Homework Flashcards
When a bank issues a loan to a customer,
the composition of bank assets changes so that bank reserves are decreased and the value of bank loans is increased.
Which of the following statements about fiat money is FALSE?
A. With fiat money, there is no risk of counterfeiting.
B. Fiat money is money whose value derives entirely from its official status as a means of exchange.
C. With fiat money, there is the risk that governments will increase the money supply at times when it is to their own advantage.
D. With fiat money, the supply of money can be adjusted more easily than with commodity money.
A. With fiat money, there is no risk of counterfeiting
In the United States, what is the approximate minimum reserve ratio for checkable bank deposits?
10 percent
- Because money is a commonly accepted measure used to set prices and make economic calculations, we say that it is
A. a unit of account.
The arrangement in which the Federal Reserve stands ready to lend money to banks in trouble is known as
the discount window
Because money is an asset that can be traded for goods and services, we say that it is
a medium of exchange
A medium of exchange that has intrinsic value in other uses is known as
commodity money
Suppose a bank finds itself with $3,000 in excess reserves. If the banking system faces a 20 percent minimum reserve requirement, what is the maximum amount of the potential increase in the money supply?
15,000
The fraction of customer deposits that a bank holds as reserves is known as
the reserve ratio
What name is given to the process of assembling several different loans into a pool and then selling shares in the pool?
Securitization
The excess of a bank’s assets over its bank deposits and other liabilities is known as
the bank’s capital
Which of the following statements about the relationship between M1 and M2 is TRUE?
A. M1 is larger than M2, because M2 does not include currency in circulation.
B. M2 is larger than M1, because M2 includes near-moneys, and M1 does not.
C. Of these two measures of the money supply, M2 is the narrower definition.
D. M1 is larger than M2, because M1 includes near-moneys, and M2 does not.
B. M2 is larger than M1, because M2 includes near-moneys, and M1 does not.
The money multiplier is the ratio of
the money supply to the monetary base.
Which of the following statements is FALSE?
A. As people choose to hold more of their money as currency, rather than as checkable deposits, the size of the money multiplier will be reduced.
B. Following the collapse of Lehman Brothers, currency in circulation became a larger fraction of the monetary base than it typically is.
C. In January 2012, the monetary base was actually larger than M1.
D. In January 2012, the money multiplier was less than one.
B. Following the collapse of Lehman Brothers, currency in circulation became a larger fraction of the monetary base than it typically is.
When the Federal Reserve buys and sells U.S. Treasury bills, this is known as
open-market operations
When a bank borrows reserves from the Fed itself, it is said to be borrowing at ____________
the discount window
Banks typically borrow in the federal funds market when they have insufficient funds to ____________________
meet the reserve requirement of the Federal Reserve
A change in reserve requirements or a change in the discount rate will ____________________
have an effect on the money supply
The seven members of the Federal Reserve Board of Governors
are appointed by the U.S. president and must be approved by Congress.
The monetary base is the sum of ________________
currency in circulation and reserves held by banks
How many regional Federal Reserve banks are there?
12
To increase the interest rate, the Federal Reserve will _______ U.S. Treasury bills, and this will have the effect of _______ the money supply.
sell; decreasing
Monetary policy that increases the demand for goods and services is known as
expansionary monetary policy
The short-run effect of an increase in the money supply is that
the aggregate price level increases, and real output also increases.
An increase in the money supply will lead to a short-run _______ in investment spending, due to the resulting _______ interest rate.
increase; lower
What is measured on the horizontal axis when we draw a money demand curve?
The quantity of money demanded by the public
The Federal Open Market Committee meets _______ times per year.
8
When long-term interest rates are higher than short-term rates, the market is signaling that
it expects short-term rates to rise in the future.
In the long run, a monetary expansion
raises the aggregate price level but has no effect on real GDP.
The downward slope of the money demand curve shows that
people hold more money when interest rates are lower.
The advent of ATM machines has
shifted the demand for money to the left.
