Econ Unit 4 Chapter 10

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Using the information in the table, calculate the demand deposits possible if this bank complies with a reserve ratio of 20% and maintains no excess reserves. Assets Liabilities Reserves $25,000 Demand Deposits __________ Loans _______ Gov Bonds _______ HINT: If the reserve ratio is 20%, then 1/5 of the deposits must be held as required reserves. $25,000 is 1/5 of $_______. $25,000/$_______ = 1/5, which equals 20%.

$125,000

Micro Bank has the simplified balance sheet below: Assets Liabilities Reserves $20,000 Demand Deposits $150,000 Loans $100,000 Owners Equity $0 Gov Bonds $30,000 Use the above table to calculate the maximum possible change in loans for this bank if the reserve ratio is 10%. HINT: On the above balance sheet, the reserves include both required and excess reserves. Since demand deposits are $150,000, 10% of $150,000 equals $15,000. Therefore, there will be $______ in excess reserves for this bank ($20,000 - $15,000).

$5,000

If a commercial bank has no excess reserves and the reserve requirement is 20%, what is the value of new loans this single bank can issue if a new customer deposits $1,000?

$800

If required reserves are $150 and deposits are $1000, what is the required reserve ratio?

15%

If, upon receiving a checking deposit of $600, a bank's excess reserves increased by $510, the required reserve ratio must be: HINT: This means the RR is $90. $90/$600 x 100 = __

15%

Which of the following is NOT a function of money? HINT: Money serves multiple functions in an economy. Money is first and foremost a medium of exchange. Because it eliminates the need for barter, it makes commerce much more convenient and efficient. It is also a unit of account in that it serves as the unit people use to describe how much of something they want. Finally, it is supposed to hold value over time. A dollar bill should be worth the same amount tomorrow that it is today.

A source of intrinsic value

Which of the following contributed to the financial crisis of 2008? subprime lending securitization deleveraging low interest rates leading to a housing boom All of the above

All of the above

A financial instrument through which a borrower is contracted to pay the principal at a specified interest rate at a specified date in the future is called:

a bond.

Which of the following is an open market operation?

a central bank purchasing bonds

Which of the following will increase the demand for loanable funds?

a decrease in the interest rate

Economists illustrate a decrease in the money supply as: HINT: A decrease in money supply is a reduction of the quanity of money on the horizontal axis in the money market graph

a leftward shift of the vertical money supply curve.

A $25,000 price tag on a new car is an example of money as

a unit of account.

A decrease in business spending on plant and equipment with an increase in the real interest rate could be caused by:

an increase in borrowing by the federal government.

People's attitudes about the trade-off between risk and return affect how much of their wealth people hold as money. Heightened fear will lead to: HINT: The greater the fear of loss, the less people will want to hold investments that could suffer a loss, and therefore the higher the demand for money (cash and checking accounts)

an increase in the demand for money.

People's attitudes about the trade-off between risk and return affect how much of their wealth people hold as money. Heightened fear will lead to: HINT: The greater the fear of loss, the less people will want to hold investments that could suffer a loss, and therefore the higher the demand for money (cash and checking accounts).

an increase in the demand for money.

Money is: HINT: Money is used as a means to purchase goods and services in an economy. Whether it is commodity money (for example, gold) or fiat currency (the paper bills we use today),

any asset that can easily be used to purchase goods and services.

The supply curve is upward sloping because:

as the price increases, suppliers can earn higher levels of profit or justify higher marginal costs to produce more.

A highly liquid assest

can be converted into a means of payment easily without loss of value.

Liabilities, by definition, mean what is owed, not owned. Which of the following would be included as a liability on a commercial bank's balance sheet?

demand deposits

Banks lend the excess reserves created when new deposits come in because they want to

earn a profit

In the united states, the dollar is

fiat money

All of the following are components of the money supply in the United States EXCEPT: HINT: The U.S. currency is a "fiat currency", which means its value is not backed by a commodity. Thus, gold bullion (a commodity) is not a part of the money supply, even though it is WORTH money. Every other choice listed here is a more direct form of money, and is a component of the money supply.

gold bullion

All of the following are components of the money supply in the United States EXCEPT:

gold bullion.

If the supply of money in the money market shifts to the left:

interest rates will rise and capital investment will fall.

According to the law of demand, a(n) ______ relationship exists between the price of a good and the quantity demanded of that good. As the price of a good goes up, buyers demand ______ of that good.

inverse; less

The major difference between real and nominal gross domestic product (GDP) is that real GDP:

is adjusted for price-level changes using a price index.

Under a fractional reserve banking system, banks are required to:

keep part of their demand deposits as reserves.

Banks create money by

lending excess reserves that get redeposited in other banks.

