CH 14
The formula for the multiplier is A. StartFraction 1 Over left parenthesis 1 minus MPS right parenthesis EndFraction1(1 − MPS). B. StartFraction MPS Over MPC EndFractionMPSMPC. C. StartFraction 1 Over left parenthesis 1 minus MPC right parenthesis EndFraction1(1 − MPC). D. StartFraction MPC Over left parenthesis 1 minus MPC right parenthesis EndFractionMPC(1 − MPC).
C. StartFraction 1 Over left parenthesis 1 minus MPC right parenthesis EndFraction1(1 − MPC).
Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________. A. contracts; contracts B. expands; expands C. expands; contracts D. contracts; expands
C. expands; contracts
Why might the analyst have been unsure of the size of the multiplier in this case? A. When production occurs in two different states long dash—in this case, California and Nevada long dash—the effect on GDP can vary. B. The analyst is not likely convinced of the success of Tesla's Model 3 electric cars. C. It depends on whether people spend their additional income on cars, appliances, furniture, or other products. D. The real-world multiplier is not simple to calculate.
D. The real-world multiplier is not simple to calculate.
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
Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction, A. M1 will decrease by $100. B. both M1 and M2 will increase by $100. C. M2 will increase by $100. D. Both B and C are correct.
A. M1 will decrease by $100.
A higher required reserve ratio _________ the value of the simple deposit multiplier. A. eliminates B. decreases C. increases D. leaves unchanged
B. decreases
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier. A. eliminates B. increases C. decreases D. leaves unchanged
C. decreases
Evidence shows that the quantity equation is correct over the long run, which implies that the A. growth rate of the velocity of money causes the level of prices to change. B. growth rate of inflation leads to growth in GDP. C. growth rate of the money supply determines the rate of inflation. D. growth rate of GDP causes most of the change in the money supply.
C. growth rate of the money supply determines the rate of inflation.
Which one of the following is not one of the policy tools the Fed uses to control the money supply? A. Open market operations. B. Discount policy. C. Reserve requirements. D. Moral suasion.
D. Moral suasion.
Congress passed legislation to create the Federal Reserve System in 1913 in order to A. end the instability created by a huge crude oil price hike during that time. B. take the monetary control over the economy away from the Treasury Department. C. end the instability created by a savings and loan fiasco that occurred during that time. D. end the instability created by bank panics by acting as a lender of last resort.
D. end the instability created by bank panics by acting as a lender of last resort.
Very high rates of inflation are called A. stagflation. B. acceleration. C. inflationary gap. D. hyperinflation.
D. hyperinflation.
The financial firms of the shadow banking system were A. less vulnerable than commercial banks to bank runs because they were not controlled by the Federal Reserve. B. less vulnerable than commercial banks to bank runs because they were less leveraged than commercial banks. C. less vulnerable than commercial banks to bank runs because they were selling risky investments such as mortgage backed securities. D. more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.
D. more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.
Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply? A. discount loans B. discount rate C. open market operations D. reserve requirements
D. reserve requirements
What are the largest asset and the largest liability of a typical bank? A. Loans are the largest asset and deposits are the largest liability of a typical bank. B. Cash in its vault is the largest asset and bonds are the largest liability of a typical bank. C. Loans are the largest liability and deposits are the largest asset of a typical bank. D. Reserves are the largest asset and deposits are the largest liability of a typical bank.
A. Loans are the largest asset and deposits are the largest liability of a typical bank.
Which of the following is included in M2 but not M1? A. Money market deposit accounts in banks B. Traveler's checks C. Currency D. Checking account deposits at banks
A. Money market deposit accounts in banks
When the Federal Reserve buys bonds through open market operations commabuys bonds through open market operations, A. The money supply will increase. B. The money supply will decrease. C. There is no effect on the money supply. D. Not enough information is given.
A. The money supply will increase.
A column in the New York Times in 2017 noted that Tesla was expanding both its California automobile factory where it was beginning to produce its Model 3 electric cars and it's Nevada "Gigafactory" where it was producing lithium-ion batteries for cars and other uses. The article quoted an investment analyst as saying: "I don't know what kind of multiplier you put on that, but it's a significant boost to the economy." Source: James B. Stewart, "Elon Musk Has Trump's Ear, and Wall Street Takes Note," New York Times, January 26, 2017. What does the analyst mean by a multiplier? A. The process by which an increase in autonomous expenditure leads to a larger increase in real GDP. B. The process that determines how much employment will increase as a result of Tesla's increased production. C. The difference between the cash revenues received by Tesla and the cash spending by the firm. D. The amount by which Tesla's production of Model 3 cars changes when its investment spending changes.
