Macro Chapter 14 Homework

Suppose the reserve requirement is 5​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$40 ​billion? A. ​$200 billion increase B. ​$40 billion increase C. ​$800 billion increase D. ​$8 billion increase

$800 billion increase - Assume that the required reserve​ (RR) is​ 10%. An increase in a​ bank's reserves will increase checkable deposits in the economy as a whole by an amount more than the initial increase in reserves. For​ example, if Bank​ A's reserves increase by​ $1,000, then it must hold​ 10% of these additional reserves. It has an incentive to loan out the rest. It holds​ $100 and loans out​ $900. If the person who borrowed the​ $900 from Bank A uses the money to buy a​ $900 item, then the person selling that item will deposit that​ $900 in his or her​ bank, Bank B. Bank​ B's reserves increase by​ $900, in which case it will hold on to​ 10% and loan out the​ rest, and so on. In​ sum, initial increases in bank reserves will increase total checkable deposits by a multiple of itself. In this​ case, $1,000+[0.9×1,000]+[(0.9×0.9)×1,000]+[(0.9×0.9×0.9)×1,000]+... or $1,000×1+0.9+0.92+0.93+...+0.9n or 11−0.9 ​= 10.10 ​= 1RR​= Simple deposit multiplier​ = 10. Checkable deposits in the economy change by the amount of the change in reserves multiplied by the simple deposit multiplier.​ Therefore, a​ $1,000 increase in reserves increases checkable deposits​ by: $1,000×1RR ​= $10,000.

The United States is divided into 12 Federal Reserve Districts. The Federal Reserve​ Bank's Board of Governors consists of 7 members appointed by the president of the U.S. to​ 14-year, ​ non-renewable terms. One of the board members is appointed to a 4 ​year, renewable term as the chairman.

12,7,4,

In a fractional reserve banking systemLOADING...​, what is the difference between a​ "bank run" and a​ "bank panic?" A. A bank run involves many​ banks; a bank panic involves one bank. B. A bank run is a U.S.​ issue; a bank panic is an international issue. C. A bank run is a local​ issue; a bank panic is a national issue. D. A bank run involves one​ bank; a bank panic involves many banks.

A bank run involves one​ bank; a bank panic involves many banks. - Fractional reserve banking system A banking system in which banks keep less than 100 percent of deposits as reserves. In​ practice, withdrawals are not a problem for banks because banks assume that not all depositors will withdrawal their money simultaneously. Bank run A situation where many depositors simultaneously decide to withdrawal money from a bank. 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.

Which of the following is NOT a function of​ money? A. Acceptability B. Medium of exchange C. Unit of account D. Store of value

Acceptability - Anything used as money should fulfill the following​ functions: 1. Medium of exchange. When sellers of goods and services are willing to accept money in exchange for goods and​ services, then money serves as a medium of exchange. An economy is more efficient when a single good is recognized as a medium of exchange. 2. Unit of account. When each good has a single price quoted in terms of the medium of​ exchange, money serves as a unit of account. It provides a way to measure value in the economy in terms of money. 3. Store of value. Money allows value to be stored easily. What you​ don't use​ today, you can use next week. That​ is, money tends to be durable such that its value is not lost by spoilage. 4. Standard of deferred payment. Money can facilitate exchange over time by acting as a standard of deferred​ payment, which is useful in lending and borrowing. Next Question

Which of the following is true with respect to Irving​ Fisher's quantity​ equation, M×V=P×Y​? A. M​ = M1 definition of the money supply B. V​ = Average number of times a dollar is spent on goods and services C. V=P×YM D. P​ = the GDP deflator E. All of the above

All of the above - The quantity equation is M×V=P×Y ​or, V=P×YM. M​ = Money​ supply: We use M1. V​ = Velocity of​ money: The average number of times each dollar in the money supply is used to purchase goods and services included in GDP. P​ = Price​ level:​ Typically, the GDP deflator. Y​ = Real​ output:​ Typically, real GDP.

