Graded assignment #6
Choose the correct statement
Deposits are money, checks are not money, and credit cards are not money.
If the Fed makes an open market sale of $1 million of securities to a bank, what initial changes occur in the economy? The monetary base ______ and the Fed's assets ______.
decreases; decrease
What is the money multiplier? The money multiplier is the ratio of the change in the quantity of ______ to the change in the quantity of ______.
Money; monetary base
The Fed is the lender of last resort, which means _______.
if depository institutions are short of reserves, they can borrow from the Fed
To increase its assets to $2.3 trillion in 2008, the Fed used ______.
last resort loans
Risky Assets: Counting to a Trillion Prior to the financial crisis, the Fed held less than $1 trillion in assets and most were in safe U.S. government securities. By mid-December 2008, the Fed's balance sheet had increased to over $2.3 trillion. The massive expansion began when the Fed rolled out its lending program: sending banks cash in exchange for risky assets. Source: CNN Money, September 29, 2009 What are the Fed's policy tools and which policy tool did the Fed use to increase its assets to $2.3 trillion in 2008? The Fed's policy tools include _______.
open market operations, last resort loans, and required reserve ratio
What are the Fed's three policy tools? The Fed's three policy tools are _______.
open market operations, last resort loans, and the required reserve ratio
In June 2009, currency held by individuals and businesses was $853 billion; traveler's checks were $5 billion; checkable deposits owned by individuals and businesses were $792 billion; savings deposits were $4,472 billion; time deposits were $1,281 billion; and money market funds and other deposits were $968 billion. Calculate M1 and M2 in June 2009.
1,650 8,371
Suppose an increase in the monetary base of $400,000 increases the quantity of money by $1,200,000. Calculate the money multiplier.
3
The bank plans to hold $3 for every $100 in deposits. The bank holds desired reserves of $15 comma 000 and unplanned reserves of $15 comma 000. What is the bank's desired reserve ratio and its actual reserves? The bank's desired reserve ratio is 3 percent The banks actual reserves are $30,000
3 30,000
Sara withdraws $1,000 from her savings account at the Lucky S&L, keeps $50 in cash, and deposits the balance in her checking account at the Bank of Illinois. What is the immediate change in M1 and M2? The immediate change is ______ in M1 of $1,000 and ______ in M2.
An increase; no change
The bank's total assets ______, it reserves _____.
Are the same; decrease
How does a change in the quantity of money change the interest rate in the long run? In the long run, an increase in the quantity of money _______ the interest rate.
Does not change
What is the central bank of the United States and what functions does it perform? The central bank of the United States is the ______.
Federal Reserve System
Complete the sentence. The liabilities of the Fed are ______, and these liabilities along with ______ make up the monetary base.
Federal Reserve notes held by households and businesses and reserves of depository institutions; coins issued by the Treasury
What is the monetary base and how does it relate to the Fed's balance sheet? The monetary base is the sum of _______. The monetary base is equal to _______.
Federal Reserve notes, coins, and depository institution deposits at the Fed; the liabilities of the Fed plus coins issued by the Treasury
How does an open market operation change the monetary base? An open market purchase ______ the monetary base. An open market sale ______ the monetary base.
Increases; decreases
What is the equation of exchange? The equation of exchange is ______ and it is true ______.
MV = PY; by definition
The required reserve ratio is the
Minimum percentage of deposits that depository institutions are required to hold as reserves
Complete the sentences. The demand for money is the relationship between the quantity of real money demanded and the _______ when all other influences on the amount of money that people wish to hold remain the same.
Nominal interest rate
Both graphs show a demand for money curve. In the left graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in the nominal interest rate. Draw either an arrow along the curve showing the direction of change, or a new demand for money curve. In the right graph, draw a point to show the quantity of money demanded when the interest rate is 5 percent. Show the effect of an increase in real GDP. Draw either an arrow along the curve showing the direction of change, or a new demand for money curve.
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Calculate the M1 and M2 measures of money using the information on the right.
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In the economy of Nocoin bank deposits are $500 billion. Bank reserves are $60 billion, of which two thirds are deposits with the central bank. Households and firms hold $20 billion in bank notes. There are no coins. Calculate the monetary base and the quantity of money. Calculate the banks' desired reserve ratio and the currency drain ratio (as percentages).
Picture
The graph shows the demand for money curve and the supply of money curve. The Fed decreases the quantity of real money supplied to $3.9 trillion. Draw a new MS curve that shows the effect of the Fed's action. Label it. Draw a point at the new equilibrium quantity of money and interest rate. Before the Fed decreases the quantity of money, the equilibrium interest rate is 4 percent a year. After the Fed decreases the quantity of money, at an interest rate of 4 percent a year, people want to hold _______ money than the quantity supplied, so they _______ bonds.