A. The process by which an increase in autonomous expenditure leads to a larger increase in real GDP.
An MPC equal to 0 implies a multiplier of 1, meaning that a $1 increase in autonomous expenditures would increase real GDP by only $1. Why does an MPC of 0 results in no multiplier effect? Explain your answer using the logic of the multiplier process. A. When the MPC is 0, any additional income does not induce any additional consumption spending. B. An MPC equal to 0 indicates that consumers are drawing more from their savings in order to increase consumption. C. When the MPC is 0, any additional income does not induce any additional savings by households. D. An MPC of 0 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
A. When the MPC is 0, any additional income does not induce any additional consumption spending.
Reserve requirements are changed infrequently because A. banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement. B. banks cannot usually meet the reserve requirement so the Fed does not monitor it. C. banks can determine the amount of reserves they wish to hold regardless of the reserve requirement. D. banks set loan decisions based on credit ratings and do not need to focus on reserve requirements.
A. banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to A. buy U.S. Treasury securities from the public. B. print U.S. Treasury securities and distribute them to banks. C. buy U.S. dollars in the foreign exchange market. D. sell U.S. Treasury securities to the public.
A. buy U.S. Treasury securities from the public.
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 less than the decrease in reserves. C. by an amount equal to the decrease in reserves. D. An initial decrease in reserves will increase checkable deposits.
A. by an amount greater than the decrease in reserves.
On January 1, 2002, Germany officially adopted the euro as its currency, and the deutsche mark stopped being legal tender. According to an article in the Wall Street Journal, even 10 years later many Germans continued using the deutsche mark, and many stores in Germany continued to accept it. Source: Vanessa Fuhrmans, "Who Needs the Euro When You Can Pay with Deutsche Marks?" Wall Street Journal, July 18, 2012. It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because A. it is still accepted as legal tender for transactions. B. consumers are able to keep this a secret. C. the exchange rate between the deutsche mark and the euro is fixed. D. the government initially issued this currency.
A. it is still accepted as legal tender for transactions.
Money serves as a standard of deferred payment when A. payments agreed to today but made in the future are in terms of money. B. sellers are willing to accept it in exchange for goods or services. C. it can be easily stored today and used for transactions in the future. D. All of the above are examples of money serving as a standard of deferred payment.
A. payments agreed to today but made in the future are in terms of money.
The quantity theory of money is better able A. to explain the inflation rate in the long run. B. to explain the inflation rate in the short run. C. to explain the natural rate of unemployment in the long run. D. to explain the full employment in the long run.
A. to explain the inflation rate in the long run.
When money is acting as a store of value, it allows an individual to A. transfer dollars, and therefore purchasing power, into the future. B. measure the value of goods and services in the economy. C. exchange goods for other goods and services in the economy. D. trade money for goods and services in the economy.
A. transfer dollars, and therefore purchasing power, into the future.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply? A. Households, firms, and banks. B. The U.S. Senate and the U.S. House of Representatives. C. The U.S. President and Vice President. D. The U.S. Mint and the U.S. Treasury.
A. Households, firms, and banks.
The M2 definition of the money supply includes A. M1, savings accounts, small time deposits, and money markets. B. M1, savings accounts, mutual funds, and credit cards. C. M1, savings accounts, small time deposits, money markets, and credit cards. D. savings accounts, mutual funds, small time deposits, and credit cards.
A. M1, savings accounts, small time deposits, and money markets.
A columnist in the New York Times noted, "Normally when we say that a central bank like the Federal Reserve or European Central Bank creates money from thin air, it does so by buying up bonds." Source: Neil Irwin, "Helicopter Money: Why Some Economists Are Talking about Dropping Money from the Sky," New York Times, July 28, 2016. Does the government create money by printing currency? A. Yes, but banks create the majority of the money supply by making loans. B. Yes, this is the primary way that banks create money. C. No, banks create money through the Treasury Department. D. No, banks create money by funding credit card companies.
