Final Exam Questions — Post Review (1)

Liquidity trap (16)

Adding more liquidity to banks bas little no no positive effects on lending, borrowing, inventing, and aggregate demand.

Suppose the ABC Bank has excess reserves of $4,000 and outstanding demand deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves? a. $20,000 b. $24,000 c. $84,000 d. $16,000

B.

The asset demand for money is most closely related to money functioning as a a: standard of value. b: store of value. c: medium of exchange. d: unit of account.

B.

What near-monies are included in the M2 money supply?

Near monies are included: money market deposit accounts, small-time deposits, money market mutual fund, and noncheckable savings deposits.

Demand deposits (14)

the checkable deposits of banks and thrifts. - NOW: negotiable order of withdrawal - ATS: automatic transfer service

Liabilities (15)

the claims of nonowners of the bank against the firm's assets

Net worth (15)

the claims of the owners of the firm against the firm's assets

Reserve ratio (15)

the ratio of the required reserves the bank must keep to the bank's own outstanding checkable-deposit liabilities: bank's required reserves ---------------------------- bank's checkable-deposit liabilities

If the economy adds to its inventory of goods during some year:

this amount should be included in calculating that years GDP

Balance sheets main assets and main liabilities (15)

assets: 1. securities 2. laons to bank liabilites: 1. reserves of commerical bank 2. treasury deposits 3. Federal reserve notes outsanding

Federal Budget Deficit

fed government spending exceeds tax revenues

What gives money it's value? (14)

- Acceptability: Currency and checkable deposits are money because people accept them as money. - Legal Tender: The government has designated paper money is a valid and legal means of payment of any debt that was constructed in dollars. - Relative Scarcity: money derives its value from its scarcity relative to its utility

Money M1: Currency (14)

- Coins are minted by the U.S. Mint - Paper money is printed by the Bureau of Engraving and Printing - Both are under the U.S. Department of Treasury - Coins are issued by the U.S. Treasury - Paper money (Federal Reserve Notes) is issued by the Federal Reserve System (U.S. central bank)

Excluded from M1 (14)

- Currency held by the U.S. Treasury, the Federal Reserve banks, commercial banks and thrift institutions to prevent double counting - Any checkable deposits of the government that are held by commercial banks or thrift institutions to allow for a better assessment of the amount of money available to the private sector for potential spending.

Fed Functions and Responsibilities (14)

- Issuing currency - Setting reserve requirements and holding reserves - Lending to financial institutions and serving as an emergency lender of last resort - Providing for check collection - Acting as a fiscal agent for the federal government - Supervising banks - Controlling the money supply

Functions of Money (14)

- Medium of exchange: usable for buying and selling goods and services. - Unit of account: monetary units are a yardstick for measuring the relative worth of a wide variety of goods, services, and resources. It also defines debt or tax obligations or a nations GDP. - Store of value: enables people to transfer purchasing power from the present to the future

12 Federal Reserve Banks (14)

- act as the U.S. central bank - one for each of the 12 districts across the country - Controlled by the Board of Governors - are privately owned by a commercial banks in its district (federally chartered banks are required to purchase shares of stock in the Federal Reserve Bank in their district) - Interact with government, commercial banks, and thrifts - Not motivated by profit - Are "bankers' banks" and perform the same functions for banks and thrifts as those institutions perform for the public. - Issue Federal Reserve Notes, paper money

Federal Open Market Committee (FOMC) (14)

- aids the Board of Governors - 12 members ( 7 from board of governors, president of the New York Fed, 4 presidents of other Feds on a 1-year rotating basis) - direct the purchase and sale of government securities, borrowing and lending government securities in the open market

Clearing a check against a bank (15)

1. Check written and given to seller 2. Seller banks sends check to federal reserve- electonically 3. Employee clears or collects checks - increase sellers banks by amount 4. Fed sends check to bank and bank reduces account of deposit the or and reduces amount of bank

Steps to generating a commercial bank (15)

