Chapter 6

Question 1

What is money?

Answer 1

Anything that is generally acceptable in making exchanges

Question 2

What is barter?

Answer 2

trade without money

Question 3

What does a “double coincidence of wants” mean?

Answer 3

With barter, one must find someone who both wants what he has and has what he wants.

Question 4

How does money evolve from barter?

Answer 4

Eventually some goods become more acceptable in making exchanges.

Question 5

What is the wellspring of all US dollars?

Answer 5

The Federal Reserve and the banking system

Question 6

What is liquidity?

Answer 6

How easily an asset can be converted to a spendable form

Question 7

What are the parts of M1?

Answer 7

currency held outside banks, including checking accounts and traveler’s checks

Question 8

How big is M1?

Answer 8

$3 Trillion

Question 9

Why was the Fed created?

Answer 9

To be a lender of last resort to prevent banking crises.

Question 10

T/F: The Fed’s early record was not good.

Answer 10

True; they caused a huge deflation that economists believe in the cause of the Great Depression.

Question 11

T/F: If Congress wanted to end the Fed, they could refuse to fund it.

Answer 11

False; The Fed funds itself.

Question 12

T/F: The President runs the Fed.

Answer 12

False- the board of 7 governors are appointed by the President for a 14 year term. The Chair is appointed for a 4 year term. All are confirmed by the Senate.

Question 13

Who is the Federal Open Market Committee?

Answer 13

The board of governors, the president of the NY Federal Reserve bank, the presidents of all other 11 district banks, 4 of whom vote at each meeting on a rotating basis

Question 14

Commodity money

Answer 14

has other uses

Question 15

Fiat money

Answer 15

only used for money

Question 16

Functions of money?

Answer 16

store of value, unit of account, medium of exchange

Question 17

Monetary policy

Answer 17

the Fed uses the money supply to attempt to affect the economy

Question 18

Tools of monetary policy?

Answer 18

Open market operations, required reserve ratio, discount rate

Question 19

What are Open market operations?

Answer 19

The buying and selling of bonds

Question 20

What is the Required Reserve Ratio?

Answer 20

The percentage of deposits that banks cannot lend out

Question 21

What is the discount rate?

Answer 21

The interest rate paid when a bank borrows from the Fed.

Question 22

Which tool of monetary policy does the Fed prefer to use?

Answer 22

Open Market Operations

Question 23

What is the formula for finding the eventual increase in money supply?

Answer 23

Amount/RRR

Question 24

Simple money multiplier is

Answer 24

1/RRR

Question 25

The value of the dollar in the domestic economy depends on

Answer 25

How many and which goods and services it will buy

Question 26

CPI

Answer 26

Consumer Price Index- the measurement is a weighted average of the prices of 200 items- weighted by the amounts of the goods that consumers can purchase

Question 27

Price Index Formula

Answer 27

[(Cost of market basket in FOCAL period)/ (Cost of market basket in BASE period)] *100

Question 28

Inflation

Answer 28

the percentage change in the price index, usually over a years time

Question 29

Inflation y1 to y2

Answer 29

=(CPI y2/CPIy1) -1

Question 30

Equivalent income

Answer 30

(CPInew/CPIold) (INCOMEold)

Question 31

Nominal Income

Answer 31

the number on the paycheck

Question 32

Real Income

Answer 32

expresses nominal income in terms of base year prices