CH 13

Question 1

What are the three uses of money?

Answer 1

• -Unit of Account (Measures Worth)
• -Means of Payment (for Goods and Services)
• -Asset (Store of Value)

Question 2

Define “Money”?

Answer 2

An asset widely accepted as a Means of Payment

–To buy goods and services–

Question 3

What is M1?

Answer 3

Money Supply=

Cash held in the hands of the public
+Checking Account Deposits
+Travelers Checks

Question 4

What are Reserves?

Answer 4

Cash in Vaults and ATM’s + in accounts with the Fed

Question 5

What is the required reserve ratio (RRR)

Answer 5

The minimum fraction of CHECKING (only) account balances that banks must hold as reserves

Question 6

How many districts are in the Fed system? Who supervises and regulates these districts?

Answer 6

12 Districts; Each with their own District Bank.

Supervised by the Board of (7) Governers who appoint 3 Directors of each District Bank.

Question 7

What is the FRS? What year was it founded?

Answer 7

Federal Reserve System: The monetary authority of the US, charged with creating and regulating the nation’s supply of money. (US Central Bank)

–Founded in 1913 when it was created by Congress, Not a part of any branch of Government!

Question 8

What is the unit of account in the US?

Answer 8

The dollar!

Question 9

What is the Board of Governers in charge of? What do they get to set?

Answer 9

In charge of the FRS. 7 Members that are appointed by the President and Confirmed by the senate.

—They decide the Reserve Requirement and the Discount Rate—

Question 10

What are the functions of the Fed?

Answer 10

Supervising & Regulating Banks
Acting as a "Bank" for Banks
Issuing Paper Currency
Check Clearing
Guiding the Macro Economy
Dealing with Financial Crisis

Question 11

What is the FOMC? How many people are on it? What does it control?

Answer 11

The Federal Open Market Comittee.
7 Governers and 5 Reserve Bank Presidents

–Controls the Money Supply and Interest Rates–

Question 12

What are the two types of Open Market Operations?

Answer 12

Open Market Purchase & Open Market Sale of Government Bonds.

–Changes the Supply of Money–

Question 13

What is a Bond?

Answer 13

A promise to pay back borrowed funds, issued by a corporation or government agency

Question 14

How does an Open Market Purchase affect the money supply and the interest rate?

Answer 14

OMP: Fed purchases their bonds, Increasing the money supply and Lowering the Interest Rate

Question 15

How does an Open Market Sale affect the Money Supply and the Interest Rate?

Answer 15

OMS: Fed sells their bonds, decreasing the Money Supply and Increasing the Interest Rate.

Question 16

What is the Money Multiplier? Give the formula.

Answer 16

The number by which we multiply the injection of reserves to get the total change in Money Supply

1/Required Reserve Ratio (RRR)
x Change in Reserves
= Change in Money Supply

Question 17

When is a Bank declared Insolvent?

Answer 17

Bank Failure is when its total Assets are less than the total Liabilities. (Also, Negative SE)

Question 18

What is the FDIC?

Answer 18

Federal Deposit Insurance Corporation

• • Insurance for banks that insures a person’s deposit in the bank fails
    
    • –(decrease panics and runs)

Question 19

What is included in a Banks Balance Sheet?

Answer 19

Total Assets and Total Liabilities/Stockholders Equity

Question 20

What is the “Discount Rate”

Answer 20

The interest rate that the Fed charges banks on loans it gives to the Banks.