Chapter 29 The Monetary System TRUE FALSE 1 ANS T NAT Analytic MSC Definitional ANS T NAT Analytic MSC Definitional 3 ANS T NAT Analytic MSC Definitional 4 ANS T NAT Analytic MSC Definitional In an economy that relies on barter trade requires a double coincidence of wants 1 DIF LOC The role of money REF 29 0 TOP Barter 2 Joe wants to trade eggs for sausage Lashonda wants to trade sausage for eggs Joe and Lashonda have a double coincidence of wants 1 REF 29 0 DIF LOC The role of money TOP Barter The use of money allows trade to be roundabout 1 DIF LOC The role of money REF 29 0 TOP Money Trade Roundabout trade is beneficial for an economy 1 DIF LOC The role of money REF 29 0 TOP Money Trade 5 Money allows people to specialize in what they do best thereby raising everyone s standard of living ANS T NAT Analytic MSC Interpretive DIF LOC The role of money TOP Money REF 29 0 2 6 When money functions as a unit of account then it cannot be commodity money ANS F NAT Analytic MSC Interpretive DIF LOC The role of money REF 29 1 TOP Money 2 7 Demand deposits are balances in bank accounts that depositors can access by writing a check ANS T NAT Analytic MSC Definitional DIF LOC The role of money TOP Demand deposits REF 29 1 1 8 According to economists a collection of valuable jewels is not money ANS T NAT Analytic TOP Money DIF LOC The Study of economics and the definitions of economics MSC Interpretive REF 29 1 2 9 A debit card is more similar to a credit card than to a check 2 ANS F NAT Analytic TOP Money DIF LOC The Study of economics and the definitions of economics MSC Interpretive REF 29 1 10 Gary s wealth is 1 million Economists would say that Gary has 1 million worth of money ANS F NAT Analytic MSC Definitional DIF LOC The role of money TOP Money REF 29 1 1 11 Marc puts prices on surfboards and skateboards at his sporting goods store He is using money as a unit of account ANS T NAT Analytic MSC Definitional 1 DIF LOC The role of money REF 29 1 TOP Money 1950 Chapter 29 The Monetary System 1951 12 Sandra routinely uses currency to purchase her groceries She is using money as a unit of account ANS F NAT Analytic MSC Definitional DIF LOC The role of money TOP Money REF 29 1 1 13 Bottles of very fine wine are less liquid than demand deposits 1 ANS T NAT Analytic MSC Interpretive DIF LOC The role of money REF 29 1 TOP Liquidity 14 U S dollars are an example of commodity money and hides used to make trades are an example of fiat money ANS F NAT Analytic MSC Definitional DIF LOC The role of money TOP Commodity money REF 29 1 1 15 When the Soviet Union began breaking up in the late 1980s cigarettes began replacing the ruble as the medium of exchange even though the ruble was legal tender The cigarettes provide an example of fiat money ANS F NAT Analytic MSC Interpretive 1 DIF LOC The role of money REF 29 1 TOP Commodity money 16 In order for currency to be widely used as a medium of exchange it is sufficient for the government to designate it as legal tender 1 REF 29 1 ANS F NAT Analytic MSC Definitional DIF LOC The role of money TOP Currency 17 M1 includes savings deposits ANS F NAT Analytic MSC Definitional 1 DIF LOC The role of money REF 29 1 18 M2 is both larger and more liquid than M1 ANS F NAT Analytic MSC Interpretive DIF LOC The role of money 1 REF 29 1 19 Credit cards are a medium of exchange ANS F NAT Analytic MSC Definitional DIF LOC The role of money 2 REF 29 1 TOP Money supply TOP Money supply Liquidity TOP Medium of exchange 20 The series of bank failures in 1907 occurred despite the creation of the Federal Reserve many years earlier ANS F REF 29 2 NAT Analytic MSC Interpretive DIF LOC The role of money TOP Federal Reserve System 1 21 Federal Reserve governors are given long terms to insulate them from politics ANS T NAT Analytic MSC Interpretive DIF LOC Monetary and fiscal policy REF 29 2 2 TOP Federal Reserve System 22 The Federal Reserve is a privately operated commercial bank ANS F 1 NAT Analytic MSC Definitional DIF LOC Monetary and fiscal policy REF 29 2 TOP Federal Reserve System 23 The Federal Reserve was created in 1913 after a series of bank failures in 1907 ANS T NAT Analytic MSC Definitional DIF LOC Monetary and fiscal policy REF 29 2 1 TOP Federal Reserve System 1952 Chapter 29 The Monetary System 24 Members of the Board of Governors are appointed by the president of the U S and confirmed by the U S Senate ANS T NAT Analytic MSC Definitional 1 DIF LOC Monetary and fiscal policy REF 29 2 TOP Federal Reserve System 25 Monetary policy is determined by a committee whose voting members include all the presidents of the regional Federal Reserve Banks ANS F NAT Analytic TOP Federal Open Market Committee DIF LOC Monetary and fiscal policy REF 29 2 1 MSC Definitional 26 The Federal Reserve primarily uses open market operations to change the money supply ANS T NAT Analytic MSC Definitional DIF LOC Monetary and fiscal policy REF 29 3 1 TOP Open market operations If the Fed buys bonds in the open market the money supply decreases 1 DIF LOC Monetary and fiscal policy REF 29 3 TOP Open market operations 27 ANS F NAT Analytic MSC Applicative 28 Banks cannot influence the money supply if they hold all deposits in reserve ANS T NAT Analytic MSC Interpretive DIF LOC Monetary and fiscal policy REF 29 3 2 TOP Banks Money supply 29 Banks still could contribute to changes in the money supply even if they were required to hold all deposits in 1 DIF LOC Monetary and fiscal policy REF 29 3 TOP Fractional reserve banking 30 If banks hold any amount of their deposits in reserve then they do not have the ability to influence the money supply 2 DIF LOC The role of money REF 29 3 TOP Reserves Money supply 31 When the Federal Reserve decreases the discount rate the quantity of reserves increases and the money supply ANS T NAT Analytic TOP Discount rate Reserves Money supply DIF LOC Monetary and fiscal policy REF 29 3 MSC 2 Interpretive 32 The money multiplier equals 1 1 R where R represents the reserve ratio ANS F NAT Analytic MSC Definitional DIF LOC Monetary and fiscal policy REF 29 3 1 TOP Money multiplier 33 Assume that when 100 of new reserves enter the banking system the money supply ultimately increases by 625 Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits …