ECO 17
What accounts for the difference between the two curves shown in the figure?
banks' need to cover expenses and make a profit (Banks charge more on loans than they pay out to the depositors whose money they are lending out.)
Arrange the systems of economic exchange according to the order in which they historically appeared, from ancient times to the present.
barter system commodity money commodity-backed money fiat money
Match the type of bank to its correct description. central bank
the type of bank citizens use to open a checking account or take out an auto loancommercial bank Correct label:commercial bank the Federal Reservecentral bank Correct label:central bank the type of bank that typically serves to help firms raise money to investinvestment bank Correct label:investment bank
What is the primary objective of open market operations by the Federal Reserve Bank?
to grow or shrink the money supply (By adjusting the nation's money supply, the Fed tries to manage inflation and keep the economy on a steady course.)
Place each quantitative easing amount in the appropriate spot in the timeline.
1.725 trillion dollars 600 billion dollars up to 85 billion dollars per month (Left to right)
A bank has $320 million in deposits, of which it is holding $39 million in reserves. If the required reserve ratio is 10%, what is the maximum amount the bank could still lend out, as new loans?
7 (Based on the required reserve ratio of 10%, the bank is required to hold only $32 million in reserves (10% of $320 million). $39 million minus the minimum of $32 million equals $7 million.)
If the Federal Reserve Bank wanted to set the money multiplier at mm = 12.5, what reserve ratio should it require? (Use the simple money multiplier for this calculation.)
8%
Consider this hypothetical balance sheet for YooHoo Bank, in the fictional country of Hellond.
8% (required reserves=rr × depositsrequired reserves=rr × deposits.)
Abinav was excited to get his $1,200 tax rebate check so he could buy a motorcycle because he was uncomfortable taking the city bus during the pandemic. His friend sold him a used motorcycle for $800. He also purchased a new helmet from an online store for $50 and put the remaining $350 in the bank to help him cover his tuition bill for the summer.Thinking about how Abinav allocated his tax rebate check, identify the role money played in the statements below. Not all labels will be used.
Abinav purchased a helmet online.medium of exchange Correct label:medium of exchange The cost of the motorcycle was $800, and the helmet was $50.unit of account Correct label:unit of account Abinav deposited the remaining funds into his bank.store of value Correct label:store of value
Anna has a yard full of chickens but needs milk for her baby. Josiah, who is allergic to eggs, has a cow that produces milk. Put the events in order to describe how Anna obtains milk by the barter method.
Anna takes eggs from her chickens to Josiah to trade for milk. Josiah tells Anna he does not eat eggs, but will accept apples in exchange for milk. Anna finds someone who has apples and is willing to trade them for eggs. Anna gives apples to Josiah and gets milk in return.
Fill in the blanks to complete the passage about discount borrowing. Drag word(s) below to fill in the blank(s) in the passage.
Around the time of the Great Depression, the Fed stopped actively using the discount rate to administer monetary policy. When it did use this tool, an increase would discourage borrowing by banks, and a decrease would encourage bank borrowing. Today, banks are generally discouraged from borrowing from the Fed, unless the banks are struggling. (In 2008, the Fed made discount loans to other financial institutions besides just struggling banks. This was an unprecedented move, to prevent a domino-like collapse of the U.S. financial system.)
Fill in the blanks to complete the passage about one of the three key functions of money.
Because money creates a standard unit of account, it is possible to compare the prices of two goods, which allows people to communicate the value of the goods in a way that is easily understood. This characteristic of money also enables it to serve as a recording device, or a way to measure accounts and transactions in a consistent manner.
What factors prompted banks to suddenly start holding excess reserves in 2008, as shown in the graph?
Contributed to Excess Reserves During the Great Recession, lending money became riskier. The Fed began paying interest on reserves banks deposited with it. Did Not Contribute to Excess Reserves Banks' profits exceeded their ability to find lenders. The Fed set the reserve requirement lower than banks wanted.
Which of the following are functions of money?
Correct Answer(s) It can be traded for goods and services. It has value, so owning money allows people to hold wealth. It provides a standard measure for prices to be quoted in. Incorrect Answer(s) It provides individuals the opportunity to engage in barter. It requires a double coincidence of wants.
Which of the following actions qualify as open market operations?
Correct Answer(s) The Fed sells U.S. Treasury bonds to a private bank. The Fed buys U.S. Treasury bonds from a financial institution. Incorrect Answer(s) The Fed takes in deposits from private banks. The Fed sets the interest rate it pays on deposits from private banks.
Which of the following is true if you deposit $1,000 in a bank checking or savings account? Assume a 10% bank reserve requirement.
Correct Answer(s) The bank has $900 it can lend to someone else. You have $1,000 available to spend if you choose. The bank's reserves will increase by at least $100. Incorrect Answer(s) The bank has $1,000 it can lend to someone else. The bank's liabilities decrease by at least $1,000. (Unless someone else makes a withdrawal at the same time you are depositing your money, the bank's reserves must increase by at least 10% of your deposit.)