Picture
The graph shows the demand for money curve. Draw a point to show the interest rate and quantity of money demanded when the interest rate is 5 percent a year. Draw an arrow to show the effect of an increase in the interest rate above 5 percent a year. Label it 1. Draw an arrow to show the effect of a decrease in the interest rate below 5 percent a year. Label it 2. When the interest rate rises, other things remaining the same, the opportunity cost of holding money ______ and ______.
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The table gives information about the commercial banks in Zap. If banks have no unplanned reserves, what is the banks' desired reserve ratio?
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The table shows the balance sheets for the Federal Reserve Bank of New York and Wells Fargo. The FOMC sells $ 20 million of securities to Wells Fargo. Enter the transactions that take place to show the changes in the balance sheets.
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What are the official measures of money? Are all the measures really money? The two main official measures of money in the United States today are ______. The two main official measures of money in the United States ______ really money.
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What is the Federal Open Market Committee and what are its main functions? The Federal Open Market Committee is the _______.
Picture
What makes something money? What functions does money perform? Something is money if it is a commodity or token that is generally acceptable as a ______.
Picture
The central bank of the United States performs many functions, one of which is that it _______.
Provides banking services for businesses and individual citizens
An open market operation is the ___
Purchase or sale of government securities by the Federal Reserve System in the loanable funds markets
Complete the sentences. A ______ is a depository institution that accepts savings deposits and makes mostly home-purchase loans. A ______ is a depository institution owned by a social or economic group such as a firm's employees that accepts savings deposits and makes mostly personal loans.
Savings bank; credit union
What are the problems that arise when a commodity is used as money? Using a commodity as money creates problems because ______.
a commodity is bulky and its value changes over time
The deposits of the following three types of depository institutions make up the nation's money: ______.
commercial banks, thrift institutions, and money market mutual funds
The ratio of reserves to deposits that a bank plans to hold is its ______. If a bank has $10 million in actual reserves and $8 million in desired reserves, then it has ______.
desired reserve ratio; unplanned reserves
The Bank of America's total assets ______ and its total liabilities ______.
do not change; do not change
A bank manager tells you that she doesn't create money. She just lends the money that people deposit. Explain why she is wrong. The bank manager is wrong because ______.
every new loan creates a new deposit, and a new deposit is new money
Complete the sentences. A depository institution takes deposits from ______ and earns most of its income by _______.
households and firms; making loans and buying securities that earn a higher interest rate than that paid to depositors
Suppose the Fed buys $50 million of government securities from the Bank of America. Complete the sentences. The Fed's total assets ______ and its total liabilities ______.
increase by $50 million; increase by $50 million
What is the quantity theory of money? The quantity theory of money is that in the _______, an increase in the quantity of money brings an equal percentage increase in the _______.
long run; increase in the price level
Upper A rise in the price level _______ the nominal interest rate in the short run.
raises
Explain the change in the nominal interest rate in the short run if a. Real GDP increases. b. The money supply increases. c. The price level rises. Other things remaining the same: An increase in real GDP ______ the nominal interest rate in the short run. An increase in the money supply ______ the nominal interest rate in the short run.
raises; lowers
How is the money market equilibrium determined in the short run? In the short run, ______ and ______ adjusts to achieve equilibrium.
real GDP determines the demand for money curve and the Fed determines the quantity of real money supplied; the nominal interest rate
When the nominal interest rate rises, the opportunity cost of holding money ______ and the quantity of real money demanded ______.
rises; decreases
How is the velocity of circulation calculated? The velocity of circulation is the average number of times a dollar of money is used annually to buy ______. The formula used to measure the velocity of circulation, V, is ______, where P is the price level, Y is real GDP, and M is the quantity of money.
the goods and services that make upth GDP; V = (P times Y) divided by M
What limits the quantity of money that the banking system can create? The quantity of money that the banking system can create is limited by _______.
the monetary base, desired reserves, and desired currency holdings
Complete the sentence. When the Fed buys securities from a bank, ______.
the bank's reserves increase but its deposits do not change
A 26-year-old Montreal man appears to have succeeded in his quest to barter a single, red paperclip all the way up to a house. It took almost a year and 14 trades. Source: CBC News, July 7, 2006 Is barter a means of payment? Is it just as efficient as money when trading on e-Bay? Explain. Barter ______ a means of payment. When trading on e-Bay, barter _______.
is; is not as efficient as money because barter requires a double coincidence of wants
