ECON206 Chapter Notes - Chapter 3: Barter, Market Liquidity, Transaction Cost

1. Which of the following both increase the money supply?

an increase in the discount rate and an increase in the interest rate on reserves
an increase in the discount rate and a decrease in the interest rate on reserves
a decrease in the discount rate and an increase in the interest rate on reserves
a decrease in the discount rate and a decrease in the interest rate on reserves

all wealth.
all assets, including real assets and financial assets.
all financial assets, but not real assets.
those types of wealth that are regularly accepted by sellers in exchange for goods and services.

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

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

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

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.

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?

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?

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

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

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

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

1.Economists use the term money to refer to

A.all wealth.

B.all assets, including real assets and financial assets.

C.all financial assets, but not real assets.

D.those types of wealth that are regularly accepted by sellers in exchange for goods and services.

2.Which of the following is a function of money?

A.a unit of account

B.a store of value

C.medium of exchange

D.. All of the above are correct.

3.You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate?

A.medium of exchange

B.unit of account

C.store of value

D.liquidity

4.Any item that people can use to transfer purchasing power from the present to the future is called

A.a medium of exchange.

B.a unit of account.

C.a store of value.

D.None of the above is correct.

5.Liquidity refers to

A.the ease with which an asset is converted to the medium of exchange.

B.the measurement of the intrinsic value of commodity money.

C.the measurement of the durability of a good.

D.how many time a dollar circulates in a given year.

6.Which list ranks assets from most to least liquid?

A.money, bonds, cars, houses

B.money, cars, houses, bonds

C.bonds, money, cars, houses

D.bonds, cars, money, houses

7.When we measure and record economic value, we use money as the

A.liquid asset.

B.medium of exchange.

C.unit of account.

D.store of value.

8.Commodity money is

A.backed by gold.

B.the principal type of money in use today.

C.money with intrinsic value.

D.receipts created in international trade that is used as a medium of exchange.

9.Fiat money

A.has no intrinsic value.

B.is backed by gold.

C.is a medium of exchange but not a unit of account.

D.is any close substitute for currency such as checkable deposits.

10.M1 includes

A.currency.

B.demand deposits.

C.traveler's checks.

D.All of the above are correct.

11.Which of the following items is included in M2?

A.credit cards

B.money market mutual funds

C.corporate bonds

D.large time deposits

12.Which of the following does the Federal Reserve not do?

A.conduct monetary policy

B.act as a lender of last resort

C.convert Federal Reserve Notes into gold

D.serve as a bank regulator

13.The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of

A.the Board of Governors.

B.the FOMC.

C.the regional Federal Reserve Bank presidents.

D. the U.S. Treasury.

14.When conducting an open-market sale, the Fed

A.buys government bonds, and in so doing increases the money supply.

B.buys government bonds, and in so doing decreases the money supply.

C.sells government bonds, and in so doing increases the money supply.

D.sells government bonds, and in so doing decreases the money supply.

15.An open-market purchase

A.increases the number of dollars and the number of bonds in the hands of the public.

B.increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

C.decreases the number of dollars and the number of bonds in the hands of the public.

D.decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.

16. If a bank has a reserve ratio of 8 per cent, then

A.government regulation requires the bank to use at least 8 per cent of its deposits to make loans.

B.the bank's ratio of loans to deposits is 8 per cent.

C.the bank keeps 8 per cent of its deposits as reserves and loans out the rest.

D.the bank keeps 8 per cent of its assets as reserves and loans out the rest.

17.If a bank uses $100 of excess reserves to make a new loan when the reserve ratio is 20 per cent, this action by itself initially makes the money supply

A.and wealth increase by $100.

B.and wealth decreased by $100.

C.increase by $100 while wealth does not change.

D.decrease by $100 while wealth decreases by $100.

18.The money multiplier equals

A.1/R, where R represents the number of reserves in the economy.

B.1/R, where R represents the reserve ratio for all banks in the economy.

C.1/(1+R), where R represents the number of reserves in the economy.

D.1/(1+R), where R represents the reserve ratio for all banks in the economy.

19.If the reserve ratio is 10 per cent, the money multiplier is

A.100.

B.10.

C.9/10.

D.1/10.

20.As the reserve ratio increases, the money multiplier

A.increases.

B.does not change.

C.decreases.

D.could do any of the above.

21.If the reserve ratio is 5 per cent, then $1,000 of additional reserves can create up to

A.$200 of new money.

B.$2,000 of new money.

C.$20,000 of new money.

D.None of the above is correct.

22.When the Fed makes open-market purchases, bank

A.withdrawals and lending increase.

B.withdrawals increase and lending decreases.

C.deposits and lending increase.

D.deposits increase and lending decreases.

23.The discount rate is the interest rate that

A.banks charge one another for loans.

B.banks charge the Fed for loans.

C.the Fed charges banks for loans.

D.the Fed charges Congress for loans.

24.If the discount rate is lowered, banks borrow

A.less from the Fed so reserves increase.

B.less from the Fed so reserves decrease.

C.more from the Fed so reserves increase.

D.more from the Fed so reserves decrease.

25.The Fed can increase the money supply by conducting open-market

A.sales or by raising the discount rate.

B.sales or by lowering the discount rate.

C.purchases or by raising the discount rate.

D.purchases or by lowering the discount rate.

26.The Fed can directly protect a bank during a bank run by

A.increasing reserve requirements.

B.selling government bonds to the bank.

C.lending reserves to the bank.

D.doing any of the above.

27.The federal funds rate is the interest rate

A.the Federal Reserves charges for loans it makes to the federal government.

B.the Federal Reserve charges banks for short-term loans.

C.banks charge each other for short-term loans of reserves.

D.on newly issued one-year Treasury bonds.

28.If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

A.buying bonds. This buying would increase the money supply.

B.buying bonds. This buying would reduce the money supply.

C.selling bonds. This selling would increase the money supply.

D.selling bonds. This selling would reduce the money supply.