Chapter 14 Flashcards
The narrowest definition of money is called ________ . a. “L” money b. M2 c. M1 d. time deposits
M1
Economists regard both currency and deposits as money.True False
True
Checking accounts are not considered a part of M1 money supply because checks are not legal tender and are usually not accepted as a medium of exchange.True False
False
The primary currency circulating in the United States consists of: a. bank checks that are certified. b. Federal Reserve Notes. c. credit cards. d. gold certificates.
Federal Reserve Notes.
Currency is by far the largest element of the M1 monetary aggregate, the narrowest definition of the money supply. The remainder is made up of coins and community currencies.True False
FALSE
M2 includes: a. debit cards. b. credit cards. c. mutual insurance policies. d. money market mutual funds.
money market mutual funds.
Which of the following correctly describes the difference between M1 and M2? a. M1 includes currency, coins, gold and silver, whereas M2 does not contain gold and silver. b. M1 is made up of currency, traveler’s checks, and money in checkable accounts, whereas M2 contains M1 plus savings deposits, small-denomination time deposits, and money market mutual funds. c. M1 is limited to currency, whereas M2 contains M1 plus travelers checks and money in checkable accounts. d. M1 includes currency and traveler’s checks, whereas M2 contains M1 plus money in checking accounts.
M1 is made up of currency, traveler’s checks, and money in checkable accounts, whereas M2 contains M1 plus savings deposits, small-denomination time deposits, and money market mutual funds.
Banks are ________ that link lenders (depositors) to borrowers. Banks exist because they can specialize in evaluating the likelihood of borrower repayment and reducing risk by developing a diversified portfolio rather than lending to a single borrower. a. monopolies b. non-profit organizations c. financial intermediaries d. government agencies
financial intermediaries
Asymmetric information involves: a. information overload in the loan market. b. information that is available on the Web. c. use of the Federal Reserve information system. d. an inequality of information in the loan market.
an inequality of information in the loan market.
If one borrower fails to repay a loan, a. most banks will have serious problems. b. a bank will attempt to sell the loan. c. it will not affect a diversified bank d. the bank will report this to the borrower’s employer.
it will not affect a diversified bank
Liabilities consist of anything of value that is owned and assets are things that are owed to someone else.True False
FALSE
The assets of a bank include deposits, while the liabilities of a bank include loans.True False
FALSE
If the required reserve ratio is 10 percent, and $1 million in new deposits are made at a bank, then which of the following are true? a. Required reserves are $100,000 and excess reserves are $900,000. b. Required reserves are $900,000 and excess reserves are $100,000. c. Required reserves are $10,000,000 and excess reserves are $90,000,000. d. Required reserves are $1,000,000 and excess reserves are $9,000,000
Required reserves are $100,000 and excess reserves are $900,000.
When a new deposit is made at a bank, required reserves represent the fraction of total deposit that the bank can loan out to borrowers.True False
FALSE
If total deposits at Resolute Bank and Trust are $100 million, total loans are $70 million, and excess reserves are $20 million, then which of the following is the required reserve ratio? a. 10 percent b. 20 percent c. 30 percent d. 70 percent
10 percent
Excess reserves equal total reserves plus required reserves.True False
FALSE
From the perspective of a bank, the objectives of ________ and ________ are at odds with one another. a. profitability; cost minimization b. accepting deposits; making loans c. asset liquidity; the holding of bank reserves d. liquidity; profitability
liquidity; profitability
The Federal Funds Market provides for day to day lending and borrowing among banks having excess reserves on account at the Fed.True False
TRUE
The total money supply in the economy will not increase if you deposit $200 given to you on your birthday in your checking account, and the bank holds $100 of that money as vault cash, and loans out the other $100.True False
FALSE
When banks transform excess reserves into loans, the money supply ultimately increases because borrowers spend the money they borrow, and that money eventually ends up in someone’s checking account, an element of the money supply.True False
FALSE
The Fed makes an initial cash injection of $10,000 by buying a $10,000 Treasury Bond from Janis. Janis deposits the $10,000 in her checking account at Friendly Bank. Friendly Bank holds $1,000 in reserve and lends out $9,000 to Bruno, who deposits this $9,000 in his checking account at Last National Bank. What is the total money supply so far in this question? a. $19,000 b. $10,000 c. $9,000 d. $1,000
$19,000
You have $1,000 in your checking account at Generous Savings and Loan (GSL). GSL holds $300 of your money in reserve and makes a $700 student loan to Wilma, who promises to repay the loan with interest. Wilma now has an additional $700 in her checking account. By how much has the money supply M1 increased? a. $2,000 b. $1,700 c. $1,000 d. $700
$700
An initial injection of money into the banking system will create new money supply through a sequence of excess reserves being transformed into loans. New money creation eventually ends because required reserves shrink loanable excess reserves in each round of new money creation.True False
TRUE
Simple money multiplier is the reciprocal of the ________ . a. discount rate b. lending interest rate c. required reserve ratio d. deposit rate
required reserve ratio
