ECON 2030 Exam 2
A new financial innovation results in people switching their funds from checking deposits to savings accounts. The quantity of M1 ________ and the quantity of M2 ________.
decreases, does not change
What is a firm that takes deposits from households and firms and makes loans to other households and firms?
depository institution
The largest component of M2 is:
deposits
What are examples of financial innovations that have decreased the demand for money?
ATM machines, credit cards, automatic transfers between deposits
The current chairman of the Federal Reserve System is:
Ben Bernanke
What is included in the measure of M2?
M1, savings deposits, time deposits
Comparing M1 and M2 we know that:
M2 is larger because it contains M1 and other assets
What is the equation of exchange?
MV=PY
If net taxes equal government spending, the government runs a:
balanced budget
What are the riskiest assets held by commercial banks?
comercial loans
What are examples of depository institutions?
commercial bank, money market mutual fund, a thrift institution or a savings and loan association
The Bank of Japan is Japan's central bank. As part of its duties, the Bank of Japan would:
control the quantity of money in circulation in Japan
An individual wanting the most liquid asset possible will hold:
currency
In the United States today, money consists of:
currency and deposits at banks
What is included in the measure of M1?
currency held outside banks, traveler's checks, checking deposits at savings and loans
M1 includes all the following items except ________. A) checking deposits owned by individuals and businesses B) traveler's checks C) deposits in money market mutual funds D) currency owned by individuals and businesses
deposits in money market mutual funds
A bank cannot create money unless its ________.
desired reserves are greater than actual reserves
The interest rate paid by commercial banks to borrow money from the Fed:
discount rate
What is the interest rate that the Fed charges on loans of reserves to depository institutions?
discount rate
When the Federal Reserve lends reserves to depository institutions, it charges them interest. That interest rate is called the:
discount rate
What are some of the Fed's monetary policy tools?
discount rate, required reserve ratio, buying and selling US government securities
The ________ rate is the interest rate at which the Fed lends ________ to depository institutions.
discount rate, reserves
The main influences on financial innovation include:
economic environment, technology, regulation
The monetary expansion process from an open market operation continues until:
excess bank reserves are eliminated
Assume the economy is initially in full-employment equilibrium. According to the Aggregate Demand-Aggregate Supply model, an increase in government spending would lead to an ______. The price level would ______ and real GDP would ______. In this case, stagflation would _____.
expansion, increase, increase, not occur
What is the main policy-making organ of the Federal Reserve?
federal open market committee
What institutions are part of the structure of the Federal Reserve?
federal open market committee, federal reserve banks, board of governors
What is the development of new financial products and services?
financial innovation
What are some assets on the Fed's balance sheet?
foreign exchange, gold, government securities, loans to banks
How do depository institutions make a profit?
from the spread between the interest rate they pay on deposits and the interest rate they receive on loans
The development of new financial products has been spurred by what?
high inflation and high interest rates, new technology in long-distance communication, attempts to circumvent bank regulations
What do money market mutual funds invest in?
highly liquid assets
What does the quantity theory of money predict?
how changes in the quantity of money affect the price level
If a customer deposits $10,000 in currency into a checking account, the bank's total reserves ________.
increase
When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________.
increase, stay the same
If the demand for loanable funds shifts to the right, the equilibrium real interest rate ______, saving ________, and investment _________.
increases, increases, increases
One role of monetary policy is to control ________ by changing the ________.
inflation, quantity of money in circulation
What is the opportunity cost of holding money?
interest rate
The Federal Reserve does the following:
issue bank notes, conduct monetary policy, supervise commercial banks
What is true about a central bank?
it is a public authority, it regulates a nations depository institutions, it controls the quantity of money
A bank's required reserves are calculated by multiplying ________.
its deposits by the required reserve ratio
What is an example of using money as a store of value?
keeping $200 on hand for an emergency
If real GDP decreases, the demand for money curve will shift:
leftward and the interest rate will fall
What is an asset category that carries the highest interest rate?
