econ chapter 14 quiz
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
suppose you decide to withdraw $100 in currency from your checking account what is the effect on M1? ignore any actions the bank may take as a result of you having withdrawn the $100
M1 remains unchanged
the M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets
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
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
if something is to be considered as money, it has to fulfill
all four functions
which of the following is not a policy tool the federal reserve uses to manage the money supply
changing income tax rates
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
banks use deposits to make consumer loans to households and commercial loans to businesses. banks will loan out every penny of their deposits in order to make a profit
false. banks must hold a fraction of their deposits as vault cash or with the federal reserve
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
evidence shows that the quantity equation is correct over the long run, which implies that the
growth rate of money supply determines the rate of inflation
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
very high rates of inflation are called
hyperinflation
what is included in M2 but not M1
money market deposit accounts in banks
which one of the following is not one of the policy tools the fed uses to control the money supply
moral suasion
if online lenders find that borrowers are defaulting on loans at higher than expected rates, can they offset the problem by charging higher interest rates on the loans
no, because only the most high risk borrowers will accept loans, meaning the borrower is more likely to default
in the definition of money supply, where do credit cards belong
not included in the definition of money supply
why would online lenders skip this step in the loan application process
online lenders skip this step because gathering and reviewing information on borrowers is costly
NOT a function of money
open market operation
why do banks require borrowers to submit pay stubs and tax returns when applying for a loan
pay stubs and tax returns allow lenders to gauge a borrower's ability to pay back the loan
the formula for the simple deposit multiplier
simple deposit multiplier = 1/RR
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
which policy tool is the most important
the fed conducts monetary policy principally through open market operations
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 the real GDP, then there will be inflation
the average number of times each dollar in the money supply is used to purchase goods and services is called
the velocity of money
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 wont pay the money back
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
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