Quiz 565

Related: Economics, Microeconomics

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Quiz 565

Subjective Short Answer

1. What does the “double coincidence of wants” refer to?

2. The existence of money makes trade easier. How is it that money can also increase the
standard of living?

3. The ease with which an asset can be converted into the economy’s medium of exchange is
known as _____.

4. What are the functions of money?

5. You believe the dollars you have today will be accepted in the future in exchange for goods
and services. Which function of money does this illustrate?

6. The prices of goods at a grocery store are listed in dollars. Which function of money does this
illustrate?

7. One of the features of money is its store of value. However, most people do not hold their
wealth as currency. Given that currency is the most liquid type of asset, why don’t people hold
all their wealth as currency?

8. Money, such as gold, with some intrinsic value is called _____. Money with no intrinsic value
is called _____.

9. List two examples of commodity money.

10. In many circumstances, prisoners are not allowed to possess cash. Does this mean there is no
money in prison? Explain.
11. If you withdraw $500 from your savings account and deposit it in your checking account,
then M1 will change by _____ and M2 will change by _____.

12. List the two main functions performed by the Fed?

13. What does it mean for the Fed to be the “lender of last resort?”

14. How are Federal Reserve Board Governors selected?

15. Why do Federal Reserve Board of Governors have long (14 year) terms?

16. Monetary policy is made by the ______.

17. Why is the president of the New York Fed always a voting member of the FOMC?

18. How does the Fed Open Market Committee increase the money supply?

19. The Fed ____ bonds when it conducts an open-market purchase. This action _____ the
money supply.

20. The primary tool used by the Federal Reserve to change the money supply is _____.

21. Monetary policy has an important influence on _____ and _____ in the short run.

22. Why is the Chairman of the Federal Reserve often referred to as the “second most powerful
person in the United States?”

23. What is the change in the money supply when the Fed purchases $100 worth of bonds in a
100-percent-reserve banking system?

24. The fractional reserve characteristic of the banking system allows banks to create money and
also create wealth from bank deposits. Describe why this statement is or is not true.

25. A bank has $30,000 in deposits and has $5,400 in reserves. What is its reserve ratio?

26. In a fractional reserve economy where the required reserve ratio is 10%, must it be the case
that an initial deposit of $100 increases the total money supply by $1,000? Explain.

27. The money multiplier is _____ when the reserve ratio is 12.5 percent.

28. Suppose a bank has $3,000 in reserves, $25,000 of deposits, and a 10 percent reserve
requirement. What is the amount of excess reserves?

29. Suppose the required reserve ratio is 20%. What is the maximum amount of total money
supply that can be created from an initial deposit of $200? In general, why might the actual
amount of total money creation be less than the maximum?
30. A bank has $1000 in deposits and maintains a 12 percent reserve ratio. Its reserves are
$_____.

31.
First National Bank

Assets Liabilities
Reserves $1,200 Deposits $10,000
Loans 8,800

The reserve ratio for this bank is _____. If the required reserve ratio is 10 percent, then this bank
has excess reserves of _____.

32. Suppose a bank purchases $50 of government securities using funds from reserves. How
much do bank assets change as a result of this transaction?

33. A bank operates with reserves of $100, loans of $300 and securities of $100. The bank’s only
liability is deposits of $400 since it has zero debt. Calculate the bank’s leverage ratio.

34. Describe how the use of leverage affects the impact of bank investments.

35. When banks decide to increase their reserves, the money supply will _____ (holding all else
constant).

36. Suppose a bank is operating with a leverage ratio of 20. What is the maximum decrease in
the market value of assets before the bank becomes insolvent?

37. What is bank insolvancy?

38. Describe the role of bank leverage in bank insolvency during times of falling asset prices.

39. When the Fed purchases government bonds the money supply _____ and the federal funds
rate _____.

40. What is the change in the money supply when the Fed purchases $700 worth of bonds and
the required reserve ratio is 14 percent assuming banks hold no excess reserves?

41. Discuss why the Fed rarely changes the reserve requirements.

42. The interest rate charged by the Fed to member banks is called the _____.

43. Trace the effects on the money supply when the Fed decreases the discount rate.

44. What is the Term Auction Facility?

45. Name three actions the Fed can take to increase the money supply.
46. List two reasons why the Fed can not control the exact size of the money supply.

47. Describe the role of the Federal Deposit Insurance Corporation (FDIC).

48. The _____ is the interest rate at which banks make overnight loans to other banks.

49. When the federal funds rate is below the target rate, the Fed will _____ bonds. This action
will _____ the money supply.

50. The Fed began paying interest on reserves in October 2008. Holding all else constant, what
effect would this have on the money supply?

51. Economists argue that the move from barter to money increased trade and production. How
is this possible?

52. What is the difference between money and wealth?

53. Which of the three functions of money are commonly met by each of the following assets in
the U.S. economy?
a. paper dollar
b. precious metals
c. collectibles such as baseball cards, stamps, and antiques

54. Are credit cards and debit cards money? What's the difference between credit and debit
cards?

55. What is the difference between commodity money and fiat money? Why do people accept
fiat money in trade for goods and services?

56. What does the text mean by the question, "Where Is All the Currency?" How does it answer
the question?

57. What is meant by the term "lender of last resort?" In what circumstances might the Fed be a
lender of last resort?

58. Compare the Board of Governors and the Federal Open Market Committee.

59. What makes the New York Federal Reserve regional bank so important?

60. Designers of the Federal Reserve System were concerned that the Fed might form policy
favorable to one part of the country or to a particular party. What are some ways that the
organization of the Fed reflects such concerns?

61. Which two of the Ten Principles of Economics imply that the Fed can profoundly affect the
economy?
62. Explain why banks can influence the money supply if the required reserve ratio is less than
100 percent.

63. If the reserve ratio is 20 percent, how much money can be created from $100 of reserves?
Show your work.

64. Draw a simple T-account for First National Bank which has $5,000 of deposits, a required
reserve ratio of 10 percent, and excess reserves of $300. Make sure your balance sheet balances.

65. Suppose that in a country the total holdings of banks were as follows:
required reserves = $45 million
excess reserves = $15 million
deposits = $750 million
loans = $600 million
Treasury bonds = $90 million

Show that the balance sheet balances if these are the only assets and liabilities.

Assuming that people hold no currency, what happens to each of these values if the central bank
changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of
excess reserves, and banks don’t change their holdings of Treasury bonds? How much does the
money supply change by?

66. Explain how each of the following changes the money supply.
a. the Fed buys bonds
b. the Fed auctions credit
c. the Fed raises the discount rate
d. the Fed raises the reserve requirement

67. Describe the two things that limit the precision of the Fed's control of the money supply and
explain how each limits that control.

68. During the early 1930s there were a number of bank failures in the United States. What did
this do to the money supply? The New York Federal Reserve Bank advocated open market
purchases. Would these purchases have reversed the change in the money supply and helped
banks? Explain.