ch 16 Alexi Econ

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What are the largest asset and the largest liability of a typical​ bank?

Loans are the largest asset and deposits are the largest liability of a typical bank.

Which one of the following is not the formula for the quantity theory of​ money?

M x V = P x Y

he Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because

M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply.

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.

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 What is the effect on M1 Ignore any actions the bank may take as a result of your having withdrawn the​ $100.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

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.

The M2 definition of the money supply includes

M1, savings​ accounts, small time​ deposits, and money markets.

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.

Why would deposit insurance provide the banking system with protection against​ runs?

Since most depositors are​ insured, it is less likely that panicked buyers will simultaneously withdraw funds.

Which tool is the most​ important?

The Fed conducts monetary policy principally through open market operations.

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.

Money serves as a standard of deferred payment when

payments agreed to today but made in the future are in terms of money.

Money serves as a unit of account when

prices of goods and services are stated in terms of money.

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

When the Federal Reserve purchases Treasury securities in the open​ market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

Suppose that velocity is 3 and the money supply is​ $600 million. According to the quantity theory of​ money, nominal output equals

$1.8 billion.

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.

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 ​$15,000 is $100,000.

100,000

If the money supply is growing at a rate of 6 percent per​ year, real GDP​ (real output) is growing at a rate of 1 percent per​ year, and velocity is​ constant, what will the inflation rate​ be?

5%

If the money supply is growing at a rate of 6 percent per​ year, real GDP​ (real output) is growing at a rate of 1 percent per​ year, and velocity is growing at 2 percent per year instead of remaining​ constant, what will the inflation rate​ be?

7%

In a fractional reserve banking system what is the difference between a​ "bank run" and a​ "bank panic?"

A bank run involves one​ bank; a bank panic involves many banks.

What is price​ deflation?

A fall in the price level.

Commodity money

A good used as money that also has value independent of its use as money.

he M1 measure of the money supply includes which of the following​ components?

ALL checking account deposits in banks currency in circulation holdings of​ traveler's checks

The use of money

ALL reduces the transaction costs of exchange. allows for greater specialization. eliminates the double coincidence of wants.

Which of the following conditions make a good suitable for use as a medium of​ exchange?

ALL the good should be​ durable, valuable relative to its​ weight, and divisible. The good should be of standardized​ quality, so that any two units are identical. The good must be acceptable to​ (that is, usable​ by) most buyers and sellers.

Which of the following is a monetary policy LOADING... tool used by the Federal Reserve​ Bank?

ALL Buying​ $500 million worth of government​ securities, such as Treasury bills. Decreasing the rate at which banks can borrow money from the Federal Reserve. Increasing the reserve requirement from 10 percent to 12.5 percent.

To determine if these values are consistent with the quantity​ equation, additional information would be needed about

ALL \ the level of real GDP. the size of the money supply. the price level and velocity of money.

the simple deposit multiplier equals

ALL the ratio of the amount of deposits created by banks to the amount of new reserves. the​ inverse, or​ reciprocal, of the required reserve ratio. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves.

What is meant by Professor​ Spencer's statement​ "This printing of money​ 'will keep the​ [deflation] wolf from the​ door'"?

An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.

What does the article mean by Chinese businesses being starved for​ credit?

Being starved for credit means Chinese businesses cannot get loans.

Why would deflation cause​ "shoppers to hold​ back," and what does​ Evans-Pritchard mean when he​ says, "Once this psychology gains a​ grip, it can gradually set off a​ self-feeding spiral that is hard to​ stop"?

Consumers delay​ purchases, expecting prices to fall​ more, and the lack of demand causes prices to fall further.

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 of the following is not a Federal Reserve​ district?

Denver

Briefly explain whether you agree or disagree with the following​ statement: ​"Assets are things of value that people own. Liabilities are debts.​ Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a​ liability."

Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.

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.

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.

What is the​ "shadow banking​ system"?

Financial firms that raise money from investors and provide it to borrowers.

Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling. All of the following are correct ​except:

Firms lose since they​ don't have the convenience of credit cards

If Irving Fisher was correct in his prediction about the value of​ velocity, then the quantity equation can be written to solve for the inflation rate as​ follows:

Inflation rate​ = Growth rate of the money supply - Growth rate of real output.

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 a fiat money

It is a commodity money because it has value as recycled paper.

How would such a large quantity of Confederate dollars have affected the value of the Confederate​ currency?

It would have generated high inflation and therefore decreased the value of the Confederate currency.

what is a​ "classic type of​ run"?

Many depositors simultaneously decide to withdraw their money from a bank.

