Macroeconomics Chapter 8 University of Iowa
Choose the correct statement.
Deposits are money, checks are not money, and credit cards are not money.
The central bank of the United States is the ________.
Federal Reserve System
The liabilities of the Fed are ________, and these liabilities along with ________ make up the monetary base.
Federal Reserve notes held by households and businesses and reserves of depository institutions; coins issued by the Treasury
The monetary base is the sum of _________. The monetary base is equal to ________.
Federal Reserve notes, coins, and depository institution deposits at the Fed; the liabilities of the Fed plus coins issued by the Treasury
The ratio of reserves to deposits that a bank plans to hold is its _______. If a bank has $10 million in actual reserves and $8 million in desired reserves, then it has _________.
desired reserve ratio; excess reserves
The Bank of America's total assets ________ and its total liabilities ________.
do not change; do not change
A fall in the price level ________ the nominal interest rate in the short run.
lowers
A decrease in real GDP ________ the nominal interest rate in the short run. A decrease in the money supply _________ the nominal interest rate in the short run.
lowers; raises
Money is any commodity or token that is generally acceptable as a _______.
means of payment
When the nominal interest rate rises, the opportunity cost of holding money _______ and the quantity of real money demanded ________.
rises; decreases
Suppose an increase in the monetary base of $200,000 increases the quantity of money by $400,000. Calculate the money multiplier.
2
The two main official measures of money in the United States today are _______. The two main official measures of money in the United States ________ really money.
M1 and M2; are
The equation of exchange is _________ and it is true ________.
MV = PY; by definition
Categorize the following items as either an asset of the Fed or a liability of the Fed.
U.S. government securities--asset Federal Reserve notes--liability Loans to depository institutions--asset Depository institution deposits--liability
Indicate whether the following items are money or not money in the United States today.
Your loan to pay your school fees--not money The check you have just written to pay for your rent--not money U.S. dollar bills in your wallet--money Cash in Citibank's cash machines--not money
According to the quantity theory of money, in the long run an increase in the quantity of money of 5 percent brings _______ in the price level.
a 5 percent increase
A problem with using a commodity as money is ________.
a commodity's value changes over time
Suppose that Sara withdraws $1,000 from her savings account at the Lucky S&L, keeps $50 in case, and deposits the balance in her checking account at the Bank of Illinois. The immediate change is ________ in M1 of $1,000 and _______ in M2.
an increase; no change
The Fed's policy tools include all of the following except _________.
changing government expenditure
The deposits of the following three types of depository institutions make up the nation's money: __________.
commercial banks, thrift institutions, and money market mutual funds
The Fed makes an open market sale of securities to a bank. The monetary base _________ and the Fed's assets _________. The bank's total assets _________, its reserves _________.
decrease; decrease are the same; decrease
When the interest rate falls, other things remaining the same, the opportunity cost of holding money __________ and _________.
falls; the quantity of money demanded increases
A depository institution takes deposits from ________ and earns most of its income by _________.
households and firms; making loans and buying securities that earn a higher interest rate than that paid to depositors
The Fed is the lender of last resort, which means _______.
if depository institutions are short of reserves, they can borrow from the Fed
A bank manager tells you that she doesn't create money. She just lends the money that people deposit. The bank manager is _______ because _______.
incorrect; every new loan creates a new deposit
Suppose the Fed buys $50 million of government securities from the Bank of America. The Fed's total assets ________ and its total liabilities ________.
increase by $50 million; increase by $50 million
An open market purchase ________ the monetary base. An open market sale ________ the monetary base.
increases; decreases
Barter _______ a means of payment. When trading on e-Bay, barter _________.
is; is not as efficient as money because barter requires a double coincidence of wants
A central bank performs all of the following functions except _________.
it is responsible for paying all government employees
To increase its assets to $2.3 trillion in 2008, the Fed used _________.
last resort loans
The money multiplier is the ratio of the change in the quantity of ________ to the change in the quantity of _________.
money; monetary base
The demand for money is the relationship between the quantity of real money demanded and the _________ when all other influences on the amount of money that people wish to hold remain the same.
nominal interest rate
An open market operation is the __________.
purchase or sale of government securities by the Federal Reserve System in the loanable funds market
In the long run, an increase in the quantity of money _________.
raises the price level and lowers the value of money
In the short run, _______ and ______ adjusts to achieve equilibrium.
real GDP determines the demand for money curve and the Fed determines the quantity of real money supplied; the nominal interest rate
A _________ is a depository institution that accepts savings deposits and makes mostly home-purchase loans. A ________ is a depository institution owned by a social or economic group such as a firm's employees that accepts savings deposits and makes mostly personal loans.
savings bank; credit union
The monetary base is equal to ________.
the Fed's liabilities together with coins issued by the Treasury
When the Fed buys securities from a bank, ________.
the bank's reserves increase but its deposits do not change
The velocity of circulation is the average number of times a dollar of money is used annually to buy ________. The formula used to measure the velocity of circulation, V, is ________, where P is the price level, Y is real GDP, and M is the quantity of money.
the goods and services that make up GDP; V = (P x Y) / M
The quantity of money that the banking system can create is limited by ________.
the monetary base, desired reserves, and desired currency holdings