ECO 202 - Chapter 14
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.
What is included in M2 but not M1?
Money market deposit accounts in banks
V in Fisher's quantity equation
average number of times a dollar is spent on goods and services; velocity of money
Reserve requirements are changed infrequently because
banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.
An initial decrease in a bank's reserves will decrease checkable deposits
by an amount greater than the decrease in reserves.
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
changing income tax rates
The U.S. dollar can best be described as
fiat money
This large amount of currency per person can be partially explained because
many U.S. dollars are held outside of the country by foreigners.
What is a "classic type of run"?
many depositors simultaneously decide to withdraw their money from a bank
When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange
The policy change would "free up cash" because
reserves that were required are now excess reserves available for lending
What refers to the minimum fraction of deposits banks 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.
The quantity theory of money is better able
to explain the inflation rate in the long run.
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
$1.8 billion
Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $50 billion?
$1000 billion increase
V =
(P x Y) / M
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
- Increasing the reserve requirement from 10 percent to 12.5 percent. - Buying $500 million worth of government securities, such as Treasury bills. - Decreasing the rate at which banks can borrow money from the Federal Reserve.
Which of the following is true with respect to hyperinflation?
- It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. - It can be hundredslong dasheven thousandslong dashof percentage points per year. - In the presence of hyperinflation, firms and households avoid holding money.
The use of money
- Reduces the transaction costs of exchange - eliminates the double coincidence of wants - allows for greater specialization
M2 includes...
- all of the assests in M1 - savings accounts, small-denomination time deposits, and money market mutual funds - a broader definition of money compared to M1 and currency
What does the FOMC do?
- includes Board of Governors and the presidents of 12 Federal Reserve regional banks - determines the target federal funds rate and the direction of open market operation policies - makes decisions that are voted on by all 7 members of the BOG but only 5 of the 12 regional bank presidents
policy tools the Fed uses to manage money supply
- open market operations - reserve requirements - discount policy
What are the functions of money?
- unit of account - store of value - medium of exchange
If the money supply is growing at a rate of 3 percent per year, real GDP (real output) is growing at a rate of 0 percent per year, and velocity LOADING... is constant, what will the inflation rate be?
3%
If the money supply is growing at a rate of 3 percent per year, real GDP (real output) is growing at a rate of 0 percent per year, and velocity is growing at 2 percent per year instead of remaining constant, what will the inflation rate be?
5%
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.
What is price deflation?
A fall in the price level
What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"?
An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.
What is the largest area of the M1 money supply?
Checking account deposits
Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.
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.
In addition to the Federal Reserve Bank, what other economic factors influence the money supply?
Households, firms, and banks
Fisher's quantity equation
M x V = P x Y
M in Fisher's quantity equation
M1 definition of money supply
What did Geithner mean by the "non-bank financial system"?
Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households.
Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money...?
No. The goods are not a store of value.
Why would deposit insurance provide the banking system with protection against runs?
Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
According to the quantity theory of money, inflation results from which of the following?
The money supply grows faster than real GDP
True or False: If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
True
velocity of money formula
V = (P x Y) / M
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.
Banks must hold...
a fraction of their deposits as vault cash or with the Federal Reserve
What is the largest liability of a typical bank?
deposits
Credit cards are...
included in neither the M1 definition of the money supply nor in the M2 definition.
If you move $100 from your savings account to your checking account, then M1 will ____ by $100 and M2 will ___.
increase; remain the same.
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
M1 includes more than just currency because
other assets can also be used to make transactions to buy goods and services.
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants
The monetary policy tool that the People's Bank of China was using was changes to the..
required reserve ratio
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 People's Bank of China was hoping this policy action would...
stimulate economic growth
P in Fisher's quantity equation
the GDP deflator
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.
double coincidence of wants
the fact that for a barter trade to take place between two people, each person must want what the other one has