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Exam 9: The Nature and Creation of Money

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Question 61

Multiple Choice

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What is the value of the deposit multiplier in a 100-percent reserve banking system?

A) 0.
B) 1
C) a value between 0 and 1
D) a value greater than 1

E) A) and C)
F) A) and B)

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Question 62

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If a bank has $20,000 in deposits and $2,000 in legal reserves, then it is loaned up if the required reserve ratio is 10%.

A) True
B) False

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Question 63

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Gresham's Law is the tendency for low-quality money to drive high-quality money out of circulation.

Which of the following items serve as a store of value? I. cash in your pocket II. the balance in your checking account III. an original Picasso painting IV. a $1,000 corporate bond

Credit cards are

Scenario 1: Fed Buys Bonds from Sheila Jones Consider a banking system in which the reserve requirement is 10%, banks try not to hold excess reserves, consumers and firms hold money only in the form of checking account balances, and all loan proceeds are spent. Suppose initially all banks in the system are loaned up. Now, suppose that the Fed buys a $100,000 bond from Sheila Jones, who banks at the Perez Bank, and that she deposits her check in her checking account at Perez Bank. -Refer to Scenario 1. As a result of Sheila's deposit, Perez Bank can increase its loans by

Table 9-6: Deposit Expansion Stages In Table 9-6, assume that banks loan out 100% of their excess banking reserves, there are no cash withdrawals, and all loan proceeds are spent. Figures have been rounded up to the nearest whole number. -Refer to Table 9-6. What is the value of $A in stage 1?

The functions of money are

Table 9-6: Deposit Expansion Stages In Table 9-6, assume that banks loan out 100% of their excess banking reserves, there are no cash withdrawals, and all loan proceeds are spent. Figures have been rounded up to the nearest whole number. -Refer to Table 9-6. What is the required reserve ratio?

The value of the simple money multiplier tends to be greater when individuals hold less cash.

Credit cards are money since they facilitate the purchase of goods and services.

A bank has $100,000 in checkable deposits and $30,000 in reserves. If the required reserve ratio is 20%, what is the maximum amount of loans this bank can create?

A financial intermediary is an institution that collects funds from lenders and distributes these funds to borrowers.

Inflation reduces the ability of money to function as a

To reduce the political influence on the Board of Governors,

Which of the following is not an example of a financial intermediary?

Scenario 1: Fed Buys Bonds from Sheila Jones Consider a banking system in which the reserve requirement is 10%, banks try not to hold excess reserves, consumers and firms hold money only in the form of checking account balances, and all loan proceeds are spent. Suppose initially all banks in the system are loaned up. Now, suppose that the Fed buys a $100,000 bond from Sheila Jones, who banks at the Perez Bank, and that she deposits her check in her checking account at Perez Bank. -Refer to Scenario 1. Immediately following Sheila's $100,000 deposit into her checking account, Perez Bank

If you need cash you can go to the bank and withdraw some of your savings. If you have some U.S. treasury bonds, you can also "cash" them in. Why, then, does the definition of money include savings accounts but not government bonds as part of the M2 money supply?

Table 9-2 -Refer to Table 9-2. In Year 1, if savings deposits had been $200 billion instead of $150 billion, M1 would have been

Suppose the Fed conducts an open market sale of $50 million in government securities. If the required reserve ratio is 20%, what is the maximum change in the money supply? Assume that banks try not to hold excess reserves and there is no currency withdrawal from the banking system.