money and banking chp 1 and 2

store of value

A _______ is the accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in teh future

Alt-A

A _________ borrower is a borrower who states his or her income but does not document or prove the amount of income

standard of deferred payment

A _________ is a characteristic of money by which it facilitates exchange over time

medium of exchange

A _________ is something that is generally accepted as payment for goods and services

unit of account

A __________ is a way of measuring value in an economy in terms of money

A

Are the assets included in M1 more or less liquid than the assets included in M2? A. M1 assets are more liquid than M2 assets B. M1 assets have the same liquidity as M2 assets C. M1 assets are less liquid than M2 assets D. M1 assets have no liquidity

D

By the 2000s, what significant changes had taken place in the mortgage market? A. Lenders loosened the standards for obtaining a mortgage loan-- often lending to subprime borrowers and the Alt-A borrowers B. Lenders created new types of non-traditional loans, allowing borrwers to pay a very low interest rate for the first few years of the mortgage and then pay a higher rate in later years. C. Investment banks began buying mortgages, bundling large numbers of htem together as mortgage-backed securities, and reselling them to investors D. All of the above.

C

Could the actions of the Federal Reserve and Treasury be viewed as a moral hazard problem? A. Yes, financial firms such as Bear Stearns will always have more information than the federal government does and thus will use that information to offer risky-- but profitable-- investments B. Uncertain, if the actions of the Fed and the Treasury prove to be successful, then there are no moral hazard problems. C. Yes, financial firms such as Bear Stearns may continue taking on riskier investments because they believe a federal bailout is likely. D. No, the Federal Reserve and Treasury would never act in a way that may lead to moral hazard problems

increase

Economists classify a "bubble" as an unsustainable ______ in the price of a class of assets, such as the purchase of a home

B

Has the growth of M1 been more or less stable than the growth rate of M2? A. the growth of M1 and M2 have grown at the same rate B. the growth of M1 has been more stable than the growth of M2 C. The growth of M1 has been less stable than the growth of M2 D. more data is required before economists can determine this

B

How do the Fed's current responsibilities compare with its responsibilities when it was first created by Congress? A. In addition to its original role of taking in deposits and making loans, the modern Fed is now responsible for solving the financial crisis B. In addition to its original role as a lender of last resort, the modern Fed is now responsible for monetary policy C. The role of the modern Fed has not changed from the role of the original Fed D. In addition to its original role as regulator of the banking system, the modern Fed is now the lender of last resort.

C

How does commodity money differ from fiat money? A. commodity money is designated by the government as legal tender, while fiat money is used in bartering B. commodity money has no intrinsic value, while fiat money has value beyond its use as currency C. commodity money has value beyond its use as currency, while fiat money has no intrinsic value D. consumers have more confidence that commodity money will retain its value and thus is the preferred medium of exchange

B

How does specialization improve an economy's standard of living? A. Specialization decreases taxes B. specialization increases productivity C. Specialization offers an economy a solution to the barter system D. one could argue that specialization actually limits an economy and thus may not improve the standard of living

A

How does using money affect the level of transaction costs in an economy? A. transactions costs are reduced from barter by eliminating the "double coincidence of wants" problem B. transactions costs are reduced from barter by eliminating the costs of production C. transaction costs are reduced from barter by eliminating transportation costs D. transactions costs are unchanged with the use of money

B

How is purchasing power affected by inflation? A. Purchasing power is unaffected by inflation B. Purchasing power decreases as inflation increases C. Purchasing power decreases as inflation decreases D. Purchasing power increases as inflation increases

A

If there were a decrease in the efficiency of the payments system, what would be the cost to the economy? A. Transactions would be more costly-- that is, the economy would not benefit from specialization B. Transactions would be less costly-- that is, the economy would not benefit from specialization C. Transactions would be more costly -- however, the cost is to the individual consumer and not the economy D. the economy would likely be unaffected as payments will still be made

D

In 2009, Dole Food Company, which markets fresh fruits and vegetables, moved from being a private company to a public company by conducting an initial public offering (IPO). Were investors who bought stock in this IPO doing so in the primary market or in the secondary market? A. Secondary market-- the IPO raises money indirectly for the company B. Primary market-- the IPO raises money indirectly for the company C. Secondary market-- the stock is being sold from a company that already exists D. Primary market-- the stock is being sold for the first time

A

Is the equation of exchange a theory? A. No, a theory is a statement about the world that might possibly be false. B. Yes, the equation of exchange is a statement about the world that might possibly be false C. No, it is not a theory because velocity is assumed to be constant D. None of the above.

