ECO 2301 Test 4
Credit cards are not considered part of the money supply because
they are a loan which you have to use money to pay for later
The Fed can supply funds to the markets in the case of a financial panic because
they are the lender of last resort.
Along with currency not in banks and deposits in checking accounts, what is another component of the M1 measure of money?
traveler's checks
interest rates typically rise in booms because the demand for money increases when real income risesrises
true
If the reserve ratio is 0.70., the simplified money multiplier will be
1.43
to help ensure political independence, each member of the Board of Governors is appointed to year terms.
14
If the reserve ratio is 0.4, the simplified money multiplier will be
2.5
Given the following information about Gotham Bank: Bank Deposits $50,000 Loans 34,000 Reserves 12,000 Reserve Requirement 20 percent Gotham Bank is holding ________ in excess reserves.
2000
The most basic measure of money in the United States is called
M1 and is the sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler's checks.
The president of the Federal Reserve Bank is always a member of the FOMC.
New York
Which of the following explains the speculative demand for money?
Stock and bond prices might fall during economically volatile periods.
Which of the following statements is true?
The higher interest rates are, the lower the quantity of money demanded.
When the Federal Reserve conducts an open market purchase of government bonds, the money supply
increases and interest rates decrease.
the types of lags in policy are
inside lags (the time it takes for policymakers to recognize and implement policy changes) and outside lags (the time it takes for policy to actually work
Raising Interest Rates on Reserves. If a central bank raised the interest rates it paid on reserves, the supply of money would
decrease
If the Federal Reserve lowers interest rates, the dollar
depreciates, and demand for U.S. exports increases.
Suppose a bank has $8 million in deposits and a reserve ratio of 20 percent. Its required reserves are
$1,600,000.
Currency held by the public $450 billion Demand deposits 220 billion Other checkable deposits 170 billion Traveler's checks 2 billion Savings deposits 800 billion Small time deposits 50 billion Money market mutual funds 170 billion Table 13.1 According to the information in Table 13.1, M2 is equal to
$1,862 billion.
If the reserve ratio is 0.050.05 and a deposit of $300300 is placed into a bank, that bank can lend out
285
Bank Deposits $50,000 Loans 25,000 Required Reserves 15,000 Excess Reserves 10,000 What is the reserve ratio?
30 percent
If the reserve ratio is 0.40 and a deposit of $500 is placed into a bank, that bank can lend out $
300 .
Suppose a retiree takes all his old coins that have been sitting in large jars at his house for years to the bank and deposits them. He deposits a total of $20,000. If the required reserve ratio is 6%, this transaction could increase the overall money supply by
313,333
e required reserve ratio is 0.20, and there is a cash withdrawal of $8,000, there would be a total decrease in checking account balances of
40,000
Given the following information about Metropolis Bank: Bank Deposits $50,000 Loans 17,500 Required Reserves 30,000 Excess Reserves 2,500 The required reserve ratio must be
60
Are Federal Reserve Chairmen Too Powerful? Economic research has shown that the chairman of the Federal Reserve is more powerful, relative to other committee members, than the head of the central bank in other countries. Fed chairpersons have much more influence over actual decisions than other members. Recall Professor Blinder's findings that committees make better decisions than individuals and that leaders of groups, per se, do not matter for the quality of decision making. Which of the statements below correctly relates Blinder's findings to the argument that the tradition of a strong chairman in the United States reduces the effectiveness of monetary policy?
A strong Fed chairman will cause the Board to act more like an individual, thereby reducing the ability to distinguish between trends and random eventslong dash—a necessity for effective monetary policy.
What conclusions can we draw when it comes to money demand?
An increase in prices or an increase in real GDP will increase money demand.
In order for a barter transaction to be successful, there must be a
B. double coincidence of wants.
A stress tests for banks is a method to determine if bank buildings are strong enough to withstand a major earthquake.
False
Deposits in checking accounts are not included in the definition of money because they are not a very liquid asset
False
Decisions on changes to the money supply are made by the
Federal Open Market Committee.
Money Market Mutual Funds, Banks, and Reserves. Money market mutual funds typically invest in government securities and other financial instruments that can be easily bought and sold. They are not subject to reserve requirements and, in fact, hold minimal reserves. Banks, on the other hand, make loans to businesses for investment purposes. Prior to 2008, banks did not normally earn interest on reserves. Suppose that banks still do not earn any interest on reserves. If there were no reserve requirements for banks, how do you think their reserve holdings would compare to money market mutual funds?
The level of bank reserve holdings would be similar to those held by money market mutual funds since banks can earn more money by keeping reserves at minimal levels.
Which of the following explains the liquidity demand for money?
