Econ Exam 2; Chapter 24

Which of the following is an advantage of using money as a medium of exchange?

It avoids having to rely on barter, the exchange of one good or service for another.

Which of the following is not a function of the Federal Reserve System?

It determines tax levels in conjunction with the U.S. Treasury.

What happens to the value of the deposit multiplier when banks hold excess reserves?

It is smaller than the value implied by the formula.

Which of the following is a consequence of deposit insurance?

It may induce the officers of a bank to take more risks.

Why might monetary policy authorities be concerned when non-bank financial intermediaries account for a growing share of an economy's financial assets?

Monetary policy authorities fear that this situation might lessen their ability to control money supply because non-bank financial intermediaries are not as heavily regulated as banks.

Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services. What function do these packages of mackerel perform?

They function as a medium of exchange.

In the federal penitentiary at Lompoc, California, inmates used packages of mackerel to buy items such as haircuts at the prison barber shop and laundry services. What function do these packages of mackerel serve?

They functioned as money.

In Romania under Communist Party rule in the 1980s, Kent cigarettes served as a medium of exchange. Given this, which of the following statements is true?

This illustrates the use of Kent cigarettes as commodity money.

To reduce the political influence on the Board of Governors,

each member is appointed for 14 years, with one term expiring every two years.

Any reserves that banks hold in excess of required reserves are called

excess reserves

When banks hold more reserves than are required, such reserves are called

excess reserves

A bank is "loaned up" when

excess reserves are zero

The _____ rate is the interest rates charged when a bank lends reserves to another bank.

federal funds

Suppose the required reserve ratio is 10%. Mr. Normal uses his ATM card to withdraw $1,000 from this checking account in California National Bank. This action has

not changed the M1 or M2 measures of money supply.

Debit cards are

not considered money because they merely show that their owners have a relationship to money.

Credit cards are

not money

The quantity of reserves that banks must hold against deposits is called

required reserves.

If the Fed raises its target for the federal fund rate, this indicates

the Fed is pursuing a contractionary monetary policy.

Which of the following is not an example of a financial intermediary?

the New York Stock Exchange

The function of money illustrated by the prevailing prices of goods and services is the

unit of account function.

When a person makes price comparisons among products, money is being used as a(n)

unit of account.

Which of the following is an example of a bank's assets?

vault cash

In the banking system today, the reserves banks hold against their deposit liabilities must take one of two forms. They are

vault cash and deposits at the Fed.

Which of the following illustrates the medium-of-exchange function of money?

writing a check to buy a new Volkswagen

One disadvantage of commodity money is that

its quantity can fluctuate erratically.

A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 10%, what is the amount of required reserves?

$10,000

A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 20%, what is the maximum amount of loans this bank can create?

$10,000

Assume that the required reserve ratio is 10%. An increase of $1,000 in the banking system's excess reserves may result in a total expansion of new deposits for the banking system as a whole by as much as

$10,000

A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 10%, what is the amount of excess reserves?

$20,000

Suppose the required reserve ratio is 10%. If a bank has total reserves of $80,000 and checkable deposits of $550,000, what is the amount of the bank's required reserves?

$55,000

Suppose you deposit $1,000 cash in your checking account at a bank. If the bank is loaned up and if the required reserve ratio is 10%, the maximum amount that the bank can lend now, following your deposit is

$900

What is the value of the deposit multiplier in a 100-percent reserve banking system?

1

Which of the following is true?

A bank is insolvent when its net worth becomes negative.

When a member bank borrows reserves from the Fed,

it pays an interest rate called the discount rate.

Which of the following statements is false about M1 and M2?

All the assets included in M2 are also included in M1.

Linda sells her Economics textbook to Ejere for $40. Ejere pays Linda with a check, which she deposits in her checking account in West Bank. Which statement below describes the check-clearing process?

Ejere's bank loses $40 in both reserves and checkable deposits. Linda's bank gains $40 in both checkable deposits and reserves.

