ECON 202 CHAPTER 14

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 A. market clearing mechanism. Your answer is not correct.B. theory of comparative advantage. C. principle of a double coincidence of wants. This is the correct answer.D. irrational exuberance doctrine.

principle of a double coincidence of wants.

In an article in the American Free Press​, Professor Peter Spencer of York University in England is quoted as​ saying: ​"This printing of money​ 'will keep the​ [deflation] wolf from the​ door'." In the same​ article, Ambrose​ Evans-Pritchard, a writer for the​ London-based newspaper The Telegraph​, is quoted as​ saying: ​"Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a​ grip, it can gradually set off a​ self-feeding spiral that is hard to​ stop." ​Source: Doug​ French, "We Should Celebrate Price​ Deflation," American Free Press​, November​ 17, 2008. What is price​ deflation? A. A fall in the price level. B. An increase in the price level. C. A decrease in the rate of growth of the price level. D. An increase in the rate of growth of the price level.

A. A fall in the price level.

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"? A. Consumers delay​ purchases, expecting prices to fall​ more, and the lack of demand causes prices to fall further. B. Decreases in the price level cause the money supply to​ decrease, which makes it difficult to purchase goods. C. Deflation increases purchasing​ power, so it is not necessary to buy as many goods. D. Banks will be unwilling to lend when prices are​ falling, causing a decrease in investment and a fall in demand.

A. Consumers delay​ purchases, expecting prices to fall​ more, and the lack of demand causes prices to fall further.

An initial decrease in a​ bank's reserves will decrease checkable deposits A. by an amount greater than the decrease in reserves. B. by an amount equal to the decrease in reserves. C. by an amount less than the decrease in reserves. D. An initial decrease in reserves will increase checkable deposits.

A. by an amount greater than the decrease in reserves.

Which of the following is the largest liability of a typical​ bank? A. deposits B. reserves C. Treasury bills D. loans

A. deposits

Credit cards are A. included in neither the M1 definition of the money supply nor in the M2 definition. B. included in the M2 definition of the money​ supply, but not in the M1 definition. C. included in the M1 definition of the money​ supply, but not in the M2 definition. D. included in both the M1 and the M2 definitions of the money supply.

A. included in neither the M1 definition of the money supply nor in the M2 definition.

The Federal Reserve Bank of New York is always a voting member of the FOMC because A. it carries out the policy directives of the FOMC. B. it always has an employee as a member of the Board of Governors. C. it has the most political affiliations of the Federal Reserve districts. D. it is the largest of the Federal Reserve districts.

A. it carries out the policy directives of the FOMC.

This policy change would​ "free up​ cash" because A. reserves that were required are now excess reserves available for lending. B. total deposits would increase. C. reserves that were excess are now required reserves available for lending. D. total reserves would increase.

A. reserves that were required are now excess reserves available for lending.

A double coincidence of wants refers to A. the fact that for a barter trade to take place between two​ people, each person must want what the other one has. B. the situation in which a good that is used as money also has value independent of its use as money. C. the idea that a barter economy is more efficient than an economy that uses money. D. the situation where two parties are involved in a transaction where money is the medium of exchange.

A. the fact that for a barter trade to take place between two​ people, each person must want what the other one has.

M1 includes more than just currency because A. other assets can also be used to make transactions to buy goods and services. B. the federal mint makes a profit from printing currency as dollar bills. C. the government wants to be able to quote that there is a large amount of money in the economy. D. people hold money as other stores of value such as savings accounts and money market mutual funds. Your answer is not correct. The amount of U.S. currency outstanding averages to about​ $2,800 per person in the U.S. This large amount of currency per person can be partially explained because A. rich people hold massive amounts of currency in vaults and​ safes, which makes the average large. B. most people carry large quantities of currency in their wallets and purses. C. many U.S. dollars are held outside of the country by foreigners. D. All of the above.

A. other assets can also be used to make transactions to buy goods and services. C. many U.S. dollars are held outside of the country by foreigners.

The U.S. dollar can best be described as A. reserve money. B. fiat money. C. commodity-backed money. D. commodity money.

