econ ch16

A bank which must hold 100 percent reserves opens in an economy that had no banks and a total initial money supply (currency) of $1,000. If customers deposit $87 into the bank, what is the value of the money supply? a.$1,000 b.$87 c.$1,087 d.$913

$1000 Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account with a check or debit card. Each deposit in a bank reduces currency, since the money will no longer be in the hands of the public, and increases the demand deposit portion of M1 by the same amount. Each withdrawal decreases the demand deposits of M1, but increases currency by the same amount. Therefore banks do not influence the money supply in a system of 100-percent-reserve banking. In this case, if a customer deposits $87 into her checking account, currency will decrease by $87 but at the same time demand deposits will increase by $87 leaving M1 unchanged. Therefore, the money supply does not change and remains at $1,000.

If the reserve ratio is 5 percent, then $500 of new reserves can generate a.$10,000 of new money in the economy. b.$1,000 of new money in the economy. c.$2,500 of new money in the economy. d.$25 of new money in the economy.

$10000 of new money in the economy The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If the reserve ratio is 5 percent, the money multiplier is 1/0.05=20. Therefore, $500 in new reserves can generate 20 X $500 =$10,000 in new money in the economy.

The manager of the bank where you work tells you that the bank has $500 million in deposits and $350 million dollars in loans. If the reserve requirement is 5 percent, how much is the bank holding in excess reserves? a.$25 million b.$50 million c.$125 million d.$150 million

$125 million If a bank has received $500 million in deposits, and has loaned out $350 million of those funds, then the bank is holding $150 million in reserves. If the reserve requirement is 5 percent, this bank is required to hold 0.05 X $500 million = $25 million as reserves. Since the bank is holding $150 million in reserves, this banks excess reserves must be $125 million.

A bank's reserve ratio is 20 percent and the bank has $1,000 in deposits. Its reserves amount to a.$50. b.$20. c.$200. d.$2,000.

$200 The reserve ratio of a bank is the fraction of deposits that banks hold as reserves. This means that if bank has $1,000 in deposits, and a 20 percent reserve ratio, its reserves must be $1,000 X 20% = $200.

Economy of imaginary country of Othal Type of money / Amount Large time deposits / $60 billion Small time deposits / $40 billion Demand deposits / $150 billion Other checkable deposits / $25 billion Savings deposits / $32.5 billion Traveler's checks / $2.5 billion Money market mutual funds / $100 billion Currency / $75 billion Credit card balances / $150 billion Miscellaneous categories of M2 / $15 billion Refer to the Table. What is the M1 money supply? a.$505 billion b.$440 billion c.$150 billion d.$252.5 billion

$252.5 billion M1 includes demand deposits, traveler's checks, other checkable deposits and currency. In this case this is equal to $150 billion + $2.5 billion + $25 billion + $75 billion = $252.5 billion.

Economy of imaginary country of Othal Type of money / Amount Large time deposits / $60 billion Small time deposits / $40 billion Demand deposits / $150 billion Other checkable deposits / $25 billion Savings deposits / $32.5 billion Traveler's checks / $2.5 billion Money market mutual funds / $100 billion Currency / $75 billion Credit card balances / $150 billion Miscellaneous categories of M2 / $15 billion Refer to the Table. What is the M2 money supply? a.$252.5 billion b.$580 billion c.$440 billion d.$880 billion

$440 billion M2 includes everything in M1, plus savings deposits, small time deposits, money market mutual funds and the miscellaneous categories of M2. M1 includes demand deposits, traveler's checks, other checkable deposits and currency. In this case this is equal to $150 billion + $2.5 billion + $25 billion + $75 billion = $252.5 billion in M1. This means that M2 is $252.5 billion + $32.5 billion + $40 billion + $100 billion + $15 billion = $440 billion.

If a bank has just enough reserves to meet the required reserve ratio of 25 percent, and receives a deposit of $800, it has initially experienced a a.$800 increase in excess reserves and no increase in required reserves. b.$200 increase in excess reserves and a $600 increase in required reserves. c.$800 increase in required reserves and no increase in excess reserves. d.$600 increase in excess reserves and a $200 increase in required reserves.

$600 increase in excess reserves and a $200 increase in required reserves If a bank receives a deposit of $800 dollars, and has a required reserve ratio of 25%, then it will be required to keep $800 X 25% = $200. This means that the bank experiences a $200 increase in required reserves. The remaining 75% of the deposit is, initially before it is loaned out, considered part of excess reserves because the bank is not required to hold these funds. This means the bank experiences an initial increase of $800 X 75% = $600 increase in excess reserves. The bank, if it so desires, can lend out these excess reserves as loans, or keep the excess reserves in anticipation of future loans.

If the reserve ratio is 20 percent, then $150 of new reserves can generate a.$170 of new money in the economy. b.$750 of new money in the economy. c.$75 of new money in the economy. d.$3,000 of new money in the economy.

$750 of new money in the economy The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If the reserve ratio is 20 percent, the money multiplier is 1/0.2=5. Therefore, $150 in new reserves can generate 5 X $150 =$750.

Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits? a.$950 billion b.$5 billion c.$105 billion d.$500 billion

$950 billion Since $5 billion, of the $100 billion of reserves, are excess reserves, the required reserves are only $95 billion. $95 billion * (1/10% required reserves) = $950 billion in deposits. In other words, if $950 billion are deposited, a 10% reserve requirement requires the bank to keep at least $95 billion. If they hold an extra $5 billion, reserves will equal $100 billion.

Under what reserve ratio is a bank unable to create money? a.8% b.100% c.5% d.90%

100% When banks hold only a fraction of deposits as reserves, the banking system creates money. When banks hold only a fraction of deposits as reserves, they loan out the remaining money into the economy with the intention of earning a profit when the loan is repaid with interest. Demand deposits remain constant, because depositors still have access to those funds. However, because money has been loaned out by the bank, currency in the hands of the general public has increased. Because M1 includes both demand deposits and currency, M1 has increased. Therefore, at any reserve ratio that is less than 100%, banks will lend money and the money supply will be increased.

Suppose a bank has total assets of $1,000, capital of $50, and liabilities of $950; the leverage ratio for this bank is ____. a.20 b.1.053 c.0.95 d.0.05

20 The leverage ratio is the ratio of assets to bank capital, or in this case, $1,000/$50 or 20.

If $200 of new reserves generates $1,000 of new money in the economy, then the reserve ratio is a.12.5 percent. b.20 percent. c.100 percent. d.5 percent.

20 percent The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If $1,000 of new money is created from $200 of new reserves, the money multiplier must be 5. In order for the money multiplier to be 5 the reserve ratio must be 0.2 or 20 percent. Then 1/R would be 1/0.2 = 5. This would lead to $1,000 in new money generated by $200 in new reserves since $200 X (1/0.2) = $1,000 in new money in the economy.

First National Bank Assets / Liabilities and Owners' Equity Reserves $2000 / Deposits $10,000 Loans $8000 / Debt $1500 Short-term securities $2000 / Capital (owners' equity) $500 Refer to the Table. This bank's leverage ratio is a.24. b.25. c.48. d.12.

