ECO 202 Chapter 14

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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

Which of the following is included in M2 but not M1?

Money market deposit accounts in banks

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

An initial decrease in a banks reserves will decrease checkable deposits

by an amount greater than the decrease in reserves

M2 is the best definition of money as a medium of exchange

false

The US dollar can be best described as

fiat money (example)

This large amount of currency per person can be partially explained because

many US dollars are held outside the country by foreigners

When sellers are willing to accept money in exchange for goods and​ services, money is acting as a

medium of exchange

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

Equation for velocity

(PxY) V= ________ M

The use of money

-allows for greater specialization -eliminates the double coincidence of wants -reduces the transaction cost of exchange

Which of the following is a monetary policy tool used by the Federal Reserve​ Bank?

-decreasing the rate at which banks can borrow money from the federal reserve -

The​ (FOMC) Federal Open Market Committee

-includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks​ (though not all are voting​ members) -determines the target federal funds rate and the direction of open market operation policies -makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional presidents

Which of the following is true with respect to ​hyperinflation?

-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 or thousands of percentage points a year -in the presence of hyperinflation, firms and households avoid holding money

What is price deflation?

A fall in the price level

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

Which of the following is not a function of money?

Acceptability

Reserve requirements are changed infrequently because

Banks set long term policy decisions, loan decisions, and deposit decisions based on the reserve requirement

Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?

Changing income tax rate

Which is the following is typically the largest liability of a typical bank?

Deposits

In addition to the Federal Reserve bank, what other actors influence the money supply?

Households, firms, and banks

The Federal Reserve Bank of New York is always a voting member of the FOMC because

It carries out the policy directives of FOMC

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 real world multiplier

Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money​ supply?

Reserve Requirements

Why would deposit insurance provide the banking system with protection against​ runs?

Since most depositors are insured, it is less likely that buyers will panic and simultaneously withdrawal funds

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

According to the quantity theory of money​, inflation results from which of the​ following?

The money supply grows faster than real GDP

The quantity theory of money is better table to explain

inflation in the long run

Credit cards are included in...

neither the M1 nor M2

M1 includes more than just currency because

other assets can also be used to make transactions to buy goods and services

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

A double coincidence of wants refers to

the fact that for a barter or trade to take place between two people, each person must want what the other one has


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