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Exploring Macroeconomics 5th Edition Robert L. Sexton - Solutions
8. Money isa. whatever is generally accepted in exchange for goods and services.b. an object to be consumed.c. a highly illiquid asset.d. widely used in a barter economy.
7. Money makes it easier to borrow and repay loans. This function of money is referred to asa. a store of value.b. a means of deferred payment.c. a unit of account.d. a standard of value.e. none of the above.
6. Currency is a poor store of value whena. the unemployment rate is high.b. banks are failing at an abnormally high rate.c. the rate of inflation is very high.d. gold can be purchased at bargain prices.e. All of the above are correct.
5. Barter is inefficient compared to using money for trading becausea. it is more expensive over long distances.b. potential buyers may not have appropriate items of value to sellers with which to barter.c. it is more time consuming, since it is more difficult to evaluate the products that are
4. The distinction between M1 and M2 is based ona. liquidity—the ease with which an asset can be converted into cash.b. storability—the ease with which an asset can be stored.c. divisibility—the ease with which an asset can be used to make specific payments.d. portability—the ease with
3. Credit cardsa. are included in the M1 definition of the money supply.b. are included in the M2 definition of the money supply.c. are included in the M3 definition of the money supply.d. are included only in the broadest definition of the money supply.e. are not included in the definition of the
2. The money supply that includes only currency, checkable deposits, and traveler’s checks is known asa. M1.b. M2.c. M3.d. L.
1. Money’s principal role is to serve asa. a standard for credit transactions.b. a medium of exchange.c. a standard for making bank loans.d. a standard for the real bills doctrine.
41. When a person pays a loan back to a bank, demand deposits decline, directly reducing the money supply. True or False.
40. If some banks choose not to lend all of their excess reserves, the total amount of money created by an initial cash deposit will be smaller. True or False.
39. The higher the required reserve ratio, the larger the money multiplier. True or False.
38. The money multiplier is 1 divided by the required reserve ratio. True or False.
37. Assume that Bank One receives a new cash deposit of $100,000. With a 10 percent required reserve ratio, this creates$10,000 of required reserves and $90,000 of excess reserves. True or False.
36. New loans create new money directly, but they also create excess reserves in other banks, which leads to still further increases in both loans and the stock of money. True or False.
35. When banks create more money, they also directly create wealth. True or False.
34. If a bank lends out its excess reserves of $90,000, at the time the loan is made the money supply will increase by $90,000.
33. Banks earn no interest on reserves, whether kept as cash on hand or in accounts with the Federal Reserve. True or False.
32. Actual reserves equal required reserves minus excess reserves. True or False.
31. The difference between a bank’s assets and its liabilities constitutes the bank’s capital, or net worth. True or False.
30. The predominant liability of virtually all banks is deposits. True or False.
29. Even though banks must meet their reserve requirements, they do not want to keep any more of their funds as additional reserves than necessary for safety, because cash assets do not earn any interest. True or False.
28. Reserve requirements exist primarily to eliminate bank runs. True or False.
27. In the absence of reserve requirements, a prudent bank would still put some limit on its loan volume. True or False.
26. If you go into a bank and borrow $1,000, the bank probably will simply add $1,000 to your checking account at the bank, but it will not create new money in the process. True or False.
25. Financial institutions can create money by making loans. True or False.
24. Unlike in other nations, few separate commercial banks operate in the United States. True or False.
23. Lending in money imposes more risks on buyers and sellers than lending in commodities. True or False.
22. Money is the only medium of exchange that is generally accepted for most transactions. True or False.
21. A majority of U.S. money, whether M1 or M2, is in the form of deposits at privately owned financial institutions. True or False.
20. When people lose faith in the exchangeability of pieces of paper that the government decrees as money, even legal tender loses its status as meaningful money. True or False.
19. As long as people have confidence in something’s convertibility into goods and services, no further backing is necessary for it to serve as money. True or False.
18. When two forms of money are available, people prefer to spend the form of money that is more valuable. True or False.
17. When the United States was on an internal gold standard, the dollar was defined as equivalent in value to a certain amount of gold. True or False.
16. People prefer to keep the bulk of their liquid assets as currency or in transaction accounts rather than in the form of savings accounts of various kinds. True or False.
15. M1 includes currency, checkable deposits, and traveler’s checks, but not savings accounts. True or False.
14. M1 is substantially larger than M2. True or False.
13. Money market mutual funds have experienced tremendous growth over the last 20 years, but they are not highly liquid assets. True or False.
12. Liquidity refers to the ease with which one asset can be converted into another asset or goods and services. True or False.
11. Most purists would argue that nontransaction deposits are near money assets but not money itself, because they are not a direct medium of exchange. True or False.
10. People use nontransaction accounts primarily because they generally pay higher interest rates than transaction deposits. True or False.
9. Economists are not completely in agreement on what constitutes money for all purposes. True or False.
8. Credit cards are included in some measures of the money supply. True or False.
7. The use of transaction deposits instead of currency provides an element of insurance or safety. True or False.
6. Other checkable deposits that earn interest but have some restrictions have become an important component in the supply of money. True or False.