Which items are parts of the M1 money supply?
Correct Answer(s) money in checking accounts currency traveler's checks Incorrect Answer(s) certificates of deposit (CDs) money in savings accounts
Credit cards are included in the money supply.
FALSE (Purchases made with credit cards involve a loan extended right at the cash register. When the loan is made, the credit card company is actually paying for the purchase, until the cardholder later repays the loan.)
The ability to regulate commercial banks and monitor bank balance sheets is outside the Fed's authority. It is the duty of commercial banks to privately monitor their own activities.
FALSE (The Fed is charged with ensuring the financial stability of banks, which includes monitoring bank activities and making sure a bank limits risk and doesn't lend more than it should.)
Drag each component of the M2 money supply into place in the figure.
FIGURE 17.1
Apply the correct labels to the diagram of fractional reserve banking. Not all labels will be used.
FIGURE 17.5 money deposited, (Big portion) available for loans, (smaller potion) reserves, money lent
Fill in the blank to complete the statement about what happened to M1 and M2 during the pandemic.
INCREASE (M1 (currency and checkable deposits) is included in M2.)
Fill in the blanks to complete the passage about barter-based and money-based economies.
In barter economies, goods and services are traded without the use of money. Therefore, in order for a trade to occur, a double coincidence of wants is required. With the introduction of money, trade becomes much easier: there is now a medium of exchange between buyers and sellers.
Place the events in order to describe how a bank with a temporary reserve shortfall uses a short-term loan to bring its reserves up to the required level.
Lending activity depletes American Bank's reserves below the required reserve level. American Bank takes out a short-term loan with TrueBlue Bank. The Fed facilitates the transaction. The loan to American Bank begins earning interest for TrueBlue Bank at the federal funds rate. With some of its own borrowers paying off loans and new deposits coming in, American Bank no longer needs the money borrowed from TrueBlue Bank. American Bank pays off the loan and is able to maintain the required reserves.
After a sluggish quarter, the Federal Reserve Bank decides to increase the money supply in the economy. When the money-creation process is complete, the Fed wants there to be $20 billion worth of new funds in the money supply. If the required reserve ratio is 5%, what is the simple money multiplier, and by how much should the Fed initially increase the money supply? Assume that all currency is deposited in banks and that banks hold no excess reserves.
Money multiplier: 20 Initial money increase: $1 billion (This initial money supply, multiplied by the money multiplier, equals the total amount of new funds: $20 billion.)
Which of the following are responsibilities of the Federal Reserve?
Responsibilities of the Federal Reserve Act as a bank for banks, both accepting deposits and extending loans. Apply a countercyclical economic policy to the money supply. Set the required reserve ratio for banks. Not a Responsibility of the Federal Reserve Raise money for the operations of the federal government by selling bonds.
The simple money multiplier, m^m=1/rr is greater than the real-world money multiplier.
TRUE
In recent decades, as the Fed administers monetary policy, it has relied less on adjustments to the reserve requirement and the discount rate than it used to.
TRUE (The Fed has developed other, better policy tools for controlling the money supply and now makes much less use of the reserve requirement or discount rate for that purpose.)
Money's role as a store of value is less important today than it once was.
TRUE (Today most of our stored value is "virtual": it exists in the form of account balances rather than bills and coins.)
In the wake of the Great Recession, how did the amount of reserves held by banks change?
The Fed began paying interest on reserves, so the amount of excess reserves held by banks increased significantly. (Until the fall of 2008, banks held virtually no excess reserves. By paying interest on reserves, the Fed created an incentive for banks to hold reserves above the required amount.)
Place the events in order to describe how money the Fed adds to the economy starts to be multiplied. The reserve requirement in this example is 10%.
The Fed buys a security from a bank for $1,000. The bank sets $100 aside as required reserves. The bank lends $900 to a customer needing a loan. The customer spends the $900 at a store .The store owner deposits the $900 in another bank.
Identify each action by the Fed as expanding the money supply, shrinking it, or neither.
The Fed lends money to struggling banks.expands the money supply Correct label:expands the money supply The Fed regulates banks to ensure stability.neither expands nor shrinks Correct label:neither expands nor shrinks The Fed sells Treasury bonds to investors.shrinks the money supply Correct label:shrinks the money supply The Fed buys mortgage-backed securities.expands the money supply Correct label:expands the money supply
Fill in the blanks to complete the passage about the business of banking.
The main function of commercial banks is to accept deposits and then to lend the same money (minus required reserves) back out. Banks make a profit by charging a higher interest rate on loans than the interest rate they pay on deposits. Through the loan process, banks are actually able to create money. (By acting as intermediaries, banks enable depositors to earn interest and at the same time enable borrowers to engage in ventures that would be impossible without the loaned money.)