loans
A savings bank is a depository institution that ________.
makes mostly mortgage loans
The most direct way in which money eliminates the need for a double coincidence of wants is through its use as a:
medium of exchange
When you buy a hamburger for lunch, you are using money as a:
medium of exchange
The functions of money are:
medium of exchange. unit of account, and store of value
What are the services of a depository institution?
minimizing the cost of obtaining funds, pooling risk, creating liquidity
What is the sum of Federal Reserve notes, coins, and banks' deposits at the Fed?
monetary base
What is controlling the quantity of money and interest rates to influence aggregate economic activity called?
monetary policy
What is M1 a measure of?
money and includes both currency and checking deposits
Sarah buys shares from a financial institution that uses her funds together with other funds to purchase U.S. treasury bills. Sarah has deposited her money into a ________.
money market mutual fund
What determines how much the quantity of money will be expanded given a change in the monetary base?
money multiplier
What is the ratio of the change in the quantity of money to the change in the monetary base?
money multiplier
What is true concerning commercial banks?
most maintain cash reserves equal to their deposits
An increase in the interest rate creates a ________ the money demand curve, and an increase in real GDP creates a ________ the money demand curve.
movement up along, rightward shift of
What kind of slope does the demand for money curve have?
negative
What is proportional to the price level?
nominal demand for money
What are checks?
not money
What is a tool that is used by the Fed to control the quantity of money?
open market operations
Assume that the economy is at full employment initially and the price level is P1. Suddenly, due to a negative demand shock, the economy experiences a recession. According to the Aggregate Demand-Aggregate Supply model, in the long run the economy will produce _______ and the price level will be _______ P1.
potential GDP, lower than
The unit of account function occurs when money serves as a:
pricing mechanism
The term "crowding out" relates to the decrease in:
private investment from a government budget deficit
What allows banks to minimize the cost to a business of borrowing?
raising funds from a large number of depositors
The demand for money increases as:
real GDP increases
The major role of a commercial bank is to:
receive deposits and make loans
Assume the economy is initilly in full-employment equilibrium. According to the Aggregate Demand-Aggregate Supply model, an increase in the exchange rate would leaf to an ______. The price level would ______ and real GDP would _____. In this case, the output gap is _______.
recession, decrease, decrease, negative
What are the primary functions of the Federal Reserve System?
regulate the nation's financial institutions, conduct the nation's monetary policy
The fraction of deposits that banks are required to keep:
required reserve ratio
What is the minimum percentage of deposits that a depository institution must hold and cannot use for lending?
required reserve ratio
The fraction of deposits that banks want to hold:
reserve-to-deposit ratio
Money Multiplier Equation:
reserves/deposits
When the quantity of money demanded is greater than the quantity of money supplied, people ________ bonds and the interest rate ________.
sell, rises
By borrowing money from many depositors and lending money to a variety of borrowers, depository institutions
spread risk efficiently
Using a credit card can best be likened to:
taking out a loan
What does an open market operation involve?
the Fed's purchase or sale of government securities
Monetary policy is only conducted by:
the Federal Reserve
What does the Federal Reserve System control?
the amount of currency in circulation
When the Fed conducts an open market operation by purchasing securities from a bank, ________.
the bank's reserves increase
For a commercial bank, the term "reserves" refers to:
the cash in its vaults and its deposits at the Federal Reserve
What indicated that inflation is strongly correlated with the growth rate of the money supply and it past of the quantity theory of money?
the equation of exchange
What does the quantity theory of money address?
the long run effects the quantity of money has on the price level
What happens when the price level doubles?
the nominal demand for money increases
A change in _____ creates a movement along the aggregate demand curve but does not shift the aggregate demand curve.
the price level
What does the quantity of money that people choose to hold depends on?
the price level, financial innovation
In the quantity theory of money, the velocity of circulation is assumed to not be influenced by what?