24 The leverage ratio of a bank is the ratio of its assets to bank capital. In this case, bank capital is $500 and assets amount to $12,000. Therefore, the leverage ratio is $12,000/$500 = 24.

The manager of the bank where you work tells you that your bank has $10 million in excess reserves. She also tells you that the bank has $200 million in deposits and $165 million in loans. Given this information you find that the reserve requirement must be a.10/200. b.15/200. c.25/200. d.35/200.

25/200 If a bank has $200 million in deposits, and has loaned out $165 million of those deposits, then it has kept $200 million -$165 million = $35 million as reserves. Of those $35 million in reserves, $10 million are excess reserves. This means that the bank was only required to keep $35 million -$10 million = $25 million in reserves. This means that of $200 million deposited, the bank is only required to keep $25 million in reserves. This equates to a 25/200, or 12.5% reserve requirement.

If the reserve ratio is 20 percent, the money multiplier is a.20. b.1/20. c.5. d.8/10.

5 The formula for the money multiplier is 1/R, where R is represents the reserve ratio of all banks in the economy. If the reserve ratio is 20 percent, the money multiplier is 1/0.2=5.

Ashley owns a home worth $500,000 and owes $100,000 in student loans. If you asked an economist, she would say Ashley has $400,000 worth of money. True False

False Economists define "money" as the set of assets in an economy that people regularly use to buy goods and services from other people. This is different than wealth, which is based on assets, such as a house, and liabilities, such as a loan you have to pay back. The key difference is that assets and liabilities are not commonly used to purchase goods and services from other individuals. In this case, you have information on Ashley's assets and liabilities, but you have no information on the actual amount of money Ashley holds. Therefore, by definition used by economists, you cannot say that Ashley has $400,000 worth of money without more information.

When the Fed sells government bonds the money supply increases and the federal funds rate decreases. True False

False If the Fed sells bonds, bank reserves decrease and banks need more overnight loans from each other to comply with reserve requirements. The rise in demand for these types of overnight loans leads to an increase in the cost of these loans, or, in other words, an increase in the federal funds rate. The decrease in reserves from banks also allows for fewer loans to be made, which decreases the money supply.

The agency responsible for regulating the money supply in the United States is U.S. Treasury. True False

False The Federal Reserve, often referred to as "the Fed", is the central bank of the United States. The Fed is responsible for oversight of the banking system and the regulation of the quantity of money (money supply) in the economy.

Since money is the most liquid asset, most people seek to allocate all of their wealth towards currency. True False

False When people decide how to allocate their wealth, they must balance the liquidity of each asset with the ability of each asset to store value over time. For example, money is the most liquid asset but does not store value perfectly over time. When prices rise, the purchasing power of a fixed amount of money declines. In other words, if inflation exists, individuals holding only money will see their purchasing power decline. Therefore, individuals will seek to allocate at least some of their wealth towards other assets.

Which type of money has no intrinsic value? a.Fiat money b.Gold c.Neither commodity money nor fiat money has intrinsic value. d.Commodity money

Fiat money Fiat money is money without intrinsic value that is used only because of government decree. For example, most paper money used around the world is fiat money. These paper currencies have no intrinsic value in and of themselves, but are used as money because the government in each respective country has ordered that the currency be accepted as legal tender for debt. Gold is an example of commodity, which is money that has intrinsic value.

Under what system do banks generally lend out the majority of the funds deposited? a.Fractional reserve banking b.No such banking system exists c.100-percent-reserve banking d.Demand deposit banking

Fractional reserve banking A fractional reserve banking system is a banking system in which banks keep only a fraction of the deposits they receive as reserves. This allows banks in this system to loan out a portion of the deposits they receive, and earn an accounting profit when the loan is repaid with interest. This gives banks the incentive to loan out much of the money it receives as deposits, as allowable by law. In a 100-percent-reserve banking system, banks keep all deposits they receive as reserves. This prohibits banks from lending out their deposits as loans.

Small time deposits $300 billion Demand deposits and other checkable deposits $200 billion Savings deposits $400 billion Money market mutual funds $350 billion Traveler's checks $15 billion Large time deposits $200 billion Currency $125 billion Miscellaneous categories in M2 $10 billion Given the following information, what are the values of M1 and M2? a.M1 = $200 billion, M2 = $1,540 billion b.M1 = $340 billion, M2 = $1,400 billion c.M1 = $340 billion, M2 = $1,600 billion d.M1 = $325 billion, M2 = $1,415 billion

M1 = $340 billion, M2 = $1400 billion M2 includes everything in M1, plus savings deposits, small time deposits, money market mutual funds and the miscellaneous categories of M2. M1 includes demand deposits, traveler's checks, other checkable deposits and currency. In this case this is equal to $200 billion + $15 billion + $125 billion = $340 billion in M1. This means that M2 is $340 billion + $400 billion + $300 billion + $350 billion + $10 billion = $1,400 billion.

Suppose the money multiplier is equal to 1 in the economy of the fictional country of Opria. What does this indicate about the type of banking system in Opria? a.Opria uses a fractional reserve banking system and banks create money. b.Opria uses a 100-percent reserve system and banks do not create money. c.Opria uses a 100-percent reserve system and banks create money. d.Opria uses a fractional reserve banking system and banks do not create money.

Opria uses a 100-percent-reserve system and banks do not create money The only way for the money multiplier, 1/R, to equal 1 is if R itself is equal to 1. If R is equal to 1, banks in Opria keep all deposits as reserves. This would indicate that Opria uses a 100-percent-reserve banking system. Under such a system, banks cannot loan out reserves and money cannot be created by banks.

If R represents the reserve ratio for all banks in the economy, then the money multiplier must be equal to 1 divided by what? a.R b.(1+R) c.(1-R) d.R2

R The formula for the money multiplier is 1/R, where R is represents the reserve ratio of all banks in the economy.

Raymond works as a valuation expert. His job is to look at companies, assess how much their assets and liabilities are worth, and place a dollar valuation on the company that other companies must pay in an acquisition. Raymond's company valuations are an example of the unit of account function of money. True False

True A unit of account is the yardstick people use to post prices and record debts. When you want to measure economic value and record economic value, you will need to use money as the unit of account. By valuing the company's assets and liabilities, Raymond has placed a price tag on the company and has measured the economic value of the company. These valuations are an example of the unit of account function of money.

Which scenario is the best example of the unit of account function of money? a.The grocery store you shop at accepts money in exchange for their food. b.The money you have now can be used towards the purchase of a car today, or a new model of car next year. c.Selling your house for cash requires a long and complicated process, while your video games can be sold for cash quickly and easily. d.You have a yard sale, and you put a price tag of $50 on your old television and $10 for your old pots.

