unit 4 test

Country A has a deposit insurance strategy to protect banks against bank runs. The insurance premium is 13 cents for every $⁢100 in bank deposits for banks where liabilities account for less than 70% of assets and 64 cents for every $⁢100 in bank deposits for banks where liabilities account for more than 70% of assets. Suppose that an individual wants to make a $⁢21,000 deposit in a bank that has $⁢5,100 billion of assets and $⁢3,315 billion of liabilities. Determine the insurance premium this bank will pay for the deposit discussed

1. 3315/5100 * 100 65 2. Using the ratio of the bank's liabilities to its assets, determine which insurance premium the bank should pay for every $⁢100 in bank deposits 13 cents 3. 21000/100 * .13 27.3

Assume that in 2016, a country's nominal GDP was $⁢4,180 billion, and the money supply was $⁢1,520 billion. In 2017, the government wanted to increase real GDP by 10%. Assuming that the velocity of money did not change, determine the change in money supply required to implement the change in real GDP, if the price level was 100 in 2016 and 105 in 2017

1. 4180/1520 2.75 2. Determine real GDP in 2016 based on nominal GDP in 2016 4180 3. 4180 * (100% + 10%) 4598 4. (105/100 * 4598)/2.75 1755.6 5. 1755.6 - 1520 235.6

An economy's M2 money supply was $⁢4,500 billion in 2015. In 2020, M1 money supply in this economy decreased by $⁢270 billion, while the value of savings accounts increased by $⁢480 billion. Calculate the difference in M2 between 2015 and 2020

1. 4500-270+480 4710 2. 4710-4500 210

In 2015, the net worth of a bank was $⁢600 billion, and the bank's liabilities were $⁢150 billion. In 2020, the value of customers' deposits in the bank increased by $⁢70 billion, and reserves decreased by $⁢40 billion. Calculate the net worth of the bank in 2020 if other parameters remained constant

1. 600 + 150 750 2. 150 + 70 220 3. 750 - 40 710 4. 710 - 220 490

Consider a bank with $⁢61 million of total assets and $⁢55 million of liabilities in 2017. In 2018, loans decreased by $⁢16 million. Calculate the bank's net worth following this change. Round your answer to the nearest whole number if necessary

1. 61 - 16 45 2. 45-55 -10

Suppose the dollar price of socks is $⁢8.40 per pair, and the price of shirts is $⁢48 per shirt. If you started using socks as a unit of account, what would be the price of shirts measured in pairs of socks?

1. What type of calculation should be used to find the value of one thing in terms of another? division 2. When dividing, would the unit of account go in the numerator or denominator? denominator 3. 48/8.4 5.71

The Federal Reserve System includes leaders and governing boards appointed both federally and in the private sector, each with specific decision-making authority. Which statement about the organization and responsibilities of the various entities of the Federal Reserve System is correct?

Appointments to the Board of Governors are confirmed by the Senate. Federal Reserve member banks elect directors of regional Boards in each district.

store of value

money must serve as a store of value, which preserves economic value that one can spend or consume in the future.

standard of deferred payment

money serves as a standard of deferred payment. This means that if money is usable today to make purchases, it must also be acceptable to make purchases today that the purchaser will pay in the future

unit of account

money serves as a unit of account: it is the ruler by which we measure values

In response to rising inflation, the Federal Reserve effectively adjusts the money supply by implementing a contractionary policy. After the Fed's action, velocity decreases and price level (GDP deflator) remains constant. Which of the following must be true?

nominal GDP will fall

In response to rising unemployment, the Federal Reserve effectively adjusts the money supply by lowering interest rates. After the Fed's action, velocity increases and price level (GDP deflator) remains constant. Which of the following must be true?

nominal GDP will rise

true

public and private debts can be paid with fiat money a government declaration makes fiat money a country's legal tender

In response to rising inflation, the Federal Reserve effectively adjusts the money supply by implementing a contractionary policy. After the Fed's action, velocity and price level (GDP deflator) both remain constant. Which of the following must be true?

real GDP will fall

Funds that a bank keeps on hand and does not loan out or invest in bonds are called [blank]

reserves

If the reserve requirement is 8.5% and the Federal Reserve makes an open market purchase of bonds of $⁢230 million, which of the following statements is true? Select the best answer

The open market purchase of bonds decreases excess reserves by $⁢230 million and leads to a decrease of M1 of $⁢2,714 million.

