Econ Chapter 32
What are the three basic functions of money?
A medium of exchange, a unit of account, and store of value
TARP is the
Troubled Asset Relief Program funded with general tax revenue and the issuance of government debt.
The chairperson of the Federal Reserve Board is selected by the
U.S. president and confirmed by the Senate.
The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers
more likely to default on their loans.
Consider the following statement: "Money is whatever society says it is." This statement acknowledges that money
must be an acceptable medium for exchange to occur.
The Federal Reserve Board of Governors
coordinates policies for the 12 Federal Reserve Banks.
Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates?
The Federal Open Market Committee (FOMC).
Which of the following statements is true? Half the money supply is backed by gold. The money supply is backed by Treasury notes. The gold standard applies to a small fraction of the money supply. There is no concrete backing to the money supply in the United States.
There is no concrete backing to the money supply in the United States.
Government and Federal Reserve emergency loans create moral hazard because there is a tendency
for financial services firms to take on greater risks because they assume they are at least partially insured against losses.
Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small-denominated time deposits, and $30 million of money market mutual fund deposits. From these numbers we see that this small country's M1 money supply is ___________, while its M2 money supply is ____________.
$10 million; $280 million
Which of the following is not a function of the Fed? Advising Congress on fiscal policy. Setting reserve requirements for banks. Serving as a lender of last resort. Regulating the supply of money.
Advising Congress on fiscal policy.
What near-monies are included in M2 money supply?
Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances
Which two of the following financial institutions offer checkable deposits included within the M1 money supply:
Commercial Banks, Thrift Institutions
What is the largest component of M1?
Currency
Which of the components of M1 is legal tender?
Currency
Which of the following items is not included in either M1 or M2:
Currency held in banks
What are the components of the M1 money supply?
Currency in circulation and checkable deposits
Who in the U.S. is responsible for maintaining money's purchasing power?
The Board of Governors of the Federal Reserve System
The major categories of firms that make up the U.S. financial services industry include
commercial banks, thrifts, insurance companies, and securities related firms.
True or false. The financial crisis hastened the ongoing process in which the financial services industry was transforming from having a few large firms to many small firms
false
Compared to a decade ago, there are
fewer bank firms.
The categories of financial firms have become more blurred as these firms are trying to
retain their market share.
When economists say that the Federal Reserve Banks are 'central' banks, this means
the policies are coordinated by the Federal Reserve Board of Governors.
When economists say that the Federal Reserve Banks are quasi-public banks, this means
they are a blend of private ownership and public control.
When economists say that the Federal Reserve Banks are 'bankers' banks, this means
they perform the same functions for banks as banks perform for the public.
Economists nearly uniformly support an independent Fed rather than one beholden directly to either the President or Congress because
this independence allows the Fed to more effectively control the money supply and maintain price stability.
The Federal Open Market Committee (FOMC)
votes on the Fed's monetary policy and directs the purchase or sale of government securities.
Consider the following statement: "The invention of money is one of the great achievements of humankind, for without it, the enrichment that comes from broadening trade would have been impossible." This statement acknowledges that
without money, trade must occur through barter, which is inefficient and cumbersome.
An important reason why members of the Federal Reserve's Board of Governors are each given extremely long, 14-year terms is to:
Insulate members from political pressures that could result in inflation.
The purchasing power of money is
inversely related to the price level.
The Federal Reserve serves as "lender of last resort." In the Financial Crisis of 2007-2008 this meant that they
used creative facilities to lend to financial institutions in the emergency.
Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar?
It will rise by a third (33.3 percent).
The three functions of money are:
Medium of exchange, unit of account, and store of value.
Following are two hypothetical ways in which the Federal Reserve Board might be appointed. a. Upon taking office, the U.S. President appoints 7 people to the Federal Reserve Board, including a chair. Each appointee must be confirmed by a majority vote of the Senate, and each serves the same 4-year term as the president. b. Congress selects 7 members from its ranks (4 from the House of Representatives and 3 from the Senate) to serve as its pleasure as the Board of Governors of the Federal Reserve System. In the opinion of most economists
neither option is ideal because the independence of the Fed would be compromised.
The face value of a coin is greater than its intrinsic value because
otherwise people would sell it for its intrinsic value.
Rapid inflation can undermine money's ability to perform its functions. For example, in runaway inflation
people revert to barter because money fails as a medium of exchange.
The value of money is determined by
people's willingness to accept it in exchange for goods and services.
Mortgage backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because they
reduced the risk exposure, or cost, that banks faced after issuing these subprime loans, and encouraged this type of lending.
The Federal Open Market Committee (FOMC) includes
the Board of Governors members and 5 of the 12 presidents of the Federal Reserve Banks, of which, the president of the New York Fed has a permanent voting seat.
James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a state pension plan, which at the same time purchases an insurance policy from AIG that will pay off if James and the other people whose mortgages are in the security can't pay off their mortgage loans. Suppose that James and all the other people can't pay off their mortgages. Which financial entity is legally obligated to suffer the loss?
AIG.
Which of the following are included in the functions of the Federal Reserve System?
Issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks
City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company's chances for success are dubious, but City Bank makes the loan anyway because it believes that the government will bail it out if SheetOil goes bankrupt and cannot repay the loan. City Bank's decision to make the loan has been affected by:
Moral hazard.
Consider the following statement: "In most economies of the world, the debts of government and commercial banks are used as money." This statement acknowledges that
accounts in commercial banks are customer deposits, and thus are debts of commercial banks.
Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008 because they resulted in
an increase in demand for housing and a rapid increase in home prices that was unsustainable.
Consider the following statement: "Any central bank can create money; the trick is to create enough, but not too much, of it." This statement acknowledges that a central bank
can create too much money, lowering its value and causing inflation.
Between 1980 and 2007, the bank and thrift share of the financial services market
declined substantially.
Consider the following statement: "When the price of everything goes up, it is not because everything is worth more but because the currency is worth less." This statement acknowledges that
if the price of everything rises, it means that the currency has less purchasing power.
Other than its main role of controlling the supply of money, the functions of the Federal Reserve include
issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.
American International Group (AIG) exacerbated the financial crises of 2007-2008 by
issuing billions of dollars of collateralized default swaps that had embedded mortgage-loan risk.
Consider the following statement: "People often say they would like to have more money, but what they usually mean is that they would like to have more goods and services." This statement acknowledges that
money can be used to purchase goods and services, but as an asset money provides little return.
