question

The three functions of money are:

answer

medium of exchange, measure of value, store of value

question

When money is being used as a _______ ___ _______ it is being used in the buying and selling of goods and services.

answer

Medium of exchange

question

Money is being used as a _______ ___ _______ when it is a yardstick for measuring the relative worth of heterogenous goods and services.

answer

Measure of value

question

The existence of money enables us to avoid barter. In this capacity, money is functioning as a

answer

Medium of exchange

question

Money makes it possible to easily compare the prices of different products with one another. In this capacity, money is functioning as a

answer

Measure of value

question

Barter exchange:

answer

hinders specialization in the economy.

question

The 3 major definitions of money are:

answer

M1, M2, and M3

question

_______ is currency and checkable deposits.

answer

M1

question

_______ is M1 + noncheckable savings deposits + small time deosits + money market deposit accounts + money market mutual funds

answer

M2

question

______ is M2 + large time deposits

answer

M3

question

______ is the most narrowly defined definition of money.

answer

M1

question

Which official money aggregate shows the smallest money supply?

answer

M1

question

The narrow definitions of money (M1) includes only:

answer

currency and checkable deposits

question

What is the correct definition of the M1 money supply?

answer

checkable deposits, coins, and paper currency

question

The M1 definition of money does not include

answer

savings deposits

question

Passbook savings deposits are excluded from the M1 money supply because they

answer

are not accepted as a medium of exchange

question

_____ and _____ are near monies. Near monies are certain highly liquid financial assets such as noncheckable savings accounts, time deposits and short term government securities which, although they do not directly function as a medium of exchange, can e readily and without risk of financial loss converted into currency or checkable deposits.

answer

M2 and M3

question

Passbook savings accounts are

answer

near money

question

True or False: Credit cards are included in the definition of money

answer

false

question

Money has value because of the following three reasons:

answer

acceptability, legal tender, relatively scarce

question

True or False: people accept paper money because they are confident that others will also be willing to accept it in exchange for goods and services.

answer

true

question

True or False: People accept paper mone because it has been designated as legal tender by government.

answer

true

question

True or False: Money derives its value from its scarcity relative to its usefulness

answer

true

question

United States currency in the 1980's is:

answer

fiat money (money that is not backed by any commodity)

question

The two types of demand for money:

answer

Asset demand and transaction demand

question

The transactions motive for holding money referred to money held in order to

answer

pay regular expenses

question

Changes in economic expectations about interest rates are most likely to affect the:

answer

asset demand for money

question

True or False: The transactions demand for money varies indirectly with nominal GDP.

answer

false

question

The _______ demand for money is being affected when money is being used as a medium of exchange.

answer

transactions

question

Households and firms will want more money for transactions purposes if either ________ _______ or real output increases.

answer

prices rise

question

True or False: The transactions demand for money is assumed to be dependent on interest rates

answer

false

question

The advantages of holding money as an asset is that it is ______ and ______ ______.

answer

liquid and lacks risk

question

The disadvantage of holding money as an asset is that it does not____ ______ ______

answer

earn interest income

question

In models of the asset demand for money, assets can be held as ________ or _______.

answer

money or bonds

question

Keynes described three motives for demanding or "holding" money. They include all of the following except

answer

The contributory motive

question

True or False: As bond prices increases interest prices also increase.

answer

false

question

The Board of Governors of the Federal Reserve System has _____ members.

answer

7

question

Each member of the Board of Governors of the Federal Reserve System is appointed for _____ years.

answer

14

question

True or False: The Federal Open Market Committee is made up of the 7 members of the Board of Governors and the 13 presidents of the regional banks.

answer

false

question

The Federal Reserve System was established in

answer

1913

question

Today there are ____ Federal Reserve banks, and ____ branches.

answer

12, 24

question

The Board of Governors consists of

answer

7 members, appointed by the President of the United States.

question

In the United States there is:

answer

one Federal Reserve Bank for each 10,000 customers.

question

The Federal Advisory Council is composed of

answer

12 prominent commercial bankers

question

The original purpose of the Federal Reserve was to

answer

act as a lender of last resort

question

Today, the primary function of the Federal Reserve is to

answer

stabilize the economy by regulating the money supply

question

The function of the Federal Reserve banks is to

answer

manage the money supply in accordance with the needs of the economy as a whole

question

The policy making branch of the Federal Reserve is called

answer

the Board of Governors

question

Gresham's Law states that:

answer

bad money drives out good money

question

The use of a _______ _______ _______ ____ _______ makes it possible for banks to create money.