M1 money supply and M2 money supply

There are two definitions of money

Bank A has the following balance sheet Reserves 60 Deposits 530 Bonds 250 Loans 300 Net Worth 80 Assume that due to open market operations, the amount of loans increased by $⁢20 million. Bank A wishes to maintain the same level of reserves that it originally had. Which statement is correct? Select the best answer

There will be a temporary increase of twenty million dollars in the amount of reserves.

commodity money

These items are considered commodity money since they have a useful value other than money

In expansionary monetary policy, interest rates decrease and investment increases

True because price level increases. False because price level increases.

In expansionary monetary policy, the quantity of loanable funds increases, while interest rates decrease

True because this will eventually lead to an increase in consumption.

Money serves as a [blank], which means that it is a widely accepted way to settle a debt in the economy

standard of deferred payment

medium of exchange

t acts as an intermediary between the buyer and the seller. Instead of exchanging accounting services for shoes, the accountant now exchanges accounting services for money. The accountant then uses this money to buy shoes. To serve as a medium of exchange, money must be widely accepted as a method of payment in the markets for goods, labor, and financial capital

[Blank] means that customers can withdraw a bank's liabilities in the short term while customers repay its assets in the long term

the asset liability time mismatch

Which action is something the Fed does not have the authority to do?

the fed funnels billions of dollars toward scientific research

false

the fed is a common name for central banks in north American countries and England the fed does not process checks the federal reserve provides banking services only to the federal government like most central banks, the federal reserve is decentralized as the fed chair has only one vote, he or she has the same power and influence as others on the board of governors a president for each regional federal reserve district is appointed by the president of the United States each state in the U.S. has its own Federal Reserve bank the federal reserve system includes only federally appointed leaders commercial banks in each district elect a board of directors for each regional federal reserve bank, but all of these boards are headed by the chair of the fed

Which statement is correct about functions for money

as a unit of account, money allows us to compare the value of goods like a car and a cleaning service that are difficult to compare in a barter system price tags on goods in a shop illustrate the unit of account function of money, which allows us to measure the value of these goods in terms of money exchanging an apartment in the city for money and then using this money to buy a house in a village instead of a direct exchange of an apartment for a house illustrates the medium of exchange function of money

Engaging with banks worldwide to minimize and contain systemic risks

banking supervision

true

government rules affect the quantity of reserves that banks in the US hold when mattress savings in an economy are substantial, the overall quantity of money and loans declines when an economy is in a recession, banks are likely to hold a higher proportion of reserves the proportion of reserves that the federal reserve bank requires banks to hold influences the amount of money that can be created in a multi-bank system funds that are deposited in a demand deposit account increase M1 money supply all else equal, the higher excess reserves are, the higher is the total change in M1 money supply

false

items used as fiat money have a useful value other than money barter refers to a system of exchange based on commodity money barter refers to a system of exchange based on fiat money fiat money is backed by a commodity commodity money is a perfect store of value

Suppose the Fed makes sure that banks are not discriminating against consumers on the basis of sex. What is this an example of

the role of a fed as a bank regulator

false

Leverage is a term financial economists use to mean "lending." Monetary policy is usually easy and straightforward due to a clear mechanism of its implementation in the real world. When many banks are choosing to hold excess reserves, contractionary monetary policy may not work well. Using the basic quantity equation of money, the money supply equals the product of the price level and nominal GDP divided by velocity. Economists suspect that changes in velocity are related to a poor quality of materials used to print money. Monetary policy affects the economy immediately, without significant time lags.

Consider an economy with multiple banks. Required reserves held from recently made customer deposits amount to $⁢68 billion. Calculate the value of loans the bank will issue if the money multiplier equals 7. Assume that all excess reserves are loaned out

1. (1/7) * 100 14.3% 2. 68/14.3% 476 3. 476-68 408

In a multi-bank system, after customers deposited additional $⁢840 billion in the bank, M1 money supply increased by $⁢1,260 billion. Calculate the value of loans issued by the bank during the first round of loans. Assume that all the excess reserves are loaned out

1. (1/x) * 840 * (1-x)= 1260 2. x= 840/(1260 + 840) * 100 40% 3. 840 * (100% - 40%) 504

Consider an economy with multiple banks. Customers deposited $⁢850 billion in cash in banks. As a result, the M1 money supply increased by $⁢3,785 billion. Calculate the reserve requirement set by the central bank for commercial banks if all excess reserves are loaned out

1. (1/x) * 850 * (1 - x) = 3785 2. 850/(3785+850) * 100 18.3

Consider a country that has a deposit insurance strategy to protect banks against bank runs. The insurance premium is 18 cents for every $⁢100 in bank deposits for banks where liabilities account for less than 50% of assets and 48 cents for every $⁢100 in bank deposits for banks where liabilities account for more than 50% of assets. Suppose that an individual wants to make a deposit and is thinking about two options: Bank A that has $⁢2,400 billion of assets and $⁢1,320 billion of liabilities and Bank B that has $⁢2,700 billion of assets and $⁢1,215 billion of liabilities. If the planned total insurance premium that the chosen bank will pay for the deposit is $⁢18, what was the deposit amount? Round to the nearest whole number if necessary

1. (1320/2400) * 100 A= 55 (1215/2700) * 100 B= 45 2. Based on the obtained results for the liabilities to assets ratios, determine the bank that is considered more reliable bank B 3. Use the assets to liabilities ratio of Bank B to determine which insurance premium this bank should pay for every $⁢100 in bank deposits 18 cents 4. (18/.18) * 100 10000

Assume that aggregate demand is $⁢770 billion and that $⁢400 billion of it is consumption spending and $⁢260 billion is investment spending. The Fed conducts an expansionary monetary policy and changes the interest rate from 10% to 9%. Assume that every 11 percentage point change in interest rate results in a 20% change in consumption spending and a 15% change in investment spending. Other components of aggregate demand are the same at the initial and new equilibrium points. Determine the level of output that corresponds to the new equilibrium point given the expansionary monetary policy. Both consumption and investment spending change in the same direction

1. 770 - 400 - 260 110 2. 10% - 9% 1 3. 400 * (100% + 20%) 480 4. 260 * (100% + 15%) 299 5. 110 + 480 + 299

A bank holds $⁢80 billion in checking accounts, $⁢140 billion in savings accounts, and $⁢50 billion in reserves. The bank has also issued loans for $⁢150 billion and purchased 0.8 billion bonds, each worth $65

1. 80 + 140 220 2. 0.8 * 65 52 3. 150 + 52 + 50 252 4. 252 - 220 32

false

A one percentage point change in the federal funds rate will typically have the same one percentage point effect on interest rates under long-term loans. In the U.S., monetary policy directly sets specific interest rates in specific markets. In the U.S., monetary policy directly sets specific interest rates in specific markets. A one percentage point change in the federal funds rate will typically have the same one percentage point effect on interest rates under long-term loans. Quantitative easing is used by the Fed both to stimulate and restrain the economy. An expansionary monetary policy should be used in order to reduce inflationary pressure on prices. Expansionary monetary policy is also called tight monetary policy. Countercyclical policies always lead to negative outcomes. If expansionary monetary policy goes too far, it can trigger a recession. Before the implementation of quantitative easing, the Fed never purchased short-term Treasury securities.

false

Bank supervision has no ability to force the bank to close or be sold to another bank. Bank capital is usually equal to or higher than its assets. There is a national staff of bank examiners who conduct reviews of the one hundred largest national and foreign banks. Bank supervision can run only into political questions. All U.S. banks pay the same insurance premiums. As insolvent banks fail due to bank runs, the bank runs increase stability in the banking system. A bank run can be caused only by officially published banking papers reporting negative bank net worth. A bank run affects only banks that have negative net worth. All U.S. banks pay the same insurance premiums. In the United States, the Federal Deposit Insurance Corporation (FDIC) is known as the lender of last resort. A bank run occurs when banks are healthy and have a positive net worth. Banks are not permitted to purchase U.S. Treasury securities. Banks are allowed to invest in the stock market once their assets become smaller than their liabilities. Banks are not permitted to purchase U.S. Treasury securities. Every country has deposit insurance programs in place. In the United States, the government guarantees that depositors will receive all of their deposited funds if a bank fails. A bank run at one bank cannot provoke runs on other banks. The United States enacted deposit insurance in the late eighteenth century.

commodity backed currencies

Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other commodities held at a bank

fiat money

Fiat money has no intrinsic value but is declared by a government to be a country's legal tender.

