Chapter 4 The monetary System

Question 1

Definition of money

Answer 1

Money is the stock of assets that can be readily used to make transactions .

Question 2

Functions of money

Answer 2

medium of exchange  (we use it to buy stuff)
store value (transfers purchasing power from now to the future)
unit of account (the common unit by which everyone measures prices and value)

Question 3

Types of money

Answer 3

1 Fiat money (government-issued currency that is not backed by a commodity such as gold)
2 Commodity money (money whose value comes from a commodity of which it is made like gold coins or coca beans)
3 Electronic money (like Bitcoin

Question 4

Money supply

Answer 4

Quantity of money available in a country

Question 5

Monetary policy

Answer 5

Control over the money supply.

Question 6

Monetary authority

Answer 6

the institute that changes monetary policy by using specific monetary instruments .

Question 7

How many tiers do banking systems have?

Answer 7

in most countries they have two tiers

Question 8

Central bank

Answer 8

first tier bank that licenses controls and monitors the commercial banks

Question 9

Monetary policy is conducted by?

Answer 9

the country’s central bank

Question 10

open market operations

Answer 10

the tools the Federal Reserve (Fed) uses to achieve the desired target federal funds rate by buying and selling, mainly, U.S. Treasuries in the open market.

Question 11

Money aggregate C or M0

Answer 11

Physical paper and coin currency in circulation, plus bank reserves held by the central bank also known as the monetary base

Question 12

Money aggregate M1

Answer 12

C+ plus traveler’s checks and demand deposits

Question 13

Money aggregate M2

Answer 13

broad money (M2 plus foreign currency
deposits of resident sectors (excluding banks and
government).

Question 14

The money supply equals

Answer 14

the currency held by public plus demand deposits at banks (C+D)

Question 15

Reserves (R) :

Answer 15

the portion of deposits that the banks have not lent

Question 16

100-percent-reserve banking:

Answer 16

a system in

which banks hold all deposits as reserves.

Question 17

Fractional-reserve banking:

Answer 17

a system in which banks hold a fraction of their

deposits as reserves.

Question 18

How much impact does 100 percent reserve banking has on the size of money supply ?

Answer 18

It has no effect .

Question 19

Bank capital:

Answer 19

the resources a bank’s owners have

put into the bank

Question 20

Leverage

Answer 20

the use of borrowed money to supplement

existing funds for purposes of investment

Question 21

Leverage rate

Answer 21

assets/capital

Question 22

Capital requirement:

Answer 22

minimum amount of capital mandated by regulators.
intended to ensure banks will be able to pay off
depositors

Question 23

M =C+D

Answer 23

money supply is the sum of currency and

demand deposits

Question 24

B=C+R

Answer 24

monetary base is the sum

of currency and bank reserves

Question 25

M=(cr+1)/(cr+rr)*B

Answer 25

money supply depends on the three exogenous

variables(monetary base, currency deposit ,reserve-deposit ratio)

Question 26

Reserve requirements

Answer 26

Fed regulations that impose a minimum

reserve–deposit ratio on banks.

Question 27

excess

reserves.

Answer 27

reserves above the minimum required