IHSS 1200 Chapter 16
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
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. ($500*10%)
Suppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $50 billion?
$333 billion increase
Velocity is defined as
(P × Y)/M.
The use of money
- allows for greater specialization - reduces the transaction costs of exchange -eliminates the double coincidence of wants
The United States is divided into ___ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of ___ members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a ___ year, renewable term as the chairman.
12; 7; 4
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.
Which of the following is NOT a function of money?
Acceptability
Which of the following conditions make a good suitable for use as a medium of exchange?
All of the above conditions must be met (The good should be of standardized quality, so that any two units are identical; The good should be durable, valuable relative to its weight, and divisible; The good must be acceptable to (that is, usable by) most buyers and sellers)
The M1 measure of the money supply includes which of the following components?
All of the above.
The figure to the right shows a breakdown of the M1 definition of the money supply in 2017. Which area corresponds to the amount of checking account deposits?
C (The largest area)
In the definition of the money supply, where do credit cards belong?
Credit cards are not included in the definition of the money supply.
Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
Which of the following is true with respect to hyperinflation?
In the presence of hyperinflation, firms and households avoid holding money; 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 hundreds—even thousands—of percentage points per year.
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
If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:
Inflation rate = Growth rate of the money supply - Growth rate of real output.
In 2008, the required reserve ratio for a bank's first $9.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10 percent on all deposits. Therefore, the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?
Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.
Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,
M1 will decrease by $100.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets
Which of the following is true with respect to Irving Fisher's quantity equation, M×V=P×Y?
M = M1 definition of the money supply; V = Average number of times a dollar is spent on goods and services; P = the GDP deflator; V = (P*Y)/M
According to the quantity theory of money, inflation results from which of the following?
The money supply grows faster than real GDP.
The simple deposit multiplier equals
all of the above (the inverse, or reciprocal, of the required reserve ratio; the formula used to calculate the total increase in checking account deposits from an increase in bank reserves; the ratio of the amount of deposits created by banks to the amount of new reserves)
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 initial increase in a bank's reserves will increase checkable deposits
by an amount greater than the increase in reserves.
A higher required reserve ratio _________ the value of the simple deposit multiplier.
decreases (SDM = 1/RR)
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier.
decreases, (The more excess reserves banks keep, the smaller the deposit multiplier)
Which of the following is not a factor that helped lead to the financial crisis of 2007-2009?
deposit insurance for commercial banks
Which of the following is the largest liability of a typical bank?
deposits
The U.S. dollar can best be described as
fiat money
There is a strong link between changes in the money supply and inflation
in the long run
Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are
included only in M2.
fiat money
money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money.
Money serves as a unit of account when
prices of goods and services are stated in terms of money.
The process of ________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets.
securitization
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has.
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
the required reserve ratio
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.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks.
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
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