Macroeconomics ch 10

Question 1

What is Money?

Answer 1

Valuable because it can be used for making exchanges.

Question 2

What is the direct exchange of goods?

Answer 2

Barter, requires a double coincidence of wants, and is harder than making a trade using money.

Question 3

Compared to barter, money:

Answer 3

Increases specialization

Question 4

The most important function of money is

Answer 4

Medium of exchange

Question 5

When we hold onto money instead of spending it immediately

Answer 5

We are using money as a store of value, we can use our buying power when it is most valuable to us, and we may lose buying power if there is inflation.

Question 6

Money has value because

Answer 6

it is generally accepted as a medium of exchange

Question 7

M1 consists of

Answer 7

currency in circulation and liquid deposits

Question 8

Which of the following is money?

Answer 8

NOT a check or credit card

Question 9

In our fractional reserve banking system

Answer 9

Banks hold reserves equal to only a fraction of their deposits, the fraction of deposits that must be held is determined by the required-reserve ratio, and the required-reserve ratio is set by the Federal Reserve System.

Question 10

If checkable deposits in 1st bank total $500 million and the required-reserve ratio is 10%, then required reserves for 1st Bank equal

Answer 10

$50 million

Question 11

To meet its reserve requirement, a bank may count which asset?

Answer 11

Reserve balance accounts with the Fed

Question 12

If the required-reserve ratio is 12%, and a bank receives a deposit of $1,000, how much may the bank loan out?

Answer 12

$880

Question 13

Excess Reserves

Answer 13

Is the excess of reserves over required reserves and they may be loaned out

Question 14

U.S. government securities

Answer 14

Are debt instruments issued by the federal government

Question 15

U.S. government securities are an attractive investment for a bank because they

Answer 15

Pay interest, are highly liquid, and are low-risk.

Question 16

If the required-reserve ratio is 10%, the potential deposit multiplier is

Answer 16

10

Question 17

One-shot inflation can be caused by

Answer 17

An increase in Aggregate Demand

Question 18

If the price level increases at a high rate year after year

Answer 18

This is continued inflation, it is caused by continued increases in aggregate demand, and the money supply must be increasing rapidly.

Question 19

An increase in the rate of inflation

Answer 19

DOES NOT increase the buying power of people who hold money, increases the real interest earned on savings, and benefits lenders and hurts borrowers.

Question 20

If Karen earns a 6% interest rate on her savings when the inflation rate is 4%, her real interest rate is

Answer 20

2%

Question 21

A successful counterfeiter

Answer 21

Earns profit by seigniorage

Question 22

When a government pays for government spending by issuing new currency

Answer 22

The increase in the money supply will cause inflation and this is an indirect tax on the holders of money

Question 23

According to “The Economic Organization of a P.O.W Camp”, economic activity in the camp

Answer 23

Arose spontaneously as prisoners attempted to enhance their standard of living

Question 24

In the P.O.W camp, cigarettes has the followings flaw when used as money

Answer 24

Their quantity fluctuated causing price level instability