ECO372T_Week4_Practice_&_Assignments

Determine whether each item listed below is included: A certificate of deposit. (a) in both M1 and M2 (b) only M2 (c) in neither M1 or M2

(b) only M2

Determine whether each item listed below is included: The money you have in your savings account. (a) in both M1 and M2 (b) only M2 (c) in neither M1 or M2

(b) only M2

The most liquid measure of money supply; includes demand deposits, traveler's checks, currency, and other checkable deposits. M1 = Currency + Demand Deposits + Other Checkable Deposits + Traveler's Checks

M1

A broader definition of the money supply: it includes M1 plus savings account deposits, small-denomination time deposits, balances in money market deposit accounts in banks, and non institutional money market fund shares M2 = M1 + Savings Deposits + Money Market Funds + Small Time Deposits

M2 = M1 + Savings Deposits + Money Market Funds + Small Time Deposits

_______ ______ can change the money supply by increasing or decreasing the amount of reserves in the banking system

The Fed

Monetary Policy

The actions taken by a country's central bank to influence the supply of money and credit in the economy.

Money Multiplier

The amount by which a $1 change in reserves will change the money supply.

Liquidity

The degree to which an asset can be readily converted into currency.

M1

The most liquid measure of the money supply; includes: demand deposits traveler's checks currency and other checkable deposits (aka checking accounts)

The reserves of a bank held as currency ear little to no interest. True or False

True In normal times, excess reserves aren't profitable, as they don't earn a return. Instead of holding cash as excess reserves, banks could lend those funds and earn interest. ... The federal funds rate can be thought of as the interest rate at which financial institutions make short-term loans to each other.

The Fed serves as

the bank of the federal government.

Determine whether each item listed below is included: Your available credit on your home equity line of credit. (a) in both M1 and M2 (b) only M2 (c) in neither M1 or M2

(c) in neither M1 or M2

Which of the following is considered money? - Credit cards - Cheques - Debit cards - Checkable deposits

- Checkable deposits

The Three Functions of Money:

- Medium of Exchange - Unit of Account - Store of Value

The federal reserve operates independently within the government because:

- Once a fed governor is confirmed by the senate, a president cannot decide to remove the governor from his or her position - the federal open market committee meets behind closed doors

The Federal Reserve is not independent of government because:

- The Senate either confirms or rejects a nominated Federal Reserve governor. - Congress can decide to increase scrutiny FEDS accounting records. - The chairperson of the Federal Reserve Board of governors is required to testify before congress. - Congress can decide to terminate the Federal Reserve System.

The federal deposit insurance corporation (FDIC) is ___________

- a government corporation that operates as an independent agency - not part of the federal reserve system

The institutions that largely influence money supply are: - banks and the Fed - the U.S. treasury and banks - the U.S. mint and the Fed - the U.S. senate and banks

- banks and the Fed

Interest rates and prices are often determined: - by the U.S. mint - by the number of commercial banks in an economy - by the federal government - by the money in an economy

- by the money in an economy

Examples of M2 assets would be: - certificates of deposits - stocks - bonds - a savings account - time deposit

- certificates of deposits - a savings account - time deposits

the federal reserve is not independent of government because:

- congress can decide to terminate the federal reserve system - congress can decide to increase scrutiny of the feds accounting records- the chairperson of the federal reserve board of governors is required to testify before congress- the us president nominates federal reserve governors - the president appoints the federal reserve chairperson from among the federal reserve board of governors

The majority of the money in the U.S. economy is: - in $20 and $100 dollar bills - nothing tangible you can hold, but is instead merely a computer entry - held as paper currency - comprised of currency that was printed last year

- nothing tangible you can hold, but is instead merely a computer entry

Suppose the reserve requirement is 15%, for every $100 on deposit, the banks needs to hold $______ on reserves

$15

As the bank for the federal government, the Fed: - processes government checks - clears checks - process postal money orders - makes small transfers - processes U.S. savings bonds

- processes government checks - processes postal money orders - processes U.S. savings bonds

The Federal Open Market Committee (FOMC)

- promotes stable prices - determines and implements the nations monetary policy - promotes economic growth in the U.S. economy - controls the money supply

The Fed provides banks with financial services by:

- receiving and delivering the currency - transferring funds - clearing checks

Choose the correct answer: The federal reserve: - coordinates the operations of congress and the president - regulates member banks to promote stable prices and economic growth - makes banking rules for developed nations - controls the operations of the stock market

- regulates member banks to promote stable prices and economic growth

The Federal Reserve operate independently within the government because:

- the President or Congress does not order the Federal Reserve to pursue some specific course of action. - once a Fed governor is confirmed by the Senate, a President cannot decide to remove the governor from his or her position.

