Money

Commodity money

A good used as money that also has value independent of its use as money.

If the money supply is growing at a rate of 6 percent per​ year, real GDP​ (real output) is growing at a rate of 2 percent per​ year, and velocity is​ constant, what will the inflation rate​ be? Velocity of money The average number of times each dollar in the money supply is used to purchase goods and services included in GDP.

Inflation rate​ = Growth rate of the money supply - Growth rate of real output​ (real GDP). This one only if velocity is constant. If velocity isn't constant. Inflation rate​ = Growth rate of the money supply​ + Growth rate of velocity minus Growth rate of real output​ (real GDP) 6-2 =4 %

Which of the following is true with respect to Irving​ Fisher's quantity​ equation, M times V equals P times Y ​?

https://imgur.com/a/V6sRoRB

​[Related to the Making the Connection​] In​ 2015, some business startups were offering the service of transferring money in the form of bitcoins among individuals and businesses in developing countries. At the same​ time, an article in the Wall Street Journal noted that in the United​ States, "Most ordinary consumers remain wary of using an​ unproven, six-year-old digital currency that many associate with illicit​ drugs, extreme price fluctuations and security​ risks." ​Source: Michael J. Casey and Paul​ Vigna, "Interest in Bitcoin Grows on Wall​ Street," Wall Street Journal​, March​ 29, 2015. Using bitcoins might be more attractive to individuals and firms in developing countries than to individuals and firms in the United States because A. the total amount of bitcoins is​ limited, so inflation will not undermine their value. B. the total amount of bitcoins is​ unlimited, so inflation will not undermine their value. C. there is a permanent record of Bitcoin transactions. D. they are less expensive when purchased in other currencies.

A

Which of the following is not a function of​ money? A. Commodity. B. Standard of deferred payment. C. Medium of exchange. D. Unit of account. E. Store of value.

A

The average number of times each dollar in the money supply is used to purchase goods and services is called A. the discount rate. B. the velocity of money. C. the quantity theory of money. D. the fractional reserve system.

B.

Fiat money

Money, such as paper​ currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money.

Using the information below compute the M2 money supply The M2 money supply is ​$ M2 is a calculation of the money supply that includes all elements of M1 as well as "near money. Checking account deposits comprise the largest percentage of​ M1, while the share of​ traveler's checks is so small that it can effectively be ignored. M2 is the broad definition of the money supply. It includes M1 and other assets that can be used as a medium of exchange even though they are not as liquid such as savings account​ deposits, small-denomination time deposits​ (e.g., certificates of​ deposit), balances in money market deposit accounts in​ banks, and noninstitutional money market fund shares. Currency and coin held by the public Checking account balances ​Traveler's checks Savings account balances Small denomination time deposits Money market deposit accounts in banks Noninstitutional money market fund shares

just add up the $ that fall into the m1/m2 categories.

Using the following information what is the velocity of​ money? Component I value ------------------------------------------------------------ Money supply 1,100 Price level 1.89 Real gdp 15,000 The velocity of money is equal​ to

velocity of money = (Money supply)(velocity)=(Real gdp)(price level). Multiply gdp and price level. Then divide by the MV. 15,000x 1.89 = 28,350 / 1100 = 25.77 if money supply is 1k, price level 1.05, and real gdp 8k, the velocity is 8.4

Excess reserves A. are the deposits that banks do not use to make loans. B. are reserves banks keep above the legal requirement. C. are reserves banks keep to meet the reserve requirement. D. are loans made at above market interest rates. Suppose the required reserve ratio is 11% and a bank has the following balance​ sheet: Assets I Liabilities ------------------------------------------------------------- Reserves $3,000 I Deposits $15,000 Loans $12,000 I Required reserves are equal to the required reserve ratio(11%) multiplied by the amount of deposits (15,000). Excess reserves are equal to total reserves minus required reserves.

1. B. 2. 0.11 x 15k = 1,650 = required reserve. Excess reserves =total reserve(assets >reserves) = 3,000 - 1,650 =1350

600 and 0.4 = 900. 600/0.4 = 1,500. 1,500 - 600 = 900. Suppose you deposit ​$2,200 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.20? The change in the money supply​ is

2,200/0.20 (1/RR) = 11,000 11,000 - initial deposit(2,200) = 8,800

Suppose you deposit ​$2 comma 400 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.5 ​0? The change in checking deposits is equal​ to: ​

4,800

If the money supply is growing at a rate of 8 percent per​ year, real GDP​ (real output) is growing at a rate of 2 percent per​ year, and velocity is growing at 3 percent per year instead of remaining​ constant, what will the inflation rate​ be?

