ECON 1010 Chapter Notes - Chapter 24: Open Market Operation, United States Treasury Security, Monetary Base

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4 Oct 2015

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Any commodity or token that is generally acceptable as a means of payment. A means of payment is a method of settling a debt. Money has 3 other functions: medium of exchange, unit of account, store of value. Are m1 and m2 really money: all items in m1 are means of payment. They are money: some savings deposits in m2 are not means of payment these are called liquid assets. The banking system: two institutions, depository institutions any firm that takes deposits from households and firms and makes loans to other household and firms (e. g. chartered banks, credit unions, mutual fund co. , mortgage and loan co. , trust co. ) Chartered bank: a private firm, chartered under the bank act of 1992 to receive deposits and make loans. Credit unions: a cooperative organization that operates . Bofc is: banker to the banks and government, bofc accepts deposits from depository institutions that make up the payments system and the government pf.

Related Questions

Question 1

The higher the capital utilization rate, the greater the depreciation rate.

True

False

Question 2

Higher capital utilization rates may raise the user costs of capital because higher utilization rates imply

operating at inconvenient times.

paying overtime to employees operating the machines.

operating when complementary services like transporters are unavailable or more expensive.

All of the above.

Question 3

If the rental price of capital increase, the capital utilization rate

increases.

decreases.

remains the same.

depends on whether the substitution rate is greater than the income effect

Question 4

The vacancy rate in the labor market is

the number of job openings divided by the number of unemployed people in the labor force.

the number of job openings divided by the number of workers in the labor force.

the ratio of open jobs to filled jobs.

the ratio of open jobs to the total number of jobs that employers want occupied.

Question 5

Unemployment can exist in a market clearing model if it takes some search time for workers to find jobs.

True

False

Question 6

A decrease in workersâ effective real incomes while they are unemployed will

lower the job finding rate and raise the expected duration of unemployment.

lower the job finding rate and the expected duration of unemployment.

raise the job finding rate and lower the expected duration of unemployment.

raise the job finding rate and the expected duration of unemployment.

Question 7

In the Barro model, the natural rate of unemployment is

zero.

fixed.

Question 8

If the interest rate increases, the real demand for money also increases

True

False

Question 9

Commodity money is money that has value because

of the intrinsic value of the commodity.

it is legal tender.

the government says so.

All of the above.

Question 10

High-powered money is

money held by business for investment.

total currency in circulation plus depository institution deposits at the Fed.

total currency in circulation.

government bonds held by the public and depository institutions.

Question 11

U.S. M1 money includes

currency held by the public.

checkable deposits.

travelerâs checks.

All of the above.

Question 12

U.S. M2 money includes

currency, time deposits, and government bonds.

savings deposits, small time deposits, and private bonds.

checkable deposits, savings deposits, and small time deposits.

retail money market mutual funds, small time deposits, and government bonds.

Question

Money is different from other assets like capital and bonds in that

money does not pay interest.

money has intrinsic value.

money is a better long term store of value.

All of the above.

Question

If a personâs income doubles, we expect their cash holdings to

Question 15

Real money demand does not change when

nominal GDP changes.

the interest rate changes.

the price level changes.

All of the above.

Question 16

All else constant, the price level rises when the supply of money increases.

True

False

Question 17

If the nominal interest rate were to increase, then

money demand decreases and the price level increases.

money demand increases and the price level decreases.

the money supply and the price level would increase.

the money supply and the price level would decrease.

Question 18

Real money demand is a function of real GDP and the nominal interest rate.

True

False

Question 19

The real return on money is zero.

True

False

Question 20

If the expected inflation rate is 5% and the unexpected inflation rate is 4%, the actual inflation is

-1%

1.25%

Question 21

When the rate of growth of money is constant

the inflation rate equals the growth rate of money.

the nominal interest rate rises.

real money balances are declining.

All of the above.

Question 22

A decrease in the money growth rate in the market clearing model causes

a decrease in the nominal interest rate.

an increase in money demand.

a decrease in the price level.

All of the above.

Question 23

A decrease in the money growth rate in the market clearing model causes

an increase in the nominal interest rate.

an increase in money demand.

an increase in the price level.

All of the above.

Question 24

Under price level targeting the money supply becomes

Q 25 During a recession, the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.

True

False

Multiple choices

1. Banks face liquidity risk because

A) they can have difficulty meeting their depositor's demands to withdraw money.

B) they are unable to borrow from the Federal Reserve.

C) households and businesses may seek to borrow a large number of funds in a short period of time.

D) governments tend to run high budget deficits.

2. The original intention of the Fed's role as lender of last resort was to make loans to banks that were

A) not illiquid nor insolvent.

B) illiquid, but not insolvent.

C) insolvent, but not illiquid.

D) both illiquid and insolvent.

3. Why might a nation seek to maintain a pegged exchange rate?

A) It makes business planning easier for firms involved in the global economy.

B) It removes the need to intervene in the foreign exchange market.

C) It ensures that the exchange rate will remain at its equilibrium.

D) It makes their currency more attractive on the foreign exchange market.

4. Suppose a country pegs its currency. If investors start to believe the peg will collapse and the currency is going to depreciate, as the government defends the peg the interest rate will

A) Not move as interest rates must remain constant in a peg

B) Increase to maintain the peg

C) Decrease to maintain the peg

D) It depends on the inflation rate is low or high compared to the country to which the currency is pegged.

5. When the Fed extends loans to depository institutions

A) increases the level of reserves.

B) it decreases the level of reserves.

C) it reduces the total value of the assets on its balance sheet.

D) it reduces the total value of the liabilities on its balance sheet.