1. Creating a banks 2. Acquiring property and equipment 3. Accepting deposits 4. Depositing reserves in the federal reserve 4a Excess Reserves: excess-required 4b required reserves controls the lending ability of commercial banks 4c Assets and liabilities- checking deposits assets-liabilities bank liable for repaying whenever withdrawn 5. Clearing a check drawn against a bank 6. Granting loans 7. Buying government securities

Tools of monetary policy (16)

1. Open market operations- Buying and selling bonds from public and banks 2. Reseve ratio- influence ability of banks to lend 3. Discount rate- inrrest charged on loan from fed to commercial bank 4. Intrest on rerserves - IORR and IOER 4a- if reduce intrest rate- Increase money in bank loan and more money in economy 4b- if increase intrest rate- reduce amount of bank lending, less money in economy

Total demand for money (15)

1. Transactions demanded -varies directly with GDP 2. Assets demanded -varies inverse with interest rates

Effects of expansionary monetary policy (16)

1. buy government securities 2. lower legal reserve ratio 3. lower discount rate 4. reduce interest rate on reserves

Effects of contractionary(restrictive) monetary policy (16)

1. sell government securities 2. raise legal reserve ratio 3. riase discount rate 4. incerease interest rate on reserves

3 rules of the Taylor rule (16)

1. when real gdp= potential gdp + inflation is at target 2% = fed fund = 4% 2. For every increase of real GDP above potential gdp - fed raise fed fund by 1/2% 3.For every increase of inflation = fed fund by 1/2%

Monetary multiplier (15)

1/required reserves ratio

Midpoint formula

A method for calculating price elasticity of demand or price elasticity of supply that averages the starting and ending prices and quantities when computing percentages

Suppose a commercial banking system has $100,000 of outstanding demand deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of a. $75,000. b. $15,000. c. $300,000. d. $175,000. e. $122,000.

A.

One reason that "near-monies" are important is because: A. they simplify the definition of money and therefore the formulation of monetary policy. B. they can be easily converted into money or vice versa, and thereby can influence the stability of the economy. C. they do not reflect the level of consumer spending, but they have a critical impact on saving and investment in the economy. D. credit cards synchronize one's expenditures and income, thereby reducing the cash and checkable deposits one must hold.

B. they can be easily converted into money or vice versa, and thereby can influence the stability of the economy.

What function is money serving when you buy a ticket to a movie? A. A store of value. B. A medium of exchange. C. A transaction demand. D. A unit of account.

B. A medium of exchange.

What is the most important function of the Federal Reserve System? A. Lending money to banks and thrifts. B. Controlling the money supply. C. Setting reserve requirements. D. Acting as the fiscal agent for the U.S. government.

B. Controlling the money supply.

Paper money in the United States comes in the form of: A. U.S. Treasury bonds. B. Federal Reserve Notes. C. U.S. Treasury bills. D. federal legal tender.

B. Federal Reserve Notes.

Which of the following is correct? A. When borrowers take out bank loans, the money supply is decreased. B. The actual reserves of a commercial bank equal its excess reserves plus its required reserves. C. When borrowers repay bank loans, the money supply is increased. D. A single commercial bank can legally lend an amount greater than its excess reserves.

B. The actual reserves of a commercial bank equal its excess reserves plus its required reserves.

U.S. currency has value primarily because it: A. is legal tender, is generally acceptable in exchange for goods or services, and is backed by the gold and silver of the federal government. B. is relatively scarce, is legal tender, and is generally acceptable in exchange for goods and services. C. facilitates trade, is legal tender, and permits the use of credit cards and near-monies. D. is generally acceptable in exchange for goods and services, is backed by the gold and silver of the federal government, and facilitates trade.

B. is relatively scarce, is legal tender, and is generally acceptable in exchange for goods and services.

Mortgage debt crisis before vs. after (16)

Before: Fed lowering the fed fund rate and using open market operations to buy bonds and adjust bank reserves After: quantitative easing- buying bonds to increase reserves in banking

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of a. $100,000. b. $500,000. c. $80,000. d. $180,000. e. $50,000.

C.

Checkable deposits are included in: a: M1 but not in M2 b: M2 but not in M1 c: both M1 and M2 d: neither M1 nor M2

C.