If the reserve ratio was set at 100%, then banks could: HINT: Banks are only able to lend their excess reserves.

make no loans

The fact that using money avoids the double coincidence of wants necessary in a barter economy illustrates which function of money?

medium of exchange

The functions of money are:

medium of exchange, unit of account, and store of value.

Financial intermediaries perform the vital task of:

moving funds from savers to investors

Which of the following applies to money when it serves as a store of value? I . Money is a store of value because it is an agreed measure for stating goods' prices. II. The more stable money's value, the better it serves as a store of value. III. When money serves as a store of value, it requires a double coincidence of wants.

II only

Which of the following is true of the quantity of money demanded?

It falls when interest rates rise, because the opportunity cost of holding money increases

Which of the following is true of the quantity of money demanded? HINT: the interest rate is the price of money. If the price of a good goes up...

It falls when interest rates rise, because the opportunity cost of holding money increases.

Which of the following is an example of using money as a store of value?

Keeping $200 on hand for an emergency

Which of the following is an example of using money as a store of value? HINT: Buying a dress or an automobile, ordering products online, and paying rent are all examples of money being used as a method of payment. However, keeping $200 on hand for an emergency is an example of storing money today to cover a potential need in the future. In this case, money is serving as a store of value.

Keeping $200 on hand for an emergency

Which of the following is the most liquid monetary aggregate?

M1

Which of the following measures of the money supply is largest?

M2

Which of the following measures of the money supply is largest? HINT: The Federal Reserve publishes weekly and monthly data on two money supply measures M1 and M2. The money supply measures reflect the different degrees of liquidity—or spendability—that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits (checkable deposits), and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.

M2

Which of the following measures of the money supply is largest? HINT: The Federal Reserve publishes weekly and monthly data on two money supply measures M1 and M2. The money supply measures reflect the different degrees of liquidity—or spendability—that different types of money have. The narrowest measure, M1, is restricted to the most liquid forms of money; it consists of currency in the hands of the public; travelers checks; demand deposits (checkable deposits), and other deposits against which checks can be written. M2 includes M1, plus savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds. M2 is therefore the largest measure of the money supply. M2 incorporates all the other answers listed.

M2

Which of the following is true regarding short-term and long-term interest rates?

Short-term interest rates are more important for determining the demand for money.

When the Fed sells bonds in the open market, which curve in the bond market shifts and in which direction?

The demand curve shifts left.

If a bank customer deposits $1,000 of circulating currency into her demand deposit, what will be the immediate effect on M1? HINT: M1 is the total of circulating currency and demand deposits. Since the circulating currency was deposited into a demand deposit, circulating currency decreased by $1,000, and demand deposits increased by $1,000.

no change

The minimum percentage of deposits that a bank must hold and cannot use for lending is known as the

required reserve ratio

As a unit of account, money is used to: HINT: If someone quotes a price of $100, everyone understands the value this represents. On the other hand, four pounds of lobster may have the same value, but quoting prices in lobster is not useful because most consumers cannot relate to the value it represents.

state prices of all goods and services.

The opportunity cost of holding money refers to: HINT: Opportunity cost refers to a foregone opportunity. In this case, it is the opportunity to earn interest on an interest-bearing asset such as a bond. When you hold money, you are giving up the opportunity to earn interest on something else you could hold instead.

the interest that could have been earned if the money balances had been changed into an interest-bearing asset.

The money demand curve illustrates the relationship between the interest rate and:

the quantity demanded of money

The money demand curve illustrates the relationship between the interest rate and: HINT: Economists use the demand curve for money to illustrate the inverse relationship between the quantity of money demanded and the interest rate. It depicts how much money is demanded at each interest rate.

the quantity of money demanded

Which of the following is a primary function of money?

to serve as a unit of account

What are the main components of money demand? HINT: The main components of money demand are transactions demand and asset demand. None of the other choices except for "transactions demand" are correct, however "transactions and asset demand" is a more complete answer than "transactions demand" is.

transaction and asset demand

People hold money in order to buy goods and services. Economists call this: HINT: Since money is a medium of exchange, it is the means by which we purchase goods and services. Money facilitates the exchange, and this creates transactions within an economy. Economists call this transactions demand because people want to hold money in order to conduct transactions in which they buy and sell the goods and services they need and want

transactions demand.

The speculative demand for money: HINT: The speculative demand for money refers to situations in which people hold money in order to find an opportune time to purchase other assets that will earn them a return. In others words, to speculate on these investments. It is also called "the asset demand for money." They could either hold money or hold these investments instead. The higher the interest rate on these other assets (such as bonds), the less money people choose to hold. Therefore, the speculative demand for money varies inversely (negatively) with the interest rate.

varies inversely with the interest rate.

Opportunity cost, most broadly defined, is:

what we forgo, or give up, when we make a choice or a decision.

Economists consider a number to be "real":

when it has been adjusted for inflation.


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