Money and Prices in the Long Run- CH 11 The Monetary System

Consider four survivors on an island. Rupert has machete wants fishing spear Amber has cooking pot wants fishing spear Rob has fishing spear wants machete Tom has cooking pot wants machete Which of the following pairs have a double-coincidence of wants with each other? A. Rupert with Amber, and Rob with Tom B. Amber with Tom C. Rupert with Rob D. None of the above have a double-coincidence of wants

C. Rupert with Rob Two people have a good that the other one wants. Rupert has a machete, Rob wants a machete/ Rob has fishing spear, Rupert wants a fishing spear (pg 218)

If people decide to hold more currency relative to deposits, the money supply a. falls. The Fed could lessen the impact of this by buying Treasury bonds. b. falls. The Fed could lessen the impact of this by selling Treasury bonds. c. rises. The Fed could lessen the impact of this by buying Treasury bonds. d. rises. The Fed could lessen the impact of the by selling Treasury bonds.

a. falls. The Fed could lessen the impact of this by buying Treasury bonds. If people aren't depositing their money in the bank, such as a saving, banks can't lend out loans. Without loaning money, money supply falls. To avoid it to fall, Fed's want to buy bonds from public

The money supply increases when the Fed a. lowers the discount rate. The increase will be larger the smaller the reserve ratio is. b. lowers the discount rate. The increase will be larger the larger the reserve ratio is. c. raises the discount rate. The increase will be larger the smaller the reserve ratio is. d. raises the discount rate. The increase will be larger the larger the reserve ratio is.

a. lowers the discount rate. The increase will be larger the smaller the reserve ratio is When Feds lower the discount rate it encourages banks to borrow. This increases the quantity of reserves (deposits that banks have received but have not loaned)---> increases money supply(more money in saving!) The increase will be larger. Feds can influence the reserve ration by alrering reserve req. ---> Decrease in reserve req. (regulations on the min. amount of reserves that banks must hold against deposits)---> lowers the reserve ratio (the fraction of deposits that banks hold as reserves)---raises the money multiplier --->increases the money supply So.......smaller the reserve ratio, the larger?????

Suppose that the reserve ratio is 5 percent and that a bank has $1,000 in deposits. Its reserves are a. $5. b. $50. c. $95. d. $950.

b. $50. (pg 228) Use Money Multiplier: Step 1) 1/R=M 1=Reserves R= Reserve Ratio M= Deposits Step 2) X/.05=$1000 Step 3) 1000 x .05 =$50

If the reserve ratio is 5 percent, the money multiplier is a. 25 b. 20 c. 2.5. d. 1.25.

b. 20 (pg228)

In a fractional reserve banking system, an increase in reserve requirements a. increases both the money multiplier and the money supply. b. decreases both the money multiplier and the money supply. c. increases the money multiplier, but decreases the money supply. d. decreases the money multiplier, but increases the money supply.

b. decreases both the money multiplier and the money supply. ?????

When the Fed conducts open-market sales, a. it sells Treasury securities, which increases the money supply. b. it sells Treasury securities, which decreases the money supply. c. it borrows from member banks, which increases the money supply. d. it lends money to member banks, which decreases the money supply.

b. it sells Treasury securities, which decreases the money supply (page 230) Open market sales are buying/selling bonds. Not loaning/borrowing. When the gov. sells bonds to the public it decreases the money supply. This is because the public pays for the bonds with their money, and is not going into the bank (they are not saving as much as they would be). This reduces money circulation.

If the reserve ratio is 100 percent, depositing $500 of paper money in a bank a. will eventually increase the money supply by $500. b. leave the size of the money supply unchanged. c. will eventually decrease the size of the money supply by $500. d. None of the above is correct.

b. leave the size of the money supply unchanged. ????

Which of the following lists two things that both increase the money supply? a. lower the discount rate, raise the reserve requirement ratio b. lower the discount rate, lower the reserve requirement ratio c. raise the discount rate, raise the reserve requirement ratio d. raise the discount rate, lower the reserve requirement ratio

b. lower the discount rate, lower the reserve requirement ratio Lowering the discount rate to banks encourages banks to borrow from the Fed--->increasing money supply. Lowering reserve req lowers money multiplier and increases money supply

Suppose that banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the a. money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds. b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds. c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds. d. money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.

b. money supply to fall. To reduce the impact of this the Fed could buy Treasury bondss. ????

