Chapter 14

Question 1

Money

Answer 1

An asset that can easily be used to purchase goods and services

Question 2

Currency in circulation

Answer 2

Cash held by the public

Question 3

Checkable bank deposits

Answer 3

Bank accounts on which people can write checks

Question 4

Money supply

Answer 4

The total value of financial assets in the economy that are considered to be money

Question 5

Three main roles of money in an economy:

Answer 5

1. Medium of exchange
2. Store of Value
3. Unit of account

Question 6

Medium of exchange

Answer 6

An asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption

Question 7

Store of value

Answer 7

A means of holding purchasing power over time

Question 8

Unit of activity

Answer 8

A measure used to set prices and make economic calculations

Question 9

Commodity money

Answer 9

A good used as a medium of exchange that has intrinsic value in other uses

Question 10

Commodity-backed money

Answer 10

A medium of exchange with no intrinsic value whose ultimate value is guranteed by a promise that it can be converted into valuable goods

Question 11

Fiat money

Answer 11

A medium of exchange whose value derives entirely from its official status as a means of payment

Question 12

Monetary aggregate

Answer 12

Overall measure of the money supply

Question 13

Near-moneys

Answer 13

Financial assets that can’t be directly used as a medium of exchange but can readily converted into cash or checkable bank deposits

Question 14

Bank reserves

Answer 14

The currency banks hold in their vaults plus their deposits at the Federal Reserve.

Question 15

T-account

Answer 15

a tool for analyzing a business’s financial position by showing, in a single table, the business’s assets (on the left) and liabilities (on the right).

Question 16

Reserve ratio

Answer 16

The fraction of bank deposits that a bank holds as reserves

Question 17

Bank failure

Answer 17

The bank would be unable to pay off its depositors in full

Question 18

Bank run

Answer 18

A phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of bank failure

Question 19

Discount window

Answer 19

A source of cash when it’s needed

Banks have access to this to protect from bank runs

Question 20

Deposit insurance

Answer 20

Guarantees that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account

Question 21

Bank’s capital

Answer 21

The excess of a bank’s assets over its bank deposits and other liabilities

Question 22

Reserve Requirements

Answer 22

Rules set by the Federal Reserve that determine the minimum reserve ratio for banks

10% for checkable bank deposits

Question 23

Discount window

Answer 23

An arrangement in which the Federal Reserve stands ready to lend money to banks in trouble

Question 24

Four features of banks to protect against Bank Runs:

Answer 24

Deposit Insurance

Capital Requirements

Resere Requirements

Discount Window

Question 25

Excess reserves

Answer 25

A bank's reserves over and above its required reserves

Question 26

Increase in checkable bank deposits from $1,000 in excess reserves =

Answer 26

$1,000/rr

Question 27

Monetary base

Answer 27

The sum of currency in circulation and bank reserves The quantity the monetary authorities control

Question 28

Checkable bank deposits

Answer 28

A part of the money supply because they are available for spending, aren't part of the monetary base

Question 29

Money supply consists of:

Answer 29

currency in circulation checkable or near checkable bank deposits

Question 30

Why is the money supply larger than the monetary base?

Answer 30

Because each dollar of bank reserves backs several dollars of bank deposits

Question 31

Money multiplier

Answer 31

The ratio of the money supply to the monetary base

Question 32

Central bank

Answer 32

An institution that oversees and regulates the banking system and controls the monetary base

Question 33

The Federal Reserve Bank of New York plays a special role:

Answer 33

It carries out open-market operations \*usually the main tool of monetary policy

Question 34

federal funds market

Answer 34

Allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves

Question 35

federal funds rate

Answer 35

The interest rate determine in the federal funds market

Question 36

Three main policy tools of the FED

Answer 36

Reserve requirements Discount rate Open-market operations

Question 37

Banks in need of reserves can borrow from the FED itself via the \_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 37

discount window

Question 38

Discount rate

Answer 38

The rate of interest the Fed charges on loans to banks

Question 39

Open-market operation

Answer 39

A purchase or sale of government debt by the FED

Question 40

commercial bank

Answer 40

banks that mainly make business loans, as opposed to home loans

Question 41

Eurozone

Answer 41

the group of countries that have adopted the euro as their currency

Question 42

commercial banks

Answer 42

Accept deposits and are covered by deposit insurance

Question 43

Investment bank

Answer 43

Trades in financial assets and is not covered by deposit insurance

Question 44

Savings and loan (thrift)

Answer 44

Another type of deposit-taking bank, usually specialized in issuing home loans

Question 45

leverage

Answer 45

A financial insitution engages in **leverage** when it finances its investments with borrowed funds

Question 46

Balance sheet effect

Answer 46

The reduction in a firm's net worth due to falling asset prices

Question 47

Vicious cycle of deleveraging

Answer 47

Takes place when asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcin sales of more assets and causing further declines in asset prices

Question 48

subprime lending

Answer 48

Lending to home-buyers who don't meet the usual criteria for being able to afford their payments

Question 49

securitization

Answer 49

A pool of loans is assembled and shares of that pool are sold to investors

Question 50

TED spread

Answer 50

Shoows the difference between the interest rate on three-month loans that banks make to each other and the interest rate the federal government pays on three-month loans