answer

Fractional reserve system of banking

question

One of the problems with a fractional reserve system of banking is that banks are vulnerable to _______ or ______

answer

panics or runs

question

Fractional reserve banking is a situation where banks

answer

hold only a fraction of their demand deposits as reserves

question

According to the fractional reserve principle

answer

a bank only needs a fraction of a dollar in reserves for each dollar of demand deposits

question

Banks can increase the money supply because they can

answer

loan out a portion of their reserves

question

Money is created when banks make ______

answer

loans

question

When banks use their excess reserves to grant loans to consumers, the money supply

answer

grows

question

When loans are repaid _____ is destroyed

answer

money

question

True or False: Money is created when people deposit money into a demand deposit in the bank

answer

false

question

Banks create money by

answer

creating demand deposits

question

The _____ _____ is an amount of funds equal to a specified percentage of its own deposit liabilities which a member bank must keep on deposit with the Federal Reserve Bank in its district or as vault cash

answer

legal reserve

question

The reserve ratio is equal to ______ _____ ______ ________ divided by the ________ ________ __________ ________.

answer

commercial banks required reserves, commercial banks demand deposit liabilities

question

The reserve requirement is the

answer

percentage of bank deposits that banks must hold as required reserves

question

______ _______ are a means by which the Board of Governors can influence the lending ability of commercial banks.

answer

Legal reserves

question

True or False: Commercial banks and other depository institutions are required to keep legal reserve deposits, or simply "reserves" equal to a specified percentage of their own deposit liabilities as cash, government securities, or on deposit with the Federal Reserve Bank of their district.

answer

false

question

Bank reserves include

answer

vault cash plus funds on deposit with the Fed.

question

A banks excess reserves are defined as

answer

total reserves minus required reserves

question

The amount by which a banks actual reserves exceed its required reserves is the banks

answer

excess reserves

question

Excess reserves for commercial banks are equal to

answer

actual reserves minus required reserves

question

Whenever a check is drawn against a bank and deposited in another bank, the collection of that check will entail a loss of both ________ and _______ ______ by the bank upon which the check is drawn.

answer

reserves and demand deposits

question

An increase in banks loans would tend to decrease

answer

banks excess reserves

question

True or False: When a bank accepts deposits of cash, the composition of the money supply is changed, but the total supply of money is not directly altered.

answer

true

question

True or False: When a commercial bank buys government bonds from the public, the effect is substantially the same as that of lending. New money is created.

answer

true

question

The selling of government bonds to the public by a commercial bank will _____ the supply of money.

answer

decrease

question

The potential money multiplier equals

answer

1/reserve requirements ratio

question

The potential money multiplier determines the maximum supply of

answer

money that can be generated if banks hold no excess reserves and all private funds are deposited in banks

question

1/required reserve ratio=

answer

money multiplier

question

The _____ _____ tells us the maximum amount of new demand deposit money which can be created for a single dollar of excess reserves, given the value of R.

answer

money multiplier

question

The entire banking system could increase total loans by an amount equal to

answer

a multiple of its excess reserves

question

True or False: The banking system can lend by a multiple of its excess reserves, but each individual bank can only lend dollar four dollar with its excess reserves because reserves lost by a single bank are not lost to the banking system as a whole.

answer

true

question

As the reserve requirements ratio increases

answer

the actual money multiplier would decrease

question

Each bank must limit its loans to the amount of its excess reserves because

answer

when customers spend the money they have borrowed, the bank is likely to lose reserves to other banks.

question

Although individual banks must limit their loans to the amount of their excess reserves, the banking system can make loans equal to a multiple of its excess reserves. The basic reason for this difference is that

answer

reserves lost by an individual bank are gained by other banks in the system.

question

Two "leakages" which dampen the money-creating potential of the banking system are _____ _____ and bankers hold _____ _____.

answer

currency drains and excess reserves

question

True or False: The fundamental objective of monetary policy is to assist the economy in achieving a full employment, noninflationary level of total output.

answer

true

question

The 3 tools of monetary policy are:

answer

open market operations, changing the reserve ratio, and changing the discount rate

question

Open market operations are:

answer

FED purchase or sale of government bonds on the open market.

question

Open-market operations involve

answer

the buying and selling of government securities by the Federal Reserve

question

The FED controls the money supply primarily through

answer

open-market operations

question

If the Federal Reserve Bank ______ (buys,sells) government bonds in the open market commercial bank reserves will be increased.

