Chapter 12: Money, Banking and the Financial System

Question 1

Money

Answer 1

Any good that is widely accepted for purposes of exchange and the repayment of debt.

Question 2

3 Major functions of money

Answer 2

• Medium of exchange
• Unit of account
• Store of value

Question 3

Barter

Answer 3

Exchanging goods and services for other goods and services without the use of money.

Question 4

Medium of Exchange

Answer 4

Anything that is generally acceptable in exchange for goods and services

Question 5

Unit of Account

Answer 5

A common measure in which relative values are expressed

Question 6

Store of Value

Answer 6

The ability of an item to hold value over time

Question 7

Double Coincidence of Wants

Answer 7

In a barter economy, a requirement which must be met before a trade can be made. It specifies that a trader must find another trader who at the same time is willing to trade what the first trader wants and wants what the first trader has.

Question 8

M1

Answer 8

Currency held outside banks plus checkable deposits plus traveler’s checks.

Question 9

Currency

Answer 9

Coins and paper money

Question 10

Federal Reserve Notes

Answer 10

Paper money issued by the Federal Reserve

Question 11

Checkable Deposits

Answer 11

Deposits on which checks can be written

Question 12

M2

Answer 12

M1 plus savings deposits (including money market deposit accounts) plus small-denomination time deposits plus money market mutual funds (retail).

Question 13

Savings Deposit

Answer 13

An interest-earning account at a commercial bank or thrift institution.
Normally, checks cannot be written on savings deposits and the funds in a savings deposit can be withdrawn at any time without a penalty payment.

Question 14

Time Deposit

Answer 14

An interest-earning deposit with a specified maturity date.

They are subject to penalties for early withdrawal, that is withdrawal before the maturity date.

Question 15

Money Market Deposit Account (MMDA)

Answer 15

An interest-earning account at a bank or thrift institution for which a minimum balance is usually required and most of which offer limited check-writing privileges.

Question 16

Money Market Mutual Fund (MMMF)

Answer 16

An interest-earning account at a mutual fund company, for which a minimum balance is usually required and most of which offer limited check-writing privileges. Only retail MMMFs are part of M2.

Question 17

Fractional Reserve Banking

Answer 17

A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities.

Question 18

Federal Reserve System (the Fed)

Answer 18

The central bank of the United States.

Question 19

Reserves

Answer 19

The sum of bank deposits at the Fed and vault cash.

Question 20

Required Reserve Ratio (r)

Answer 20

A percentage of each dollar deposited that must be held in reserve form

Question 21

Required Reserves

Answer 21

The minimum dollar amount of reserves a bank must hold against its checkable deposits as mandated by the Fed.

Question 22

Reserve Requirement

Answer 22

The Fed rule that specifies the amount of reserves a bank must hold to back up deposits.

Question 23

Excess Reserves

Answer 23

Any reserves held beyond the required amount; the difference between (total reserves and required reserves.

Question 24

Direct Finance

Answer 24

Borrowers and lenders come together in a market setting, such as in the bond market.

Question 25

Indirect Finance

Answer 25

Funds are loaned an borrowed through a financial intermediary.

Question 26

Financial Intermediary

Answer 26

A financial intermediary transfers funds from those who want to lend funds to those who want to borrow them.

Question 27

Asymmetric Information

Answer 27

Relates to an economic agent on one side of a transaction having information that an economic agent on the other side of the transaction does not have.

Question 28

Adverse Selection

Answer 28

A phenomenon that occurs when the parties on one side of the market, who have information not known to others, self-select in a way that adversely affects the parties on the other side of the market.

Question 29

Moral Hazard

Answer 29

A condition that exists when one party to a transaction changes his or her behavior in a way that is hidden from and costly to the other party.

Question 30

Balance Sheet

Answer 30

A record of the assets and liabilities of a bank.

Question 31

Asset

Answer 31

Anything of value that is owned or that one has claim to.

Question 32

Liability

Answer 32

Anything that is owed to somebody else.

Question 33

Insolvency

Answer 33

A condition in which one’s liabilities are greater than one’s assets.