Homework 6
What happens in the money market when there is an increase in the supply of money?
The equilibrium quantity of money increases and the equilibrium interest rate decreases.
An increase in the money supply will lower the equilibrium rate of interest.
True
Money is any item that is widely used and freely accepted as payment for goods and services.
True
When banks hold more reserves than are required, such reserves are called
excess reserves.
Credit cards are
not money.
Which of the following is not an example of a financial intermediary?
the New York Stock Exchange
When a person makes price comparisons among products, money is being used as a(n)
unit of account.
What is meant by leverage?
use of borrowed funds to magnify returns (and maybe losses)
One disadvantage of commodity money is that
its quantity can fluctuate erratically.
If the reserve ratio is 10%, and banks do not hold excess reserves, a $10 million in reserves would increase the money supply by at most
$100 million
Suppose the required reserve ratio is 10%. If a bank has total reserves of $80,000 and checkable deposits of $550,000, what is the amount of the bank's required reserves?
$55,000
The required reserve ratio is 10%. What is the value of the deposit multiplier?
10
An increase in the money supply tends to reduce investment.
False
As a result of an increase in the money supply, the aggregate demand will shift to the left.
False
Commodity money is paper currency that may be redeemed for a specific commodity at a specified rate on the currency.
False
Fiat money is money that has a value apart from its use as money.
False
Higher interest rates tend to increase the demand for money.
False
The demand for money curve is negatively sloped because people tend to hold less money at lower interest rates.
False
The discount rate is the rate of interest charged when banks lend excess reserves to one another.
False
The federal funds rate is the interest rate the Fed charges to banks when it lends reserves to them.
False
When the price of a bond rises, the interest rate paid on the bond also rises.
False
Separation of commercial and investment banking was accomplished in the great depression by which law?
Glass-Steagall
Which of the following is NOT an advantage of using money as a medium of exchange?
It reduces the overall price level
What happens when you withdraw cash from a bank?
The bank's reserves are reduced.
The demand curve for money shows the quantity of money demanded at each interest rate, all other things unchanged.
True
Which of the following best illustrates the unit of account function of money?
You list prices for clothing sold on your Web site, www.nattydresser.com, in dollars.
A financial institution that accepts deposits, makes loans, and offers checking accounts is
a commercial bank.
A bond is
a debt instrument, that is, the issuer has taken out a loan.
Which of the following decreases the demand for money?
a decrease in real GDP
An institution that collects funds from lenders and distributes these funds to borrowers is called
a financial intermediary.
The functions of money are
a store of value, a unit of account, and a medium of exchange.
Sketch Money Demand and Supply curves and label the equilibrium interest rate. If the interest rate is above the equilibrium rate, there will be
an excess supply of money and the interest rate will fall.
All else constant, a decrease in the supply of money will lead to
an increase in interest rates
The monetary aggregate, M1, increases when
an individual switches funds from a savings account to a checking account.
The principle of fractional reserve banking makes it possible for a
bank to make loans.
A bank that has no excess reserves
cannot create loans.
Rank the following items in terms of most liquid to least liquid.
cash, checkable deposits, savings deposits, an office building your father owns
Which of the following is an example of a bank's liabilities?
checkable deposits
A bank's reserves are
deposits that banks have accepted from customers but have not loaned out.
Currency in the United States today is
fiat money.
Between the early 1970s and the mid-2000s, banks' share of the U.S. credit market financial assets
has diminished significantly as nonbank financial intermediaries started to offer more and more services that were previously offered exclusively by banks.
Suppose the Fed increases reserves. We can expect this transaction to
increase the money supply, raise bond prices, and lower interest rates.
A bank is _______ when its _______ become(s) _______ .
insolvent; net worth; negative
If bond prices rise,
interest rates fall, which in turn, stimulate investment.
Gresham's Law
is the tendency for bad money to drive good money out of circulation.
The ease with which an asset can be converted to money is its
liquidity.
Which of the following is an example of a bank's assets?
loans made to customers
Which of the following describes the medium-of-exchange function of money?
paying $30 for a haircut
Which of the following describes the store of value function of money?
putting away $50 each month into your savings account
Which of the following is NOT part of M1?
savings accounts
Money is any item that
serves as a medium of exchange for goods and services.
Which of the following is included in M2 but not in M1?
small-denomination time deposits
The Federal Depository Insurance Corporation (FDIC) has the power to close a bank when
the bank is insolvent.
When a bank receives new deposits, it can make new loans up to the amount of
the excess reserves generated by the deposits
The opportunity cost of holding money is
the higher interest rates that can be earned by holding a bond fund.
The financial system's role in the economic system is to
transfers resources (funds) from savers to borrowers
