Chapter 17 - Money and the Federal Reserve Flashcards
What is the paper bills and coins that are used to buy goods and services?
Currency
What are the three functions of money?
- It’s a medium of exchange
- It’s a unit of account
- It’s a store of value
What is what people trade for goods and services?
A medium of exchange
Is money the only type of medium of exchange?
No
What involves the trade of a good or service without a commonly accepted medium of exchange?
Barter
What occurs when each party in an exchange transaction happens to have what the other party desires?
A double coincidence of wants
What involves the use of an actual good in place of money?
Commodity money
What are the advantages of commodity money?
It limits inflation
What is money that can be exchanged for a commodity at a fixed rate?
Commodity-backed money
What do modern economies mostly use as their medium of exchange?
Fiat money
What is money that has no value except as the medium of exchange?
Fiat money
What are the disadvantages of commodity money?
Its market value fluctuates
What are the disadvantages of fiat money?
It is subjected to rapid monetary expansion and inflation
What are the advantages of fiat money?
There isn’t a limit to the amount that can be printed
Today in the United States, the dollar ($) is: A. intrinsically valued money. B. fiat money. C. commodity money. D. commodity-backed money.
B. fiat money
What is the measure in which prices are quoted?
Unit of account
What are the advantages of unit of account?
It creates a common language and a unit of measurement. It also creates a consistent method of record keeping.
What is a means for holding wealth?
Store of value
The store of value role of money has declined recently due to what three things?
- Stocks
- Bonds
- Savings accounts
What are the three ways that we measure how much money is out there?
- Checkable deposits
- M1
- M2
What are deposits in bank accounts from which depositors may make withdrawals by writing checks?
Checkable deposits
What is the money supply measure that is essentially composed of currency and checkable deposits?
M1
M1 was the most used measure until when?
The 1970s
What is the money supply measure that includes everything in M1 plus savings deposits, money market mutual funds, and small-denomination time deposits?
M2
What are accounts that are blocked for a certain amount of time called?
Certificate of Deposits
What measurement of money supply do we use today?
M2
What is the equation to find money supply?
currency + deposits
Are credit cards apart of money supply?
No
Why is M2 currently a more monitored measure of the money supply than M1?
A. ATMs have allowed easier access to savings deposits.
B. M2 doesn’t include coins, which may be obsolete in a few years.
C. Banks pressured the Fed to include savings in the money supply measure.
D. People have increased use of credit cards.
A. ATMs have allowed easier access to savings deposits.
What measurement of money supply is debit cards apart of?
M1
What invention caused M2 to become the main measurement of money supply?
ATMs
Are checking and savings accounts included in M1 or M2?
M2
What is the primary function of commercial banks?
Financial intermediation
What does it mean when banks are financial intermediaries?
They accept deposits and extend loan
Where can information about a bank’s financial operations be found?
The bank’s balance sheet
What is an accounting statement that summarizes a firm’s key financial information?
A balance sheet
What are the items that a firm owns?
Assets
What are the financial obligations a firm owes to others?
Liabilities
What is the difference between a firm’s assets and its liabilities?
Owner’s equality
What is the primary interest-earing use of bank funds?
Loans
What are the portion of bank deposits that are set aside and not lent out?
Reserves
How do banks primarily fund their activities?
Deposits
What occurs when banks hold only a fraction of deposits on reserve?
Fractional reserve banking
What is the current required reserve ratio?
10%
What are the two reasons banks hold reserves?
- To accommodate customer withdraws
2. It’s a requirement by the Federal Reserve
What occurs when many depositors attempt to withdraw their funds at the same time?
A bank run
What is the portion of deposits that banks are required to keep on reserve?
The required reserve ratio (rr)
What is the equation used to figure our required reserves?
required reserve ratio x deposits
What are any reserves held in excess of those required?
Excess reserves
What is the equation used to figure our excess reserves?
total reserves - required reserves
What is the government program that insures your bank deposits?
Federal Deposit Insurance Corporation (FDIC)
What was the goal of the FDIC?
To increase bank stability and decrease bank runs
What did the FDIC create?
A moral hazard situation
What did the FDIC mean for banks?
That they no longer have an incentive to monitor risks
True or False:
Our modern banking system is a fractional reserve system
True
Banks increase the money supply by: A. printing (minting) money. B. controlling interest rates. C. lending out funds to borrowers. D. storing the money of savers.
C. lending out funds to borrowers
What is the rate at which banks multiply money when all currency is deposited into banks and they hold no excess reserves?
The simple money multiplier (mm)
What is the simple money multiplier equation?
1 / required reserve ratio
Realistically, what does the simple money multiplier represent?
The maximum size of the money multiplier
With a reserve requirement of 5% and an initial deposit of $400, what is the total amount of money that could be in the money supply? A. $420 B. $780 C. $4,000 D. $8,000
D. $8,000
(1/.05) = 20 x 400 = 8,000
What is the central bank of the United States?
The Federal Reserve (Fed)
What are the three responsibilities of the Fed?
