Book: Chapter 13

Question 1

Federal Open Market Committee

FOMC

Answer 1

• The group that decides on monetary policy: it consists of the 7 members of the Board of Governors plus 5 of 12 regional bank presidents on a rotating basis.

Question 2

Federal Reserve Bank

Answer 2

• one of the 12 regional banks that are an official part of the Federal Reserve System

Question 3

money

Answer 3

• any items that are regularly used in economic transactions or exchanges and accepted by buyers and sellers

Question 4

balance sheet

Answer 4

• an account statement for a bank that shows the sources of its funds (liabilities) as well as the uses of its funds (assets)

Question 5

fiat money

Answer 5

• a monetary system in which money has no intrinsic value but is backed by the government

Question 6

money multiplier

Answer 6

• the ratio of the increase in total checking account deposits to an initial cash deposit

Question 7

barter

Answer 7

• the exchange of one good or service for another

Question 8

gold standard

Answer 8

• a monetary system in which gold backs up paper money

Question 9

owners’ equity

Answer 9

• the funds provided to a bank by its owners

Question 10

Board of Governors of the Federal

Reserve

Answer 10

• the seven-person governing body of the Federal Reserve System in Washington DC.

Question 11

lender of last resort

Answer 11

• a central bank is the lender of last resort, all others having failed, from which banks in emergency situations can obtain loans

Question 12

required reserves

Answer 12

• the specific fraction of their deposits that banks are required by law to hold as reserves

Question 13

liabilities

Answer 13

• the sources of funds for a bank, including deposits and owners’ equity

Question 14

reserve ratio

Answer 14

• the ratio of reserves to deposits

Question 15

central bank

Answer 15

• a banker’s bank: an official bank that controls the supply of money in a country

Question 16

assets

Answer 16

• the uses of the funds of a bank, including loans and reserves

Question 17

reserves

Answer 17

• the portion of banks’ deposits set aside in either vault cash or as deposits at the Federal Reserve

Question 18

commodity money

Answer 18

• a monetary system in which the actual money is a commodity, such as gold or silver.

Question 19

M1

Answer 19

• the sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler’s checks

Question 20

M2

Answer 20

• M1 plus other assets, including deposits in savings and loans accounts and money market mutual funds

Question 21

store of value

Answer 21

• the property of money that holds that money preserves value until it is used in an exchange

Question 22

double coincidence of wants

Answer 22

• the problem in a system of barter that one person may not have what the other desires

Question 23

medium of exchange

Answer 23

• any item that buyers give to sellers when they purchase goods and services

Question 24

unit of account

Answer 24

• a standard unit in which prices can be stated and the value of goods and services can be compared

Question 25

excess reserves

Answer 25

• any additional reserves that a bank holds above required reserves

Question 26

monetary policy

Answer 26

• the range of actions taken by the Federal Reserve to influence the level of GDP or inflation

Question 27

Money solves the problem of double coincidence of wants that would regularly occur under a system of _____.

Answer 27

• barter

Question 28

Gold is a good example of commodity money. (True/False)

Answer 28

• true

Question 29

Deposits in checking accounts are included in the definition of money because they are a very liquid asset. (True/False)

Answer 29

• true

Question 30

The largest component of M2 is deposits in _____.

Answer 30

• savings deposits

Question 31

Money market mutual funds are hard to classify in a definition of money because they are only held to facilitate transactions. (True/False)

Answer 31

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Question 32

So much U.S. currency is in global circulation because it is a safe asset compared to assets denominated in foreign currency. (True/False)

Answer 32

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Question 33

Debit Cards. In recent years, debit cards have become popular. Debit cards allow the holder of the card to pay a merchant for goods and services directly from a checking account. How do you think the introduction of debit cards affected the amount of currency in the economy? How about the amount of checking account deposits?

Answer 33

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Question 34

Gift Cards. Gift cards have grown in popularity as a mechanism to give gifts. Cards are available for popular bookstores and for coffee shops. Should these gift cards be considered part of the money supply? How do they differ from traveler’s checks?

Answer 34

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Question 35

Brazilian Local Money “The capavaris issued in Brazil can be viewed as a type of gift card for purchases made locally.” Explain this quote. (Related to Application 1 on page 276 .)

Answer 35

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Question 36

Credit Cards. Why aren’t traditional credit cards | part of the money supply?

Answer 36

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Question 37

Inflation and Currency Held Abroad. Suppose inflation in the United States rose to around 7 percent a year. How do you think this would affect the demand for U.S. currency by foreigners?

Answer 37

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Question 38

Currency and Underground Economy. Search the Web for articles on “currency and the underground economy.” How have various authors used estimates of currency to measure the underground economy?

Answer 38

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Question 39

Banks are required by law to keep a fraction of their | deposits as _____.

Answer 39

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Question 40

When reserves do not pay interest, banks prefer to | keep reserves rather than make loans. (True/False)

Answer 40

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Question 41

If the reserve ratio is 0.2 and a deposit of $100 is made | into a bank, the bank can lend out _____.