You have a yard sale, and you put a price tag of $50 on your old television and $10 for your old pots A unit of account is the yardstick people use to post prices and record debts. In this case, instead of listing the price of your old television as "5 pots" (since you are selling your television for 5 times what you are selling your pots for), the unit of account function of money allows you to list the price of your television in money (in this case, dollar) terms. Generally, quoting prices in this way is standard practice, and is an example of the unit of account function of money.

Which of the following is not an example of currency? a.A nickel b.A $100 bill c.A $1,000 balance stored in a checking account d.A $20 bill

a $1000 balance stored in a checking account Currency includes only the paper bills and coins in the hands of the public, while demand deposits are balances in bank accounts that depositors can access on demand by writing a check. Therefore, a $20 bill, a $100 bill, and a nickel would all be considered currency while a $1,000 bank account balance would be considered a demand deposit.

Which of the following would fit an economist's definition of "money"? a.A 10 bedroom and 12 bathroom mansion b.A municipal bond from the state of California. c.A share of stock in Ford Motor Company d.A $20 bill

a $20 bill Economists have a more specific definition of the word "money" than the general public. Economists use the word "money" to refer to the set of assets in an economy that people regularly use to buy goods and services from other people. This is different than an asset, such as a large house or financial assets like stocks and bonds, which might be valuable but are not regularly exchanged directly. These assets would contribute to one's wealth, but people do not commonly accept houses, stocks, or bonds as forms of payment. You would need to sell these assets for cash in order to make purchases, however a $20 bill is cash that is generally accepted as a form of payment for goods and services

Which of the following is not a function of money? a.A store of value b.Medium of exchange c.A tool to increase barter d.A unit of account

a tool to increase barter Money has three primary functions in the economy: use as a medium of exchange, use as a unit of account, and use as a store of value. Money is not used to increase barter (the exchange of one good or service for another). Money decreases the need for barter, since individuals can simply use money to purchase goods or services rather than bartering for them.

Which of the following does the Federal Reserve do? a.It makes loans to any qualified business that requests one b.Convert Federal Reserve Notes into gold c.Act as a lender of last resort to banks d.Controls fiscal policy in the United States

act as a lender of last resort to banks When financially troubled banks find themselves short of cash, the Fed acts as a lender of the last resort. In other words, the Fed lends to those banks who cannot borrow anywhere else. The Fed makes such loans to maintain stability in the banking system.

A store of value is a.an item that buyers give to sellers when they want to purchase goods and services. b.the item that can be converted into currency with ease. c.an item that people can use to transfer purchasing power from the present to the future. d.an item people use to post prices and record debts.

an item that people can use to transfer purchasing power from the present to the future A store of value is an item that people can use to transfer purchasing power from present to the future. One of the primary reasons a seller accepts money for a good or service in the present time period is because that seller can hold the money and use it to purchase another good or service in the future.

Jerome Powell was a.appointed Chair of the Board of Governors in 2017 by President Donald Trump. b.appointed Chair of the Board of Governors in 1991 by President George H.W. Bush. c.appointed Chair of the Board of Governors in 1995 by President Bill Clinton. d.reappointed Chair of the Board of Governors in 2009 by President Barack Obama.

appointed chair of the board of governors in 2017 by President Donald Trump Jerome Powell was appointed chairman of the Fed by Donald Trump in 2017. Ben Bernanke was appointed by George W. Bush in 2005 and was reappointed by Barack Obama in 2009. Janet Yellen was appointed by Obama in 2014 and served until 2017.

The members of the Federal Reserve's Board of Governors a.have 10 members in total. b.are required to have been economics professors at elite universities. c.serve 16-year terms to get insulated from political pressures. d.are appointed by the president of the U.S. and confirmed by the U.S. Senate.

are appointed by the president of the US and confirmed by the US senate The board of governors of the Fed is made up of the seven members that must be appointed by the president and confirmed by the U.S. senate. The governors serve terms of 14-years in order to get insulated from the current political climate and to make more objective decisions.

Stocks and bonds a.have all the same functions as money, but are not considered money by economists. b.are examples of stores of value and units of account, but do not function as medium of exchange. c.are examples of stores of value, but not units of account nor medium of exchange. d.are forms of money, according to economists.

are examples of stores of value, but not units of account nor medium of exchange Money is not the only store of value in an economy. An individual can also defer purchasing power in the present time period to the future by holding non-monetary assets such as stocks, bonds, or other financial assets. For example, if you purchase a share of stock for $100 today, you are transferring the purchasing power (the goods you could have bought with that $100 today) of that money to a later date when you sell the stock for currency that can then be used to purchase goods. In this way, the share of stock is transferring value from the present to the future.

First Bank of Zogua, a fictional bank, has made a $1 million loan. This loan appears on what part of T-account of the First Bank of Zogua? a.liabilities. b.assets. c.contingent considerations. d.reserves.

assets Loans are assets and are noted as such in the T-account of the bank. The loans are assets because they represent money owed to the bank by borrowers that will be repaid at a later date. Loans are distinct items from reserves in the T-account and both are counted in the bank's assets.

All else equal, which of the following will cause the money supply to fall? a.banks decide to hold the same amount of excess reserves relative to deposits. b.banks make more loans. c.banks decide to hold more excess reserves relative to deposits. d.banks decide to hold less excess reserves relative to deposits

banks decide to hold more excess reserves relative to deposits One issue with the Fed's ability to control the money supply is that it has little control over how much banks decide to lend. When money is deposited in a bank, new money is created only when the bank loans it out. For example, suppose banks decide to make fewer loans, and hold excess reserves. Banking reserves increase, leading to fewer loans and less money created through fractional reserve banking. The result is a decrease in the money supply with no action on the part of the Fed.

Which of the following is not true in a system of 100-percent-reserve banking? a.Banks accept deposits. b.Banks hold all deposits in reserves until the depositor withdraws the funds. c.Banks influence the supply of money. d.Banks do not make loans.

banks influence the supply of money Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account with a check or debit card. Each deposit in a bank reduces currency, since the money will no longer be in the hands of the public, and increases the demand deposit portion of M1 by the same amount. Each withdrawal decreases the demand deposits of M1, but increases currency by the same amount. Therefore banks do not influence the money supply in a system of 100-percent-reserve banking.

Banks can borrow money from the Fed's discount window. Alternatively banks can a.participate in auctions at the Fed's discount window. b.borrow money from foreign governments at the Fed's Term Auction Facility. c.borrow money from the Fed's Term Auction Facility. d.borrow money from commercial banks at the Fed's Term Auction Facilit.y

borrow money from the Fed's Term Auction Facility In recent years, the Fed has set up new mechanisms for banks to borrow funds. Under the Fed's Term Auction Facility, the Fed sets a quantity of funds it wants to lend banks, and eligible banks can bid to borrow these funds. The funds go to the banks that offer to pay the highest interest rate on the loan, while also having acceptable collateral.

