EC112 Final, Chapter 11

A medium of exchange that is valuable because a government says that it has value is known as _______________.

fiat money

Institutions that accept funds and provide loans are known as _________________________.

financial intermediaries

When banks are only required to hold a fraction of their deposits on reserve they are part of _________________________.

fractional reserve system

A _______________ is a type of pooled fund that often engages in highly speculative investments and is generally restricted to wealthy clients

hedge fund

The portion of bank reserves that a bank must keep on reserve are known as _______________________.

required reserves

An agent responsible for finding a buyer for sellers of different securities is known as a ____________________.

securities broker

Which of these is (was) NOT a financial intermediary? a. The New York Stock Exchange b. Bank of America c. MetLife Insurance Company d. Washington Mutual Savings and Loan e. All of these are (were) financial intermediaries

A. All of these are (were) financial intermediaries

Which of the following is the most liquid? a. A $20 bill in your pocket b. A gold necklace c. Three shares of Microsoft stock d. A certificate of deposit (CD) in your bank. e. A new Toyota Prius automobile

A. a $20 bill in your pocket

Speculative bubbles ... a. generally form for psychological and economic reasons. b. are an important source of economic growth. c. generally occur due to a general lack of liquidity. d. are generally associated with tight credit conditions. e. None of these statements is true

A. generally form for psychological and economic reasons.

Which of the following is NOT a function of money? a. A hedge against inflation. b. A unit of account. c. A store of value. d. A medium of exchange. e. All of these are functions of money.

A.a hedge against inflation

Which of these would be an INCORRECT use a balance sheet for a private bank? a. A "government bonds" entry listed as an asset. b. A "deposits" entry listed as a liability. c. A "loans" entry listed as an asset. d. Both (b) and (c) are incorrect. e. All three of (a), (b), AND (c) are correct entries.

B. A "deposits" entry listed as a liability

Suppose Tabatha takes $500 from her savings account and deposits it in her checking account. What is the change in M1 and M2? a. M1 increases and M2 decreases b. M1 increases and M2 remains unchanged c. M1 and M2 both increase d. M2 increases and M1 remains unchanged e. M1 and M2 both remain unchanged

B. M1 increases and M2 remains unchanged

A hedge fund is an example of ... a. a financial intermediary b. a nonbank financial institution c. an investment bank d. a pension fund e. None of these.

B. a nonbank financial institution

Explain the difference between required reserves and excess reserves

Banks generate much of their profit from the use of other peoples' money. Checking account deposits entrusted to banks are also known as "demand deposits" because the depositors have access to their money whenever they want. Consequently banks are obligated to hold a minimal portion of these deposits in liquid reserves. This portion is a percentage (set by the Federal Reserve in the U.S.) of total deposits and is known as required reserves. All of the reserves a bank has beyond this category of required reserves are referred to as excess reserves.

Which of these sequences best captures the liquidity continuum? a. Checking accounts, precious metal, real estate, share of stock b. Checking accounts, precious metal, share of stock, real estate c. Checking accounts, share of stock, precious metal, real estate d. Checking accounts, share of stock, real estate, precious metal e. Precious metal, checking accounts, share of stock, real estate

C. Checking accounts, share of stock, precious metal, real estate

Which of these is NOT an example of leverage? a. An investment bank increases its liabilities to speculate on derivatives. b. A local entrepreneur borrows heavily to finance the cost of starting a new business. c. General Motors issues new stock to raise funds for a new factory. d. Microsoft issues commercial bonds to finance production of a new product. e. All of these are examples of leverage

C. General Motors issues new stock to raise funds for a new factory.

"Fiat money" refers to ... a. Older U.S. coins that contain a high (90%) silver content. b. A creative alternative to modern money (such as cigarettes in a prisoner of war camp.) c. Money that is valuable because a government says it has value. d. Paper money backed by gold or other precious metals. e. None of these is fiat money.

C. Money that is valuable because a government says it has value.

Hyperinflation ... a. is often defined as any annual inflation rate higher than 10 percent. b. describes the German economy after World War II. c. can be become so severe that people resort to barter. d. means that people tend to save money much more aggressively. e. none of these statements is accurate.

C. can be become so severe that people resort to barter.

Which of the following is not a reason why an unexpected episode of inflation is harmful to an economy? a. It wipes out the value of people's savings. b. It hurts people on fixed incomes, such as retired people who receive non-indexed pensions. c. It redistributes wealth from debtors to creditors. d. It creates menu costs. e. It creates uncertainty, which makes financial planning for the future more difficult.

C. it redistributes wealth from debtors to creditors.

Explain the difference between a commercial bank and an investment bank

Commercial banks provide retail services to individuals and businesses. These are the institutions that we typically associate with checking accounts and lending. Investment banks are institutions that focus on underwriting and issuing securities. They do not provide traditional banking functions.

