Chapter 15 & 16
A member of Congress, who has never had an economics course, has just been placed on a Money and Banking Committee. The official needs a briefing prior to the first meeting concerning the role of the money supply in the economy. Which of the following statements should you insist that the official remember when entering the first committee meeting?
There is a direct, albeit loose, relationship between the growth of the money supply and the price level; and a direct relationship between the growth of the money supply and GDP growth.
The Fed sells 30,000,000 in bonds to Jim, a bond dealer who pays for the bonds with a check drawn on his bank. Assume a 20% required reserve ratio. Which of the following statements correctly records this transaction at Jim's bank with respect to the bank's reserves?
The bank's reserves will go down by $30,000,000
Viewed as an accounting identity, the equation of exchange is always ________ , because the amount of funds ___________ on final output of goods and services must equal the total amount of funds ______ for final output
True; spent; received
What type of relationship exists between the growth of the money supply and changes in the inflation rate?
A direct relationship.
Which of the following assets is the least liquid?
A house.
direct effect
AD rises because with an increase in the money supply, people now want to purchase more output of real goods and services
Which of the following does not describe some of the functions of the Federal Reserve Bank?
Acts as a medium of exchange, a unit of accounting, a store of value and a standard of deferred payment.
Suppose that the economy currently is in long-run equilibrium. Explain the short- and long-run adjustments that will take place in an aggregate demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.
Aggregate demand curve shifts to the right; in the short-run both price level and real GDP increase. Over the long run the short-run aggregate supply curve shifts upward to the left and a new long-run equilibrium is reached at the initial equilibrium GDP but at a higher price level.
An example of a fiduciary monetary system is
American one-dollar bills.
Which of the following assets is the most liquid?
A traveler's check.
What is the basic structure of the Federal Reserve Bank?
There are 12 district banks, a Board of Governors and a Federal Open Market Committee.
Which of the following statements is incorrect?
There are a total of 25 Federal Reserve district banks.
Which of the following statements is true when considering national banking structures around the world?
U.S. businesses only obtain approximately 30% of their funds from bank loans compared to 65% for European firms.
Money may serve as a "standard of value" that allows for comparison of the relative worth of various goods and services. What function of money does this describe?
Unit of accounting.
central bank
a bankers bank usually an official institution that also serves as a country treasury bank central banks normally regulate commercial banks
The indirect effect of an increase in the money supply works through
a decrease in the interest rate increasing investment and consumption.
A customer's savings deposit is ______ to a commercial bank
a liability
Funds borrowed from a credit union in the federal funds market is _______ to a commercial bank
a liability
A corporation that recently obtained a loan from several banks to finance installation of a new computer network instead directs some of the funds to executive bonuses. This situation poses
a moral hazard problem
A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses
a moral hazard problem
An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation. This situation poses
a moral hazard problem
money multiplier
a number that, when multiplied by a change in reserves in the banking system, yields the resulting change in the money supply
standard of deferred payment
a property of an item that makes it desirable for use as a means of settling debts maturing in the future essential property of money
According to the quantity theory of money and prices, a −3% change in the money supply, holding other variables constant, leads to
a −3% change in the price level.
When a temporarily illiquid bank which is otherwise in good financial condition borrows money from the Fed in an attempt to prevent a loss of confidence in the bank or in other banks, this is an example of the Fed
acting as the lender of last resort.
money supply
amount of money in circulation
assets
amounts owned all items to which a business or household holds legal claims the uses of funds by financial intermediaries
A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his ex-wife. This situation poses
an adverse selection problem
An individual with several children who has just learned that she has lung cancer applies for life insurance but fails to report this recent medical diagnosis. This situation poses
an adverse selection problem
A state-chartered financial institution exempt from laws requiring it to have federal deposit insurance decides to apply for deposit insurance after experiencing severe financial problems that may bankrupt the institution. This situation poses
an adverse selection problem
An auto loan to an individual is _______ to a commercial bank
an asset
The bank's required reserve is ________ to a commercial bank
an asset
Vault cash is
an asset
bank run
an attempt by many of a banks depositors to convert transactions and time deposits into currency out of fear that the banks liabilities may exceed its assets result is the failure of that depository institution
medium of exchange
any item that sellers will accept as payment money facilitates exchange by reducing transaction costs associated with means of payment uncertainty: permits specialization, facilitates efficiencies
money
any medium that is universally accepted in an economy both by sellers of goods and services as payments for those goods and services and by creditors as payments for debt
Required reserves
are the minimum amount of legal reserves that a depository institution must have to back up its checkable deposits.
