Final Econ Exam

Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 5 percent. If the Federal Reserve lowers the required reserve ratio to 3 percent, then the bank will now have excess reserves of $0. $2,000. $3,000. $5,000.

$2,000

Table 16-3 Assets Liabilities Reserves +$7,000 Deposits +$50,000 Loans +$46,000 Net Worth +$3,000 Refer to Table 16-3. Consider the above simplified balance sheet for a bank. If the required reserve ratio is 10 percent, the bank can make a maximum loan of $2,000. $5,000. $6,300. $45,000.

$2,000.

Discount rate

Interest rate paid on money banks borrow from the Fed.

Two types of Interest Rates

Loanable & Money Market Models

What are bank's main assets?

Loans

Goals of Monetary POlicy

Low & Stable Inflation High sustainable economic growth Power is divided among states and regions, public and private sector, banking and other industries

In which of the following situations would the Fed conduct contractionary monetary policy? The Fed believes that aggregate demand was growing too slowly to keep up with potential GDP. The Fed is worried that deflation will become a problem. The Fed fears that unemployment is climbing above the natural rate. The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.

The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.

Bank Run

The Great Depression

The statement, "My iPhone is worth $300" represents money's function as a standard of deferred payment. a unit of account. a medium of exchange. a store of value.

a unit of account.

The interest rate that banks charge other banks for overnight loans is the discount rate. Treasury bill rate. prime rate. federal funds rate.

federal funds rate.

Disadvantage of fiat money

fiat money is only acceptable as long as households and firms have confidence that if they accept paper dollars in exchange for goods/ services, the dollars will not lose much value during the time they hold them.

Hedge funds

funds that raise $ from wealthy investors, and make "sophisticated" (often non-standard) investments

mutual funds

funds that sells shares to invest and use money to buy short-term treasury

commodity money

goods used as money that also have value independent of their use of money

bank panic

if many banks simultaneously experience bank runs

unit of account

money allows a way of measuring value in a standard manner

store of value

money allows people to defer consumption til a later date by storing value. Other assets can do this too, but money does it particularly well because it is liquid, easily exchanged for good.

An appreciating yen makes Japanese products more expensive in both foreign markets and the Japanese market. more expensive in foreign markets. more expensive in the Japanese market. less expensive in foreign markets.

more expensive in foreign markets.

M1

narrowest definition of the money supply: sum of currency in circulation, checking account deposits in banks, holdings of traveler's checks

When the federal reserve was created in 1913, it's main responsibility was to ______

prevent bank runs

To decrease the money supply, the Federal Reserve could Selected Answer: raise the required reserve ratio. raise income taxes. conduct an open market purchase of Treasury securities. lower the discount rate. raise the required reserve ratio.

raise the required reserve ratio.

fiat money

refers to any money, such as paper currency, that is authorized by a central bank/ gov. body makes central banks more flexible in managing money supply

required reserves

reserves that a bank is legally required to hold, based on its checking account deposits (generally at least 10%).

barter trades would require...

a double coincidence of wants

assets

anything of value owned by a person or firm

If the bank of Waterloo receives a $10,000 deposit and the reserve requirement is 10 percent, how much can the bank loan out? (Assume that before the deposit this bank is just meeting its legal reserve requirement.) $1,000 $9,000 $10,000 $11,000

$9,000

FR

(jointly with FDIC) has an important role of regulating commercial banks, whose primary role is to accept funds from depositors and make loans to borrowers.

a good should have the following characteristics:

1) acceptable 2) standard quality 3) durable 4) valuable relative to its weight

3 Primary Functions of Money

1) medium of exchange 2) unit of account 3) store of value

3 monetary policy tools:

1) open market operations 2) discount policy 3) reserve requirements Tools do not directly affect broader objectives. Instead, Fed uses these tools to directly influence its monetary policy targets

Fed pursues four main monetary policy goals

1. Price Stability 2. High Employment 3. Stability of financial markets and institutions 4. Economic growth

If the required reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an increase in checking account deposits (including the original deposit) in the banking system as a whole of up to $100. $1,000. $10,000. $100,000.

10,000

If the required reserve ratio is 5 percent, then the simple deposit multiplier is 2. 5. 10. 20.

20

You're traveling in Japan and are thinking about buying a new kimono. You've decided you'd be willing to pay $175 for a new kimono, but kimonos in Japan are all priced in yen. If the kimono you're looking at costs 14,000 yen, under which of the following exchange rates would you be willing to purchase the kimono? (Assume no taxes or duties are associated with the purchase.) 24.5 yen per dollar 65 yen per dollar 80 yen per dollar

80 yen per dollar

Balance Sheet

A firm's assets are listed on the left, and its liabilities (and stock holders' equity, or net worth) are listed on the right and left. Left and right sides must add to the same amount.