Which of the following is not one of the characteristics necessary for commodity money to be used as money? a. It must be durable. b. It must be portable. c. It must be generally acceptable. d. It must be differentiated. e. It must be scarce.

D. It must be differentiated.

Which of the following is not included as "money" in M1? a. Currency in circulation b. Checkable deposits c. Traveler's checks d. The use of a credit card e. The use of debit cards that take funds from a checking account

D. The use of a credit card

The Glass-Steagall Act ... a. was passed in 2009 to prevent future financial crises. b. was strengthened in 1999 to increase financial regulation. c. was passed in the late 1980s in response to the Savings & Loan crisis. d. was passed in the 1930s to increase financial regulation. e. None of these is correct.

D. was passed in the 1930s to increase financial regulation

Why is deflation harmful to an economy?

Deflation is a problem because: it redistributes wealth from debtors to creditors, it creates menu costs; it creates uncertainty, making financial planning for the future more difficult; and it can lead to cutbacks in borrowing and spending, which can slow down the economy

Which of the following is NOT a component of the M2 definition of the money supply? a. Certificates of deposit b. Checking account deposits c. Retail money market funds d. Travelers checks e. All of these are components of the M2 definition of the money supply.

E. All of these are components of the M2 definition of the money supply

Which of these is NOT an example of a bank type described in the textbook? a. Goldman Sachs investment bank b. Washington Mutual Savings and Loan c. Service Federal Credit Union d. The Federal Reserve e. All of these are examples of bank types described in the textbook.

E. All of these are examples of bank types described in the textbook.

. Nonbank institutions ... a. have been growing in importance in our financial system. b. often provide much more attractive alternatives to traditional savings accounts. c. are typically subject to less government regulation than traditional banks. d. include pension funds and insurance companies. e. All of these statements are accurate

E. All of these statements are accurate

According to the textbook, why is deflation harmful to an economy? a. It redistributes wealth from debtors to creditors. b. It creates menu costs. c. It creates uncertainty, which makes financial planning for the future more difficult. d. It can lead to cutbacks in borrowing and spending, which can slow down the economy. e. All of the above

E. all of the above

Which of the following is NOT a type of money described in the textbook? a. Fishhooks as money. b. Fiat money. c. Commodity money. d. Silver coins as money. e. All of these are types described in the text.

E. all of these are types described in the text

Nelson takes a $100 bill he had in his wallet and deposits it into his checking account. Thus, M1 increases by $100.

False, M1 remains unchanged. There has just been a change in the composition of M1, but the size of M1 remains the same

Why is inflation harmful to an economy?

Inflation is harmful because: it wipes out the value of people's savings; it hurts people on fixed incomes; it redistributes wealth from creditors to debtors; it creates menu costs; and it creates uncertainty, making financial planning for the future more difficult

The measure of the money supply that includes currency in circulation, traveler's checks, and checking accounts is called __________________.

M1

Identify the components of M1 and M2

M1 consists of currency in circulation, traveler's checks, and checkable deposits. M2 consists of all of M1, plus savings accounts, and other funds such as small certificates of deposit and retail money market funds

The __________ definition of the money supply is broad enough to include savings deposits as well as checkable deposits and currency

M2

What was the Glass-Steagall Act? Why was it originally passed? Why have some economists argued that elements of the Act should be restored?

The Glass-Steagall Act was a 1933 legislative attempt to provide greater stability for the banking system through increased government regulation. It contained a number of provisions including the separation of commercial banking from investment banking. Some economists have argued that a "firewall" such as the one provided by Glass-Steagall should be restored between institutions that are federally insured (by the FDIC) and investment banks because of differences in risk-taking across the two types of banks.

What are the three roles of money? And what are two types of money?

The three roles of money are: medium of exchange, store of value, and unit of account. Two types of money are commodity money and fiat money. Commodity money is a good that is used as money that is also valuable in itself. Fiat money is a medium of exchange used as money because the government declares it as such and people accept it

Coins and paper money have in some periods been commodity money and in other periods fiat money.

True

When a government finances its expenditures by printing money rather than collecting taxes, this can lead to "too much money chasing too few goods" and hyperinflation.

True

Vault cash and deposits at the Federal Reserve both count towards _____________, a term that describes funds not lent out or invested by a private bank.

bank reserves

One alternative to saving money in a bank is to use a ______________________ , which is a category of pooled funds

collective investment vehicle

When something contains intrinsic value and also serves as a medium of exchange it is known as ____________________.

commodity money

When the aggregate price level falls economists use the term ____________ to describe the situation

deflation

The portion of bank reserves that banks are permitted to lend or invest are known as ______________________.

excess reserves

The use of debt to increase the potential rate of return on one's own investment is called __________________.

leverage

The fact that money can be immediately used in exchange, whereas valuable jewelry cannot, illustrates the fact that money is very __________________.

liquid