If the money multiplier is 5 and the Fed wants to increase the money supply by $100,000, it could a.sell $20,000 worth of bonds. b.sell $100,000 worth of bonds. c.buy $20,000 worth of bonds. d.buy $100,000 worth of bonds.

buy $20000 worth of bonds When the Fed purchases government bonds, the money supply increases. To determine how the much the money supply increases, you must use the money multiplier. If the Fed buys $20,000 worth of government bonds, eventually the money supply will increase by $20,000 X 5 =$100,000 because of the fractional reserve banking system in the U.S. Therefore, if the Fed wishes to increase the money supply by $100,000 and the money multiplier is 5, the Fed should purchase $20,000 worth of bonds.

In order to ensure banks can pay back depositors, Bank regulators impose a.leverage. b.capital requirements. c.loans. d.short-term securities.

capital requirements Bank regulators require banks to hold certain amounts of capital, known as a capital requirement. This is done in order to make sure banks will be able to pay off their depositors.

The Fed conducts open market operations that cause bank withdrawals and lending to decrease. The Fed has a.decreased taxes. b.increased taxes. c.conducted open market sales. d.conducted open market purchases.

conducted open market sales In order to decrease the money supply, the Fed will have to conduct open market sales of government bonds. When individuals purchase bonds from the Fed, they will use currency, most often withdrawn from their bank accounts. This causes bank reserves to decrease, which means banks have less money to lend and lending will decrease. Therefore, when the Fed conducts open market sales, bank withdrawals increase and lending decreases.

When it buys government bonds to increase the money supply, the Fed is a.enacting fiscal policy. b.regulating a bank. c.conducting an open-market purchase. d.conducting an open-market sale.

conducting an open-market purchase If the FOMC at the Fed decides to increase the money supply, the Fed buys government bonds from the public in the bond market. After the purchase, the dollars are in the hands of the public and the overall money supply increases. Because the Fed does this through buying bonds, this is known as an open-market purchase.

When it sells government bonds to decrease the money supply, the Fed is a.enacting fiscal policy. b.regulating a bank. c.conducting an open-market purchase. d.conducting an open-market sale.

conducting an open-market sale If the FOMC at the Fed decides to decrease the money supply, the Fed sells government bonds from its portfolio to the public in the bond market. After the sale, the dollars the Fed receives for the bonds are out of circulation in the general economy and the overall money supply decreases. Because the Fed does this through selling bonds, this is known as an open-market sale.

Which of the following are used to defer payments and are therefore not money? a.Debit cards b.Currency c.Checks d.Credit cards

credit cards Credit cards are excluded from all measures of the quantity of money. This is because credit cards are not really a form of payment, but rather are a method of deferring payment. When you use a credit card, the bank that issued the card is actually making the payment and you must pay the bank back at a later date. When you pay the bank back, you will likely do so using funds from M1.

Suppose that in a country people lose confidence in the banking system and so hold relatively more currency and less deposits. As a result, bank reserves will a.increase and the money supply will eventually decrease. b.increase and the money supply will eventually increase. c.decrease and the money supply will eventually decrease. d.decrease and the money supply will eventually increase.

decrease and the money supply will eventually decrease One issue with the Fed's ability to control the money supply is that it has little control over how much households choose to deposit in banks. For example, if the public loses confidence in the banking system and withdraws money from their bank accounts, choosing instead to hold more currency. Banking reserves fall, leading to fewer loans and less money created through fractional reserve banking. The result is a decrease in the money supply with no action on the part of the Fed.

As a result of sizable losses in 2008 and 2009, banks experienced a shortage of capital, which induced them to __ a.decrease lending because they had to meet capital requirements. b.increase profits. c.increase lending because capital requirements made it easier to lend. d.increase lending because they had to meet capital requirements.

decrease lending because they had to meet capital requirements The crisis created a shortage in capital, requiring banks to reduce lending to meet capital requirements, creating a credit crunch.

To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can a.not change the discount rate. b.stop lending money to banks. c.increase the discount rate. d.decrease the discount rate.

decrease the discount rate The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed decreases the discount rate, banks will tend to borrow more money from the Fed since the interest they have to pay back has decreased. This will lead to increased borrowing from the Fed, and therefore more money will end up in bank reserves. This will enhance the ability of banks to make loans as well. In the end, the money supply will increase if the fed decreases the discount rate.

In a 100-percent-reserve banking system, if an individual deposits money in their checking account, currency would a.decrease, but demand deposits would increase by the same amount and M1 would not change. b.increase, while demand deposits would decrease by less and M1 would increase. c.increase, but demand deposits would decrease by the same amount and M1 would not change. d.decrease, while demand deposits would increase by less and M1 would decrease.

decrease, but demand deposits would increase by the same amount and M1 would not change Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account. Each deposit in a bank reduces currency, since the money will no longer be in the hands of the public, and increases the demand deposit portion of M1 by the same amount.

The Fed changes the discount rate and, as a direct result, reserves have increased. The Fed has most likely a.not changed the discount rate. b.stopped lending money to banks. c.increased the discount rate. d.decreased the discount rate.

decreased the discount rate The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed decreases the discount rate, banks have a stronger incentive to borrow more money from the Fed since the interest they have to pay back has decreased. This will lead to increased borrowing from the Fed, and the money borrowed will end up in reserves at other banks. This means, as the Fed decreases the discount rate, borrowing increases and reserves increase.

As the reserve ratio increases, the money multiplier a.increases. b.increases, then decreases, then increases again. c.does not change. d.decreases.

decreases The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. This means that as R gets bigger, the denominator of the fraction 1/ R gets larger. This means the fraction 1/R gets smaller. In short, as the reserve ratio increases, the money multiplier must decrease.

Assume banks hold no excess reserves. If the Fed increases the reserve ratio from 5 percent to 10 percent, then the money multiplier a.increases from 10 to 20. b.increases from 5 to 10. c.decreases from 20 to 10. d.decreases from 10 to 5.

decreases fri=om 20 to 10 The money multiplier is equal to 1/R, where R is the reserve ratio. Initially, if the reserve requirement is 5 percent, the money multiplier is 1/0.05 = 20. After the reserve requirement is increased to 10 percent, the money multiplier is 1/0.1 =10. Therefore, the money multiplier decreases from 20 to 10.

Funds in an account where you can access by writing a check or through your debit card are best described as a.currency. b.money market mutual funds. c.time deposits. d.demand deposits.

demand deposits Demand deposits are balances in bank accounts that depositors can access on demand by writing a check. While balances in these types of accounts are not technically currency, since they are not paper money and coins held in the hands of the general public, they are close enough to currency that they are included in the same category of money stock, M1, as currency.

Which of the following lists accurately describes M1? a.Savings deposits, small time deposits, money market mutual funds and other minor categories b.Only currency c.Savings deposits, checking deposits, and currency d.Demand deposits, traveler's checks, other checkable deposits and currency

demand deposits, traveler's checks, and other checkable deposits and currency M1 includes demand deposits, traveler's checks, other checkable deposits and currency. In general, M1 includes the most liquid assets, while M2 includes everything in M1 plus a few additional assets which are less liquid. These assets include savings deposits, small time deposits, money market mutual funds and a few other minor categories.

