Microeconomics
How many Federal Reserve regional banks are there?
12 The 12 district banks are in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
Which of the following are financial intermediaries? Check all that apply. A) A commercial bank B) The Federal Reserve C) A credit union D) The U.S. government
A) A commercial bank C) A credit union Financial intermediaries are institutions that borrow money (in other words, pool money from savers) in order to make loans to others. They earn a profit by paying a lower interest rate to the people who lend them money than they charge the people to whom they make loans. For example, suppose you have some money that you've saved, and you want to invest it. You could find someone to loan it to who would pay you interest on the loan, but that would be risky: the person you lend it to might not be able to pay you back. A safer alternative is to deposit the money in a bank, which would in turn loan it to someone else. Because the bank makes many such loans, they can absorb the loss if only a few people default on their loans. And because you are willing to accept a lower interest rate in exchange for greater security, the bank can pay you a lower interest rate than it charges to its borrowers.
How does the Federal Reserve regulate the money supply? Check all that apply. A) By buying and selling bonds through open-market operations B) By buying and selling stocks C) By setting the interest rates on home mortgages and auto loans D) By setting reserve requirements E) By setting the interest rate charged by reserve banks for loans to member banks (the discount rate)
A) By buying and selling bonds through open-market operations D) By setting reserve requirements E) By setting the interest rate charged by reserve banks for loans to member banks (the discount rate) The Federal Reserve regulates the money supply in three main ways: by injecting or removing money through open-market operations (that is, by targeting the federal funds rate), by setting the discount rate, and by setting reserve requirements. The Federal Reserve does not set interest rates on loans from commercial banks to its customers. Nor does it lend money directly to individuals—it only provides loans to member banks.
Cattle can be used as money but can also be slaughtered for food. Cattle are an example of: A) Commodity money B) Representative money C) Fiat money
A) Commodity money Commodity money is any form of money that also has intrinsic consumption value. Fiat money is money that is not itself a commodity and cannot be redeemed for a commodity; its value arises from the fact that it is commonly accepted as money. For example, dollar bills are valuable because they are so widely accepted as having value. Representative money is money that stands for a specific quantity of commodity.
Which of the following are frequently mentioned goals of the Federal Reserve? Check all that apply. A) Exchange rate stability B) Price stability C) Productivity growth D) Trade surpluses
A) Exchange rate stability B) Price stability Two frequently mentioned goals of the Federal Reserve are price stability and maximum employment. Four others are (1) economic growth, (2) interest rate stability, (3) financial market stability, and (4) exchange rate stability. Price stability helps keep the economy running smoothly, while exchange rate stability facilitates international flows of trade and investment.
Which of the following contributes to making the Federal Reserve an "independent" policymaking body? A) Members of the Board of Governors are appointed for 14-year, nonrenewable terms. B) Its role is written into the U.S. Constitution. C) There are 12 different Federal Reserve banks.
A) Members of the Board of Governors are appointed for 14-year, nonrenewable terms. Because members of the Federal Reserve Board of Governors are appointed for 14-year terms, and because a president can serve at most 8years in office, the president cannot change the makeup of the Board very much. Furthermore, the 14-year term is nonrenewable, so Board members do not feel they need to enact a particular policy in order to be reappointed. For both of these reasons, Board members are largely insulated from political pressures and can, therefore, make judgments based solely on the economic needs of the country.
The Federal Reserve sets the reserve requirement, which banks must meet through deposits at the Fed and cash held at the bank. What do these requirements achieve? Check all that apply. A) They help to facilitate transfers of funds between banks when a customer from one bank writes a check to a customer of another. B) They help to control the money supply. C) They help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash. D) They mean that banks must have one dollar of deposits for every dollar it loans.
A) They help to facilitate transfers of funds between banks when a customer from one bank writes a check to a customer of another. B) They help to control the money supply. C) They help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash. The main function of fractional reserve requirements is to control the amount of deposits in the banking system and, consequently, the size of the money supply. Fractional reserve banking allows banks to hold only a fraction of their total deposits on reserve. Specifically, banks must hold enough reserves to make sure that they can meet the day-to-day needs of their customers, from withdrawing money directly to writing checks to customers at other banks. Of course, there is some risk that a bank will not have enough cash in its vault to meet all withdrawals on a given day. However, that risk is very low. If banks were unregulated, they might choose to make too many loans relative to their reserves. This would cause depositors to feel less secure in their ability to demand their deposits at any time, which in turn would reduce the amount of money kept in banks. By setting a reserve requirement, the Federal Reserve helps to prevent this from happening. By adjusting bank reserves held at the Fed, the check clearing process is simplified.
Which of the following are objectives that the Federal Reserve tries to achieve when setting monetary policy? Check all that apply. A) Zero inflation B) Price stability C) Interest rate stability D) Economic growth E) Zero unemployment
B) Price stability C) Interest rate stability D) Economic growth The Federal Reserve tries to set policies that will help the United States maintain low unemployment and strong economic growth while keeping prices, interest rates, and exchange rates stable. While it would be nice to have no unemployment or inflation, those are not realistic goals for the Fed to set.
Unlike pennies and nickels, which cost more to produce than they are worth, paper money and quarters are: A) Useful as a medium of exchange B) A good store of value C) Examples of token money
C) Examples of token money If the value of coins exceeds the cost of producing them, the issuing authority can earn a profit by producing money. Such money, whose face value exceeds its cost of production, is called token money .
At first, it might seem that valuable commodities, such as cattle or lead bars, might be good forms of money. What makes paper money preferable to these alternatives? A) It has more intrinsic value than cattle or lead. B) It is less likely to be stolen. C) It is divisible (unlike cattle) and easily portable (unlike lead bars).
C) It is divisible (unlike cattle) and easily portable (unlike lead bars). Paper money satisfies the criteria of ideal money better than commodity money. It is portable, divisible, of uniform quality, produced at a low opportunity cost, and has a stable value (subject to inflation rates). In addition, paper money has a lower transaction cost of exchange than commodity money. It's much easier to buy a condo in the city if the buyer offers $500,000 rather than 500 cows or 1000 lead bars, should the value be the same. However, paper money has its limitations: It does not have intrinsic value (for example, fiat money is money only because the government says so), may not be as durable as lead bars (average life of a dollar note is 18 months) or as delicious as a steak, and perhapscould be stolen more easily than cattle.
Larry wants to purchase a new computer and go to the Caribbean for spring break. The computer is priced at $1,299, and the vacation is priced at$800. He has only $1,574 in his checking account, so he cannot afford to purchase both. After much thought, Larry buys the computer and writes a check for $1,299. Identify what role money plays in each of the following parts of the story. Hint: Select each role only once.
Larry can easily determine that the price of the computer is more than the price of the vacation. (Unit of Account) Larry has $1,574 in his checking account. (Store of Value) Larry writes a check for $1,299. (Medium of Exchange) Money acts as a unit of account by providing buyers and sellers a common reference point for valuing goods and services. The fact that the prices of both the computer and the vacation are listed in the same units (dollars) means that Larry can easily compare the prices of his options. Money acts as a store of value by providing a means of transferring purchasing power from the present to the future. By keeping money in his checking account, Larry stores wealth until he is ready to make a purchase. Finally, money acts as a medium of exchange by providing an accepted method of payment for goods and services. In this case, Larry writes a check, and money is withdrawn from the checking account to pay the computer company $1,299 in exchange for a new computer.