A. Yes, but banks create the majority of the money supply by making loans.
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. A. fewer; decrease B. fewer; increase C. more; increase D. more; decrease
A. fewer; decrease
A study by the management consulting company McKinsey & Company recommended that the U.S. increase spending on infrastructure, such as bridges and highways, by between $150 and $180 billion per year. The study estimated that the result would be an increase in GDP of between $270 billion and $320 billion per year. Source: David Harrison, "Nation's Crumbling Roads Put a Dent in Drivers' Wallets," Wall Street Journal, July 31, 2015. If the McKinsey study's estimate of the effect of infrastructure spending on GDP is correct, the implied value of the multiplier is between A. 1.50 and 1.76. B. 1.78 and 1.80. C. 1.80 and 2.00. D. 1.76 and 1.78.
B. 1.78 and 1.80.
Conversely, an MPC equal to 1 implies an infinite multiplier, meaning that a $1 increase in autonomous expenditures would increase real GDP by an infinite amount. Why does an MPC of 1 result in an infinite multiplier? Explain your answer using the logic of the multiplier process. A. When the MPC is 1, any additional income does not induce any additional consumption spending. B. An MPC of 1 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on. C. When the MPC is 1, any additional income does not induce any additional savings by households. D. An MPC equal to 1 ignores real-world complications and as such overstates the true value of the multiplier.
B. An MPC of 1 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
An article in the Wall Street Journal in 2017 noted that: "China now has one of the highest [required reserve] ratios in the world, economists say, even though many businesses are starved of credit..." Source: Lingling Wei, "China's Trillion-Dollar Yuan Defense Puts Growth at Risk," Wall Street Journal, April 13, 2017. What does the article mean by Chinese businesses being starved for credit? A. This would indicate that Chinese businesses must pay high interest rates on their loans. B. Being starved for credit means Chinese businesses cannot get loans. C. When Chinese businesses are starved of credit, it means they are not profitable. D. Being starved for credit means that Chinese businesses are holding excess cash.
B. Being starved for credit means Chinese businesses cannot get loans.
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply? A. Reserve requirements. B. Changing Income tax rates. C. Open market operations. D. Discount policy.
B. Changing Income tax rates.
What is the "shadow banking system"? A. Illegal borrowing and lending through the underground economy. B. Financial firms that raise money from investors and provide it to borrowers C. Commercial banks making subprime loans to homebuyers. D. Banks that are outside of the Federal Reserve System and thus not subject to regulation.
B. Financial firms that raise money from investors and provide it to borrowers
Why would Tesla's engage in this investment spending result in a significant boost to the economy? A. It reduces the amount that households will need to purchase a car, which in turn, will lead to an increase in the MPS. B. It increases autonomous expenditures, causing an even larger increase through the multiplier effect on real GDP. C. As households become more optimistic about the future of electric cars, they will save more money now to be able to buy an electric car later. D. Tesla's investment spending will lead to lower prices, which will increase the demand for Tesla's Model 3 cars.
B. It increases autonomous expenditures, causing an even larger increase through the multiplier effect on real GDP.
The Federal Reserve uses two definitions of the money supply, M1 and M2, because A. M2 is also known as cash and cash equivalent, whereas M1 represents the standard of deferred payment function. B. M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply. C. M2 is a narrow definition focusing more on liquidity, whereas M1 is a broader definition of the money supply. D. M2 satisfies the medium of exchange function of money, whereas M1 satisfies the store of value function.
B. M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1LOADING...? Ignore any actions the bank may take as a result of your having withdrawn the $100. A. M1 increases by $100 as a result of additional currency in circulation. B. M1 remains unchanged. C. M1 decreases by $100 as a result of lower checking deposits. D. None of the above occur.
B. M1 remains unchanged.
How do the banks "create money"? A. Banks buy bonds in the open market and gain reserves; this excess reserve holding increases the money supply. B. When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands. C. When there is a decrease in checking account deposits, banks lose reserves and reduce their loans, and the money supply expands. D. Banks sell bonds in the open market and lose reserves; the excess cash holding by households increases the money supply.
B. When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
A central bank can "create money" by buying bonds because A. the bonds are sold to the Federal Reserve which converts the funds to currency. B. by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply. C. the central bank is the only entity that can print money. D. they pay for the bonds with paper currency.
B. by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply.
The most important role of the Federal Reserve in today's U.S. economy is A. balancing the government's budget by increasing taxes and cutting spending. B. controlling the money supply to pursue economic objectives. C. negotiating with foreign nations to reduce the enormous trade deficit. D. managing the Wall Street investment banking and hedge fund operations.
B. controlling the money supply to pursue economic objectives.
Which of the following is not a factor that helped lead to the financial crisis of 2007dash-2009? A. high leverages of financial firms that purchased mortgage-backed securities B. deposit insurance for commercial banks C. falling housing prices D. All of the above helped lead to the financial crisis of 2007dash-2009.
B. deposit insurance for commercial banks
The U.S. dollar can best be described as A. reserve money. B. fiat money. C. commodity money. D. commodity-backed money.
B. fiat money.
Credit cards are A. included in the M1 definition of the money supply, but not in the M2 definition. B. included in neither the M1 definition of the money supply nor in the M2 definition. C. included in both the M1 and the M2 definitions of the money supply. D. included in the M2 definition of the money supply, but not in the M1 definition.
B. included in neither the M1 definition of the money supply nor in the M2 definition.
The Federal Reserve Bank of New York is always a voting member of the FOMC because A. it always has an employee as a member of the Board of Governors. B. it carries out the policy directives of the FOMC. C. it has the most political affiliations of the Federal Reserve districts. D. it is the largest of the Federal Reserve districts.
B. it carries out the policy directives of the FOMC.
According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur? A. the nominal interest rate will decrease B. nominal GDP will increase C. the price level will decrease D. the discount rate will increase
B. nominal GDP will increase
Money serves as a unit of account when A. it can be easily stored and used for transactions in the future. B. prices of goods and services are stated in terms of money. C. sellers are willing to accept it in exchange for goods or services. D. All of the above are examples of money serving as a unit of account.
B. prices of goods and services are stated in terms of money.
If there is an increase in the marginal propensity to consume (MPC), then A. the level of consumption expenditures will decrease. B. the value of the expenditure multiplier will increase. C. the value of government purchases will increase. D. the increase in the MPC will not affect the equilibrium amount of output in the aggregate expenditure model.
B. the value of the expenditure multiplier will increase.
Suppose the reserve requirement is 55%. What is the effect on total checkable deposits in the economy if bank reserves increase by $4040 billion? A. $88 billion increase B. $800800 billion increase C. $4040 billion increase D. $200200 billion increase
B. $800800 billion increase
An article in the Wall Street Journal in 2017 about Venezuela notes that: "The economy has shrunk by an estimated 27% since 2013. The International Monetary Fund says inflation this year will hit 720%." Source: Matt Wirz, Kejal Vyas, and Carolyn Cui, "Venezuela Tries to Resell $5 Billion Bond at Deep Discount Of Oil and Coconut Water," Wall Street Journal, June 5, 2017. Are these facts related? Briefly explain. A. Yes, Venezuela failed to print enough new money to rapidly grow the economy, which resulted in a rising price level. B. Yes, high inflation diminishes the ability of the Venezuelan currency to function as money, leading to lower output growth. C. No, since the government can print more money to deal with the hyperinflation, there is likely no relation between these facts. D. No, according to the quantity theory of money, there is no useful relationship between the money supply and inflation.
B. Yes, high inflation diminishes the ability of the Venezuelan currency to function as money, leading to lower output growth.
Would a larger multiplierLOADING... lead to more severe recessions or less severe recessions? A. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be less severe. B. A larger multiplier means that large changes in spending lead to small changes in GDP, and thus recessions would be less severe. C. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe. D. A larger multiplier means that large changes in spending lead to small changes in GDP, and thus recessions would be more severe.
C. A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.
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. False. In reality, banks are rarely able to find borrowers for all of their deposits. B. True. Deposits that sit in a bank as vault cash earn no interest. C. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve. D. True. Any money that is left over after a bank loans money to businesses and households will be loaned to other banks.
C. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
During the Civil War, the Confederate States of America printed lots of its own currencylong dash—Confederate dollarslong dash—to fund the war. By the end of the war, nearly 1.5 billion paper dollars had been printed by the Confederate government. Source: "Textual Transcript of Confederate Currency," Federal Reserve Bank of Richmond. How would such a large quantity of Confederate dollars have affected the value of the Confederate currency? A. It would have generated substantial deflation, lowered the price of goods and services, and pushed the Confederate states toward economic recession. B. More money in circulation leads to increased spending. As spending increases, real output increases, and the economy enters an economic expansion. C. It would have generated high inflation and therefore decreased the value of the Confederate currency. D. It would have had no substantial effect on the Confederate currency.