B. fiat money.

Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as​ reserves? A. the simple deposit multiplier B. the required reserve ratio C. the quantity equation D. the cash to deposit ratio

B. the required reserve ratio

Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$40 ​billion? A. ​$600 billion increase B. ​$267 billion increase C. ​$3 billion increase D. ​$40 billion increase

B. ​$267 billion increase

In a fractional reserve banking system LOADING...​, what is the difference between a​ "bank run" and a​ "bank panic?" A. A bank run is a U.S.​ issue; a bank panic is an international issue. B. A bank run involves one​ bank; a bank panic involves many banks. C. A bank run is a local​ issue; a bank panic is a national issue. D. A bank run involves many​ banks; a bank panic involves one bank.

B. A bank run involves one​ bank; a bank panic involves many banks.

Which of the following is NOT a function of​ money? A. Unit of account B. Acceptability C. Store of value D. Medium of exchange

B. Acceptability

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. A. True. Deposits that sit in a bank as vault cash earn no interest. B. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve. C. False. In​ reality, banks are rarely able to find borrowers for all of their deposits. D. True. Any money that is left over after a bank loans money to businesses and households will be loaned to other banks.

B. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

In​ 2008, the required reserve ratio for a​ bank's first​ $9.3 million in checking account deposits was zero. It was 3 percent on deposits between​ $9.3 million and​ $43.9 million, and 10 percent on deposits above​ $43.9 million. In most​ cases, and for​ simplicity, we assume that the required reserve ratio is 10 percent on all deposits.​ Therefore, the simple deposit multiplier is 10. Is the​ real-world deposit multiplier greater​ than, less​ than, or equal to the simple deposit​ multiplier? A. Equal. There is no difference between the two. B. Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier. C. Greater. Inflation plays a large role in the increase in checkable deposits. D. None of the above. They are very different concepts.

B. Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier.

Which of the following is not a correct statement about​ M2? A. M2 is a broader definition of money compared to M1 and currency. B. M2 is the best definition of money as a medium of exchange. C. M2 includes all of the assets in M1. D. M2 includes savings​ accounts, small-denomination time​ deposits, and money market mutual funds. If you move​ $100 from your savings account to your checking​ account, then M1 will _______ and M2 will _______.

B. M2 is the best definition of money as a medium of exchange. increase by 100$ remain the same

Which of the following is included in M2 but not​ M1? A. ​Traveler's checks B. Money market deposit accounts in banks C. Currency D. Checking account deposits at banks

B. Money market deposit accounts in banks

Suppose that the Federal Reserve makes a​ $10 million discount loan to First National Bank​ (FNB) by increasing​ FNB's account at the Fed. Complete the following​ T-account to show the impact of this transaction. First National Bank Assets Liabilities Reserves $10 million Discount loan $10 million Assume that before receiving the discount​ loan, FNB had no excess reserves LOADING.... The maximum amount of the​ $10 million that FNB can issue in loans is $10 million . Assume that the required reserve ratio is​ 10%. The maximum total increase in the money supply that can result from the​ Fed's discount loan is A. ​$9 million. B. ​$100 million. C.​ $90 million. D. None of the above.

B. 100 million

The figure to the right shows a breakdown of the M1 definition LOADING...of the money supply in 2015. Which area corresponds to the amount of checking account​ deposits? A. A B. B C. C

C

In a speech delivered in June​ 2008, Timothy​ Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury​ secretary, said: The structure of the financial system changed fundamentally during the boom. . . .​ [The] non-bank financial system grew to be very large. . . .​ [The] institutions in this parallel financial system​ [are] vulnerable to a classic type of​ run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks. ​Source: Timothy F.​ Geithner, "Reducing Systemic Risk in a Dynamic Financial​ System," Remarks at the Economics Club of New​ York, June​ 9, 2008. What did Geithner mean by the​ "non-bank financial​ system"? A. Banks that are outside of the Federal Reserve System and thus not subject to ordinary banking regulations. B. Buyers and sellers of stocks and bonds in asset markets that are outside of the banking system. C. Money market mutual​ funds, hedge​ funds, and other financial firms that raise money from investors and provide it to firms and households. D. Credit​ unions, savings and​ loans, and other thrift institutions that are not classified as commercial banks but still take deposits and make loans.

