MACRO - Unit 4

the seven members appointed by the president and confirmed by the U.S. Senate who serve for one nonrenewable 14-year term; their responsibility is to supervise and control the money supply and the banking system of the United States.

Board of Governors of the Federal Reserve System

T/F: Although it has considerable political independence, the Fed is legally a branch of the U.S. Treasury Department.

False

T/F: An increase in the discount rate by the Federal Reserves causes the money stock to expand.

False

T/F: An increase in the supply of money, other things being equal, will raise the equilibrium interest rate.

False

T/F: Any item can successfully serve as money.

False

T/F: External debt refers to the portion of the national debt owned by private individuals and internal debt refers to that part owned by the public sector.

False

T/F: Internal ownership of the debt refers to the portion of the national debt owned by government agencies.

False

T/F: Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess demand for money, leading people to sell bonds.

False

T/F: The Federal Reserve System was created by act of Congress in 1931 in an effort to end a wave of bank failures brought on by the Great Depression.

False

T/F: The entire national debt is owed to U.S. citizens.

False

T/F: The market in which banks make loans of reserves for terms of over one year is called the federal funds market.

False

T/F: The Federal Funds Committee executes the purchases and sales of government securities decisions of the Federal Reserve.

False (Federal Open Market Committee)

government agency established in 1933 to insure commercial bank deposits up to a specified limit

Federal Deposit Insurance Corporation (FDIC)

directs the buying and selling of U.S. government securities, which is a key method of controlling the money supply

Federal Open Market Committee (FOMC)

our central bank and was established in 1913

Federal Reserve System

the view that changes in monetary policy directly change aggregate demand, and thereby prices, real GDP, and employment

Monetarism

T/F: A bank can extend new loans equal amount by which its excess reserves increase.

True

T/F: Although the chairman of its Board of Governors is appointed by the president, the Fed operates with considerable independence from the executive branch of the government.

True

T/F: An open-market purchase by the Federal Reserve injects excess reserves into the banking system and allows the money supply to expand.

True

T/F: Banks create money when they make loans.

True

T/F: Banks that wish to borrow required reserves can turn to the federal funds market.

True

T/F: If the Fed uses its tools to expand the money supply, bond prices will be bid up and interest rates will fall.

True

T/F: In a system in which all banks have a uniform reserve requirement, the money multiplier is equal to 1 divided by the required-reserve ratio.

True

T/F: John Maynard Keynes listed three types of motives for people holding money - transactions, precautionary, and speculative.

True

T/F: Money eliminates the need to barter.

True

T/F: The required-reserve ratio is required reserves stated as a percentage of checkable deposits.

True

T/F: The way to prevent the national debt from growing is for the budget not to be in deficit.

True

The use of a dollar bill to buy a concert ticket represents the use of money as a: a. medium of exchange. b. unit of account. c. store of value. d. All of the answers above are correct.

a. medium of exchange.

The national debt is unlikely to cause national bankruptcy because the: a. national debt can be refinanced by issuing new bonds. b. interest on the public debt equals GDP. c. national debt cannot be shifted to future generations for repayment. d. federal government cannot repudiate the outstanding national debt.

a. national debt can be refinanced by issuing new bonds.

Assume the Fed decreases the money supply and the demand for money curve is fixed. In response, people will: a. sell bonds, thus driving up the interest rate. b. buy bonds, thus driving down the interest rate. c. buy bonds, thus driving up the interest rate. d. sell bonds, thus driving down the interest rate.

a. sell bonds, thus driving up the interest rate.

The stock of money people hold to pay everyday predictable expenses is the: a. transactions demand for holding money. b. precautionary demand for holding money. c. speculative demand for holding money. d. store of value demand for holding money.

a. transactions demand for holding money.

Which of the following statements is true? a. The speculative demand for money at possible interest rates gives the demand for money curve its upward slope. b. There is an inverse relationship between the quantity of money demanded and the interest rate. c. According to the quantity theory of money, any change in the money supply will have no effect on the price level. d. All of the answers above are correct.

b. There is an inverse relationship between the quantity of money demanded and the interest rate.

In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected to: a. decrease as real GDP increases. b. increase as the interest rate decreases. c. increase as the interest rate increases. d. None of the answers above are correct. e. All of the answers above are correct .

b. increases as the interest rate decreases.

Most of the U.S. national debt is owed to ____________. Thus a rising national debt implies that there will be a future redistribution of income and wealth in favor of____________. a. foreigners, foreigners. b. other U.S. citizens, bondholders c. foreigners, those needing government services d. other U.S. citizens, those needing government services.

b. other U.S. citizens, bondholders

The number of presidentially appointed members who sit on the Federal Reserve Board of Governors is: a. none. b. seven. c. nine. d. twelve.

b. seven.

the direct exchange of one good for another good, rather than for money

barter

Members of the Federal Reserve Board of Governors serve one nonrenewable term of: a. 4 years. b. 7 years. c. 14 years. d. life.

c. 14 years.

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money? a. 14. b. 7. c. 3.5. d. 2

c. 3.5.

Which of the following is not an example of money used as a unit of account? a. A British pound is worth $3.00. b. Auto repairs for a small business were $3,000, and business travel was $8,000. c. A housewife has a $5,000 credit card limit. d. Gasoline sells for $1.20 per gallon, and oil is $5.00 per quart.

c. A housewife has a $5,000 credit card limit.