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

Money market deposit accounts in banks

why might investors in a money market mutual​ fund, for​ example, be more likely to​ "rush to the​ exits" if they heard bad news about the​ fund's investments, than would bank depositors if they received bad news about their​ bank's investments?

Money market mutual funds are not protected by deposit​ insurance, as commercial​ banks' deposits are through the Federal Deposit Insurance Corporation​ (FDIC).

What did Geithner mean by the​ "non-bank financial​ system"?

Money market mutual​ funds, hedge​ funds, and other financial firms that raise money from investors and provide it to firms and households.

Fiat money

Money, such as paper​ currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money

Which one of the following is not one of the policy tools the Fed uses to control the money​ supply?

Moral suasion.

If online lenders find that borrowers are defaulting on loans at higher than expected​ rates, can they offset the problem by charging higher interest rates on the​ loans? Briefly explain.

No, because only the most​ high-risk borrowers will accept​ loans, meaning the borrower is more likely to default.

In November 2016 the Indian government decided to withdraw paper currency that made up more than 86 percent of the value of all rupee bills in circulation. An article in the Wall Street Journal published shortly after that decision described a small merchant in India as having​ "traded one customer a kilogram of​ potatoes, cauliflower and tomatoes for half a liter of honey. That was a good​ deal, he says. In normal​ times, the honey would be 120 rupees in the market​ (around $1.80) and the vegetables 70​ rupees." Does the​ merchant's ability to arrange a barter deal with a customer indicate that the Indian economy​ doesn't actually require money to function​ efficiently? Briefly explain.

No, resorting to barter means that each trade required a double coincidence of wants for trade to occur.

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." Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money

No. The goods are not a store of value.

Why would online lenders skip this step in the loan application​ process?

Online lenders skip this step because gathering and reviewing information on borrowers is costly.

Which one of the following is not a function of​ money?

Open market operation. choices Unit of account. Store of value. Medium of exchange. Open market operation.

The U.S. penny is made primarily of zinc. There have been several times in recent years when zinc prices have been high and it has cost the U.S. Treasury more than one cent to manufacture a penny. There are currently about 1.4 billion pennies in circulation. Economist​ François Velde of the Federal Reserve Bank of Chicago has proposed making the current penny worth 5 cents.

The effect of this proposal would cause an increase in the value of M1. Is this change likely to have much impact on the​ economy? NO

According to the quantity theory of money , inflation results from which of the​ following?

The money supply grows faster than real GDP.

How does the quantity theory provide an explanation about the cause of ​ inflation?

The quantity equation shows that if the money supply grows at a faster rate than real​ GDP, then there will be inflation.

Why​ don't more people use their savings to make loans rather than keeping the funds in bank accounts that earn very low rates of​ interest?

There is a risk that the borrower​ won't pay the money back.

What is commercial​ lending?

This is when banks make loans to businesses.

Which of the following is the largest liability of a typical​ bank?

deposits

Velocity is defined as

V = (P xY)/ M

When Congressman Brady stated that Woodrow Wilson used​ "federalism" to convince Congress to pass the Federal Reserve​ Act, he meant that

Wilson created a Federal Reserve System composed of 12 district banks under the supervision of a board in Washington.

Does the government create money by printing​ currency?

Yes, but banks create the majority of the money supply by making loans.

An article in the Wall Street Journal in 2017 about Venezuela notes​ that: "The economy has shrunk by an estimated​ 27% since 2013. The International Monetary Fund says inflation this year will hit​ 720%." Are these facts​ related? Briefly explain.

Yes, high inflation diminishes the ability of the Venezuelan currency to function as​ money, leading to lower output growth.

Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for​ credit? Briefly explain.

Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.

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 pro to a business of ditching cash is

a reduced risk of robbery

if something is to be considered as money, it has to fulfill

all 4 functions

In the securitization​ process,

banks grant loans to households and bundle the loans into securities that are then sold to investors.

Technological changes that make it possible for businesses to ditch cash include all of the following except

barter

the article qualifies the observation as applying to the developed world. Using bitcoins may be more attractive to individuals and firms in developing​ countries, such as Brazil or​ India, than to individuals and firms in the United States be

bitcoins would help conceal the high levels of corruption and illegal activity that take place in developing countries.

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.

A central bank can​ "create money" by buying bonds because

by increasing the​ banks' reserves, banks can make loans which increase checking account​ balances, and these are part of the money supply.

Congress passed legislation to create the Federal Reserve System in 1913 in order to

end the instability created by bank panics by acting as a lender of last resort.