Increasing money supply

BUYS U.S. TREASURY SECURITIES—Treasury bills, notes, and bonds, which are short-term.

Investment Banks

Banks that do not typically accept deposits from/make loans to households; provide investment advice and also engage in creating and trading securities such as mortgage-backed securities.

Open Market Operations

Buying/selling of Treasury Secuirites by the Fed reserve in order to control money supply.

Functions of Federal Reserve Banks

Check clearing Manage currency in circulation Discount lending Regulating and supervision Economic Research Board of gov.'s in DC

contractionary monetary policy

Decrease in money supply and increasing federal funds rate is called contractionary money policy. Tight money. INCREASING INTEREST RATES TO REDUCE INFLATION (REDUCE REAL GDP).

Main parts of Fed

District federal reserve banks, board of governors, federal open market committee.

Decreasing money supply

Fed "sells" its security. These open market operations can occur very quickly and are easily reversible. could also lower the discount rate

Fractional Reserve Banking System

In the US, and most countries around the world, banks do not keep all of the deposits: money in the vault. Banks make use of money and invest it.

Infant industries need protection

Industries might need some time to "start-up" and become competitive; but tariffs must eventually be removed

Protecting national security

Maybe we shouldn't import all our guns from elsewhere...

Money Market Model

More short-term The demand curve for money illustrates the quantity of money demanded at a given interest rate. ... When money demand increases, the demand curve for money shifts to the right, which leads to a higher nominal interest rate.

Troubled Asset Relief Program

Providing funds to banks in exchange for stock Offering discount loans to previously ineligible investment banks

Figure 19-4 Figure 19-4 shows the U.S. demand and supply for leather footwear. Refer to Figure 19-4. Suppose the government allows imports of leather footwear into the United States. The market price falls to $24. What area represents consumer surplus? Answers: V + W + X + Y R + S + V R + S + T + U R + S

R + S + T + U

Loanable Funds Model

Relevant long-term. The term loanable funds includes all forms of credit, such as loans, bonds, or savings deposits.

Which of the following is not a major function in the Federal Reserve System?

Setting income tax rates

By lowering the discount rate...

The Fed encourages banks to borrow (and hence lend out) more money, increasing the money supply. Raising the discount rate has the opposite effect.

Protectionsim

The use of trade barriers to shield domestic firms from foreign competition

Functions of Fed Reserve

They set discount rate Reg. of bank holding companies and approves bank mergers Chair advises president and testifies in Congress

Restriction trade "saves jobs" and "protects high wages"

We have seen that overall people are better off with trade, even though some individuals are worse off.

Monetary Policy

actions FR takes to manage money supply int. rates to pursue macroeconomic policy objectives

Figure 17-2 Refer to Figure 17-2. In the figure above, the movement from point A to point B in the money market would be an increase in the price level. an open market sale of Treasury securities by the Federal Reserve. a decrease in real GDP. a decrease in the required reserve ratio by the Federal Reserve.

an open market sale of Treasury securities by the Federal Reserve.

money

any asset that people are generally willing to accept in exchange for goods and services or for payment of debts

M2

broader definition of $ supply. It includes M1, plus savings account deposits, small-denomination time deposits, balances in $ market deposit accounts, and non-institutional money money market fund shares.

Which of the following is an appropriate policy for the Fed to pursue if it wants to increase the money supply? buy U.S. Treasury bills raise the reserve requirement lower taxes raise the discount rate

buy U.S. Treasury bills

The primary tool the Federal Reserve uses to increase the money supply is lowering the discount rate. printing more money. lowering the required reserve ratio. buying Treasury securities.

buying Treasury securities.

Federal Reserve

central bank of the U.S. However, money issued by the Fed Reserve is no longer exchangeable for gold, nor is any current world currency. Instead, Fed. Issues currency known as fiat money.

A decrease in the demand for American-made goods will decrease the supply of dollars in the foreign exchange market. decrease the demand for dollars in the foreign exchange market. increase the supply of dollars in the foreign exchange market. increase the demand for dollars in the foreign exchange market.

decrease the demand for dollars in the foreign exchange market.

If a person takes $100 from his/her piggy bank at home and puts it in his/her savings account, then M1 will ________ and M2 will ________. increase; increase decrease; increase increase; decrease not change; increase decrease; not change

decrease; not change

bank run

depositors lose confidence in a bank and try to withdraw their money all at once

Reverses

deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.

