Econ 320 Lecture 3 Practice Problems

Money is NOT a(n): -medium of exchange. -store of value. -unit of account. -input to production.

-input to production.

Use this balance sheet to answer the question. The reserve-deposit rate is 20 percent, and a customer withdraws $200 from his account in American Bank. The value of the bank's loans, once the bank makes the adjustment needed to maintain its reserve-deposit ratio, will be: Assets Reserves $400 Loans $1600 Liabilities Deposits $2000 -$1,400. -$1,440. -$1,760. -$1,800.

-$1,440.

Suppose that the monetary base is $50,000 and that the reserve-deposit ratio and the currency-deposit ratio are 0.2 and 0, respectively. In this scenario, the money supply will equal: -$10,000. -$25,000. -$150,000. -$250,000.

-$250,000.

Use this balance sheet to answer the question. The reserve-deposit ratio is 20 percent, and a customer deposits $100 into American Bank. What will be the value of the bank's reserves, once the bank makes the adjustment required to maintain its reserve-deposit ratio? Assets Reserves $400 Loans $1600 Liabilities Deposits $2000 -$380 -$400 -$420 -$500

-$420

Assuming that banks hold no excess reserves, suppose that banks have a reserve-deposit ratio of 10 percent. If people deposit all their currency in banks, so that the currency-deposit ratio is zero, then $10 million in deposits would generate a total money supply of _____ million dollars. -100 -1,000 -1 million -10 million

-100

Suppose that a $100 purchase of government bonds by the U.S. Federal Reserve causes a $200 increase in the money supply of an economy in which the public holds 50 percent of deposits as currency. What percentage of bank deposits is held as reserves? -10 percent -25 percent -50 percent -Not enough information is given to make this calculation.

-25 percent

From 2007 to 2014, the U.S. monetary base increased by about _____ percent, while M1 increased by about _____ percent. -400; 100 -100; 400 -600; 450 -450; 600

-400; 100

Suppose that a $100 purchase of government bonds by the U.S. Federal Reserve causes a $200 increase in the money supply in an economy in which banks hold 25 percent of deposits as reserves. What percentage of bank deposits is held as currency? -10 percent -25 percent -50 percent -Not enough information is given to make this calculation.

-50 percent

Which are included in M1 but not M2? -All items in M1 are also included in M2. -Coins are included in M1 but not M2. -Demand deposits are included in M1 but not M2. -Paper bills are included in M1 but not M2.

-All items in M1 are also included in M2.

_____ banks in the world operate under a 100-percent-reserve banking system. -Almost all -All -About half of -Almost no

-Almost no

In a 100-percent-reserve banking system, banks: -loan out 100 percent of their deposits. -hold some reserves as currency in the vaults of local banks and hold the rest electronically at the Federal Reserve. -serve no purpose. -cannot create money.

-cannot create money

From 2007 to 2014, the U.S. monetary base increased by about 400 percent, but M1 increased by only about 100 percent. This means that the money multiplier _____ during this period. -decreased -stayed the same -increased -fluctuated

-decreased

The process of transferring funds from savers to borrowers is called: -financial intermediation. -the capital requirement. -fiscal policy. -monetary policy.

-financial intermediation.

From 2007 to 2014, the U.S. monetary base increased about 400 percent but M1 increased by only about 100 percent. This occurred because banks wanted to: -hold more reserves during the financial crisis and economic downturn of this period. -decrease money creation to help the unemployed during the Great Recession of 2007-2008. -make greater profits from investing in technology. -increase the money multiplier to help the economy.

-hold more reserves during the financial crisis and economic downturn of this period.

Suppose that the Federal Reserve requires all lending to commercial banks go through the Term Auction Facility (TAF) only. This would _____ the Federal Reserve's ability to control the money supply. -have no effect on -improve -slightly weaken -greatly weaken

-improve under the Term Auction Facility, the Fed set a quantity of funds it wanted to lend to banks, and eligible banks then bid to borrow those funds. The loans went to the highest eligible bidders — that is, to the banks that had acceptable collateral and offered to pay the highest interest rate. Unlike at the discount window, where the Fed sets the price of a loan and the banks determine the quantity of borrowing, at the Term Auction Facility the Fed set the quantity of borrowing, and a competitive bidding process among banks determined the price. The last Term Auction Facility auction was conducted in 2010, but this policy illustrates that the Federal Reserve has various ways to alter the monetary base and the money supply.

As the economy recovered following the economic downturn of 2007-2008, some observers were concerned that banks would reduce their holdings of excess reserves by making loans. In response to this problem, the Federal Reserve decided to _____ the interest paid on reserves in order to _____ bank lending. -increase; discourage -decrease; discourage -increase; encourage -decrease; encourage

-increase; discourage

An increase in the funds available for banks to borrow through the Term Auction Facility (TAF) will MOST likely cause the monetary base to _____ and the money supply to _____. -increase; increase -increase; decrease -decrease; increase -decrease; decrease

-increase; increase

According to some economists, the U.S. Federal Reserve might have reduced the severity of the Great Depression if it had: -increased the monetary base even more than it did. -decreased the money multiplier. -maintained a laissez-faire approach and allowed the invisible hand of the market to solve all problems. -decreased the monetary base.

-increased the monetary base even more than it did. Although it is easy to explain why the money supply fell, it is more difficult to decide whether to blame the Federal Reserve. One might argue that the monetary base did not fall, so the Fed should not be blamed. Critics of Fed policy during this period make two counterarguments. First, they claim that the Fed should have taken a more vigorous role in preventing bank failures by acting as a lender of last resort when banks needed cash during bank runs. Doing so would have helped maintain confidence in the banking system and prevented the large fall in the money multiplier. Second, they point out that the Fed could have responded to the fall in the money multiplier by increasing the monetary base even more than it did. Either of these actions would likely have prevented such a large fall in the money supply and reduced the severity of the Great Depression.

Deposit insurance promotes a financial system's stability because it prevents large: -increases or decreases in the currency-deposit ratio. -swings in the discount rate. -swings in the reserve requirements. -swings in excess reserves.

-increases or decreases in the currency-deposit ratio.

One may expect that barter will be most common in a society in which: -there is no government. -goods are relatively expensive. -physical cash has been replaced by digital currency. -imports exceed exports.

-there is no government.