D

Is the store-of-value function unique to money? if not, give some other examples of stores of value A. No, money is only one of many assets that can be used to store value. B. No, money is only one of many assets that can be used to store value. Items such as shares of stock and Treasury bonds represent a store of value. C. Yes, money is the only asset that can be used to store value. D. A and B only

A

Must money be a store of value to serve its function as a medium of exchange? Why or why not? A. Yes, people will not accept the form of money unless it can be stored easily. B. No, these are separate functions independent of each other C. Uncertain, people may spend all of their money, making the store-of-value function unnecessary

C

Since the 1960s, which measure of money supply had grown more rapidly, M1 or M2? A. Since the 1960s, M1 and M2 have grown at the same rate B. Since the 1960s, M1 has grown more rapidly C. Since the 1960s, M2 has grown more rapidly D. Since the 1960s, the size of M2 has remained constant

monetary policy

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives

A

What a saver would consider a financial asset a borrower would consider a financial liability. A. true B. false

D

What actions did the Federal Reserve and Treasury take in dealing with the financial crisis? A. The Treasury passed the Troubled Asset Relief Program (TARP) and actively worked with the Fed to ensure financial stability B. The Federal Reserve and the Treasury worked together to find a buyout partner for Bear Stearns C. The Fed aggressively lowered interest rates and created several new credit windows for distressed banks D. All of the above.

A

What are the four main functions of money? Describe each function. A. money should serve as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment B. money should serve as commodity money, a medium of exchange, a unit of account, and store of value C. money should serve as a medium of exchange, a unit of account a standard of deferred payment, and wealth D. money should serve as a unit of account, a store of value, a standard of deferred payment, and legal tender

A

What are transaction costs? A. the costs in time or other resources that parties incur when agreeing and carrying out an exchange of goods and services B. the costs in time or other resources that parties incur during the production process of goods and services C. the costs in time or other resources that parties incur in the process of transporting goods and services D. all of the above

C

What is a payments system? A. A promise to pay a transaction in the financial system B. A system of exchange in which individuals trade goods and services for payment C. A mechanism for conducting transactions in the economy D. A system that utilizes debit cards, ATMs and other forms of electronic funds for payment

A

What is commodity money? A. a good used as money that has value independent of its use as money B. money that has no value apart from its use as money C. money accepted as payment of taxes and must be accepted by individuals and firms in payments of debts D. any form of money used to purchase a commodity

D

What is purchasing power? A. the total quantity of money in the economy B. the sum of the value of a person's assets minus the value of the person's liabilities. C. The ease with which an asset can be exchanged for money D. The number of goods and services that can be purchased with a unit of currency

B

What is specialization? A. a system in which individuals produce the goods or services that they value most B. a system in which individuals produce the goods or services for which they are relatively best at C. a system in which individuals produce all the goods or services that they require for daily living D. a system in which individuals produce the goods or services that have the highest price

C

What is the Federal Reserve? A. The agency that regulates financial markets B. The agency that regulates federally chartered banks C. The central bank of the US D. The agency that insures deposits in banks

C

What is the cause of hyperinflation? A. an undervalued currency B. A very large tax increase C. a very high rate of growth in the money supply D. all of the above

C

What is the equation of exchange? A. M+V = P - Y B. V = PM/Y C. MV = PY D. M- V= P - Y

