Econ Review- Chapter 11

Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of __________ in demand deposits.

$7,500,000

Identify whether each of the following examples belongs in M1 or M2. If an example belongs in both, be sure to check both boxes. 1. Carlos has a roll of quarters that he just withdrew from the bank to do laundry. 2. Felix has $25,000 in a money market account. 3. Janet has $8,000 in a two-year certificate of deposit (CD).

1). M1+M2 2). M2 3). M2

Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.

Amount Deposited- 1,500,000 Change in Excess Reserves- 1,200,000 Change in Required Reserves- 300,000

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. Edison, a client of First Main Street Bank, deposits $1,500,000 into his checking account at First Main Street Bank.

Assets: Reserves- $1,500,000 Liabilities: Deposits- $1,500,000

Personal possession of currency is prohibited in U.S. prisons, although, in practice, prisoners still exchange goods and services. U.S. prisoners used cigarettes as a medium of exchange until smoking was banned in U.S. prisons in 2003. After 2003, prisoners looked to other items on the commissary menu to facilitate exchange. In 2008, the Wall Street Journal reported that energy bars had caught on as money in some U.S. prisons. One important difference between using energy bars and using dollars as money is that ____________ have intrinsic value.

Energy Bars

U.S. dollars are an example of _____ money.

Fiat

Now, suppose First Main Street Bank loans out all of its new excess reserves to Crystal, who immediately uses the funds to write a check to Brian. Brian deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Kevin, who writes a check to Hilary, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Maria in turn.

First Main Street Bank: 1,500,000 ; 300,000 ; 1,200,000 Second Republic Bank: 1,200,000 ; 240,000 ; 960,000 Third Fidelity Bank: 960,000 ; 192,000 ; 768,000

Alex writes a check for $1,299.

Medium of Exchange

Select the assets in order of their liquidity, from most liquid to least liquid.

Most Liquid- $10.00 bill Second-Most Liquid- Funds in a money market account Third-Most Liquid- Share of stock Least Liquid- Boat

Suppose that Best National Bank currently has $200,000 in demand deposits and $130,000 in outstanding loans. The Federal Reserve has set the reserve requirement at 10%.

Reserves- $70,000 Required Reserves- $20,000 Excess Reserves- $50,000

Alex has $1,537 in his checking account

Store of Value

Alex can easily determine that the price of the computer is more than the price of the vacation.

Unit of Account

The measure of the money stock called M1 includes a. wealth held by people in their checking accounts. b. wealth held by people in their savings accounts. c. wealth held by people in money market mutual funds. d. everything that is included in M2 plus some additional items.

a. wealth held by people in their checking accounts.

Which list ranks assets from most to least liquid? a. currency, fine art, stocks b. currency, stocks, fine art c. fine art, currency, stocks d. fine art, stocks, currency

b. currency, stocks, fine art

In a fractional-reserve banking system, an increase in reserve requirements a. increases both the money multiplier and the money supply. b. decreases both the money multiplier and the money supply. c. increases the money multiplier, but decreases the money supply. d. decreases the money multiplier, but increases the money supply.

b. decreases both the money multiplier and the money supply.

Which of the following is included in both M1 and M2? a. savings deposits b. demand deposits c. small time deposits d. money market mutual funds

b. demand deposits

When there is a reserve requirement, banks a. must hold exactly the required quantity of reserves. b. may hold more than, but not less than, the required quantity of reserves. c. may hold less than, but not more than, the required quantity of reserves. d. must seek the Fed's permission whenever they wish to expand or contract their loans to customers.

b. may hold more than, but not less than, the required quantity of reserves.

The Fed's primary tool to change the money supply is a. changing the interest rate on reserves. b. changing the reserve requirement. c. conducting open market operations. d. redeeming Federal Reserve notes.

c. conducting open market operations.

If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would a. rise from 10 to 20. b. rise from 5 to 10. c. fall from 10 to 5. d. not change.

c. fall from 10 to 5.

As opposed to a payments system based on barter, a payments system based on money a. requires a double coincidence of wants. b. leads to less specialization. c. makes trades less costly. d. None of the above is correct.

c. makes trades less costly.

Economists use the term "money" to refer to a. all wealth. b. all assets, including real assets and financial assets. c. all financial assets, but not real assets. d. those types of wealth that are regularly accepted by sellers in exchange for goods and services.

d. those types of wealth that are regularly accepted by sellers in exchange for goods and services.

To decrease the money supply, the Fed could a. sell government bonds. b. increase the discount rate. c. increase the reserve requirement. d. All of the above are correct.

d. All of the above are correct.