Chapter 29: The Monetary System

Question 1

Medium of exchange

Answer 1

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

Question 2

Unit of account

Answer 2

The yardstick people use to post prices and record debts

Question 3

Store of value

Answer 3

An item that people can use to transfer purchasing power from the present to the future

Question 4

Liquidity

Answer 4

The ease with which an asset can be converted into the economy’s medium of exchange

Question 5

Commodity

Answer 5

Money that takes the form if a commodity with intrinsic value

Question 6

Fiat money

Answer 6

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

Question 7

Currency

Answer 7

The paper bills and coins in the hands of the public

Question 8

Demand deposits

Answer 8

Balances in bank accounts that depositors can access on demand by writing a check

Question 9

Federal Reserve (Fed)

Answer 9

The central bank of the United States

Question 10

Central bank

Answer 10

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

Question 11

Money supply

Answer 11

The quantity of money available in the economy

Question 12

Monetary policy

Answer 12

The setting of the money supply by policy makers in the central bank

Question 13

Reserves

Answer 13

Deposits that banks have received but have not loaned out

Question 14

Fractional-reserve banking

Answer 14

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

Question 15

Reserve ratio

Answer 15

The fraction of deposits that banks hold as reserves

Question 16

Money multiplier

Answer 16

The amount of money the banking system generates with each dollar of reserves

Question 17

Bank capital

Answer 17

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

Question 18

Leverage

Answer 18

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

Question 19

Leverage ratio

Answer 19

The ratio of assets to bank capital

Question 20

Open-market operations

Answer 20

The purchase and sale of U.S. Government bonds by the Fed

Question 21

Discount rate

Answer 21

The interest rate on the loans that the Fed makes to banks

Question 22

Reserve requirements

Answer 22

Regulations on the minimum amount of reserves that banks must hold against deposits

Question 23

Federal funds rate

Answer 23

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

Question 24

Money

Answer 24

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