question

Simple Deposit Multiplier=

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1/RR

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RR is

answer

reserve ratio

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The real world money multiplier

answer

is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash

question

A baseball fan with a MT baseball acrd wants to trade it for a MC baseball card, but everyone the fan knows who has a MC card doesn't want a MT card. Economists characterize this problem as a failure of the

answer

principle of a double coincidence of wants

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Which of the following best explains the difference between commodity money and fiat money?

answer

fiat money has no value except as money, whereas commodity money has value independent of its use as money

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Which of the following is not a function of money?

answer

open market operation

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if something is to be considered as money it has to fulfill ______

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all four functions

question

Paper currency is a good medium of exchange because it is

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not valuable

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Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?

answer

No. The goods are not a store of value

question

What are the four functions of money?

answer

medium of exchange, unit of account, store of value, standard of deferred payment

question

The people buying medical services at this hospital could not use money to pay for the medical services they were buying because the

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Zimbabwean currency was worthless

question

Under these circumstances, was the chinese paper currency a commodity money or a fiat money?

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it is a commodity money because it has value as recycled paper

question

When sellers are willing to accept money in exchange for goods and services, money is acting as

answer

a medium of exchange

question

If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.

answer

True

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Suppose congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling all are correct except

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firms lose since they don't have the convenience of credit cards

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It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because

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it is still accepted as a legal tender for transactions

question

A double coincidence of wants refers to

answer

the fact that for a barter trade to take place between two people, each person must want what the other one has

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Money serves as a unit of account when

answer

prices of goods are stated in the terms of money

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Money serves as a standard of deferred payment when

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payments agreed to today but made in the future are in terms of money

question

Which of the following conditions make a good suitable for use as a medium of exchange?

answer

(all of the above)

question

What is fiat money?

answer

money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money

question

Which of the following is included in M2 but not M1?

answer

money market deposit accounts in bank

question

The federal reserve uses two definitions of the money supply, M1 and M2, because

answer

M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply

question

Distinguish among money, income, and wealth.

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A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts

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The central bank of a country controls the money supply, which equals the currency held by

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the public plus their checking account balance

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Which are not included in the M1 definition of the money supply?

answer

savings account and master card

question

"I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that is true, then the US is less than half as wealthy as the government statistics indicate."

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Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.

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"Income is only one way of measuring wealth" Do you agree?

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Income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts

question

Suppose you have $2000 in a shoebox. One day you decide to deposit the money in a checking account. How will this action affect the M1 and M2 definitions of money supply?

answer

Both M1 and M2 will remain unchanged

question

Suppose you decide to withdraw $100 from your checking account. What is the effect on M1?

answer

M1 remains unchanged

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If you took a $20 to the treasury dept or federal reserve bank, with what type of lawful money is the government likely to redeem it?

answer

with another reserve note of equal value

question

Drug dealers might find using a virtual currency like bitcoin to be appealing because it can be

answer

used to make anonymous transactions

question

The M1 measure of the money supply includes which of the following components?

answer

(all of the above) checking account deposits, holding of travlers check, currency in circulation

question

Savings account balances, small denomination time deposits, and non institutional money market fund shares are

answer

included only in M2

question

Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,

answer

M1 will decrease by $100

question

What are the largest asset and the largest liability of a typical bank?

answer

loans are the largest asset and deposits are the largest liability

question

How do the banks "create" money?

answer

when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands

question

What is commercial lending?

answer

this is when banks make loans to businesses

question

We can say that loans are funded by deposits because deposits give banks financial capital, which can be loaned out so banks can make a profit. true or false?

answer

true

question

"assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a cracking account deposit to bean asset and a car loan to be a liability." agree or disagree?

answer

Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability

question

Which of the following is the largest liability of a typical bank?

answer

deposits

question

Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?

