Chapter 14

Open market operations refer to the purchase or sale of ________ to control the money supply

U.S. Treasury securities by the Federal Reserve

A bank will consider a car loan to a customer ________ and a customer's checking account to be ________.

an asset; a liability

In economics, money is defined as

any asset people generally accept in exchange for goods and services

Which of the following is not counted in M1?

credit card balances

The portion of ________ that a bank does not loan out or spend on securities is known as ________.

deposits and reserves

People hold money as opposed to financial assets because money

is perfectly liquid

Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan all of their excess reserves, the real-world deposit multiplier is

less than 5

Banks can make additional loans when required reserves are

less than total reserves

The quantity theory of money seeks to explain the connection between money and

prices

The velocity of money is defined as

the average number of times annually that each dollar is used to purchase goods and services.

The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals

the growth rate of real GDP

A bank's liabilities are

things the bank owes to someone else.

The statement, "My iPhone is worth $300" represents money's function as

unit of account

If households and firms decide to hold less of their money in checking account deposits and more in currency, then initially, the money supply

will not change

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's excess reserves increase by

$8,000

Consider the information above for a simple economy. Assume there are no traveler's checks. Refer to Scenario 14-1. M1 in this simple economy equals

$3,000

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A can make a maximum loan of

$8,000

A cash withdrawal from the banking system

All of the above are correct

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

acting as a lender of last resort

The largest proportion of M1 is made up of

checking account deposits

The sale of Treasury securities by the Federal Reserve will, in general,

decrease the quantity of reserves held by banks

A decrease in the reserve requirement ________ bank reserves and ________ the money supply.

increases, increases

Bank reserves include

vault cash and deposits with the Federal Reserve.

Scenario 14-2 Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's reserves immediately increase by

$10,000

Assets Liabilities Reserves +$7,000 Deposits +$50,000 Loans +$46,000 Net Worth +$3,000 Refer to Table 14-3. Consider the above simplified balance sheet for a bank. If the required reserve ratio is 10 percent, the bank can make a maximum loan of

$2,000

Scenario 14-2 Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's required reserves increase by

$2,000

Assets Liabilities Reserves +$4,000 Deposits +$4,000 Refer to Table 14-1. Suppose a transaction changes a bank's balance sheet as indicated in the T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank has excess reserves of

$3,600

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of

$5,000

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

$50,000

Assets Liabilities Reserves +$8,000 Deposits + $8,000 Refer to Table 14-2. Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of

$7,200.

Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve raises the required reserve ratio to 12 percent, then the bank will now have excess reserves of

-$2,000

According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be

15 percent

If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is

5

According to the U.S. Treasury,

firms do not have to accept cash as payment for goods and services.

Commodity money

has value independent of its use as money

In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience

hyperinflation

The quantity theory of money predicts that, in the long run, inflation results from the

money supply growing at a faster rate than real GDP

The quantity equation states that the

money supply times the velocity of money equals the price level times real output.

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount policy, and reserve requirements

Silver is an example of a

commodity money

Which of the following is a true statement?

excess reserves = actual reserves - required reserves

Economies where goods and services are traded directly for other goods and services are called ________ economies.

barter

Which of the following statements regarding the use of gold as money is false?

It has standardized quality

The quantity equation states that

M x V = P x Y

Banks can continue to make loans until their

actual reserves equal their required reserves

If a bank receives a $1 million discount loan from the Federal Reserve, then the bank's reserves will

increase by $1 million

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.

increases, increases

Which of the following assets is most liquid?

money

You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have

money = $300, annual income = $6,000, and wealth = $4,300.