Chapter 14 Macroeconomics
82 test answers
Unlock all answers in this set
Unlock answers 82question
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
Unlock the answer
question
Which of the following is not a function of money?
answer
open market operation
Unlock the answer
question
if something is to be considered as money it has to fulfill ______
answer
all four functions
Unlock the answer
question
Paper currency is a good medium of exchange because it is
answer
not valuable
Unlock the answer
question
Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?
answer
No. The goods are not a store of value
Unlock the answer
question
What are the four functions of money?
answer
medium of exchange, unit of account, store of value, standard of deferred payment
Unlock the answer
question
The people buying medical services at this hospital could not use money to pay for the medical services they were buying because the
answer
Zimbabwean currency was worthless
Unlock the answer
question
Under these circumstances, was the chinese paper currency a commodity money or a fiat money?
answer
it is a commodity money because it has value as recycled paper
Unlock the answer
question
When sellers are willing to accept money in exchange for goods and services, money is acting as
answer
a medium of exchange
Unlock the answer
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
Unlock the answer
question
Suppose congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling all are correct except
answer
firms lose since they don't have the convenience of credit cards
Unlock the answer
question
It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because
answer
it is still accepted as a legal tender for transactions
Unlock the answer
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
Unlock the answer
question
Money serves as a unit of account when
answer
prices of goods are stated in the terms of money
Unlock the answer
question
Money serves as a standard of deferred payment when
answer
payments agreed to today but made in the future are in terms of money
Unlock the answer
question
Which of the following conditions make a good suitable for use as a medium of exchange?
answer
(all of the above)
Unlock the answer
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
Unlock the answer
question
Which of the following is included in M2 but not M1?
answer
money market deposit accounts in bank
Unlock the answer
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
Unlock the answer
question
Distinguish among money, income, and wealth.
answer
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
Unlock the answer
question
The central bank of a country controls the money supply, which equals the currency held by
answer
the public plus their checking account balance
Unlock the answer
question
Which are not included in the M1 definition of the money supply?
answer
savings account and master card
Unlock the answer
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."
answer
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.
Unlock the answer
question
"Income is only one way of measuring wealth" Do you agree?
answer
Income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts
Unlock the answer
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
Unlock the answer
question
Suppose you decide to withdraw $100 from your checking account. What is the effect on M1?
answer
M1 remains unchanged
Unlock the answer
question
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
Unlock the answer
question
Drug dealers might find using a virtual currency like bitcoin to be appealing because it can be
answer
used to make anonymous transactions
Unlock the answer
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
Unlock the answer
question
Savings account balances, small denomination time deposits, and non institutional money market fund shares are
answer
included only in M2
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
What is commercial lending?
answer
this is when banks make loans to businesses
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
Which of the following is the largest liability of a typical bank?
answer
deposits
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
The simple deposit multiplier equals
answer
all of the above
Unlock the answer
question
A higher required reserve ratio ____ the value of the simple deposit multiplier
answer
decreases
Unlock the answer
question
An increase in the amount of excess reserves that banks keep ____ the value of the real world deposit multiplier
answer
decreases
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
The most important role of the federal reserve in todays US economy is
answer
controlling the money supply to pursue economic objectives
Unlock the answer
question
Which one of the following is not one of the policy tools the fed uses to control the money supply?
answer
moral suasion
Unlock the answer
question
Which tool is the most important
answer
The fed conducts monetary policy principally through open market operations
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
What is the shadow banking system?
answer
financial firms that raise money from investors and provide it to borrowers
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
What is a classic type of run?
answer
Many depositors simultaneously decide to withdraw their money from a bank
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
How would this action pump money into the financial system to support lending?
answer
banks can make more loans
Unlock the answer
question
In the securitization process,
answer
banks grant loans to households and bundle the loans into securities that are then sold to investors
Unlock the answer
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
Unlock the answer
question
To increase the money supply, the FOMC directs the trading desk to
answer
buy US treasury securities
Unlock the answer
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
Unlock the answer
question
Which of the following is not the formula for the quantity theory of money?
answer
M*Y=P*V
Unlock the answer
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
Unlock the answer
question
The quantity theory of money is better able
answer
to explain the inflation rate in the long run
Unlock the answer
question
Very high inflation rates are called
answer
hyperinflation
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
What is price deflation?
answer
a fall in the price level
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
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
Unlock the answer
question
There is a string link between changes in the money supply and inflation
answer
in the long run
Unlock the answer