Chapter 6

Question 1

Money is

Answer 1

anything that is generally acceptable in making exchanges.

Question 2

Barter is

Answer 2

trading without using a widely acceptable means of exchange (money)

Question 3

To barter

Answer 3

there must be a double coincidence of wants. If I have pizza and I want to trade for gas, I need to find someone with gas who wants to trade for pizza.

Question 4

Which is more successful– money or barter?

Answer 4

Money is more successful in trading because a double coincidence of wants is an inconvenience.

Question 5

The functions of money are

Answer 5

1) A medium acceptable form of exchange– acceptable and convenient means of exchange 2) Unit account– each unit of the means of exchange is of the same value 3) Store of value– it holds value over time.

Question 6

Commodity money is

Answer 6

money that has uses outside of the three functions of money.

Question 7

Money that has no use outside the three functions is

Answer 7

fiat money.

Question 8

The wellspring of all U.S. dollars is the

Answer 8

Fed Reserve and National Bank

Question 9

Liquidity is

Answer 9

the ease of which money can be transferred into a usable form.

Question 10

The most referenced unit of measure is

Answer 10

M1.

Question 11

M1 is the sum of

Answer 11

paper currency held outside of banks, checking account balances, and travelers’ checks.

Question 12

The balance of the M1 account is nearly

Answer 12

2.8 Billion, and has increased since the 1980s

Question 13

The Federal Reserve was created

Answer 13

to stabilize the banking system to be a lender for last resort banks.

Question 14

While the Federal Reserve was created to stabilize the banking system,

Answer 14

Friedman, Hayek, and other economists credit the Federal Reserve as the cause of the Great Depression.

Question 15

How does the Fed get its budget?

Answer 15

It doesn’t get its budget from Congress– it creates it itself.

Question 16

Monetary policy

Answer 16

is how the Fed uses the money supply in attempt to affect the economy.

Question 17

The Federal Open Market Committee (FOMC)

Answer 17

conducts monetary policy and is composed of seven members of the Board of Governors, the President of the New York Federal Reserve Bank, and the Presidents of the other eleven district banks

Question 18

Voting against the chairman is often frowned upon,

Answer 18

so most of his recommendations are adopted.

Question 19

The three tools of monetary policy are

Answer 19

open market operations– buying and selling bonds from previous owners who bought bonds from the U.S. government, the required reserve ratio– how much banks must keep in their reserves, limiting how much money the banks can lend out, and the discount rate– when a bank borrows money from the fed, it pays interest at a discounted rate.

Question 20

When the Fed buys bonds from owners,

Answer 20

bonds flow into the economy and money flows into the economy, increasing the money supply, and vice-versa.

Question 21

A bank’s reserves consist of

Answer 21

it’s vault cash plus the money in their account at the Fed.

Question 22

Excess reserves are

Answer 22

reserve money banks can use to lend out, outside of the required reserve ratio.

Question 23

With a lower required ratio,

Answer 23

banks can lend more money, and vice-versa.

Question 24

In creating money, the Fed’s target is

Answer 24

the Federal Funds Rate, which is a free market rate at which banks lend to other banks.

Question 25

The fed prefers to use

Answer 25

Open Market operations to change the money supply.

Question 26

Money simplifies exchange in an economy by

Answer 26

giving a common unit of account.

Question 27

The Consumer Price Index (CPI)

Answer 27

measures prices of 200 goods that a typical consumer buys.

Question 28

The PCE price measure

Answer 28

excludes gas money and food from its calculation.

Question 29

The Price Index is found by

Answer 29

((cost of market basket in a period of interest)/(cost of market basket in a base period)) X 100

Question 30

To find inflation

Answer 30

subtract the base year Price Index from the Price Index of interest, and then divide it by the price index from the base year.