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chapter: ©2009 Worth Publishers >> Krugman/Wells Money, Banking, and the Federal Reserve System 14 CHECK YOUR UNDERSTANDING

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Check Your Understanding 14-1 Questions 1-3

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1a) The defining characteristic of money is: 1.fiat. 2.liquidity. 3.commodity-backed.

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1b) Suppose you hold a gift certificate that is good at participating stores. Is the gift certificate money? 1.yes 2.no

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2) Although most bank accounts pay some interest, depositors can get a higher rate of interest by depositing their money in a certificate of deposit, or CD. The depositor pays a penalty for withdrawing the money before the CD comes. A small CD would be counted in: 1.M1. 2.M2. 3.M3.

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3) A system of commodity money uses resources more efficiently than a system of commodity-backed money. 1.True 2.False

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Check Your Understanding 14-2 Question 1

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1) Suppose you are a depositor at First Street Bank. You hear a rumor that the bank has suffered serious losses on its loans. Every depositor knows that the rumor isn’t true, but each thinks that most other depositors believe the rumor. Assuming that the bank _____ deposit insurance this will _____ a bank run. 1.has; not lead to 2.does not have; lead to 3.does not have; not lead to a 4.A & B 5.B & C

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NEW CHECK YOUR UNDERSTANDING Check Your Understanding 14-2 Question 2*

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NEW CHECK YOUR UNDERSTANDING 2a) ______ are rules set by the federal reserve that determine the minimum reserve ratio for banks. 1.Capital requirements 2.Reserve requirements

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NEW CHECK YOUR UNDERSTANDING 2b) ______ mean that a bank must have a certain amount of capital to protect depositors from loss. 1.Capital requirements 2.Reserve requirements

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NEW CHECK YOUR UNDERSTANDING Check Your Understanding 14-3 Question 1* Suppose that $2000 is deposited in a checking account at a local bank. The reserve requirement is 20%.

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NEW CHECK YOUR UNDERSTANDING 1.$0 2.$400 3.$1600 4.$2000 1a*) Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. How much is the change in the money supply?

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NEW CHECK YOUR UNDERSTANDING 1.$0 2.$400 3.$1600 4.$2000 1b*) Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. How much does the bank need to keep in reserves?

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NEW CHECK YOUR UNDERSTANDING 1.$0 2.$400 3.$1600 4.$2000 1c*) Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. What is the maximum amount that this bank can loan, based on this deposit?

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NEW CHECK YOUR UNDERSTANDING 1.0 2.0.20 3.0.80 4.5 1d*) Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. What is the money multiplier?

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NEW CHECK YOUR UNDERSTANDING 1.$0 2.$1600 3.$8000 4.$10,000 1e*) Suppose that $2000 in cash is deposited in a checking account at a local bank. The reserve requirement is 20%. What is the maximum expansion possible of the money supply?

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Check Your Understanding 14-3 Questions 1 and 2

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1a) Banks create money because when currency is deposited in a bank, the bank can lend excess reserves out, which leads to new deposits in the banking system and a multiplier effect on the money supply. 1.true 2.false

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1b) Assume that total reserves are equal to $200 and total bank deposits are equal to $1,000. Also assume that the public does not hold any currency. Now suppose that the required reserve ratio falls from 20% to 10%. What is the maximum possible change in deposits in response to the reserve requirement decrease? 1.There will be no change in bank deposits. 2.Deposits will increase by $100. 3.Deposits will decrease by $100. 4.Deposits will increase by $1,000. 5.Deposits will decrease by $1,000.

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2) Assume that $1000 in cash is deposited into First Street Bank and the required reserve ratio is 10%. Each time someone receives a bank loan, he or she keeps half of it in cash. If First Street Bank loans the maximum allowed, demand deposits will increase by $______ and cash will increase by $______. 1.$0; $0 2.$100; $100 3.$450; $450 4.$900; $0

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Check Your Understanding 14-4 Question 1

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1a) Assume that any money lent by a bank is always deposited in a checkable deposit and that the reserve ratio is 10%. The Fed purchases $100 million in Treasury bills. What is the size of the money multiplier? 1.0 2.0.10 3.0.90 4.10

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1b) Assume that any money lent by a bank is always deposited in a checkable deposit and that the reserve ratio is 10%. The Fed purchases $100 million in Treasury bills. What is the effect on the value of checkable deposits? 1.no change 2.$100 million increase 3.$1 billion increase 4.$1 billion decrease

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Check Your Understanding 14-5 Questions 1-3

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1) The Panic of 1907, the S&L crisis, and the crisis of 2008 were all due to too much regulation of the financial sector. 1.True 2.False

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2) The creation of the Federal Reserve failed to prevent bank runs during the Great Depression. 1.True 2.False

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3a) The balance sheet effect describes the process through which banks create money in a fractional reserve system. 1.True 2.False

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3b) The vicious cycling of deleveraging occurs when highly profitable firms pay back loans before their due date, causing the lender to suffer large opportunity costs of holding cash. 1.True 2.False

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