Money supply M1 does not include the currency held by: a: Households in their wallets or purses b: Business firms c: Commercial banks d: State and local governments

C.

The transactions demand for money is most closely related to money functioning as a a: standard of value. b: store of value. c: medium of exchange. d: unit of account.

C.

When a bank loan is repaid, the supply of money a: may either increase or decrease. b: is increased. c: is decreased. d: is constant, but its composition will have changed.

C.

Answer the question based on the following balance sheet for the First National Bank. Assume the reserve ratio is 15% Refer to the above data. This commercial bank has excess reserves of: Assets Liabilities&Net Worth Reserves: 50,000 Checkable Deposits: 120,000 Loans: 75,000 Stock Shares: 130,000 Securities: 25,000 Property: 100,000 A. $15,000. B. $27,000. C. $32,000. D. $18,000.

C. $32,000. Excess reserves=Actual reserves - Required reserves. Required reserves=Required reserve ratio * Checkable-deposit liabilities= 15%*$120,000=$18,000. So excess reserves = $50,000-$18,000=$32,000.

The Federal Reserve System consists of which of the following? A. U.S. Treasury Department and Bureau of Engraving and Printing. B. Federal Deposit Insurance Corporation and Controller of the Currency. C. Board of Governors and the 12 Federal Reserve Banks. D. Federal Open Market Committee and Office of Thrift Supervision.

C. Board of Governors and the 12 Federal Reserve Banks.

What "backs" the money supply? A. The amount of gold the U.S. government has on deposit at its banks. B. The fact that currency is issued as Federal Reserve Notes. C. The U.S. government's ability to keep the value of money relatively stable. D. The fact that the intrinsic value of coins in circulation is greater than their face value.

C. The U.S. government's ability to keep the value of money relatively stable.

A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be an example of: A. an asset. B. capital stock. C. a liability. D. net worth.

C. a liability.

A bank owns a 10-story office building. In the bank's balance sheet, this would be an example of: A. a liability. B. a checkable deposit. C. an asset. D. capital stock.

C. an asset.

Other things being equal, an expansion of commercial bank lending: A. reduces the money supply. B. is desirable during a period of demand-pull inflation. C. increases the money supply. D. changes the compostion, but not the size, of the money supply.

C. increases the money supply.

Near-monies (14)

Certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits. Includes - Savings deposits (including money market deposit accounts, MMDA) - Small-denominated (less then $100,000) time deposits - Money market mutual funds held by individuals

Multiple deposit expansion (15)

Commercial banking system can lend by multiple of its excess reserves

Money definition M1 (14)

Consists of two components: - Currency (coins and paper money) in the hands of the public - All checkable deposits (all deposits in commercial banks and "thrift" or savings institutions on which checks of any size can be drawn)

Assuming the reserve requirement is 20 percent and commercial banks have no excess reserves initially, the commercial banking system could increase the money supply by a maximum of $1,000,000 if the Federal Reserve Banks would a: buy $250,000 of securities from commercial banks. b: sell $1,000,000 of securities to commercial banks. c: buy $1,000,000 of securities from commercial banks. d: buy $200,000 of securities from commercial banks. e: sell $200,000 of securities to commercial banks.

D.

Smith deposits $200 in currency in his checking account at a bank. This deposit is treated as: A. an addition of $200 to the money supply because of the creation of a checkable deposit of $200. B. an addition of $200 to the money supply because the bank holds $200 in currency and the checking account has been increased by $200. C. a subtraction of $200 from the money supply because the $200 in currency is no longer in circulation. D. no change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits.

D. no change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits.

A commercial bank has checkable-deposit liabilities of $50,000 and a reserve ratio of 20 percent. What is the amount of required reserves? A. $250,000. B. $50,000. C. $1million. D. $10,000.

D. $10,000. Required reserves = reserve ratio * checkable-deposit liabilities = 20% * $50,000= $10, 000.

Mike transfers $4000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2? A. M1 increases and M2 decreases. B. M2 increases and M1 stays the same. C. M1 decreases and M2 increases. D. M1 increases and M2 stays the same.