Open market operations
are the purchase and sale of existing U.S. government securities by the Federal Reserve.
Excess reserves
are zero if required reserves equal legal reserves. are negative if legal reserves are not sufficient to cover required reserves. are minimized by profit-maximizing banks since they generate no income.
During the 1945-1946 Hungarian hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more stable, it created a good called a "tax pengö", in which all bank deposits were denominated for purposes of taxation. Nevertheless, payments for goods and services were made only in terms of the regular Hungarian currency, whose value tended to fall rapidly even though the value of a tax pengö remained stable. Prices were also quoted only in terms of the regular currency. Lenders, however, began denominating loan payments in terms of tax pengös. The tax pengö functioned as money in Hungary in 1945 and 1946
as a store value
Deposits with a Federal Reserve district bank are
assets
Loans to a private company are
assets
Loans to other banks in the federal funds market are
assets
U.S. Treasury bills are
assets
demand for money curve
assume that the amount of money demanded for transactions purposes is proportionate to income determined by the opportunity cost of holding money
Why might people wish to direct their funds through a bank instead of lending directly to a business
asymmetric information adverse selection moral hazard larger scale and lower management costs
Financial intermediaries specialize in tackling problems of _______ information. They address the _________ problem by carefully reviewing the credit-worthiness of loan applicants, and they deal with the ________ problem by monitoring borrowers after they receive loans. Many financial intermediaries also take advantage of cost reductions arising from the centralized management of funds pooled from the savings of many individuals.
asymmetric; adverse selection; moral hazard
Since the financial meltdown of the late 2000s, the Fed has launched a credit policy which consists of
auctioning funds to banking institutions. providing short-term emergency financing arrangements for nonfinancial firms. purchasing some of the debts of auto finance companies.
transactions deposits
checkable and debatable account balances in commercial banks and other types of financial institutions, such as credit unions and mutual savings banks accounts in financial institutions on which you can easily transmit debit card and check payments without many restrictions
The M2 measurement of the money supply includes all of M1 plus several other highly liquid assets. Which of the following is not one of those assets which is included in M2?
credit card balances
The demand for money curve shows the relationship between the interest rate and the quantity of money demanded, and is
downward sloping
MZM (money at zero maturity)
entails adding deposits without set maturities to M1 includes all money mutual funds but excludes all deposits with fixed maturities
The _________ states that the expenditures by some people will equal income receipts by others, or MsV PY (money supply times velocity equals nominal GDP).
equation of exchange
The net export effect of contractionary monetary policy predicts that a country's
exports decrease as the money supply contracts.
The Fed
federal reserve system; central bank of the US most important regulatory agency in the US monetary system established in 1913 by the Fed, signed by Pres Woodrow Wilson
When expansionary monetary policy causes interest rates to fall, foreign residents will want _____ U.S. financial instruments. The resulting ________ in the demand for dollars will reduce the dollar's value in foreign exchange markets, leading to ______ in net exports
fewer; decrease; increase
Modern nations have ________ monetary systems—national currencies are not convertible into a fixed quantity of gold or silver.
fiduciary
thrift institution
financial institution that receives most of its funds from the savings of the public
travelers checks
financial instruments purchased from a bank or a nonbonding organization and signed during purchase that can be used as cash upon a second signature by the purchaser
The Fed's credit policy since 2008 has
given private banks more time to recover from the financial crisis. provided banks more liquidity. led to an expansion of asymmetric information problems by reducing banls' incentive to screen and monitor borrowers.
transactions demand
holding money as a medium of exchange to make payment varying level related to nominal GDP
asset demand
holding money as a store of value instead of holding other assets, such as certificates of deposit, corporate bonds or stocks
precautionary demand
holding money to meet unplanned expenditures and emergencies
An increase in the money supply will
increase the price level. create a direct effect of an increase in consumption due to higher money balances. create an indirect effect of increased consumption and investment through increased saving and loans.
A credit card is not considered money because
it is not a unit of accounting. it is not a store of value. it simply defers rather than completes transactions that ultimately involve the use of money.
what is the cost of holding money (opportunity cost)
it is the alternative interest yield obtainable by holding some other asset
According to the equation of exchange, if velocity is constant and output is fixed at the full employment level, then any percentage increase in the money supply will
lead to an equal percentage increase in the price level.