8 + 3 - 2 = 9%

The Federal Reserve is divided into two​ bodies: A. the Board of Governors and 12 regional districts. B. the FDIC and the Treasury. C. the FDIC and 12 regional districts. D. the Board of Governors and the FDIC.

A

Which one of the following is not a reason why businesses accept paper currency knowing​ that, unlike a gold​ coin, the paper the currency is printed on is worth very​ little? Paper currency is a good medium of exchange because it is A. not valuable. B. universally acceptable. C. durable. D. divisible. E. of standard quality.

A

In the securitization​ process, A. banks grant loans to households and bundle the loans into securities that are then sold to investors. B. banks make loans to​ households, and then collect payments from the government to cover these loans. C. security investors make loans to​ banks, who in turn make loans to households. D. government bonds are used as a source of funds to make loans to households.

A.

The M2 definition of the money supply includes A. ​M1, savings​ accounts, small time​ deposits, and money markets. B. savings​ accounts, mutual​ funds, small time​ deposits, and credit cards. C. ​M1, savings​ accounts, small time​ deposits, money​ markets, and credit cards. D. ​M1, savings​ accounts, mutual​ funds, and credit cards.

A.

In the late​ 1940s, the Communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its​ value, and most businesses refused to accept it. At the same​ time, there was a paper shortage in Japan. During these​ years, Japan was still under military occupation by the United States. Some U.S. troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in​ China, ship it to Japan to be recycled into​ paper, and make a substantial profit. Under these​ circumstances, was the Chinese paper currency a commodity money or a fiat money ​? A. It is a fiat money because it has no value except as money. B. It is a commodity money because it has value as recycled paper. C. It is a fiat money because it has value as recycled paper. D. It is a commodity money because it has no value except as money.

B

Which one of the following is not the formula for the quantity theory of​ money?

B. https://imgur.com/a/uM5l2W3

End of Chapter 3.2 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 a decrease in reserves by​ $100 and an increase in deposits by​ $100. B. 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. D. Your​ bank's balance sheet shows an increase in reserves by​ $100 and an increase in deposits by​ $100.

C

How does the quantity theory provide an explanation about the cause of ​ inflation? A. The quantity equation shows that if the money supply grows at a faster rate than nominal ​ GDP, then there will be inflation. B. The quantity equation shows that if the money supply grows at the same rate as real​ GDP, then there will be inflation. C. The quantity equation shows that if the money supply grows at a faster rate than real​ GDP, then there will be inflation. D. The quantity equation shows that if the money supply grows at a slower rate than real​ GDP, then there will be inflation.

C.

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. Mint and the U.S. Treasury. C. The U.S. Senate and the U.S. House of Representatives. D. ​Households, firms, and banks.

D. In addition to the Fed and its three monetary policy​ tools, two other actorslong dash the nonbank public and bankslong dash influence the money supply. The nonbank​ public: Households and firms decide how much money to hold as deposits in banks. The more​ deposits, the more loans banks can make and the greater the effect on the money supply. ​Banks: Can choose to hold more money as reserves than the legally required amount. This action on the part of banks influences the money supply independent of the actions of the Fed.

The fiscal deficit of the country Zoldova has been increasing at an alarming rate for the last decade. One of the major reasons for the worsening fiscal deficit has been indiscriminate government spending which had to be financed by printing more currency. The continuous increase in money supply to finance wasteful government expenditure caused the inflation rate to hit triple digits. With rising instability in the​ country, the central bank had to redenominate its currency earlier this year. As a​ result, currency worth​ 10,000 Zoldovan dollars last year are now worth only 100 Zoldovan dollars. Which of the following is most strongly implied by the information given in the​ question? A. Generous salaries and perks to government officials accounted for a substantial portion of government spending. B. This is the first time the country has experienced hyperinflation. C. ​Zoldova's GDP reached an​ all-time low this year. D. Personal income tax rates in this country are very low. E. The ability of the Zoldovan dollar to function as a store of value has declined.

