econ chapter 14 quiz

which one of the following is not the formula for the quantity theory of money

M x Y = P x V

the 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

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 ignore any actions the bank may take as a result of you having withdrawn the $100

M1 remains unchanged

the M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets

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

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

if something is to be considered as money, it has to fulfill

all four functions

which of the following is not a policy tool the federal reserve uses to manage the money supply

changing income tax rates

an increase in the amount of excess reserves that banks keep ____ the value of the real-world deposit multiplier

decreases

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

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

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

evidence shows that the quantity equation is correct over the long run, which implies that the

growth rate of money supply determines the rate of inflation

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

very high rates of inflation are called

hyperinflation

what is included in M2 but not M1

money market deposit accounts in banks

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

no, because only the most high risk borrowers will accept loans, meaning the borrower is more likely to default

in the definition of money supply, where do credit cards belong

not included in the definition of money supply

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

NOT a function of money

open market operation

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

the formula for the simple deposit multiplier

simple deposit multiplier = 1/RR

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

which policy tool is the most important

the fed conducts monetary policy principally through open market operations

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 the real GDP, then there will be inflation

the average number of times each dollar in the money supply is used to purchase goods and services is called

the velocity of money

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 wont pay the money back

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

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