The Fed's credit policy since 2008 has
led to a reduction in the money multiplier.
Federal insurance of bank deposits insulates depositors from risks, so depositors are __________ concerned about riskier investment strategies by depository institutions. Thus, bank managers have an incentive to invest in _______ assets to make ______ rates of return
less; riskier; higher
Borrowings from a Federal Reserve district bank are
liabilities
Obviously financial intermediaries need to collect money from a variety of sources so they can redirect it where it can be used efficiently. The primary source of funds for a financial intermediary are known as its
liabilities
Transactions deposits are
liabilities
Commercial banks screen their borrowers before a loan can be approved, in order to
limit adverse selection
Stockbrokers monitor the companies after investing funds in them, in order to
limit moral hazard
Money is a highly ___________ asset because it can be disposed of with low transaction costs and with relative certainty as to its value.
liquid
Money market mutual funds combine the savings of many individuals, in order to
lower management costs
When the Fed sells bonds, it must offer them at a _______ price. When the Fed buys bonds, it must pay a ________ price
lower, higher
In an open economy, the net export effect
may offset an expansionary fiscal policy but enhance an expansionary monetary policy.
unit of accounting
measure by which prices are expressed common denominator of the price system it is a central property of money
functions of money
medium of exchange unit of accounting story of value(purchasing power) standard of deferred payment
When sellers accept money as payment in market transactions, money is serving as a
medium of exchange.
Until 1946, residents of the island of Yap used large doughnut-shaped stones as financial assets. Although prices of goods and services were not quoted in terms of the stones, the stones were often used in exchange for particularly large purchases, such as payments for livestock. To make the transaction, several individuals would place a large stick through a stone's center and carry it to its new owner. A stone was difficult for any one person to steal, so an owner typically would lean it against the side of his or her home as a sign to others of accumulated purchasing power that would hold value for later use in exchange. Loans would often be repaid using the stones. These stones performed the following functions of money
medium of exchange, store of value, and standard of deferred payment functions of money.
Money is defined by its functions, which are as a __________ of __________, __________ of __________, __________ of __________, and __________ of __________ __________.
medium of exchange; unit of accounting; store of value; and standard of deferred payment.
transaction approach
method of measuring the money supply by looking at money as a medium of exchange
liquidity approach
method of measuring the money supply by looking at money as a temporary store of value
Currency M1
minted coins and paper currency not deposited in financial institutions bulk of currency in circulation actually does not circulate within the US border
The quantity theory of money and prices states that a change in the _________ will bring about a proportional change in the ______.
money supply; price level
Scott is seeking a loan from his bank for a home improvement project. He receives the loan and then decides to take a special vacation opportunity to Las Vegas and enter a gambling tournament. The bank, as a financial intermediary, is facing a problem of
moral hazard.
The possibility that a borrower might engage in riskier behavior after a loan has been obtained is known as
moral hazard.
On a bank's balance sheet, ________ are assets and ________ are liabilities.
reserves and loans; transactions deposits
M2 = M1 plus:
savings deposits small denomination (<100,000) time deposits balances in retail money market mutual funds
The M1 measurement of the money supply includes all of the following components except
savings deposits.
Bitcoins can serve as a unit of accounting. This is illustrated by the fact that
some sellers even quote online bitcoin prices.
What are the features of federal deposit insurance?
Depository institutions' premiums are based on the value of their deposits with the funds being held for use in the case of a failed bank so that depositors can be reimbursed.
The FOMC outlines the Fed's general monetary policy strategy in the FOMC ______ , which it transmits to the Trading Desk of the Federal Reserve Bank of ________ for implementation
Directive; New York
Because of the FDIC, the federal government is not exposed to asymmetric information problems.
FALSE
In the United States, the dollar volume of payments using checks exceeds the volume using debit cards.
FALSE
Money is the least liquid asset.
FALSE
The market price of existing bonds is directly related to the rate of interest.
FALSE
When the money supply increases, interest rates also increase.
FALSE
With contractionary monetary policy, the net export effect results in a deprecaition of the dollar, where the international price of the dollar falls.
FALSE
To limit the fallout from systemwide failures and bank runs, Congress created the ______ in 1933. Since the advent, there have been no true bank runs at federally insured banks.
