chapter 14 homework
a suitable medium of exchange must meet the following criteria
1. Acceptability 2. Standardized quality 3. Durability 4. Value relative to weight 5. Divisibility
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.
commodity money
A good used as money that also has value independent of its use as money.
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.
bank panic
A situation in which many banks experience bank runs at the same time.
bank run
A situation where many depositors simultaneously decide to withdrawal money from a bank.
the quantity theory of money
A theory of the connection between money and prices that assumes that the velocity of money is constant.
money
Assets that people are generally willing to accept in exchange for goods and services or for payment of debts.
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.
money as a 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.
money as a 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.
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.
fractional reserve banking system
A banking system in which banks keep less than 100 percent of deposits as reserves.
monetary policy
The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
The United States is divided into _______ Federal Reserve Districts part 2: 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. part 3: One of the board members is appointed to a _______ year, renewable term as the chairman
12 The Federal Reserve Bank acts as a lender of last resort, provides check-clearing services, and acts as a banker's bank. The most important role of the Federal Reserve Bank (the Fed) is that of monetary policy and control of the money supply. The country is divided into 12 districts, each with its own branch of the Federal Reserve Bank. The Board of Governors of the Federal Reserve banks consists of 7 members, each appointed by the president to 14-year, non-renewable terms. One of the 7 board members is appointed to be the chairman for a 4-year, renewable term. part 2: 7 The Federal Reserve Bank acts as a lender of last resort, provides check-clearing services, and acts as a banker's bank. The most important role of the Federal Reserve Bank (the Fed) is that of monetary policy and control of the money supply. The country is divided into 12 districts, each with its own branch of the Federal Reserve Bank. The Board of Governors of the Federal Reserve banks consists of 7 members, each appointed by the president to 14-year, non-renewable terms. One of the 7 board members is appointed to be the chairman for a 4-year, renewable term. Part 3: 4
Which of the following is NOT a function of money? A. Acceptability B. Store of value C. Medium of exchange D. Unit of account
A. 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.
An initial increase in a bank's reserves will increase checkable deposits A. by an amount greater than the increase in reserves. B. by an amount equal to the increase in reserves. C. by an amount less than the increase in reserves. D. An initial increase in reserves will decrease checkable deposits.
A. 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. 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 1/(1−0.9) = 1/0.10 = 1/RR= 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: $1,000×1/RR = $10,000.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply? A. Households, firms, and banks. B. The U.S. Mint and the U.S. Treasury. C. The U.S. Senate and the U.S. House of Representatives. D. The U.S. President and Vice President.
A. 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.
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.
The figure shows a breakdown of the M1 definition of the money supply in 2019. Which area corresponds to the amount of checking account deposits? A. A B. B
B. B The narrowest definition of the money supply: The sum of currency in circulation and checking account deposits in banks.
According to the quantity theory of money, inflation results from which of the following? A. The money supply grows slower than real GDP. B. The money supply grows faster than real GDP. C. The money supply grows at the same rate as GDP.
B. 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.
Credit cards are A. 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. C. included in both the M1 and the M2 definitions of the money supply. D. 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. 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.
Suppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $40 billion? A. $3 billion increase B. $267 billion increase C. $40 billion increase D. $600 billion increase
B. $267 billion increase change in checking account deposits= change in bank reserves x (1/Reserve Ratio) = 40 billion x (1/15)= 267 billion 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 1/(1−0.9) = 1/0.10 = 1/RR= 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: $1,000×1/RR = $10,000.
reserves
Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.
Evaluate the following statement: 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. 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. D. 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. 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.
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. Greater. Inflation plays a large role in the increase in checkable deposits. B. Equal. There is no difference between the two. C. Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier. D. None of the above. They are very different concepts.
C. 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 U.S. dollar can best be described as A. commodity-backed money. B. commodity money. C. fiat money. D. reserve money.
C. 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.
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 a fractional reserve banking system, 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 involves many banks; a bank panic involves one bank. C. A bank run is a U.S. issue; a bank panic is an international issue. 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. 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 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.
D. 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.
Which of the following is true with respect to hyperinflation? A. It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. B. In the presence of hyperinflation, firms and households avoid holding money. C. It can be hundreds—even thousands—of percentage points per year. D. All of the above.
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.
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.
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.
Which of the following is true with respect to Irving Fisher's quantity equation, M×V=P×Y? A. P = the GDP deflator B. V=P×YM C. V = Average number of times a dollar is spent on goods and services D. M = M1 definition of the money supply E. All of the above
E. All of the above The quantity equation is M×V=P×Y or, V=P×Y/M. 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.
barter economies
Economies where goods and services are traded directly for other goods and services.
required reserves
Reserves that a bank is legally required to hold, based on its checking account deposits.
excess reserves
Reserves that banks hold over and above the legal requirement.
required reserve ratio
The minimum fraction of reserves that banks are required by law to keep as reserves.
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.
money as a 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.
money as a 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.
reserve requirements
a tool the Fed uses to manage money supply; 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.
discount policy
a tool the fed uses to manage money supply; 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.
open market operations
a tool the fed uses to manage money supply; 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.