Macroecon - Unit 3
Trade - PPC
With no world trade, production possibilities curve for each country also defines its consumption possibilities
What affects banker bookkeeping
Writing checks, using ATM, accepting electronic deposits, sending electronic payment, and getting a loan all affect the size of the checkable deposits component of M1 (the money supply)
14-2 Which of the following defines the "unit fo account" function of money? A) a common measurement of the relative value of different goods and services B) the ability of money to hold value over time C) the materials used to to manufacture money are of medium grade or quality so that people will not hoaard money for its commodity value D) money is widely accepted in exchange for goods and services
a
14-4 What establishes the value of fiat money? A) our collective trust and confidence that the central government, which decrees that money cannot be refused as payment for debt B) gold and silver owned by large commercial banks C) the central gov. authority's promise to redeem fiat money for gold and silver upon demand D) none
a
14-3 Which of the following defines the "store of value" function of money? A) a common measurement of the relative value of different goods and services B) the ability of money to hold value over time C) that the materials used to manufacture money are of medium grade or quality, so that people will not hoard money for its commodity value D) that money is widely accepted in exchange for goods and services
b
14-6 Which of the following is a problem with barter? A) individuals will not exchange goods B) individuals' wants must coincide in order for there to be exchange C) goods can be exchanged, but services cannot
b
14-7 Which of the following is not a characteristic of money? A) it provides a way to measure the relative value of goods and services B) it is always backed by something of high intrisstic value such as gold or silver C) it is generally acceptable as a medium of exchange D) it allows for saving and borrowing
b
14-5 If a society were to use a widely accepted, easily measurable, but highly perishable food product as its money, which of the following functions of money would me most impaired? A) medium of exchange B) unit of account C) store of value D) none
c
16-7 based on the equation of exchange, the money supply in the economy is calculated as A) M=V/PQ B) M=V(PQ) C) MV=PQ D) M= PQ - V
c
14-1 Which of the following defines the "medium of exchange" function of money? A) to provide a common measurement of the relative value of different goods and services B) the ability of money to hold value over time C) the materials used to manufacture money are of medium grade so that people will not hoard money for its commodity value D) money that is widely accepted in exchange for goods and services
d
16-16 suppose that the fed makes a $100 billion open market sale of treasury bonds, and the money multiplier is 6. which of the following impacts are most likely to result? A) money supply shifts inward, and the equilibrium interest rate rises in the money market B) the money supply shifts outward, and the equilibrium interest rate falls in the money market C) investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy D) both answers a and c E) both answers b and c
d
Other properties of money
liquidity, scarcity, portable, accessible, uniform
Three functions of money
medium of exchange, unit of account, store of value
Three tools of fed
selling of bonds, interest rates, change in required reserve ratio
comparative advantage
the ability of a country to produce a good at a lower opportunity cost than another country
absolute advantage
the ability of a country to produce a good using the same or less resources than another country
M2
the definition of the money supply that equals M1 plus near monies such as savings deposits and small time deposits
Equilibrium interest rate
the intersection of the money demanded and the money supplied (intersection of curves)
Monetarist theory
the theory that changes in money supply directly determine changes in prices, real GDP, and employment
Money
Anything that serves as a medium of exchange, unit of account, and store of value
Commodity money
Anything that serves as money while having market value in other uses
· How does a change in interest rates affect demand for money
As the interest rate falls, the opportunity cost of holding money falls, and people increase their speculative balances
14-11 The M1 definition of the money supply consists of A) coins and currency in circulation B) coins and currency in circulation, and checkable deposits C) federal reserve notes, gold certificates, and checkable deposits D) federal reserve notes and bank loans