FDIC
quantitative easing
Fed open market purchases intended to generate an increase in bank reserves at a nearly 0 interest rate
open market operations
Fed purchases and sells government bonds issued by the US treasury causes a change in the price of bonds
The central bank in the United States is the __________ , which was established on December 13, 1913.
Federal Reserve System
At present, the policy strategy of the Federal Open Market Committee (FOMC) focuses on aiming for a target value of the _______ rate, which the FOMC seeks to achieve via _________ that alter the supply of reserves to the banking system.
Federal funds; open market operations
_________ Fintermediaries, including depository institutions such as commercial banks and savings institutions, insurance companies, mutual funds, and pension funds, transfer funds from ultimate lenders (savers) to ultimate borrowers.
Financial
Which of the following is a situation of moral hazard created by the existence of the FDIC?
Financial institutions, with FDIC protection, use depositors' funds in riskier investment projects.
Which of the following is not a duty of the a central bank?
Guarantee the savings of its citizens.
Which of the functions of the Federal Reserve is appropriately matched with its correct institution?
Holds reserve balances for depository institutions; The Federal Reserve Bank.
Which of the following events caused Congress to begin seriously looking at setting up the Federal Reserve system?
Some severe banking crises at the end of the 19th century and early 20th century.
potential money multiplier
the reciprocal of the required reserve ration, assuming no leakages into currency and no excess reserves equal to 1 divided by the required reserve ratio =1/ reserve ratio
Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself. You pay cash for the gift and write a check for the sweater. Your purchases are made with money holdings represented by
the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater.
The value of the U.S. dollar is based on
the public's faith that the dollar can be exchanged for goods and services.
____________ deposits are any deposits in financial institutions from which the deposit owner can transfer funds using a debit card or checks.
transactions
Holding money as a medium of exchange to make payments is known as
transactions demand.
The money supply can be defined in a variety of ways, depending on whether we use the transactions approach or the liquidity approach. Using the ________ approach, the money supply consists of currency, transactions deposits, and traveler's checks. This is called ________
transactions, M1
Financial intermediaries
transfer funds from savers to investors.
When money is used as a standard of value that allows people to compare the relative worth of various goods and services, it is serving as a
unit of accounting.
The Federal Deposit Insurance Corporation (FDIC)
was created in 1933 to prevent bank runs that had been plaguing the economy during the Great Depression. assures depositors that their deposits will be fully recoverable (up to a maximum of $250,000 per depositor per institution) regardless of how serious a bank's financial situation may be. creates moral hazard problems in that big banks take on more risk knowing the FDIC will consider them "too big to fail."
If the Fed decreases the discount rate, relative to the federal funds rate, then this
would decrease the cost of funds for institutions borrowing from the Fed.
what backs money? gold, silver, federal government?
your confidence backs money
If the Fed engages in an open market sale with a bond dealer, the bond dealer's bank's transactions deposits liabilities will ________ and the money supply will ________.
decrease; decrease
If the Federal Reserve implements an expansionary monetary policy that reduces the market interest rate, this will tend to ________ foreign investment in U.S. financial assets and ________ U.S. net exports.
discourage; increase
If the economy is operating beyond full employment, contractionary monetary policy will shift the aggregate demand curve to the ________ and the price level will ________.
left; decrease
When the Fed makes an open market purchase, the supply curve for bonds in the private market shifts to the ________ and the price of bonds ________.
left; increases
If the economy is operating at less than full employment, expansionary monetary policy will shift the aggregate demand curve to the ________ and the price level will ________.
right; increase
The determinants of the demand for money balances are the __________ demand, the __________ demand, and the __________ demand.
transactions; precautionary; asset.
Which of the following statements is true when considering central banks?
The number of central banks in the world grew enormously after the Great Depression.
The potential money multiplier is equal to
1 divided by the reserve ratio.