Selling Treasury bills will _________ the money supply
decrease
Buying treasury bills will _____________ the money supply
increase (shift to right)
When the Federal Reserve undertakes actions to decrease the money supply, the money supply curve shifts to the _______, and the equilibrium interest rate _______.
left; increases
Selling Treasury bills _________ the interest rate
increases
If the current interest rate is below the target rate, the Federal Reserve will
sell U.S. Treasury bills.
The liquidity preference model of the interest rate asserts that
the interest rate is established by the interaction of the supply and demand for money.
An increase in the money supply shifts aggregate demand to the _______, thereby causing a _______ level of real output in the short run.
right; higher
If the economy starts out in long-run macroeconomic equilibrium, the long-run effect of an increase in the money supply is to
leave real GDP unchanged
An increase in the aggregate price level
will cause an increase in the demand for money.
The opportunity cost of holding money
A. is higher when interest rates are higher.
When short-term interest rates fell between 2007 and 2008,
the opportunity cost of holding money decreased.
In the AD–AS model, the short-run aggregate supply curve will shift to the left when _______________________
there is an increase in nominal wages
Shifting Phillips curve left is a result of a ___________ shock
positive supply shock
The unemployment rate at which inflation does not change over time is known as the
nonaccelerating inflation rate of unemployment.
Disinflation is ________________
the process of bringing down inflation that has become embedded in expectations.
The reduction in the purchasing power of money caused by inflation is known as
The inflation tax
In countries with persistently high inflation, increases in the money supply
are quickly translated into changes in the inflation rate.
What is measured on the horizontal axis of a graph depicting the short-run Phillips curve?
Unemployment rate
The actual rate of unemployment will be equal to the natural rate of unemployment when
actual aggregate output is equal to potential output.
To pursue a strategy of disinflation, policy makers must
keep the unemployment rate above its natural rate for an extended period.
The short-run Phillips curve represents a trade-off between which two variables?
Inflation and unemployment rates
In the classical model of the price level,
the real quantity of money is always at its long-run equilibrium level.
A liquidity trap arises when
conventional monetary policy is ineffective because nominal interest rates are up against the zero lower bound.
What is the effect of an expansionary monetary policy in the AD–AS model?
This will shift aggregate demand to the right, thereby increasing the price level.
Governments are most likely to print money as a way of paying expenses when
a large budget debt has been incurred and further borrowing is not a workable option.
In the long run, a persistent attempt to reduce unemployment at the expense of higher inflation
will cause accelerating inflation
In providing funds to financial institutions when they are unable to borrow in private credit markets, a central bank serves as
a lender of last resort
A financial institution that engages in maturity transformation without accepting deposits is known as
a shadow bank
What term is applied to situations in which the failure of one financial institution increases the odds that another will fail?
Financial contagion
Which of the following is the most direct consequence of a credit crunch?
Businesses and consumers cut back on spending
As a financial panic occurs,
people hold more cash, believing financial institutions to be unsafe.
What term is given to the situation in which asset prices reach unreasonably high levels due to the expectation of further price gains?
An asset bubble
Which of the following was NOT a major contributing factor to the U.S. financial crisis of 2008?
A. A vicious circle of deleveraging
B. An asset bubble in the housing market
C. An unregulated shadow banking system
D. A persistently high unemployment rate
D. A persistently high unemployment rate
In the decade leading up to the 2007 financial crisis, the shadow banking sector ___________
increased in size
Depository banks perform all of the following functions EXCEPT
A. influencing the money supply.
B. maturity transformation.
C. providing liquidity for savers.
D. printing money.
D. printing money.
The system of bank regulation put in place following the Great Depression included all of the following
Capital requirements
Reserve requirements
Deposit insurance
The major financial crises that occured between 1973 and 1907 all resulted in ______________________
economic downturns
In the aftermath of a banking crisis,
banks tend to hold on to more excess reserves.