E

Suppose banks keep no excess reserves and that all banks are currently meeting the reserve requirement. The Federal Reserve then makes an open market purchase of ​$16 , 000 from Bank 1. Use the​ T-account below to show the result of this transaction for Bank​ 1, assuming Bank 1 keeps no excess reserves after the transaction. ​(Remember T-accounts show the changes to a​ bank's balance​ sheet.) The simple deposit multiplier is used to determine the total increase in deposits and the money​ supply: total increase in deposits = change in bank reserves/rr The higher the required reserve​ ratio, the smaller is the simple deposit multiplier. When RR​ = 10%, the multiplier is 10 and the total increase in deposits is​ $10,000. 10 x 1k The total increase in the money supply is ​$10,000minus ​$1,000equals​$9,000. This process also works in​ reverse: when banks lose​ reserves, they reduce their loans and the money supply contracts. Assume all of Bank​ 1's loans of ​$16,000 are spent by the borrowers and then deposited into Bank 2. Use the​ T-account below to show the result of this transaction for Bank​ 2, assuming Bank 2 keeps no excess reserves and the reserve requirement is 9 ​%. ​(Remember T-accounts show the changes to a​ bank's balance​ sheet.) Assume all of Bank​ 2's loans of ​$14 comma 560 are spent by the borrowers and then deposited into Bank 3. Use the​ T-account below to show the result of this transaction for Bank​ 3, assuming Bank 3 keeps no excess reserves and the reserve requirement is 9 ​%. ​(Remember T-accounts show the changes to a​ bank's balance​ sheet.)

Fed open market purchase is buying securities. on the table, reserve = 0 loans = 16k securities = -16k Deposits = 0 for the second table, 16k is deposited into the second bank. Deposits = 16k 16k x 0.09 = 1440 = required reserves loans = 14560 = required reserves - deposit For bank 3... repeat step from bank 2.

Which of the following best explains the difference between commodity money and fiat​ money? A. Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money. B. All money is commodity​ money, as it has to be exchanged for gold by the central bank. C. Commodity money has no value except as​ money, whereas fiat money has value independent of its use as money. D. Commodity money is usually authorized by the central​ bank, whereas fiat money has to be exchanged for gold by the central bank.

A

To increase the money​ supply, the FOMC directs the trading​ desk, located at the Federal Reserve Bank of New​ York, to A. buy U.S. Treasury securities from the public. B. sell U.S. Treasury securities to the public. C. buy U.S. dollars in the foreign exchange market. D. print U.S. Treasury securities and distribute them to banks.

A.

When the Federal Reserve decreases the required reserve ratio comma A. The money supply will increase. B. The money supply will decrease. C. There is no effect on the money supply. D. Not enough information is given.

A.

Which of the following is not a Federal Reserve​ district? A. Denver B. Dallas C. Richmond D. Philadelphia

A.

The formula for the simple deposit multiplier is A. Simple Deposit Multiplier = 1 / RR . B. 1/ 1-RR C. -RR/1-RR D. (1-RR)/ RR If the required reserve ratio is 0.20, the maximum increase in checking account deposits that will result from an increase in bank reserves of ​$15,000 is ​

A. $75000 1/RR 1 = 15,000, RR = 0.20 15,000/0.20 = 75,000

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 local​ issue; a bank panic is a national issue. B. A bank run involves one​ bank; a bank panic involves many banks. C. A bank run is a U.S.​ issue; a bank panic is an international issue. D. A bank run involves many​ banks; a bank panic involves one bank. Fractional reserve banking system A banking system in which banks keep less than 100 percent of deposits as reserves.

B.

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 A. ​$200 in excess reserves. B. ​$50 in required reserves. C. ​$50 in excess reserves. D. ​$200 in required reserves.

B.

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

B.

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

B. 1/1-0.9 = 1/0.10 = 1/ rr = simple deposit multiplier = 10 Therefore, a​ $1,000 increase in reserves increases checkable deposits​ by: 1,000x 1/ rr = 10,000

M1 includes more than just currency because A. people hold money as other stores of value such as savings accounts and money market mutual funds. B. the federal mint makes a profit from printing currency as dollar bills. C. other assets can also be used to make transactions to buy goods and services. D. the government wants to be able to quote that there is a large amount of money in the economy. 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.

C C

In the last few years investment in green technology has increased substantially in​ Daslow, a developed economy. With an increased flow of credit to this​ sector, the stock prices of some of the leading green technology firms went up by 75 percent or more in the current fiscal year. A group of economists in Daslow claims that such a sharp increase in stock prices are an indication of a bubble. Since bubbles are​ unsustainable, this could hurt the economy in the near future.​ However, a group of industry analysts disagrees. They feel that with rising concern for the​ environment, the green technology industry is only likely to grow faster. Since the sector has been growing due to an increase in​ demand, it is unlikely that there is a bubble. A. Daslow outsources the manufacturing of various​ goods, including some​ carbon-intensive products. B. According to a recent market​ survey, 40 percent of the total population believes that the government is not doing enough to protect the environment. C. Daslow signed an environmental treaty last year that makes it mandatory for them to reduce pollution to a certain level within a​ five-year period. D. Most of the firms in this sector were set up in the last two to three years. E. Very few countries in the world have made substantial investments in green technology.

