Chapter 34: Money, Banking, and Financial Institutions
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55 Terms
An asset's ______ is the ease with which it can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power.
liquidity
3 multiple choice options
A "stock" of some item or group of items is called what?
Money
3 multiple choice options
What is the money in the form of currency and checkable deposits in commercial banks called?
M1
3 multiple choice options
Currency in the hands of the public and checkable deposits are components of
M1
3 multiple choice options
Money functions primarily as a medium of ____, a unit of ,____ and a store of value.
exchange; account
Who issues metal coins?
U.S. Treasury
3 multiple choice options
The ease with which an asset can be converted quickly into cash, with little or no loss of purchasing power, is called what?
Liquidity
3 multiple choice options
True or false: The currency of the United States consists primarily of metal coins and paper money.
True
Money is a ______ of some item or group of items.
stock
3 multiple choice options
Currency that derives its value from the amount printed on it rather than from the value of the paper or metal from which it is made is referred to as
Token
3 multiple choice options
M1 is a component of the U.S. ______.
money supply
3 multiple choice options
Which of the following characteristics of checks has made checkable deposits a large component of the M1 money supply?
Extrinsic value
Intrinsic value
Safety
Convenience
Safety
Convenience
Which of the following are components of M1?
Checkable deposits
Saving deposits
Stock certificates
Currency
Checkable deposits
Currency
A second and broader definition of money includes which of the following?
M1 plus several near-monies
3 multiple choice options
Metal coins are issued by the US _____
treasury
In the United States, the monetary authorities are members of the Board of Governors of what institution?
Federal Reserve System
3 multiple choice options
Which of the following comprise the currency of the United States?
Metal coins
Paper money
Small time deposits
Checkable deposits
Metal coins
Paper money
Who is the central authority of the U.S. money and banking system?
The Board of Governors of the Federal Reserve
3 multiple choice options
Token money consists of
bills or coins with face values that exceed their commodity value
3 multiple choice options
The 12 Federal Reserve Banks are quasi-public banks, which blend ______ ownership and public control.
private
The safety and convenience of ______ has made checkable deposits a large component of the M1 money supply.
checks
3 multiple choice options
What type of operations serve to control the nation's money supply and influence interest rates?
Open-market
3 multiple choice options
True or false: Money supply M1 includes all components of M2
False
True or false: Commercial state banks are private banks chartered by the individual states to operate within those states.
True
In the United States, the monetary authorities are members of the Board of Governors of the ____ ____ System.
Federal Reserve
Who establishes reserve requirements or the fraction of checking account balances that banks must maintain as currency reserves?
The Fed
3 multiple choice options
The central authority of the U.S. money and banking system is the
Board of Governors of the Federal Reserve System
3 multiple choice options
Studies show that countries that have independent central banks, such as the Federal Reserve Bank, compared to those that have little or no central bank independence, have lower average rates of
inflation
3 multiple choice options
The 12 _____ _____ banks blend private ownership and public control, making them quasi-public banks
Federal Reserve
The purpose of open-market operations is to control the nation's money supply and influence ____ rates
interest
Private banks chartered by the individual states to operate within those states are called
State banks
3 multiple choice options
The Federal Reserve Bank sets ______ which are the fractions of checking account balances that banks must maintain as currency reserves.
reserve requirements
3 multiple choice options
Studies show that countries that have independent central banks like the Fed have lower rates of _____ , on average, than countries that have little or no central bank independence.
inflation
The three functions of money are
medium of exchange, unit of account, and store of value
3 multiple choice options
What are the components of the M1 money supply?
Currency in circulation and checkable deposits
3 multiple choice options
What is the largest component of M1?
checkable deposits
3 multiple choice options
Which of the components of M1 is legal tender?
Currency
3 multiple choice options
Why is the face value of a coin greater than its intrinsic value?
People would sell it for its intrinsic value
3 multiple choice options
What near-monies are included in the M2 money supply?
Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances
3 multiple choice options
James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a state pension plan, which at the same time purchases an insurance policy from a company called AIG that will pay off if James and the other people whose mortgages are in the security can't pay off their mortgage loans. Suppose that James and all the other people can't pay off their mortgages.
Which financial entity is legally obligated to suffer the loss
AIG
3 multiple choice options
Suppose the central bank in the nation of Zook attempts to pay off its national debt by printing large amounts of currency. The large increase in the money supply causes the price level to rise by 1,200 percent. What do you expect will happen to the value of Zook's currency?
The value of Zook's currency will ______ by ____ percent
Decrease/91
Explanation:
1/12 = 0.08
In our example, the new value of money is 0.08 and the old value is 1,
so the percentage change = [(0.08 − 1)/1] × 100 = −91.67 percent.
The negative value indicates a decrease, but since we have stated that it is a decrease, we drop the negative sign from our answer.
Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small-denominated time deposits, and $30 million of money market mutual fund deposits.
From these numbers we see that this small country’s M1 money supply is __________, while its M2 money supply is __________.
EXPLANATION:
M1 is the total of cash in circulation and checkable deposits. For this country, that adds up to $10 million ($4 million in cash + $6 million in checkable deposits).
M2 includes everything in M1 plus savings deposits, small-denominated time deposits, and money market mutual fund deposits. So, for this country, the M2 money supply is $280 million ($10 million in M1 + $200 million in savings deposits + $40 million in small-denominated time deposits + $30 million in money market mutual fund deposits).
$10 million; $280 million
3 multiple choice options
Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates?
Federal Open Market Committee (FOMC)
3 multiple choice options
What "backs" the money supply in the United States?
There is no concrete backing to the money supply in the United States.
3 multiple choice options
What determines the value (domestic purchasing power) of money?
People's willingness to accept it in exchange for goods and services
3 multiple choice options
How does the purchasing power of money relate to the price level?
It is positively related to the price level.
3 multiple choice options
In the United States, who is responsible for maintaining money's purchasing power?
Board of Governors of the Federal Reserve System
3 multiple choice options
When economists say that the Federal Reserve Banks are central banks, it means that
the banks' policies are coordinated by the Federal Reserve Board of Governors.
3 multiple choice options
When economists say that the Federal Reserve Banks are quasi-public banks, it means that
Federal Reserve Banks are a blend of private ownership and public control.
3 multiple choice options
When economists say that the Federal Reserve Banks are bankers' banks, it means that
they perform the same functions for banks as banks perform for the public.
3 multiple choice options
The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers
more likely to default on their loans.
3 multiple choice options
Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008. These loans resulted in
an increase in demand for housing and a rapid, unsustainable increase in home prices.
3 multiple choice options
Mortgage-backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because
they reduced the risk exposure that banks faced after issuing subprime loans, and encouraged this type of lending.
3 multiple choice options
Suppose that Lady Gaga goes to Las Vegas to play poker and at the last minute her record company says it will reimburse her for 40 percent of any gambling losses that she incurs.
a. Will Lady Gaga probably wager more or less as a result of the reimbursement offer?
More
Suppose that Lady Gaga goes to Las Vegas to play poker and at the last minute her record company says it will reimburse her for 40 percent of any gambling losses that she incurs.
b. What economic concept does your answer illustrate?
Moral hazard