Depository banks borrow on a _______ basis from depositors and lend on a ______ basis to others.
short-term; long- term
In 2010, Congress passed the “Wall Street Reform and Consumer Protection Act” to regulate activities in financial markets. This legislation is more commonly known as
the Dodd-Frank bill
What term is applied to the circumstance in which borrowers cannot acquire credit?
credit crunch
Which three countries experienced major banking crises in the early 1990s?
Finland, Sweden, and Japan
The historical record of the Great Depression shows that
there was a credit crunch in the years 1931 and 1932.
During a vicious circle of deleveraging
financial institutions sell assets at deeply discounted prices in order to raise cash.
When a shadow bank sells an asset with the agreement that it will buy it back for a higher price after a brief time interval, it is engaged in a(n)
repo
The term macroeconomics first appeared in
1933
The Friedman-Phelps hypothesis predicted that
the apparent trade-off between inflation and unemployment would disappear once inflationary expectations became entrenched.
New classical macroeconomics asserts that
shifts in aggregate demand affect only the aggregate price level, leaving aggregate output unchanged.
All else equal, increases in the interest rate tend to
decrease investment spending
The viewpoint that asserts that GDP will grow steadily if the money supply grows steadily is known as
monetarism
In responding to the financial crisis of 2008, the Federal Reserve
made large-scale purchases of private assets
Milton Friedman argued that the expansionary effects of an increase in government spending
are partially offset by an accompanying rise in interest rates.
The natural rate hypothesis
limits the role of activist macroeconomic policy.
According to the classical view, an expansionary monetary policy
will increase aggregate demand, thereby raising the aggregate price level.
In the classical view, a leftward shift of aggregate demand results in
a lower aggregate price level with an unchanged level of real GDP.
Keynes used the term animal spirits to refer to what we now know as
business confidence
According to the natural rate hypothesis, inflation will accelerate over time unless
unemployment is high enough that the actual inflation rate equals the expected inflation rate.
Since 1980, the velocity of money has been ________________________
somewhat erratic and unpredictable
Expansionary fiscal policy put in place before the 1972 U.S. presidential election resulted in______________of inflation after the election.
sharp acceleration
The American economist who pioneered the measurement of business cycles was
Wesley Mitchell
Milton Friedman’s analysis of the economy led him to advocate
the use of a monetary policy rule
A key finding of Friedman and Schwartz in their research regarding the monetary history of the United States was that business cycles were associated with fluctuations in
the money supply
If interest rates are higher in Canada than in the United States, then
capital will flow from the United States to Canada.
When a currency becomes more valuable in terms of other currencies, we say that it
has appreciated.
A country has a fixed exchange rate when
the government keeps the exchange rate near a particular target.
A country’s balance of payments accounts are
a summary of its transactions with other countries
If a Brazilian citizen working in the United States sends part of her earnings to family members in Sao Paulo, this transaction is considered to be
an international transfer
An increase in the established value of a currency governed by a fixed exchange rate regime is known as
a reavaluation
Money flowing into the U.S. from foreigners who purchase U.S. assets is the positive component of the U.S. financial account.
Foregin exchange controls distort ____________________
incentives for international trade
When the exchange rate changes from (5.5 pesos = 1 dollar) to (6.5 pesos = 1 dollar), the peso has ________ and the dollar has ________.
depreciated, appreciated
In an open economy with a floating exchange rate, a lowering of the domestic interest rate will lead to a(n) ______ of the currency, which will _______ exports.
depreciation; increase
The sale of American-made Boeing aircraft to an airline in the United Arab Emirates is considered to be
a sale or purchase of goods and services
International differences in the demand for funds primarily reflect
underlying differences in investment opportunities.
Increase in the interest rate shifts demand to the
right
An increased demand for U.S. dollars on the part of Europeans would cause
the dollar to appreciate against the euro
Licensing systems that limit the right of citizens to buy foreign currency are known as
foreign exchange controls.
The stocks of foreign currency that governments use to buy and sell their own currency are known as
foreign exchange reserves
The real exchange rate is the nominal exchange rate adjusted for differences in
the aggregate price level
