Chapter 13

Question 1

First National Trust has assets of $900,000 and liabilities of $600,000. First National Trust’s owners’ equity is

Answer 1

$300,000

Question 2

Money is an imperfect store of value because of

Answer 2

inflation

Question 3

The president of which of the following district banks of the Federal Reserve System is always on the FOMC?

Answer 3

New York

Question 4

Suppose the required reserve ratio is 10%. A $10 million deposit allows commercial banks to create a maximum total of ________ in deposits.

Answer 4

$100 million

Question 5

Because banks have been required to keep 10 percent of deposits exceeding $103.6 million as reserves in 2015, one would expect that on the basis of the formula the money multiplier is

Answer 5

10

Question 6

The required reserve ratio is 15%. The money multiplier is

Answer 6

6.67.

Question 7

In a barter economy, the exchange of goods trade requires a double coincidence of wants. (T/F)

Answer 7

true

Question 8

If the total assets of the bank exceeds the banks total liabilities, then

Answer 8

owner’s equity is positive.

Question 9

money

Answer 9

any items regularly used in economic transactions or exchange and accepted by buyers and sellers

Question 10

medium of exchange

Answer 10

any item that buyers give to sellers when they purchase goods and services

Question 11

barter

Answer 11

exchange of one good / service for another

Question 12

double coincidence of wants

Answer 12

the problem in a system of barter that one person may not have what the other desries

Question 13

unit of account

Answer 13

a standard unit in which prices can be stated and the value of goods and services compared

Question 14

store of value

Answer 14

the property of money that holds money preserves until it is used in an exchange

Question 15

commodity money

Answer 15

a monetary system in which the actual money is a commodity, such as gold or silver

Question 16

gold standard

Answer 16

a monetary system in which gold backs up paper money

Question 17

fiat money

Answer 17

a monetary system in which money has no intrinsic value but is backed by the gov’t

Question 18

M1

Answer 18

the sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler’s checks

Question 19

M2

Answer 19

M1 plus other assets, including deposits in savings and loans accounts and money market mutual funds

Question 20

balance sheet

Answer 20

an account statement for a bank that shows the sources of its funds (liabilities) as well as the uses of its funds (assets)

Question 21

liabilities

Answer 21

the sources of funds for a bank, including deposits and owners’ equity

Question 22

assets

Answer 22

the uses of the funds of a bank, including loans and reserves

Question 23

owners’ equity

Answer 23

the funds provided to a bank by its owners

Question 24

reserves

Answer 24

the portion of banks’ deposits set aside in either vault cash or as deposits at the Federal Reserve

Question 25

required reserves

Answer 25

the specific fraction of their deposits that banks are required by law to hold as reserves

Question 26

excess reserves

Answer 26

any additional reserves that a bank holds above required reserves

Question 27

reserve ratio

Answer 27

the ratio of reserves to deposits

Question 28

money multiplier

Answer 28

ratio of increase in total checking account deposits to an initial cash deposit – which is just 1/(reserve ratio)

Question 29

central bank

Answer 29

a banker’s bank: an official bank that controls the supply of money in an economy

Question 30

lender of last resort

Answer 30

a central bank is the lender of last resort, the last place, all others having failed, from which banks in emergency situations can obtain loans

Question 31

monetary policy

Answer 31

the range of actions taken by the federal reserve to influence the level of GDP or inflation

Question 32

federal reserve bank

Answer 32

one of the 12 regional banks that are an official part of the federal reserve system

Question 33

board of governors

Answer 33

7 person governing body of the federal reserve system in Washington DC

Question 34

FOMC

Answer 34

Federal open market committee; the group that decides on monetary policy: it consists of 7 members of the Board of Governors + 5 of the 12 regional bank presidents on a rotating basis

Question 35

what are the three key properties of money?

Answer 35

it’s a medium of exchange, a unit of account, and a store of value

Question 36

what’s the difference between demand deposits and the “other checkable deposits” in M1?

Answer 36

demand deposits don’t pay interest; checkable deposits do. But that distinction is not as pronounced as it used to be

Question 37

the total increase in checking account balance throughout all banks is equal to

Answer 37

initial cash deposit / reserve ratio