IHSS 1200 Chapter 16

Credit cards are

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

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. ($500*10%)

Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by $50 billion?

$333 billion increase

Velocity is defined as

(P × Y)/M.

The use of money

- allows for greater specialization - reduces the transaction costs of exchange -eliminates the double coincidence of wants

The United States is divided into ___ Federal Reserve Districts. The Federal Reserve​ Bank's Board of Governors consists of ___ members appointed by the president of the U.S. to​ 14-year, non-renewable terms. One of the board members is appointed to a ___ year, renewable term as the chairman.

12; 7; 4

In a fractional reserve banking system​, what is the difference between a​ "bank run" and a​ "bank panic?"

A bank run involves one​ bank; a bank panic involves many banks.

Which of the following is NOT a function of​ money?

Acceptability

Which of the following conditions make a good suitable for use as a medium of​ exchange?

All of the above conditions must be met (The good should be of standardized​ quality, so that any two units are identical; The good should be​ durable, valuable relative to its​ weight, and divisible; The good must be acceptable to​ (that is, usable​ by) most buyers and sellers)

The M1 measure of the money supply includes which of the following​ components?

All of the above.

The figure to the right shows a breakdown of the M1 definition of the money supply in 2017. Which area corresponds to the amount of checking account​ deposits?

C (The largest area)

In the definition of the money​ supply, where do credit cards​ belong?

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

Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

Which of the following is true with respect to ​hyperinflation?

In the presence of​ hyperinflation, firms and households avoid holding money; It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP; It can be hundreds—even thousands—of percentage points per year.

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; Buying​ $500 million worth of government​ securities, such as Treasury bills; Decreasing the rate at which banks can borrow money from the Federal Reserve

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.

In​ 2008, the required reserve ratio for a​ bank's first​ $9.3 million in checking account deposits was zero. It was 3 percent on deposits between​ $9.3 million and​ $43.9 million, and 10 percent on deposits above​ $43.9 million. In most​ cases, and for​ simplicity, we assume that the required reserve ratio is 10 percent on all deposits.​ Therefore, the simple deposit multiplier is 10. Is the​ real-world deposit multiplier greater​ than, less​ than, or equal to the simple deposit​ multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier.

Jill makes a deposit into her savings account at the local bank with​ $100 in cash. As a result of this​ transaction,

M1 will decrease by​ $100.

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets

Which of the following is true with respect to Irving​ Fisher's quantity​ equation, M×V=P×Y​?

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 = (P*Y)/M

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

The money supply grows faster than real GDP.

The simple deposit multiplier equals

all of the above (the​ inverse, or​ reciprocal, of the required reserve ratio; the formula used to calculate the total increase in checking account deposits from an increase in bank reserves; the ratio of the amount of deposits created by banks to the amount of new reserves)

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.

An initial increase in a​ bank's reserves will increase checkable deposits

by an amount greater than the increase in reserves.

A higher required reserve ratio​ _________ the value of the simple deposit multiplier.

decreases (SDM = 1/RR)

An increase in the amount of excess reserves that banks keep​ _________ the value of the​ real-world deposit multiplier.

decreases, (The more excess reserves banks keep, the smaller the deposit multiplier)

Which of the following is not a factor that helped lead to the financial crisis of 2007-​2009?

deposit insurance for commercial banks

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

deposits

The U.S. dollar can best be described as

fiat money

There is a strong link between changes in the money supply and inflation

in the long run

Savings account​ balances, small-denomination time​ deposits, and noninstitutional money market fund shares are

included only in M2.

fiat​ money

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

Money serves as a standard of deferred payment when

payments agreed to today but made in the future are in terms of money.

Money serves as a unit of account when

prices of goods and services are stated in terms of money.

The process of​ ________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets.

securitization

A double coincidence of wants refers to

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

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

Suppose that velocity is 3 and the money supply is​ $600 million. According to the quantity theory of​ money, nominal output equals

​$1.8 billion.

In addition to the Federal Reserve​ Bank, what other economic actors influence the money​ supply?

​Households, firms, and banks.

Whenever banks gain reserves and make new​ loans, the money supply​ ___________; and whenever banks lose​ reserves, and reduce their​ loans, the money supply​ __________.

​expands; contracts

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