Econ 102 Chapter 8

medium of exchange, unit of account, and store of value.

1) Aside from being a means of payment, the other functions of money are

adjusting the amount of money in circulation; conducting monetary policy

10) When the Fed is ________ it is ________.

monetary policy.

11) Controlling the quantity of money and interest rates to influence aggregate economic activity is called

Federal Open Market Committee

12) Which part of the Federal Reserve System meets every 6 weeks to determine the nation's monetary policy?

currency and reserves of depository institutions

13) The monetary base is the sum of

is the fraction of a bank's total deposits that is required to be held in reserves.

14) The required reserve ratio

an open market operation

15) The sale of $1 billion of securities to a bank or some other business by the Fed is an example of

an increase in lending by banks.

16) When the Fed lowers the federal funds rate, it can lead to

Securities decrease by $100 million and reserves increase by $100 million.

17) The Fed buys $100 million of government securities from Bank A. What is the effect on Bank A's balance sheet?

Securities increase by $100 million and reserves of Bank A increase by $100 million

18) The Fed buys $100 million of government securities from Bank A. What is the effect on the Federal Reserve's balance sheet?

medium of exchange

2) The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a

it can make loans and it can create money

23) When a bank has excess reserves

$50

24) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 15 percent. How many loans can Bank A create at Bank A?

zero, because Bank A has no excess reserves

25) Suppose Bank A holds $200 of reserves, has deposits of $1000, and the desired reserve ratio is 20 percent. How many deposits can Bank A create?

a currency drain occurs

26) When part of the quantity of money is held in currency, then

smaller is the money multiplier.

27) The larger the public's currency drain from the banking system, the

decreases the size of the money multiplier

28) An increase in the currency drain

5

29) When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals

unit of account

3) Frank spends Saturday afternoon at the Dodge dealership looking at new trucks. The model that he is interested in has a sticker price of $29,000. The fact that the price is quoted in dollars is an example of money used as a

independent of the price level

30) The quantity of real money demanded is

increase; stay the same

31) When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________.

rises and people hold less money

32) When the nominal interest rate rises, the opportunity cost of holding money

the interest that could have been earned if the money balances had been changed into an interest-bearing asset.

33) The opportunity cost of holding money refers to

bond prices rise and the interest rate falls.

44) In the short run, when the Fed increases the quantity of money

bond prices fall and the interest rate rises

45) In the short run, when the Fed decreases the quantity of money

in a year the average dollar is exchanged 3 times to purchase goods and services in GDP.

46) If an economy has a velocity of circulation of 3, then

$12 trillion

47) If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP?

$27 million

48) The quantity of money in an economy is $9 million, and the velocity of circulation is 3. Nominal GDP in this economy is ________.

quantity of money.

49) According to the quantity theory of money, in the long run, changes in the price level are the result of changes in the

the price level

50) According to the quantity theory of money, in the long run, an increase in the quantity of money results in an equal percentage increase in ________.

are merely instructions to transfer money.

6) Checks are NOT money because they

not part of money because they represent a loan of money to the user.

7) Credit cards are

the cash in its vaults and its deposits at the Federal Reserve.

8) For a commercial bank, the term "reserves" refers to

create required reserve ratios

9) Depository institutions do all the following EXCEPT