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ECON 100 - homework 6: the financial sector and the economy

Terms in this set (27)

True or false? Policy makers in practice use the money multiplier to determine the amount of reserves needed to achieve the desired money supply. Explain.

a. False. The cash-to-deposit rate fluctuates too much, making the multiplier change.
b. True. The Fed has tried other methods, but none of the methods work better than the money multiplier.
c. False. The federal funds rate fluctuates too much, making the multiplier change.
d. True. Setting reserves has proven to be an effective way to target the money supply.
a. False. The cash-to-deposit rate fluctuates too much, making the multiplier change.
The financial sector channels saving into spending.

What is the risk of the financial sector expanding the spending flow too much?

a. If the financial sector expands the spending flow too much, inflationary pressures in either goods or assets may result.
b. If the financial sector expands the spending flow too much, a recession in either goods or assets may result.
c. If the financial sector transfers more than just the right amount, a smoothly running economy will result.
d. If the financial sector expands the spending flow too much, imports will increase more than exports.
a. If the financial sector expands the spending flow too much, inflationary pressures in either goods or assets may result.
The financial sector channels saving into spending.

What kept this from happening in the United States in the period from 2000 to 2007?

a. Globalization kept inflation low because foreign firms could sell products at much lower prices than could domestic firms.
b. People lost faith in existing financial institutions, causing serious concerns about what might happen to the U.S. economy.
c. Existing financial institutions were running smoothly, so people did not pay attention to the financial sector.
d. Globalization produced a hyperinflation because foreign firms sold products at much higher prices than domestic firms.
a. Globalization kept inflation low because foreign firms could sell products at much lower prices than could domestic firms.
While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 5 percent of its money in reserves:

How much money can the bank initially lend out?
$95
While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 5 percent of its money in reserves:

After these two initial transactions, by how much is the money in the economy changed?
$195
While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 5 percent of its money in reserves:

What's the money multiplier?
$20
While Jon is walking to school one morning, a helicopter flying overhead drops a $100 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 5 percent of its money in reserves:

How much money will eventually be created by the banking system from Jon's $100?
$2000
Assuming individuals hold no currency, calculate the simple money multiplier for each of the following reserve ratios:

3 percent:
11 percent:
17 percent:
24 percent:
20 percent:
45 percent:
70 percent:
3 percent: 33.33
11 percent: 9.09
17 percent: 5.88
24 percent: 4.17
20 percent: 5.00
45 percent: 2.22
70 percent: 1.43

hint: 1/r
What are two roles of the financial sector?

a. The financial sector facilitates taxes, acting as a lubricant to the fiscal side of the economy. Its second role is to transfer taxes, outflows from the spending stream, back into income.
b. The financial sector facilitates the supply of money, acting as an agent of the Fed. Its second role is to transfer money, outflows from the monetary stream, back into banks.
c. The financial sector facilitates trade, acting as a lubricant to the economy. Its second role is to transfer saving, outflows from the spending stream, back into spending.
d. The financial sector facilitates production, acting as a lubricant to the economy. Its second role is to transfer investment, outflows from the saving stream, back into saving.
c. The financial sector facilitates trade, acting as a lubricant to the economy. Its second role is to transfer saving, outflows from the spending stream, back into spending.
In what market are short-term interest rates determined?

a. loanable funds market
b. foreign exchange market
c. money market
d. factor market
c. money market
What are two components of M2 that are not components of M1?

- small-denomination time deposits
- checking accounts
- stock certificates
- savings deposits
- municipal bonds
- traveler's checks
small-denomination time deposits; savings deposits
Assuming individuals hold no currency, calculate the money multiplier for each of the following reserve ratios:

5 percent:
10 percent:
20 percent:
25 percent:
50 percent:
75 percent:
100 percent:
5 percent: 20.0
10 percent: 10.0
20 percent: 5.0
25 percent: 4.0
50 percent: 2.0
75 percent: 1.33
100 percent: 1.0

hint: 1/r
Categorize the following as components of M1, M2, both, or neither.

a. State and local government bonds. _____
b. Checking accounts. _____
c. Money market deposits. _____
d. Currency. _____
e. Stocks. _____
f. Corporate bonds. _____
a. neither
b. both
c. M2
d. both
e. neither
f. neither
If dollar bills (Federal Reserve notes) are backed by nothing but promises and are in real terms worthless, why do people accept them?

a. Large corporations use dollar bills.
b. People are misguided: money is inherently worthless.
c. Congress controls their value by law.
d. Social convention: everyone believes that other people will accept dollar bills in exchange for goods.
d. Social convention: everyone believes that other people will accept dollar bills in exchange for goods.
For each of the following, state whether it is considered money in the United States. Explain why or why not.

A check you write against deposits you have at Bank USA:

a. Money: can be used as a medium of exchange
b. Not money: not accepted for purchase
c. Not money: has no real value
d. Money: serves as a unit of account
a. Money: can be used as a medium of exchange
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