The members of the federal open market include:

- the board of governors - the president of the New York fed - four presidents from district banks other than NY

Transaction demand depends on:

1) how much output people buy. 2) how expensive output is.

Explain the changes in M1 and M2 for each of the following scenarios.

1. When Lily transfers $100 from her savings account into her checking account, M1 increase by $100 and M2 remain the same. 2. If Miguel deposits $200 cash into his money market mutual fund, M1 decrease by $200 and M2 remain the same. 3. If Sam takes $1,000 from his savings account to purchase Microsoft stock, M1 remain the same and M2 decrease by $1,000.

President Woodrow Wilson signed the Federal Reserve Act in ________.

1913 The 1913 Federal Reserve Act created the Federal Reserve System. It was implemented to establish economic stability in the U.S. by introducing a Central Bank to oversee monetary policy. The Federal Reserve Act is one of the most influential laws shaping the U.S. financial system.

Suppose that Ava withdraws $300 from her savings account at Second Bank. The reserve requirement facing Second Bank is 10%. Assume the bank does not wish to hold any excess reserves of new deposits. Use this information to complete the balance sheet below to show how Second Bank's assets and liabilities change when Ava withdraws the $300 from the bank.

A Simple Bank Balance Sheet Assets Change in Reserves: $ -30 Change in Loans: $ -270 Liabilities Change in Deposits: $ -300 Explanation When Ava withdraws $300 from her savings account, it will decrease the amount of deposits at Second Bank by $300. This will reduce deposits and the amount that the bank has for reserves and loans. So -$300 should be entered into the response on the liabilities side. Since the reserve requirement is 10% and the bank holds no excess reserves, the bank will decrease reserves by 10% × -$300 = -$30, so -$30 should be entered into the response on the asset side as reserves. Given that banks does not hold excess reserves, any amount of deposits withdrawn that do not come from reserves would have to be a reduction in loans. This typically comes from loans that are repaid and not lent out again. Since the withdrawal is $300 and the bank only uses $30 from reserves, then $300 - $30 = $270 is the amount of the withdrawal that will need to come from a reduction in loans. To show the reduction in loans, the $270 decrease in loans would be entered into the response on the asset side as loans.

For each of the following, determine whether the item meets the economic definition of money: - medium of exchange - unit of account - store of value

A U.S. $20 bill. It is a medium of exchange. It is a unit of account. It is a store of value. It is money.

M2

A broader measure of the money supply that includes: M1 savings deposits small-denomination time deposits money market mutual funds

Traveler's Check

A certificate, or check, that can be converted to currency.

Store of Value

A characteristic of certain assets that enables them to transfer wealth from the present into the future; one of the functions of money.

Money Market Mutual Fund

A demand deposit that accepts deposits and purchases short-term bonds and commercial debt in order to pay interest on the deposited funds.

money market mutual fund (MMMF)

A demand deposit that accepts deposits and purchases short-term bonds and commercial debt in order to pay interest on the deposited funds.

The asset demand for money is

A downward-sloping curve. As the interest rate falls, the quantity of money demanded increases.

Unit of Account

A measurement unit that allows buyers and sellers to easily compare the value of different goods, services, and resources; one of the functions of money.

All of the following are included in M1 except A: checking account balances B: coin and currency C: money market mutual fund shares D: travler's checks

A: checking account balances

Medium of Exchange

Any item used to facilitate trade between buyers and sellers; one of the functions of money.