In a system of fractional-reserve banking, the amount of money in the economy depends on the behavior of ____ a.depositors and bankers but does not prevent the Fed from perfectly controlling the money supply. b.depositors and bankers, which prevents the Fed from perfectly controlling the money supply. c.only bankers. d.only depositors.

depositors and bankers, which prevents the Fed from perfectly controlling the money supply The Fed can provide incentives to lend more or less, but it does not directly control a bank's profit-maximizing decision of how much money to lend nor the decisions of households. Without being able to control or perfectly predict the behavior of banks and households, the Fed cannot perfectly control the nation's money supply.

Central banks are institutions a.that exist today, but only in the United States. b.that do not exist in the United States today. c.tasked with creating fiscal policy in an economy. d.designed to oversee the banking system and regulate the quantity of money in the economy.

designed to oversee the banking system and regulate the quantity of money in the economy A central bank is an institution designed to oversee the banking system and regulate the quantity of money in the economy. Presently, the Federal Reserve is the central bank of the United States.

The government of fictional country of Dobar has decided to use paper currency, known as Dobar dollars, as money. Which of the following best describes Dobar dollars? a.Dobar dollars are both fiat money and commodity money. b.Dobar dollars are commodity money with intrinsic value. c.Dobar dollars are neither commodity money nor fiat money. d.Dobar dollars are fiat money with no intrinsic value.

dobar dollars are fiat money with no intrinsic value Fiat money is money without intrinsic value that is used as money because of government decree. Because the Dobarian government has ruled that Dobar dollars are to be used as money, and the Dobar dollars have no intrinsic value themselves, Dobar dollars can be classified as fiat money.

The Federal Open Market Committee (FOMC) is responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system. True False

false The Fed monitors each bank's financial condition and facilitates bank transactions by clearing checks. This task is largely left to the regional Federal Reserve banks to carry out, not the FOMC.

The Fed most often influences the money supply by changing reserve requirements for banks. True False

false The Fed most frequently influences the money supply using open market operations. This is because open market operations are easy to carry out, on either a smaller or larger scale, and typically do not require changes in laws or regulations.

The money supply increases if a.households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans. b.households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans. c.households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans. d.households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans.

households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves ad make more loans One issue with the Fed's ability to control the money supply is that it has little control over how much banks decide to lend. When money is deposited in a bank, new money is created only when the bank loans it out. For example, suppose banks decide to make more loans, and hold less excess reserves. Banking reserves decrease, leading to more loans and more money created through fractional reserve banking. The result is an increase in the money supply with no action on the part of the Fed. Furthermore, if the public gains confidence in the banking system and deposits more money into their bank accounts, banking reserves increase leading to more loans and more money created through fractional reserve banking. The result is also an increase in the money supply with no action on the part of the Fed.

One reason that the Fed's control of the money supply is not precise is because ____ a.none of the Fed's tools are powerful. b.households' decisions, which are out of the Fed's control, impact the money supply. c.the Fed has only one monetary tool. d.the Fed cannot provide incentives for banks.

households' decisions, which are out of the Fed's control, impact the money supply Households choose to hold deposits in banks. This decision of how much a household decides to hold depends on some factors that are outside of the Fed's control, such as confidence in the banking system.

One of the key differences between a fractional-reserve banking system and a 100-percent-reserve banking system is that a.in a fractional reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a 100-percent-reserve banking system keep all deposits as reserves. b.there are no important differences between the two banking systems. c.in a 100-percent-reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a fractional reserve banking system keep all deposits as reserves. d.in a fractional reserve banking system banks are prohibited from loaning reserves, while banks in a 100-percent-reserve banking system are required to loan reserves.

in a fractional reserve banking system, banks only keep a fraction of deposits as reserve, while banks in a 100-percent-reserve banking system keep all deposits as reserves A fractional reserve banking system is a banking system in which banks keep only a fraction of the deposits they receive as reserves. This allows banks in this system to loan out a portion of the deposits they receive. In a 100-percent-reserve banking system, banks keep all deposits they receive as reserves. This prohibits banks from lending out their deposits as loans.

First National Bank Assets / Liabilities and Owners' Equity Reserves $2000 / Deposits $10,000 Loans $8000 / Debt $1500 Short-term securities $2000 / Capital (owners' equity) $500 Refer to the Table. The required reserve ratio is 10 percent and First National Bank sells $200 of its short-term securities to the Federal Reserve. This action will initially a.increase First National's reserves by $200. Its excess reserves are $1,200. b.decrease First National's loans by $200. Its reserves increase by $200. c.decrease First National's reserves by 200. Its excess reserves are $0. d.increase First National's loans by $200. Its reserves decrease by $200.

increase First National's reserves by $200. Its excess reserves are $1200 The required reserve ratio is 10 percent, which means that of the $10,000 in deposits the bank is only required to hold $1,000 in reserves. Since it is now holding $2,000 in reserves the bank's excess reserves amount to $1,000 and its reserves ratio is $2,000/$10,000 = 20 percent. If the bank sells $200 of its short term securities, its reserves will increase by that same amount ($200). Since the additional reserves have not yet been loaned out, the bank's excess reserves increase by $200 from $1,000 to $1,200.

If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $50 million worth of government bonds, bank reserves a.increase by $50 million and the money supply eventually increases by $100 million. b.decrease by $50 million and the money supply eventually decreases by $100 million. c.increase by $50 million and the money supply eventually increases by $500 million. d.decrease by $50 million and the money supply eventually decreases by $500 million.

increase by $50 million and the money supply eventually increases by $500 million If the reserve ratio is 10 percent, and banks hold no excess reserves and individuals do not hold currency, then the money multiplier is 1/0.1 = 10. When the Fed purchases $50 million in government bonds, there is initially $50 million of new money in the economy in the hands of the public. The public then deposits this money in banks since they do not seek to hold currency. This causes reserves to rise by $50 million, and the money supply eventually increases, in total, by $50 X 10 = $500 million.

Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will a.increase by less than $50,000. b.decrease by less than $50,000. c.increase by more than $50,000. d.increase by exactly $50,000.

increase by more than $50000 If the Fed purchases $50,000 worth of government bonds from the public, the $50,000 of currency ends up in the hands of the public. When the public deposits this money into banks in the United States, bank reserves increase by $50,000. When these banks make loans with these new reserves, new money is created on top of the initial $50,000 increase. Therefore, the money supply increases by more than $50,000 in this case.

To decrease the money supply the Fed can conduct open-market sales. Alternatively, the Fed can a.not change the discount rate. b.stop lending money to banks. c.increase the discount rate. d.decrease the discount rate.

increase the discount rate The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed increases the discount rate, banks will tend to borrow less money from the Fed since the interest they have to pay back has increased. This will lead to decreased borrowing from the Fed, and therefore less money will end up in bank reserves. This will reduce the ability of banks to make loans as well. In the end, the money supply will decrease if the fed increases the discount rate.

