Chapter 16

Question 1

Three functions of money in the economy

Answer 1

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

Question 2

Medium of exchange

Answer 2

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

Question 3

Unit of account

Answer 3

The yardstick people use to post prices and record debts

Question 4

Store of value

Answer 4

An item that people can use to transfer purchasing power from the present to the future
Ex: money, stocks, bonds

Question 5

Wealth

Answer 5

The total of all stores of value including money and non-monetary assets

Question 6

Liquidity

Answer 6

The ease with which an acid can be converted into that economy’s medium of exchange
Money is the most liquid asset because it is the economy’s medium of exchange

Question 7

Commodity money

Answer 7

Money that takes the form of a commodity with intrinsic value (Item has value even if not used as money)

Question 8

Fiat money

Answer 8

Money without intrinsic value that is used as money because of government decree

Question 9

Money stock

Answer 9

Quantity of money circulating in the economy

Question 10

Currency

Answer 10

The paper bills and coins in the hands of the public; The most widely excepted medium of exchange

Question 11

Demand deposits

Answer 11

Balances in bank accounts that depositors can access on demand by writing a check
Bank depositors can’t write checks against the balances in their accounts

Question 12

Federal reserve

Answer 12

The Central Bank of the United States; responsible for regulating the system of Fiat money

Question 13

Central bank

Answer 13

An institution designed to oversee the banking system and regulate the quantity of money in the economy

Question 14

Job of the federal reserve

Answer 14

1. Regulate banks and ensure the health of the banking system
   * lender of last resort
2. Control the money supply (quantity of money available in the economy)

Question 15

Monetary policy

Answer 15

The setting of the money supply my policymakers in the central bank

Question 16

Open market operations

Answer 16

Purchase and sale of US government bonds (certificate of indebtedness to the US government)

Question 17

Federal open market committee FOMC

Answer 17

Makes monetary policy; Power to increase or decrease the amount of money in the economy

Question 18

Reserves

Answer 18

Deposits that banks have received but have not loaned out

*thanks hold all deposits and reserve, they do not influence the supply of money

Question 19

T account

Answer 19

Accounting statement that shows changes in a banks assets and liabilities

Question 20

Fractional reserve banking

Answer 20

A banking system in which banks hold only a fraction of deposits as reserves; creation of money

Question 21

Reserve ratio

Answer 21

The fraction of deposits that banks hold as reserves

Question 22

Reserve requirement

Answer 22

Minimal amount of reserves that banks must hold set by the Federal Reserve
Excess reserves: reserves above the legal minimum

Question 23

Money multiplier

Answer 23

The amount of money the banking system generates with each dollar of reserves
Reciprocal of the reserve ratio
The higher the reserve ratio, the last of deposit thanks blown out, and the smaller money multiplier

Question 24

Bank capital

Answer 24

The resources a bank’s owners have put into the institution

Question 25

Leverage

Answer 25

The use of borrowed money to supplement existing funds for purposes of investment

Question 26

Leverage ratio

Answer 26

The ratio of assets to bank capital

Question 27

Capital requirement

Answer 27

And government regulation specifying a minimum amount of bank capital; ensures that banks will be able to pay off their depositors

Question 28

Credit crunch

Answer 28

When a shortage of capital induces banks to reduce lending

Question 29

Open market operations

Answer 29

The purchase and sale of US government bonds by the federal reserve

Question 30

How the Fed increases money supply

Answer 30

Buys bonds from the public ⬆️ # dollars in economy: some held as currency (increases the money supply) and some deposited

Question 31

How the Fed reduces the money supply

Answer 31

Sells government bonds to the public ➡️ public pays for bonds w/ currency and deposits ➡️ reduces money in circulation

Question 32

How the food increases the quantity of reserves in the economy

Answer 32

Lends reserves to banks

Question 33

Discount rate

Answer 33

The interest rate on the loan is that the Fed makes to banks When high: discourages banks from borrowing reserves (⬇️ Quan reserves and $$ supply) When low: encourages banks to borrow from the Fed (⬆️ Quan reserves and $$ supply)

Question 34

Reserve requirements

Answer 34

Regulations on the minimum amount of reserves that banks must hold against deposits Higher: Banks must hold more reserves and can loan less of each $ deposited Lower: Banks can hold less reserves and can loan more of each $ deposited

Question 35

Interest on reserves

Answer 35

Fed pays banks interest on deposits

Question 36

Problems in controlling the money supply

Answer 36

1. The Fed does not control the amount of money that household choose to hold as deposits in banks 2. The food does not control the amount that bankers choose to lend

Question 37

Federal funds rate

Answer 37

The interest rate at which banks make overnight loans to one another

Question 38

Money

Answer 38

The set of assets and an economy that people regularly use to buy goods and services from other people