Explanation Money is commonly computed into two types of money supplies: M1, which includes currency, demand deposits, traveler's checks, and other checkable deposits, and M2, which includes M1 (all of the assets in M1), savings accounts, retail money funds (money market mutual funds), and small-denomination time deposits. a. M1 = Currency + Demand Deposits + Other Checkable Deposits + Traveler's Checks = $82 billion + $80 billion + $37 billion + $4 billion = $203 billion b. M2 = M1 + Savings Deposits + Money Market Funds + Small Time Deposits = $203 billion (found in part a) + $460 billion + $44 billion + $22 billion = $729 billion

Calculate the M1 Money Supply: 203 billion Calculate the M2 Money Supply: 729 billions

As the bank for the federal government the FED:

Collects federal tax paymentsprocesses US savings bondsprocesses postal money orders.

_________ in active circulation includes money in everyone's pockets and is part of ____

Currency, M1

The reserve requirement for commercial banks A: is set by the president of the united states B: is actually less than that required to prevent a run on bank deposits. C: is set by the US congress D: has a direct effect on how much money can be created from a new deposit

D: has a direct effect on how much money can be created from a new deposit

FOMC

Determines and implements the nations monetary policy and controls the money supply "to promote stable prices and economic growth" in the US economy

The Federal Reserve Act of 1913:

Established the federal reserve system.

___________ reserves are equal to total reserves minus required reserves.

Excess

The Federal Reserve is commonly called the ______.

Fed

When banks in the U.S. need additional currency for customers, they get it from the _______.

Fed.

The entity that oversees research into domestic and international financial conditions and investigates the health of the economy, the effect of banking laws, and other issues that consumers and businesses face is the:

Federal Reserve Board of Governors

___________ rates affect investment, economic growth, inflation, and employment

Interest

_________________ facilitates trade between buyers and sellers, and makes specialization more possible, which helps make the economy more productive.

Money

Demand Deposits aka checking account balance aka checkable deposits

Money held in an account that can be converted to currency on demand. Often called checkable deposits or checking accounts.

Time Deposit

Money held in an account that cannot be converted to currency, without a penalty, before a specified time.

Are model cars... - a medium of exchange? - a unit of account? - a store of value? - money?

No to all, except a store of value. It is a store of value.

Is the Mona Lisa... - a medium of exchange? - a unit of account? - a store of value? - money?

No to all, except a store of value. It is a store of value.

Is silver... - a medium of exchange? - a unit of account? - a store of value? - money?

No, no, yes, no

You can write a check to pay for goods and services. The check itself is: - money - not money

Not money.

Currency

Physical units of money, such as cash and coins.

The Federal Reserve:

Regulates member banks to promote stable prices and economic growth.

Money held in an account that cannot be converted to currency, without penalty, before a specified time.

Time Deposit

___________ demand depends on how much output people buy, which is based on their incomes;and how expensive the output is, which is based on the _______.

Transaction; price

A certificate, or check that can be converted to currency

Traveler's Check

The Federal Reserve is so powerful that statements made can affect stocks halfway around the world. - True - False

True

Is postage stamp in prison... - a medium of exchange? - a unit of account? - a store of value? - money?

Yes, yes, yes, yes.

Suppose the transaction demand for money is $8 billion. Graphically, the transaction demand for money is

a vertical line at $8 billion.

Suppose the Federal Reserve increases the amount of reserves by $100 million and the total money supply increases by $500 million.

a. What is the money multiplier? 5 b. Using the money multiplier from part a, how much will the money supply change if the Federal Reserve increases reserves by $50 million? $250m Explanation a. Depending on the data that you have, the money multiplier can be found by taking 1/rr or by taking the total change in the money supply divided by the change in reserves. In this case, we are given the change in reserves of $100 million and the total change in the money supply of $500 million. Therefore, we can find the money multiplier by taking the total change in the money supply divided by the change in reserves, which is equal to $500 million/$100 million = 5. b. When we know the money multiplier, we can find the total change in the money supply by taking the money multiplier times the change in reserves. If the money multiplier is 5 and reserves increase by $50 million, then the total change in the money supply can be found by taking 5 × $50 million = $250 million. Therefore, the money supply increases by a total of $250 million.

