to make any new loans.
What does it mean to say that banks "create money"?
When funds are deposited into the banks, it keeps a fraction of these deposits with itself and lends the remaining. In making a loan a bank increases the checking account balance of the borrower. When the borrower purchases something, he pays for it by writing a check for it when seller deposit this check with his bank then the seller's bank keep a portion of this with itself and lend the remaining.
In the late 1940s...
Whether the Chinese paper currency was commodity money or fiat money differs from the point of view of the Chinese and the Japanese, due to the differing intentions of its use by both. From point of view of Chinese: The Chinese currency was still their fiat money, if it were exchanged at the foreign exchange rate between the dollar and Chinese currency. From the point of the Jap: Chinese paper currency served as commodity money
Briefly explain whether each of the following is counted in M1.
a) The coins in your pocket Can be readily used to purchase goods or services, so it is included in M1 b)A checking account deposit holder can write checks and present it as payment for purchase of goods and services--included in M1. c) Savings accounts not used for transaction purposes.--not used in M1 d) travelers checks can be used to make payments--counted in M1 e)Credit cards don't represent money, but only a promise to pay back in the future. -wont be counted in M1.
According to Peter Heather...
a) What is a medium of exchange? Any object can serve as a medium of exchange that is generally accepted by sellers as payment for their goods and services. b)What does the author mean when he writes that roman coins could have proved the German tribes with a medium of exchange? The Roman coins had a general acceptance among the German tribes, and they were in plentiful circulation among them. So, even though the German tribes don't devise any coin of their own as a medium of exchange, the Roman coins could've provided this medium. This is due to the general acceptance and abundance of Roman coins among them. c)Any member from the German tribe--who is offered Roman coins as a payment for good sand services--is assured that this Roman coin would secure him a certain purchasing power. Even if other members of the German tribe would someday be unwilling to accept the Roman coins, the holder of the Roman coins can import goods and services from the Roman Empire, where it is the fiat money.
Friedrich Schneider...
a)If the observation is correct, then it can be inferred that the buyers and sellers in country C carry out each and every transaction in cash. They deal in cash transactions as they don't have faith in banks. Each and every transaction in a country is done in cash. If anyone wants to do business in the country cash is needed and proprietors distribute wages in cash. b) printing currencies of a high denomination will increase inflation. It will also reduce corruption
A baseball fan with a Mike Trout baseball card wants to trade it for Miguel Cabrera baseball card, but everyone the fan knows who has a Cabrera card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants
penny is made of zinc..
the definition of M1 includes the currency in cirulation held by households and firms and checking account deposits in banks and value of travelers checks. Since a penny is worth 1 cent there is $.014 billion pennies in circulation. Now when they move to 5 cents, the increase in M1 would be $.056 billion.
