chp13

The Role of Flexible Prices

if wages and prices are "sticky" in the short run, they are still flexible over time Over the long run, the surge in aggregate demand ends up as an increase in the price level, not as a rise in output

Which of the following is the most inclusive and accurate list of what is included in the M2 money supply?

savings deposits, money market funds, time deposits, and M1

How much money is created by a bank with $20 million in assets if it lends out half of its assets with a required reserve ratio of 10%.

$100,000,000

The monetary multiplier is defined as

1/R, where R is the required reserve ratio.

What is the amount that a bank can lend out if the required reserve ratio is 15%

85% of its deposits

What are the components of the M1 money supply

Currency in circulation, checkable deposits, and travelers checks

if $2,000 is withdrawn from the bank by a customer, the bank's

Assets and liabilities decrease

Briefly explain the role played by banks between savers and borrowers and the economic benefit, if any, derived from their taking on this role.

Banks are financial intermediaries that operate between a saver who deposits money in a bank and a borrower who receives a loan from that bank. As intermediaries, banks make it far easier for a complex economy to carry out the extraordinary range of transactions that occur in goods, labor, and financial capital markets.

Identify and briefly explain the circumstances that could lead to a bank developing a negative net worth, and the various methods that banks may employ to protect themselves from this type of outcome.

Banks run a risk of negative net worth if the value of their assets declines. The value of assets can decline because of an unexpectedly high number of defaults on loans, or if interest rates rise and the bank suffers an asset-liability time mismatch in which the bank is receiving a low rate of interest on its long-term loans but must pay the currently higher market rate of interest to attract depositors. Banks can protect themselves against these risks by choosing to diversify their loans or to hold a greater proportion of their assets in bonds and reserve

When $100 is deposited in the banking system, it leads to maximum expansion in bank deposits of $1,000. What is the required reserve ratio assuming that the excess reserves are 0

Correct; (100/1000) x100=10%

Which of the following is not considered a characteristic of money

It must have intrinsic value

When you purchase a T-shirt for $25, money is serving which function

Medium of exchange

When you take a vacation and keep cash with you in case you might need it, money is serving as a

Store of value

An increase in the reserve requirement causes the size of the monetary multiplier to

decrease, the amount of excess reserves in the banking system to decrease, and the money supply to decrease.

"Potential GDP

is the level of output that an economy can achieve when all resources (land, labor, capital, and entrepreneurial ability) are fully employed

Physical capital per person

the amount and kind of machinery and equipment available to help a person produce a good or service.

Neoclassical perspective

the philosophy that, in the long run, the business cycle will fluctuate around the potential, or full-employment, level of output. vertical line on LRAS

Rational expectation

the theory that people form the most accurate possible expectations about the future that they can, using all information available to them

Adaptive expectations

the theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change.

List the three specific functions of money that economists have identified.

used as a medium of exchange used as a unit of account money as a store of value deferred payment