Chapter 25 - The Money Supply and the Federal Reserve System

Question 1

barter

Answer 1

The direct exchange of goods and services for other goods and services.

Question 2

medium of exchange, or means of payment

Answer 2

What sellers generally accept and buyers generally use to pay for goods and services.

Question 3

store of value

Answer 3

An asset that can be used to transport purchasing power from one time period to another.

Question 4

liquidity property of money

Answer 4

The property of money that makes it a good medium of exchange as well as a store of value: It is portable and readily accepted and thus easily exchanged for goods.

Question 5

unit of account

Answer 5

A standard unit that provides a consistent way of quoting prices.

Question 6

commodity monies

Answer 6

Items used as money that also have intrinsic value in some other use.

Question 7

fiat, or token, money

Answer 7

Items designated as money that are intrinsically worthless.

Question 8

legal tender

Answer 8

Money that a government has required to be accepted in settlement of debts.

Question 9

currency debasement

Answer 9

The decrease in the value of money that occurs when its supply is increased rapidly.

Question 10

M1, or transactions money

Answer 10

Money that can be directly used for transactions.

Question 11

near monies

Answer 11

Close substitutes for transactions money, such as savings accounts and money market accounts.

Question 12

M2, or broad money

Answer 12

M1 plus savings accounts, money market accounts, and other near monies.

Question 13

financial intermediaries

Answer 13

Banks and other institutions that act as a link between those who have money to lend and those who want to borrow money.

Question 14

run on a bank

Answer 14

Occurs when many of those who have claims on a bank (deposits) present them at the same time.

Question 15

Federal Reserve Bank (the Fed)

Answer 15

The central bank of the United States.

Question 16

reserves

Answer 16

The deposits that a bank has at the Federal Reserve bank plus its cash on hand.

Question 17

required reserve ratio

Answer 17

The percentage of its total deposits that a bank must keep as reserves at the Federal Reserve.

Question 18

excess reserves

Answer 18

The difference between a bank’s actual reserves and its required reserves.

Question 19

money multiplier

Answer 19

The multiple by which deposits can increase for every dollar increase in reserves; equal to 1 divided by the required reserve ratio.

Question 20

Federal Open Market Committee (FOMC)

Answer 20

A group composed of the seven members of the Fed’s Board of Governors, the president of the New York Federal Reserve Bank, and four of the other
11 district bank presidents on a rotating basis; it sets goals concerning the money supply and interest rates and directs the operation of the Open Market Desk in New York.

Question 21

Open Market Desk

Answer 21

The office in the New York Federal Reserve Bank from which government securities are bought and sold by the Fed.

Question 22

lender of last resort

Answer 22

One of the functions of the Fed: It provides funds to troubled banks that cannot find any other sources of funds.

Question 23

discount rate

Answer 23

The interest rate that banks pay to the Fed to borrow from it.

Question 24

moral suasion

Answer 24

The pressure that in the past the Fed exerted

on member banks to discourage them from borrowing heavily from the Fed.

Question 25

open market operations

Answer 25

The purchase and sale by the Fed of government securities in the open market; a tool used to expand or contract the amount of reserves in the system and thus the money supply.