Chapters 14-17 macro
Which one of the following is not the formula for the quantity theory of money?
M x Y = P x V
The Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply
Distinguish among money, income, and wealth.
A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts.
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.
The formula for the simple deposit multiplier is
Simple Deposit Multiplier = 1/RR
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
Which tool is the most important?
The Fed conducts monetary policy principally through open market operations.
How do the banks "create" money?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
A baseball fan with a Mike Trout baseball card wants to trade it for a Miguel Cabrera baseball card, but everyone the fan knows who has a Cabrera card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants
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
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
Using bitcoins might be more attractive to individuals and firms in developing countries than to individuals and firms in the United States because
the total amount of bitcoins is limited, so inflation will not undermine their value.
If the required reserve ratio is 0.05, the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000 is
$20,000 x (1/0.05) = $400,000
The United States is divided into ___ Federal Reserve Districts.
12
One of the board members is appointed to a ___ year, renewable term as the chairman.
4
The Federal Reseve Bank's Board of Governors consists of ___ members.
7
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.
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 M1 measure of the money supply includes which of the following components?
All of the above.
The simple deposit multiplier equals
All of the above.
The use of money
All of the above.
The (FOMC) Federal Open Market Committee
All of the above.
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
All of the above.
Which of the following is true with respect to Irving Fisher's quantity equation, M x V = P x Y?
All of the above.
Which of the following is true with respect to hyperinflation?
All of the above.
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.
The economic definition of money is:
Any asset that people are generally willing to accept in exchange for goods and services.
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.
Which of the following is not a Federal Reserve district?
Denver
Briefly explain whether you agree or disagree with the following statement: "Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability."
Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.
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.
Which of the following best explains the difference between commodity money and fiat money?
Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
What is the "shadow banking system"?
Financial firms that raise money from investors and provide it to borrowers.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks
What are the largest asset and the largest liability of a typical bank?
Loans are the largest asset and deposits are the largest liability of a typical bank.
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
What is a "classic type of run"?
Many depositors simultaneously decide to withdraw their money from a bank.
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
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.
Which one of the following is not a function of money?
Open market operation.
Based on the quantity theory of money, if velocity is constant, inflation is likely to occur when:
The money supply grows at a faster rate than real GDP.
When the Federal Reserve buys bonds through open market operations,
The money supply will increase.
Which of the following is the largest liability of a typical bank?
deposits
How does the quantity theory provide an explanation about the cause of inflation?
The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
Why don't more people use their savings to make loans rather than keeping the funds in bank accounts that earn very low rates of interest?
There is a risk that the borrower won't pay the money back.
What is commercial lending?
This is when banks make loans to businesses.
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation.
True
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
We can say that loans are funded by deposits because deposits give banks financial capital, which can be loaned out so banks can make a profit
True
Does the government create money by printing currency?
Yes, but banks create the majority of the money supply by making loans.
If Greeks were able to swap goods and services for other goods and services, did it matter that currency was not available because the banks had been closed?
Yes, it mattered. Without money, swapping goods and services for other goods and services requires that each person must want what the other one has, and takes considerable time and energy.
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.
Congress passed legislation to create the Federal Reserve System in 1913 in order to
end the instability created by bank panics by acting as a lender of last resort.
If something is to be considered money, it has to fulfill
all four functions
In the securitization process,
banks grant loans to households and bundle the loans into securities that are then sold to investors.
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 (decrease) in a bank's reserves will increase (decrease) checkable deposits
by an amount greater than the increase (decrease) in reserves
A central bank can "create money" by buying bonds because
by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply.
Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 definition of the money supply?
c & e
If Schneider is correct, businesses and consumers might prefer to carry out transactions by using
cash
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
changing income tax rates
The most important role of the Federal Reserve in today's U.S. economy is
controlling the money supply to pursue economic objectives
A higher required reserve ratio _________ the value of the simple deposit multiplier
decreases
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier
decreases
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
The U.S. dollar can best be described as
fiat money
Evidence shows that the quantity equation is correct over the long run, which implies that the
growth rate of the money supply determines the rate of inflation.
When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange
Very high rates of inflation are called
hyperinflation
________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.
hyperinflation
There is a strong link between changes in the money supply and inflation
in the long run
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
Money is an imperfect standard of deferred payment because ______ causes the value of money to decrease over time.
inflation
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
Farms and small-businesses might be more likely than large corporations to rely on banks for funding because
large corporations have more ways to obtain funding than do farms and small businesses.
Which of the following would be the least desirable candidate to be a good medium of exchange?
milk
What is 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
Which one of the following is not one of the policy tools the Fed uses to control the money supply?
moral suasion
The financial firms of the shadow banking system were
more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.
Which one of the following is not a reason why businesses accept paper currency knowing that, unlike a gold coin, the paper the currency is printed on is worth very little? Paper currency is a good medium of exchange because it is
not valuable
The Federal Reserve is divided into two bodies:
the Board of Governors and 12 regional districts
An asset would be usable as a medium of exchange for all of the following reasons except:
the asset should be a commodity that has intrinsic value.
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.
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking account balances.
The average number of times each dollar in the money supply is used to purchase goods and services is called
the velocity of money.
The Chinese government has refused to print currency in denominations higher than the 100-renminbi note, which is the equivalent of about $16. The United States prints $100 bills and all other countries print currency in denominations that are at least that high. The Chinese government might be reluctant to print currency in high denominations
to discourage corruption
The quantity theory of money is better able
to explain the inflation rate in the long run.
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future
Governments sometimes allow hyperinflation to occur because
when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
