Homework 8: Money and Monetary Policy

Which of the following best explains the difference between commodity money and fiat money?

Fiat money has no value except as money, whereas commodity money has value independent of its use as money.

What is the purpose of the Taylor rule? The Taylor rule is used to

analyze and predict how the Fed targets the federal funds rate.

Which of the following is the largest liability of a typical bank?

deposits

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has

$50 in required reserves

What is a banking panic?

A situation in which many banks experience runs at the same time.

The M1 measure of the money supply includes which of the following components? -checking account deposits in banks -currency in circulation -holdings of traveler's checks

All of the above

Which of the following is true with respect to Irving Fisher's quantity equation, MxV=PxY? - M=M1 definition of the money supply - V=Average number of times a dollar is spent on goods and services - P= the GDP deflator - V=(PxY)/M

All of the above.

The economic definition of money is:

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

For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. If has not targeted money supply at the same time because the

Fed cannot target both at the same time: It has to choose between targeting an interest rate and targeting the money supply.

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:

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

What is the Taylor rule?

It is a rule that links the Fed's target for the federal funds rate to the current inflation rate, real equilibrium federal funds rate, inflation gap and output gap.

The formula for the simple deposit multiplier is

Simple Deposit Multiplier = 1/RR

Which of the following best explains how the Federal Reserve acts to help prevent banking panics?

The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.

Based on the quantity theory of money, if velocity is constant, inflation is likely to occur when:

The money supply grows at a faster rate than real GDP

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

The money supply grows faster than real GDP.

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.

You bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it _____ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it _____ U.S. Treasury securities.

buys; sells

The U.S. dollar can best be describes as

fiat money.

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

The federal funds rate

is the rate that banks charge each other for short-term loans of excess reserves.

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _____, so the quantity of money demanded will be _____.

low; high

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

If the Fed believes the inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Red believes the economy is about to fall into recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right.