Click on the two quantities that must be equal for the financial statement to be balanced.
Total Liabilities and net worth & Total Assets (The right side of a bank's balance sheet shows the sources of the firm's funds.)(The left side of a bank's balance sheet shows how the bank chooses to use its funds.)
Fill in the blanks to complete the passage about how banks create money.
When a bank customer makes a deposit, the bank takes possession but the customer still has the money available for use. However, when the bank then lends out the money, the borrower has use of the money, too. In this way, two people are using the same money at the same time. The money has in effect been multiplied.
Match each term to the corresponding description. Assets
items a bank owns assets Correct label:assets the portion of bank deposits that is set aside and not lent outreserves Correct label:reserves financial obligations the bank owes to othersliabilities Correct label:liabilities a bank's assets minus the bank's liabilitiesowner's equity Correct label:owner's equity
Match each term to the corresponding definition.
money deposited with the Fed by private banksfederal funds Correct label:federal funds rate of interest paid by private banks to the Feddiscount rate Correct label:discount rate rate of interest paid on interbank loansfederal funds rate Correct label:federal funds rate money lent by the Fed to private banksdiscount loans Correct label:discount loans
Match each type of money to the corresponding definition.
money that can be exchanged for a commodity at a fixed rate.commodity-backed money Correct label:commodity-backed money money that has no value except as a medium of exchangefiat money Correct label:fiat money an exchangeable good of intrinsic value, such as silver or tobaccocommodity money Correct label:commodity money paper bills and coins used as moneycurrency Correct label:currency
Identify each attribute as being associated with fiat money, commodity-backed money, or both.
not tied to anything with intrinsic, stable value Correct label:fiat money a type of money used in the United States prior to 1971 Correct label:commodity-backed money not tied to a good for which the demand can change Correct label:fiat money type of money used in most modern economies Correct label:fiat money A government can expand the supply deliberately and quickly. Correct label:fiat money U.S. silver certificates are a historical example. Correct label:commodity-backed money more portable than commodity money Correct label:both
Place the components of the M2 money supply in order, from smallest to largest.
small time deposits money market mutual funds currency checkable deposits savings deposits
If a country's required reserve ratio is 8%, when the central bank puts $1,000 of new currency into circulation, by how much can the money supply grow assuming all currency is deposited in a bank and no banks hold excess reserves? Use the simple money multiplier.
12,500
Suppose that inflation has started to creep upward, and the Fed wants to use open market operations to counteract this trend. Drag the correct labels and statement into place to describe the Fed's actions.
17.7 (Green arrow government securities) (outer right government securities, less money) (Blue arrow dollars) (In open market operations, the Fed purchases or sells bonds. In this way, the market for loanable funds either grows or shrinks, which affects the money supply. To counteract inflation, the Fed will want to take moves to reduce the money supply.)
In the United States, how much of an individual's money deposited at a bank is completely insured by the FDIC if that bank fails?
250,000
Suppose the M2 money supply is $13 trillion, including: $1 trillion in currency $3 trillion in checking accounts $7 trillion in savings accounts $1 trillion in money market mutual funds $1 trillion in certificates of deposit What is the M1 money supply?
4 TRillion (To find M1 from M2, subtract everything that is not currency or checkable deposits.)
Which scenarios are examples of a double coincidence of wants?
Double Coincidence of Wants Chad has a desk that Aiden wants, and Aiden has money that Chad wants. Devon has a pumpkin that Ella wants, and Ella has a hat that Devon wants. Not a Double Coincidence of Wants Alma has a car that Bruno wants and also has a rug that Bruno wants. Claire has a sandwich that Ed wants, and Bill has a dessert that Diane wants. Boris has a pair of concert tickets that Elaine wants, and Elaine has a barely used laptop that Fiona wants.
For two people to successfully barter, there needs to be a double coincidence of wants. What does this mean?
Each party's desires match up with something the other party has. (Without money in an economy as a medium of exchange everyone can use, transactions could take place only when double coincidences of wants occur. This makes bartering an inefficient alternative to money.)
Which statement best explains why there was a coin shortage during the COVID-19 pandemic?
Explains the Shortage Shutdowns limited access to bank lobbies. Does Not Explain the Shortage An increase in online shopping meant customers demanded less change. The Federal Reserve refused to print more money.
Fill in the blanks to complete the passage about the role of the FDIC.
The Federal Deposit Insurance Corporation makes sure depositors get their money back if an insured bank fails. This agency was implemented during the Great Depression in response to the high number of bank failures. The peace of mind the FDIC provided depositors resulted in a decreased frequency of bank runs. However, since banks and their customers are no longer fully exposed to risk, there is increased potential for moral hazard. (Banks often include the phrase "Member, FDIC" in their advertising as reassurance for prospective customers.)
