ECON 200 Chapter 30-31

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A bank has $320 million in deposits and is holding $39 million in reserves. If the required reserve ratio is 10%, what is the maximum new loan amount the bank can extend?

7 million dollars

Adjustments to the reserve requirement and the discount rate are less important than they used to be as tools used by the Fed to implement monetary policy.


Anna has a yard full of chickens but needs milk for her baby. Josiah, who is allergic to eggs, has a cow that produces milk. Put the events in order to describe how Anna obtains milk by the barter method.

Anna takes eggs from her chickens to Josiah to trade for milk. Josiah tells Anna he does not eat eggs, but will accept apples in exchange for milk. Anna finds someone who has apples and is willing to trade them for eggs. Anna gives apples to Josiah and gets milk in return.

Arrange the systems of economic exchange according to the order in which they historically appeared.

barter system; commodity money; commodity-backed money; fiat money

Because money creates a standard -, it is possible to compare the prices of two goods, which allows people to communicate the – of the goods in a way that is easily understood. This characteristic of money also enables it to serve as a – device, or a way to measure accounts and transactions in a consistent manner.

unit of account; value; recording;

Click on the two quantities that must be equal for the financial statement to be balanced.

Total assets; Total liabilities and net worth;

Consider this hypothetical balance sheet for YooHoo Bank, in the fictional country of Hellond.
Calculate YooHoo Bank’s required reserve ratio, as a percentage. Round to the nearest percent if necessary.


Credit cards are included in the money supply.


Discount loans extended by the Federal Reserve -normally an important factor in the macroeconomy. The Fed used the discount rate to administer monetary policy actively until the -. During that time, the Fed would increase the discount rate to – borrowing by banks, or decrease the discount rate to -bank borrowing. Today, the Fed discourages discount borrowing unless banks are -.

are not; Great Depression; discourage; encourage; struggling;

Discount loans extended by the Federal Reserve Bank – normally an important factor in the macroeconomy. However, in crises discount loans are a safety net that reassures the -. It is in the economy’s best interest that the Fed serves as a regulator of banks because of the – nature of banking.

are not; financial market; interdependent;

Drag each component of the M2 money supply into place in the figure.

saving deposits; small time deposits; checking deposits;

For two people to successfully barter, there needs to be a double coincidence of wants. What does this mean?

Each party’s desires match up with something the other party has.

Identify each attribute as being associated with fiat money, commodity-backed money, or both.

more portable than commodity money Correct label: both not tied to anything with intrinsic, stable value Correct label: fiat money type of money used in the United States prior to 1971 Correct label: commodity-backed money not tied to a good for which the demand can change Correct label: fiat money U.S. silver certificates are a historical example. Correct label: commodity-backed money A government can expand the supply deliberately and quickly. Correct label: fiat money type of money used in most modern economies Correct label: fiat money

If a country’s required reserve ratio is 8%, when the central bank puts $1,000 of new currency into circulation, by how much can the money supply grow assuming all currency is deposited in a bank and no banks hold excess reserves? Use the simple money multiplier.


If the Federal Reserve Bank wanted to set the money multiplier at mm = 12.5, what reserve ratio should it require? (Use the simple money multiplier for this calculation.)


In 2007, the Federal Reserve began buying greater quantities of Treasury bonds than usual. What was the intent of this decision?

to drive interest rates down

In barter economies, goods and services are – without the use of money. In order for a trade to occur, a – is required. With the introduction of -, trade becomes much easier: there is now a -between buyers and sellers.

traded; double coincidence of wants; money; medium of exchange;

In the short term, expansionary policy benefits many people by increasing – and reducing -. However, it hurts suppliers whose prices are -. They have higher overall costs but their overall revenue does not go up -.

aggregate demand; unemployment; sticky; as much;

In the short term, unexpected expansionary policy is -. In the long term, prices adjust and the effects of monetary policy -. What remains are – prices and correspondingly – money.

effective; wear off; higher; less-valuable;

In the United States, what amount of an individual’s deposit money is completely covered by the FDIC if the bank fails?


