Chapter Questions
The three functions of money are:a. Liquidity, store of value, and gifting.b. Medium of exchange, unit of account, and liquidity.c. Liquidity, unit of account, and gifting.d. Medium of exchange, unit of account, and store of value.
Suppose that a small country currently has $\$ 4$ million of currency in circulation, $\$ 6$ million of checkable deposits,$\$ 200$ million of savings deposits, $\$ 40$ million of small denominated time deposits, and $\$ 30$ million of money market mutual fund deposits. From these numbers we see that this small country's $M 1$ money supply is__________________________while its $M 2$ money supply is___________________________.a. $\$ 10$ million; $\$ 280$ million.b. $\$ 10$ million; $\$ 270$ million.c. $\$ 210$ million; $\$ 280$ million.d. $\$ 250$ million; $\$ 270$ million.
Recall the formula that states that $ SV=1 / P,$ where $V$ is the value of the dollar and $P$ is the price level. If the price level falls from 1 to $0.75,$ what will happen to the value of the dollar? a. It will rise by a third $(33.3$ percent).b. It will rise by a quarter $(25$ percent).c. It will fall by a quarter $(-25$ percent).d. It will fall by a third $(-33.3$ percent).
Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates? a. The Federal Reserve System.b. The 12 Federal Reserve Banks.c. The Board of Governors of the Federal Reserve System.d. The Federal Open Market Committee (FOMC).
An important reason why members of the Federal Reserve's Board of Governors are each given extremely long, 14 -year terms is to: a. Insulate members from political pressures that could result in inflation.b. Help older members avoid job searches before retiring.c. Attract younger people with lots of time left in their careers.d. Avoid the trouble of constantly having to deal with new members.
Which of the following is not a function of the Fed? a. Setting reserve requirements for banks.b. Advising Congress on fiscal policy.c. Regulating the supply of money.d. Serving as a lender of last resort.
James borrows $\$ 300,000$ for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a state pension plan, which at the same time purchases an insurance policy from AIG that will pay off if James and the other people whose mortgages are in the security can't pay off their mortgage loans. Suppose that James and all the other people can't pay off their mortgages. Which financial entity is legally obligated to suffer the loss? a. Bank A.b. Bank B.c. The state pension plan.d. AIG.
City Bank is considering making a $\$ 50$ million loan to a company named Sheet-oil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company's chances for success are dubious, but City Bank makes the loan anyway because it believes that the government will bail it out if Sheet-oil goes bankrupt and cannot repay the loan. City Bank's decision to make the loan has been affected by: a. Liquidity.b. Moral hazard.c. Token money.d. Securitization.
True or False: The financial crisis hastened the ongoing process in which the financial services industry was transforming from having a few large firms to many small firms.