econ final
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 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
$100 million.
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.
The United States is divided into 12 Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of 7 members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a 4 year, renewable term as the chairman.
12,7,4
In a fractional reserve banking system LOADING... , what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank; a bank panic involves many banks.
Which of the following is NOT a function of money?
Acceptability
The (FOMC) Federal Open Market Committee
All of the above
Which of the following is true with respect to Irving Fisher's quantity equation, Upper M times Upper V equals Upper P times Upper M×V=P×Y?
All of the above
Which of the following conditions make a good suitable for use as a medium of exchange?
All of the above conditions must be met.
The M1 measure of the money supply includes which of the following components?
All of the above.
The simple deposit multiplier equals
All of the above.
Which of the following is a monetary policy LOADING... tool used by the Federal Reserve Bank?
All of the above.
Which of the following is true with respect to hyperinflation?
All of the above.
In the figure to the right, when the money supply increased from MS 1MS1 to MS 2MS2, the equilibrium interest rate fell from 4% to 3%. Why?
All of the above. IMAGE 2
The economic definition of money is:
Any asset that people are generally willing to accept in exchange for goods and services.
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.
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?
C
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
Changing Income tax rates
Which of the following is not a function of money?
Commodity.
Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.
Consumption of durable goods Business investment projects The value of the dollar
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
[Related to Don't Let This Happen to You] 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.
Hermesia, a developed economy, has been experiencing low growth in output with a high rate of unemployment for more than a year. Two members of the National Trade Union in Hermesia, Geoffrey Miller and Arthur Davis, are discussing the relevant expansionary policies that can be taken by the central bank or the government to stimulate economic growth in Hermesia. Geoffrey suggests that the central bank should substantially lower the reserve requirements of the commercial banks so that money supply and household spending both increase. Arthur, however, disagrees. According to him, a decrease in the reserve requirements will not have the desired impact on money supply. He believes that an increase in government spending is more likely to boost the economy than an expansionary monetary policy. Which of the following, if true, will weaken Geoffrey's claim that lowering the reserve requirement will have a strong positive impact on demand?
Due to a recent recession in Hermesia, consumers are still uncertain about economy's prospects in spite of a positive growth rate.
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.
What is the "shadow banking system"?
Financial firms that raise money from investors and provide it to borrowers.
[Related to Don't Let This Happen to You] A newspaper article contains the statement: "Income is only one way of measuring wealth." Source: Sam Roberts, "As the Data Show, There's a Reason the Wall Street Protesters Chose New York," New York Times, October 25, 2011. 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
In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1MD1 to MD 2MD2 (Point A to Point C)?
Increase in real GDP or increase in the price level IMAGE 4
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?
Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier
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 of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
Low prices
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.
[Related to Solved Problem #2] Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1 LOADING... ? 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.
Which of the following is not a correct statement about M2?
M2 is the best definition of money as a medium of exchange.
[Related to Solved Problem #2] 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
Which of the following 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.
The government of West Tarragon declared the lowest unit of its currency to be redundant from the next quarter. The polka, which is the lowest denomination of the currency in West Tarragon, is a copper coin that has been in circulation for the last 40 years. The government justified its decision by saying that the purchasing power of the polka has dwindled substantially over time. Jenny Merchant, a journalist, claims that this move will adversely affect the average consumer by pushing up the price level. Which of the following, if true, would strengthen Jenny's claim that taking the polka out of circulation will cause inflation?
Most cash purchases are likely to be rounded off to a higher unit of the currency once the polka is taken out of the system
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)
Open market purchase of government securities
If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?
Procyclical policy
The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?
The Fed can only soften the magnitude of recessions, not eliminate them.
Georgina Paul, a student of economics, was studying the last decade's money supply data for her country X. Georgina noticed that M2 has consistently been higher than M1 and the ratio of M1 to M2 was more or less stable at around 0.3 for most of the years. However, although the central bank of X did not conduct any expansionary monetary policy in recent times, the ratio M1:M2 increased considerably to 0.7 in the last two years. Which of the following, had it happened in the last two years, would explain this outcome?
The central bank introduced interest rates on checking accounts which induced people to move funds from savings to checking accounts.