The Fed seldom uses the reserve requirement ratio to influence the money supply. What is the reason for this?

Frequent manipulation of reserve requirements would require bankers to constantly adjust their lending policies to changing requirements, which could be destabilizing for financial markets.

Which of the following items serve as a unit of account?

I. $100 cash II. checkable deposits

Which of the following items serve as a medium of exchange in the United States?

I. $100 cash III. the balance in your checking account

Which of the following are primary functions of a central bank?

I. act as a regulator of banks III. set monetary policy

Which of the following items serve as a store of value?

I. cash in your pocket II. the balance in your checking account III. an original Picasso painting IV. a $1,000 corporate bond

The Federal Reserve System

I. is the central bank for the United States.

The non-bank public chooses among various financial assets in deciding in what form it wants to hold liquidity. It thereby increases or decreases

I. the M1 measure of money supply. II. the reserves of commercial banks.

Which of the following is part of M1?

II. cash in your wallet III. checkable deposits IV. traveler's checks

Open market transactions involve which of the following activities?

III. buying or selling previously issued government bonds to change the volume of bank reserves

The Fed's narrowest measure of money supply is

M1

Freema withdraws $1,000 from her checking account to purchase a $1,000 time-deposit. As a result of her transaction,

M1 decreases and M2 is unaffected.

When her $1,000 time deposit expires, Suneeta decides not to renew the time deposit and opts to cash out. As a result of her transaction

M1 increases and M2 is unaffected.

How does the Fed decide which monetary measure should be the focus of its monetary policy choices?

The Fed would like to track a monetary measure that is most closely related to the level of real GDP and the price level.

What happens when you withdraw cash from a bank?

The bank's reserves are reduced.

Which of the following best illustrates the unit of account function of money

You list prices for clothing sold on your Web site, www.nattydresser.com, in dollars.

A financial institution that accepts deposits, makes loans, and offers checking accounts is

a commercial bank

If the Fed increases the discount rate, it is pursuing

a contractionary policy because it will be more costly for banks to borrow funds and this puts upward pressure on interest rates in the economy.

Which of the following would lead to a change in the money measure, M1?

a customer withdraws funds from her checking account to purchase a 6-month time deposit

An institution that collects funds from lenders and distributes these funds to borrowers is called

a financial intermediary.

The banking system is able to make new loans equal to

a multiple of total excess reserves of the system.

The functions of money are

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

The price of an iPhone 7 is $650. What is the function of money in this context?

a unit of account

An activity performed by commercial banks that is not performed by insurance companies is

accepting deposits and offering checking accounts.

Decreasing the reserve requirement ratio is

an expansionary policy because it raises the amount of excess reserves in the banking system.

The monetary aggregate, M1, increases when

an individual switches funds from a savings account to a checking account.

The Board of Governors of the Federal Reserve System is

appointed by the president of the United States and confirmed by the Senate

The unit-of-account function of money means that money is used

as a consistent means of measuring the value of things.

Which of the following equations is correct?

assets = liabilities + net worth

The Federal Reserve System was established in 1913 in response to the

bank panic of 1907

Suppose the reserve ratio is 25% and banks do not hold excess reserves. When the Fed sells $40 million of bonds to the public,

bank reserves decrease by $40 million and money supply could decrease by a maximum of $160 million.

The principle of fractional reserve banking makes it possible for a

bank to make loans.

Inmates at the federal penitentiary at Lompoc, California, accepted packages of mackerel in exchange for goods and services. Why were they willing to accept mackerel in exchange for goods and services?

because the inmates know that they could use the packages of mackerel to buy other goods and services

A bank that has no excess reserves

cannot create loans.

Rank the following items in terms of most liquid to least liquid.

cash, checkable deposits, savings deposits, an office building your father owns

The deposit multiplier is given by the formula

change in checkable deposits ÷ change in reserves.

Which of the following is an example of a bank's liabilities?

checkable deposits

The largest component of M1 is

checkable deposits.

