Macro Unit 3

10. The multiple by which the commercial banking system can expand the supply of money is equal to: A. The reciprocal of the reserve ratio B. The reciprocal of the federal funds rate C. The ratio of actual reserves to required reserves D. The ratio of required reserves to actual reserves

A

What is money used for?

A medium of exchange

Changes in Interest rates in relation to Aggregate Demand causes what to shift?

A- shift of interest rates not ad (B)- shift of AD not interest rates c- shift of both d- shift of neither

A point or combination that is on the production possibilities curve is:

A. Unattainable, but some resources are unemployed (B) Attainable and resources are fully employed C. Attainable only if we get additional resources D. Attainable, but some resources are unemployed

What is the equation for excess reserves?

Actual- required = excess

An investor owns bond #1 that has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in:

Arbitrage

One reason that "near-monies" are important is because: A. Credit cards synchronize one's expenditures and income, thereby reducing the cash and checkable deposits one must hold B. They can be easily converted into money or vice versa, and thereby can influence the stability of the economy C. They simplify the definition of money and therefore the formulation of monetary policy D. They do not reflect the level of consumer spending but they have a critical impact on saving and investment in the economy

B

In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that:

Banks held on to excess reserves and people chose to pay off loans rather than spend

During the Financial Crisis of 2007-2008, investors demanded much higher risk premiums in their investments. This caused the SML to:

Become Steeper

If a persons account drafts a 20,000 check what is effected in terms to assets and liabilities of the bank?

Checkable deposits, reserves

What is another term for liability stock shares owned by a bank?

Claims of owners

A key reason that actively managed funds have lower returns than index funds with a similar level of risk is that: A. Index funds spend more on research and management B. Diversification is more important to actively managed funds C. Index funds require more buying and selling to generate their returns D. Management and trading costs reduce the returns of actively managed funds

D

Other things equal, an appreciation of the U.S. dollar would:

Decrease net exports and decrease aggregate demand

Which of the following are liabilities to a bank?

Demand and time deposits

The interest rate that the Fed charges banks

Discount rate

Traditionally, the Fed often communicated its intentions to restrict or expand monetary policy by announcing a change in its target for the:

Federal Funds Rate

The interest rate that banks charge each other

Federal Funds rate

The group that influences decisions made by the Board of Governors

Federal Open Markets Committee

The board of governors; "monetary authorities" control the

Federal reserve system

A person buys a $10,000 bond from the bank ensured that it will collect to 12,000. What happens to the money supply?

Goes down

If the discount rate is decreased what happens to the money supply?

Goes up

What is the too big to fail policy?

Government wants to keep backing banks to ensure business

What is another term for diversifiable risks

Idiosynchratic risks

Where can you find checkable deposits? In relation to m1 and m2

In both

What are the three parts of a bond?

Interest rate, coupon/payment, face value

Firms that help corporations and government raise money by selling stocks and bonds

Investment banks

What induces banks to increase their holdings in the federal reserve?

Iron reserves

When paper money is designated as legal tender, it means that:

It is a means of payment by law

What is the equation for money managed?

MM= 1/ required reserves+ excess reserves

interest-bearing account containing a variety of interest-bearing short-term securities with minimum balance requirements, and limits on withdrawals.

MMDA

TARP created a ______ by protecting firms from losses and encouraging them to take greater risks

Moral hazard

What are subprime mortgage loans?

Mortgage loans made to very high risk individuals

Firms that pool deposits by customers to purchase stocks or bonds

Mutual fund Companies

What are the four main tools the Fed uses to change the money supply?

Open market operations, the reserve ratio, the discount rate, interest on reserves

What varies directly with Interest Rates in terms of opportunity cost?