The need to hold money to make transactions on quick notice.
Deposits in checking accounts are included in the definition of money because they are a very liquid asset.
True
Bitcoins as Store of Value. Bitcoins are a new form of electronic, privately issued money that can potentially preserve the anonymity of transactions. The prices of a single Bitcoin has varied between $400 and $1,200 in recent years. From the point of view of money as a store of value, Bitcoins are
a poor store of value because their prices fluctuate too much.
The President of the New York Federal Reserve Bank. Which of the following is a reason that the president of the New York Federal Reserve Bank is always a voting member of the Federal Open Market Committee?
a. NY is the world's financial center. B. The FRB of NY conducts monetary policy. C. NY is a major economic power of the U.S. all
The Federal Reserve is not the:
agency that decides the tax rate.
Bond prices move in the opposite direction of interest rates because
an existing bond will look less favorable if interest rates on new bonds are higher.
A decrease in the supply of money will cause acountry's currency to
appreciate
Occasionally, some economists or politicians suggest that the Secretary of the Treasury become a member of the Federal Open Market Committee. This would most likely ▼ the independence of the Federal Reserve.
decrease
Gifts cards have grown in popularity as a mechanisms to give gifts. Cards are available for popular book stores and for coffee shops. Gift cards Traveler's checks are sold by
are not considered part of the money supply since they have a fixed value paid for in advance. banks and non-banks and can be used for purchases in any enterprise.
The uses of the funds of a bank, including loans and reserves.
assets
Banks consider loans they make to be ▼ If a customer brings in $2,000 to deposit into a checking account, it is ▼ for the bank. If a customer enters the bank and secures a $2,000 personal loan, it is ▼ for the bank.
assets, liability, asset
An account statement for a bank that shows the sources of its funds (liabilities) as well as the uses of its funds (assets
balance sheet
Reserves Setting the Interest Rate on Reserves. If the Fed set an interest rate on reserves close to the market interest rate on loans,
banks would have little incentive to make loans.
Money solves the problem of double coincidence of wants that would regularly occur under a system of
barter
The Federal Reserve arranged for JPMorgan Chase & Co. to ____ Bear Stearns during the financial crisis in 2008.
buy
If the Federal Reserve wishes to increase the money supply to stimulate the economy, it
buys government bonds from the private sector in open market purchases.
Suppose a retiree takes all his old coins that have been sitting in large jars at his house for years to the bank and deposits them. He deposits a total of $20,000. If the required reserve ratio is 6%, this transaction could increase the overall money supply by
by $ 313333
Flea Markets and the Demand for Money. People often like to visit flea markets to look for unexpected opportunities. Flea markets also typically use cash. This is an example of the liquidity demand for money because
cash purchases are expected, and cash is the most liquid asse
To increase the level of output in the short run, the Fed should:
conduct an open market purchase
Inflation and Currency Held Abroad. Suppose inflation in the United States rose to around 7 percent a year; this would _____the demand for U.S. currency by foreigners.
decrease
Open market purchases lead to rising bond prices, which cause interest rates to
decrease
In recent years, debit cards have become popular. Debit cards allow the holder of the card to pay a merchant for goods and services directly from a checking account.The introduction of debit cards most likely ____the amount of currency in the economy.
dercreased
Where Should Regional Banks Be Located Today? Given the changes in the location of economic activity that have occurred since the founding of the Federal Reserve, how would the location of the regional banks change if they were allocated by economic activity? The locations of the banks and the branches would be ▼ the same different since economic activity has geographically shifted.
different, west, san francisco
If a bank directly receives a loan from the Federal Reserve, it is offered at the ▼ rate.
discount
Banks borrow from the Fed at the:
discount rate.
Any additional reserves that a bank holds above required reserves.
excess reserves
Interest rates typically fall in booms because the demand for money decreases when real income risesrises.
false
Not much U.S. currency is in global circulation because it is an unsafe asset compared to assets denominated in foreign currency
false
Through its effect on money demand, a decrease in prices will increase interest rates
false
Banks trade reserves with one another in the:
federal funds market.
When the Federal Reserve purchases bonds on the open market, it leads to ▼ levels of investment and output in the economy
higher
When the Federal Reserve conducts an open market sale of government bonds to private investors,
imports rise and GDP decreases.
The Fed's Balance Sheet. In pursuing its policies of quantitative easing, the Fed increased the size of its balance sheet through purchases of assets. Since balance sheets have to "balance," the Fed's increase in liabilities was
in the form of additional bank reserves from the asset purchase
Purchasing Long-Term Government Bonds. If the Fed purchased long-term government bonds held by the public, then the supply of money would
increase
Which of the following will decrease the supply of money?
increase reserve requirements.