The required reserve ratio is 0.05. If the Federal Reserve buys $1,000,000 worth of bonds from a bond dealer who has her account at Bank XYZ above and she deposits the entire $1,000,000 into a checking account at Bank XYZ, what will be the new required and excess reserves for this bank (assume no new loans are made)? (Remember that required reserves are found by applying the required reserve ratio to the amount of total checkable deposits.) Total checkable deposits at Bank XYZ grow by ___________ Bank XYZ is now required to hold an additional $________ as required reserves due to this $1,000,000 deposit into a checking account. and can now lend an additional __________ due to this 1,000,000 deposit into a checking account
1,000,000 because of this deposit from the broker 50,000 95,000,000
The reserve ratio is 27 percent. What is the value of the potential money multiplier?The value of the potential money multiplier is
3.7 1/.27
If the total money supply is $45 billion, real GDP is $60 billion, and the price level is 3, the income velocity of money is
4
actual change in the money supply
=actual money multiplier X change in total reserves
As a result of monetary policy of the Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this outcome?
A Fed sale of bonds to brokers and banks.
Which of the following statements is true concerning a fractional reserve banking system?
Banks maintain a fraction of deposits on hand to meet the daily needs of their customers.
There are 12 Federal Reserve district banks, with 25 branches. The Federal Reserve System is managed by the _________ in Washington, D.C. The Fed interacts with almost all depository institutions in the United States, most of which must keep a certain percentage of their transactions deposits on reserve with the Fed. The Fed serves as the chief regulatory agency for all depository institutions that have Federal Reserve System membership.
Board of Governors
Which of the following is a true statement?
Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand.
$5 billion in traveler's checks are included in
M1 and M2
A $1,000 balance in a transactions deposit at a mutual savings bank. This item is counted in
M1 and M2
A $20 Federal Reserve note is counted in
M1 and M2
A $50 traveler's check is counted in
M1 and M2
A $50 traveler's check. This item is counted in
M1 and M2
There are two major ways of measuring money, M1 and M2. Which statement is true about the measuring of M1 and M2?
M1 is measured by the transactions approach which stresses the role of money as a medium of exchange while M2 is measured by the liquidity approach which stresses the role of money as a temporary store of value.
When we add savings deposits, small-denomination time deposits, and retail money market mutual fund balances to ________ , we obtain the measure known as ________
M1; M2
$15 billion in small-denomination time deposits are included in
M2
20 billion in money market deposit accounts are included in
M2
A $10,000 time deposit an elderly widow holds at her credit union. This item is counted in
M2
A $25,000 money market deposit account is counted in
M2
A $50,000 money market deposit account balance. This item is counted in
M2
A $500 time deposit is counted in
M2
liquidity approach to measuring money
M2
RobertRobert needs to decide between buying a big screen TVbig screen TV for $1,800 or being able to go on a Florida vacationFlorida vacation for $1,000 and still having enough left over to buy a small screen TVsmall screen TV for $800. RobertRobert opts for the small screen TVsmall screen TV and the Florida vacationFlorida vacation. RobertRobert has used money in what ways in making his decision?
Medium of exchange and a standard unit of account.
Which of the following is not a reason people choose to hold money balances?
Money holdings are good assets during periods of inflation.
$50 billion in U.S. Treasury bills are included in
Neither M1 or M2
__________ of depository institutions consist of their vault cash and deposits that they hold with ________
Reserves; Federal Reserves
money balances
SYNONYMOUS WITH MONEY, money stock and money holdings
All deposits in U.S. banks are insured by the Federal Deposit Insurance Corporation.
TRUE
An expansionary monetary policy decreases the rate of interest, which in turn increases planned investment.
TRUE
Federal Reserve policymaking which involves direct lending to financial and nonfinancial firms is called credit policy.
TRUE
Federal deposit insurance currently covers up to $250,000 per depositor per institution.
TRUE
Individuals purchasing new bonds issued by a corporation is an example of direct finance for the corporation.
TRUE
Liabilities refer to amounts owed, and assets refer to amounts owned.
TRUE
Since 2010, the FDIC has been able to assess premium rates on banks' total liabilities.
TRUE
The FDIC possesses regulatory powers to offset risk-taking temptations to depository institution managers.
TRUE
When the money supply increases, aggregate demand rises.
TRUE
Which of the following is a true statement?
The FDIC has reduced the number of depositors who have lost savings, but in doing so, has inadvertently encouraged banks to make riskier loans.
If you live in Atlanta, Georgia, and you purchase a computer in Los Angeles, California, while there on vacation, which of the following paths would your check take before it finally clears?
The check goes from the computer store's bank to the Federal Reserve bank in San Francisco, then to the Federal Reserve bank in Atlanta, and then to your bank.