C. It would have generated high inflation and therefore decreased the value of the Confederate currency.
b. What is a "classic type of run"? A. Many investors decide to purchase funds at the same time, which runs up the price or value of the asset. B. Many investors decide to sell funds at the same time, which runs down the price or value of the asset. C. Many depositors simultaneously decide to withdraw their money from a bank. D. Many banks simultaneously decide to issue mortgage-backed securities, driving down their price.
C. Many depositors simultaneously decide to withdraw their money from a bank.
An article in the Wall Street Journal on the shadow banking system contained the following observation: "If investors rush to the exits en masse, acting as a herd, asset prices could plummet and markets could face funding problems." Source: Bylan Talley, "IMF Warns (Again) of Growing Shadow-Banking Risks," Wall Street Journal, April 8, 2015. Why might investors in a money market mutual fund, for example, be more likely to "rush to the exits" if they heard bad news about the fund's investments, than would bank depositors if they received bad news about their bank's investments? A. It is easier to buy and sell assets in the mutual fund money market than it is to adjust deposits in the banking system. B. A small share of assets in the shadow banking system are managed by a large number of institutional investors who are more likely to react to bad news about the fund's investments than the small number of bank depositors with relatively large holdings. C. Money market mutual funds are not protected by deposit insurance, as commercial banks' deposits are through the Federal Deposit Insurance Corporation (FDIC). D. Investors in the shadow banking system are better informed about news related to the fund's investments than are bank depositors about news related to their banks' investments.
C. Money market mutual funds are not protected by deposit insurance, as commercial banks' deposits are through the Federal Deposit Insurance Corporation (FDIC).
c. Why would deposit insurance provide the banking system with protection against runs? A. To be covered by deposit insurance, depositors must agree not to withdraw all their funds without notice. B. Deposit insurance guarantees all deposits, and thus there is no incentive to withdraw funds. C. Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds. D. Deposit insurance guarantees that banks cannot go out of business by losing deposits.
C. Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
In the securitization process, A. banks make loans to households, and then collect payments from the government to cover these loans. B. government bonds are used as a source of funds to make loans to households. C. banks grant loans to households and bundle the loans into securities that are then sold to investors. D. security investors make loans to banks, who in turn make loans to households.
C. banks grant loans to households and bundle the loans into securities that are then sold to investors.
The article qualifies the observation as applying to the developed world. Using bitcoins may be more attractive to individuals and firms in developing countries, such as Brazil or India, than to individuals and firms in the United States because A. with bitcoins, developing countries would have less need for bartering. B. bitcoins are not susceptible to hacking attempts, which occur more frequently in developing countries. C. bitcoins would help conceal the high levels of corruption and illegal activity that take place in developing countries. D. using bitcoins can prevent the spread of the underground economy in developing countries.
C. bitcoins would help conceal the high levels of corruption and illegal activity that take place in developing countries.
Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have leftover from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1LOADING... definition of the money supply? A. b & e B. a & b C. c & e D. d & e
C. c & e
Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are A. included only in M1. B. financial assets that are not included in the money supply. C. included only in M2. D. included in both M1 and M2.
C. included only in M2.
Which of the following would be the least desirable candidate to be a good medium of exchange? A. dollar bills B. seashells C. milk D. gold
C. milk
The process of ________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets. A. discount operations B. fractional reserve banking C. securitization D. open market operations
C. securitization
An asset would be usable as a medium of exchange for all of the following reasons except: A. the asset should be durable and not lose value due to spoilage. B. the asset should be divisible since goods are valued at different amounts. C. the asset should be a commodity that has intrinsic value. D. the asset must be generally accepted by most people.
C. the asset should be a commodity that has intrinsic value.
A double coincidence of wants refers to A. the situation in which a good that is used as money also has value independent of its use as money. B. the situation where two parties are involved in a transaction where money is the medium of exchange. C. the fact that for a barter trade to take place between two people, each person must want what the other one has. D. the idea that a barter economy is more efficient than an economy that uses money.
C. the fact that for a barter trade to take place between two people, each person must want what the other one has.
When the Federal Reserve purchases Treasury securities in the open market, A. the buyers of these securities pay for them with checks drawn on their bank account and bank reserves increase. B. the public starts buying houses and firms invest in anticipation of bank increasing their reserves. C. the sellers of such securities deposit the funds in their banks and bank reserves increase. D. the sellers of such securities buy new securities in the open market and there is an increase in bank reserves.
C. the sellers of such securities deposit the funds in their banks and bank reserves increase.
The average number of times each dollar in the money supply is used to purchase goods and services is called A. the discount rate. B. the fractional reserve system. C. the velocity of money. D. the quantity theory of money.
C. the velocity of money.
The multiplier represents the A. amount disposable income changes by when there is an increase in consumption. B. total amount of additional increases in investment expenditures from an increase in consumption. C. total amount of additional increases in consumption spending induced by an initial change in aggregate expenditure. D. amount of additional government purchases created from an increase in investment spending.
C. total amount of additional increases in consumption spending induced by an initial change in aggregate expenditure.
Governments sometimes allow hyperinflation to occur because A. when governments want to spend more than they collect in taxes, the Fed engages in expansionary fiscal policy, resulting in a rising interest rate, often resulting in hyperinflation. B. when governments want to spend more than they collect in taxes, government purchases increases are held back until a new tax can be imposed on the general public, often resulting in hyperinflation. C. when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation. D. when governments want to spend more than they collect in taxes, private company bonds are sold to the public at a higher interest rate than GDP growth rate, often resulting in hyperinflation.
C. when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for credit? Briefly explain. A. No, this would indicate that Chinese banks are making more loans to households instead of businesses. B. Probably not, since there is no correlation between banks' willingness to make loans and the required reserve ratio. C. Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans. D. No, this would indicate that Chinese banks must store more reserves at the central bank instead of the vault.
C. Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.
In a fractional reserve banking systemLOADING..., what is the difference between a "bank run" and a "bank panic?" A. A bank run is a local issue; a bank panic is a national issue. B. A bank run is a U.S. issue; a bank panic is an international issue. C. A bank run involves many banks; a bank panic involves one bank. D. A bank run involves one bank; a bank panic involves many banks.
D. A bank run involves one bank; a bank panic involves many banks.
The simple deposit multiplier equals A. the inverse, or reciprocal, of the required reserve ratio. B. the ratio of the amount of deposits created by banks to the amount of new reserves. C. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. D. All of the above.
D. All of the above.
The (FOMC) Federal Open Market Committee A. determines the target federal funds rate and the direction of open market operation policies. B. includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (though not all are voting members). C. makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents. D. All of the above. E. A and B only.
D. All of the above.
Which of the following is a monetary policyLOADING... tool used by the Federal Reserve Bank? A. Decreasing the rate at which banks can borrow money from the Federal Reserve. B. Increasing the reserve requirement from 10 percent to 12.5 percent. C. Buying $500 million worth of government securities, such as Treasury bills. D. All of the above.
D. All of the above.
Which of the following is true with respect to hyperinflation? A. It can be hundredslong dash—even thousandslong dash—of percentage points per year. B. In the presence of hyperinflation, firms and households avoid holding money. 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.
D. All of the above.
Which of the following best explains the difference between commodity money and fiat money? A. Commodity money has no value except as money, whereas fiat money has value independent of its use as money. B. All money is commodity money, as it has to be exchanged for gold by the central bank. C. Commodity money is usually authorized by the central bank, whereas fiat money has to be exchanged for gold by the central bank. D. Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
D. Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
Source: Timothy F. Geithner, "Reducing Systemic Risk in a Dynamic Financial System," Remarks at the Economics Club of New York, June 9, 2008. a. What did Geithner mean by the "non-bank financial system"? A. Buyers and sellers of stocks and bonds in asset markets that are outside of the banking system. B. Credit unions, savings and loans, and other thrift institutions that are not classified as commercial banks but still take deposits and make loans. C. Banks that are outside of the Federal Reserve System and thus not subject to ordinary banking regulations. D. Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households.
D. Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households.
Which tool is the most important? A. The Fed conducts monetary policy principally by changing the reserve requirement. B. The Fed conducts monetary policy principally through discount policy. C. The Fed conducts monetary policy principally by tax cuts and government spending increases. D. The Fed conducts monetary policy principally through open market operations.