B
14-17 Which of the following is not one of the functions of the federal reserve? A) clearing checks B) printing currency C) supervising and regulating banks D) controlling the money supply
B
14-18 Which of the following is in charge of the buying and selling of gov. securities by the fed? A) president B) federal open market committee C) congress D) none
B
15-4 If the fed decides to engage in an open market operation to increase the money supply, what will it do? A) sell treasury bonds, bills or notes on the bond market B) buy treasury bonds, bills or notes on the bond market C) increase the required reserve ratio D) increase the fed funds rate
B
15-5 ____ plus ____ plus ____ equals ____ A) total deposits, loans, required reserves, excess reserves B) loans, required reserves, excess reserves, total deposits C) required reserves, total deposits, excess reserves, loans D) excess reserves, loans, total deposits, required reserves
B
16-11 Starting from an equilibrium at E1 in exhibit 12, a rightward shift of the money supply curve from MS1 to MS2 would cause an excess A) demand for money, leading people to sell bonds B) supply of money, leading people to buy bonds C) supply of money, leading people to sell bonds D) demand for money, leading people to buy bonds
B
16-2 A decrease in the interest rate, other things being equal causes a(n) A) upward movement along the demand curve for money B) downward movement along the demand curve for money C) rightward shift of the demand curve for money D) leftward shift of the demand curve for money
B
14-12 which of the following items is not included when computing M1? A) coins in circulation B) currency in circulation C) savings accounts D) checking account entries
C
14-14 which of the following is not part of M1? A) checking accounts B) coins C) credit cards D) paper currency
C
14-19 The major protection against sudden mass attempts to withdrawal cash from the banks is the A) federal reserve B) consumer protection act C) deposit insurance provided by the FDIC D) gold and silver backing the dollar
C
14-9 The easier it is to convert an asset directly into goods and services without loss, the A) less secure B) more secure C) more liquid D) less liquid
C
15-12 The cost to a member bank of borrowing from the federal reserve is measured by the A) reserve requirement B) price of securities in the open market C) discount rate D) yield on gov. bonds
C
15-3 Which of the following is correctly the money multiplier? A) the required reserve ratio B) 1/(1-the required reserve ratio) C) 1/(required reserve ratio) D) 1/(1-MPC)
C
16-10 Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that the A) money demand curve is horizontal at any interest rate B) aggregate demand curve is nearly flat C) investment demand curve is nearly vertical. D) money demand curve is vertical
C
16-18 equation of exchange A) TR = PQ B) MV = VM C) MV = PQ D) TR = VM
C
16-19 which of the following is the velocity of money? A) how quickly the ave. worker gets paid after his or her work is done B) the ave. speed of ATM machines C) the ave. number of times per year that a given dollar of the money supply is spend D) none
C
14-10 M1 refers to A) the most narrowly defined money supply B) currency held by the public plus checking acct. balances C) the smallest $ amount of money supply definitions D) all
D
14-13 Which of the following is part of the M2 definition of the money supply, but not part of M1? A) checkable deposits B) currency held in banks C) currency in circulation D) money market mutual fund shares
D
14-15 Which definition of the money supply includes credit cards, or plastic money? A) M1 B) M2 C) both a and b D) neither a nor b
D
14-16 Which of these institutions has the responsibility for controlling the money supply? A) commercial banks B) congress C) us treasury dept. D) federal reserve system
D
14-8 Which of the following is not a store of value? A) dollar B) money market mutual fund share C) checking account balance D) credit card
D
15-1 Which of the following correctly describes fractional reserve banking? A) the federal gov. only insures a fraction of the deposits at most banks B) banks keep a fraction of their loans with other banks to maintain the quality of their loan port. C) banks can loan out al but a small fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults. D) banks can loan out all but a fraction of its own money, but must hold all money deposited at the bank on reserve in bank vaults.
