Chapter 16: Macroeconomics

Given the following information, what are the values of M1 and M2? Small time deposits $2,200B Demand deposits and other checkable deposits $1,700 billion Savings deposits $2,600 billion Money market mutual funds $1,500 billion Traveler's checks $60 billion Large time deposits $1,500B Currency $350 billion Miscellaneous categories in M2 $75 billion A. M1 = $2,110 billion, M2 = $8,485 billion. B. M1 = $2,050 billion, M2 = $9,985 billion. C. M1 = $4,310 billion, M2 = $6,285 billion. D. M1 = $3,610 billion, M2 = $9,985 billion.

A. M1= $2100 billion, M2=$8485 billion

Savings deposits are included in A. M1 and M2. B. M2 but not M1. C. neither M1 nor M2. D. M1 but not M2.

B. M2 but not M1

The Fed increases reserves if it conducts open market A. sales or auctions term credit B. purchases or auctions term credit. C. purchases but not if it auctions term credit D. term-8sales but not if it auctions term credit

B. Purchases or auctions term credit

Money is A. not the most liquid asset but a perfect store of value. B. the most liquid asset but an imperfect store of value. C. neither the most liquid asset and nor a perfect store of value. D. the most liquid asset and a perfect store of value.

B. The most liquid asset but an imperfect store of value

The discount rate is A. the percentage of deposits banks hold as excess reserves. B. the rate at which the Fed lends to banks. C. the percentage difference between the face value of a Treasury bond and what the Fed pays for it. D. the rate at which public banks lend to other public banks.

B. The rate at which the Fed lends to banks

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank. Suppose the Bank of Tazi loaned the banks of Tazi 10 million tazes. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply change? A. 125 million tazes B. 250 million tazes C. 200 million tazes D. None of the above is correct.

C. 200 million tazes

When the Fed decreases the discount rate, banks will A. borrow less from the Fed and lend less to the public. The money supply decreases. B. borrow more from the Fed and lend less to the public. The money supply decreases. C. borrow more from the Fed and lend more to the public. The money supply increases. D. borrow less from the Fed and lend more to the public. The money supply increases.

C. Borrow more from the Fed and lend more to the public. The money supply increases.

A bank's assets equal its liabilities under A. fractional-reserve banking but not under 100-percent-reserve banking. B. neither 100-percent-reserve banking nor fractional-reserve banking. C. both 100-percent-reserve banking and fractional-reserve banking. D. 100-percent-reserve banking but not under fractional-reserve banking.

C. Both 100-percent-reserve banking and fractional-reserve banking

The primary difference between commodity money and fiat money is that A. fiat money is a medium of exchange but commodity money is not. B. fiat money has intrinsic value but commodity money does not. C. commodity money has intrinsic value but fiat money does not. D. commodity money is a medium of exchange but fiat money is not.

C. Commodity money has intrinsic value but fiat money does not

Which of the following is included in both M1 and M2? A. demand deposits B. currency C. other checkable deposits D. All of the above are correct.

D. All of the above

The money supply decreases if A. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively fewer excess reserves and make more loans. B. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively more excess reserves and make fewer loans. C. households decide to hold relatively less currency and relatively more deposits and banks decide to hold relatively less excess reserves and make more loans. D. households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans.

D. Households decide to hold relatively more currency and relatively fewer deposits and banks decide to hold relatively more excess reserves and make fewer loans

The First Bank of Fairfield Assets: 1. Reserves $1000 2. Loans $7000 Liabilities: 1. Deposits $8000 If $800 is deposited into the First Bank of Fairfield, and the bank takes no other actions, its A. reserves will increase by $100. B. loans will increase by $800. C. assets will decrease by $800. D. liabilities will increase by $800.

D. Liabilities will increase by $800

Economists use the term "money" to refer to A. all financial assets, but not real assets. B. all wealth. C. all assets, including real assets and financial assets. D. those types of wealth that are regularly accepted by sellers in exchange for goods and services.

D. Those types of wealth are regularly accepted by sellers in exchange for goods and services

T/F: Gary's wealth is $1 million. Economists would say that Gary has $1 million worth of money.

FALSE

T/F: The LESS banks borrow, the more reserves they have for funding new loans and increasing the money supply

FALSE

T/F: The money supply of Granov is $10,000 in a 100-percent-reserve banking system. If the Central Bank of Granov decreases the reserve requirement ratio to 10 percent, the money supply could increase by no more than $9,000.

