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What is Fiat Money?
Fiat money is the government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro and other major global currencies.
The word “fiat” comes from the Latin and is often translated as the decree “it shall be” or “let it be done.”
Terms and Answers to Learn
A. Fiat money has no value except as money, whereas commodity money has value independent of its use as money
B. all money is commodity money, as it has to be exchanged for gold by the central bank
C. commodity money has no value except as money, where as fiat money has value independent of its use as money
A. open market operation
B. store of value
C. medium of exchange
D. unit of account
A. all three functions
B. all four functions
A. reduces the transaction costs of exchange
B. eliminates the double coincidence of wants
C. Allows for greater specialization
D. All of the above
A. Sellers are willing to accept it in exchange for goods or services
B. It can be easily stored and used for transactions in the future
C. Prices of goods and services are stated in terms of money
A. It can be easily store today and used for transactions in the future
B. Payments agreed to today but made in the future are in terms of money
C. Sellers are willing to accept it in exchange for goods or services
A. M2 satisfies the medium of exchange function of money, whereas M1 satisfies the store of value function
B. M2 is a narrow definition focusing more on Liquidy, whereas M1 is a broader definition of the money supply
C. M1 is a narrow definition focusing more on liquidy, whereas M2 is a broader definition of the money supply
A. A person’s money is the currency held and the checking account balance, income is the earning and wealth is equal to the value of assets minus all debts
B. A person’s money is the currency held and the earnings from work, income is equal to the bank balance and wealth is equal to the profit from investment
C. A person’s money is the currency in the pocket, income is the earning and wealth is equal to asset value
A. Banks
B. The public plus they’re checking and savings account balances
C. The public plus their checking account balances
A. Both M1 and M2 will remain unchanged
B. M1 will decrease and M2 will increase
C. Both M1 and M2 will increase by $2000
A. Included in both the M1 and M2 definitions of the money supply
B.Included in the M1 definition of the money supply, but not in the M2 definition
C. Included in neither the M1 definition of the money supply nor in the M2 definition
A. Loans of the largest assets and deposits are the largest liability of a typical bank
B. Reserves are the largest asset and deposits are the largest liability of a typical bank
C. Loans of the largest liability and deposits are the largest asset of a typical bank
A. When there is a decrease in checking account deposits, banks lose reserves and reduce their loans, and the money supply expands
B. When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands
C. Banks buy bonds in the open market and gain reserves; this excess reserve holding increases the money supply
A. 1/RR
B. -RR/1-RR
C. 1/1-RR
A. Equals the simple deposit multiplier because banks keep no excess reserves and households do not hold excess cash
B. Is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash
C. Is larger than the simple deposit multiplier because banks have no excess reserves and households do not deposit checks
A. Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability
B. Agree. checking accounts or something of value that is in the bank. Therefore, they are a bank asset
C. Disagree. Both checking accounts and car loans represent bank liabilities
A. Are loans made at above market interest rates
B. Are reserves banks keep above the legal requirement
C. Are reserves banks keep to meet the reserve requirement
A. $50 in required reserves
B. $50 in excess reserves
C. $200 in required reserves
A. the ratio of the amount of deposits created by banks to the amount of new reserves
B. The formula used to calculate the total increase in checking account deposits from an increase in bank reserves
C. The inverse, or reciprocal, of the required reserve ratio
D. All of the above
A. Increases
B. Decreases
C. Eliminates
A. Take the monetary control over the economy away from the Treasury Department
B. End the instability created by a huge crude oil price hike during that time
C. End the instability created by bank panics by acting as a lender of last resort
A. Negotiating with foreign nations to reduce the enormous trade deficit
B. Controlling the money supply to pursue economic objectives
C. Balancing the government’s budget by increasing taxes and cutting spending
A. The sellers of such securities by new securities in the open market and there is an increase in bank reserves
B. The sellers of such securities deposits the funds in their banks and bank reserves increase
C. The buyers of those securities pay for them with checks drawn on their bank account and bank reserves increase
A. The buyers of these securities pay for them with checks and bank reserves fall
B. The buyers of such securities by new securities in the open market and there is a decrease in bank reserves
C. The sellers of such securities deposit the funds in their banks and bank reserves decrease
A. You would have to reduce lines to make up for the necessary increase in reserves
B. You would need to make loans to match the new reserve requirement
C. You would have to charge less for your loans because rates are now at 12%
A. 14
B. 12
C. 8
A. 8
B. 7
C. 6
A. 6
B. 4
C. 7
A. Decreasing the rate at which banks can borrow money from the Federal Reserve
B. Increasing the reserve requirement from 10% to 12.5%
C. Buying 500 million worth of government securities, such as treasury bills
D. All of the above
A. Discount rate
B. Discount loans
C. Reserve requirements
A. Banks can determine the amount of reserves they wish to hold regardless of the reserve requirement
B. Banks cannot usually meet their reserve requirements so the Fed does not monitor it
C. Banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement
A. More; decrease
B. Fewer; decrease
C. Fewer; increase
A. To explain the inflation rate in the long run
B. To explain the full employment in the long run
C. To explain the inflation rate in the short run
A. Inversely with the price level
B. Directly with the volume of employment
C. Directly with the price level
A. May either rise or fall
B. Will rise by one sixth
C. Will fall by one sixth
A. Increase the purchasing power of each dollar
B. Decrease the purchasing power of each dollar
C. Have no impact on the purchasing power of the dollar
A. 55 million
B. 50 million
C. 45 million
A. It has $500 in reserves and $4500 in loans
B. It has $50 in reserves and $4950 in loans
C. It has $555 in reserves and $4445 in loans
A. $3300 billion
B. $2970 billion
C. $2673 billion
A. $55 million
B. $50 million
C. $45 million
A. Banks do not accept deposits
B. Banks do not influence the supply of money
C. All of the above are correct
A. $50
B. $100
C. $150
A. Redeems federal reserve notes
B. Buys government bonds from the public
C. Raises the discount rate
A. Banks by treasury securities from Fed, which increases the money supply
B. Banks by treasury securities from the Fed, which decreases the money supply
C. It buys treasury securities, which increases the money supply
A. Borrow more from the Fed and lend more to the public. The money supply increases
B. Borrow more from the Fed and lend less to the public. The money supply decreases
C. Borrow less from the Fed and lend more to the public. The money supply increases
A. Buy government bonds or increase the discount rate
B. Buy government bonds or decrease the discount rate
C. Sell government bonds or increase the discount rate
A. Increased both the money multiplier and the money supply
B. Decreased both the money multiplier and the money supply
C. Increased the money multiplier and decrease the money supply
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