Which of the following is a store of value? a. Money market mutual fund share. b. Repurchase agreement. c. All of the above are a store of value. d. None of the answers above are a store of value

c. All of the above are a store of value.

A direct exchange of fish for corn is an example of: a. storing value. b. a modern exchange method. c. barter. d. a non-coincidence of wants.

c. barter

The sum of past federal budget deficits is the: a. GDP debt. b. trade debt plus GDP. c. national debt. d. Congressional debt.

c. national debt.

The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets is the: a. unit-of-account motive for holding money. b. precautionary motive for holding money. c. speculative motive for holding money. d. transactions motive for holding money.

c. speculative motive for holding money.

The national debt is best described as the: a. amount by which this year's federal spending exceeds its taxes. b. value of all U. S. Treasury bonds owned by foreigners. c. sum of all federal budget deficits, past and present. d. percentage of GDP needed to finance a country's investment.

c. sum of all federal budget deficits, past and present.

_____________ is money that has a marketable value, such as gold and silver. Today, the United States uses fiat money that must be accepted by law, but is not convertible into gold, silver, or any commodity.

commodity money

Anything can be money if it acts as a: a. unit of account. b. store of value. c. medium of exchange. d. All of the answers above are correct.

d. All of the answers above are correct.

The U.S. Treasury financed federal budget deficits by selling: a. Treasury bonds. b. Treasury notes. c. Treasury bills. d. All of the answers above. are correct. e. None of the answers above are correct.

d. All of the answers above are correct.

With regard to the national debt, to whom does the federal government owe money? a. Taxpayers b. Federal government workers c. The Treasurer of the United States d. Investors who buy U.S. Treasury bills, bonds, and notes

d. Investors who buy U.S. Treasury bills, bonds, and notes

If Congress fails to pass a budget before the fiscal year starts, then federal agencies may continue to operate only if Congress has passed a: a. balanced budget amendment. b. deficit reduction plan. c. tax increase. d. continuing resolution

d. continuing resolution

Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that people: a. increase the supply of bonds, thus driving up the interest rate. b. increase the supply of bonds, thus driving down the interest rate. c. increase the demand for bonds, thus driving up the interest rate. d. increase the demand for bonds, thus driving down the interest rate.

d. increase the demand for bonds, thus driving down the interest rate.

legislated legal limit on the national debt

debt ceiling

Changes in the ___________ occur when the Fed changes the rate of interest it charges on loans of reserves to banks

discount rate

Which of the following appears on the asset side of a bank's balance sheet? a. Excess reserves. b. Loans. c. Required reserves. d. None of the answers above are correct. e. All of the answers above are correct.

e. All of the answers above are correct.

In Keynes's view, an excess quantity of money demanded causes people to: a. sell bonds and the interest rate falls. b. increase speculative balances. c. buy bonds and the interest rate rises. d. buy bonds and the interest rate falls. e. None of the answers above are correct

e. None of the answers above are correct.

The federal budget process begins when federal agencies submit their budget requests to the: a. Congressional Budget Office (CBO). b. Council of Economic Advisors (CEA). c. Department of Commerce (DOC). d. Treasury Department. e. None of the answers above are correct.

e. None of the answers above are correct. (Office of Management and Budget)

Decisions regarding Fed purchases and sales of government securities are made by the: a. FDIC. b. Discount Committee. c. Council of Economic Advisors. d. Federal Funds Committee. e. None of the answers above are correct.

e. None of the answers above are correct. (Federal Open Market Committee)

an accounting identity which is the foundation of Monetarism; the equation MV=PQ states that the money supply times that velocity of money is equal to the price level times real output

equation of exchange

allow a bank to create money by exchanging loans for deposits

excess reserves

a burden because it is the portion of the national debt a nation owes to foreigners; when interest is paid on this type of debt, this income transfers purchasing power to other nations

external national debt

a private market in which banks lend reserves to each other for less than 24 hours

federal funds market

the interest rate banks charge for overnight loans of reserves to other banks

federal funds rate

money accepted by law and not because of redeemability or intrinsic value

fiat money

the basis of banking today and originated with the goldsmiths in the middle ages

fractional reserve banking

The percentage of the national debt a nation owes to its own citizens

internal national debt

__________ is the most important function of money. This means that money is widely accepted in payment for goods and services.

medium exchange

action taken by the Fed to change the money supply

monetary policy

_________ can be anything that serves as a (1) medium of exchange, (2) unit of account, and (3) store of value.

money

the maximum change (positive or negative) in checkable deposits (money supply) due to a change in excess reserves

money multiplier

The dollar amount that the federal government owes holders of government securities. It is the cumulative sum of past deficits.

national debt

the buying and selling of government securities by the Fed through its trading desk at the New York Federal Reserve

open market operations

money held to pay unpredictable expenses

precautionary demand for money

a Monetarist argument that the velocity of money, V, and output Q, variables in the equation of exchange are relatively constant; given this assumption, changes in the money supply yield proportionate changes in the price level

quantity theory of money

the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed

required reserve

the percentage of deposits held as required reserves

required reserve ratio

money held to take advantage of price changes in nonmoney assets

speculative demand for money

___________ is the property of money to hold its value over time. Money is said to be highly liquid, which means it is readily usable in exchange.

store of value

money held to pay for everyday predictable expenses

transactions demand for money

___________ is the function of money to measure relative values by serving as a common yardstick for valuing goods and services.

unit of account

the number of times each dollar is spent; Keynesians view this concept as volatile and Monetarists disagree

velocity of money