lesson 11 quiz - 1 M1 is the narrow measure of the money...

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1. M1 is the narrow measure of the money supply and consists of currency outside the banking system plus checkable deposits inside the banking system. 2. When banks make loans banks “create” money as defined by M1. 3. A bank holds the required reserve off of a new loan / deposit for one customer and then lends the excess reserve to someone else, repeating the money creation process many times. 4. The money control process is called monetary policy 5. For the Fed there must be a balance between maintaining banking stability for the nation and allowing individual banks to operate profitably. 6. In this Circular Flow example the Money Supply is reduced as the Fed subtracts $20 billion of Reserves to/from the banking system. 7. In this Circular Flow example Business borrowing and Capital spending went down as the Fed used its Open Market Operations to reduce the Money Supply. 8 A major benefit of the Fed’s “tight money” approach in this example is that the Price Level (Average Price) has decreased to $2.00 9. In the longer run one of the risks of the Fed’s “tight money” approach is that people’s standard of living may be reduced because of the declining productivity caused by the forced reductions in Investment Spending. 10. Goldsmiths formulated a principle that only 5 percent of deposits were needed in reserve at any particular time. 11. The multiple credit expansion process based on excess reserves does reverse when loans are repaid. 12. If a bank’s actual legal reserves are more than required, then the bank has none of the above reserves which can be lent to customers. 13. A major benefit of the Fed’s “tight money” approach in this example is that the 17% inflation rate has been squeezed out of this economy. 14. A bank’s balance sheet follows the accounting format that “Assets = Liabilities + Net Worth” 15. The Federal Reserve controls the portion of depositors’ funds that must be kept on reserve and, thereby, controls the growth of the money supply 16. The Fed is committed to the stability of money and this requires that the money supply not grow too rapidly. (True) 17. As a result of the rising interest rates in this example, Businesses choose to reduce their Investment Spending by $ 200 billion. 18. When a customer deposits $100 of cash into their checking account at a bank, the cash
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This note was uploaded on 06/18/2011 for the course ECON 2302 taught by Professor Methenitis during the Fall '10 term at Richland Community College.

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lesson 11 quiz - 1 M1 is the narrow measure of the money...

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