An Increase in the Riskiness of the Stock Market. If investors began to think the stock market is becoming moremore risky, how will this belief affect the demand for money? The demand for money will This would have
increase since people will prefer assets that have a more certain value more affect on M1 since money is a larger component of M1 than of M2.
An open market purchase will increase the supply of money, which will cause the interest rate to decrease, which will increaseinvestment, which results in an increase in output
increase,
China's Increase in Reserve Requirements. The Chinese government purchased U.S. dollars in the foreign exchange market with Chinese currency. During the same period, the Chinese sharply raised the reserve requirement on banks because they wanted to prevent the money supply from expanding too rapidly. The effect of the Chinese government's purchase of U.S. dollars in the foreign exchange market with Chinese currency would be to ▼ _______ the supply of Chinese currency.
increase, reducing, decreasing
silver
is a good example of commodity money
The Federal Reserve is reluctant to change the required reserve requirements because
it disrupts the banking system
Which of the following is NOT a function of the Federal Reserve?
lending money to individuals who can not receive loans from anyone else
Deposits are examples of a bank's
liabilities.
the sources of funds for a bank, including deposits and owners' equity
liabilties
Banks create money by
making loans which increases deposits because the required reserve ratio is a fraction of deposits
The Federal Open Market Committee (FOMC) votes on:
monetary policy.
"Greeks have increased their holdings of euros in cash because they have great faith in the monetary system of Europe."This quote is ____ The reason that the Greeks held cash in euros is because they
not accurate The reason that the Greeks held cash in euros is because they
Suppose the Federal Reserve buys $100 million of government bonds owned by Goldman Sachs. This type of transaction is called an After this transaction
open market purchase Goldman Sachs will have $100 million of excess reserves to loan, increasing the money supply
The funds provided to a bank by its owners
owners' equity
When reserves did not pay did not pay interest, banks
preferred to make loans rather than keep reserves
Which of the following is not a key function of the Federal Reserve
printing currency
Buy or Sell Bonds? If you strongly believed that the Federal Reserve was going to surprise the markets and decrease interest rates, you would want to ▼ bonds.
purchase
To increaseincrease the supply of money, the Fed should ▼ bonds.
purchase
Interest Rates, Durable Goods, and Nondurable Goods. Refrigerators and clothing are to some extent durable goods. The decision to purchase a refrigerator is likely to be more sensitive to interest rates than the decision to buy clothing because
refrigerators are expensive and sometimes payment is financed.
The amount of their deposits that banks are required by law to hold as reserves.
required reserves
The portion of banks' deposits set aside in either vault cash or as deposits at the Federal Reserve
reserves
Buy or Sell Bonds? If you strongly believed that the Federal Reserve was going to surprise the markets and increase interest rates, you would want to____bonds
sell
Decisions about the supply of money are made by
the Federal Open Market Committee which includes the seven members on the Board of Governors and the president of the New York Federal Reserve Bank
We measure the opportunity cost of holding money with
the interest rate
Which of the following is one way that the Fed cannot change the supply of money?
the process of printing money
The Federal Reserve Loan to JPMorgan Chase & Co. When the Federal Reserve makes a loan to a bank or financial institution, it requires the institution to specify certain assets the Federal Reserve can take possession of if the loan is not repaid. These assets are known as collateral. When the Federal Reserve made its $30 billion loan to JPMorgan, it allowed JPMorgan to use some of the assets of Bear Stearns as collateral. Why was this risky for the Federal Reserve? Why was this a good deal for JPMorgan?
the quality of the collateralized assets of Bear Sterns was unknown., JPMorgan did not have to offer as much of its own, more valuable assets as collateral.
The Federal Reserve might engage in open market sales of bonds if
there is rapid inflation.
During the Great Depression, banks held excess reserves because they were concerned that depositors might be more inclined to withdraw funds from their accounts. At one point, the Fed became concerned about the "excess" reserves and raised the reserve requirements for banks. a. Assuming that banks were holding excess reserves for precautionary purposes, would they continue to hold excess reserves even after reserve requirements were raised? b.After the Fed raised the reserve requirement, the money supply would
yes, decrease
An ATM Next to Your Apartment Building. Suppose an ATM connected to your own bank is installed right next to your apartment building. a. How will this affect the average amount of currency you carry around with you? b. If you withdraw funds at your ATM only from your checking account, will your action have any effect on total money demand?
you will carry less currency since it is convenient to leave your money holdings in the bank earning some interest. No, if this withdrawal is an action that facilitates your normal level of transactions.
Lower U.S. interest rates brought on by the Fed will cause the exchange rate to
fall, decreasing the value of a dollar (which is called depreciation).