answer

buys

question

If the Federal Reserve desired to increase the lending ability of banks, it would

answer

buy government securities

question

To reduce the supply of money, the Federal Reserve

answer

sells government securities on the open market

question

When the FED buys government securities in the "open market"

answer

the money supply tends to expand

question

True or False: Raising the reserve ratio changes required reserves to excess reserves, thereby enhancing the ability of banks to create new money by lending.

answer

false

question

When the Federal Reserve increases the reserve requirement

answer

the lending ability of banks tends to contract.

question

An increase in the reserve requirements ratio would

answer

decrease the potential money multiplier

question

When the FED raises the reserve requirements ratio

answer

excess reserves are reduced

question

True or False: The reserve requirements are very powerful tools, thus the federal reserve uses it frequently.

answer

flase

question

The rate at which banks can borrow money from the FED is called

answer

the discount rate

question

Monetary policy makers may expand the money supply by

answer

cutting the discount rate

question

By ________ the discount rate the Federal Reserve makes it possible for banks to make more loans

answer

decreasing

question

Changes in the discount rate

answer

are generally regarded as an ineffective policy tool

question

Changes in the discount rate have little effect on the banking system's lending ability because

answer

banks are reluctant to borrow from the Federal Reserve

question

One of the weaknesses of the discount rate is that the federal reserve _______ make banks borrow from it

answer

cannot

question

True or False: The discount rate can have an announcement effect.

answer

true

question

When the Federal Reserve makes loans to member banks it is referred to as a lender _____ ______ _______.

answer

of last resort

question

The rate banks pay to borrow reserves from one another is called

answer

the federal funds rate

question

What 3 things should the federal reserve do for an easy monetary policy?

answer

decrease the required reserve ratio, decrease the discount rate, buy government securities

question

What 3 things should the federal reserve do for a tight monetary policy?

answer

increase the required reserve ratio, increase the discount rate, sell government securities

question

3 minor controls that the federal reserve can use are:

answer

margin requirements, consumer credit, and moral suasion

question

True or False: One of the weaknesses of monetary policy is that while the Federal Reserve can pursue an easy money policy, it cannot force banks to make loans to expand the money supply.

answer

true

question

True or False: The flatter the demand for money curve the larger will be the effect of any given change in the money supply upon the equilibrium rate of interest.

answer

false

question

True or False: A flat investment demand curve will mean that a change in the money supply will not elicit a very large change in investment.

answer

false

question

A ______ _______ refers to the situation where an increase in the GDP which occurs because of an easy monetary policy will in turn increase the demand for money, tending to partially offset or blunt the interest reducing effect of the easy monetary policy

answer

feedback effect

question

True or False: One of the weaknesses of monetary policy is that it is isolated from the political process.

answer

false

question

True or False: While it is true that monetary policy can be altered very quickly, it can take a long time before the effects of monetary policy show up in the economy.

answer

true

question

The equation of exchange is

answer

MV=PQ

question

___ is the money supply in the equation of exchange.

answer

M

question

___ is the velocity of money in the equation of exchange.

answer

V

question

___ is the price level in the equation of exchange.

answer

P

question

___ is the physical volume of goods and services produced in the equation of exchange.

answer

Q

question

The algebraic statement of MV=PQ is known as

answer

the equation of exchange

question

According to the quantity theory of money

answer

the velocity of money is constant

question

True or False: Monetarists believe that although a change in M may cause short-run changes in real output and employment as market adjustment occur, the long-run impact of a change in M will be on the price level

answer

true

question

If an economist believes that velocity is stable, this economist is probably a

answer

monetarist

question

If an economist believes that velocity is unstable, this economist is probably a

answer

keynesian

question

True or False: Monetarists hold that changes in the money supply are the single most important factor in determining the levels of output, employment, and prices.

answer

true

question

Monetarists believe that the velocity of money is

answer

stable

question

True or False: Keynesians argue that the government has contributed to the instability of the business cycle through its clumsy and mistaken attempts to achieve greater stability through discretionary fiscal and monetary policy.

answer

false

question

True or False: Keynesians contend there are many loose links in the cause-effect chain or monetary policy with the result that monetary policy is an uncertain and relatively weak stabilization tool compared with fiscal policy.

answer

true

question

According to Keynes, monetary policy affects the level of output and income

answer

by altering the rate of interest

question

According to the Keynesian model, a reduction in the money supply will tend to

answer

reduce the level of investment spending

question

According to the Keynesian model, which would be an appropriate monetary policy action for a period of unemployment?

