ch 16 Alexi Econ
What are the largest asset and the largest liability of a typical bank?
Loans are the largest asset and deposits are the largest liability of a typical bank.
Which one of the following is not the formula for the quantity theory of money?
M x V = P x Y
he Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
distinguish among money, income, and wealth.
A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1 Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged
Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,
M1 will decrease by $100.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase.
Why would deposit insurance provide the banking system with protection against runs?
Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
Which tool is the most important?
The Fed conducts monetary policy principally through open market operations.
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money.
Money serves as a unit of account when
prices of goods and services are stated in terms of money.
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
the required reserve ratio
When the Federal Reserve purchases Treasury securities in the open market,
the sellers of such securities deposit the funds in their banks and bank reserves increase.
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
$1.8 billion.
Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has
$50 in required reserves.
If the required reserve ratio is 0.15, the maximum increase in checking account deposits that will result from an increase in bank reserves of $15,000 is $100,000.
100,000
If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 1 percent per year, and velocity is constant, what will the inflation rate be?
5%
If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 1 percent per year, and velocity is growing at 2 percent per year instead of remaining constant, what will the inflation rate be?
7%
In a fractional reserve banking system what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank; a bank panic involves many banks.
What is price deflation?
A fall in the price level.
Commodity money
A good used as money that also has value independent of its use as money.
he M1 measure of the money supply includes which of the following components?
ALL checking account deposits in banks currency in circulation holdings of traveler's checks
The use of money
ALL reduces the transaction costs of exchange. allows for greater specialization. eliminates the double coincidence of wants.
Which of the following conditions make a good suitable for use as a medium of exchange?
ALL the good should be durable, valuable relative to its weight, and divisible. The good should be of standardized quality, so that any two units are identical. The good must be acceptable to (that is, usable by) most buyers and sellers.
Which of the following is a monetary policy LOADING... tool used by the Federal Reserve Bank?
ALL Buying $500 million worth of government securities, such as Treasury bills. Decreasing the rate at which banks can borrow money from the Federal Reserve. Increasing the reserve requirement from 10 percent to 12.5 percent.
To determine if these values are consistent with the quantity equation, additional information would be needed about
ALL \ the level of real GDP. the size of the money supply. the price level and velocity of money.
the simple deposit multiplier equals
ALL the ratio of the amount of deposits created by banks to the amount of new reserves. the inverse, or reciprocal, of the required reserve ratio. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves.
What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"?
An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.
What does the article mean by Chinese businesses being starved for credit?
Being starved for credit means Chinese businesses cannot get loans.
Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.
In the definition of the money supply, where do credit cards belong?
Credit cards are not included in the definition of the money supply.
Which of the following is not a Federal Reserve district?
Denver
Briefly explain whether you agree or disagree with the following statement: "Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability."
Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.
Do you agree or disagree with the following statement? "I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the United States is less than half as wealthy as the government statistics indicate."
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.
Which of the following best explains the difference between commodity money and fiat money?
Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
What is the "shadow banking system"?
Financial firms that raise money from investors and provide it to borrowers.
Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling. All of the following are correct except:
Firms lose since they don't have the convenience of credit cards
If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:
Inflation rate = Growth rate of the money supply - Growth rate of real output.
In the late 1940s, the Communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value, and most businesses refused to accept it. At the same time, there was a paper shortage in Japan. During these years, Japan was still under military occupation by the United States. Some U.S. troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in China, ship it to Japan to be recycled into paper, and make a substantial profit. Under these circumstances, was the Chinese paper currency a commodity money or a fiat money
It is a commodity money because it has value as recycled paper.
How would such a large quantity of Confederate dollars have affected the value of the Confederate currency?
It would have generated high inflation and therefore decreased the value of the Confederate currency.
what is a "classic type of run"?
Many depositors simultaneously decide to withdraw their money from a bank.
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
why might investors in a money market mutual fund, for example, be more likely to "rush to the exits" if they heard bad news about the fund's investments, than would bank depositors if they received bad news about their bank's investments?
Money market mutual funds are not protected by deposit insurance, as commercial banks' deposits are through the Federal Deposit Insurance Corporation (FDIC).
What did Geithner mean by the "non-bank financial system"?
Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households.
Fiat money
Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money
Which one of the following is not one of the policy tools the Fed uses to control the money supply?
Moral suasion.
If online lenders find that borrowers are defaulting on loans at higher than expected rates, can they offset the problem by charging higher interest rates on the loans? Briefly explain.
No, because only the most high-risk borrowers will accept loans, meaning the borrower is more likely to default.
In November 2016 the Indian government decided to withdraw paper currency that made up more than 86 percent of the value of all rupee bills in circulation. An article in the Wall Street Journal published shortly after that decision described a small merchant in India as having "traded one customer a kilogram of potatoes, cauliflower and tomatoes for half a liter of honey. That was a good deal, he says. In normal times, the honey would be 120 rupees in the market (around $1.80) and the vegetables 70 rupees." Does the merchant's ability to arrange a barter deal with a customer indicate that the Indian economy doesn't actually require money to function efficiently? Briefly explain.
No, resorting to barter means that each trade required a double coincidence of wants for trade to occur.
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit." Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money
No. The goods are not a store of value.
Why would online lenders skip this step in the loan application process?
Online lenders skip this step because gathering and reviewing information on borrowers is costly.
Which one of the following is not a function of money?
Open market operation. choices Unit of account. Store of value. Medium of exchange. Open market operation.
The U.S. penny is made primarily of zinc. There have been several times in recent years when zinc prices have been high and it has cost the U.S. Treasury more than one cent to manufacture a penny. There are currently about 1.4 billion pennies in circulation. Economist François Velde of the Federal Reserve Bank of Chicago has proposed making the current penny worth 5 cents.