5. Most of the money that we use for day-to-day transactions is official legal tender. True or False.
4. Metallic coins and paper currency are the only forms of legal tender. True or False.
3. Checks provide the basis for most transactions of relatively modest size in the United States today. True or False.
2. In the United States, the Federal Reserve System issues paper currency. True or False.
1. Money is anything that is generally accepted in exchange for goods or services. True or False.
42. When a person pays a loan back to a bank, demand deposits __________ and the money supply __________.
41. The actual monetary impact of an initial deposit created out of excess reserves within a short time period is __________ indicated by the money multiplier.
40. Potential money creation from a cash deposit equals that initial deposit times __________.
39. The monetary expansion of an individual bank is limited to its __________ reserves.
38. Whenever excess reserves appear, banks will convert the __________ reserves into other __________ assets.
37. Required reserves equal __________ times __________.
36. Any time the aggregate amount of bank __________ changes, the aggregate amount of liabilities and capital must also change by the same amount, by definition.
35. Checking account deposits and time deposits constitute __________ of banks.
34. Most banks keep a majority of their reserves as __________.
33. The largest asset item for most banks is __________.
32. Money is created when banks __________.
31. Our banking system is sometimes called a(n)__________ system because banks find it necessary to keep cash on hand and reserves at the Federal Reserve equal to some fraction of their checkable deposits.
30. __________ require banks to keep on hand a quantity of cash or reserve accounts with the Federal Reserve equal to a prescribed proportion of their checkable deposits.
29. Banks make their profit by collecting __________ interest payments on the loans they make than they pay their depositors for those funds.
28. If you go into a bank and borrow $1,000, the bank probably will simply __________ to your checking account at the bank.
27. In making loans, financial institutions act as intermediaries between __________, who supply funds, and __________ seeking funds to invest.
26. Most important, financial institutions are __________ for savings and liquid assets that are used by individuals and firms for transaction purposes.
25. Aside from commercial banks, the banking system includes two other important financial institutions:__________ and __________.
24. The biggest players in the banking industry are __________.
23. The value of money fluctuates far __________ than the value of many individual commodities.
22. With money, a common __________ exists, so that the values of diverse goods and services can be precisely compared.
21. Money is both a(n) __________ of value and a(n)__________ of value.
20. The more complex the economy, the __________ the need for one or more universally accepted assets serving as money.
19. The primary function of money is to serve as a(n)__________.
18. Our money is money because of confidence that we have in __________ institutions as well as in our __________.
17. Something is money only if people will generally __________ it.
16. ____________ Law states that “cheap money drives out dear money.”
15. _____________ includes M1, plus saving accounts, time deposits (except for some large-denomination certificates of deposit), and money market mutual funds.
14. Money market mutual funds are considered _________ money because they are relatively easy to convert into money for the purchase of goods and services.
13. Assets that can be quickly converted into money are considered highly ____________ assets.
12. Two primary types of nontransaction deposits exist:__________ accounts and ___________ deposits.
11. ___________ deposits are fund accounts against which the depositor cannot directly write checks.
10. Credit cards are not money; they are ________ for the use of money in exchange.
9. Credit card payments are actually guaranteed ___________, which merely defer customer payment.
8. Transaction deposits are a popular monetary instrument precisely because they lower ____________ costs compared with the use of metal or paper currency.
7. ____________ deposits and ___________ deposits have replaced paper and metallic currency as the primary source of money used for transactions in the United States.
6. ___________ deposits are assets that can be easily converted into currency or used to buy goods and services directly.
5. Demand deposits are deposits in banks that can be ____________ on demand by simply writing a check.
4. Assets in checking accounts in banks are more formally called __________ deposits.
3. Legal tender is _________ money.
2. __________ consists of coins and/or paper that some institution or government has created to be used in the trading of goods and services and the payment of debts.
1. The most important disadvantage of using commodities as money is that they ___________ easily after a few trades.
17. Illustrate diagrammatically the short-run and long-run effects of a government budget deficit. Describe the mechanism that makes these effects different.
16. Answer the following questions:a. Describe the crowding-out effect of an increase in government purchases.b. Why does the magnitude of the crowding-out effect depend on how responsive interest rates are to increased government borrowing and how responsive investment is to changes in interest
15. Why do automatic stabilizers minimize the lag problem with fiscal policy?
14. How do automatic stabilizers affect budget deficits and surpluses? How would automatic stabilizers be affected by an annually balanced budget rule?
13. Why can a decrease in tax rates increase AS as well as AD, whereas an increase in government purchases will increase AD but not AS?
12. Use the accompanying diagram to answer questions a and b.a. Starting from the initial equilibrium in the diagram, illustrate the case of a supply-side fiscal policy that left the price level unchanged.b. Compared to your answer ina, when would a supply-side fiscal policy result in an increase
11. Explain why an equal dollar increase in both government purchases and net taxes would increase aggregate demand.
10. Why does it take a larger reduction in taxes to create the same increase in AD as a given increase in government purchases?
9. Could the multiplier be written as 1 divided by the marginal propensity to save (MPS)?
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