D
15-2 If total deposits at last bank and trust are $100 million, total loans are $70 and excess reserves are $20 million, then which of the following is required reserve ratio? A) 70% B) 30% C) 20% D) 10%
D
16-1 Keynes gave which of the following as a motive for people holding money? A) transactions demand B) speculative demand C) precautionary demand D) all
D
16-15 the monetarist transmission mechanism through which monetary policy affects the price level, real gdp, and employment depends on the A) indirect impact of changes on the interest rate B) indirect impact of changes on profit expectations C) indirect impact of changes in fiscal policy on aggregate demand D) indirect impact of changes in the monetary supply on aggregate demand
D
16-3 Assume the demand for money curve is stationary and the fed increases the money supply. the result is that people A) increase the supply of bonds, thus driving up the interest rate B) increase the supply of bonds, thus driving down the interest rate C) increase the demand for bonds, thus driving up the interest rate D) decrease the demand for bonds, thus driving down the interest rate
D
16-6 Using the aggregate supply and demand model, assume the economy is in equilibrium on the intermediate portion of the aggregate supply curve. A decrease in the money supply will decrease the price level and A) lower both the interest rate and the real gdp B) raise both the interest rate and real gdp C) lower the interest rate and raise real gdp D) raise the interest rate and lower real gdp
D
16-8 The V in the equation represents the A) variation in GDP B) variation in cpi C) variation in real gdp D) ave. number of times per year a dollar is spent on final goods and services
D
16-9 Which of the following is not an issue in the Keynesian-monetarist debate? A) the importance of monetary vs. fiscal policy B) the importance of a change in the money supply C) the importance of a crowding out effect D) all are issues
D
Theory of money
The theory that any change in the money supply leads directly to a proportional change in the price level
Why do countries trade?
Trade allows countries to consume goods and services exceeding their own production possibilities curve; Greatest efficiency and higher standard of living
Specialization & Trade
Global trade allows for a country to consume a combination of goods that exceeds its own production possibilities curve
The beginning of money creation
In the Middle Ages, gold was the money of choice in most European nations; The founders of our modern banking system: Goldsmiths - people who would keep other people's gold sage for a service charge
lags of monetary policy
Inside lag: time policy change needed and Fed does something; Outside lag: time between decision is made and policy change has an effect on the economy
spending affects GDP output, employment, and prices
Less spending = lower prices, GDP and employment
How does the money multiplier work?
Loans are deposited as checkable deposits in banks, which creates excess reserves and new loans and checkable deposits throughout the banking system
Fractional Banking System: modern + history
Modern fractional reserve banking: a system in which banks keep only a small percentage of their deposits on reserve at the Fed; Based on the system created by medieval goldsmiths
Fiat money
Money accepted by law and not because of its own tangible value
Banker Bookkeeping Concept
Money consists largely of bookkeeping entries (checkable deposits)
What does the fed do?
Regulates, supervises, and sets policy concerning money in the US
14-20 Which of the following is not part of the fed. reserve system? A) council of economic advisors B) board of governers C) federal open market committee D) 12 federal reserve district banks E) federal advisory council
A
16-12 Beginning from an equilibrium at E2 in exhibit 12, a decrease in the money supply from $600 billion to $400 billion causes people to A) sell bonds and drive the price of bonds down B) buy bonds and drive the price of bonds up C) buy bonds and drive the price of bonds down D) sell bonds and drive the price of bonds up
A
16-4 assume the demand for money curve is fixed and the fed decreases the money supply. the result is a temporary A) excess quantity of money demanded B) excess quantity of money supplied C) increase in the price of bonds D) increase in the demand for bonds
A
16-5 assume the demand for money curve is fixed and the fed increases the money supply. the result is that the price of bonds A) rises B) remains unchanged C) falls D) none
A
change in money supply affects interest rates
Decreases money supply = increase interest rates
The Fed
Entity that controls the money supply in the US; The central banker for the nation
Free trade
The flow of goods between countries without restrictions or special taxes
Protectionism
The government's use of restrictions to protect domestic producers from foreign competition
What is the money multiplier (MM)?
The maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold. The money multiplier is equal to 1 divided by the required reserve ratio; inverse relationship between required reserve ration and money multiplier
M1
The narrowest definition of the money supply. Includes currency and checkable deposits