The effect of this proposal would cause an increase in the value of M1. Is this change likely to have much impact on the economy? NO
According to the quantity theory of money , inflation results from which of the following?
The money supply grows faster than real GDP.
How does the quantity theory provide an explanation about the cause of inflation?
The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
Why don't more people use their savings to make loans rather than keeping the funds in bank accounts that earn very low rates of interest?
There is a risk that the borrower won't pay the money back.
What is commercial lending?
This is when banks make loans to businesses.
Which of the following is the largest liability of a typical bank?
deposits
Velocity is defined as
V = (P xY)/ M
When Congressman Brady stated that Woodrow Wilson used "federalism" to convince Congress to pass the Federal Reserve Act, he meant that
Wilson created a Federal Reserve System composed of 12 district banks under the supervision of a board in Washington.
Does the government create money by printing currency?
Yes, but banks create the majority of the money supply by making loans.
An article in the Wall Street Journal in 2017 about Venezuela notes that: "The economy has shrunk by an estimated 27% since 2013. The International Monetary Fund says inflation this year will hit 720%." Are these facts related? Briefly explain.
Yes, high inflation diminishes the ability of the Venezuelan currency to function as money, leading to lower output growth.
Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for credit? Briefly explain.
Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.
Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet.
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
A pro to a business of ditching cash is
a reduced risk of robbery
if something is to be considered as money, it has to fulfill
all 4 functions
In the securitization process,
banks grant loans to households and bundle the loans into securities that are then sold to investors.
Technological changes that make it possible for businesses to ditch cash include all of the following except
barter
the article qualifies the observation as applying to the developed world. Using bitcoins may be more attractive to individuals and firms in developing countries, such as Brazil or India, than to individuals and firms in the United States be
bitcoins would help conceal the high levels of corruption and illegal activity that take place in developing countries.
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S. Treasury securities from the public.
A central bank can "create money" by buying bonds because
by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply.
Congress passed legislation to create the Federal Reserve System in 1913 in order to
end the instability created by bank panics by acting as a lender of last resort.
A con to a business of ditching cash is
cash is the only medium of exchanged used by some.
The most important role of the Federal Reserve in today's U.S. economy is
controlling the money supply to pursue economic objectives.
Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 definition of the money supply?
c & e
A higher required reserve ratio _________ the value of the simple deposit multiplier.
decreases
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier.
decreases
Which of the following is not a factor that helped lead to the financial crisis of 2007-2009?
deposit insurance for commercial banks
Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________
expands , contracts
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
false. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
fewer; decrease
Startups and small businesses might be more likely than large corporations to rely on banks for funding because
large corporations have more ways to obtain funding than do startups and small businesses.
Very high rates of inflation are called
hyperinflation
________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.
hyperinflation
there is a strong link between changes in the money supply and inflation
in the long run
Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are
included only in M2
A newspaper article contains the statement: "Income is only one way of measuring wealth." Do you agree that income is a way of measuring wealth?
income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts.
When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange
What is fiat money?
money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money
Based on a Survey of Consumer Payment Choice, researchers from the Federal Reserve Bank of Boston estimated that the average consumer, 18 years of age and older, held about $202 in currency. However, there is actually about $4,500 of currency in circulation for every person in the United States. The amount of U.S. currency in circulation is much higher than the amount held by the U.S. population because
more than half of the currency is held outside the borders of the United States.
The financial firms of the shadow banking system were
more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.
According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?
nominal GDP will increase
During the years from 2010 to 2016, the average annual growth rate of M1 was 10.3 percent, while the inflation rate as measured by the GDP deflator averaged 1.6 percent. These values are
not included in the quantity equation.
Which one of the following is not a reason why businesses accept paper currency knowing that, unlike a gold coin, the paper the currency is printed on is worth very little? Paper currency is a good medium of exchange because it is
not valuable
Why do banks require borrowers to submit pay stubs and tax returns when applying for a loan?
pay stubs and tax returns allow lenders to gauge a borrower's ability to pay back the loan.
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants.
The process of ________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets.
securitization
The formula for the simple deposit multiplier is
simple deposit multiplier = 1/RR
The Federal Reserve is divided into two bodies:
the Board of Governors and 12 regional districts.
because of this
the M1 monetary aggregate is a poor measure of the U.S. money supply.
he source line for the Apply the Concept includes an article entitled "Why Your Business Should Ditch Cash." A business that "ditches cash" means
the business no longer accepts currency as payment.
When the Federal Reserve sells Treasury securities in the open market,
the buyers of these securities pay for them with checks and bank reserves fall.
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has.
M1
the narrowest definition of the money supply: The sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks.
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking acount balances.
An article in the Wall Street Journal discussing the relatively slow adoption of bitcoin by individuals and businesses notes that: "The vast majority of consumers, certainly in the developed world, simply don't care about the benefits of decentralization and anonymity." All of the following may help explain the slow adoption of bitcoin except
the vast majority of consumers may not care that bitcoins provide no record of their transactions.
The quantity theory of money is better able
to explain the inflation rate in the long run.
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation.
true
If some of the Roman coins had been taken to Germania, then the coins could have been a medium of exchange in Germania if people began to consider it safe and would have accepted it for payments. If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
true
We can say that loans are funded by deposits because deposits give banks financial capital, which can be loaned out so banks can make a profit.
true
Governments sometimes allow hyperinflation to occur because
when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
There are ________ members of the Board of Governors, who the President of the United States appoints to ________. One of the Board members is appointed Chairman for ________.
7; 14-year nonrenewable terms; a 4-year renewable term