In a 100-percent-reserve banking system, if an individual withdraws money from their checking account, currency would a.increase, but demand deposits would decrease by the same amount and M1 would not change. b.decrease, but demand deposits would increase by the same amount and M1 would not change. c.decrease, while demand deposits would increase by less and M1 would decrease. d.increase, while demand deposits would decrease by less and M1 would increase.

increase, but demand deposits would decrease by the same amount and M1 would not change. Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account. Each withdrawal from a bank increases currency in circulation, since more money flows to the hands of the public, and reduces the demand deposit portion of M1 by the same amount.

The Fed changes the discount rate and, as a direct result, reserves have decreased. The Fed has most likely a.not changed the discount rate. b.stopped lending money to banks. c.decreased the discount rate. d.increased the discount rate.

increased the discount rate The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed increases the discount rate, banks will tend to borrow less money from the Fed since the interest they have to pay back has increased. This will lead to decreased borrowing from the Fed, and therefore less money will end up in bank reserves. This means, as the Fed increases the discount rate, borrowing decreases and reserves decrease.

Assume banks hold no excess reserves. If the Fed decreases the reserve ratio from 20 percent to 10 percent, then the money multiplier a.increases from 10 to 20. b.increases from 5 to 10. c.decreases from 5 to 10. d.decreases from 20 to 10.

increases from 5 to 10

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 20 percent. If the Fed lowers the reserve requirement to 10 percent and at the same time buys $20 billion worth of bonds, then by how much does the money supply change? a.It rises by $1,200 billion. b.It decreases by $100 billion. c.It rises by $110 billion. d.It rises by $2,400 billion.

it rises by $1200 billion Under these assumptions, if the banking system holds $200 billion in reserves, then a reserve requirement of 20 percent implies that the banking system has had $1,000 billion in deposits. If the fed lowers the reserve requirement to 10 percent, then banking system is only required to hold 0.1 X $1,000 billion = $100 billion in deposits, and can thus lend out the remaining $100 billion of the original $200 billion. Meanwhile, if the Fed buys $20 billion worth of bonds, this will result in another $20 billion in new money. The money multiplier is 1/0.1 = 10. This means the money supply will increase by 10 X ($100 billion + $20 billion) = $1,200 billion.

First Bank of Zogua, a fictional bank, has just received a $100 deposit from an individual. This deposit appears on what part of T-account of the First Bank of Zogua? a.assets. b.reserves. c.liabilities. d.contingent considerations.

liabilities Deposits are liabilities and are noted as such in the T-account of the bank. The deposits are liabilities because they represent money owed by the bank to the depositors who initially deposited the funds.

You sell your old smartphone online for cash. The fact that you accept cash for your old smartphone best illustrates which function of money? a.Liquidity b.Unit of account c.Medium of exchange d.Measure of equity

medium of exchange A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. Money, in most industrialized countries, is the commonly accepted medium of exchange. This function of money allows individuals to exchange money for goods, like smartphones, because they know others have also accepted money as the medium of exchange. In other words, this transaction is possible because both you and the potential buyers of your phone have accepted money as the medium of exchange. This is an example of how money is used as a medium of exchange.

You purchase a beer at a bar using cash. The fact that the bar accepts your cash for the beer beUt illustrates which function of money? a.Liquidity b.Unit of account c.Medium of exchange d.Store of debt

medium of exchange A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. Money, in most industrialized countries, is the commonly accepted medium of exchange. This function of money allows you to exchange money for goods, like beer, because both you and the bar have accepted money as a medium of exchange, making the transaction possible. Therefore, the bar will give you a beer for your money. This is an example of how money is used as a medium of exchange.

The two primary tasks of the Federal Reserve are a.monetary policy and tax collection. b.monetary policy and national security. c.fiscal policy and bank regulation. d.monetary policy and bank regulation.

monetary policy and bank regulation The Federal Reserve serves two primary purposes. The first is to regulate banks in order to ensure the health of the banking system. This includes making loans to distressed banks as part of the "lender of the last resort" role of the Fed. Second, the Fed controls the quantity of money in the economy, called the money supply, through the use of monetary policy. This monetary policy is made by the Federal Open Market Committee (FOMC), which meets every 6 weeks in Washington D.C.

Which of the following assets is most liquid? a.Shares of stock in a popular technology company b.A municipal bond from the city of San Diego c.A condominium in the Manhattan borough of New York d.Money

money Liquidity refers to the ease with which an asset can be converted into the economy's medium of exchange. Since money is the economy's medium of exchange, it does not need to be converted and is therefore the most liquid. All other answer choices represent assets that must first be sold in order to be converted to the economy's medium of exchange, and therefore must be less liquid than money.

If you want to measure and record economic value, you will primarily use which function of money? a.Money as a means of barter b.Money as a store of value c.Money as a unit of account d.Money as a medium of exchange

money as a unit of account A unit of account is the yardstick people use to post prices and record debts. When you want to measure economic value and record economic value, you will need to use money as the unit of account. For example, if you take out a student loan for school, your future loan repayments will be measured in dollars as opposed to the goods you can possibly buy with those dollars.

Which of the following is not included in M1? a.Money market mutual funds b.Other checkable deposits c.Traveler's checks d.Currency

money market mutual funds M1 includes demand deposits, traveler's checks, other checkable deposits and currency. In general, M1 includes the most liquid assets, while M2 includes everything in M1 plus a few additional assets which are less liquid. These assets include savings deposits, small time deposits, money market mutual funds and a few other minor categories. In summary, Money market mutual funds are included in M2 but not M1.

Which of the following best defines commodity money? a.Money without intrinsic value that is used because of government decree b.Money that takes the form of a commodity with intrinsic value c.Money that does not allow prices to adjust to supply and demand d.Money that must be backed by a precious metal, such as silver

money that takes the form of commodity money with intrinsic value Commodity money is money that takes the form of a commodity with intrinsic value. This means that these commodities would have value even if it was not used as money. The most common example of commodity money is gold, as it has both been used as money as well as displayed value in industry and in making jewelry. Commodity money does not have to be a precious metal such as gold or silver; for example, cigarettes have been known to be used as commodity money in prison settings.

Which of the following decrease when the Fed makes open market purchases? a.reserves but not currency. b.neither currency nor reserves c.currency and reserves d.currency but not reserves

neither currency nor reserves When the Fed purchases government bonds, it is conducting open market purchases. Because the Fed purchases government bonds in the public bond market, the currency used to make the purchases ends up in the hands of the general public. Because currency is included in M1, M1 increases and the money supply is larger than before. Further, because individuals may deposit this new money in a bank account, bank reserves and lending will also increase. Therefore, both currency and reserves increase.

When the Fed buys U.S. government bonds, it has conducted a.open market sales, which increase the money supply. b.open market sales, which decrease the money supply. c.open market purchases, which increase the money supply. d.open market purchases, which decrease the money supply.

open market purchases, which increase the money supply When the Fed purchases government bonds, it is conducting open market purchases. Because the Fed purchases government bonds in the public bond market, the currency used to make the purchases ends up in the hands of the general public. Because currency is included in M1, M1 increases and the money supply is larger than before. Further, because individuals may deposit this new money in a bank account, bank reserves and lending will also increase.

