ECON 120 - CHAP. 14
Commodity money
A good used as money that also has value independent of its use as money.
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.
The use of money A. eliminates the double coincidence of wants. B. allows for greater specialization. C. reduces the transaction costs of exchange.
D. all of the above.
Suppose the required reserve ratio is 11% and a bank has the following balance sheet: Assets: (Reverses: $3000, Loans: $12,000) Liabilities: (Deposits: 15,000) This bank keeps required reserves of $_______, and excess reserves of $______
Required reserves are equal to the required reserve ratio multiplied by the amount of deposits: 0.11 ×$15,000 =$1,650. Excess reserves are equal to total reserves minus required reserves: $3,000 −$1,650=$1,350.
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 $ 14,000 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.)
Reserves $0 Deposits $0 Loans $14000 Securities $-14000
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.
fewer decrease
Money is an imperfect standard of deferred payment because ____ causes the value of money to decrease over time
inflation
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future.
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.
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
Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account. Wells Fargo Assets Liabilities Reserves +$100,000 Deposits $100,000 If the required reserve ratio is 0.10 or 10 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $... (Enter your response rounded to the nearest whole number).
10% of $100,000 => 10000 The maximum loan Wells Fargo can make as a result of this transaction is: $100,000 - 10000 => $90,000
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?
It is a commodity money because it has value as recycled paper
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.
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.
uppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $50 billion?
$333
A suitable medium of exchange (such as the U.S. dollar) meets the following criteria:
1. Acceptability 2. Standardized quality 3. Durability 4. Value relative to weight 5. Divisibility
If the money supply is growing at a rate of 5 percent per year, real GDP (real output) is growing at a rate of 0 percent per year, and velocity is constant, what will the inflation rate be?
As M+V = P+Y in terms of growth a) Since M=5% whereas V is constant and Y=0, so the prices increase by 5% 5+0=0+P Inflation = 5%
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.
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.
Assets: Reverses $10 million Discount Loan: $10 million
Suppose you deposit $ 1,300 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 0.10? The change in checking deposits is equal to: $___
Change in the Money supply = (Change in the Monetary base) x (Money multiplier) Money multiplier= 1/reserve ratio=1/0.10=10 Change in money supply= 1300 x 10 = 13000
Suppose you deposit $1,800 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.50? The change in the money supply is?
Deposit=$1,800 Multiplier=1/0.50=2 $1,800*2=$3600 The increase in TOTAL money supply would be [($1,800 x 2) - $1,800] = $3600 - $1,800 = 1,800
Assume all of Bank 1's loans of $14,000 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.)
Deposits: 14000 Reverses: 14000 x 9% = 1260 Loans: 14000 - 1260 = 12740
Barter economies
Economies where goods and services are traded directly for other goods and services.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1LOADING...? Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged.
If the money supply is growing at a rate of 5 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?
M=5%, Y=0, V=2% 8+2=0+P So,the price level will increase by 7% Inflation = 7%
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit."Source: W. Stanley Jevons, Money and the Mechanism of Exchange, New York: D. Appleton and Company, 1889, pp. 1-2.Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?
No. The goods are not a store of value.
If some of the Roman coins had been taken to Germania, then the coins could have been a medium of exchange in Germania if people began to consider it safe and would have accepted it for payments. If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
TRUE
When the Federal Reserve decreases the discount rate
The money supply will increase.
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S. Treasury securities from the public.
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier.
decrease
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
According to Peter Heather, a historian at King's College London, during the Roman Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: "Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells us, Germani of the Rhine region were using good-quality Roman silver coins for this purpose)." Source: Peter Heather, The Fall of the Roman Empire: A New History of Rome and the Barbarians, New York: Oxford University Press, 2006, p. 89. When sellers are willing to accept money in exchange for goods and services, money is acting as a?
medium of exchange.
According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?
nominal GDP will increase
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.
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