Suppose the Federal Reserve increases the amount of reserves by $100 million and the total money supply increases by $500 million. a. What is the money multiplier? b. Using the money multiplier from part a, how much will the money supply change if the Federal Reserve increases reserves by $50 million?

a. What is the money multiplier? 5 b. Using the money multiplier from part a, how much will the money supply change if the Federal Reserve increases reserves by $50 million? $250m Explanation: a. Depending on the data that you have, the money multiplier can be found by taking 1/rr or by taking the total change in the money supply divided by the change in reserves. In this case, we are given the change in reserves of $100 million and the total change in the money supply of $500 million. Therefore, we can find the money multiplier by taking the total change in the money supply divided by the change in reserves, which is equal to $500 million/$100 million = 5. b. When we know the money multiplier, we can find the total change in the money supply by taking the money multiplier times the change in reserves. If the money multiplier is 5 and reserves increase by $50 million, then the total change in the money supply can be found by taking 5 × $50 million = $250 million. Therefore, the money supply increases by a total of $250 million.

affect investment, economic growth, inflation, and employment

affect investment, economic growth, inflation, and employment

Bond cost and bond yield

always move in opposite direction.

In economics, the word money means: - how much income a person earns - how much savings a person has - any item that both buyers and sellers will generally accept in exchange for goods and services - how much wealth a person has

any item that both buyers and sellers will generally accept in exchange for goods and services

Money is:

anything that both buyers and sellers will accept in exchange for goods and services. Explanation Money is more than just currency or metal. Money can be anything that both buyers and sellers will accept in exchange for goods and services. Other items, such as seeds, grains, or cows have been used as money in the past. However, some goods—like currency and coins—are better at facilitating trade than other goods.

Loans are an _______ to a bank and a ___________ to the person who borrowed the money.

asset; liability

Which of the following is NOT a function of the Fed? A: providing a system of check collection and clearing for depository institutions B: regulating the money supply in the economy C: offering checking accounts to the US public D: Acting as goverment's fiscal agent

c: offering checking accounts to the US public

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

Money held in an account that can be converted to currency on demand. often called checkable deposits or checking accounts.

demand deposits

The interest rate at which banks can borrow money directly from the federal reserve is called the:

discount rate

Monetary policy affects interest rates which in turn, affect:

economic growth, inflation, employment, investment

A __________ of the money in an economy is issued by the Federal Reserve; the rest is created by banks.

fraction

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal is known as:

fractional reserve banking

the fed operates:

independently within the government, but not independent of it

The ____________ rate is the payment made to agents that lend or see money, expressed as annualized percentage of the monetary amount lent or saved.

interest

Banks play a crucial role in determining _______ rates and the __________ supply.

interest (rates) money (supply) Banks bring together people who have money, with people who would like to borrow money. This can affect the money supply and interest rates.

The Federal Reserve District Banks are divided:

into geographical regions with the majority of the district banks located in the eastern half of the United States. Explanation The 12 Federal Reserve District Banks were designed and created to allow smaller geographical regions representation in the nation's monetary policies. The regions were formed in 1913 based on where the majority of the population and economic interests were concentrated. Therefore, the majority of the district banks were located in the eastern half of the United States, which made up most of the economic activity of the United States in 1913.

Conducting Fiscal Policy is/is not;

is not a duty of the Federal Reserve.

Central Banks do not:

make loans to you, other households, or to businesses other than banks

Using __________ as a means of exchange in our economy makes it easier for people to make transactions with each other.

money

In order to conduct daily transactions and have a stable asset for future purchases,

people hold one of their savings as money.

Currency is

physical units of money, such as cash and coins

Interest is the _________ ___ ____________.

price of money.

Monetary policy affects _____________ rates charged on loans and paid on savings.

refers to the Fed's actions to influence the supply of money and credit in the US economy; affects interest rates charged on loans and paid on savings, thereby influencing the price of goods, services, and resources

To make sure banks meet the daily needs of customers, the Federal Reserve enforces a:

reserve requirement

If the bank keeps all deposits as __________, the bank won't make any money.

reserves

The money _____________ in an economy is largely determined by a central monetary authority

supply

A _______ deposit is an interest-bearing deposit held by a bank or financial institution for a fixed term whereby the depositor can only withdraw the funds after giving notice.

time

Every ___ years, a new member is appointed to the Federal Reserve Board of Governors.

two