- Monetary policy
- Central banking
- Bank regulation
Who is the current chairperson of the Fed?
J. Powell
What does the term central bank mean?
It means that they are the bank for banks
What are deposits that private banks hold on reserve at the Federal Reserve?
Federal funds
What is the interest rate on loans between private banks?
The federal fund rate
What are loans from the Federal Reserve to private banks?
Discount loans
What is the interest rate on the discount loans made by the Federal Reserve to private banks?
The discount rate
What is the primary tool of monetary policy?
Open market operations
What involve the purchase or sale of bonds by a central bank?
Open market operations
Buys or sells:
When the Fed wants to increase the amount of money in the economy it _____ bonds; when it wants to decrease the amount of money in the economy it _____ bonds
Buys; sells
What is the targeted use of open market operations in which the central bank buys securities specifically targeted in certain markets?
Quantitative easing
Increase or Decrease:
In order to increase the money multiplier, you need to _______ the required reserve ratio
Decrease
Increase or Decrease:
In order to decrease the money multiplier, you need to _______ required reserve ratio
Increase
What was the original monetary policy tool?
Discount rate
Why would the Fed decrease discounts rates?
To discourage borrowing by banks and to decrease money supply
Discount loans are:
A. loans offered by private banks at a lower interest rate.
B. cheap loans to individuals from nonbank businesses.
C. loans from the Fed to private banks.
D. loans private banks make to each other
C. loans from the Fed to private banks
Assume there is a required reserve ratio of 10% and that banks keep no excess reserves. In which of the following scenarios is there a bigger increase in the money supply.
i. Jane takes $1,000 from under her mattress and deposits it into a checking account.
ii. The Fed purchases $1,000 worth of government securities from a commercial bank.
A. Jane depositing the funds into the checking account
B. The Fed purchasing the securities
C. They both increase the money supply by the same amount.
D. Neither of them increases the money supply.
C. They both increase the money supply by the same amount.
Out of fears that the money supply is too large, the Federal Reserve has decided to decrease the money supply. How could the Federal Reserve accomplish this?
A. purchase bonds from financial institutions
B. sell bonds to financial institutions
C. lower the discount rate
D. lower the required reserve ratio
B. sell bonds to financial institutions
Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. Assuming a required reserve ratio of 10%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action?
A. $15
B. $135
C. $150
D. $1,500
D. $1,500
Suppose the Federal Reserve engages in open-market operations. It sells $20 billion in U.S. securities. It also raises the reserve ratio. This causes excess reserves to _______, the money supply to ________, and the money multiplier to ________.
A. decrease; decrease; decrease
B. decrease; increase; increase
C. increase; increase; increase
D. increase; decrease; decrease
A. decrease; decrease; decrease
The financial panic and credit freeze in late 2008 pointed to the Fed’s important role:
A. lender of last resort.
B. creator of inflation
C. promoter of price stability.
D. promoter of full employment
A. lender of last resort.
Unable to borrow from other banks, University Bank is forced to turn to the Federal Reserve for needed funds. What is the interest rate the Federal Reserve will charge University Bank called?
A. open market operations
B. required reserve ratio
C. federal funds rate
D. discount rate
D. discount rate
Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, imagine that $300 is deposited into a checking account. By how much more does the money supply increase if the Fed lowers the required reserve ratio to 7%?
A. $1,285.7
B. $2,285.7
C. $3,285.7
D. $4,285.7
A. $1,285.7
What is a difference between fiat and commodity money?
A. Fiat money has a higher intrinsic value than commodity money.
B. Fiat money allows an economy to easily expand the money supply, whereas it is more difficult to expand the supply of commodity money.
C. Fiat money resolves the double coincidence of wants, whereas commodity money does not.
D. Inflation only occurs in an economy that relies on commodity money.
B. Fiat money allows an economy to easily expand the money supply, whereas it is more difficult to expand the supply of commodity money.
What is the difference between M1 and M2?
A. Everything counted in M1 is also counted in M2.
B. M1 includes less liquid assets like savings deposits, while M2 includes liquid assets like currency.
C. M1 is always larger than M2.
D. M2 includes credit cards, while M1 does not.
A. Everything counted in M1 is also counted in M2.
Which of the following statements is true?
A. Reserve requirements are just as precise or predictable as open market operations
B. M1 is now a better measure of our economy’s medium of exchange
C. Banks are not allowed to create money, as per Fed regulations
D. Quantitative easing is the targeted use of open market operations in which the central bank buys securities specifically targeting certain market
D. Quantitative easing is the targeted use of open market operations in which the central bank buys securities specifically targeting certain market
Which of the following statements represent a use of money that is not consistent with its definition?
A. “A bank holds the money of its depositors in its vault.”
B. “I just used my credit card as money to buy a new television.”
C. “I will accept either currency or gold as money for the purchase of my house.”
D. “I got some money at the ATM with my debit card.”
B. “I just used my credit card as money to buy a new television.”
What is the medium of exchange in an economy?
Money
Do practice problems from chapter
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