Suppose the Federal Reserve changes the discount rate from 3.0 to 5.8. What will be the effect on the money supply?

In response, banks will raise the amount of reserves they hold on hand since the cost of not having sufficient reserves has risen, and this will decrease the money supply.

[Blank] has no intrinsic value but is declared by a government to be the country's legal tender

fiat money

true

Some economists worry about a leverage cycle, which can worsen the economic downturn in the future. Velocity is a term that economists use to describe how quickly money circulates through the economy. When many banks are choosing to hold excess reserves, expansionary monetary policy may not work well. Monetary policy in the real world is often quite complicated. during an expecially deep recession, expansionary monetary policy may have little effect on either the price level or real GDP

Which action is an example of expansionary monetary policy?

The Fed lowers the reserve requirement.

true

The Federal Reserve was founded when many banks failed as a result of bank runs. The powers "to coin money" and "to regulate the value thereof" were delegated to the Fed by Congress. If the central bank raises the discount rate, the money supply falls. The specific interest rate targeted in open market operations is a very short-term interest rate. When the central bank purchases bonds from a commercial bank that wants to hold its reserves constant, the money supply rises. When the central bank lowers the discount rate, the money supply rises. The reserve requirement is the percentage of each bank's deposits that it is legally required to hold either as cash in their vault or on deposit with the central bank. In practical terms, a bank can easily reduce its quantity of loans.

Which statement is correct about the barter system and a double coincidence of wants

a double coincidence of wants is an essential condition for an exchange between two people in a barter system in a modern economy, barter trades are difficult to arrange because of extensive division of labor

barter

trading one good or service for another—is highly inefficient in a modern, advanced economy

Which function of money does the following statement best reflect? Select the best answer. Buying a house costs more money than renting an apartment

unit of account

Which function of money does the following statement best reflect? Select the best answer. Money acts as a common denominator.

unit of account

The Bank of Japan handles monetary policy for the country that uses the [blank]

yen

Suppose the Fed cuts the discount rate. What is this an example of

expansionary monetary policy

Suppose the Fed makes an open market purchase of bonds. What is this an example of

expansionary monetary policy

true

loan diversification reduces a bank's exposure to negative events in a specific industry or geographic area a substantial rise in interest rates in a country can cause severe problems for banks operating there one of the reasons banks go bankrupt is inaccurate assumptions about the percentage of loans that will not be repaid on time or will not be repaid at all banks can buy and sell issued home loans in the secondary loan market the price of a specific loan in the secondary loan market is dependent on the ratio of the interest rate the financial institution charged on the original loan and the current interest rate in the economy loans issued to individuals or firms are viewed by a bank as assets banks try to issue loans only to healthy businesses and firms when an individual borrows money from a bank, the money is a liability for the individual and an asset for the bank that issued the loan

Assuring that banks do not discriminate on the basis of sex or marital status

safeguarding the public against unfair practices

M2 money

savings deposits in banks, which are bank accounts for which you cannot write a check directly but from which you can easily withdraw money at an ATM or bank

Assume that Bank A has $⁢200 million in assets and a net worth of $⁢50 million. Determine the amount of Bank A's reserves if in the country where the bank operates, the reserve requirement equals 11%

1. 200 - 50 150 2. 150 * 11% 16.5

Suppose that a central bank has established reserve requirements of 10%. Bank A has $⁢400 million in deposits, and Bank B has $⁢1,200 million in deposits. Assuming that banks are required to hold their reserves on deposit with the central bank, determine the total amount of deposits in the central bank if only the deposits of these two banks are considered