D. M1 increases and M2 stays the same.

The 12 Federal Reserve Banks can best be characterized as: A. national banks, quasi-public banks, and investment banks. B. investment banks, bankers' banks, and public banks. C. regional banks, public banks, and member banks. D. central banks, bankers' banks, and quasi-public banks.

D. central banks, bankers' banks, and quasi-public banks.

Money functions as a store of value if it allows you to: A. increase your confidence in money. B. make exchanges in a more efficient manner. C. measure the value of goods in a reliable way. D. delay purchases until you want the goods.

D. delay purchases until you want the goods.

The Federal Open Market Committee (FOMC): A. provides advice on banking policy to the Fed. B. monitors regulatory banking laws for member banks. C. follows the actions and operations of financial markets to keep them open and competitive. D. sets policy on the sale and purchase of government bonds by the Fed.

D. sets policy on the sale and purchase of government bonds by the Fed.

A $70 price tag on a sweater in a department store window is an example of money functioning as a: A. medium of exchange. B. store of value. C. standard of deferred payments. D. unit of account.

D. unit of account.

Interest rates (15)

price paid to use money

Governments responsibility in stabilizing purchasing power (14)

Effective control of money supply by monetary authorities

Time deposits (14)

Funds become available at their maturity, ie. 6-month CD.

What backs the money supply (14)

Governments ability to keep the value of money relatively stable

The Taylor rule (16)

How the fed should change interest rate from divergence in gdp and inflation.

Extraordinary quantitative easing (16)

Increase legal reserves in banks and buying debt to encourage banks to keep a higher level of excess reserves

Federal Funds Rate (15)

Interest rate pain on overnight loans of excess reserve

Federal Funds Market (15)

Market in which loans are made. Borrowing immediately available reserves at FED

Monetary policy pros and cons (16)

pros: 1. Flexibility and speed 2. No political pressure cons: 1. reconitions and operations lags complicate the timing 2. in severe recessions, its depended on banks to lend excess reerves

Why is the face value of a coin greater than its intrinsic value?

People would sell it for its intrinsic value. Basically if the face value were to be greater than its intrinsic value, people would remove the coins and sell it for its metal.

Expansionary monetary policy (16)

Recession and rising unemployment -increase money supply of credit in economy + aggregate demand and real output

Repos and reverse repos (16)

Repo: Fed makes loan of money in exchange for government bonds posted as collateral Reverse Repo: Fed posts government bonds as collateral when borrowing

Purchasing Power of the Dollar (14)

The amount a dollar will buy varies inversely with price level

What are the components of the M1 money supply?

The components of the M1 money supply are: Currency (coins and paper money) and all checkable deposits(all deposits in the commercial banks and "thrift" or savings institutions on which checks of any size can be drawn).

Token Money (14)

The face value of any piece of currency is unrelated to its intrinsic value - the value of the physical material out of which that piece of currency is constructed.

Immediate market period

The length of time during which the producers of the market or unable to change the quantity supplied in response to a change in price in which there is a perfectly inelastic supply.

Monetary authorities (14)

The members of the Board of Governors of the Federal Reserve System (the Fed)

Market for money (15)

Toal demand + total supply of money

Balance sheets (15)

a statement of assets- things owned by the bank or owed to the bank - and claims on those assets. Assets = liabilities + net worth

Required reserves (15)

banks or thrifts that provide checkable deposits must by law keep an amount of funds equal to a specified percentage of the bank's own deposit liabilities. This is keep on deposit with the Federal Reserve Bank in its district or as cash in the bank's vault.

Vault cash (15)

cash held by a bank. aka: till money

Monetary Policy (16)

consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy. The goal is to achieve and maintain price-level stability, full employment, and economic growth.

Fractional reserve banking system (15)

in which only a portion (fraction) of checkable deposits are backed up by reserves of currency in bank vaults or deposits at the central bank.

Money Definition M2 (14)

includes M1 plus several near-monies

Bond price and interest rates (15)

varies inversely