Which of the following is a store of value and a common medium of exchange?

checking account balances

The Federal Reserve System is made up of twelve regional banks owned by

commercial banks in the respective districts that have chosen to be members of the Fed.

Money that has value apart from its use as money is called

commodity money

Which of the following is an example of a bank's reserves?

currency held in the vaults of the bank

M1 includes

currency in circulation plus checkable deposits plus traveler's checks.

The maximum amount of increase in the money supply that can be caused by an increase in excess reserves is equal to the

deposit multiplier x the change in excess reserves.

A bank's reserves are

deposits that banks have accepted from customers but have not loaned out.

Which of the following is an interest rate that is set directly by the Fed?

discount rate

Currency in the United States today is

fiat money.

Money that some authority has declared legal tender is called

fiat money.

Because commodity money is not uniform in quality, there is a tendency

for lower quality commodity money to drive higher quality commodity money out of circulation.

A system in which banks hold reserves whose value is less than the sum of claims on those reserves is called

fractional reserve banking.

The law requires banks to maintain

fractional reserves in the form of cash in their vaults or deposits with the central bank against their deposit liabilities.

For a given level of reserves, an increase in the reserve requirement ratio will

increase legal reserves and decrease excess reserves.

If the Fed buys U.S. government bonds from the public, it

increases the volume of reserves in the banking system and the money supply tends to grow.

If you withdraw currency from your savings account, you are

increasing M1 but not affecting M2.

In 2008, commercial banks' share of the U.S. credit market changed as a result of

investment banks that experienced significant difficulties resulting from real estate investments applied for status as commercial banks.

Membership in the Federal Reserve System

is held by only a minority of banks in the banking system.

Gresham's Law...

is the tendency for bad money to drive good money out of circulation.

Which of the following is true regarding the interest rate earned on the reserves that bank's keep at the Fed?

it is relatively low

Which of the following illustrates the store-of-value function of money?

keeping $20,000 in cash in your mattress instead of buying a new Volkswagen

The ease with which an asset can be converted to money is its

liquidity

Which of the following is an example of a bank's assets?

loans made to customers

The Federal Reserve does all of the following except

make loans to individuals

If banks were required to keep 100% of deposits in reserves, they could

make no loans.

The Fed conducts an open market purchase of $10 million in government securities. If the reserve ratio is 20%, what is the maximum change in the money supply? Assume banks hold no excess reserves and there is no currency withdrawal from the banking system.

maximum increase in money supply = $50 million

You spend $20 to buy a used textbook at the college bookstore. What function does money perform here?

medium of exchange

When you buy a ticket to the rodeo, you are using money as a

medium of exchange.

Any item that serves as a medium of exchange is called

money

The three main monetary policy instruments are

open market operations, reserve requirement ratio, and the discount rate.

The Fed's most important and most frequently used tool of monetary policy is

open-market operations

Which of the following describes the medium-of-exchange function of money?

paying $30 for a haircut

Which of the following describes the store of value function of money?

putting away $50 each month into your savings account

The Fed can increase the federal funds rate by

selling government securities which decreases bank reserves.

Money is any item that

serves as a medium of exchange for goods and services.

Which of the following is included in M2 but not in M1?

small-denomination time deposits

Money is essentially defined by

social usage.

Keeping a $20 bill in your purse to purchase a movie DVD when it comes out next month means that money functions as a

store of value

Inflation reduces the ability of money to function as a

store of value.

When you discover money in your coat that you placed there last winter, you unexpectedly find you were using money as a(n)

store of value.

The Federal Depository Insurance Corporation (FDIC) has the power to close a bank when

the bank's net worth falls below a certain level.

Which of the following is the most liquid asset?

the cash that your Aunt Ursula stuffs in her mattress

When a bank receives new deposits, it can make new loans up to the amount of

the excess reserves generated by the deposits

The deposit multiplier is the inverse of

the required reserve ratio