C. Money market mutual​ funds, hedge​ funds, and other financial firms that raise money from investors and provide it to firms and households.

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." ​Source: W. Stanley Jevons​, Money and the Mechanism of Exchange​, New​ York: D. Appleton and​ Company, 1889, pp.​ 1-2. Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money LOADING...​? A. No. The goods are not a medium of exchange. B. No. The goods are only a medium of exchange and store of value. C. No. The goods are not a store of value. D. Yes. The goods fulfill all four functions of money.

C. No. The goods are not a store of value.

c. Why would deposit insurance provide the banking system with protection against​ runs? A. To be covered by deposit​ insurance, depositors must agree not to withdraw all their funds without notice. B. Deposit insurance guarantees that banks cannot go out of business by losing deposits. C. Since most depositors are​ insured, it is less likely that panicked buyers will simultaneously withdraw funds. D. Deposit insurance guarantees all​ deposits, and thus there is no incentive to withdraw funds.

C. Since most depositors are​ insured, it is less likely that panicked buyers will simultaneously withdraw funds.

According to the quantity theory of money LOADING...​, inflation results from which of the​ following? A. The money supply grows at the same rate as GDP. B. The money supply grows slower than real GDP. C. The money supply grows faster than real GDP.

C. The money supply grows faster than real GDP.

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. A. Your​ bank's balance sheet shows an increase in reserves by​ $100 and an increase in deposits by​ $100. B. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and an increase in deposits by​ $100. C. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100. D. Your​ bank's balance sheet shows an increase in reserves by​ $100 and a decrease in deposits by​ $100.

C. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100.

The​ People's Bank of China was hoping this policy action would A. increase interest rate income for investors. B. expand the banking sector. C. stimulate economic growth. D. lower the inflation rate.

C. stimulate economic growth.

When the Federal Reserve sells Treasury securities in the open​ market, A. the public starts selling houses and firms disinvest in anticipation of banks decreasing their reserves. B. the sellers of such securities deposit the funds in their banks and bank reserves decrease. C. the buyers of these securities pay for them with checks and bank reserves fall. D. the buyers of such securities buy new securities in the open market and there is a decrease in bank reserves.

C. the buyers of these securities pay for them with checks and bank reserves fall.

When the Federal Reserve purchases Treasury securities in the open​ market, A. the buyers of these securities pay for them with checks drawn on their bank account and bank reserves increase. B. the sellers of such securities buy new securities in the open market and there is an increase in bank reserves. C. the sellers of such securities deposit the funds in their banks and bank reserves increase. D. the public starts buying houses and firms invest in anticipation of bank increasing their reserves.

C. 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 A. ​$180 million. B. ​$200 million. C. ​$1.8 billion. D. ​$2 billion.

C. ​$1.8 billion.

According to Peter​ Heather, a historian at​ King's College​ London, during the Roman​ Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins​ instead: ​"Although no coinage was produced in​ Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange​ (already in the first​ century, Tacitus tells​ us, Germani of the Rhine region were using​ good-quality Roman silver coins for this​ purpose)." ​Source: Peter​ Heather, The Fall of the Roman​ Empire: A New History of Rome and the Barbarians​, New​ York:Oxford University​ Press, 2006, p. 89. When sellers are willing to accept money in exchange for goods and​ services, money is acting as a a. store of value. B. standard of deferred payments. C.medium of exchange. D. unit of account. 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 False

C. medium of exchange True

What is meant by Professor​ Spencer's statement​ "This printing of money​ 'will keep the​ [deflation] wolf from the​ door'"? A. An increase in the money supply will increase the velocity of​ money, and thus there will be hyperinflation. B. An increase in the money supply will decrease the price level because money will be worth less. C. An increase in the money supply will cause consumers to demand more goods. D. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.

D. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.

Which of the following is not a policy tool the Federal Reserve uses to manage the money​ supply? A. Reserve requirements. B. Discount policy. C. Open market operations. D. Changing Income tax rates.

