Macroeconomics Chapters - 4, 5, 7

_____ refers to the process of transferring funds from savers to borrowers.

Financial intermediation

Which is the equation used to calculate the money supply M?

M = Currency + Deposits

The Fed increases the interest rate it pays banks for holding reserves:

Monetary base- increase Money Multiplier- decrease Money supply- decrease

The federal reserve buys bonds using open market operations:

Monetary base- increase Money multiplier- no effect Money Supply- increase

_____ are included in the money supply.

Neither checks nor debit cards

According to the text, which is the MOST likely reason that individuals began to hold paper money instead of gold?

People believed the government's promise that it would redeem government-issued paper bills for gold.

Which are included in M2 but not included in M1?

Saving deposits are included in M2 but not in M1.

The _____ is a new mechanism that the Federal Reserve has set up that allows for banks to borrow from it.

Term Auction Facility

an important factor in the evolution of commodity money to fiat money is:

a desire to reduce transaction costs

Credit cards are:

a method of deferring payment.

What are the three functions of money

a store of value, a medium of exchange, a unit of account

If the Federal Reserve pays a higher interest rate on reserves, the money supply will MOST likely:

decrease

In a fractional-reserve banking system, the leverage ratio must always be:

greater than 1

using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tends to have _______ rates of inflation and decades of low money growth tended to have ________ rates of inflation

high ; low

An increase in the number of bank failures will MOST likely cause the reserve-deposit ratio to

increase

Money is NOT a(n):

input to production.

Assuming that banks hold no excess reserves, suppose that banks hold a reserve-deposit ratio of 25 percent. If a customer deposits $4,000, the bank will keep as reserves _____ and will lend out _____.

$1,000; $3,000

Which item would be MOST likely to be characterized as fiat money?

the U.S. half-dollar coin

the costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors

which of the following is not part of the money supply

the balances that are in your retirement account

the ratio of the money supply to the monetary base is called

the money multiplier

if you hear in the news that the Federal reserve conducted open-market purchases, then you should expect_________to increase

the money supply

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases

when a pizza maker lists the price of a pizza as $10, this is an example of using money as an:

unit of account

When a person knows that three one-dollar bills can buy a gallon of gasoline when the price of a gallon of gasoline is $3.00, then that person understands that money can serve as a:

unit of account.

If currency held by the public equals 100 billion, reserves held by banks equal 50 billion, and bank deposits equal 500 billion, then the money supply equals

600 billion

if the monetary base equals 400 billion and the money multiplier equals 2, then the money supply equals:

800 billion

which of the following would most likely be called a hyperinflation

price increases averaged 300 percent per year

if the transactions velocity of money remains constant while the quantity of money doubles the:

price of the average transaction multiplied by the number of transactions must double

If bankers were to become more cautious because of bank failures, they would increase the _____ratio, and the money multiplier would _____.

reserve-deposit; decrease

Which is an example of commodity money?

salt

the inconvenience associated with reducing money holdings to avoid the inflation tax is called:

shoe leather costs

When money serves as a _____, it allows an individual to transfer purchasing power from the present to the future.

store of value

if velocity is constant and in addition the factors of production and the production function determine real GDP, then:

the price level is proportional to the money supply

the value of a bank's owners' equity is called bank:

capital

Because of leverage, a 5 percent decline in the value of a bank's assets will cause the value of the bank's ________ to fall by _________ than 5 percent

capital ; more

demand deposits are funds held in

checking accounts

A decrease in the confidence of consumers in the banking system caused by bank failures would cause the _____ ratio to increase and the money multiplier to _____.

currency-deposit; decrease

Raising the reserve requirement would MOST likely cause the money supply to:

decrease

If the monetary base doubles but the money supply stays the same, the money multiplier will:

decrease by half

In a 100-percent-reserve banking system, a customer withdrawal will:

decrease deposits.

when the Fed decreases the interest rate paid on reserves, it:

decreases the reserve-deposit ratio (rr)

Liabilities of banks include:

demand deposits

The "fractional" in "fractional-reserve banking" refers to banks keeping as reserves a fraction of customer:

deposits in the banks' vaults or at the Federal Reserve.

The Federal Reserve:

did not pay interest on reserves in the past but recently began to do so.