In the wake of the Great Recession, how did the amount of reserves held by banks change?

The Fed began paying interest on reserves, so the amount of excess reserves held by banks increased significantly.

Match each term to the corresponding definition.

rate of interest paid on interbank loans Correct label: federal funds rate rate of interest paid by private banks to the Fed Correct label: discount rate money deposited with the Fed by private banks Correct label: federal funds money lent by the Fed to private banks Correct label: discount loans

Match each term to the corresponding definition.

the purchase or sale of bonds by the central bank Correct label: open market operations the amount of deposits a bank must hold in reserve and cannot lend Correct label: reserve requirement money lent by the Fed to private banks Correct label: discount loans rate of interest paid by private banks to the Fed Correct label: discount rate

Match each term to the corresponding description.

a bank’s assets minus the bank’s liabilities Correct label: owner’s equity the portion of bank deposits that is set aside and not lent out Correct label: reserves financial obligations the bank owes to others Correct label: liabilities items a bank owns Correct label: assets

Match each type of money to the corresponding definition.

paper bills and coins used as money Correct label: currency an exchangeable good of intrinsic value, such as silver or tobacco Correct label: commodity money money that can be exchanged for a commodity at a fixed rate. Correct label: commodity-backed money money that has no value except as a medium of exchange Correct label: fiat money

Match the type of bank to its correct description.

the type of bank that typically serves to help firms raise money to invest Correct label: investment bank the type of bank citizens use to open a checking account or take out an auto loan Correct label: commercial bank the Federal Reserve Correct label: central bank

Money’s role as a store of value is less important today than it once was.


Money multiplier: –
Initial money increase: –

20; $1 billion

Most open market operations are – and are aimed at maintaining the economic status quo. During the -, however, – targeted open market operations were used to encourage economic growth. These actions were dubbed "-." The first round of this practice focused primarily on the – market.

routine; Great Recession; narrowly; quantitative easing; housing;

Place in order the events that occur in the short run when the Federal Reserve enacts expansionary monetary policy.

As the Fed buys bonds, new money enters the loanable funds market. Market equilibrium shift toward more money being lent at a lower interest rate. The increased borrowing leads to increased in vestment and purchasing of goods and services. The aggregate demand curve shifts rightward.

Place the events in order to describe how a bank with a temporary reserve shortfall uses a short-term loan to bring its reserves up to the required level.

Lending activity depletes American Bank’s reserves below the required search level. American Bank takes out a short-term loan with TrueBlue Bank. The Fed facilitates the transaction. The loan to American Bank begins earning interest for TrueBlue Bank at the federal funds rate. With some of its own borrowers paying off loans and new deposits coming in, American Bank no longer needs the money borrowed from TrueBlue Bank. American Bank pays off the loan and is able to maintain the required reserves.

Place the money supply measures in order of smallest to largest.

currency; checkable deposits; M1; saving deposits; M2;

Suppose that inflation has started to creep upward, and the Fed wants to use open market operations to counteract this trend. Drag the correct items into place to depict the Fed’s actions.

government securities; dollars; result: less money in the economy;

Suppose the M2 money supply is $13 trillion, including:
$7 trillion in savings accounts
$3 trillion in checking accounts
$1 trillion in money market mutual funds
$1 trillion in certificates of deposit
$1 trillion in currency
What is the M1 money supply?

4 trillion dollars

Suppose you own a small business and have been thinking about expanding production, including hiring more workers. Until recently, interest rates at your bank have been too high for you to obtain a loan. However, the central bank decides to expand the money supply, which lowers interest rates to a level where you can take out a loan and expand production. Select the ways in which your actions affect the macroeconomy.

Correct Answer(s) Aggregate demand increases. Real GDP increases. Unemployment goes down. Investment increases. Incorrect Answer(s) The inflation rate goes down.

The ability to regulate commercial banks and monitor bank balance sheets is outside the Fed’s authority. It is the duty of commercial banks to privately monitor their own activities.