Which of the following is a monetary policy. tool used by the Federal Reserve​ Bank? A. Increasing the reserve requirement from 10 percent to 12.5 percent. B. Decreasing the rate at which banks can borrow money from the Federal Reserve. C. Buying​ $500 million worth of government​ securities, such as Treasury bills. D. All of the above.

All of the above. - The Federal Reserve Bank​ (the Fed), conducts monetary policy to achieve macroeconomic policy objectives. To manage the money​ supply, the Fed uses one or more of the following​ tools: 1. 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. 2. 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. 3. 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.

The use of money A. allows for greater specialization. B. eliminates the double coincidence of wants. C. reduces the transaction costs of exchange. D. all of the above.

Barter economies Economies where goods and services are traded directly for other goods and services. The double coincidence of wants A major shortcoming of barter economies is that in order for barter to​ occur, each person must want what the other person has. Money Assets that people are generally willing to accept in exchange for goods and services or for payment of debts. Money eliminates the problems associated with barter economies and allows people to specialize by making the exchange of goods and services easier.

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. A. True. Any money that is left over after a bank loans money to businesses and households will be loaned to other banks. B. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve. C. False. In​ reality, banks are rarely able to find borrowers for all of their deposits. D. True. Deposits that sit in a bank as vault cash earn no interest.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.- Reserves Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve. Required reserves Reserves that a bank is legally required to​ hold, based on its checking account deposits. Required reserve ratio The minimum fraction of reserves that banks are required by law to keep as reserves. Excess reserves Reserves that banks hold over and above the legal requirement. Assets are the value of anything owned by the bank. Liabilities are the value of anything that the bank owes. ​ Stockholders' equity is the difference between the two. Loans are generally a​ bank's largest asset. Deposits are generally a​ bank's largest liability.

The U.S. dollar can best be described as A. ​commodity-backed money. B. commodity money. C. fiat money. D. reserve money.

Fiat money - A suitable medium of exchange​ (such as the U.S.​ dollar) meets the following​ criteria: 1. Acceptability 2. Standardized quality 3. Durability 4. Value relative to weight 5. Divisibility Commodity money A good used as money that also has value independent of its use as money. Fiat money ​Money, such as 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.

In addition to the Federal Reserve​ Bank, what other economic actors influence the money​ supply? A. The U.S. Mint and the U.S. Treasury. B. The U.S. Senate and the U.S. House of Representatives. C. The U.S. President and Vice President. D. ​Households, firms, and banks.

Households, firms, and banks. - In addition to the Fed and its three monetary policy​ tools, two other actors—the nonbank public and banks—influence the money supply. The nonbank​ public: Households and firms decide how much money to hold as deposits in banks. The more​ deposits, the more loans banks can make and the greater the effect on the money supply. ​Banks: Can choose to hold more money as reserves than the legally required amount. This action on the part of banks influences the money supply independent of the actions of the Fed.

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? A. Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier. B. Equal. There is no difference between the two. C. Greater. Inflation plays a large role in the increase in checkable deposits. D. None of the above. They are very different concepts.

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier. - The simple deposit multiplier has two important​ assumptions: ​First, we assume that banks keep the absolute minimum amount on reserve. In​ fact, banks often hold more on reserve than they are legally required to hold so that they can guard against bank runs and bank panics.​ Second, we assume that individuals always deposit the entire check and​ don't hold any in cash. When we relax these simplifying​ assumptions, the​ real-world deposit multiplier is much lower than the simple deposit multiplier. Although the story of the deposit multiplier can be​ complicated, the most important component of the money supply is checking account balances. When banks gain​ reserves, they make loans. When they make​ loans, checking account balances increase and the money supply increases. The entire process works in​ reverse: when banks lose​ reserves, loans​ decrease, checking account balances​ fall, and the money supply contracts.

The M2 definition of the money supply includes A. ​M1, savings​ accounts, small time​ deposits, money​ markets, and credit cards. B. ​M1, savings​ accounts, mutual​ funds, and credit cards. C. savings​ accounts, mutual​ funds, small time​ deposits, and credit cards. D. ​M1, savings​ accounts, small time​ deposits, and money markets.

