Exam 3: Chapters 10-13

Liquidity refers to the ability of an asset to hold its value in periods of inflation. T or F?

False Liquidity refers to the ease with which it can be converted into cash.

As the federal funds rate rises, the banks' opportunity cost of holding excess reserves falls. T or F?

False, as it rises, borrowing seems more expensive so less reserves are demanded.

An inflationary gap exists when consumers and businesses are demanding more output than the economy is capable of producing at full employment. T or F?

True

Inflation reduces the multiplier affect by reducing consumers' wealth and purchasing power. T or F?

True

Productivity increases, brought about by increased education and training, may shift the aggregate supply curve outward. T or F?

True

The money supply can be increased by decreasing the required reserve ratio. T or F?

True

To increase the money supply, the Fed purchases government securities from banks, paying for them with new reserves. T or F?

True

When equilibrium GDP is greater than potential GDP, jobs are plentiful and labor is in great demand. T or F?

True

Modern paper money is fiat money because it is backed only by the faith the holder has in the government that issued it. T or F?

True Fiat money is declared by the gov't. It is of little value itself, but when there is faith that it's backed by the government it holds value.

If the banking system has $5 million in excess reserves, and the required reserve ratio is 25%, what is the maximum amount by which the money supply can be increased?

$20 million use oversimplified money multiplier 1/m(reserves)= 1/.25(5)= 20 million

The Fed conducts an open market sale of Treasury Bills of $5 million. If the required reserve ratio is .2, what change in the money supply can be expected using the oversimplified money multiplier?

-$25 million Oversimplified money multiplier: change in money supply=(1/m) x change in reserves

The banking system receives a new cash deposit of $250,000. Total deposits eventually rise by $1 million. The value of the reserve ratio is

0.25 use oversimplified money multiplier to solve for m 1/m(250,000)=1000000 250000/1000000=0.25

A one-dollar tax reduction has the same effect as a one-dollar increase in government purchases. T or F?

False

At higher interest rates, banks will want to hold more reserves. T or F?

False

Banks in the United States may create new money equal to their amount of required reserves. T or F?

False

Wage decreases lead to a decrease in aggregate quantity supplied. T or F?

False

When prices for goods and services are quoted in money terms, this is an example of money being used as a store of value. T or F?

False Money being used as a store of value would be any form of wealth (commodity, asset, or money) that has value and can be stored and retrieved over time.

The United States was among the first of the modern industrial nations to establish a central banking system. T or F?

False The U.S. was distrustful of centralized economic power and was almost the only important nation without a central bank. England was among the first.

If the Fed sells a T-bill to a commercial bank, how will this effect the money supply?

It will decrease the money supply

The Fed's purchase and sale of government securities is known as

Open market operations

How can the economy come back to potential GDP level after suffering from a recessionary period?

The Fed buys T-bills from banks, to increase money supply. Aggregate demand goes up and total consumer expenditures goes up

How can the economy come back to the potential GDP level after suffering from an inflationary period?

The Fed purchases T-bills from banks, decreasing money supply. Aggregate demand goes down and total consumer expenditures goes down.

Which of the following definitions of the money supply includes only the most liquid forms of money? a. M1 b. M2 c. savings deposits d. money market mutual deposits

a. M1 There are only two definitions for money supply (M1&M2) M1 includes only coins, paper money, traveler's checks, conventional checking accounts, and certain other checkable deposits in banks and savings institutions. M2 is much more broad than M1 and also includes most forms of savings account balances, plus shares in money market mutual funds.