answer

the purchase of government securities by the FED

question

According to the Keynesian model, if the FED wanted to reduce inflationary pressures, which combinations of policies should it pursue?

answer

increase the reserve requirement, increase the discount rate, buy government securities

question

Equilibrium GDP would tend to increase if

answer

the reserve requirement was lowered

question

Monetary policy may be less effective in combating unemployment than it is in combating inflation because

answer

bankers may not use the additional reserves provided by the fed to make loans.

question

According to the classical economists, if the money supply doubled

answer

the price level would tend to double.

question

Monetarists contend that

answer

the economy is inherently stable

question

Monetarists tend to support

answer

a fixed rate of growth in the money supply

question

Monetarists support a "monetary rule." This means they would like to see

answer

the money supply increased at a constant annual rate

question

According to the monetarists view, Keynesian monetary policy which attempts to stabilize the economy

answer

has tended to make the performance of the economy worse than it would otherwise have been

question

According to monetarists, increases in government spending

answer

tend to crowd out investment spending

question

Monetarists do not believe that monetary policy should be used to manipulate or micromanage the economy. Instead they believe that the proper money policy is:

answer

a slow growth of the money supply

question

True or False: The monetarists believe that the monetary authorities should attempt to control interest rates

answer

false

question

The ______ ______ theory think that people behave rationally as does all of economics. market participants gather information and process it intelligently to form expectations about things in which they have a monetary stake.

answer

rational expectations

question

True or False: Rational expectations theory contends that the aggregate response of the public to its expectations will make discretionary stabilization policies very effective

answer

false

question

The _________ ________ ______ contends that businesses, consumers, and workers generally understand how the economy functions and effectively use available information to protect or further their own self interests.

answer

Rational Expectations Theory

question

The ______ ______ _____ assumes that people form their expectations of future inflation on the basis of previous and present rates of inflation and only gradually change their expectations as experience unfolds.

answer

Adaptive Expectations Theory

question

Supporters of the theory of rational expectations believe that Keynesian monetary and fiscal policy

answer

tend to be ineffective or counterproductive

question

Monetarists and rational expectations theorists both support

answer

a "monetary rule"

question

Monetarists and rational expectations theorists believe that if policy makers would avoid intervening in the economy

answer

unemployment and inflation would tend to be minimized

question

The ______ _____ shows that the greater the rate of growth of aggregate demand, the greater will be the resulting inflation and the greater the growth of real domestic output

answer

Phillips Curve

question

Phillips curve suggests that goals may be in conflict between

answer

full employment and price level stability

question

______ is when the economy is experiencing both inflation and unemplyment

answer

stagflation

question

Stagflation may be defined as

answer

high inflation combined with high unemployment

question

Stagflation presents problems for Keynesian monetary policy because

answer

it is impossible to increase and decrease spending at the same time

question

Keynesian economists contend that ____ _____ _____ cause stagflation in the 1970's

answer

aggregate supply shocks

question

The adaptive expectations theory distinguishes between a _____ ____ phillips curve and a _____ _____ Phillips Curve

answer

long run, short run

question

The ______ ______ ______ concludes that the economy is stable in the long-run at the natural rate of unemployment

answer

Natural rate hypothesis

question

According to the natural rate theory, one-shot expansionary macroeconomic policies can push unemployment below its natural rate

answer

in the short run, but it will return to the natural rate in the long-run

question

According to natural rate theory, macropolicy cannot influence the rate of

answer

unemployment in the long-run

question

_______ ______ economists contend that changes in aggregate supply-shifts in the long-run aggregate supply curve must be recognized as an "active" force in determining both the levels of inflation and unemployment

answer

Supply side

question

Which policy would not be supported by a supply-side economist?

answer

an increase in marginal tax rates to help pay off the public debt

question

Modern supply side policy stresses the idea that

answer

taxes and government spending critically affect aggregate supply

question

Supply-side economists believe that

answer

lowering tax rates will increase the incentive to work

question

The ______ curve shows the relationship between tax rates and tax revenue. As tax rates increase from 0 to 100 percent, tax revenue will increase from 0 to some maximum level and then decline to 0.

answer

Laffer

question

The Laffer curve shows that

answer

higher tax rates boost tax revenue up to a point; after that, higher taxes lower tax revenue

question

Tax rate reductions can yield more tax revenue if

answer

people respond by choosing much less leisure and more work

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