Hermesia, a developed economy, has been experiencing low growth in output with a high rate of unemployment for more than a year. Two members of the National Trade Union in Hermesia, Geoffrey Miller and Arthur Davis, are discussing the relevant expansionary policies that can be taken by the central bank or the government to stimulate economic growth in Hermesia. Geoffrey suggests that the central bank should substantially lower the reserve requirements of the commercial banks so that money supply and household spending both increase. Arthur, however, disagrees. According to him, a decrease in the reserve requirements will not have the desired impact on money supply. He believes that an increase in government spending is more likely to boost the economy than an expansionary monetary policy. Which of the following, if true, will weaken Arthur's claim that a decrease in the reserve requirements will not substantially increase money supply?
The central bank of Hermesia has recently reduced the interest rate on excess reserves to zero.
The government of West Tarragon declared the lowest unit of its currency to be redundant from the next quarter. The polka, which is the lowest denomination of the currency in West Tarragon, is a copper coin that has been in circulation for the last 40 years. The government justified its decision by saying that the purchasing power of the polka has dwindled substantially over time. Jenny Merchant, a journalist, claims that this move will adversely affect the average consumer by pushing up the price level. Which of the following, if true, will support the government's decision to take the polka out of circulation?
The face value of the coin is much lower than the intrinsic value of the coin.
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
The federal funds rate IMAGE 1
According to the quantity theory of money quantity theory of money , inflation results from which of the following?
The money supply grows faster than real GDP.
The following is from an article on community banks: "Their commercial-lending businesses, funded by their stable deposit bases, make them steady earners." Source: Karen Richardson,"Clean Books Bolster Traditional Lenders," Wall Street Journal, April 30, 2007, p. C1. What is commercial lending?
This is when banks make loans to businesses.
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
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.
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.
The use of money
all of the above.
The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model LOADING... If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06LRAS06, we would expect the Federal Reserve Bank to pursue a contractionary monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators? Actual real GDP decreases . Potential real GDP does not change . Price level decreases . Unemployment increases .
answers within
Reserve requirements are changed infrequently because
banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.
Consider the figures below and determine which is the best description of what causes the shift from AD 1AD1 to AD 2AD2.
both a and b IMAGE 5
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it buys U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it sells U.S. Treasury securities
buys, sells
An initial decrease in a bank's reserves will decrease checkable deposits
by an amount greater than the decrease in reserves.
An initial increase in a bank's reserves will increase checkable deposits
by an amount greater than the increase in reserves.
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 LOADING... definition of the money supply?
c & e
In the figure to the right, the opportunity cost LOADING... of holding money decreases when moving from Point A to Point B on the money demand curve.
decrease IMAGE 3
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 the largest liability of a typical bank?
deposits
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.
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
The U.S. dollar can best be described as
fiat money.
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are
included only in M2.
If you move $100 from your savings account to your checking account, then M1 will increase by $100 and M2 will remain the same .
increase by 100 remain the same
Money is an imperfect standard of deferred payment because inflation causes the value of money to decrease over time.
inflation
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
The Federal Reserve Bank of New York is always a voting member of the FOMC because
it carries out the policy directives of the FOMC
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
many U.S. dollars are held outside of the country by foreigners.
Which of the following would be the least desirable candidate to be a good medium of exchange?
milk
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 $340 in currency. However, there is actually about $4,000 of currency for every person in the United States. Source: Kevin Foster, Scott Schuh, and Hanbing Zhang, "The 2010 Survey of Consumer Payment Choice," Federal Reserve Bank of Boston Research Data Report, No. 13-2, November 2013. 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
M1 includes more than just currency because
other assets can also be used to make transactions to buy goods and services.
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 policy tools is the Federal Reserve least likely to use in order to actively change the money supply?
reserve requirements
The short-term nominal interest rate is considered the most relevant interest rate when conducting monetary policy.
short term nominal interest rate
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
An asset would be usable as a medium of exchange for all of the following reasons except:
the asset should be a commodity that has intrinsic value.
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.
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking acount balances.
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
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future.
Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $50 billion?
$1,000 billion increase
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