Opportunity cost of money

For profit or non profit institutions that collect monthly payments from workers to buy stocks/bonds

Pension funds

Interest Rate that is used by banks for loyal customers

Prime rate

What term goes hand in hand with "No such thing as free lunch"

Scarcity

Firms that offer security advice and buy and sell stocks and bonds for clients

Securitites firms

What are the benefits of monetary over fiscal

Speed/frequency and Isolation from political pressure

An economy can only effectively employ money as a unit of account when its purchasing power is what?

Stable

What is another term for non diversifiable risks?

Systemic Risks

What did congress pass in late 2008 with 700 billion in funding for bailouts?

TARP

What constitutes as bankers banks?

The 12 federal reserve banks collectively known as the central bank.

In the United States runs on banks are prevented because

The FDIC guarantees bank accounts

What happens when a customer uses a check to withdraw money from its banks "checkable deposits" and write it to someone who then deposits that check.

The check is received by the 2nd bank, they then send it to the federal reserve. The Fed takes the amount out of the 1st banks reserves, and places it into the 2nd banks.

22. If the Fed wants to maintain current interest rates, it would be buying government bonds in the open market when:

The demand for money increases

What is a major opportunity cost of going to college on a full-time basis?

The foregone income that could be earned working full-time job

The demand for money as a medium of exchange is called

The transactions demand for money

If there is a point on the production possibilities point is it attainable?

Yes

What does "there is no such thing as a free lunch" mean in economics?

a) That products only have value because people are willing to pay for them b) That sometimes people may take friends out to lunch and pay for them c) That all items in the lunch menu have specific prices D That scarce resources are used up to provide "freebies" and giveaways

The short run aggregate supply curve assumes that A- nominal wages were established by firms and workers, with the belief that the price level will stay constant b-nominal wages are flexible and will rise and fall along with the price level c-the price level is flexible d- product prices are inflexible and will remain constant even when input prices change

a,c

The so-called too-big-to-fail policy has two conflicting sides: on one hand there's the moral hazard problem that it creates, but in the other hand the Fed must:

a. Ensure the employment of people in financial services b. Control the money supply (C) Protect the stability of the banking system d. Promote competition among banks

What are the two basic functions of commercial banks?

accepting deposits, making loans

What are the three lags of fiscal policy?

administrative, operational, recognition

What is the equation for % rate of return?

amount of return/ Amount paid

In the short run, when equilibrium occurs there a- is no possibility of a gdp gap b- may exist a positive gdp gap c- may exist high unemployment d- will always exist full-employment level of output

b,c

When an economy move along its short-run aggregate supply curve, we can assume that a- the price level is remaining constant b- the real output level is remaining constant c- input prices are remaining constant

c

Money supply can consist of two components which are?

currency, checkable deposits

Banks operating on the basis of ________ are vulnerable to panics or bank runs.

fractional reserves

What happens to Interest Rate if money supply goes up?

goes down

What happens to the price of a bond when there are lower interest rates?

goes up

If the fed wants to reduce bank lending it can

increase interest earned on excess reserves

What are the effects of reverse repos?

increase the federal funds rate

the ease with which it can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power

liquidity

Where can you find credit card transactions? In relation to m1 and m2

m2

certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits. are called

near-monies

An increase in a banks checkable deposits, through a cash deposit does what to the money supply

no change

An economy can effectively employ money as a unit of account only when its ____ ______ is relatively stable

purchasing power

_____ checkable deposits reduces the supply of money

reducing

What are the two main assets of the Federal reserve?

securities and loans to commercial banks

What are the three types of investment?

stocks, bonds, mutual funds

If the government backed currency with something tangible like gold what would happen to money?

supply of money would depend on how much gold was available

If the government backed the currency with something tangible like gold then the:

supply of money would vary with how much gold was available

Savings and loan associations (S&Ls), mutual savings banks, and credit unions. Are known as savings or

thrift institutions

A withdrawal of cash will decrease the banks checkable deposits but not change the total supply of money. True or False?

true

Money serves as a store of _____ that allows people to transfer purchasing power from the present to the future

value