FALSE

T/F: U.S. dollars are an example of commodity money and hides used to make trades are an example of fiat money.

FALSE

How the Fed influences reserves now

Term Auction Facility

Term Auction Facility

The Fed chooses the quantity of reserves it will loan, then banks bid against each other for these loans

Board of Governors

7 members, located in Washington D.C.

Capital Requirement

A government regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts

T-Account

A simplified accounting statement that shows a bank's assets and liabilities

When colonists in Virginia used tobacco as money, their money A. was commodity money. B. had no intrinsic value. C. had no store of value. D. was fiat money.

A. Was commodity money

Money Multiplier

Amount of money the banking system generates with each dollar of reserves

Central Bank

An institution that oversees the banking system and regulates the money supply

Medium of Exchange

An item buyers give to sellers when they want to purchase goods and services, divisible

Store of Value

An item people can use to transfer purchasing power from the present to the future, durable

When a bank loans out $1,000, the money supply A. decreases. B. increases. C. does not change. D. may do any of the above.

B. Increases

If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve A. sells government bonds from its portfolio to the public. B. sells various types of stocks and bonds from its portfolio to the public. C. creates dollars and uses them to purchase government bonds from the public. D. creates dollars and uses them to purchase various types of stocks and bonds from the public.

C. Creates dollars and uses them to purchase government bonds from the public

What is included in liabilities (owe)

Deposits, Debt, Equity (capital)

Federal Open Market Committee

Includes Board of Governors, decides monetary policy

Formula for Money

M= C+D C= Currency D= Demand Deposits

Required reserve ratio

Minimum percent of deposits that banks must keep as reserves

Fiat money

Money without intrinsic value, used as money because of government decree

Money Supply

Quantity of money available in the economy

Bank Capital

Resources a bank obtains by issuing equity to its owners

T/F: A fractional reserve banking system creates money, but not wealth

TRUE

Federal Reserve (the Fed)

The central bank of the U.S.

Discount rate

The interest rate on loans the Fed makes to banks

What does the Fed system consist of? (3)

1. Board of Governors 2. 12 Regional Fed banks 3. Federal Open Market Committee (FOMC)

How can the Fed change the money supply (2)

1. Changing the bank reserves 2. Changing the money multiplier

2 Types of Money:

1. Commodity money 2. Fiat money

M1 (4)

1. Currency 2. Demand deposits 3. Traveler's checks 4. Other checkable deposits

M2 (4)

1. M1 2. Saving deposits 3. Small time deposits 4. Money market mutual funds

3 Functions of Money

1. Medium of Exchange 2. Unit of Account 3. Store of Value

Fed's main tools of monetary control (3)

1. Open Market Operations 2. Discount rate 3 Reserve Requirement ratio

What would happen without money?

1. Trade would require barter 2. Every transaction would require a double coincidence of wants

Money Multiplier formula

1/R

Change of money supply formula

=change in bank reserves X money multiplier

When prisoners use cigarettes or some other good as money, cigarettes become A. commodity money and function as a unit of account. B. fiat money, but do not function as a unit of account. C. fiat money and function as a unit of account. D. commodity money, but do not function as a unit of account.

A. Commodity money and functions as a unit of account

A bank has a 20 percent reserve requirement, $8,000 in loans, and has loaned out all it can given the reserve requirement. A. It has $10,000 in deposits. B. It has $9,600 in deposits. C. It has $6,400 in deposits. D. It has $1,600 in deposits.

A. It has $10,000 in deposits

How the Fed traditionally influences reserves

Adjusting the discount rate

Bank Capital formula

Assets- Liabilities

An economy starts with $50,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $45,750. The T-account of the bank is shown below. Assets: 1. Reserves $4250 2. Loans $45750 Liabilities: 1. Deposits $50,000 If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by A. $287.25. B. $1,764.71. C. $2,000 or more. D. $1,614.71.

B. $1,764.71

If the reserve ratio is 5 percent, then $500 of additional reserves can create up to A. $10,500 of new money. B. $10,000 of new money. C. $9,500 of new money. D. $2,500 of new money.

B. $10,000 of new money

Which of the following might explain why the United States has so much currency per person? A. U.S. citizens are holding a lot of foreign currency. B. Currency may be a preferable store of wealth for criminals. C. People use credit and debit cards more frequently. D. All of the above help explain the abundance of currency.

