Economics Module 5 Practice HW

25 July 2022
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question
A central bank is​ ______. The​ ______ is the central bank of the United States.
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A central bank is a public authority that provides banking services to banks and governments and regulates financial institutions and markets. In the United​ States, the central bank is the Federal Reserve System.
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One of the​ Fed's policy tools is​ ______.
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The discount rate is the interest rate at which the Fed stands ready to lend reserves to commercial banks. The discount rate is one of the​ Fed's policy tools.
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Choose the statement about the Fed that is correct.
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The Federal Open Market Committee​ (FOMC) is the​ Fed's main​ policy-making committee. The FOMC meets approximately every six weeks to review the state of the economy.
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An open market operation is​ ______.
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An open market operation is the purchase or sale of government securities by the Federal Reserve System in the open market.
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Reserves consist of the currency in the​ _____ plus the balance on its​ _____ account at​ _____.
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Reserves consist of the currency in the​ bank's vaults plus the balance on its reserve account at a Federal Reserve Bank.
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The federal funds rate is the​ _____ rate on​ _____ loans.
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The Federal funds rate is the interest rate on interbank loans​ (loans made in the federal funds​ market).
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The Federal Open Market Committee is the​ Fed's _____ committee.
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The Federal Open Market Committee is the​ Fed's main policy making committee.
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South​ Korea: Bank reserves raised To rein in​ spending, the Bank of Korea raised the required reserve ratio to 7 percent from 5 percentlong dashthe first raise in almost 17 years. With higher required​ reserves, banks will have to cut the amount of loans they make.
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Banks are required to hold an amount equal to the required reserve ratio multiplied by deposits. When the required reserve ratio​ increases, banks must hold more required reserves. Banks loan out excess reserves. When required reserves​ increase, excess reserves​ decrease, and the quantity of loans decreases.
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China conducts open market operations The​ People's Bank of China​ (the central bank of​ China) indicated it would lower interest rates and inject 685 billion yuan​ ($105 billion) into the banking system through open market operations. Reserves in the banking system​ ______. Banks​ ______ loans. Bank deposits​ ______ and the quantity of money​ ______.
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If the​ People's Bank of China wants to increase the quantity of​ money, it makes an open market purchase. The​ People's Bank of China increases the reserves of the banks. Reserves in the banking system increase. Banks make more loans because they have excess reserves. When the​ People's Bank of China makes an open market​ purchase, bank deposits increase because loans increase. Money includes bank​ deposits, so the quantity of money increases.
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Your bank manager tells you that she does not create​ money; she just lends what is deposited. Explain why she is wrong and how she creates money. The banking system creates money because​ ______.
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The banking system creates money because a bank that has excess reserves can make loans. When a bank creates a​ loan, the bank increases the balance of the​ borrower's account and that increase in deposits is new money.
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If the Fed makes an open market sale of​ $1 million of securities to a​ bank, the​ bank's reserves​ ______. Excess reserves​ ______. Bank deposits​ ______ and the quantity of money​ ______.
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If the Fed makes an open market sale of​ $1 million of securities to a​ bank, the bank pays for the securities with bank reserves. The​ bank's reserves decrease. Excess reserves decrease. Excess reserves have decreased so the bank calls in loans and makes fewer loans. When the bank calls in loans and makes fewer​ loans, bank deposits decrease and the quantity of money decreases.
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Excess reserves are a​ bank's _____ reserves minus its​ _____ reserves.
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Excess reserves are a​ bank's actual reserves minus its desired reserves.
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Money multiplier is the number by which​ ________ is multiplied to find the resulting​ _________.
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Money multiplier is the number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money.
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The velocity of circulation is the​ _____ number of times in a​ _____ that each dollar of money gets used to buy final goods and services.
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The velocity of circulation is the average number of times in a year that each dollar of money gets used to buy final goods and services.
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A commodity or token is money if it is​ _______.
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Money is any commodity or token that is generally accepted as a means of payment.
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Money in the United States today includes​ _______.
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Money in the United States today consists of currency and deposits at banks and other financial institutions. Ex: people's wallets, bank deposits, stores tills
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Rick withdraws​ $500 from his savings​ account, keeps​ $100 as​ currency, and deposits​ $400 in his checking account.
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M1 consists of currency held by individuals and​ businesses, travelers' checks and checkable deposits owned by individuals and businesses. When Rick withdraws​ $500 from his savings​ account, keeps​ $100 as​ currency, and deposits​ $400 in his checking​ account, M1 increases by​ $500. But M2 does not change. M2 consists of M1 plus other types of deposits.
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The money multiplier​ _______.
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Money multiplier​ = (1​ + C​/D​) divided by ​(R​/D​ + C​/D​) where C​/D is the currency drain ratio and R​/D is the desired reserve ratio. So an increase in the desired reserve ratio decreases the money multiplier.
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If the quantity theory of money is correct and other things remain the​ same, an increase in the quantity of money increases​ _______.
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The quantity theory of money is the proposition that when real GDP equals potential​ GDP, an increase in the quantity of money brings an equal percentage increase in the price level. And when the price level​ rises, nominal​ GDP, which equals the price level multiplied by real​ GDP, also increases.
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If tax revenues are​ $3,500 billion and the​ government's budget balance is a​ $720 billion​ deficit, calculate the​ government's outlays.
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A budget balance is tax revenues minus outlays. If tax revenues are​ $3,500 billion and the​ government's budget balance is a​ $720 billion​ deficit, then the​ government's outlays equal tax revenues plus the budget​ deficit, which is​ ($3,500 +​ $720) billion​ = $4,220 billion.
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National debt is the amount of government​ _____ -​ _____ that has arisen from past​ _____.
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National debt is the amount of government debt outstanding​ - debt that has arisen from past budget deficits.
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Which of the following statements illustrates monetary policy​?
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Monetary policy includes changing the quantity of money and the interest rate. The fact that the Fed has raised the federal funds rate by 0.3​ percent, implies a change in the interest rate. So it illustrates monetary policy.
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U.S. national debt​ ______ when the federal​ government's ______.
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National debt is the amount of government debt outstandinglong dashdebt that has arisen from past budget deficits. So U.S. national debt increases when the government has a budget​ deficit, and the government has a budget deficit when outlays exceed tax revenue.
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The​ Fed's "dual​ mandate" is to achieve​ ________.
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The​ Fed's "dual​ mandate" is to achieve stable prices and maximum employment. The goal of​ "stable prices" means keeping the inflation rate low and predictable. The goal of​ "maximum employment" means keeping the unemployment rate close to the natural unemployment rate.