If the Fed raises the reserve requirement on deposits from 15% to 20%, what would happen to the money supply

a. it would decrease

Expansionary fiscal policy can cause a rise in real GDP in combination with

an increase in the price level

The discount rate is the rate that the a. Treasury pays on savings bonds b. Fed charges member banks c. Fed charges on government securities d. Fed charges the Treasury for sales of securities

b. Fed charges member banks

Analysis indicates that the economy is in a recessionary gap. Which of the following is the most appropriate policy mix in this situation? a. a budget surplus and expansionary monetary policy b. a budget deficit and expansionary monetary policy c. a budget deficit and contractionary monetary policy d. a budget surplus and contractionary monetary policy

b. a budget deficit and expansionary monetary policy

Liquidity refers to the a. rapidity with which money flows through the economy b. ease with which an asset can be converted to cash c. ease with which banks move funds from checking to savings accounts

b. ease with which an asset can be converted to cash

When the Fed wants to expand the money supply through open market operation, it

buys government securities from member banks

To calculate a firm's per unit of output profit, it is necessary to subtract a. price from cost per unit b. price from resource costs c. cost per unit from product price d. cost per unit from cost of recources

c. cost per unit from product price

If people began to hold more cash, the money multiplier process will a. increase in intensity b. remain the same c. decrease in actual size d. cause larger amounts of excess reserves

c. decrease in actual size

The major contribution of goldsmiths to the development of modern banking was a. local banking b. market banking c. fractional reserve banking d. gold standard banking

c. fractional reserve banking this is a system under which bankers only keep a fraction of the funds they hold on deposit as reserves.

The initial development of paper money began when people used____ as payment for goods and services a. credit cards b. commodity money c. goldsmith receipts d. gold coins

c. goldsmith receipts

The principal objective of the Federal Reserve System is to a. circulate coins and paper Fed Res notes b. subsidize the income of member banks c. help stabilize the economy through monetary policy d. make profits to remit to the Treasury Dept.

c. help stabilize the economy through monetary policy

An increase in the reserve ratio would tend to a. increase excess reserves and raise the money multiplier b. decrease excess reserves, decrease the money multiplier c. increase excess reserves, decrease the money multiplier d. decrease excess reserves and raise the money multiplier

c. increase excess reserves and decrease the money multiplier the money multiplier is the ratio of newly created bank deposits to new reserves

Fiat money is a. always backed by gold or silver b. useful in buying Italian cars c. only backed by gov't decree d. not as liquid as precious metals

c. only backed by gov't decree

In reality, commercial banks are_____ of the district Federal Reserve Banks

customers

Which is an example of a medium of exchange? a. Richard puts money in a piggy bank b. Ellen deposits cash into a money market account c. Sean puts a new $20 bill into his currency collection d. Marian buys a carbo-loaded drink before a marathon

d. Marian buys a carbo-loaded drink before a marathon because she is using her money to exchange for the water

Any reserves held by a bank above the amount of minimum legal services are called a. total reserves b. required reserves c. fiat money d. excess reserves

d. excess reserves

If the Fed buys a U.S. treasury bill from a member of the public, the banking system has a. less reserves and the money supply tends to fall b. more reserves and the money supply tends to fall c. less reserves and the money supply tends to grow d. more reserves and the money supply tends to grow

d. more reserves and the money supply tends to grow

The only factor that can cause movement along the aggregate supply curve is the a. labor force b. capital stock c. availability of resources d. price level e. all of the above

e. all of the above Factors that cause movement along the aggregate supply curve are labor force, capital stock, availability of resources, and price level.

Open market operations generally involve the purchase and sales of

government securities

An increase in money supply wage rate will cause the aggregate supply curve to shift

inward, which means the quantity supplied at any price level decreases

The Fed's principal objective is to a. make profits to pay into U.S. treasury b. collect tax revenues c. supervise the business decisions of banks d. manage the money supply and interest rates

manage the money supply and interest rates

When the Fed purchases government securities from a commercial bank, the bank

receives reserves that can be loaned out

Money is almost always used to quote prices. This illustrates the function of money as a a. medium of exchange b. store of value c. unit of account d. commodity value

unit of account (the standard unit for quoting prices)

The major cost of production in the economy is

wages

Contractionary monetary policy is when

you are decreasing the amount of money in the economy to cure inflation Fed sells T-bills to banks

Expansionary monetary policy is when

you are increasing the amount of money in the economy to cure recession. Fed purchases T-bills from banks bank reserves increase (s1-->s2) interest rate decreases investment goes up aggregate demand goes up