Chapter 11

Question 1

What are the 3 functions of money?

Answer 1

1. medium of exchange
2. Unit of account
3. Store of value

Question 2

Medium of exchange

Answer 2

item buyers give to sellers when they want to purchase goods or services, method of payment (debit card)

Question 3

Unit of accounts

Answer 3

something that can be used to value goods and services, record debts, and make calculations. The US dollar for example, allows you to understand the value of something in a currency.

Question 4

Store of Value

Answer 4

item people can use to transfer purchasing power from the present to the future, many assets take this form and are good stores as they can avoid inflation. purchase it to hold and increase in value over long period of time

Question 5

what can take on all 3 functions of money?

Answer 5

Cash

Question 6

what are the two kinds of money

Answer 6

commodity money and fiat money

Question 7

commodity money

Answer 7

intrinsic value, has value even if not used as money, gold coins, cigarettes in POW camps

Question 8

fiat money

Answer 8

no intrinsic value, use as money due to governments say, The US dollar

Question 9

what are the different measures of money

Answer 9

M1 and M2

Question 10

What is included in M1

Answer 10

checking accounts + currency +savings deposits

Question 11

What is included in M2

Answer 11

checking accounts + currency + savings deposits + small time deposits + mutual funds

Question 12

what does the money supply include

Answer 12

currency as well as deposits in banks

Question 13

when is money created

Answer 13

when the bank loans money and the money supply is increased

Question 14

max change in money supply =

Answer 14

1/R * change in resources

Question 15

what is the fed?

Answer 15

central bank of the us, regulates banking system and control money supply domestically and foreign currency market.

Question 16

what is the structure of the fed

Answer 16

independent private institution owned by its members. makes policy without approval from govt. has a board of governors. The chair person is appointed by the pres for 4 yrs, and there are 6 other board members serving 14 year terms. 12 regional banks, main one in NY, meet every 6 weeks

Question 17

what is in a typical balance sheet of a commercial bank

Answer 17

• banks liabilities: amt bank owes in deposits and borrowing
• banks assets: amt bank owns in reserves loans and sercurities
• reserve ratio = R = reserves/deposits * 100

Question 18

what is the reserve ratio

Answer 18

fraction of deposits bank holds as reserves, total reserves as a percentage of total deposits
R = reserves/deposits * 100

Question 19

what are the goals of the fed

Answer 19

low unemployment, low inflation. monetary policy,
hold bank reserves, lend money to banks, influence value of $ in foreign exchange market

Question 20

what is monetary policy

Answer 20

policy created by the fed that influences, interest rates, discount rates, ffr, money supply, inflation, unemployment

Question 21

what do the banks do with their reserves

Answer 21

they use a fractional reserve banking system. they keep a fraction of deposits as reserves, use rest to make loans. reserves are received deposits that have not been loaned out.

Question 22

how do reserves affect money supply

Answer 22

• banks holds certain % as reserves and extend loans with rest, loans create currency, adding to the money supply
• deposits in banks + currency = money supply

Question 23

how does a change in reserves result in a multiplier affect on the money supply?

Answer 23

• the money multiplier = 1/R
• the higher the reserve ratio the smaller the money multiplier

Question 24

why may the true change in money supply be less than what is predicted by the multiplier

Answer 24

when the bank holds excess reserves than what is required, they dont contribute to money multiplier effect as they are not being lent out

Question 25

what are the two ways the fed can influence the money supply?

Answer 25

open market operations and discount rate policy

Question 26

what are open market operations

Answer 26

buying and selling of government bonds.

Question 27

what is the discount rate policy

Answer 27

interest rate at which banks can borrow from federal bank

Question 28

how is the money supply and AD increased.

Answer 28

• lower reserve ratio
• lower the discount rate, this encourages banks to borrow more
• fed buys govt bonds from public and pays for bonds with new money created from loans

Question 29

how is money supply and AD decreased

Answer 29

• raise discount rates to discourage borrowing, leads to lower reserves and lower MS
• ## raise reserve ratio which lowers the money multiplier and lowers the MS