D. The Fed conducts monetary policy principally through open market operations.
How does the quantity theory provide an explanation about the cause of inflation? A. The quantity equation shows that if the money supply grows at a slower rate than real GDP, then there will be inflation. B. The quantity equation shows that if the money supply grows at a faster rate than nominal GDP, then there will be inflation. C. The quantity equation shows that if the money supply grows at the same rate as real GDP, then there will be inflation. D. The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
D. The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
In an article in the Wall Street Journal, Kevin Brady, a member of Congress from Texas, stated, "To get Congress to pass the Federal Reserve Act [in 1913, President Woodrow] Wilson had to retain the support of...northeastern lawmakers while convincing southern and western Democrats that legislation would not... create a [single] central bank. Wilson's ingenious solution was federalism." Source: Kevin Brady, "How the Fed's East Coast Title Warps Monetary Policy," Wall Street Journal, June 4, 2015. When Congressman Brady stated that Woodrow Wilson used "federalism" to convince Congress to pass the Federal Reserve Act, he meant that A. Wilson persuaded Congress that they had an obligation to create a single central bank. B. Wilson deceived Congress because there is one central federal bank system. C. the Federal Reserve Act was a federal law. D. Wilson created a Federal Reserve System composed of 12 district banks under the supervision of a board in Washington.
D. Wilson created a Federal Reserve System composed of 12 district banks under the supervision of a board in Washington.
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. A. Your bank's balance sheet shows a decrease in reserves by $100 and an increase in deposits by $100. B. Your bank's balance sheet shows an increase in reserves by $100 and an increase in deposits by $100. C. Your bank's balance sheet shows an increase in reserves by $100 and a decrease in deposits by $100. D. Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
D. Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
The use of money A. eliminates the double coincidence of wants. B. allows for greater specialization. C. reduces the transaction costs of exchange. D. all of the above.
D. all of the above.
Excess reserves A. are loans made at above market interest rates. B. are reserves banks keep to meet the reserve requirement. C. are the deposits that banks do not use to make loans. D. are reserves banks keep above the legal requirement.
D. are reserves banks keep above the legal requirement.
Following the financial crisis of 2007-2009, Congress passed the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The act increased regulation of the banking system, and from 2010 to 2016, regulators approved only five new banks, which was not enough to offset the closure of existing banks. According to the article, "Community bankers say the decline in the number of banks has led to fewer lending options for startups and small businesses." Source: Rachel Witkowski, "Banks Are Finally Sprouting Anew in America," Wall Street Journal, February 8, 2017. Startups and small businesses might be more likely than large corporations to rely on banks for funding because A. interest rate restrictions apply only to startups and small businesses. B. regulations limit the size of the loans that startups and small businesses can have. C. regulations limit the size of the loans that large corporations can have. D. large corporations have more ways to obtain funding than do startups and small businesses.
D. large corporations have more ways to obtain funding than do startups and small businesses.
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but every one the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the A. irrational exuberance doctrine. B. market clearing mechanism. C. theory of comparative advantage. D. principle of a double coincidence of wants.
D. principle of a double coincidence of wants.
Compared to the narrow definition of the money supply, M1, the broader definition of the money supply, M2, also contains A. savings account deposits and certificates of deposit, but not checking account deposits in banks. B. savings account deposits, small-denomination time deposits, and balances individual investors hold in money market mutual funds. C. savings account deposits and certificates of deposit, but not traveler's checks. D. savings account deposits and certificates of deposit, but not balances individual investors hold in money market mutual funds.
D. savings account deposits and certificates of deposit, but not balances individual investors hold in money market mutual funds.
When the Federal Reserve sells Treasury securities in the open market, A. the public starts selling houses and firms disinvest in anticipation of banks decreasing their reserves. B. the buyers of such securities buy new securities in the open market and there is a decrease in bank reserves. C. the sellers of such securities deposit the funds in their banks and bank reserves decrease. D. the buyers of these securities pay for them with checks and bank reserves fall.
D. the buyers of these securities pay for them with checks and bank reserves fall.
An article in the Wall Street Journal discussing the relatively slow adoption of bitcoin by individuals and businesses notes that: "The vast majority of consumers, certainly in the developed world, simply don't care about the benefits of decentralization and anonymity." Source: Paul Vigna, "Bitcoin Still Not Ready for Prime Time, Citi Says" Wall Street Journal, June 30, 2016. All of the following may help explain the slow adoption of bitcoin except A. there is concern that the Federal Reserve does not include virtual currencies like bitcoin in M1 or M2. B. the technology behind the bitcoin system may make it possible for investors to manipulate the prices of bitcoins. C. due to its decentralized computer system, bitcoins may be more susceptible to computer hacking. D. the vast majority of consumers may not care that bitcoins provide no record of their transactions.
D. the vast majority of consumers may not care that bitcoins provide no record of their transactions.
Money is an imperfect standard of deferred payment because ____________ causes the value of money to decrease over time.
inflation