1. 400 * 10% 40 2. 1200 * 10% 120 3. 40 + 120 160

Consider that a bank holds $⁢5 million in reserves that corresponds to 10% of its assets. The net worth of this bank is $⁢9 million. What is the share of deposits in the sum of liabilities and net worth, assuming that deposits are the only liability

1. 5/10% 50 2. 50 - 9 41 3. (41/50) * 100

Suppose a bank has issued loans for $⁢500 billion, purchased bonds for $⁢150 billion, and holds $⁢210 billion in reserves. Calculate the value of the bank's liabilities if the net worth of the bank is $⁢550 billion

1. 500+150+210 860 2. 860-550 310 3.

Hassan has $⁢500 in cash and $⁢9,000 in his checking account. He decides to open a savings account, transfer $⁢6,400 into it from his checking account, and withdraw the rest of the money in the checking account as cash. Calculate the difference in M1 before and after Hassan's banking decisions

1. 500+9000 9500 2. 9000-6400 2600 3. 500+2600 3100 4. 9500-3100 6400

Assuming all amounts are in billions, suppose a bank has made $⁢54.0 in loans, has purchased $⁢40.0 in government securities, and has $⁢5.4 in reserves. Furthermore, suppose this bank has $⁢81.4 in deposits. What is the value of this bank's bank capital

1. 54+40+5.4 99.4 2. Next, identify the bank's liabilities. This is equal to the amount of deposits 81.4 3. 99.4-81.4 18

Assume that the central bank sells $⁢30 million of bonds to Bank A. Following this open market operation, Bank A brought its reserves back to their initial level by changing its amount of loans. As a result, Bank A has $⁢550 million of assets of which 58% are loans, 30% are bonds, and 12% are reserves. Determine the amount of Bank A's loans before the open market operation

1. 550 * 58% 319 2. 319+30 349

Assume that in 2017, the money supply was $⁢5,900 billion and the velocity of money was 5. Knowing that in 2018, the money supply increased by 25% and the nominal GDP increased by 30% determine the velocity of money in this 2018 economy

1. 5900 * 5 29500 2. 29500 * (1 + .3) 38350 3. 5900 * (1 + .25) 7375 4. 38350/7375 5.2

Bank A has $⁢660 million in assets: 70% of them are loans, 25% are bonds, and 5% are reserves. Suppose the central bank makes some open market operations and sells bonds for $⁢40 million to Bank A. Assume that Bank A wants to bring its reserves back after the described transaction by changing the amount of loans. Determine the amount of loans in Bank A after this operation

1. 660 * .7 462 2. 462 - 40 422

Assume that Bank A has $⁢700 million in deposits and a net worth of $⁢117 million. The assets of this bank include $⁢320 million in bonds and $⁢420 million in loans. The remainder of Bank A's assets are reserves, which Bank A holds at the reserve requirement level maintained by the central bank. What is the percentage of required reserves in the country where Bank A operates? Round to one decimal place if necessary

1. 700 + 117 817 2. 817 - 320 - 420 77 3. 77/700 * 100 11%

In 2014, the net worth of a bank was $⁢850 billion, and the value of customers' deposits was $⁢400 billion. In 2019, the net worth of the bank increased by $⁢155 billion, and the value of savings accounts increased by $⁢190 billion. Calculate the difference in the bank's total assets between 2014 and 2019.

1. 850 + 400 1250 2. 850 + 155 1005 3. 400 + 190 590 4. 1005 + 590 1595 5. 1595 - 1250 345

Assume that the equilibrium aggregate demand is $⁢850 billion and that $⁢400 billion of it is consumption spending and $⁢190 billion is investment spending. The Fed conducts contractionary monetary policy; as a result, the equilibrium interest rate changes from 2% to 6%, which in turn affects consumption spending and investment spending. If we compare consumption spending and investment spending at the new equilibrium point with their values at the initial equilibrium point, the difference is 30% and 40%, respectively (both components have changed in the same direction). If other components of aggregate demand are the same for the two equilibrium points, determine the level of aggregate demand that corresponds to the new equilibrium point