answer

the required reserve ration

question

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation American Bank has

answer

$50 in required reserves

question

The simple deposit multiplier equals

answer

all of the above

question

A higher required reserve ratio ____ the value of the simple deposit multiplier

answer

decreases

question

An increase in the amount of excess reserves that banks keep ____ the value of the real world deposit multiplier

answer

decreases

question

Whenever banks gain reserves and make new loans, the money supply ____; and whenever banks lose reserves, and reduce their loans, the money supply ____

answer

expands/contracts

question

Congress passed legislation to create the federal reserve system in 1913 in order to

answer

end the instability created by bank panics by acting as a lender of last resort

question

The most important role of the federal reserve in todays US economy is

answer

controlling the money supply to pursue economic objectives

question

Which one of the following is not one of the policy tools the fed uses to control the money supply?

answer

moral suasion

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Which tool is the most important

answer

The fed conducts monetary policy principally through open market operations

question

When the federal reserve purchases treasury securities in the open market

answer

the sellers of such securities deposit the funds in their banks and bank reserves increase

question

When the federal reserve sells treasury securities in the open market

answer

the buyers of these securities pay for them with checks and bank reserves fall

question

What is the shadow banking system?

answer

financial firms that raise money from investors and provide it to borrowers

question

The financial firms of the shadow banking system were

answer

more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks

question

Why do most depositors seem to be unworried that banks loan out most of the deposits they receive?

answer

the FDIC insures deposits up to $250,000

question

Suppose that you are a bank manager, and the federal reserve raises the required reserve ratio from 10 percent to 12 percent. What actions would you need to take?

answer

You would have to reduce loans to make up for the necessary increase in reserves

question

As you actions and those of other bank managers reduced the amount of loans made, we would expect that the money supply would end up

answer

decreasing

question

What did Geithner mean by the non bank financial system?

answer

money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households

question

What is a classic type of run?

answer

Many depositors simultaneously decide to withdraw their money from a bank

question

Why would deposit insurance provide the banking system with protection against runs?

answer

since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds

question

The federal reserve acting as the lender of the last resort to prevent a bank panic

answer

constitutes offering discount loans to distressed banks, but the "bail out of the banks" involved the banks in exchange for ownership in the banks

question

When the peoples bank of china cut the amount of cash that banks must set aside as reserves, the monetary policy tool they used was a change in the

answer

required reserve ratio

question

How would this action pump money into the financial system to support lending?

answer

banks can make more loans

question

In the securitization process,

answer

banks grant loans to households and bundle the loans into securities that are then sold to investors

question

There are ____ members of the Board of Governors, who the president of the US appoints to ____. one board member is appointed chairman for ______

answer

7/14 year non renewable term/4 year renewable term

question

To increase the money supply, the FOMC directs the trading desk to

answer

buy US treasury securities

question

By raising the discount rate, the feds leads banks to make ____ loans to household and firms, which _____ checking account deposits and the money supply.

answer

fewer/decrease

question

Which of the following is not the formula for the quantity theory of money?

answer

M*Y=P*V

question

How does the quantity theory provide an explanation about the cause of inflation?

answer

the quantity equation shows that if the money supply grows at a faster rate than real GDP then there will be inflation

question

The quantity theory of money is better able

answer

to explain the inflation rate in the long run

question

Very high inflation rates are called

answer

hyperinflation

question

Governments sometimes allow hyperinflation to occur because

answer

when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation

question

According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?

answer

nominal GDP will increase

question

During which period will the quantity theory of money be more useful in explaining changes in the inflation rate?

answer

the period where velocity is constant because when velocity is constant the changes in the money supply can be shown to be the main cause of inflation

question

What is price deflation?

answer

a fall in the price level

question

What is meant by Spencers statement "this printing of money will keep the deflation wolf from the door"?

answer

an increase in the money supply that exceeds the rate of growth of GDP will increase the price level

question

Why would deflation cause shoppers to hold back, and what does evans pritchard mean when he says, "once this psychology gains a grip, it can gradually set off a self feeding spiral that is hard to stop"?

answer

consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further

question

How would such a large quantity of confederate dollars have affected the value of the confederate currency?

answer

it would have generated high inflation and therefore decreased the value of confederacy currency

question

During the german hyperinflation many households and firms in germany were hurt, however, people with debt actually benefitted from the hyperinflation. true or false?

answer

true

question

If irving fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows

answer

Inflation rate = growth rate of the money supply - growth rate of real output

question

There is a string link between changes in the money supply and inflation

answer

in the long run

Chapter 14 Macroeconomics

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