A leverage ratio of 15 means that for every dollar of capital that bank owners have contributed, the bank has 15

dollars of assets

most hyperinflation end with_____ reforms that eliminate the need for ____

fiscal ; seigniorage

Suppose that the Federal Reserve requires all lending to commercial banks go through the Term Auction Facility (TAF) only. This would _____ the Federal Reserve's ability to control the monetary supply.

improve

An increase in the number of bank failures will MOST likely cause the currency-deposit ratio to:

increase

If the federal reserve reduces the interest rate it pays on reserves, it will tend to _________ the money multiplier and _________ the money supply

increase ; increase

Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. If the Fed does nothing, the money supply will tend to _______. However, the Fed can hold the money supply constant by ________ bonds in open-market operations

increase ; selling

the demand for real money balances generally assumed to

increase as real income increases

If the reserve-deposit ration is less than one, and monetary base increases by 1 million, then the money supply will:

increase by more than 1 million

An increase in the interest rate on reserves will MOST likely cause the reserves to _____ and the money supply to _____.

increase; decrease

Jose's Bank chooses to hold 100 percent of deposits as reserves. If a customer deposits $5,000 to his checking account, the bank's deposits will _____ $5,000, while its reserves will _____.

increase; increase $5,000

In 1932, the US government imposed a 2-cent tax on checks written on deposits in bank accounts. This action would be expected to __________ the currency-deposit ration and __________ the money supply.

increase;decrease

According to some economists, the U.S. Federal Reserve might have reduced the severity of the Great Depression if it had

increased the monetary base even more than it did.

Deposit insurance promote a financial system's stability because it prevents large

increases or decreases in the currency-deposit ratio.

according to the quantity theory of money, if the money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as result of financial innovatio, the rate of inflation must be:

increasing

if the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:

inflation of 1 percent and the nominal interest rate of 1 percent

The discount rate is the:

interest rate that the Federal Reserve charges banks when they borrow from the Federal Reserve.

the classical dichotomy

is said to hold them the values of real variables can be determined without any reference to nominal variables or the existence of money

The fed flies a helicopter over 5th Avenue in New York City and drops newly printed 100 bills

monetary base- increase money multiplier- may increase or decrease money supply- increase

rumors about a computer virus attack on ATMs increase the amount of money people hold as currency rather than demand deposits

monetary base- no effect money multiplier- decrease money supply- decrease

in a system of fraction-reserve baking, lending by banks increases the

money supply

an economy produces 50 widgets which sell for $4 each, and has a one supply of 100 what is the velocity of money?

money x velocity = price x output velocity = 2

Money is a perfect store of value when the economy is experiencing:

neither inflation nor deflation.

variable expressed in terms of money are called _____ variables

nominal

in its most general formulation, the demand function for rebalances depends on the level of income and the:

nominal interest rate

the opportunity cost of holding money is the:

nominal interest rate

according to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

Federal Reserve

Which is the equation used to calculate the monetary base B?

B = Currency + Reserves

If the reserve-deposit ratio and the currency-deposit ratio are unchanged, a _____ percent increase in the monetary base will cause a 10 percent increase in the money supply.

10

According to the text, the gold standard was most commonly used throughout the world during the

1800s

according to the quantity theory of money, a 5 percent increase in money growth increases inflation by ____ percent. Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by_____

5 ; 5

Which are included in M1 but not included in M2?

All items in M1 are also included in M2.

excess reserves are reserves that banks keep:

above the legally required amount

if nominal wages cannot be cut, then the only way to reduce real wages is by:

adjustments via inflation

In a country on a gold standard, the quantity of money is determined by the:

amount of gold

The members of the U.S. Federal Reserve Board of Governors are:

appointed by the president of the United States and confirmed by Congress.

if the demand for real money balances is proportional to real income, velocity will

be constant

checking account balances that are linked to debit cards are included in:

both M1 and M2

If a central bank wants to increase the money supply, it can _______ bonds in open-market operations or ________ reserve requirements.

buy; decrease

the inflation tax is paid:

by all holders of money

In the United States, the money supply is determined:

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

according to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises

less ; smaller

The _____ ratio is the ratio of the bank's total assets to bank capital.

leverage

Bank regulators prefer banks to have a:

low leverage ratio.

To increase the money multiplier, the Fed can

lower the interest rate paid on reserves

in a fractional-reserve banking system, banks create money when they

make loans

A reserve requirement is the:

minimum reserve-deposit ratio that bank regulators require banks to have.

The Fed reduces its lending to banks through its Term Auction Facility

monetary base- decrease money multiplier- no effect money supply- decrease