Which of the following best explains the difference between commodity money and fiat money?
Which of the following best explains the difference between commodity money and fiat money?
Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
The Fed expects that controlling that one interest rate would allow it to meet its goals for inflation and unemployment because lower short-term interest rates
encourage lending and stimulate economic activity
Money serves as a unit of account when_________. Money serves as a standard of deferred payment when__________.
prices of goods and services are stated in terms of money. payments agreed to today but made in the future are in terms of money.
Which one of the following is not one of the monetary policy goals of the Fed?
Reduce income inequality
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier
decreases
in the figure to the right, the opportunity cost of holding money______when moving from Point A to Point B on the money demand curve.
decreases
Which of the following is the largest liability of a typical bank?
deposits
Suppose the reserve requirement is 5 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $ 50 50 billion?
$1,000 billion increase
Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
A student says the following: "I understand why the Fed uses expansionary policy but I don't understand why it would ever use contractionary policy. Why would the government ever want the economy to contract?" The government would want the economy to contract when real GDP is
above potential GDP and the price level is rising
Excess reserves
are reserves banks keep above the legal requirement.
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S. Treasury securities from the public.
If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to
buy U.S. Treasury securities.
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it_____U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it_______U.S. Treasury securities.
buys; sells
Which of the following is not a function of money?
commodity
The U.S. dollar can best be described as
flat money
The Fed uses policy targets of interest rate and/or money supply because
it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
low prices
What is fiat money
money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money
The formula for the simple deposit multiplier is
simple deposit multiplier = 1/RR
If the Fed believes the economy is about to fall into recession, it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right
If the required reserve ratio is 0.15, the maximum increase in checking account deposits that will result from an increase in bank reserves of $10,000 is
$66666
Suppose you deposit $800 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.10? The change in checking deposits is equal to
$8,000
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
. Decreasing the rate at which banks can borrow money from the Federal Reserve. B. Buying $500 million worth of government securities, such as Treasury bills. C. Increasing the reserve requirement from 10 percent to 12.5 percent. D. All of the above answer all of the above
Which of the following best explains how the Federal Reserve acts to help prevent banking panics?
. The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors
The United States is divided into _____Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of ______members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a_______year, renewable term as the chairman.
12; 7; 4
When the Federal Reserve increases the required reserve ratio increases the required reserve ratio as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the interest rate
What is a banking panic?
A situation in which many banks experience runs at the same time.
Which of the following is true with respect to hyperinflation?
A. In the presence of hyperinflation, firms and households avoid holding money. B. It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. C. It can be hundreds long dash —even thousands long dash —of percentage points per year. D. All of the above answer all of the above
Which of the following conditions make a good suitable for use as a medium of exchange?
A. The good should be durable, valuable relative to its weight, and divisible. B. The good must be acceptable to (that is, usable by) most buyers and sellers. C. The good should be of standardized quality, so that any two units are identical. D. All of the above conditions must be met. answer: D
If the FOMC orders the trading desk to sell Treasury securities
A. the money supply curve will shift to the left, and the equilibrium interest rate will rise
Distinguish among money, income, and wealth
A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts.
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
Changing Income tax rates
In the definition of the money supply, where do credit cards belong?
Credit cards are not included in the definition of the money supply
Which tool is the most important?
D. The Fed conducts monetary policy principally through open market operations.
Do you agree or disagree with the following statement? "I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the United States is less than half as wealthy as the government statistics indicate."
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve
Which of the following is a monetary policy target used by the Fed?
Interest rate.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged.M2 will not be affected, but M1 will increaseSuppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,
M1 will decrease by $100.
Which of the following is not a correct statement about M2?
M2 is the best definition of money as a medium of exchange.
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
Which one of the following is not a function of money? If something is to be considered as money, it has to fulfill
Open market operation. all four functions
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.
When the Federal Reserve buys bonds through open market operations comma buys bonds through open market operations,
The money supply will increase
A higher required reserve ratio _________ the value of the simple deposit multiplier
decreases
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are
included only in M2
The federal funds rate is
the interest rate that banks charge each other for overnight loans
If the price level decreases
the money demand curve shifts to the left.
If real GDP increases,
the money demand curve shifts to the right
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking acount balances.
Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account. Wells Fargo Assets= Reserves +$100,000 liabilities= Deposits $100,000 If the required reserve ratio is 0.05 0.05, or 5 5 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is
$95,000
A newspaper article contains the statement: "Income is only one way of measuring wealth." Source: Sam Roberts, "As the Data Show, There's a Reason the Wall Street Protesters Chose New York," New York Times, October 25, 2011. Do you agree that income is a way of measuring wealth?
Income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts.
The Federal Reserve cannot affect the unemployment rate the unemployment rate directly; therefore, the Fed typically uses the following as its policy target
Interest rates
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit." Source: W. Stanley Jevons, Money and the Mechanism of Exchange, New York: D. Appleton and Company, 1889, pp. 1-2. Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money ?In the late 1940s, the Communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value, and most businesses refused to accept it. At the same time, there was a paper shortage in Japan. During these years, Japan was still under military occupation by the United States. Some U.S. troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in China, ship it to Japan to be recycled into paper, and make a substantial profit. Under these circumstances, was the Chinese paper currency a commodity money or flat money?
It is a commodity money because it has value as recycled paper.
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase
Which one of the following is not one of the policy tools the Fed uses to control the money supply?
Moral suasion
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit." Source: W. Stanley Jevons, Money and the Mechanism of Exchange, New York: D. Appleton and Company, 1889, pp. 1-2. Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money
No. The goods are not a store of value.
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 definition of the money supply
c & e
Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________
expands; contracts
The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy
An article in the Wall Street Journal notes that before the financial crisis of 2007 minus −2009, the Fed "managed just one short-term interest rate and expected that to be enough to meet its goals for inflation and unemployment" Source: Jon Hilsenrath, "Easy-Money Era a Long Game for Fed," March 17, 2013 The short-term interest rate the article is referring to is the
federal funds rate
If you move $100 from your savings account to your checking account, then M1 will _______ and M2 will
increase by $100 , remain the same
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
The article also notes that after the financial crisis, "the Fed is working through a broader spectrum of interest rates." The reference to "a broader spectrum of interest rates" means that the Fed began to focus on
longer term Treasury rates and mortgage rates
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,
the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
the required reserve ratio
The simple deposit multiplier equals
the inverse, or reciprocal, of the required reserve ratio. B. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. C. the ratio of the amount of deposits created by banks to the amount of new reserves. D. All of the above. answer all of the above
When money is acting as a store of value, it allows an individual to...... Money is an imperfect standard of deferred payment because __________causes the value of money to decrease over time.
transfer dollars, and therefore purchasing power, into the future; inflation
If the Fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left
Additionally, the federal funds rate is
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has
$50 in required reserves
There are ________ members of the Board of Governors, who the President of the United States appoints to ________. One of the Board members is appointed Chairman for ________.
7; 14-year nonrenewable terms; a 4-year renewable term
By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
fewer; decrease
