MGEC71H3 Study Guide - Fiat Money, Commodity Money, Digital Currency

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ceriseshark594

22 Jun 2014

School

UTSC

Department

Economics for Management Studies

Course

MGEC71H3

Professor

Melanie Parkin

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Document Summary

Utsc: ecm c48 midterm summer 2010: solutions. The 3 functions of money. (6 marks 2 marks each: medium of exchange (means of exchange): Without money, we would have to exchange goods and services directly through what is known as barter. Money simplifies these exchanges: unit of account (unit of measurement): As a unit of measurement, money allows us to compare the value of goods and services. It is both the standard for pricing goods and services and the means of buying and selling them. Money also allows us to compare costs, income, and profit across time. As such, money is the foundation of the accounting system, which allows us to plan and make economic decisions: store of value (means of storing purchasing power for future use): As a reserve, money allows us to accumulate savings over time and to lend those savings to someone else.

Related Questions

1. The market in which loans are bought and sold is called the:

		loan market.
		money market.
		secondary loan market.
		primary loan market.

2. Which of the following is omitted in a barter transaction?

		trade
		medium of exchange
		store of value
		money

3. If Bill performs plumbing upgrades for Alice in exchange for her incorporating his business, then their _________________________ will be satisfied.

		balance of trade
		double coincidence of wants
		convenience of exchange
		division of labour

4. If loans become far less available, then sectors of the economy that ______________ like business investment, home construction, and car manufacturing can be dealt a crushing blow.

		depend on borrowed money
		typically generate extraordinary gains
		make loans to financial capital markets
		failed to diversify risk

5. Stealth bank has deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. If the bank sells its loans at the market value of $400 million, what will its total assets equal?

		$110 million
		$710 million
		$480 million
		$510 million

6. Lance paid $175,000 for his house in 2003 and sold it for $325,000 in 2006. What function did the house serve during the time Lance owned it?

		medium of exchange
		unit of account
		store of value
		unit of exchange

7.Which of the following terms is considered to be a narrow definition of the money supply that includes, among other things, currency?

		savings
		money
		M2
		M1

8. Which of the following institutions determines the quantity of money in the economy as its most important task?

		U.S. Department of the Treasury
		Federal Open Market Committee
		Central Bank
		Federal Reserve Board of Governors

9. How are the specific interest rates for the lending and borrowing markets determined?

		U.S. Treasury Department Board policy
		by the forces of supply and demand
		through open market operations
		by altering the discount rate

10.When the central bank lowers the reserve requirement on deposits:

		the money supply increases and interest rates decrease.
		the money supply and interest rates decrease.
		the money supply and interest rates increase.
		the money supply decreases and interest rates increase.

taupeant891

QUESTION 46

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.

1.11 points

QUESTION 47

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.

1.11 points

QUESTION 48

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.

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QUESTION 49

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.

1.11 points

QUESTION 50

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.

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QUESTION 51

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.

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QUESTION 52

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.

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QUESTION 53

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.

1.11 points

QUESTION 54

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.

1.11 points

QUESTION 55

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.

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QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

		asset demand.
		precautionary demand.
		aggregate demand.
		transactions demand.

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QUESTION 57

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.

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QUESTION 58

When interest rates rise, the transactions demand for money usually

		decreases.
		increases.
		decreases initially and then increases to the original position.
		does not change.

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QUESTION 59

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.

1.11 points

QUESTION 60

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.

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10. Which of the following instruments would most likely be utilized in the direct finance market?

A) Bank commercial loans. B) U.S. Treasury Bills.

C) Commercial Paper. D) Equities.

11. The managers of a firm met with a loan officer from a local bank to apply for a loan. They told the bank's loan

officer that the loan is intended to finance an expansion in the companyâs production facility. Based on this

information, the loan officer granted the loan. However unexpected tariffs increased the cost of raw materials

needed in the production process and the loan had to be used to pay for materials rather than the planned

expansion. This incident is an example of

A) moral hazard.

B) market risk.

C) adverse selection.

D) banks' failing to charge high enough interest rates on business loans.

E) a situation in which direct finance, rather than indirect finance, should be employed.

12. From the choices below, indicate what is likely the most important asset category (in terms of $ value) in a

Money Market Mutual Fund.

A) Corporate Bonds B) Treasury Bills C) Non-Negotiable CDs D) Equities

13. Compared to interest rates on long-term U.S. Treasury debt, interest rates on short-term U.S. Treasury debt tends to

fluctuate________ and is usually __________ over time.

A) more: higher B) less: lower C) more; lower D) less; higher

14. Which of the following is true about legal tender?

A) Only legal tender may be used to pay taxes in the U.S.

B) Having legal tender status from the government is sufficient for something to be used as money.

C) Cash and checking accounts are legal tender.

D) None of the above is accurate.

15. When economists refer to the role of money as a unit of account, they mean that

A) most accounting systems reflect that goods are purchased with currency.

B) all goods are priced in terms of all other goods.

C) money gives traders a single, consistent way of measuring value in the economy.

D) money makes it possible for specialization to take place.

E) agents do not have to exercise their claim on scarce resources immediately.

16. The Federal Reserve System:

A) is required to make loans in the Fed Funds market

B) is required to create the money necessary for the U.S. Government to pay its bills.

C) is required to make loans to the U.S. Treasury.

D) is required to maintain price stability.

17. The interest rate that the Fed targets to indicate its stance on monetary policy is known as:

A) the discount rate. B) the prime rate. C) the fed funds rate. D) the standard rate.

18. Of money's three functions, the one that allows us to make decisions that maximize our satisfaction is its function as a

A) medium of exchange B) unit of account. C) standard of deferred payment D) store of value.

19. In the United States, money is backed by

A) gold and silver. B) Federal Reserve notes.

C) Congress D) Social infrastructure, political stability, and economic potential.

20. Which of the following would not be considered to be part of the money supply?

A) Currency in ATM machines

B) Coins stored in childrenâs piggy banks

C) U.S. Federal Reserve notes being used for transactions in India

D) A & B above

E) None of the above. All are part of the U.S. money supply.

MGEC71H3 Study Guide - Fiat Money, Commodity Money, Digital Currency

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