Suppose the Fed injects $50 billion of new money by buying U.S. treasury bonds from the public. If the required reserve ratio is 10 percent, banks convert all excess reserves into loans, and the public hold all their money in their checking accounts rather than in cash, then by how much will the money supply ultimately increase due to this injection? a. $5 billion b. $50 billion c. $500 billion d. $950 billion
$500 billion
Cash held by the public, excess reserves kept by banks, and a high required reserve ratio will increase the amount of new money created by an initial increase in excess reserves.True False
TRUE
A “payday loan” is a ________ amount of money borrowed for short period, by ________ income people who have a checking account, a job, and direct deposit of their paycheck. a. large; higher b. small; higher c. large; lower d. small; lower
d
The discount rate is the rate charged by the Fed on consumer loans it makes to the public, such as for student loans, automobile loans, or mortgage loans.True False
FALSE
The Fed can increase the money supply by conducting open market sales of U.S. Treasury Bonds, or by raising the required reserve ratio.True False
FALSE
The most narrow measure of money is: a. M1 b. M2 c. M3 d. Cash
M1
What types of money are considered in the measurement of M1? a. currency b. coins c. checkable deposit d. all of the above are considered in the calculation of M1
all of the above are considered in the calculation of M1
What are some disadvantages of debt cards? a. Debit cards do not immediately draw on your bank account. b. More difficult to dispute a bill before payment. c. Cannot stop payment after you have paid for the item d. Both B and C are disadvantages of debit cards.
Both B and C are disadvantages of debit cards.
Banks reduce the ________ ________ of channeling savings to creditworthy borrowers. a. interest charges b. savings deposits c. transaction costs d. checkable deposits
transaction costs
Which of the following is not one of the ways that banks reduce transaction costs for creditworthy borrowers? a. coping with asymmetric information b. increasing risk through diversification c. enforcing loan contracts d. These are all ways banks reduce transaction costs
increasing risk through diversification
Net worth is calculated by: a. Assets – Liabilities b. Assets + Liabilities c. Liabilities – Assets d. Liabilities – Depreciation
Assets – Liabilities
The dollar amount of reserves a bank is obligated by regulation to hold as cash in the bank’s vault or on account at the Fed is called the excess reserves.True False
FALSE
A measure of the ease with which an asset can be converted into money without a significant loss of value is called liquidity.True False
TRUE
Excess reserves fuel the deposit expansion process, and a lower reserve requirement drains this fuel from the banking system, thereby reducing the amount of new money in that can be created.True False
FALSE
Money expansions are dependent on some key assumptions. Which of the following is not one of those assumptions? a. banks let reserves sit idle b. borrowers do something with the money the borrow c. people do not choose to increase their cash holdings d. all of the above are assumptions of money expansion
banks let reserves sit idle
Anything of value that is owned
asset
A situation in which one side of the market has more reliable information than the other side
asymmetric information
A financial statement at a given point in time that shows assets on one side and liabilities and net worth on the other side; because assets must equal liabilities plus net worth, the two sides of the statement must be in balance
balance sheet
Bank deposits that allow the account owner to write checks to third parties; debit cards can also access these deposits and transmit them electronically
checkable deposits
Cards that tap directly into the depositor’s bank account to fund purchases; also called a check card
debit card
The interest rate the Fed charges banks that borrow reserves
discount rate
Bank reserves exceeding required reserves
excess reserves
A market for overnight lending and borrowing of reserves among banks; the interbank market for reserves on account at the Fed
federal funds market
The interest rate charged in the federal funds market; the interest rate banks charge one another for overnight borrowing; the Fed’s target interest rate
federal funds rate
Anything that is owed to other people or institutions
liability
A measure of the ease with which an asset can be converted into money without a significant loss of value
liquidity
The narrow measure of the money supply, consisting of currency and coins held by the nonbanking public, checkable deposits, and traveler’s checks
M1
A money aggregate consisting of M1 plus savings deposits, small-denomination time deposits, money market mutual funds, and other miscellaneous near-monies
M2
Measures of the economy’s money supply
money aggregates
The multiple by which the money supply changes as a result of a change in fresh reserves in the banking system
money multiplier
Assets minus liabilities; also called owners’ equity
net worth
The purchase of U.S. government bonds by the Fed to increase the money supply
open-market purchase
The sale of U.S. government bonds by the Fed to reduce the money supply
open-market sale
The ratio of reserves to deposits that banks are obligated by regulation to hold
required reserve ratio
The dollar amount of reserves a bank is obligated by regulation to hold as cash in the bank’s vault or on account at the Fed
required reserves
Deposits that earn interest but have no specific maturity date
savings deposits
The reciprocal of the required reserve ratio, or 1/r; the maximum multiple of fresh reserves by which the money supply can increase
simple money multiplier
Deposits that earn a fixed interest rate if held for the specified period, which can range from several months to several years; also called certificates of deposit
time deposits