Suppose that there is a checkable withdrawal from withdrawal from YourBank. Which of the following statements is an accurate description of the changes that occur at YourBank?
The required reserves decrease by the amount of the withdrawal times the required reserve ratio.
Which of the following is a major reason why financial intermediaries, such as banks, exist?
The existence of asymmetric information makes financial intermediaries more efficient in channelling money to its most efficient use.
Which of the following statements is true when considering liquidity?
The most liquid assets typically earn no or little interest.
During an interval between mid-2010 and early 2011, the Federal Reserve embarked on a policy it termed "quantitative easing." Total reserves in the banking system increased. Hence, the Federal Reserve's liabilities to banks increased, and at the same time its assets rose as it purchased more assets - many of which were securities with private market values that had dropped considerably. The money multiplier declined, so the net increase in the money supply was negligible. Indeed, during a portion of the period, the money supply actually declined before rising near its previous value. The Fed's "quantitative easing" can be best described as a
credit policy action.
The financial intermediary with liabilities of shares and checkable deposits and assets that include consumer debt and long term mortgage loans is a
credit union.
Advantages of the Fed's ______ policy are that it has provided institutions with more liquidity, has helped to limit the number of bank _________ , and has provided more dollars for use in international markets. Disadvantages include reduced incentives for banks to minimize operating costs and to screen and to _________ borrowers and potential conflicts of _______ policy with the Fed's monetary policy responsibilities.
credit; failures; monitor; credit
Since 2008, the Fed has implemented _________ policy, under which it has extended _______ directly to selected financial institutions and has purchased debt securities that have lost much of their market value.
credit; loans
M1
currency and coins transactions deposits travelers check
fiduciary monetary system
currency is issued by the government, and its value rests on the publics confidence that it can be exchanged for goods and services 'trust' 'confidence'
The functions of the Federal Reserve System are to supply fiduciary ________ , provide payment-clearing services, hold depository institution ________ , act as the government's fiscal agent, supervise depository institutions, regulate the supply of money, intervene in foreign currency markets, and act as the ________
currency; reserves; lender of last resort
A Federal Reserve open market sale generates _________ in the price of existing bonds and ________ in the market interest rate. An open market purchase brings about _______ in the price of existing bonds and _______ in the market rate of interest
decrease; increase; increase; decrease
Liquidity
degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs money is the most liquid asset
To use money, people must hold money. Therefore, they have a
demand for money balances
Reserves
deposits held by the Fed district bank for depository institutions, plus depository institutions vault cash
Ancient goldsmiths are credited with
developing deposit slips for gold and silver. creating paper notes that could purchase goods and services. the creation of the fraction reserve banking system.
The _________ effect of an increase in the money supply arises because people desire to spend more on real goods and services when they have excess money balances.
direct
Barter
direct exchange of goods and services for other goods and services without the use of money a direct exchange requires a double coincidence of wants
The interest rate that the Federal Reserve charges for reserves that it lends to depository institutions is called the
discount rate.
To implement a credit policy intended to expand liquidity of the banking system, the Fed desires to increase its assets by lending to a substantial number of banks. How might the Fed adjust the interest rate that it pays banks on reserves in order to induce them to hold the reserves required for funding this credit policy action? The Fed should _______ the interest rate. What will happen to the Fed's liabilities if it implements the policy action to induce banks to hold the reserves required for funding its credit policy? The Fed's liabilities will ________.
increase; increase
Increases in output and increases in the inflation rate have been linked to
increases in the money supply.
The ______ effect of an increase in the money supply works through _______ in the interest rate, which encourages businesses to make new investments with the funds loaned to them. Individuals will also engage in more consumption (on consumer durables) because of __________ interest rates
indirect; a reduction; lower
indirect finance
individuals hold money in a bank the bank lends the money to a business
direct finance
individuals purchase bonds from a business
Asymmetric information
info possessed by one party in a financial transaction but not by the other
finanial intermediaries
institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers
Contractionary monetary policy causes the
interest rate to increase.
There is ________ relationship between the prevailing rate of interest in the economy and the market price of existing bonds (and all fixed-income assets).
inverse
market price of existing bonds is _______ related to the rate of interest prevailing in the economy
inversely
The demand for money
is a downward sloping function of the interest rate.
The equation of exchange
is an accounting identity and is always correct. states that the money supply times velocity equals nominal national income. states that expenditures by some people equal income received by others.