The Fed has decreased the money supply through open market operations. Which of the following has occurred? a.open market sales, and bank reserves decrease. b.open market purchases and bank reserves decrease. c.open market sales, and bank reserves increase. d.open market purchases, and bank reserves increase.

open market sales, and bank reserves decrease In order to decrease the money supply, the Fed will have to conduct open market sales of government bonds. When individuals purchase bonds from the Fed, they will use currency, most often withdrawn from their bank accounts. Since this money ends up in the hands of the Fed, the money is no longer circulating in the general public. This means the money supply has decreased, and since some of that money came from bank accounts, reserves and lending will decrease as well.

When the Fed sells U.S. government bonds, it has conducted a.open market sales, which increase the money supply. b.open market sales, which decrease the money supply. c.open market purchases, which increase the money supply. d.open market purchases, which decrease the money supply.

open market sales, which decrease the money supply When the Fed sells government bonds, it is conducting open market sales. Because the Fed sells government bonds in the public bond market, individuals give currency to the Fed and the currency is no longer in circulation in the general public. Because currency is included in M1, M1 decreases and the money supply is reduced. Additionally, since individuals may withdraw money from their banks to make these purchases, the reserves at banks decrease along with lending.

The New York Federal Reserve Bank a.is the only regional bank that has, by default, two voting members in the FOMC. b.is not represented at FOMC meetings. c.president always gets appointed as the Fed chairman by the president of the United States. d.president always gets to vote at the FOMC meetings.

president always gets to vote at the FOMC meetings The FOMC is made up of the seven members of the board of governors and five of the twelve regional bank presidents. All twelve regional presidents attend each FOMC meeting, but only five have voting rights. The president of the New York Fed always gets a vote because New York is the financial center of the U.S. economy. Also, all Fed purchases and sales of government bonds are conducted at the New York Fed's trading desk.

In response to the credit crunch in 2008 and 2009, the U.S. Treasury ____ a.put public funds into the banking system to increase the amount of bank capital. b.decided not to act, instead allowing the market to correct the credit crunch. c.took operating control of all of the U.S. banks. d.put public funds into the banking system to decrease the amount of bank capital.

put public funds into the banking system to increase the amount of bank capital The crisis created a shortage in capital. The U.S. Treasury, with the Federal Reserve, put billions of dollars of public funds into the banking system to increase the amount of bank capital.

The amount of reserves banks must hold against deposits is known as a.discount rate. b.term auction requirement. c.reserve requirement. d.critical reserve ratio.

reserve requirement Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits. The Fed can influence the reserve ratio of banks in the economy by changing reserve requirements. This strategy is employed infrequently by the Fed.

Which of the following lists all items included in M2 but not in M1? a.Demand deposits and savings deposits b.Savings deposits, small time deposits, money market mutual funds and other minor categories c.None, M1 and M2 are essentially the same. d.Currency

saving deposits, small time deposits, money market mutual funds, and other minor categories M1 includes demand deposits, traveler's checks, other checkable deposits and currency. M2 includes everything in M1 plus a few additional assets which are less liquid than those in M1. These assets, which are included in M2 but not M1, are savings deposits, small time deposits, money market mutual funds and a few other minor categories.

Suppose the Fed wishes to decrease the money supply, which of the following open market operations will the Fed conduct to accomplish this goal? a.Lowers the discount rate. b.Increases lending to member banks. c.Sells bonds to the public. d.Purchases bonds from the public.

sells bonds to the public Open market operations involve the purchasing and selling of U.S. government bonds by the Fed. To decrease the money supply using open market operations, the Fed will sell government bonds in the bond market. When the public purchases these bonds with currency, there is less money in the hands of the public. Since M1 includes currency, M1 decreases and the money supply is reduced. Additionally, since individuals may withdraw money from their banks to make these purchases, the reserves at banks decrease along with lending. This is known as an open market sale.

Which of the following best describes what occurs under the Fed's Term Auction Facility? a.The Fed competes with other foreign central banks in an auction to borrow from major U.S. commercial banks. b.The Fed auctions off items repossessed from individuals who have evaded taxes. c.The Fed auctions a set amount of funds, and the bank that offers to pay the highest rate for the funds will get to borrow from the Fed. d.The Fed auctions funds at a set interest rate, and the bank that offers to borrow the most funds will get to borrow from the Fed.

the Fed auctions a set amount of funds, and the bank that offers to pay the highest rate for the funds will get to borrow from the Fed Households choose to hold deposits in banks. This decision of how much a household decides to hold depends on some factors that are outside of the Fed's control, such as confidence in the banking system.

One reason that the Fed's control of the money supply is not precise is because ____ a.none of the Fed's tools are powerful. b.the Fed does not control the amount that banks choose to lend. c.the Fed has only one monetary tool. d.the Fed cannot provide incentives for banks.

the Fed does not control the amount that banks choose to lend The Fed can provide incentives to lend more or less, but it does not directly control a bank's profit-maximizing decision of how much money to lend.

Which of the following will make banks want to hold more reserves at the Fed, causing the money multiplier to decrease? a.The Fed keeps the interest rate on bank deposits held at the Fed constant. b.The Fed does not allow banks to keep reserves at the Fed. c.The Fed increases the interest rate on bank deposits held at the Fed. d.The Fed decreases the interest rate on bank deposits held at the Fed.

the Fed increases the interest rate on bank deposits held at the Fed If the Fed increases interest paid on reserves held at the Fed, then banks will be encouraged to hold more reserves at the Fed. This will increase the reserve ratio in the economy, which will decrease the money multiplier.

The rate charged at the Fed's "discount window" is known as the a.the federal funds rate. b.the discount rate. c.depreciation rate. d.weighted average cost of capital.

the discount rate The discount rate is the interest rate on the loans the Fed makes to other banks. Traditionally, these loans are made from the Fed's discount window.

Which of the following best defines liquidity? a.The official government measurement of scarcity of an asset relative to other assets. b.The purchasing power of an asset in the domestic country relative to a foreign country. c.How well an asset holds its value over time. d.The ease with which an asset is converted to the medium of exchange.

the ease with which an asset is converted to the medium of exchange Liquidity refers to the ease with which an asset can be converted into the economy's medium of exchange. Since money is an economy's medium of exchange, it is the most liquid asset. Financial assets, like stocks and bonds, can usually be sold easily in financial markets, and are thus relatively liquid. Houses and other real estates, however, are non-liquid assets because it requires time, effort and in many cases, extra fees, to sell real estate in order to convert the asset into money.

Which of the following is not true regarding the Federal Reserve? a.The Fed was created to facilitate the federal government's collection of taxes as well as its expenditures. b.The Fed has other duties in addition to controlling the money supply. c.The Fed is the U.S.'s central bank. d.The Fed was created in 1913.

the fed was created to facilitate the federal government's collection of taxes as well as its expenditures The Fed, the central bank of the United States, was created in 1913 after a series of bank failures caused Congress to establish the Fed to ensure the health of the banking system in the U.S., and not to facilitate the collection of taxes. Today the Fed also controls the money supply.