M1, savings​ accounts, small time​ deposits, and money markets.- M2 A broader definition of the money​ supply: M1 plus savings account​ balances, small-denomination time​ deposits, balances in money market deposit accounts in​ banks, and noninstitutional money market fund shares.

Which of the following is true with respect to ​hyperinflation? A. In the presence of​ hyperinflation, firms and households avoid holding money. B. It can be hundreds—even thousands—of percentage points per year. C. It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. D. All of the above.

Very high rates of inflation—in excess of hundreds or thousands of percentage points per year—are known as hyperinflation. It is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP. A high rate of inflation causes money to lose its value so quickly that households and firms avoid holding it.

According to the quantity theory of money.​, inflation results from which of the​ following? A. The money supply grows at the same rate as GDP. B. The money supply grows faster than real GDP. C. The money supply grows slower than real GDP

The money supply grows faster than real GDP. - The quantity equation ​states: 1. M×V=P×Y​, where M​ = M1; V​ = Velocity; P​ = GDP​ deflator; and Y​ = Real GDP. The quantity theory refers to a connection between money and prices that assumes the velocity of​ money, V, is constant. We rewrite M×V=P×Y in terms of the growth rates of the variables to​ obtain: 2. Growth rate of M1​ + Growth rate of V​ = Growth rate of P​ + Growth rate of Y. Since the velocity of money is​ constant, the growth rate of velocity is zero. The growth rate of the price level is the inflation rate.​ Therefore, we can rewrite equation 2​ as: 3. Inflation rate​ = Growth rate of M1​ - Growth rate of real GDP. This leads to the following prediction about​ inflation: If the money supply grows at a faster rate than real​ GDP, there will be inflation. OK

An initial decrease in a​ bank's reserves will decrease checkable deposits A. by an amount greater than the decrease in reserves. B. by an amount equal to the decrease in reserves. C. by an amount less than the decrease in reserves. D. An initial decrease in reserves will increase checkable deposits.

by an amount greater than the decrease in reserves.

An initial increase in a​ bank's reserves will increase checkable deposits A. by an amount equal to the increase in reserves. B. by an amount greater than the increase in reserves. C. by an amount less than the increase in reserves. D. An initial increase in reserves will decrease checkable deposits.

by an amount greater than the increase in reserves. -Assume that the required reserve​ (RR) is​ 10%. An increase in a​ bank's reserves will increase checkable deposits in the economy as a whole by an amount more than the initial increase in reserves. For​ example, if Bank​ A's reserves increase by​ $1,000, then it must hold​ 10% of these additional reserves. It has an incentive to loan out the rest. It holds​ $100 and loans out​ $900. If the person who borrowed the​ $900 from Bank A uses the money to buy a​ $900 item, then the person selling that item will deposit that​ $900 in his or her​ bank, Bank B. Bank​ B's reserves increase by​ $900, in which case it will hold on to​ 10% and loan out the​ rest, and so on. In​ sum, initial increases in bank reserves will increase total checkable deposits by a multiple of itself.

Credit cards are A. included in neither the M1 definition of the money supply nor in the M2 definition. B. included in both the M1 and the M2 definitions of the money supply. C. included in the M1 definition of the money​ supply, but not in the M2 definition. D. included in the M2 definition of the money​ supply, but not in the M1 definition.

included in neither the M1 definition of the money supply nor in the M2 definition. -Many people buy goods and services with credit cards.​ However, credit cards are not included in the definition of the money supply. The reason is that credit cards are loans from​ banks, not money. M1 The narrowest definition of the money​ supply: The sum of currency in​ circulation, checking account deposits in​ banks, and holdings of​ traveler's checks. M2 A broader definition of the money​ supply: M1 plus savings account​ balances, small-denomination time​ deposits, balances in money market deposit accounts in​ banks, and noninstitutional money market fund shares.