Which of the following lists two things that both decrease the money supply? a. raise the discount rate, make open market purchases b. raise the discount rate, make open market sales c. lower the discount rate, make open market purchases d. lower the discount rate, make open market sales

b. raise the discount rate, make open market sales When raising the discount rate, it discourages banks to borrow from FED---> Decreasing supply Open market sales you are selling your bonds-->this decreases money supply becaseuse public is buying bonds instead of putting it into savings

In recent years the Federal Open Market Committee has focused on a target for a. M1 growth. b. the federal funds rate. c. the number of Treasury Securities issued by the federal government. d. total reserves of banks.

b. the federal funds rate. ???

In a 100-percent reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits a. M1 would increase. b. M1 would decrease. c. M1 would not change. d. M1 might rise or fall.

c. M1 would not change.

The Fed's primary tool to change the money supply is a. changing the discount rate. b. changing the reserve requirement. c. conducting open market operations. d. redeeming Federal Reserve notes.

c. conducting open market operations. (pg 224). Open Market Operations is the purchase and sale of the US. gov. bonds by the Fed. -Feds can alter the money supply by changing the discount rate, but that is NOT primary. -Feds can influence how much money the banking system can create by altering the reserve requirements. again, this is NOT primary

If the public decides to hold less currency and more deposits in banks, bank reserves a. decrease and the money supply eventually decreases. b. decrease but the money supply does not change. c. increase and the money supply eventually increases. d. increase but the money supply does not change.

c. increase and the money supply eventually increases. If people hold less money and put it in the bank they are putting into saving. This means more reserves. Since people are saving more, this increases the money supply

In a fractional reserve banking system with no excess reserves and no currency holdings, if the central bank buys $100 million of bonds, a. reserves and the money supply increase by less than $100 million. b. reserves increase by $100 million and the money supply increases by $100 million. c. reserves increase by $100 million and the money supply increases by more than $100 million. d. both reserves and the money supply increase by more than $100 million.

c. reserves increase by $100 million and the money supply increases by more than $100 million. For every dollar that is (currency) put into bank, it inceases by $1. Bonds increase more than a $

Which of the following is a store of value? a. currency b. U.S. government bonds c. fine art d. All of the above are correct.

d. All of the above are correct. Store Value: an item that people can use to transfer purchasing power from present to future. Stcks/Bonds, money baseball cards, art (pg 219)

If the reserve ratio is 5 percent, $1,000 of additional reserves can create a. $5,500 of new money b. $5,000 of new money c. $4,000 of new money d. None of the above is correct.

d. None of the above is correct. 1/r=m 1=reserves=$1000 R=Reserve ratio =5% M=deposits $1,000/.05=$20,000 $20,000 of new money can be created

If the Fed sells government bonds to the public, bank reserves tend to a. increase and the money supply increases. b. increase and the money supply decreases. c. decrease and the money supply increases. d. decrease and the money supply decreases.

d. decrease and the money supply decreases. Selling bonds decrease money supply. Reserves (deposits that banks have received but not loaned out) decrease because people do not have the money to put into bank, reserves decrease

The Federal Funds rate is the a. percentage of face value that the Federal Reserve is willing to pay for Treasury Securities. b. percentage of deposits that banks must hold as reserves. c. interest rate at which the Federal Reserve makes short-term loans to banks. d. interest rate at which banks lend reserves to each other overnight.

d. interest rate at which banks lend reserves to each other overnight. It's immediate

The Fed can increase the money supply by conducting open market a. sales and raising the discount rate. b. sales and lowering the discount rate. c. purchases and raising the discount rate. d. purchases and lowering the discount rate.

d. purchases and lowering the discount rate. (page 230) If Feeds want to increase the money supply, the Feds want to BUY(Purchase) bonds from the public.----> Increase dollars in economy. Some of the dollars are held as currency ---> increase money supply by $1. Some are deposited in banks ---> increases money supply by more than a $1 --?increase reserves. LOWER discount rate ENCOURAGES banks to borrow reserves from Fed. --> INCREASES reserves ---> INCREASE money supply =) Opposite: HIGHER discount rate DISCOURAGES banks to borrow reserves form Fed --> DECREASES reserves ----> DECREASE money supply =(

A bank's liabilities include a. both its reserves and the deposits of its customers. b. neither its reserves nor the deposits of its customers. c. its reserves, but not the deposits of its customers. d. the deposits of its customers, but not its reserves.

d. the deposits of its customers, but not its reserves (page 225) This to accounting (T-Chart) (Left) Assets(Reserves-banks that have received but have NOT loaned out) (Right) Liabilities (Deposits- the bank has to owe this to people)