1. 850 - 400 - 190 260 2. 400 * (100% - 30%) 280 3. 190 * (100% - 40%) 114 4. 260 + 280 + 114 654

Assume that in 2017 nominal GDP was $⁢90,000 billion and the velocity of money was 9.0. In 2018, the government wanted to increase nominal GDP by 10%. Assuming that the velocity of money does not change, determine the change in money supply required to implement the discussed change in nominal GDP

1. 90000/9 10000 2. 90000 * (100% + 10%) 99000 3. 99000/9 11000 4. 11000 - 10000 1000

Assume that there is a market for loanable bank funds, where the equilibrium occurs at a 6.5% interest rate, and a quantity of funds loaned and borrowed is $⁢22 billion. The Fed pursues an expansionary monetary policy, and as a result, the interest rate changes by 2.5 times, and the quantity of loaned funds changes by 1.1 times. Determine the interest rate at which the new equilibrium occurs

1. An expansionary monetary policy lowers interest rates and stimulates borrowing in the economy. 2. 6.5/2.5 2.6 3.

true

A countercyclical monetary policy can pose a danger of overreaction. A tight monetary policy reduces borrowing in the economy. Within the same type of monetary policy, both business investment and consumer borrowing usually change in the same direction. Tight monetary policy can trigger a recession.

false

the money multiplier tells by how many times reserves will be "multiplied" as they are held in banks money can only be created by the federal reserve the total change in M1 money supplied is calculated as the product of one dividend by the excess requirement and the reserve requirement as of the beginning of 2020, bitcoin was sanctioned as a legal currency in the United States and was regulated by the federal reserve the higher the reserve requirement is, the more money a multi-bank system can create all the money in an economy is the result of bank loans that institutions repeatedly re-deposit and loan when an economy is in a recession, banks are likely to hold as few reserves as possible

Which statement or scenario best illustrates how money serves as a standard of deferred payment?

an ad from a car dealership offers low down payments and one year interest-free financing a statement from a mortgage company shows the outstanding balance on a home mortgage

liquidity

Liquidity refers to how quickly you can use a financial asset to buy a good or service

A bank lending to a variety of customers to reduce risk is called [blank]

diversification

The European Central bank handles monetary policy for countries that use the [blank]

euro

Bank A has the following balance sheet Reserves $⁢90 Deposits $⁢650 Bonds $⁢190 Loans $⁢450 Net worth $80 The central bank decides to expand the money supply by $⁢35 million using Bank A's bonds. What is the value of the bonds in Bank A after this action? Enter your answer in millions in the box below

1. 190 - 35 155

Assume that Country A has a deposit insurance strategy to protect banks against bank runs. An individual has made a $⁢4,500 deposit in Bank A. It is known that the insurance premium that Bank A will pay for the deposit of this individual is $⁢4. What is the insurance premium paid for each $⁢100 of this deposit

1. (4 * 100)/4500 0.09

Consider a bank that issued loans for $⁢66 million, purchased bonds for $⁢42 million, and held $⁢15 million in reserves in 2017. In addition, savers deposited $⁢118 million in 2017. In 2018, the bank's assets increased by $⁢6 million while the amount of deposits decreased by $⁢21 million. Determine the difference between the bank's net worth in 2017 and 2018. Round your answer to the nearest whole number if necessary

1. (66 + 42 + 15) - 118 5 2. 5 + 6 + 21 32 3. 32-5 27

Consider a system with multiple banks. Customers deposited $⁢700 billion in a bank, and the bank was required by the central bank to keep $⁢77 billion in reserves. Calculate the money multiplier for this economy. Assume that all excess reserves are loaned out

1. (77/700) * 100% 11% 2. 1/11% 9.09 9.1

Consider an economy with multiple banks. The dollar value of the required reserves is $⁢128 billion. Calculate the total value of customers' deposits if the money multiplier in the economy equals 8. In your calculations, round to one decimal place if necessary

1. 1/8 .125 2. 128/.125 1024

Suppose a bank has issued loans equal to $⁢17,000 million and holds $⁢11,220 million worth of government securities. Furthermore, suppose the bank has reserves equal to $⁢2,794 million and has $⁢25,398 worth of deposits. What is this bank's bank capital (in millions of dollars)?