C.

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

C.

According to the quantity theory of money, inflation results from which of the​ following? A. The money supply grows slower than real GDP. B. The money supply grows at the same rate as GDP. C. The money supply grows faster than real GDP. The quantity theory of​ money: A theory of the connection between money and prices that assumes that the velocity of money is constant.

C. The quantity equation ​states: M x V = P x Y M(money supply?) = m1, V = velocity, P = GDP deflator or price level?, and Y = real GDP

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? A. A neighboring country recently adopted West​ Tarragon's currency as its official currency. B. The polka is the second coin that has been taken out of circulation by the government in the last ten years. C. Retailers in West Tarragon cannot charge a price higher than the maximum retail price suggested by manufacturers. D. The face value of the coin is much lower than the intrinsic value of the coin. E. The currency notes and coins in circulation comprise 32 percent of the total money supply in West Tarragon.

D

Savings account​ balances, small-denomination time​ deposits, and noninstitutional money market fund shares are A. financial assets that are not included in the money supply. B. included in both M1 and M2. C. included only in M1. D. included only in M2. Jill makes a deposit into her savings account at the local bank with​ $100 in cash. As a result of this​ transaction, A. M1 will decrease by​ $100. B. both M1 and M2 will increase by​ $100. C. M2 will increase by​ $100. D. Both B and C are correct.

D A.

By raising the discount​ rate, the Fed leads banks to make​ _________ loans to households and​ firms, which will​ _________ checking account deposits and the money supply. A. ​more; increase B. ​fewer; increase C. ​more; decrease D. ​fewer; decrease

D.

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

D.

Evidence shows that the quantity equation is correct over the long​ run, which implies that the A. growth rate of inflation leads to growth in GDP. B. growth rate of the velocity of money causes the level of prices to change. C. growth rate of GDP causes most of the change in the money supply. D. growth rate of the money supply determines the rate of inflation.

D.

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.

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

D.

​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? A. Compared to other developed​ economies, the required reserve ratio in Hermesia is low. B. Foreign exchange reserves held by the central bank of Hermesia declined by five percent recently. C. When the central bank of Hermesia had conducted open market purchase of bonds five years​ back, the increase in money supply was low. D. The central bank of Hermesia has recently reduced the interest rate on excess reserves to zero. E. The level of inflation in Hermesia is well within the central​ bank's inflation target.

D.

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

D. Anything used as money should fulfill the following​ functions: 1. Medium of exchange. When sellers of goods and services are willing to accept money in exchange for goods and​ services, then money serves as a medium of exchange. An economy is more efficient when a single good is recognized as a medium of exchange. 2. Unit of account. When each good has a single price quoted in terms of the medium of​ exchange, money serves as a unit of account. It provides a way to measure value in the economy in terms of money. 3. Store of value. Money allows value to be stored easily. What you​ don't use​ today, you can use next week. That​ is, money tends to be durable such that its value is not lost by spoilage. 4. Standard of deferred payment. Money can facilitate exchange over time by acting as a standard of deferred​ payment, which is useful in lending and borrowing.

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

D. Barter economies Economies where goods and services are traded directly for other goods and services. The double coincidence of wants A major shortcoming of barter economies is that in order for barter to​ occur, each person must want what the other person has. Money Assets that people are generally willing to accept in exchange for goods and services or for payment of debts. Money eliminates the problems associated with barter economies and allows people to specialize by making the exchange of goods and services easier.

Country Y is an industrialized economy. The budget deficit of the government has been rising sharply in the last few years. In order to fund this​ expenditure, the government has resorted to financing its deficit by issuing bonds. Jason​ McAlister, a leading economist in the​ country, believes that the velocity of money will remain unchanged but the price level will increase in the near future as a result of this action.​ However, the actual inflation turned out to be much higher than what Jason had expected. Which of the​ following, if​ true, would explain this​ outcome? A. Due to a decline in the production of food grains this​ year, the government imposed restrictions on food grain exports to ensure that the domestic demand is met. B. The consumption basket that is used to estimate the inflation level in country Y has not been revised in the last three years. C. Although infrastructure investment has traditionally been the largest component of government expenditure in country​ Y, spending in this category declined this year. D. Total tax revenue generated this year was higher than last year. E. The economy was already operating at full employment prior to the increase in money supply.

E.