Chapter 29: The Monetary System

Question 1

Barter

Answer 1

Trading goods and services directly for goods and services

Question 2

Money

Answer 2

The set of assets generally accepted in trade for goods and services

Question 3

Medium of exchange

Answer 3

The function of money when used to purchase goods and services

Question 4

Unit of account

Answer 4

The function of money when used as a yardstick to post prices and record debts

Question 5

Store of value

Answer 5

The function of money when used to transfer purchasing power to the future

Question 6

Liquidity

Answer 6

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

Question 7

Commodity money

Answer 7

Money in the form of a commodity with intrinsic value

Question 8

Fiat money

Answer 8

Money without intrinsic value

Question 9

Currency

Answer 9

Paper bills and coins in the hands of the public

Question 10

Demand deposits

Answer 10

Balances in bank accounts that can be accessed on demand by check

Question 11

Federal Reserve (Fed)

Answer 11

The central bank of the United States

Question 12

Central bank

Answer 12

An institution designed to regulate the banking system and money supply

Question 13

Money supply

Answer 13

The quantity of money in the economy

Question 14

Monetary policy

Answer 14

Decisions by the central bank concerning the money supply

Question 15

Federal Open Market Committee

Answer 15

The monetary policy committee within the Federal

Reserve

Question 16

Reserves

Answer 16

Deposits that banks have received but have not lent out

Question 17

Fractional-reserve banking

Answer 17

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

Question 18

Reserve ratio

Answer 18

The fraction of deposits held as reserves

Question 19

Money multiplier

Answer 19

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

Question 20

Open-market operations

Answer 20

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

Question 21

Reserve requirements

Answer 21

The minimum legal percent of deposits that banks must hold as reserves

Question 22

Discount rate

Answer 22

The interest rate CB charges on loans to banks

Question 23

Federal funds rate

Answer 23

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

Question 24

Intrinsic value

Answer 24

The value is independent of its use as money

Question 25

Money stock

Answer 25

The quantity of money available in the economy

Question 26

Check clearing

Answer 26

The movement of a check from the depository institution at which it was deposited back to the institution on which it was written; the movement of funds in the opposite direction and the corresponding credit and debit to the involved accounts

Question 27

Check

Answer 27

a written order to a bank to pay a stated sum from the drawer’s account.

Question 28

Lender of last resort

Answer 28

Offers loans to banks or other eligible institutions that are experiencing financial difficulty (run out of money) or are considered highly risky or near collapse

Question 29

Issues currency notes (fiat money)

Answer 29

monopoly in issuance of currency

Question 30

Monetary Base

Answer 30

the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves

Question 31

Central bank

Answer 31

an institution that oversees the banking system and regulates the money supply

Question 32

Excess Reserves

Answer 32

to get more confident that they will not run short of

cash

Question 33

reserve ratio

Answer 33

fraction of deposits that banks hold as reserves

Question 34

T-account

Answer 34

a simplified accounting statement that shows a bank’s assets and liabilities.