A con to a business of ditching cash is

cash is the only medium of exchanged used by some.

The most important role of the Federal Reserve in​ today's U.S. economy is

controlling the money supply to pursue economic objectives.

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

A higher required reserve ratio​ _________ the value of the simple deposit multiplier.

decreases

An increase in the amount of excess reserves that banks keep​ _________ the value of the​ real-world deposit multiplier.

decreases

Which of the following is not a factor that helped lead to the financial crisis of 2007-2009?

deposit insurance for commercial banks

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

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.

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

Startups and small businesses might be more likely than large corporations to rely on banks for funding because

large corporations have more ways to obtain funding than do startups and small businesses.

Very high rates of inflation are called

hyperinflation

​________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.

hyperinflation

there is a strong link between changes in the money supply and inflation

in the long run

Savings account​ balances, small-denomination time​ deposits, and noninstitutional money market fund shares are

included only in M2

A newspaper article contains the​ statement: ​"Income is only one way of measuring​ wealth." 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.

When sellers are willing to accept money in exchange for goods and​ services, money is acting as a

medium of exchange

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

Based on a Survey of Consumer Payment​ Choice, researchers from the Federal Reserve Bank of Boston estimated that the average​ consumer, 18 years of age and​ older, held about​ $202 in currency.​ However, there is actually about​ $4,500 of currency in circulation for every person in the United States. The amount of U.S. currency in circulation is much higher than the amount held by the U.S. population because

more than half of the currency is held outside the borders of the United States.

The financial firms of the shadow banking system were

more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.

According to the quantity theory of​ money, if velocity does not​ change, when the money supply of a country​ increases, what will​ occur?

nominal GDP will increase

During the years from 2010 to​ 2016, the average annual growth rate of M1 was 10.3​ percent, while the inflation rate as measured by the GDP deflator averaged 1.6 percent. These values are

not included in the quantity equation.

Which one of the following is not a reason why businesses accept paper currency knowing​ that, unlike a gold​ coin, the paper the currency is printed on is worth very​ little? Paper currency is a good medium of exchange because it is

not valuable

Why do banks require borrowers to submit pay stubs and tax returns when applying for a​ loan?

pay stubs and tax returns allow lenders to gauge a​ borrower's ability to pay back the loan.

A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball​ card, but everyone the fan knows who has a Stanton card​ doesn't want a Trout card. Economists characterize this problem as a failure of the

principle of a double coincidence of wants.

The process of​ ________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets.

securitization

The formula for the simple deposit multiplier is

simple deposit multiplier = 1/RR

The Federal Reserve is divided into two​ bodies:

the Board of Governors and 12 regional districts.

because of this

the M1 monetary aggregate is a poor measure of the U.S. money supply.

he source line for the Apply the Concept includes an article entitled​ "Why Your Business Should Ditch​ Cash." ​ A business that​ "ditches cash" means

the business no longer accepts currency as payment.

When the Federal Reserve sells Treasury securities in the open​ market,

the buyers of these securities pay for them with checks and bank reserves fall.

A double coincidence of wants refers to

the fact that for a barter trade to take place between two​ people, each person must want what the other one has.

M1

the narrowest definition of the money​ supply: The sum of currency in​ circulation, checking account deposits in​ banks, and holdings of​ traveler's checks.

The central bank of a country controls the money​ supply, which equals the currency held by

the public plus their checking acount balances.

An article in the Wall Street Journal discussing the relatively slow adoption of bitcoin by individuals and businesses notes​ that: "The vast majority of​ consumers, certainly in the developed​ world, simply​ don't care about the benefits of decentralization and​ anonymity." All of the following may help explain the slow adoption of bitcoin except

the vast majority of consumers may not care that bitcoins provide no record of their transactions.

The quantity theory of money is better able

to explain the inflation rate in the long run.

During the German hyperinflation of the​ 1920s, many households and firms in Germany were hurt​ economically; however, people with debt actually benefited some from the hyperinflation.

true

If some of the Roman coins had been taken to​ Germania, then the coins could have been a medium of exchange in Germania if people began to consider it safe and would have accepted it for payments. If coins could have been easily used to purchase goods and services in other​ areas, the coins would also have some intrinsic value.

true

We can say that loans are funded by deposits because deposits give banks financial​ capital, which can be loaned out so banks can make a profit.

true

Governments sometimes allow hyperinflation to occur because

when governments want to spend more than they collect in​ taxes, central banks increase the money supply at a rate higher than GDP​ growth, often resulting in hyperinflation.

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


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