The Federal – Corporation makes sure – get their money back if an insured bank fails. This agency was implemented during the – in response to the high number of bank failures. The peace of mind the FDIC provided depositors resulted in a decreased frequency of -. However, since banks and their customers are no longer fully exposed to risk, there is increased potential for -.

Deposit Insurance; depositors; Great Depression; bank runs; moral hazard;

The figure depicts the short-term effects of a contractionary monetary policy. Apply the labels to show how each element in the economy is affected.

economic output Correct label: goes down interest rate Correct label: goes up quantity of investment demand Correct label: goes down price level Correct label: goes down unemployment Correct label: goes up supply of loanable funds Correct label: goes down

The inflationary effect of expansionary monetary policy tends to affect output prices before input prices.


The main function of [blank] banks is to accept deposits and then to lend the same money (minus [blank]) back out. Banks make a profit by charging a higher interest rate on [blank] than the interest rate they pay on [blank]. Through the loan process, banks are actually able to [blank] money.

commercial; required reserves; loans; deposits; create;

This figure illustrates what happens when the Federal Reserve buys a large amount of Treasury bonds. Place the following events in order.

The Fed’s open market purchase injects new money into the economy. With increased serves, bank issue more loans to firms and consumers, who have increased real purchasing power as a result. Prices across the economy increase and the value of money falls. Real impacts of the expansionary policy dissipate completely, and the economy experiences inflation.

What is a lasting effect of expansionary monetary policy?

higher prices across all goods and services

What is the one tool the Federal Reserve Bank uses every day?

open market operations

What is the primary objective of open market operations by the Federal Reserve Bank?

to grow or shrink the money supply.

Which items are parts of the M1 money supply?

Correct Answer(s) traveler’s checks money in checking accounts currency Incorrect Answer(s) certificates of deposit (CDs) money in savings accounts

Which of the following actions qualify as open market operations?

Correct Answer(s) The Fed sells U.S. Treasury bonds to a private bank. The Fed buys U.S. Treasury bonds from a financial institution. Incorrect Answer(s) The Fed takes in deposits from private banks. The Fed sets the interest rate it pays on deposits from private banks.

Which of the following are functions of money?

Correct Answer(s) It can be traded for goods and services. It provides a standard measure for prices to be quoted in. It has value, so owning money allows people to hold wealth. Incorrect Answer(s) It provides individuals the opportunity to engage in barter. It requires a double coincidence of wants.

Which of the following are responsibilities of the Federal Reserve?

Correct Answer(s) Set the required reserve ratio for banks. Apply a countercyclical economic policy to the money supply. Act as a bank for banks, both accepting deposits and extending loans. Incorrect Answer(s) Raise money for the operations of the federal government by selling bonds.

Which of the following is true if you deposit $1,000 in a bank checking or savings account? Assume a 10% bank reserve requirement.

Correct Answer(s) The bank’s reserves will increase by at least $100. The bank has $900 it can lend to someone else. You have $1,000 available to spend if you choose. Incorrect Answer(s) The bank’s liabilities decrease by at least $1,000. The bank has $1,000 it can lend to someone else.

Which of the following monetary crises are seen as partial causes for the Great Depression?

Correct Answer(s) money held outside the banking system lack of deposit insurance Incorrect Answer(s) a drastic spike in the M2 money supply excessive supply of loanable funds with little demand

Which scenarios are examples of a double coincidence of wants?

Double Coincidence of Wants: Devon has a pumpkin that Ella wants, and Ella has a hat that Devon wants. Chad has a desk that Aiden wants, and Aiden has money that Chad wants. Not a Double Coincidence of Wants: Alma has a car that Bruno wants and also has a rug that Bruno wants. Claire has a sandwich that Ed wants, and Bill has a dessert that Diane wants.

Who is harmed by unexpected inflation?

Correct Answer(s) fixed-wage workers lenders that have lent money at interest rates below the new inflation rate Incorrect Answer(s) employers with flexible output prices and no workers under long-term contracts homeowners with mortgages

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