ECON1132 Study Guide - Midterm Guide: Federal Funds Rate, Federal Deposit Insurance Corporation, Fractional-Reserve Banking

QUESTION 46

When the Fed buys a U.S. bond in the open market

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QUESTION 47

When the Fed sells government securities,

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QUESTION 48

The maximum potential money multiplier is equal to

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QUESTION 49

The potential money multiplier gives us

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QUESTION 50

An increase in the reserve ratio

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QUESTION 51

The Federal Deposit Insurance Corporation insures

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QUESTION 52

Bank runs are a possibility because

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QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

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QUESTION 54

The Federal Deposit Insurance Corporation

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QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

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QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

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QUESTION 57

When people want to hold money to make regular planned expenditures, this is

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QUESTION 58

When interest rates rise, the transactions demand for money usually

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QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

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QUESTION 60

One of the economic costs of holding currency is that

Chapter 16 The Monetary System

1.Economists use the term “money” to refer to

A.all wealth.

B.all assets, including real assets and financial assets.

C.all financial assets, but not real assets.

D.those types of wealth that are regularly accepted by sellers in exchange for goods and services.

2.Which of the following is a function of money?

A.a unit of account

B.a store of value

C.medium of exchange

D.All of the above are correct.

3.You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate?

A.medium of exchange

B.unit of account

C.store of value

D.liquidity

4.Any item that people can use to transfer purchasing power from the present to the future is called

A.a medium of exchange.

B.a unit of account.

C.a store of value.

D.None of the above is correct.

5.Liquidity refers to

A.the ease with which an asset is converted to the medium of exchange.

B.the measurement of the intrinsic value of commodity money.

C.the measurment of the durability of a good.

D.how many time a dollar circulates in a given year.

6.Which list ranks assets from most to least liquid?

A.money, bonds, cars, houses

B.money, cars, houses, bonds

C.bonds, money, cars, houses

D.bonds, cars, money, houses

7.When we measure and record economic value, we use money as the

A.liquid asset.

B.medium of exchange.

C.unit of account.

D.store of value.

8.Commodity money is

A.backed by gold.

B.the principal type of money in use today.

C.money with intrinsic value.

D.receipts created in international trade that are used as a medium of exchange.

9.Fiat money

A.has no intrinsic value.

B.is backed by gold.

C.is a medium of exchange but not a unit of account.

D.is any close substitute for currency such as checkable deposits.

10.M1 includes

A.currency.

B.demand deposits.

C.traveler's checks.

D.All of the above are correct.

11.Which of the following items is included in M2?

A.credit cards

B.money market mutual funds

C.corporate bonds

D.large time deposits

12.Which of the following does the Federal Reserve not do?

A.conduct monetary policy

B.act as a lender of last resort

C.convert Federal Reserve Notes into gold

D.serve as a bank regulator

13.The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of

A.the Board of Governors.

B.the FOMC.

C.the regional Federal Reserve Bank presidents.

D. the U.S. Treasury.

14.When conducting an open-market sale, the Fed

A.buys government bonds, and in so doing increases the money supply.

B.buys government bonds, and in so doing decreases the money supply.

C.sells government bonds, and in so doing increases the money supply.

D.sells government bonds, and in so doing decreases the money supply.

15.An open-market purchase

A.increases the number of dollars and the number of bonds in the hands of the public.

B.increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

C.decreases the number of dollars and the number of bonds in the hands of the public.

D.decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.

16. If a bank has a reserve ratio of 8 percent, then

A.government regulation requires the bank to use at least 8 percent of its deposits to make loans.

B.the bank’s ratio of loans to deposits is 8 percent.

C.the bank keeps 8 percent of its deposits as reserves and loans out the rest.

D.the bank keeps 8 percent of its assets as reserves and loans out the rest.

17.If a bank uses $100 of excess reserves to make a new loan when the reserve ratio is 20 percent, this action by itself initially makes the money supply

A.and wealth increase by $100.

B.and wealth decrease by $100.

C.increase by $100 while wealth does not change.

D.decrease by $100 while wealth decreases by $100.

18.The money multiplier equals

A.1/R, where R represents the quantity of reserves in the economy.

B.1/R, where R represents the reserve ratio for all banks in the economy.

C.1/(1+R), where R represents the quantity of reserves in the economy.

D.1/(1+R), where R represents the reserve ratio for all banks in the economy.

19.If the reserve ratio is 10 percent, the money multiplier is

A.100.

B.10.

C.9/10.

D.1/10.