Arguments supporting the Federal Reserve's credit policy include all of the following except
it increased incentives to screen and monitor in order to limit asymmetric information problems.
On the one hand, the Federal Deposit Insurance Reform Act of 2005 expanded the ______ risks associated with deposit insurance by increasing limits for insured retirement deposits and indexing limits for other deposits to inflation. On the other hand, the law granted the FDIC greater discretion to assess risk-based deposit insurance ________ intended to restrain _______ risks
moral hazard; premiums; moral hazard
If contractionary monetary policy raises U.S. interest rates, there is a _______ net export effect because foreign residents will demand ____________ U.S. financial instruments, thereby demanding ______ dollars and hence causing the international price of the dollar to rise. This makes our exports more expensive for the rest of the world.
negative; more; more
A $100,000 certificate of deposit issued by a New York bank. This item is counted in
neither M1 or M2
An increase in the money supply will
not change the long-run aggregate supply curve but ultimately will only raise the price level in long-run equilibrium price level. move the equilibrium point along the short-run aggregate supply curve. shift the aggregate demand curve outward and to the right.
indirect effect
not everybody will necessarily spend the newfound money on goods and services some of the money gets deposited, so banks have higher reserves
store value
offers the ability to hold value over time necessary property of money money allows you to transfer value into the future
Fed has four tools at its disposal as monetary policy actions
open market operations changes in the reserve ratio changes in the interest rate paid on reserves discount rate changes
Holding money carries an _____ cost--the interest income forgone. Hence, the demand for money curve showing the relationship between the quantity of money balances demanded and the interest rate slopes ______
opportunity; downward
In order to induce private banks to maintain substantial reserve deposits with the Federal Reserve banks, since 2008 the Fed has
paid banks an interest rate that is higher than the federal funds rate on their reserves.
A currency will cease to function as money if
people think that they will not be able to use it to exchange for goods and services later.
Many economists believe that the growth of the money supply is
positively related to the growth of real GDP.
Moral hazard
possibility that a borrower might engage in riskier behavior after a loan has been obtained
The _______ is equal to 1 divided by the reserve ratio
potential money multiplier
Money is accepted in exchange for goods and services because people have confidence that it can later be exchanged for other goods and services. In addition, money has _______ value
predictable
financial intermediation
process by which financial institutions accept savings from businesses, households, and governments and lend the savings to other businesses, households and governments
The Fed acts like a private banking institution when it
provides payment-- clearing services to depository institutions acts as the government's fiscal agent. holds Depository institution's reserves
open market operations
purchase and sale of existing US government securities and in the open private market by the Fed
Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open market, increases the discount rate, and increases the reserve ratio. The net export effect resulting from these monetary policy actions will
raise the interest rate, increase the inflows of international capital, increase the value of the dollar, decrease exports, and as a consequence real GDP will decline even further.
The Fed acts like a government agency when it
regulates the money supply supplies the economy with fiduciary currency Supervises depository institutions
The fraction of transactions deposit liabilities that depository institutions hold as reserves is the
reserve ratio
When money is used as a means of settling debts maturing in the future, it is serving as a
standard of deferred payment.
balance sheet
statements of assets (what is owned) and liabilities (what is owed)
The fact that the number of bitcoins has an upper limit tends to place a lower bound on the bitcoin's value in terms of dollars or other traditional currencies, so the digital currency also has served as a
store of value.
When money is set aside to be used for future purchases, it is serving as a
store of value.
Functions of the Fed
supplies the economy with fiduciary currency holds depository institutions reserves acts as the governments fiscal agent supervises depository instutiions conducts monetary policy intervenes in foreign currency markets acts as the lender of last resort
fractional reserve banking
system in which depository institutions hold reserves that are less than the amount of deposits
Adverse selection
tendency for borrowers to use their borrowed finds for high-risk projects
When the Fed acts as the lender of the "last resort" it means that
the Fed lends to depository institutions it deems should not fail.
Due to the Gramm-Leach-Bliley Act of 1999
the US government allowed commercial banks to own stock and sell insurance policies.
Contractionary monetary policy by the Fed can be hampered by
the ability of U.S. citizens and businesses to obtain dollars from foreign sources.
The opportunity cost of money holdings is
the alternative interest income foregone from not holding some other asset.
People go to so much trouble to locate bitcoins because
the digital currency functions as a form of money.