D. Changing Income tax rates.

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." A. Disagree. The people who hold dollars in foreign countries tend to be wealthy Americans living abroad. B. Agree. Money and wealth are synonymous.​ Therefore, more money abroad is less wealth in the U.S. C. Agree. Wealth is the value of currency you hold minus any debts you have. Less money means less wealth. D. Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.

D. Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.

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? A. M2 will decrease and M1 will increase. B. M2 will increase and M1 will decrease. C. M2 will​ increase, but M1 will not be affected. D. M2 will not be​ affected, but M1 will increase.

D. M2 will not be​ affected, but M1 will increase.

b. What is a​ "classic type of​ run"? A. Many investors decide to sell funds at the same​ time, which runs down the price or value of the asset. B. Many investors decide to purchase funds at the same​ time, which runs up the price or value of the asset. C. Many banks simultaneously decide to issue​ mortgage-backed securities, driving down their price. D. Many depositors simultaneously decide to withdraw their money from a bank.

D. Many depositors simultaneously decide to withdraw their money from a bank.

Which of the following is a monetary policy LOADING... tool used by the Federal Reserve​ Bank? A. Increasing the reserve requirement from 10 percent to 12.5 percent. B. Decreasing the rate at which banks can borrow money from the Federal Reserve. C. Buying​ $500 million worth of government​ securities, such as Treasury bills. D. All of the above.

D. all of the above

Reserve requirements are changed infrequently because A. banks can determine the amount of reserves they wish to hold regardless of the reserve requirement. B. banks set loan decisions based on credit ratings and do not need to focus on reserve requirements. C. banks cannot usually meet the reserve requirement so the Fed does not monitor it. D. banks set​ long-term policy​ decisions, loan​ decisions, and deposit decisions based on the reserve requirement.

D. banks set​ long-term policy​ decisions, loan​ decisions, and deposit decisions based on the reserve requirement.

An article in the Wall Street Journal reported in 2015 that the​ People's Bank of​ China, which is the central bank of​ China, "is freeing up cash by reducing the amount that banks must keep in​ reserve." ​Source: Lingling​ Wei,​ "China Central Bank Checks Europe Playbook on​ Credit," Wall Street Journal​, April​ 19, 2015. The monetary policy tool that the​ People's Bank of China was using was changes to the A. volume of bonds. B. discount rate. C. interest rate. D. required reserve ratio.

D. required reserve ratio.

Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money​ supply? A. discount rate B. open market operations C. discount loans D. reserve requirements

D. reserve requirements

Which of the following is true with respect to ​hyperinflation? A. In the presence of​ hyperinflation, firms and households avoid holding money. B. It can be hundredslong dasheven thousandslong dashof percentage points per year. C. It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. D. All of the above.

D. All of the above

The​ (FOMC) Federal Open Market Committee A. includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks​ (though not all are voting​ members). B. determines the target federal funds rate and the direction of open market operation policies. C. makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents. D. All of the above. E. A and B only.

D. all of the above

Which of the following is true with respect to Irving​ Fisher's quantity​ equation, M x V = P x Y​? A. M​ = M1 definition of the money supply B. P​ = the GDP deflator C. V= P x Y / M D. V​ = Average number of times a dollar is spent on goods and services E. All of the above

E. all of the above

The use of money A. eliminates the double coincidence of wants. B. reduces the transaction costs of exchange. C. allows for greater specialization. D. all of the above.

all of the above

Velocity is defined as: a. V = M/(P x Y). b. V = M x P x Y. c. V = M + P + Y. d. V=(P x Y)/M.

d. V=(P x Y)/M.

The quantity theory of money is better able A. to explain the natural rate of unemployment in the long run. Your answer is not correct.B. to explain the full employment in the long run. C. to explain the inflation rate in the short run. D. to explain the inflation rate in the long run.

explain the inflation rate in the long run

In addition to the Federal Reserve​ Bank, what other economic actors influence the money​ supply? A. The U.S. President and Vice President. B. The U.S. Senate and the U.S. House of Representatives. Your answer is not correct.C. The U.S. Mint and the U.S. Treasury. D. ​Households, firms, and banks.

households firms and banks