Economics Chapter 14-16

What are the three basic functions of money?

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

The chairperson of the Federal Reserve Board is selected by the

US president and confirmed by the Senate

Why is monetary policy easier to conduct than fiscal policy?

because monetary policy has a much shorter administrative lag than fiscal policy

Why is cyclical asymetry important to policymakers?

because monetary policy is more effective in fighting inflation than recession

Why is the US demand for Mexican pesos downsloping?

because when the peso depreciates in value, the US finds Mexican goods less expensive, purchasing more of them and demanding more pesos

Changes in bank reserves resulting from open-market operations by the Fed will

change lending ability and the ability to create money

Which financial institutions offer checkable deposits included within the M1 money supply?

commercial banks thrift institutions

Who loses from protectional policies?

domestic consumers

Who benefits/gains from protectionist policies?

domestic producers

A balance sheet must always balance because the sum of the assets must...

equal to sum of the liabilities plus net worth

If commercial banks borrow from Fed Reserve Banks at the discount rate, then how will the commercial reserves be affected?

increase

If the Fed reduces the reserve ratio, the how will the commercial reserves be affecteD?

increase

Free-trade zones

increase the efficient use of resources within the zones but can result in a less efficient allocation of resources in the larger global economy

What is the basic determinant of the transactions demand for money?

level of nominal GDP

What is the net outcome for society?

negative

A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking system can lend by a multiple of its excess reserves because...

one bank loses reserves to other banks, but the system does not

The face value of a coin is greater than its intrinsic value because

otherwise people would sell it for its intrinsic value

Rapid inflation can undermine money's ability to perform its functions. For example, in runaway inflation...

people revert to barter because money fails as a medium of exchange

The WTO

provides a forum for the trade blocs to meet and negotiate further reductions in trade barriers

In responding to the financial crisis that began in 2007, the Fed did what?

purchased securities from banks to increase liquidity in the financial system

Rising costs will

reduce the motive for specialization

The Fed Reserve requires that commercial banks have reserves because

reserves provide the Fed a means of controlling the money supply

In percentage terms, our exports of goods and services are

small when compared to other industrialized countries

An asset on a bank's balance sheet and a liability is

something owned by the bank

How does the government restrict imports?

tariffs and import quotas

What does the Federal Open Market Committee (FOMC) include?

the Board of Governors members and 5 of the 12 presidents of the Federal Reserve Bank, of which the president of the New York Fed has a permanent voting seat

What does the FOMC vote on?

the Fed's monetary policy and directs the purchase or sales of government securities

When economists say that the Federal Reserve Banks are central banks, this means that

the policies are coordinated by the Federal Reserve Board of Governors

When economists say that the Federal Reserve Banks are quasi-public banks, this means that

they are a blend of private ownership and public control

When economists say that the Federal Reserve Banks are bankers' banks, this means that

they perform the same functions for banks as banks perform for the public

How does the government promote exports?

through the provision of subsidies to exporters

What is the basic objective of monetary policy?

to assist the economy in achieving a full-employment, non-inflationary level of total output

What are the major categories of firms that make up the US financial services industry?

- commercial banks - thrifts - insurance companies - securities related firms

What are the functions of the Federal Reserve system?

- issuing Fed Reserve notes - providing for check collection - supervising the operation of banks

What near-monies are included in M2 money supply?

- noncheckable saving deposits - money market deposit accounts - small time deposits - money market mutual fund balances

What additional programs did the Fed create and implement to facilitate its role as lender-of-last resort?

- primary dealer credit facility - asset-backed commercial paper money market mutual fund liquidity facility - commercial paper funding facility - money market investor funding facility - term asset-backed securities loan facility - interest payments on reserves

What country is the US' most important trading partner, quantitatively?

Canada

With which country does the US have the largest current trade deficit?

China

What is the largest component of M1?

Currency

What are the components of the M1 money supply?

Currency in circulation and checkable disposits

US firms will support trade liberalization if what?

the US companies producing products will be able to sell more of their products outside of the US

The Fed currently focuses monetary policy on what?

Fed funds rate

TARP

Troubled Asset Relief Program funded with general tax revenue and the issuance of government debt

The supply of pesos to Americans is upward sloping because as the peso

appreciates in value, the US goods become cheaper to Mexicans. They buy more dollars, supplying a larger quantity of pesos

How is the equilibrium rate determined?

at the intersection of the total demand for money curve and the supply of money curve

The Fed funds rate is the interest rate that the

banks charge one another on overnight loans, whereas the prime interest rate is the interest rate banks charge on loans to their most creditworthy customers

When economists say that monetary policy can exhibit cyclical asymmetry what does that mean?

expansionary and restrictive monetary policy do not have the same effectiveness in handling economic expansion and contraction

Government loans create moral hazard because their is a tendency

for financial services firms to take on greater risks because they assume they are at least partially insured against losses

In general, trade blocs are

good for world trade

Why is cyclical asymmetry related to a liquidity trap?

in a recession, adding liquidity can have little effect

Over the past few decades offshoring has what?

increased to countries with an educated labor force such as India

What is the basic determinant of the asset demand for money?

interest rate

The purchasing power of the dollar is

inversely related to the price level

Offshoring of white-collar service jobs refers to

jobs relating to data entry, book composition, and software coding

If the NY Fed Reserve Bank purchases government securities from privite businesses and consumers and the businesses and consumers hold the proceeds as cash, then how will commercial reserves be affected?

unaffected

US labor unions will support trade liberalization is what?

union workers working for companies that are expanding due to international trade will experience an increase in job opportunities