20.As the reserve ratio increases, the money multiplier

A.increases.

B.does not change.

C.decreases.

D.could do any of the above.

21.If the reserve ratio is 5 percent, then $1,000 of additional reserves can create up to

A.$200 of new money.

B.$2,000 of new money.

C.$20,000 of new money.

D.None of the above is correct.

22.When the Fed makes open-market purchases, bank

A.withdrawals and lending increase.

B.withdrawals increase and lending decreases.

C.deposits and lending increase.

D.deposits increase and lending decreases.

23.The discount rate is the interest rate that

A.banks charge one another for loans.

B.banks charge the Fed for loans.

C.the Fed charges banks for loans.

D.the Fed charges Congress for loans.

24.If the discount rate is lowered, banks borrow

A.less from the Fed so reserves increase.

B.less from the Fed so reserves decrease.

C.more from the Fed so reserves increase.

D.more from the Fed so reserves decrease.

26.The Fed can increase the money supply by conducting open-market

A.sales or by raising the discount rate.

B.sales or by lowering the discount rate.

C.purchases or by raising the discount rate.

D.purchases or by lowering the discount rate.

26.The Fed can directly protect a bank during a bank run by

A.increasing reserve requirements.

B.selling government bonds to the bank.

C.lending reserves to the bank.

D.doing any of the above.

27.The federal funds rate is the interest rate

A.the Federal Reserves charges for loans it makes to the federal government.

B.the Federal Reserve charges banks for short-term loans.

C.banks charge each other for short-term loans of reserves.

D.on newly issued one-year Treasury bonds.

28.If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

A.buying bonds. This buying would increase the money supply.

B.buying bonds. This buying would reduce the money supply.

C.selling bonds. This selling would increase the money supply.

D.selling bonds. This selling would reduce the money supply

1. which of the following would be counted as gross domestic

investment?

• GM issues 1 million shares of stock

• consolidated construction purchases 1,000 acres of land for a

regional shopping center it plans to build in a few years.

• a walmart store adds 1,000 T-shirts to ti's

inverotry

• A college buys computers for it's office staff

• you and your significant other buy a house

• you put money into a saving accountÂ

2. a car company currently has a capital stock of $100 million

and desires a capital stock of $110 million

a. if it experiences no depreciation how mch will it need to

invest to get to its desired level of capital stock

b. if its annual depreciation is 5% how much will it need to

invest to get to its desired level

c. if its annual depreciation is 10% how much will it need to

invest to get to its desired level

3. use the information below to compute the levels of gross and

net private domestic investment data are in billions of dollars

a. change in business inventories $59.3

b. residental cinstruction 369.6

c. producers durable equipment 691.3

d. nonresidential structures 246.9

e. depreciation 713.9

4. complete the table which shows investment in the united

states in billions of 2000 chained dollars

year 2005 gross domestic investment 1,873.5 depreciation 1,266.6 net private domestic investment ?

year 2006 gross domestic investnment ? depreciation 1,2161 net priavte domestic investment 696.4

year 2007 gross domestic investment 1,809.7 depreciation ? net priavate domestic investment 546.7

5. which of the following is part of M1 and M2

a. $0.27 that has accumulated under a couch cushion

b. your $2,000 line of credit with your visa account

c. $210 balance in your checking account

d. $417 in your savings account

e. 10 shares of the recently issued facebook stock that your

grandma gave you

f. $200 in travelers checks you purchased before your summer

trip to italy

6. suppose a banks balance sheet looks as follows:

assets

reservers

$2,700

property

$ 4,500

liabilities

deposits $7,200

and banks the reserve requirement is 20 percent

a. how much is excess reserves ratio 20 percent

b. how much can this bank lend

7. suppose a bank A with 25% reserve requirement has $50 million

in reserves and $200 million in checkable deposits one of the banks

depositors a major corporation writes a check to another

corporation for $5 million the check is deposited in another bank

(bank B)

a. explain how the withdrawl affects the banks reserves and

checkable deposits

b. by how much must bank A have to reduce lending?

8. assume the bank of america has access reserves of $30

milllion and outstanding transaction (checking) deposits of $180

million if the reserve ratio is 10% what is the size of the bank of

america total reserves?

9 banks fail when all depositors try to withdraw money at the

same time one way to prevent this problem would be to require bank

to hold 0 of deposits on hand

a. why would this not be desirable thing to do

b. what would happen to the banking system

c. explain how the law which requires banks to purchase fdic

insurance makes 100% reserve system unnecessary.