Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 14, Problem 1NP
To determine
To describe:
The final value of the money supply, based on the given information and conditions.
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Money serves three functions in the economy: medium of exchange, unit of account, and store of value.
Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply.
Inflation erodes money's purchasing power.
In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local
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Money serves three functions in the economy: medium of exchange, unit of account, and store of value.
Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply.
In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local currency is still used to purchase the good.
Inflation erodes money's purchasing power.
Inflation causes menu costs.
The Bank of Canada sets the reserve requirement, which banks must meet through deposits at the Bank of Canada and cash held at the bank. What
do these requirements achieve? Check all that apply.
They help to facilitate transfers of funds between banks when a customer from one bank writes a cheque to a customer of another.
They help to control the money supply.
They help to prevent bank runs by reassuring the public that banks will not make too many loans and run out of cash.
They mean that a bank must have one dollar of deposits for every dollar it lends.
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- Currently, the Fed does not have complete control of the money supply because the Congress and the Treasury can also make changes to the money supply. government bonds may not be available for purchase when the Fed wants to perform OMO. the Fed does not know where all the U.S. currency is located. the amount of money in the real economy depends on the behavior of depositors and bankers. All of the above are correct.arrow_forwardSuppose you found Rs. 2000 that was stored under your grandmother's mattress and you decided to deposit this money in a Bank of India. If the desired reserve ratio were 20 percent and all excess reserves were lent out. a) Calculate the money supply created by this deposition in the economy?b) Following a new deposit of Rs. 2000, what is the reserve requirement of the commercial bank?c) Suppose all the banks in the banking system collectively have Rs.20 million in cash reserves and have a desired reserve ratio of 20 percent, the maximum amount of demand deposits the banking system can support is?arrow_forwardVault cash is equal to $2 million, deposits by depository institutions at the central bank are $3 million, the monetary base is $15 million, and bank deposits are $35 million. Currency held by the nonbank public is $ million Iarrow_forward
- 7. a) only the central bank can create money b) commercial banks can create credit c) all UK currency is backed by central bank holdings of gold 8. An increase in the money supply can lead to a) a rise in interest rates b) a fall in the liquidity ratio c) a fall in interest rates 9. The neutrality of money refers to the idea that a) a change in money supply has no impact on output over any time period b) a change in money supply has no short run impact on output c) the real quantity of money is constant in the long termarrow_forwardThe Money Supply: Small Time Deposits (less than $100,000) Demand Deposits and other Checkable Deposits Savings Deposits Money Market Accounts for individuals: Money Market Checking Accounts = $15 billion Money Market Savings & Investment Accounts = $10 billion Money Market Mutual Funds' Accounts (less than $100,000) Currency Large Dollar Accounts (over $100,000): Money market mutual funds for individuals, businesses, governments $650 billion $300 billion $445 billion. $645 billion. $325 billion. $880 billion. $750 billion $25 billion $600 billion $130 billion $100 trillion MZM (money-with-zero-maturity) measures the value of the money supply in circulation for households and businesses to immediately buy goods and services. Given the above listed financial data, MZM calculates to: services. Given the above listed financial data, MZMarrow_forwardYour friend Sarah borrows money from her bank to buy a car. Explain to her the transactions in which the bank sets up the loan, and why the loan involves an increase in the money supply.arrow_forward
- Open market operations mean that the Fed is buying\selling government securities. This means that if the Fed wants to increase the money supply, it should ⒸBuy bonds. Sell bonds. Decrease taxes. Decrease government spending QUESTION 7 Consider the market for automobiles. Suppose consumer income decreases dramatically while simultaneously there is global shutdown that increases the cost of producing automobiles. In this situation we would expect, Price of automobiles to fall and the quantity sold to increase. O Price of automobiles to either increase or decrease and the quantity sold to fall. Price of automobiles to fall and the quantity sold to either increase or decrease. None of the above QUESTION 8 Which of the following is an example of an automatic stabilizer? O Increases in the interest rate. Unemployment insurance and welfare. O Automatically varying reserve requirements that differ by Federal Reserve Bank Region B and C.arrow_forwardMonetary policy can only be effectively designed and implemented in economies that have a fractional reserve banking system. (a) Explain what is meant by a fractional reserve banking system; (b) Using a fractional reserve requirement of 1/5 explain how “new” money will be multiplied in the economy; and (c) Explain how the fractional reserve is monitored and maintained.arrow_forwardIn the U.S., currency in circulation (C) is $1.2 trillion and the monetary base (B) is $3.7 trillion. Assume the reserve-deposit ratio (rr) and the currency-deposit ratio (cr) are both 0.25. What is the size of bank reserves (R)? What is the money multiplier? What is the money supply? What is the velocity of money if nominal GDP is $17 trillion? If the FOMC increases bank reserves (R) by $0.5 trillion and banks choose to hold all the additional reserves rather than loan them out, what is the new money supply? What is the new money supply if instead banks loan out 50% of the additional new reserves and households deposit all the additional loans? Assume that the velocity of money is constant and real GDP is growing at 1%. Use the numbers in part (a) to answer the next question. If the Fed wishes to keep the price level constant, how much (in dollars) do they need to increase the money supply?arrow_forward
- Which of these would lead to a decrease in demand for money? A) decrease in the price of goods and services B) increase in Price Level C) decrease in interest rates D) more and more businesses accept credit cards E) increase in real GDP F) increase in interest ratesarrow_forwardWhat are the main functions of a Central Bank? To reduce unemplayment, promote financial stability, and provide banking services for depository institutions and the federal government To reduce unemployment, control inflation, and promote financial stability To decrease inflation, promote financial stability, and provide banking services for depository institutions and the federal government To conduct monetary policy, promote financial stability, and provide banking services for depository institutions and the federal government Prior to the 2008 financial crisis, how did the selling of bonds by the Fed impact the economy? It increased the amount of money circulating in an economy and increased the interest rate It decreased the amount of money circulating in an economy and increased the interest rate It increased the amount of money circulating in an economy and decreased the interest rate It decreased the amount of money circulating in an economy and decreased the interest rate…arrow_forwardAn institution that oversees the banking system and regulates the money supply is known as central bank treasury congress the securities and exchange commissionarrow_forward
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