The interest rate at which banks lend reserves to each other overnight is known as a.the discount rate. b.the LIBOR. c.the prime rate. d.the federal funds rate.

the federal funds rate The federal funds rate is the short-term interest rate that banks charge one another for loans. Quite often these loans are overnight loans made in order to comply with reserve requirements.

Which of the following is not correct about the Fed? a.The Federal Reserve has 12 regional banks. b.The Board of Governors has 7 members. c.Members of the Board of Governors serve 14-year terms. d.The Federal Reserve Chair is appointed by the speaker of the house to a four-year term.

the federal reserve chair is appointed by the speaker of the house to a four-year term The chair of the Fed, who directs staff, presides over board meetings and testifies in front of congress, is appointed (and potentially reappointed) by the president for terms of 4 years. The board of governors has 7 members who serve 14-year terms. Further, the Federal Reserve does indeed have 12 regional banks.

Which of the following scenarios does not involve the use of commodity money? a.Prisoners use cigarettes or some other good as money. b.The fictional country of Feles uses silver as money. c.The government of the fictional country of Owana orders the use of paper dollars as money. d.Colonists in Virginia used tobacco as money.

the government of the fictional country of Owana orders the use of paper dollars as money Commodity money is money that takes the form of a commodity with intrinsic value. Tobacco, cigarettes and silver all have intrinsic value. Tobacco and cigarettes both have value since many consumers like to chew or smoke these commodities, while silver has uses in manufacturing mirrors, solder, batteries and jewelry. Meanwhile, paper money has no intrinsic value and is used only because of orders from the Owanian government.

Bank assets divided by bank capital is known as a.the leverage ratio b.the money multiplier c.the leverage coefficient d.required reserve ratio

the leverage ratio The leverage ratio of a bank is the ratio of its assets to bank capital.

Suppose the money multiplier has increased. Which of the following is the most likely cause? a.the reserve ratio increases. b.the money multiplier cannot increase. c.the reserve ratio does not change. d.the reserve ratio decreases.

the reserve ratio decreases The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. This means that as R gets smaller, the denominator of the fraction 1/ R gets smaller. This means the fraction 1/R gets larger. In short, if the money multiplier gets bigger it must be because the reserve ratio has gotten smaller.

If 1/R is the money multiplier in an economy, what must R represent? a.the assets of all banks in the economy b.the reserve ratio for all banks in the economy c.the liabilities of all banks in the economy d.the loans of all banks in the economy.

the reserve ratio for all banks in the economy The formula for the money multiplier is 1/R, where R is represents the reserve ratio of all banks in the economy.

Which of the following most closely fits an economist's definition of "money"? a.Total assets minus total liabilities b.Any asset that stores value c.The set of assets in an economy that people regularly use to buy goods and services d.Goods or services that can be consumed

the set of assets in an economy that people regularly use to buy goods and services Economists have a more specific definition of the word "money" than the general public. Economists use the word "money" to refer to the set of assets in an economy that people regularly use to buy goods and services from other people. This is different than an asset, such as a large house or car, which might be valuable but are not regularly exchanged directly. These assets would contribute to one's wealth, but you could not purchase a sandwich with your car unless you first sold your car for cash.

First National Bank Assets / Liabilities and Owners' Equity Reserves $2000 / Deposits $10,000 Loans $8000 / Debt $1500 Short-term securities $2000 / Capital (owners' equity) $500 Refer to the Table. The required reserve ratio is 10 percent. Which of the following is true? a.This banks reserve ratio is 10 percent. Its excess reserves are $0. b.This banks reserve ratio is 20 percent. Its excess reserves are $1,000. c.This banks reserve ratio is 20 percent. Its excess reserves are $0. d.This banks reserve ratio is 10 percent. Its excess reserves are $1,000

this banks reserve ratio is 20 percent, its excess reserves are $1000 The required reserve ratio is 10 percent, which means that of the $10,000 in deposits the bank is only required to hold $1,000 in reserves. Since it is now holding $2,000 in reserves the bank's excess reserves amount to $1,000 and its reserves ratio is $2,000/$10,000 = 20 percent.

U.S. dollars are an example of fiat money and alcohol used to make trades is an example of commodity money. True False

true Fiat money has no intrinsic value, whereas commodity money is money that has intrinsic value, that is, it would be valued even if it were not used as money. Paper dollars is an example of fiat money and alcohol is an example of commodity money.

When the Fed purchases government bonds the money supply increases and the federal funds rate decreases. True False

true If the Fed buys bonds, bank reserves increase and banks needs fewer overnight loans from each other to comply with reserve requirements. The fall in demand for these types of overnight loans leads to a decrease in the cost of these loans, or, in other words, a decrease in the federal funds rate. The increase in reserves from banks also allows for more loans to be made, which increases the money supply.

Suppose a bank is operating with a leverage rate of 20. A 4 percent increase in the value of assets a.will reduce liabilities by 4 percent. b.will reduce liabilities by 20 percent. c.will result in an 80 percent increase in owner's equity. d.will result in an 80 percent decrease in owner's equity.

will result in an 80 percent increase in owner's equity A leverage ratio of 20 means that when the value of assets rises by 4 percent, owner's equity will increase by 20 X 4 percent = 80 percent.

Which of the following is the best example of the medium of exchange function of money? a.In your job as an accountant, you record the assets and liabilities of your employer in terms of dollar amounts b.You give a maid money to clean your house c.Your loan repayments are measured in dollars d.The money in your savings account can be used for future purchases

you give a maid money to clean your house A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. Money, in most industrialized countries, is the commonly accepted medium of exchange. This function of money allows individuals to exchange money for goods or services, like maid or cleaning services. Both you and the maid have accepted money as the medium of exchange, making the transaction of your money for cleaning services possible. This is an example of how money is used as a medium of exchange. The fact that your loan repayments are measured in dollars, as well as you record assets and liabilities in dollar terms, are both examples of the unit of account function of money. The fact that the money in your savings account can be used for future purchases, rather than just purchases today, is an example of the store of value function of money.

Which of the following best illustrates the concept of a store of value? a.Everyone in your town has agreed to accept eggs as payment for goods and services. b.You purchase a home in anticipation of selling it in 2 years when the real estate market "heats up." c.At any point in time, you can check the price of a U.S. dollar in terms of Japanese yen. d.You sell an old desk online and list the price in terms of dollars.

you purchase a home in anticipation of selling it in 2 years when the real estate market "heats up" A store of value is an item that people can use to transfer purchasing power from the present to the future. By purchasing a house, you are deferring the purchasing power of your money. Because you can sell your house at a later date and use the currency you receive to buy goods and services in the future, you have effectively transferred your purchasing power from the present to the future. The house, in this scenario, is an example of a store of value.