Econ Chapter 14 Questions And Answers

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In economics, money is defined as…
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any asset people generally accept in exchange for goods and services
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Economies where goods and services are traded directly for other goods and services are called _____.
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barter
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The major shortcoming of a barter economy is…
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the requirement of a double coincidence of wants
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Commodity money…
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has value independent of its use as money
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Silver is an example of a…
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commodity money
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Soldiers in a World War II prisoner-of-war camp…
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used cigarettes as money
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What is one of the most important benefits of money in an economy?
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Money makes exchange easier, leading to more specialization and higher productivity
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If inflation were high, which functions of money would be violated?
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Store of value
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What is the most liquid asset?
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Money
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If whole tomatoes were money, what function of money would be the hardest for tomatoes to satisfy?
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Store of value
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Fiat money has…
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little to no intrinsic value and is authorized by the central bank or government body
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What is false about fiat money?
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Fiat money is backed by gold
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The most liquid measure of money supply is…
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M1
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The M1 measure of the money supply equals…
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currency plus checking account balances plus traveler’s checks
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The Federal Reserve’s narrowest definitions of the money supply is…
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M1
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As recently as 2007, the amount of seigniorage on a U.S. penny is _____, and the amount of seigniorage U.S. paper fiat money is _____.
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negative; positive
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Seigniorage:
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Actually cost to make money
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The M2 measure of the money supply equals…
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M1 plus saving account balances plus small-denomination time plus non-institutional money market fund shares
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If a person withdraws $500 from his/her saving account and puts it in his/her checking account, then M1 will _____ and M2 will _____.
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Increase; not change
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The major assets on a bank’s balance sheet are its…
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reserves, loans, and holdings of securities
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A bank will consider a car loan to a customer ______ and a customer’s checking account to be _____.
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an asset; liability
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Banks reserves include:
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vault cash and deposits with the Federal Reserve
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The required reserves of a bank equal its _____ the required reserve ratio.
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deposits multiplied by
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The Federal Reserve was established in 1913 to…
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stop bank panics by acting as a lender of last resort
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If the central bank can act as a lender of last resort during a banking panic, banks can…
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satisfy customer withdrawal needs and eventually restore the public’s faith in the banking system
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The seven members of the Board of Governors of the Federal Reserve are appointed by…
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the President
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In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevent by…
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the establishment of the Federal Deposit Insurance Corporation
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If people speculate that a run on one bank will cause a run on all banks in the financial system, and this speculation proves accurate, then the financial system would experience what is known as a…
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bank panic
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A central bank like the Federal Reserve in the United States can help banks survive a bank run by…
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acting as a lender of last resort
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The three main monetary policy tools used by the Federal Reserve to manage the money supply are…
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open market operations, discount policy, and reserve requirements
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The main tool that the Federal Reserve uses to conduct monetary policy is…
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open market operations
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The purchase of Treasury securities by the Federal Reserve will, in general,…
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increase the quantity of reserves held by banks
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To increase the money supply, the Federal Reserve could…
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conduct an open market purchase of Treasury securities
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To decrease the money supply, the Federal Reserve could…
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conduct an open market sale of Treasury securities
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The process of bundling loans together and buying and selling these bundles in a secondary finical market is called…
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securitization
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As we demonstrated in 2007, firms in the shadow banking system…
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were very vulnerable to bank runs

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