1. 17000 + 11220 + 2794 31014 2. Next, identify the total of the bank's liabilities. In this case, it equals the amount of deposits 25398 3. 31014 - 25398 5616

In a multi-bank system, after customers deposited additional funds in the bank, the M1 money supply increased by $⁢1,875 billion. Calculate the total value of customers' deposits made if the money multiplier in the economy equals 6.25. Assume that there is a non-zero reserve requirement in the economy and that all excess reserves are loaned out

1. 1875/6.25 300 2. (1/6.25) * 100 16 3. 300/(100% - 16%) * 100 357.14

Consider the following scenario: In a given year, money supply is $⁢3.29 trillion and nominal GDP is $⁢20.78 trillion. Calculate the velocity of money supply. Round your answer to two decimal places if necessary

1. 20.78/3.29 6.32

Suppose there are only two banks in a country, Bank A and Bank B, each initially having 70% of their liabilities in the form of customers' deposits. Bank A had $⁢750 billion in assets and $⁢277 billion in liabilities, and Bank B had $⁢450 billion in assets and $⁢210 billion in liabilities. There was a rumor that the bank with a lower amount in assets would experience negative worth in the short run. The news triggered a bank run, so depositors withdrew 55% of their deposits from the lower-asset bank and put it all into the higher-asset bank, which held these funds as liabilities and did not issue any new loans. To protect against future bank runs, the government used a deposit insurance strategy and required the banks to pay an insurance premium. The insurance premium is 13 cents for every $⁢100 in bank deposits when liabilities account for less than 65% of assets and 53 cents for every $⁢100 in bank deposits for banks when liabilities account for 65% or more of assets. Determine the total insurance premium Bank A will pay for its deposits

1. First, determine the lower-asset bank in the economy based on the absolute value of the bank's assets bank B 2. 277 * 70% 193.9 210 * 70% 147 3. 147 * 55% 80.85 4. (277 + 80.85)/750 * 100 47.71 5. Using the ratio of Bank A's liabilities to its assets, determine which insurance premium Bank A should pay for every $⁢100 of bank deposits? 13 cents 6. 193.9 + 80.85 274.75 7. 274.75 * 1.3 357.18

Assume that in 2019 the central bank created a monetary stimulus. As a result, the money supply increased by 35% and the quantity of goods and services produced in the economy increased by 4%. At the same time, prices increased by 16%. Determine the velocity of money for this economy in 2019 as a percentage of its initial value.

1. Money Supply × Velocity = Price Level × Real GDP 2. (100% + 16%) * (100% + 4%) 3. ANSWER FROM 2/100% + 35%

Assume that in 2018 the central bank conducted a monetary stimulus. As a result, the money supply increased by 46%, and the quantity of goods and services produced in the economy increased by 11%, the velocity of money decreased by 7%. Determine the percentage change in the price level of money in this economy in 2018

1. Money Supply × Velocity = Price Level × Real GDP 2. (100% + 46%) * (100% - 7%) 3. ANSWER FROM 2/100% + 11%

Assume that Country A has a deposit insurance strategy to protect banks against bank runs. The insurance premium is 13 cents for every $⁢100 in bank deposits for banks with a high net worth and 64 cents for every $⁢100 in bank deposits for banks with a low net worth. Suppose that an individual has made a $⁢6,130 deposit in Bank A, which is considered to be a bank with a low net worth. Determine the insurance premium that Bank A will pay for the deposit of this individual

1. Since Bank A has a low net worth, it is likely to be considered a risky bank. Determine which insurance premium Bank A should pay for every $⁢100 in bank deposits 64 cents 2. (6130/100) * .64 39.23

Below are the components of the money supply in an economy and their values: - Coins and currency in circulation: $⁢300 billion - Demand deposits and other checking accounts: $⁢390 billion - Individual money market mutual fund balances: $⁢110 billion - Savings deposits: $⁢610 billion - Time deposits: $⁢80 billion - Traveler's checks: $7 billion Determine the difference between the M1 and M2 money supply

