Chapter 14 - Econ 110

Refer to 14-2. As a result of Kristy's deposit, Bank A's reserves immediately increase by

$10,000.

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A's excess reserves increase by

$8,000.

The sale of Treasury securities by the Federal Reserve will, in general,

decrease the quantity of reserves held by banks.

The required reserves of a bank equal its ________ the required reserve ratio.

deposits multiplied by

Economists estimate that ________ of U.S. currency is outside the United States and held primarily by ________.

over half; households and firms in countries where there is little confidence in the local currency

Dollar bills in the modern economy serve as money because

people have confidence that others will accept them as money.

In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP) by

providing funds to banks in exchange for stock.

The seven members of the Board of Governors of the Federal Reserve are appointed by

the President.

In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by

the establishment of the Federal Deposit Insurance Corporation.

Which of the following determines the amount of money the banking system as a whole can create?

the quantity of bank reserves

The quantity theory of money was derived from the quantity equation by asserting that

the velocity of money was fixed.

Soldiers in a World War II prisoner-of-war camp

used gold as a fiat money.

Bank reserves include

vault cash and deposits with the Federal Reserve.

As was demonstrated in 2007, firms in the shadow banking system

were very vulnerable to bank runs.

If households and firms decide to hold less of their money in checking account deposits and more in currency, then the money supply

will decrease.

Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A can make a maximum loan of

8,000

Which of the following best describes how banks create money?

Banks create checking account deposits when making loans from excess reserves.

Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

$1,800.

Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the required reserve ratio is 10 percent, what is the maximum change in money supply

$180 million

Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 8 percent, then the bank can make a maximum loan of

$2 million.

M2 in this simple economy equals

$21,000.

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of

$5,000.

Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

$50,000.

Suppose a transaction changes a bank's balance sheet as indicated in the following T - account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of

$7,200.

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity.

If a bank receives a $1 million discount loan from the Federal Reserve, then the bank's reserves will

increase by $1 million.

The purchase of Treasury securities by the Federal Reserve will, in general,

increase the quantity of reserves held by banks.

If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will ________ and M2 will ________

increase; not change

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate

increases; increases

A decrease in the reserve requirement ________ bank reserves and ________ the money supply.

increases; increases

Which of the following information about fiat money is false ? Fiat money

is backed by gold.

People hold money as opposed to financial assets because money

is perfectly liquid.

The quantity equation states that the

money supply times the velocity of money equals the price level times real output.

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount policy, and reserve requirements.

The main tool that the Federal Reserve uses to conduct monetary policy is

open market operations.

To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could

sell Treasury securities.

Money market mutual funds sell shares to investors and use the money to buy

short-term securities.

The Federal Reserve was established in 1913 to

stop bank panics by acting as a lender of last resort.

M1 equals

sum of currency, value of all checking account deposits and the value of traveler checks

M2 equals

sum of currency, value of all checking account deposits, the value of traveler checks, saving account balances, small denomination time deposits, balances in money market deposits, and noninstiutional money market fund shares.

Hyperinflation can be caused by

the government selling bonds to the central bank.

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants.

Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

50,000

Commodity money

has value independent of its use as money.

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

11 percent.

According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be

15 percent.

The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.

Federal Reserve's Board of Governors; four presidents

The most liquid measure of money supply is

M1.

Open market operations refer to the purchase or sale of ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

According to the U.S. Treasury,

U.S. dollars must be accepted as payment for any good or service sold in the United States.

The statement, "My iPhone is worth $300" represents money's function as

a unit of account.

In 2008, the inflation rate in Zimbabwe rose to almost 15 billion percent, and eventually foreigners and local residents refused to accept the Zimbabwean dollar for goods and services. In early 2009, the new Zimbabwean government decided to

abandon its own currency and make the U.S. dollar the country's official currency.

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

acting as a lender of last resort.

In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large amount of new funds available to financial markets. The Fed expected this to increase in the money supply and the total amount of lending because of the multiplier effect, in which a given amount of new reserves results in a multiple increase in

bank deposits.

Economies where goods and services are traded directly for other goods and services are called ________ economies

barter

Economies where goods and services are traded directly for other goods and services are called ________ economies.

barter

Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because

borrowers will have to pay increasing amounts in real terms over time.

The largest liability on the balance sheet of most banks is its

checking account and savings account deposits of its customers.

The largest proportion of M1 is made up of

checking account deposits.

Silver is an example of a

commodity money.

To increase the money supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

Which of the following is not counted in M1

credit card balances

The M1 measure of the money supply equals

currency plus checking account balances plus traveler's checks.

In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience

hyperinflation.

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

Money's most narrow definition is based on its function as a

medium of exchange.

The quantity theory of money predicts that, in the long run, inflation results from the

money supply growing at a faster rate than real GDP.

The major assets on a bank's balance sheet are its

reserves, loans, and checking account deposits.

If the central bank can act as a lender of last resort during a banking panic, banks can

satisfy customer withdrawal needs and eventually restore the public's faith in the banking system

The process of bundling loans together and buying and selling these bundles in a secondary financial market is called

securitization.

Which of the following is not a consequence of the Fed changing the reserve requirement?

Changes in the ratio are easily incorporated into banks' routine management.

Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic

Required reserves would increase.

Banks can continue to make loans until their

actual reserves equal their required reserves.

A bank will consider a car loan to a customer ________ and a customer's checking account to be ________

an asset; a liability

In economics, money is defined as

any asset people generally accept in exchange for goods and services.