B. Currency may be a preferable store of wealth for criminals

Derek decides to forego a major appliance purchase and save the money. He transfers $2,100 from his checking account to his money market mutual fund. As a result of this transfer, A. M1 increases by $2,100 and M2 increases by $2,100. B. M1 decreases by $2,100 and M2 stays the same. C. M1 decreases by $2,100 and M2 increases by $2,100. D. both M1 and M2 decrease by $2,100.

B. M1 decreases by $2100 and M2 stays the same

Assets: 1. Reserves $1200 2. Loans $8000 3. Short term securities $800 Liabilities: 1. Deposits $9000 2. Debt $800 3. Capital $200 The required reserve ratio is 12 percent. Which of the following is true? A. This banks reserve ratio is 12 percent. Its excess reserves are $0. B. This banks reserve ratio is 13.3 percent. Its excess reserves are $120. C. This banks reserve ratio is 10 percent. Its excess reserves are $300. D. This banks reserve ratio is 15 percent. Its excess reserves are $240.

B. This banks reserve ratio is 13.3 percent. Its excess reserves are $120

Demand Deposits

Balances in bank accounts that depositors can access on demand by writing a check

What happens if the Fed sells government bonds to banks?

Bank reserves decrease and so does the money supply

Fractional Reserve Banking System

Banks keep a fraction of deposits as reserves and use the rest to make loans

Bank of Springfield Assets: 1. Reserves $19800 2. Loans $160200 Liabilities: 1. Deposits $180,000 If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement? A. 8.1 percent B. 89.0 percent C. 11.0 percent D. 12.4 percent

C. 11%

Which of the following defer payments? A. neither credit cards nor debit cards B. debit cards but not credit cards C. credit cards but not debit cards D. credit cards and debit cards

C. Credit cards but not debit cards

All U.S. paper dollars read "This note is legal tender for all debts, public and private." This statement represents which characteristic of US currency? A. U.S. paper money is commodity money. B. The U.S. operates under the gold standard. C. U.S. paper money is fiat money. D. U.S. paper money is a convenient store of wealth.

C. U.S. paper money is fiat money

If the reserve requirement is 5 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $10, then this bank A. will initially see its total reserves increase by $10.50. B. must increase its required reserves by $10. C. will be able to make new loans up to a maximum of $9.50. D. All of the above are correct.

C. Will be able to make new loans up to a maximum of $9.50

Fiscal Policies

Carried out by the government and adjusted taxes and government spending

The existence of money A. reduces specialization. B. allows for barter. C. hinders production. D. makes trade easier.

D. Makes trade easier

Today, bank runs are A. common because the FDIC is nearly bankrupt. B. uncommon because of the high reserve requirement. C. common because of the low reserve requirement. D. uncommon because of FDIC deposit insurance.

D. Uncommon because of the FDIC deposit insurance

What is achieved by fiscal policies?

Economic growth

Barter

Exchange of one good or service for other goods and services

T/F: An increase in the reserve requirement increases reserves and decreases the money supply.

FALSE

Reserve ratio (R)

Fraction of deposits that banks hold as reserves, total reserves as a percentage of total deposits

Examples of Commodity money

Gold coins, cigarettes

Money

Group of safe assets that households and businesses can use to make payments or to hold as short-term investments

What happens to reserves when the Fed makes loans to banks

It increases

What happens if the Fed buys a government bond from a bank

It pays by depositing a new reserves in that bank's reserve account

What is included in assets (own)

Loans, reserves, securities

12 Regional Fed banks

Located around the U.S.

What is achieved by monetary policy?

Price stability and economic growth

Open-Market Operations

Purchase and sale of US government bonds by the Fed

Leverage Ratio

Ratio of assets to bank capital, total assets/bank capital

Reserve Requirements

Regulations on the minimum amount of reserves that banks must hold against deposits, controlled by the Fed

T/F: Demand deposits are balances in bank accounts that depositors can access by writing a check or using a debit card.

TRUE

T/F: The Federal Reserve primarily uses open-market operations to change the money supply.

TRUE

T/F: With more reserves, the bank can make more loans increasing the money supply

TRUE

Commodity money

Takes the form of a commodity with intrinsic value

Currency

The paper bills and coins in the hands of the public

Monetary Policy

The setting of the money supply by policymakers in the central bank, carried out by central bank

Unit of Account

The yardstick people use to post prices and record debts, portable

Reserve ratio formula

Total reserves/ total deposits X 100

Examples of fiat money

U.S. dollar

Double coincidence of wants

Unlikely occurrence that two people each have a good the other wants-- waste of resources

Leverage

Use of borrowed funds to supplement existing funds for investment purposes