6. If the Fed buys securities worth $10 million, then

A) bank reserves will increase by $10 million.

B) bank reserves will decrease by $10 million.

C) currency in circulation will increase by $10 million.

D) bank holdings of securities increased by $10 million.

7. If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million

A) if the public holds the proceeds as currency.

B) if the public deposits the proceeds as checkable deposits.

C) if the public deposits the proceeds with the Treasury in a monetary base account.

D) whether the public holds the proceeds as currency or deposits them as checkable deposits.

8. The aggregate M1 consists of

A) currency plus all deposits in financial institutions.

B) currency plus savings deposits in financial institutions.

C) currency plus checkable deposits in financial institutions.

D) currency.

9. If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?

A) rise by $1 million

B) decline by $1 million

C) rise by $8 million

D) rise by $12.5 million

10. Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. Suppose Wells Fargo didn't have excess reserves, then by how much is Wells Fargo able to increase its loans?

A) $8 million

B) $92 million

C) $100 million

D) $1.25 billion

11. If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

A) $550 million.

B) $1.54 billion.

C) $1.9 billion

D) $15 billion.

ultramarinehornet6

Ryan savedâ $50,000 last year in his bank account so that he could buy a car this year. In thisâ case, money served the function of aâ ________.

means of deferred payment

unit of account

store of value

medium of exchange

A bank is said to have enough liquidityâ if:

it holds deposits amounting to at leastâ $100,000.

it operates for seven days a week for more than 12 hours a day.

it has enough funds to conduct its

dayminusâtominusâday

businesses and meet the regulatory requirements.

the value of its assets exceeds the value of its liabilities by at leastâ $50,000.

Consider an economy that only produces wooden chairs. Inâ 2012, the economy produced 100 wooden chairs priced atâ $10 each. The nominal GDP of the economy for the year 2012 willâ be:

â$10,000.

â$10.

â$100.

â$1,000.

Hyperinflationary episodes are always related to extremely rapid growthâ of:

real GDP.

money supply.

interest rates.

money demand.

Which of the following financial organizations have the ability to influence the supply of reserves in the Unitedâ States?

The World Bank

The Fed

Only private commercial banks

Only public sector banks

A retired worker receives a pension that is not indexed to inflation. Which of the following will happen if the rate of inflationâ rises?

The retiree will be better off.

Theâ retiree's purchasing power will fall.

The shareholders of the firm in which he worked will lose.

Theâ retiree's purchasing power will increase.

Assuming all elseâ equal, what is likely to happen to the demand curve for reserves in an economy if it goes through a period of rapidâ expansion?

There will be a n upward movement along the demand curve for reserves.

The demand curve for reserves will shift to the left.

There will be a downward movement along the demand curve for reserves.

The demand curve for reserves will shift to the right.

If the nominal interest rate in an economy isâ 9% and the expected inflation rate isâ 6%, then the expected real interest rate in the economyâ is:

â15%.

â9%.

â6%.

â3%.

If nominal GDPâ increases, what might be the cause of thisâ increase?

If nominal GDPâ increases, this could be causedâ by:

â(Select

all that

apply.â)

An increase in the price level

Deflation

An increase in real GDP

A decrease in the price level

Given the followingâ information, what is the growth rate of nominalâ GDP?

Upper Y 0Y0

real GDPâ =

â$10001000

â(in millions)

Upper Y 1Y1

real GDPâ =

â$11001100

â(in millions)

Upper Y 0Y0

price levelâ = 120120

Upper Y 1Y1

price levelâ = 130130The growth rate of nominal GDP is

nothing â%.

â (Round

your answer to the nearest

hundredth.â)

According to the quantity theory ofâ money, what must the growth rate of the money supply be given the followingâ information?

The growth rate of real GDP is

1.01.0â%.

The growth rate of nominal GDP is

3.83.8â%.

The nominal interest rate is

7.17.1â%.

The real interest rate is

4.34.3â%.

The money supplyâ (M2) is

â$10 comma 61210,612

â(in billions)According to the quantity theory ofâ money, the growth rate of the money supply must be

nothing â%.

â (Round

your answer to the nearest

tenth.â)

According to the quantity theory ofâ money, what is the inflationâ rate?

Use the information given above and calculate the inflation rate.

According to the quantity theory ofâ money, the inflation rate is

nothing â%.

â (Round

your answer to the nearest

tenth.â)

According to the quantity theory ofâ money, the inflation rate is

the ratio of money supply to nominal GDP.

the gap between the growth rate of money supply and the growth rate of real GDP.

the gap between the nominal and real interest rates.

the gap between the growth rate of money supply and the growth rate of nominal GDP.

If the inflation rate is

positivepositiveâ,

what must beâ true?

The growth rate of nominal GDP

greater than>

the growth rate of money supply.

The growth rate of real GDP

less than<

the growth rate of money supply.

The growth rate of real GDP

greater than>

the growth rate of money supply.

The growth rate of nominal GDP

less than<

the growth rate of money supply.

An open market operation isâ ____________.

the process of sellingâ Fed-issued IOUs between banks.

an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks.

where a bank borrows reserves or bonds from the Federalâ Reserve's discount window.

an exchange between private banks where the banks buy or sell bonds to each other.

The Federal Reserve conducts open market operations when it wants toâ ____________.

change the liquidity levels of banks.

influence the discount rate.

influence the federal funds rate.

change the level of reserves it holds for banks.

When the Fed

sellssells

government bonds

toto

privateâ banks, it

â¼

the electronic reserves that banks hold.

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ECON 1010 Chapter Notes - Chapter 24: Open Market Operation, United States Treasury Security, Monetary Base

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