ECON 401: Quiz 5

The use of money

all of the above; allows for greater specialization, reduces the transaction costs of exchange, eliminates the double coincidence of wants

The important role of the Federal Reserve in today's U.S. economy is

controlling the money supply to pursue economic objectives

Congress passed legislation to create the Federal Reserve System in 1913 in order to

end the instability created by bank panics by acting as a lender of last resort

The amount of U.S. currency outstanding averages to about $2,800 per person in the U.S. This large amount of currency person can be partially explained because

many U.S. dollars are held outside the country by foreigners

Which of the following would be the least desirable candidate to be a good medium of exchange?

milk

M1 included more than just currency because

other assets can also be used to make transactions to buy goods and services

The ___ is considered the most relevant interest rate when conducting monetary policy

short-term nominal interest rate

Congress broadened the Fed's responsibility since

the 1930s as a result of the Great Depression

How do the banks "create money"?

when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands

Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10 percent to 12 percent. What actions would you need to take?

you would have to reduce loans to make the new reserve requirement

The United States is divided into ___ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of ___ members appointed by the president to 14-year, non-renewable terms. One of the board members is appointed to a ___ year renewable term as the chairman.

12; 7; 4

Distinguish among money, income, and wealth

A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts

Which of the following is NOT a function of money?

Acceptability

Which of the following statements is correct?

All of the above are true; the effect of a change in the federal funds rate on long-term interest rates is usually smaller than it is on short-term interest rates, a majority of economists support the Fed's choice of the interest rate as its monetary policy target, but some economists believe the Fed should concentrate on the money supply instead, changes in the federal funds rate usually will result in changes in both short-term and long-term interest rates on financial assets.

An asset would be usable as a medium of exchange for all of the following reason except:

An asset should be a commodity that has intrinsic value

Which of the following best explains the difference between commodity money and fiat money?

Fiat money has no value except as money, whereas commodity money has value independent of its use as money

Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any action the bank may take as a result of your having withdrawn the $100.

M1 remains unchanged

What is the largest asset and the largest liability of a typical bank?

Loans are the largest asset and deposits are the largest liability of a typical bank

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets

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 banks

An initial increase in a bank's reserves will increase checkable deposits

by an amount greater than the increase in reserves

Evidence shows that quantity equation is correct over the long run, which implies that the

growth rate of the money supply determines the rate of inflation

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition

What do economists mean by the demand for money?

it is the amount of money (currency and checking account deposits) that individuals hold

The Fed is said to have a "dual mandate" because

maintaining price stability and high employment are the two most important goals of the the Fed that are explicitly mentioned in the Employment Act of 1946

The central bank of a country controls the money supply, which equals the currency held by

the public plus their checking account balances

When congress established the Federal Reserve in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors