ECN 204 Lecture Notes - Lecture 8: Credit Union, Memory Stick, Money Market
INTRO - MACROECONOMICS - Money & Banking - & The Money Market and Monetary Policy
Answer the questions below from the data in the table (all figures are in billions of dollars).
|Total currency issued by the Bank of Canada||$17|
|Total personal savings deposits||186|
|Total demand deposits||19|
|Deposits of government at the Bank of Canada||3|
|Currency held by commercial banks||3|
|Government bonds owned by the public||96|
|Nonpersonal term deposits (certificates of deposit)||41|
a. Total currency in circulation is $ _____ billion.
b. How much larger is M1 than the total currency in circulation?
M1 is larger than the total currency by $ _____ billion.
c. How much larger is M2 than M1?
M2 is larger than M1 by $ _____ billion.
Please provide an explanation as you solve this question.
d. How much larger is M3 than M2?
M3 is larger than M2 by $ _____billion.
A) Bill has $50 worth of pennies in a coffee jar
B) Mike has $600 in his checking account
C) Jill has $400 in travelerâs checks
D) Jules has $400 worth of $1 bills in the piggybank
E) John has $500 in his savings account
2. Which of the following make up the money supply as it is mostnarrowly defined?
A) coins and currency held by the nonbank public, traveler'schecks, and savings deposits
B) all coins and currency held by the nonbank public
C) coins and currency held by the nonbank public, checkingdeposits, and traveler's checks
D) coins and currency held by the nonbank public, checkingdeposits, and savings deposits
E) checking deposits, savings deposits, and money market mutualfund accounts
3. Which of the following are included in the narrowest definitionof the money supply?
A) cash in bank vaults
B) savings deposits
C) money market mutual fund accounts
D) negotiable certificates of deposit
E) checkable deposits
4. If you returned a $5 Federal Reserve note to the Fed, you couldreceive
A) $5 in silver
B) $5 in gold
C) 5 one-dollar bills
D) 10 one-dollar bills
E) a small gold bar
5. The Federal Reserve's narrowest definition of money is
D) near money
E) money market mutual funds
6. As a lender, a bank holds an advantage over any individualperson because
A) individuals do not diversify their asset holdings
B) individuals are better at enforcing loan contracts
C) banks have to engage in extensive and costly searches forpotential borrowers
D) banks develop expertise in evaluating borrowers' loanapplications
E) individuals have extensive knowledge of and experience inwriting loan contracts
7. If a bank has $1 million in assets and $50,000 in net worth, itsliabilities must equal
C) $50 million
8. Suppose the required reserve ratio is 0.1 and Linda deposits$4,000 in cash at the College State Bank. If the bank held noexcess reserves before Linda's deposit and now increases itsreserves by $500, which of the following is true?
A) The bank must have lent out an additional $4,000.
B) The $500 are required reserves.
C) The bank has excess reserves of $100.
D) Both the bank's assets and its liabilities rise by $500.
E) The bank has $500 in excess reserves.
9. Suppose that the First National Bank acquires $500,000 in newdeposits and the required reserve ratio is 12 percent. Which of thefollowing is true?
A) The First National Bank can increase the money supply by$500,000.
B) The First National Bank can increase the money supply by$400,000.
C) The First National Bank can increase the money supply by$440,000.
D) The entire banking system can increase the money supply by nomore than $500,000 if the First National Bank lends out its excessreserves.
E) The entire banking system can increase the money supply by nomore than $440,000 if the First National Bank lends out its excessreserves.
10. The ability to convert a store of value into a medium ofexchange with little loss of value is known as
11. Which of the following would likely increase the moneysupply?
A) One bank buys government securities from another bank.
B) The required reserve ratio increases.
C) The Fed increases the reserves of commercial banks and the bankshold these as excess reserves.
D) The discount rate increases.
E) A bank sells government securities to the Fed.
12. The simple money multiplier equals
A) the required reserve ratio
B) the reciprocal of the required reserve ratio
C) 1 minus the required reserve ratio
D) 1 minus the reciprocal of the required reserve ratio
E) the square of the required reserve ratio
13. If the simple money multiplier is 5, the required reserve ratiomust be
A) 5 percent
C) 10 percent
D) 50 percent
E) 20 percent
14. If an increase in excess reserves of $10 million increasescheckable deposits in the banking system by a maximum of $200million, the required reserve ratio is
B) 5 percent
C) 10 percent
D) 20 percent
E) 2 percent
15. Suppose the reserve requirement ratio is 20 percent. Assumingno bank holds excess reserves and nobody withdraws cash, a $10,000injection of new excess reserves by the Fed can create
A) $2,000 in new checkable deposits
B) $10,000 in new checkable deposits
C) $50,000 in new checkable deposits
D) $500,000 in new checkable deposits
E) $50,000 in cash
16. Which of the following is not one of the procedures the Feduses to change the money supply?
A) buying government securities
B) selling government securities
C) lending reserves through the discount window
D) changing the required reserve ratio
E) extending loans to the public
17. Which of the following statements is correct?
A) To control the money supply, the Fed relies primarily on thereserve requirement.
