Chap 6

Question 1

What is money?

Answer 1

anything that is generally acceptable in making exchanges

Question 2

What is barter?

Answer 2

trading without the use of widely accepted means of exchange

Question 3

What is a double coincidence of wants?

Answer 3

both parties want what the other is providing

Question 4

What are some goods Adam Smith listed that evolved into money?

Answer 4

labor, cattle, salt, cowry shells, cod, rai stones, mackrel

Question 5

What are the functions of money?

Answer 5

1.medium of exchange 2. unit of account 3. store of value

Question 6

Medium of Exchange

Answer 6

generally accepted and convenient in exchange

Question 7

Unit of Account

Answer 7

each unit of money is “worth” the same amount

Question 8

Store of Value

Answer 8

holds value over time

Question 9

What is commodity money?

Answer 9

money that has other uses

Question 10

What is fiat money?

Answer 10

money that doesn’t have other uses

Question 11

What is liquidity?

Answer 11

the ease with which an asset can be converted to spendable form

Question 12

What is M1 the sum of?

Answer 12

paper currency held outside the banks, checking account balances and travelers checks

Question 13

Why was the Federal Reserve created?

Answer 13

to stabilize the banking system by being a lender to troubled banks
previously done by other banks but state wanted control

Question 14

Who does the Fed depend on for a budget?

Answer 14

itself

Question 15

Who is on the board of governors (representing Fed. gov) for the Fed?

Answer 15

7 governors that serve 14 years
and a chairman that serves 4 years
(appointed by pres/senate)

Question 16

What is monetary policy?

Answer 16

how the Fed uses money supply to attempt to affect the economy

Question 17

Who conducts monetary policy?

Answer 17

Federal Open Market Committee

Question 18

Who is on the Federal Open Market Committee?

Answer 18

The Board of Governors, President of NY Federal Reserve Bank, Presidents of 11 other district banks rotate

Question 19

What are the 3 tools of monetary policy?

Answer 19

Open Market Operations
The Required Reserve Ratio
The Discount Rate

Question 20

What is Open Market Operations?

Answer 20

buying and selling U.S. bonds from individuals/businesses who previously bought them from the government

Question 21

What is the Required Reserve Ratio?

Answer 21

the Fed sets a % of deposits that bank cannot lend out, but must hold as reserves

Question 22

What is a banks reserves?

Answer 22

its vault cash plus the banks account with the Fed

Question 23

What are a banks excess reserves?

Answer 23

reserves the banks hold in excess of those the Fed requires

Question 24

What is the current required reserve ratio?

Answer 24

10%

Question 25

What is the discount rate?

Answer 25

the interest rate a bank pays when it borrows from the Fed

Question 26

What is the Federal Funds Rate?

Answer 26

a free market rate at which banks lend to other banks

Question 27

If the Fed lowers the interest rates by a point it means...(regarding money supply)

Answer 27

the money supply is increased until the Free Market Funds Rate falls by a point

Question 28

Why does the Fed prefer open market operations?

Answer 28

1. the Required Reserve Ratio can cause swings in lending and 2. ambivalence of borrowing from Fed makes the Discount rate a weak tool

Question 29

What is the formula for the eventual increase in money supply for $1000

Answer 29

$1000/.1 = 10000

Question 30

How does money simplify exchange?

Answer 30

by giving a common unit of account

Question 31

What does the value of a dollar in the domestic economy depend on?

Answer 31

how many and which goods and services it will buy

Question 32

What is the CPI?

Answer 32

Consumer Price Index

Question 33

What is the CPI based on?

Answer 33

a weighted average of prices- weighted by the amounts of the goods consumers purchase

Question 34

What does the PCE price index exclude?

Answer 34

fuel and food

Question 35

How does the CPI measure prices?

Answer 35

comparing the cost of a market basket at a period of time to the cost of the same market in some "base year"

Question 36

How do you find the Price Index?

Answer 36

PI= (cost of market basket in period of interest) / (cost of market basket in base period) x 100

Question 37

How do you calculate inflation?

Answer 37

Inflation year 1 to year 2 = (CPI year 2 - CPI year 1) / CPI year 1

Question 38

What is nominal income?

Answer 38

the number on the paycheck

Question 39

What is real income?

Answer 39

how much stuff you can buy

Question 40

What is the inflation rate?

Answer 40

% change in the price index