ch29 - The Monetary System
Which of the following lists accurately describes M1? a. Demand deposits, traveler's checks, other checkable deposits and currency. b. Only currency. c. Savings deposits, checking deposits, and currency. d. Savings deposits, small time deposits, money market mutual funds and other minor categories
Correct. a. Demand deposits, traveler's checks, other checkable deposits and currency. M1 includes demand deposits, traveler's checks, other checkable deposits and currency. In general, M1 includes the most liquid assets, while M2 includes everything in M1 plus a few additional assets which are less liquid. These assets include savings deposits, small time deposits, money market mutual funds and a few other minor categories.
Which of the following would fit an economist's definition of "money"? a. a $20 bill. b. a municipal bond form the state of California c. a share of stock in Ford Motor Company d. a 10 bedroom, 12 bathroom mansion.
Correct. a. a $20 bill. Economists have a more specific definition of the word "money" than the general public. Economists use the word "money" to refer to the set of assets in an economy that people regularly use to buy goods and services from other people. This is different than an asset, such as a large house or financial assets like stocks and bonds, which might be valuable but are not regularly exchanged directly. These assets would contribute to one's wealth, but people do not commonly accept houses, stocks, or bonds as forms of payment. You would need to sell these assets for cash in order to make purchases, however a $20 bill is cash that is generally accepted as a form of payment for goods and services.
The Fed conducts open market operations that cause bank withdrawals and lending to decrease. The Fed has a. conducted open market sales. b. decreased taxes. c. increased taxes. d. conducted open market purchases
Correct. a. conducted open market sales. In order to decrease the money supply, the Fed will have to conduct open market sales of government bonds. When individuals purchase bonds from the Fed, they will use currency, most often withdrawn from their bank accounts. This causes bank reserves to decrease, which means banks have less money to lend and lending will decrease. Therefore, when the Fed conducts open market sales, bank withdrawals increase and lending decreases.
When it sells government bonds to decrease the money supply, the Fed is a. conducting an open-market sale. b. regulating a bank. c. enacting fiscal policy. d. conducting an open-market purchase.
Correct. a. conducting an open-market sale. If the FOMC at the Fed decides to decrease the money supply, the Fed sells government bonds from its portfolio to the public in the bond market. After the sale, the dollars the Fed receives for the bonds are out of circulation in the general economy and the overall money supply decreases. Because the Fed does this through selling bonds, this is known as an open-market sale.
In a 100-percent-reserve banking system, if an individual deposits money in their checking account, currency would a. decrease, but demand deposits would increase by the same amount and M1 would not change. b. decrease, while demand deposits would increase by less and M1 would decrease. c. increase, while demand deposits would decrease by less and M1 would increase. c. increase, but demand deposits would decrease by the same amount and M1 would not change.
Correct. a. decrease, but demand deposits would increase by the same amount and M1 would not change Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account. Each deposit in a bank reduces currency, since the money will no longer be in the hands of the public, and increases the demand deposit portion of M1 by the same amount.
Funds in an account where you can access by writing a check or through your debit card are best described as a. demand deposits b. money market mutual funds c. time deposits d. currency
Correct. a. demand deposits Demand deposits are balances in bank accounts that depositors can access on demand by writing a check. While balances in these types of accounts are not technically currency, since they are not paper money and coins held in the hands of the general public, they are close enough to currency that they are included in the same category of money stock, M1, as currency.
Which of the following lists all items included in M2 but not in M1? a. currency b. savings deposits, small time deposits, money market mutual funds and other minor categories c. none, M1 and M2 are essentially the same. d. demand deposits and savings deposits
correct. b. savings deposits, small time deposits, money market mutual funds and other minor categories M1 includes demand deposits, traveler's checks, other checkable deposits and currency. M2 includes everything in M1 plus a few additional assets which are less liquid than those in M1. These assets, which are included in M2 but not M1, are savings deposits, small time deposits, money market mutual funds and a few other minor categories.
When the Fed sells U.S. government bonds, it has conducted a. open market purchases, which increase the money supply. b. open market sales, which increase the money supply. c. open market sales, which decrease the money supply. d. open market purchases, which decrease the money supply.
correct. c. open market sales, which decrease the money supply. When the Fed sells government bonds, it is conducting open market sales. Because the Fed sells government bonds in the public bond market, individuals give currency to the Fed and the currency is no longer in circulation in the general public. Because currency is included in M1, M1 decreases and the money supply is reduced. Additionally, since individuals may withdraw money from their banks to make these purchases, the reserves at banks decrease along with lending.