the quantity of money
The quantity theory of money asserts that inflation is the result of growth in:
the quantity of money
When the interest rate rises:
the quantity of money demanded decreases
The risk of making a loan is:
the risk that the borrower does not pay
What is the average number of times a dollar of money is used in a year to buy goods and services in GDP?
the velocity of circulation
Refer to the quantity theory of money. Suppose that the stock of money in the economy is $200 billion and the value of nominal GDP is $1 trillion. It must be the case that:
the velocity of circulation is 5
Refer to the Aggregate Demand and Aggregate Supply model, in the ling run:
there is full employment and real GDP is equal to potential GDP
Why are credit cards not money?
they are ID cards that make borrowing easier
Why are checks not money?
they are merely instructions to transfer money
What are the economic benefits of depository institutions?
they reduce the cost of monitoring borrows, create liquidity, pool risk
What is the primary function of money?
to serve as a unit of account
The reserve ratio is a bank's reserves as a fraction of its:
total deposits
What is true as a result of financial innovation?
variable interest rate mortgages were cerated, the use of credit cards increased
You deposit $4,000 in currency in your checking account. The bank holds 20 percent of all deposits as desired reserves. As a direct result of your deposit, your bank will create:
$3,200 of new money
The nation is divided into ________ Federal Reserve districts, each having a Federal Reserve Bank.
12
When the monetary base increases by $2 billion, the quantity of money increases by $10 billion. Thus, the money multiplier equals:
5
What is the U.S. central bank is formally called?
Federal Reserve System
An open market operation occurs when the ________ buys or sells government securities ________.
Federal Reserve System, in the open market
What is the largest liability on the Fed's balance sheet?
Federal Reserve notes
What is the ease with which an asset can be converted into money or into a means of payment with little loss of value?
Liquidity
If you use $500 of currency to purchase a saving deposit:
M1 decreases and M2 is unchanged
What is the largest asset on the Fed's balance sheet?
US government securities
According to the quantity theory of money:
V and Y are not affected by the quantity of money
Given the list of assets below, which is the most liquid? A) $500 worth of General Motors common stock B) $500 worth of General Motors bonds C) a $500 traveler's check D) a one-ounce gold coin
a $500 traveler's check
Refer to the Aggregate Demand-Aggregate Supply model. Which of the following events would shift the short run aggregate supply curve only?
a change in the cost of inputs
Currency outside of banks increases from $100 million to $200 million. What is this change considered?
a currency drain
What decreases the size of the money multiplier?
a currency drain
What happens when par to the quantity of money is held in currency?
a currency drain occurs
In the short run, what can lower the interest rate?
a decrease in the demand for money
What is a credit union?
a depository institution owned by depositors who are members of a particular group
What is a money market mutual fund?
a depository institution that sells shares and buys securities such as US Treasury bills
A $25,000 price tag on a new car is an example of money as:
a unit of account
Modern US commercial banks perform all of the following:
accepting checking deposits, accepting saving deposits, making loans to households and business firms
In the short run, what raises the interest rate?
an increase in the demand for money
________ in the currency drain ________ the money multiplier.
an increase, decrease
________ in the desired reserve ratio will ________ the money multiplier.
an increase, decrease
Checks ________ money and checking deposits ________ money.
are not, are
What is the exchange of goods and services directly for other goods and services?
barter
Which of the following is NOT a function of money? A) medium of exchange B) barter C) unit of account D) store of value
barter
What do the Fed's liabilities include?
both banks deposits and Federal Reserve notes in circulation
If net taxes are lower than government spending, the government runs a:
budget deficit
If net taxes are higher than government spending, the government run on a:
budget surplus
What do commercial banks do?
buy US government Treasury bills, accept deposits from their customers, make loans to creditworthy individuals and businesses
If the Central Bank wants to increases the stock of money in the economy, it should _______ government bonds, or _______ the discount rate, or _______ the required reserve-to-deposit ratio.
buy, decrease, decrease
How can liquidity be created?
by borrowing short and lending long
How does a bank create money?
by lending its excess reserves