Answer 41

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Question 42

If the reserve ratio is 0.2, the simplified money | multiplier will be _____.

Answer 42

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Question 43

A Bad Trade at a Bank. In 2012, the bank JPMorgan Chase lost over $2 billion in a bad trade in the market. What happened to owners’ equity after the trade? Banks versus Insurance Companies. Both insurance companies and banks are financial intermediaries. Why do macroeconomists study banks more intensively than insurance companies?

Answer 43

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Question 44

Understanding M1 and M2. If you write a check from your checking account to your money market account, what happens to M1 and M2?

Answer 44

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Question 45

Cash Withdrawals and Changes in the Money Supply. If a customer withdrew $2,000 in cash from a bank and the reserve ratio was 0.2, by how much could the supply of money eventually be reduced?

Answer 45

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Question 46

Money Market Mutual Funds, Banks, and Reserves. Money market mutual funds typically invest in government securities and other financial instruments that can be easily bought and sold. They are not subject to reserve requirements and, in fact, hold minimal reserves. Banks, on the other hand, make loans to businesses for investment purposes. If there were no reserve requirements for banks, how do you think their reserve holdings would compare to money market mutual funds?

Answer 46

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Question 47

Setting the Interest Rate on Reserves. What would be the danger if the Fed set an interest rate on reserves close to the market interest rate on loans?

Answer 47

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Question 48

The Federal Reserve is the “_____ of last resort.”

Answer 48

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Question 49

The San Francisco Federal Reserve Bank is the only one in the West because San Francisco outbid Los Angeles to be its host. (True/False)

Answer 49

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Question 50

The _____ votes on monetary policy.

Answer 50

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Question 51

_____-year terms help ensure the political | independence of the Board of Governors.

Answer 51

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Question 52

The Fed provides a system of check collection and _____.

Answer 52

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Question 53

The Treasury Secretary and the Fed. Occasionally, some economists or politicians suggest that the secretary of the Treasury become a member of the Federal Open Market Committee. How do you think this would affect the operation of the Federal Reserve?

Answer 53

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Question 54

Where Should Regional Banks Be Located Today? Given the changes in the location of economic activity that have occurred since the founding of the Federal Reserve, how would the location of the regional banks change if they were allocated by economic activity?

Answer 54

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Question 55

The President of the New York Federal Reserve Bank. The president of the New York Federal Reserve Bank is always a voting member of the Federal Open Market Committee. Given your understanding of the conduct of monetary policy, why is this true?

Answer 55

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Question 56

Additional Congressional Oversight? A presidential candidate in 2012, Ron Paul, has strongly argued for more accountability and auditing of the Federal Reserve. What are the pros and cons of more Congressional oversight of the Fed?

Answer 56

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Question 57

The Federal Reserve arranged for JPMorgan Chase & | Co. to _____ Bear Stearns during the financial crisis in 2008.

Answer 57

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Question 58

The “float” in the banking system is the difference between the Federal Reserve’s _____ and _____ when clearing checks.

Answer 58

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Question 59

Two actions the Fed took after September 11, 2001, to | ensure the financial system operated smoothly were _____ and _____.

Answer 59

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Question 60

Required Reserves during the Great Depression. During the Great Depression, banks held excess reserves because they were concerned depositors might be more inclined to withdraw funds from their accounts. At one point, the Fed became concerned that excess reserves were too high and raised the reserve requirements for banks. a. Assuming banks were holding excess reserves for precautionary purposes, do you think they would continue to want to hold them even after reserve requirements were raised? Explain. b. What do you think happened to the money supply after the Fed raised reserve requirements?

Answer 60

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Question 61

Crisis in the Short-Term Credit Market. In 1973, several major companies went bankrupt and were not going to be able to pay interest on their short-term loans. This caused a crisis in the market. There was concern that the short-term credit market would collapse, and that even healthy corporations would not be able to borrow. How do you think the Fed should have handled that situation?

Answer 61

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Question 62

The Federal Reserve Loan to JPMorgan Chase & Co. When the Federal Reserve makes a loan to a bank or financial institution, it requires the institution to specify certain assets the Federal Reserve can take possession of if the loan is not repaid. These assets are known as collateral. When the Federal Reserve made its $30 billion loan to JPMorgan, it allowed JPMorgan to use some of the assets of Bear Stearns as collateral. Why was this risky for the Federal Reserve and a good deal for JPMorgan? (Related to Application 4 on page 285 .)

Answer 62

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Question 63

Check Clearing and September 11. How did the Federal Reserve manipulate the check- clearing process to increase liquidity in response to the potential financial crisis following the terrorist attacks of September 11, 2001? (Related to Application 3 on page 284 .)

Answer 63

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Question 64

Bailouts? Some critics of the Fed’s actions with AIG and Bear Stearns said that the government was just bailing out failing financial firms that should have been allowed to fail. It is true that owners of both firms did benefit from these actions. Nonetheless, can you defend the Fed? (Related to Application 4 on page 285 .)

Answer 64

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