B) The discount rate is the rate of interest banks charge to theirbest customers.
C) The Fed changes the reserve requirement frequently.
D) Because the Fed has no way to earn income, it is dependent uponCongress for appropriations.
E) Banks can turn a borrower's IOU into money--i.e., they cancreate money.
18. Lowering the discount rate is a way to expand the money supplybecause
A) it encourages banks to borrow from the Fed so they can moreeasily accommodate their customers' needs for loans
B) it encourages business customers to borrow directly from theFed
C) a lower discount rate reduces the amount of reserves banks arerequired to keep
D) a lower discount rate automatically reduces excessreserves
E) it encourages banks to sell U.S. government securities andincrease their cash reserves
19. The Fed operates
A) on a balanced budget
B) at a loss, since Federal Reserve notes and member bank depositsearn no interest
C) at a profit, since Federal Reserve notes and bank deposits earnno interest, but government securities and loans to commercialbanks do
D) at a profit, since Federal Reserve notes and member bankdeposits earn interest
E) at a loss, since Federal Reserve notes and member bank depositsearn interest, but government securities and loans to commercialbanks do not
20. Katie Sierra is willing to pay a higher interest rate. With noincome verification, she can apply for a type of loan commonlycalled
A) lion loans
B) liars loans
C) phantom loans
D) vaporware loans
E) prime-rate loans
When the Fed buys a U.S. bond in the open market
its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.
its action expands total reserves and the money supply.
its action contracts total reserves and the money supply.
total reserves increase by the amount of the purchase but the money supply stays the same.
When the Fed sells government securities,
reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.
reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.
reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.
reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.
The maximum potential money multiplier is equal to
the reserve ratio.
one minus the reserve ratio
the inverse of the required reserve ratio.
the number of dollars on reserve.
The potential money multiplier gives us
the growth in the money supply when income increases.
the growth in real national income when the money supply increases.
the maximum potential change in the money supply due to a change in income.
the maximum potential change in the money supply due to a change in reserves.
An increase in the reserve ratio
increases the money multiplier.
will cause banks to make more loans.
has an expansionary effect on the money supply.
has a contractionary effect on the money supply.
The Federal Deposit Insurance Corporation insures
banks against lawsuits.
the deposits held in member banks.
the deposits held in the Fed.
the federal funds market.
Bank runs are a possibility because
in difficult times people want currency instead of demand deposits.
the FDIC is inefficient.
banks do not keep enough reserves to cover all their depository liabilities.
bankers are often poor businesspeople.
The manner in which FDIC deposit insurance is set up in the United States encourages banks to
make riskier loans than they otherwise would.
reject some loans that probably would be profitable.
maintain excess reserves that are too great.
be too conservative in their lending practices.
The Federal Deposit Insurance Corporation
discourages banks from engaging in excessive risk taking.
was established after the Panic of 1907.
only insures deposits in money-center banks.
increases the stability of the banking system by reducing the likelihood of bank runs.
What are the two features of money that distinguish it from all other goods in the economy?
Money is government issued and it is redeemable for gold or silver.
Money is part of every barter transaction and it is divisible.
Money is accepted as a medium of exchange and it is the common unit of account used to express prices.
Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.
Holding money to meet unplanned expenditures and emergencies is known as
When people want to hold money to make regular planned expenditures, this is
the transaction demand for money.
the spending demand for money.
the asset demand for money.
the precautionary demand for money.
When interest rates rise, the transactions demand for money usually
decreases initially and then increases to the original position.
does not change.
As nominal Gross Domestic Product (GDP) rises, the transactions demand for money
increases, and the money demand curve shifts to the right.
remains constant, and the money demand curve remains the same.
decreases, and the money demand curve shifts to the left.
increases, and the money demand curve shifts to the left.
One of the economic costs of holding currency is that
it fulfills no precautionary role.
it fulfills no transactions role.
it earns no interest income.
its real value always increases.