Chapter 14 – Econ 110

A decrease in the reserve requirement ________ bank reserves and ________ the money supply.

increases; increases

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount policy, and reserve requirements.

A decrease in the discount rate ________ bank reserves and ________ the money supply if banks
respond appropriately to the change in the rate

increases; increases

A central bank like the Federal Reserve in the United States can help banks survive a bank run by

acting as a lender of last resort.

Which of the following determines the amount of money the banking system as a whole can create?

the quantity of bank reserves

If households and firms decide to hold less of their money in checking account deposits and more
in currency, then the money supply

will decrease.

Hyperinflation can be caused by

the government selling bonds to the central bank.

Suppose a bank has $100 million in checking account deposits with no excess reserves and the
required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 8
percent, then the bank can make a maximum loan of

$2 million.

To increase the money supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

The main tool that the Federal Reserve uses to conduct monetary policy is

open market operations.

The Federal Reserve was established in 1913 to

stop bank panics by acting as a lender of last resort.

Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The
maximum loan your bank can made as a direct result of your deposit is

$1,800.

A bank will consider a car loan to a customer ________ and a customer’s checking account to be
________

an asset; a liability

Your roommate argues that he can think of no better situation than living in a deflationary
economy, as prices of goods and services would continuously fall. You disagree and argue that
during a deflation, people can be made worse off because

borrowers will have to pay increasing amounts in real terms over time.

Banks can continue to make loans until their

actual reserves equal their required reserves.

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve
ratio is 20%. As a result of Kristy’s deposit, Bank A’s excess reserves increase by

$8,000.

Refer to Scenario 14-2.
As a result of Kristy’s deposit, checking account deposits in the banking
system as a whole (including the original deposit) could eventually increase up to a maximum of

$50,000.

Refer to 14-2. As a result of Kristy’s deposit, Bank A’s reserves immediately increase by

$10,000.

Refer to Scenario 14-2. As a result of Kristy’s deposit, Bank A can make a maximum loan of

8,000

Refer to Scenario 14-2. As a result of Kristy’s deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of

50,000

Soldiers in a World War II prisoner-of-war camp

used gold as a fiat money.

Which of the following best describes how banks create money?

Banks create checking account deposits when making loans from excess reserves.

Silver is an example of a

commodity money.

M2 in this simple economy equals

$21,000.

Dollar bills in the modern economy serve as money because

people have confidence that others will accept them as money.

Suppose a transaction changes a bank’s balance sheet as indicated in the
following T
–
account, and the required reserve ratio is 10 percent. As a result of the transaction, the
bank can make a maximum loan of

$7,200.

Money’s most narrow definition is based on its function as a

medium of exchange.

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants.

To offset the effect of households and firms deciding to hold more of their money in checking
account deposits and less in currency, the Federal Reserve could

sell Treasury securities.

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows
at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

11 percent.

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back
yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as
a whole could drop up to a maximum of

$5,000.

If the central bank can act as a lender of last resort during a banking panic, banks can

satisfy customer withdrawal needs and eventually restore the public’s faith in the banking system

In economics, money is defined as

any asset people generally accept in exchange for goods and services.

Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the
required reserve ratio is 10 percent, what is the maximum change in money supply

$180 million

The quantity equation states that the

money supply times the velocity of money equals the price level times real output.

Open market operations refer to the purchase or sale of ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

Suppose there is a bank panic. Which of the following would
not
be a consequence of this bank
panic

Required reserves would increase.

Economies where goods and services are traded directly for other goods and services are called
________ economies

barter

The sale of Treasury securities by the Federal Reserve will, in general,

decrease the quantity of reserves held by banks.

The most liquid measure of money supply is

M1.

Which of the following is
not
a consequence of the Fed changing the reserve requirement?

Changes in the ratio are easily incorporated into banks’ routine management.

According to the quantity theory of money, if the money supply grows at 20 percent and real GDP
grows at 5 percent, then the inflation rate will be

15 percent.

If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will
________ and M2 will ________

increase; not change

Which of the following information about fiat money is
false
? Fiat money

is backed by gold.

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity.

The required reserves of a bank equal its ________ the required reserve ratio.

deposits multiplied by

In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large amount of new funds available to financial markets. The Fed expected this to increase in the money supply and the total amount of lending because of the multiplier effect, in which a given amount of new reserves results in a multiple increase in

bank deposits.

The statement, "My iPhone is worth $300" represents money’s function as

a unit of account.

The purchase of Treasury securities by the Federal Reserve will, in general,

increase the quantity of reserves held by banks.

Which of the following is not counted in M1

credit card balances

The M1 measure of the money supply equals

currency plus checking account balances plus traveler’s checks.

People hold money as opposed to financial assets because money

is perfectly liquid.

If a bank receives a $1 million discount loan from the Federal Reserve, then the bank’s reserves will

increase by $1 million.

According to the U.S. Treasury,

U.S. dollars must be accepted as payment for any good or service sold in the United States.

As was demonstrated in 2007, firms in the shadow banking system

were very vulnerable to bank runs.

Bank reserves include

vault cash and deposits with the Federal Reserve.

Commodity money

has value independent of its use as money.

Economies where goods and services are traded directly for other goods and services are called ________ economies.

barter

Economists estimate that ________ of U.S. currency is outside the United States and held primarily by ________.

over half; households and firms in countries where there is little confidence in the local currency

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience

hyperinflation.

In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP) by

providing funds to banks in exchange for stock.

In 2008, the inflation rate in Zimbabwe rose to almost 15 billion percent, and eventually foreigners and local residents refused to accept the Zimbabwean dollar for goods and services. In early 2009, the new Zimbabwean government decided to

abandon its own currency and make the U.S. dollar the country’s official currency.

In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by

the establishment of the Federal Deposit Insurance Corporation.

Money market mutual funds sell shares to investors and use the money to buy

short-term securities.

M1 equals

sum of currency, value of all checking account deposits and the value of traveler checks

M2 equals

sum of currency, value of all checking account deposits, the value of traveler checks, saving account balances, small denomination time deposits, balances in money market deposits, and noninstiutional money market fund shares.

The Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.

Federal Reserve’s Board of Governors; four presidents

The largest liability on the balance sheet of most banks is its

checking account and savings account deposits of its customers.

The largest proportion of M1 is made up of

checking account deposits.

The main tool that the Federal Reserve uses to conduct monetary policy is

open market operations.

The major assets on a bank’s balance sheet are its

reserves, loans, and checking account deposits.

The process of bundling loans together and buying and selling these bundles in a secondary financial market is called

securitization.

The quantity theory of money predicts that, in the long run, inflation results from the

money supply growing at a faster rate than real GDP.

The quantity theory of money was derived from the quantity equation by asserting that

the velocity of money was fixed.

The seven members of the Board of Governors of the Federal Reserve are appointed by

the President.

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

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You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have

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