Chapter 13 - Money And Banks

Question 1

Money plays an essential role in…..

Answer 1

Facilitating the continuous series of exchanges that characterizes a market economy

Question 2

What are the 3 functions of money? How many have to be fulfilled for something to be considered money?

Answer 2

ALL MUST BE FULFILLED TO BE CONSIDERED MONEY

1. Medium of exchange
2. Store of Value
3. Standard of value

Question 3

Describe “medium of exchange”

Answer 3

It must be accepted as payment for goods and services (and debts)

Question 4

Describe “store of value”

Answer 4

It can be held for future purposes

Question 5

Describe “standard of value”

Answer 5

It serves as a “yardstick” for measuring the price of goods and services.
Ex: we all know $100 is an absurd price for a burger

Question 6

What if purchasing power changes? Can it still be considered money?

Answer 6

YES- purchasing power of money will change with time. But purchasing power doesn’t change the fact that a $20 bill is a $20 bill and will always be

Question 7

The concept of money includes more than dollar bills and coins. What else is included???

Answer 7

Checking account balances

Question 8

What is a transactions account?

Answer 8

A bank account that permits direct payments to a 3rd party (with a check or debit card)

Question 9

Is the balance in your transactions account a form of money? Why or why not?

Answer 9

Yes because the balance substitutes for cash

Question 10

What is M1?

Answer 10

The abbreviation for the basic money supply

Question 11

Most money consists of _____ not _____

Answer 11

Most money consists of balances in transaction accounts, NOT cash

Question 12

M1 (money suppply) includes which 3 things?

Answer 12

1. Currency in circulation
2. Transaction account balances
3. Traveler’s checks

Question 13

What are traveler’s checks?

Answer 13

Checks that can be used outside the US - not really used much anymore because of credit cards

Question 14

_______ are a popular medium of exchange, but are NOT a form of money

Answer 14

Credit cards

Question 15

Why are credit cards not considered a form of money

Answer 15

Because they are a payment service - NOT a store of value

Question 16

When there is more m1, explain what happens to AD

Answer 16

When M1 goes up, C goes up, and thus AD goes up

Question 17

What 3 things are all affected by changes in aggregate demand?

Answer 17

Total output
Employment
Prices

Question 18

Why does the amount of money in the economy matter?

Answer 18

It influences AD

Question 19

Most of what we call money is _____ not ______

Answer 19

Bank balances, not cash

Question 20

The ____ and the ____ play only a minor role in the creation of money

Answer 20

Bureau of engraving and printing
Us mint

Question 21

A bank effectively creates money by…..

Answer 21

Making a loan

Question 22

Why is a bank making a loan considered to be a creation of money?

Answer 22

Because the bank is increasing the transactions-account balances by giving a loan, and the balances are counted as money

Question 23

Banks create transactions-account balances by…..

Answer 23

Making loans

Question 24

When you deposit cash or coins into the bank, you are changing the ______ of the money supply, not its ______

Answer 24

Changing the composition of the money supply not the size

Question 25

What are BANK RESERVES?

Answer 25

Assets held by a bank to fulfill its deposit obligations

Question 26

A monopoly bank loans $100 to a company. The total bank reserves have remained unchanged. Explain.

Although total reserves hasn’t changed, what change DID the bank make?

Answer 26

The company will use the loan to buy something from a business. That business will in turn put the money back into the same bank - total reserves did not change

HOWEVER, THE BANK CREATED MONEY BECAUSE THE CHECKING ACCOUNT IT WAS DEPOSITED INTO IS CONSIDERED MONEY

Question 27

What is the reserve ratio?

Answer 27

Ratio of a bank’s reserves to its total transactions deposits

Question 28

Do banks reserve all of their transactions deposits?

Answer 28

NO - only a fraction

Question 29

The ability of a monopoly bank to hold fractional reserves results from 2 facts:

Answer 29

• people use checks for most transactions
• there is no other bank

Question 30

The minimum reserve requirement directly limits the ability of banks to….

Answer 30

Grant new loans

Question 31

What are required reserves?

Answer 31

The minimum amount of reserves a bank is required to hold by government regulation

Question 32

Required reserves =

Answer 32

Required reserve ratio * total deposits

Question 33

What are excess reserves?

Answer 33

Bank reserves in excess of require reserves

Question 34

Excess reserves =

Answer 34

Total reserves - required reserves

Question 35

The ability of banks to make loans depends on access to…..

Answer 35

Excess reserves

Question 36

So long as a bank has excess reserves, it can….

Answer 36

Make additional loans

Question 37

We are more concerned with how much excess reserves exist in ____ rather than ____ because…..

Answer 37

We are more concerned with how much excess reserves exist in THE ENTIRE BANKING SYSTEM rather than A SPECIFIC BANK because in reality there is more than one bank in town

Question 38

The value for money multiplier represents….

Answer 38

The number of loan dollars the bank can create with $1 of excess reserves

Question 39

Money multiplier =

Answer 39

1/req reserve ratio

Question 40

Potential deposit creation =

Answer 40

Money multiplier * excess reserves of bank system

Question 41

Explain the value you get for “total deposit creation” (ex: the value is $100)

Answer 41

This means that $100 total loan CAN be created (doesn’t mean they will)

Question 42

When required reserve goes up, what happens to the potential deposit creation?

Answer 42

It goes down

Question 43

Each bank may lend an amount….

Answer 43

Equal to its excess reserve and no more