HW 10
Money serves as a unit of account when
prices of goods and services are stated in terms of money.
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.
required reserve
deposit x ratio -excess: reserves - required Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.
The U.S. dollar can best be described as
fiat money -paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money
If you move $100 from your savings account to your checking account, then M1 will______ and M2 will _______
increase by $100; remain unchanged
The purchase of $1 million of Treasury securities by the Federal Reserve, if there is no change in the quantity of currency, will cause reserves at banks to
increase by $1 million.
The purchase of Treasury securities by the Federal Reserve will, in general,
increase the quantity of reserves held by banks.
Money is an imperfect standard of deferred payment because _________ causes the value of money to decrease over time.
inflation
It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because
it is still accepted as legal tender for transactions.
The amount of U.S. currency outstanding averages to about $2,800 per person in the U.S. This large amount of currency per person can be partially explained because
many U.S. dollars are held outside of the country by foreigners.
When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange.
Of the three primary tools the Federal Reserve uses to conduct monetary policy, the tool used most often is
open market operations.
M1 includes more than just currency because
other assets can also be used to make transactions to buy goods and services.
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money.
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking account balances.
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future.
If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
true
By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
fewer; decrease
Suppose there is a bank panic. Which of the following would be a consequence of this bank panic?
-Bank checking account balances would decrease. -Individual banks would have to shrink the value of loans they made. -Bank total reserves would decrease. -The economy would likely enter into a recession. -NOT: Required reserves would increase.
Which of the following conditions make a good suitable for use as a medium of exchange?
-The good should be durable, valuable relative to its weight, and divisible. -The good should be of standardized quality, so that any two units are identical. -The good must be acceptable to (that is, usable by) most buyers and sellers.
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. -Decreasing the rate at which banks can borrow money from the Federal Reserve. -Buying $500 million worth of government securities, such as Treasury bills.
Which of the following is a correct statement about M2?
-M2 includes all of the assets in M1. -M2 includes savings accounts, small-denomination time deposits, and money market mutual funds. -M2 is a broader definition of money compared to M1 and currency. -NOT: M2 is the best definition of money as a medium of exchange.
Which of the following is a policy tool the Federal Reserve uses to manage the money supply?
-Reserve requirements. -Open market operations. -Discount policy. -NOT: Changing Income tax rates.
Which one of the following is a reason why businesses accept paper currency knowing that, unlike a gold coin, the paper the currency is printed on is worth very little? Paper currency is a good medium of exchange because it is
-durable. -universally acceptable. -divisible. -of standard quality. -Value relative to weight
An asset would be usable as a medium of exchange for all of the following reasons:
-the asset should be durable and not lose value due to spoilage. -the asset must be generally accepted by most people. -the asset should be divisible since goods are valued at different amounts.
Which one of the following are a function of money?
-unit of account -medium of exchange -store of value
If something is to be considered as money, it has to fulfill
-unit of account -medium of exchange -store of value -open market operation
Fractional reserve banking system
A banking system in which banks keep less than 100 percent of deposits as reserves. -withdrawals are not a problem for banks because banks assume that not all depositors will withdrawal their money simultaneously
Bank panic
A situation in which many banks experience bank runs at the same time. -A central bank, like the Federal Reserve Bank, can help stop a bank panic by acting as a lender of last resort. Banks borrow money from the Federal Reserve in order to pay off depositors when they cannot borrow the money elsewhere.
Bank run
A situation where many depositors simultaneously decide to withdrawal money from a bank
Using the information below compute the M2 money supply.
All Assets= $13810
The economic definition of money is:
Any asset that people are generally willing to accept in exchange for goods and services.
Distinguish among money, income, and wealth.
A person's 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.
Discount Policy
By changing the rate at which banks are able to borrow money from the Fed, the Fed encourages borrowing. This increases bank reserves and increases the money supply. The reverse is also true.
Using the information below compute the M1 money supply.
Currency and Coin Held by Public +Checking Account Balances +Traveler's Checks= $1410
Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability."
Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.
Reserve requirements
If the Fed reduces the reserve requirement, it converts required reserves into excess reserves. This increases the amount of loans a bank can offer and increases the money supply. The reverse is also true.
Do you agree that income is a way of measuring wealth?
Income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged.
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. Money market mutual funds are part of M2 and checking accounts are part of M1. Since M1 is part of M2, when you withdraw $1,000 from a money market mutual fund (M2) and deposit the funds in your bank checking account (M1), M1 increases. However, since you are also moving funds from one M2 account to another, M2 is not changed.
Open Market Operations
The buying and selling of Treasury securities to control the money supply. Buying treasury securities increases the money supply while selling treasury securities decreases the money supply.
When the Federal Reserve decreases the required reserve ratio
The money supply will increase.
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
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.
Which of the things above are included in the M1 defintion of the money supply
a. The coins in your pocket. b. The funds in your checking account. d. The traveler's check that you have left over from a trip.
Excess reserves
are reserves banks keep above the legal requirement.
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S. Treasury securities from the public.
To decrease the money supply, the Federal Reserve could
conduct an open market sale of Treasury securities.
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.
If the central bank can act as a lender of last resort during a banking panic, banks can
satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