1. determine which components of money supply are included in M2 but not M1 - Individual money market mutual fund balances, Savings deposits, Time deposits 2. 610+80+110 800

true

There is a national staff of bank examiners who conduct reviews of the largest national banks and of the U.S. branches of all foreign banks. If bank capital is positive, it means that the bank has enough assets to pay back its liabilities. Banks pay an insurance premium to the Federal Deposit Insurance Corporation. Bank runs during the Great Depression worsened the economic situation. The Federal Reserve has some responsibility for supervising financial institutions. If the agencies that supervise banks find that a bank has low or negative net worth or is making too high a proportion of risky loans, they can require the bank to change its behavior. Bank examiners from the Federal Deposit Insurance Corporation evaluate a bank's balance sheet to determine the bank's insurance premium. Bank runs no longer happen in the United States. Bank supervision can force the bank to close.

false

When the Fed was initially created, the main tool for monetary policy was changing reserve requirements. The Fed was given the power "to regulate the value of money" by Article I, Section 8 of the U.S. Constitution, but the power "to coin money" was reserved by Congress. The most commonly used tool of monetary policy for the Fed and for most central banks is changing the discount rate. There are four traditional tools used by the Fed to implement monetary policy in the economy. The Fed charges a lower discount rate than the federal funds rate. The specific interest rate targeted in open market operations can be either short- or long-term, depending on market conditions. The Fed makes large changes in the reserve requirements almost every year. The discount rate is the percentage of each bank's deposits that it is legally required to hold either as cash in their vault or on deposit with the central bank. Buying bonds by the Fed leads to a reduction of the money supply in the economy. When the central bank raises the discount rate, it becomes easier for commercial banks to pay for the funds loaned from the central bank. When the central bank decreases the reserve requirements, commercial banks have less money available to lend out. When the central bank decreases the reserve requirements, commercial banks have less money available to lend out. Open market operations always increase the quantity of money and loans. A central bank has no power to create money even in a large economy like the United States. In recent decades, the Federal Reserve has issued more discount loans than ever before. A decrease in the quantity of loans in several large banks also means more deposits in other banks. The FOMC includes ten voting members who the Board draws, on a rotating basis, from the regional Federal Reserve Banks.

true

a central bank is usually responsible for conducting monetary policy and ensuring that the nation's financial system operates smoothly there are central banks or similar structures in most countries in the world the federal reserve ensures that enough currency and coins are circulating through the financial system to meet public demands the fed's board of governors is situated in the Richmond federal reserve district alaska and hawaii are part of the geographically largest federal reserve district

double coincidence of wants

a situation in which two people each want some good or service that the other person can provide

false

banks always make accurate assumptions about the percentage of potentially "bad" loans out of all issued loans, which always meet the reality in order to attract customers and become prosperous in the long term, a bank should pay out a higher interest to depositors than it charges its borrowers an asset-liability time mismatch is beneficial for banks but disadvantage for its customers a rise in interest rates in a country is always beneficial for banks operating there as they will receive higher loan payments loan diversification is a reliable way to constantly maintain the positive net worth of a bank all categories in the assets section of a bank's balance sheet lead to future interest payments to the bank on a bank's T-account, assets will always equal liabilities it is always the same bank that issues a home loan, charges various handling and processing fees for doing so, and then collects the loan payments the net worth of a bank is the sum of its total assets and total liabilities in the financial market, banks are the only existing financial intermediaries banks, as financial intermediaries, increase transaction costs in the financial market

Which statement is correct about measuring money and the components of money supply

checkable deposits are included in M1 because institution must give the deposit holder their money when the customer writes a check or uses a debit card a balance of the account to which a debit card is linked is a component of M1 money supply

M1 money

coins and currency in circulation: coins and bills that circulate in an economy that the U.S. Treasury does not hold at the Federal Reserve Bank or in vaults

Which statement is correct about types of money

commodity money was widely used in a barter system and is almost never used in a modern economy fiat money is possible as long as all people in a society trust that fiat money is a valid form of currency

Which action could be undertaken by the Federal Reserve Bank

considering the economic merits of policy decisions

Suppose the Fed increases the discount rate. What is this an example of

contractionary monetary policy