Econ Ch 14

Refer to Table 14-3. Consider the following simplified balance sheet for a bank: If the required reserve ratio is 10 percent, the bank can make a maximum loan of

$2,000.

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

$50,000.

Refer to Table 14-2. Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the required reserve ratio is 10 percent. As a result of the transaction, the bank can make a maximum loan of

$7,200.

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's reserves immediately increase by

10,000

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's required reserves increase by

2000

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A can make a maximum loan of

8,000

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%.

8000

The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.

Federal Reserve's Board of Governors; four presidents from the other 11 Federal Reserve banks

The Federal Reserve's narrowest definition of the money supply is

M1

The most liquid measure of money supply is

M1.

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity.

Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic?

Required reserves would increase.

Open market operations refer to the purchase or sale of ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

The statement, "My iPhone is worth $300" represents money's function as

a unit of account.

In 2008, the inflation rate in Zimbabwe rose to almost 15 billion percent, and eventually foreigners and local residents refused to accept the Zimbabwean dollar for goods and services. In early 2009, the new ZImbabwean government decided to

abandon its own currency and make the U.S. dollar the country's official currency.

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

acting as a lender of last resort.

A bank will consider a car loan to a customer ________ and a customer's checking account to be ________.

an asset; a liability

In economics, money is defined as

any asset people generally accept in exchange for goods and services.

Economies where goods and services are traded directly for other goods and services are called ________ economies.

barter

Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because

borrowers will have to pay increasing amounts in real terms over time.

The largest liability on the balance sheet of most banks is its

checking account and savings account deposits of its customers.

The largest proportion of M1 is made up of

checking account deposits.

Silver is an example of a

commodity money

To increase the money supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

To decrease the money supply, the Federal Reserve could

conduct an open market sale of Treasury securities.

Which of the following is not counted in M1?

credit card balances

The M1 measure of the money supply equals

currency plus checking account balances plus traveler's checks.

The required reserves of a bank equal its ________ the required reserve ratio.

deposits multiplied by

One way investment banks differ from commercial banks is that investment banks

do not take in deposits.

According to the U.S. Treasury,

firms do not have to accept cash as payment for goods and services.

Commodity money

has value independent of its use as money.

In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience

hyperinflation

The purchase of $1 million of Treasury securities by the Federal Reserve, if there is no change in the quantity of currency, will cause reserves at banks to

increase by $1 million.

The purchase of Treasury securities by the Federal Reserve will, in general,

increase the quantity of reserves held by banks

If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________.

increase; not change

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.

increases; increases

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

insuring deposits in the banking system

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

Which of the following assets is most liquid?

money

You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have

money = $300, annual income = $6,000, and wealth = $4,300.

The quantity theory of money predicts that, in the long run, inflation results from the

money supply growing at a faster rate than real GDP

The main tool that the Federal Reserve uses to conduct monetary policy is

open market operations

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount policy, and reserve requirements

Economists estimate that ________ of U.S. currency is outside the United States and held primarily by ________.

over half; households and firms in countries where there is little confidence in the local currency

In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP) by

providing funds to banks in exchange for stock.

The major assets on a bank's balance sheet are its

reserves, loans, and holdings of securities.

If the central bank can act as a lender of last resort during a banking panic, banks can

satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.

The process of bundling loans together and buying and selling these bundles in a secondary financial market is called

securitization.

Money market mutual funds sell shares to investors and use the money to buy

short-term securities.

The Federal Reserve was established in 1913 to

stop bank panics by acting as a lender of last resort.

The seven members of the Board of Governors of the Federal Reserve are appointed by

the President

In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by

the establishment of the Federal Deposit Insurance Corporation.

Hyperinflation can be caused by

the government selling bonds to the central bank.

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants.

The quantity theory of money was derived from the quantity equation by asserting that

the velocity of money was fixed.

Soldiers in a World War II prisoner-of-war camp

used cigarettes as money.

Bank reserves include

vault cash and deposits with the Federal Reserve.

As was demonstrated in 2007, firms in the shadow banking system

were very vulnerable to bank runs.