ECO 202 Chapter 14
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
The required reserve ratio
When the Federal Reserve purchases Treasury securities in the open market,
The sellers of such securities deposit the funds in their banks and bank reserves increase
An initial decrease in a banks reserves will decrease checkable deposits
by an amount greater than the decrease in reserves
M2 is the best definition of money as a medium of exchange
false
The US dollar can be best described as
fiat money (example)
This large amount of currency per person can be partially explained because
many US dollars are held outside the country by foreigners
When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
$1.8 billion
Equation for velocity
(PxY) V= ________ M
The use of money
-allows for greater specialization -eliminates the double coincidence of wants -reduces the transaction cost of exchange
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
-decreasing the rate at which banks can borrow money from the federal reserve -
The (FOMC) Federal Open Market Committee
-includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (though not all are voting members) -determines the target federal funds rate and the direction of open market operation policies -makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional presidents
Which of the following is true with respect to hyperinflation?
-it is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP -it can be hundreds or thousands of percentage points a year -in the presence of hyperinflation, firms and households avoid holding money
What is price deflation?
A fall in the price level
In a fractional reserve banking system , what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank, a bank panic involves many
Which of the following is not a function of money?
Acceptability
Reserve requirements are changed infrequently because
Banks set long term policy decisions, loan decisions, and deposit decisions based on the reserve requirement
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
Changing income tax rate
Which is the following is typically the largest liability of a typical bank?
Deposits
In addition to the Federal Reserve bank, what other actors influence the money supply?
Households, firms, and banks
The Federal Reserve Bank of New York is always a voting member of the FOMC because
It carries out the policy directives of FOMC
Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?
Less, the simple deposit multiplier is a model with assumptions that keep it higher than real world multiplier
Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?
Reserve Requirements
Why would deposit insurance provide the banking system with protection against runs?
Since most depositors are insured, it is less likely that buyers will panic and simultaneously withdrawal funds
When the Federal Reserve sells Treasury securities in the open market,
The buyers of these securities pay for them with checks and bank reserves fall
According to the quantity theory of money, inflation results from which of the following?
The money supply grows faster than real GDP
The quantity theory of money is better table to explain
inflation in the long run
Credit cards are included in...
neither the M1 nor M2
M1 includes more than just currency because
other assets can also be used to make transactions to buy goods and services
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants
A double coincidence of wants refers to
the fact that for a barter or trade to take place between two people, each person must want what the other one has