A

What is the moral hazard problem? A. The problem that managers of a financial firm will take on riskier investments because they believe the federal government will save them from bankruptcy B. The problem that managers of a financial firm may have more information about risky investments than the federal government does C. The problem that managers may experience in distinguishing low-risk borrowers from high-risk borrowers before approving a mortgage

C

What makes a personal check money? A. Checks serve as commodity money B. Checks serve as wealth C. checks are accepted as a medium of exchange D. all of the above

D

What makes dollar bill money? A. A dollar bill is durable yet easily transportable B. A dollar bill is accepted as a means of payment and standardized in terms of quality C. A dollar bill is easily divisible D. All of the above

D

What problems did the decline in housing prices that began in 2006 cause for the financial system? A. Many subprime and Alt-A borrowers, with adjustable rate mortgages, and borrowers who made only small down payments defaulted on their mortgages B. The value of mortgage-backed securities declined sharply-- causing heavy losses for the investment institutions owning these securities C. Banks began to restrict credit to all but the safest borrowers-- limiting the flow of funds from savers to borrowers D. All of the above

A

Which involves financial intermediaries, and which involves financial markets? A. direct finance requires financial markets, while indirect finance involves financial intermediaries B. Indirect finance requires financial markets while direct finance involves finance intermediaries C. Both direct and indirect finance require financial intermediaries and financial markets D. Neither direct or indirect finance requires the use of financial intermediaries and financial markets

A

Who appoints the members of the Federal Reserve's Board of Governers? A. They are appointed by the president and confirmed by the senate B. They are appointed by the president and confirmed by the chairman of the Fed C. They are appointed by the president and confirmed by the House of Representatives D. They are appointed by the vice president and confirmed by the Senate

D

Why did governments begin issuing paper currency? A. Because those transporting gold and silver coins were often robber-- so paper certificates were issued B. Because gold and silver coins were difficult to transport- so paper certificates were issued C. because gold and silver coins no longer had any real value-- so paper certificates were issued D. A and B only

C

Why do many economists believe that there was a housing bubble in the US between 2000 and 2005? A. Because expectations of home sales were too overly optimistic during these years B. Because housing prices could not be accurately determined during these years C. Because housing prices were rising at a very rapid rate during these years D. Because housing prices were falling at a very rapid rate during these years

B

Why is paper currency needed? A. Paper currency lowered transportation costs B. paper currency lowered the cost of transactions C. paper currency lowered the costs of production D. all of the above

subprime

a _______ borrower is a borrower with a flawed credit history

M2

a broader definition of the money supply: all the assets that are included in M1, as well as time deposits with a value less than $100,000, savings accounts, money market deposit accounts, and non institutional money market mutual fund shares

M1

a narrower definition of the money supply: the sum of currency in circulation, checking account deposits, and holdings of travelers checks

hyperinflation

a rate of inflation that exceeds 100% per year

federal funds rate

the interest rate that banks charge each other on short-term loans

velocity of money

the number of times each dollar in the money supply is spent on a good or services that is included in GDP ( V= PY/M)

A

what does the quantity theory indicate is the cause of inflation? A. this theory is based upon an identity known as the equation of exchange: MV = PY, where increases in the money supply lead to an increase in inflation B. this theory is based upon an an identity known as the equation of exchange: M + V = P- Y, where increases in the money supply lead to an increase in inflation C. this theory is based upon an identity known as the equation of exchange: MV = PY, where increases in real GDP lead to an increase in inflation D. none of the above

C

what factors, if changed, would affect your willingness to accept a dollar bill or a check as money? A. if others were unwilling to accept a dollar bill or check as commodity money B. If the dollar bill or check was no longer a sign of wealth C. if others were unwilling to accept a dollar bill or check as a means of payment D. the dollar bill or check will always be accepted as money

A

what is the quantity theory of money? A. a theory about the relationship between money and the prices that assumes the velocity of money is constant B. a theory about the relationship between money and prices that assumes the velocity of money is changing C. a theory about the relationship between money and inflation that assumes the velocity of money is constant D. a theory about the relationship between money and inflation that assumes the velocity the velocity of money is changing