Low US interest rates causes

dollars to depreciate (fall), causing net exports to increase

expansionary monetary policy

easy money. IF FOMC decides to increase money and lower federal funds rate. DECREASE INTEREST RATE TO INCREASE REAL GDP.

In international exchange markets, a rise in interest rates in the United States will cause the demand for dollars to ________ and dollar to ________. increase; depreciate decrease; depreciate decrease; appreciate increase; appreciate

increase; appreciate

If the Fed buys U.S. Treasury securities, then this Selected Answer: increases reserves, causes banks to reduce their loans, and increases the money supply. decreases reserves, causes banks to reduce their loans, and increases the money supply. increases reserves, encourages banks to make more loans, and increases the money supply. decreases reserves, causes banks to reduce their loans, and decreases the money supply.

increases reserves, encourages banks to make more loans, and increases the money supply.

Domestic producers require time to gain experience and lower their unit costs; this will allow these producers to compete successfully in international markets. This statement describes the ________ argument for protectionism. protecting national security infant industry diseconomies of scale anti-dumping

infant industry

Federal Funds Rate

interest rate on overnight loans that banks charge each other. Private market where banks lend and borrow funds to and from each other is called federal funds market.

Which of the following is an asset for a bank? loans shareholders' equity short-term borrowing deposits of its customers

loans

Imposing trade barriers does all of the following except reduces economic efficiency. invites retaliation from foreign governments. lowers aggregate incomes. lowers domestic prices.

lowers domestic prices.

required reserve ratio (RR)

minimum fraction of deposits banks are required by law to keep as reserves. Excess reserves: reserves over the legal requirement. Some of it are deposited at the Fed's account, some of it are kept in vault cash.

Which of the following assets is most liquid? bond savings account money stock

money

Dumping

selling a product for a price below its cost of production

Decreasing the money supply would result in...

selling securities

The ________ the reserve ratio, the ________ the money multiplier. larger; larger smaller; smaller smaller; larger None of the above are correct.

smaller; larger

The Federal Reserve was established in 1913 to prevent bad loans by requiring banks to hold reserves. stimulate the economy by increasing bank reserves. prevent inflation by decreasing the money supply. stop bank panics by acting as a lender of last resort.

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

The Federal Reserve can directly affect its monetary policy ________, which then affect its monetary policy ________. goals; targets targets; tools targets; goals goals; tools

targets; goals

The Federal Open Market Committee consists of member Board of Governors of the Federal Reserve. the Board of Governors plus five of the Federal Reserve Bank Presidents. five of the Federal Reserve Bank Presidents. the 12 Federal Reserve Bank Presidents.

the Board of Governors plus five of the Federal Reserve Bank Presidents.

If the Fed raises its target for the federal fund rate, this indicates that the Fed is attempting to combat deflation. the Fed is pursuing a contractionary monetary policy. the Fed is concerned that the growth in aggregate demand is too slow to keep up with potential GDP. the Fed is pursuing an expansionary monetary policy.

the Fed is pursuing a contractionary monetary policy.

If the Fed pursues expansionary monetary policy then Selected Answer: the money supply will decrease, interest rates will rise and GDP will fall. the money supply will decrease, interest rates will fall and GDP will fall. the money supply will increase, interest rates will rise and GDP will rise. the money supply will increase, interest rates will fall and GDP will rise.

the money supply will increase, interest rates will fall and GDP will rise.

If the exchange rate changes from $0.08 = 1 Mexican peso to $0.09 = 1 Mexican peso, then both the peso and dollar have appreciated. both the peso and dollar have depreciated. the peso has depreciated and the dollar has appreciated. the peso has appreciated and the dollar has depreciated.

the peso has appreciated and the dollar has depreciated.

simple deposit multiplier

the ration of the amount of deposits created by banks to the amount of new reserves SDM: 1/ RR

The major shortcoming of a barter economy is the requirement of specialization and exchange. that goods and services are not traded. that money loses value from inflation. the requirement of a double coincidence of wants.

the requirement of a double coincidence of wants.

It is difficult to determine if foreign companies are selling their products for prices below their costs of production because the firms have no legal obligation to reveal this information. costs are calculated in the firms' local currencies. domestic taxes increase the firms' costs but it is difficult to determine the incidence of these taxes. the true costs of production are difficult to calculate.

the true costs of production are difficult to calculate.

Whenever banks gain reserves...

they make new loans, and the money supply expands

Whenever banks lose reserves...

they reduce their loans and the money supply contracts. This is enough to establish important relationships between banks.